The annual Berkshire Hathaway shareholder meeting was held virtually on May 2, 2020. Charlie Munger was unable to make a trip to Omaha to answer shareholder questions with Warren Buffett, however Greg Abel was there on stage as Buffett’s side kick this time around. In the first part of the meeting, Buffett talked about the history of the United States and the stock market, and pointed out how far the United States has come in the past 200 years. Buffett took the shareholders through his thought process which led him to conclude that one should “Never bet against America”. In the latter part of the meeting, Buffett and Abel answered shareholders’ questions. You can watch the entire shareholder meeting here. In this week’s blog post, I will talk about the 3 key takeaways from this year BRK shareholder meeting.
1. Never Bet Against America
Throughout his life, Buffett has been bullish on the US Economy. Buffett pointed out that he doesn’t know what the market will do tomorrow, next week, or next year; he doesn’t know whether the market will go up or down in the near future. However, Buffett did say that if you buy the cross section of America (S&P 500), then you will come out ahead over a 20-30 year period. Buffett said that just because you are getting a quote on your stock every second, it does not mean that you need to develop an opinion on your investment minute by minute. As value investors, we need to look at stocks as part of real businesses, and understand that the market is there to serve us and not to instruct us. Buffett observed that the market has the potential to drop more than 20% in one day, and an investor needs to have the right psychological approach to investing. Value investors approach and buy stocks with the idea that they are buying partnerships in businesses. Buffett showed that the United States has survived though various events ranging from the civil war to the great depression, and has come out ahead. We might have hit a rough patch with the coronavirus outbreak, but over the long run, we will come out far ahead. Buffett instructed the shareholders how to approach the current market conditions, what kind of mindset to have during these uncertain times, and concluded by saying “Never bet against America.”
2. Fundamentals Are Very Important
During the meeting, Buffett said that he made a mistake buying shares of the 4 major US airlines. Buffett stated that Berkshire has now sold its entire interest in all the major airlines. Said differently, Buffett is out of the airline industry. Now, I know some of you might be scratching your head and thinking, airline stocks are “cheap” right now, and isn’t the golden rule of investing “Buy Low, Sell High”? So, why is Buffett selling at a loss, when the prices are low? These are all great questions! As value investors, we focus on the underlying business and try to understand if that business has changed fundamentally.
Let me provide an analogy – assume you have a goose that lays golden eggs. For the past 10 years, that goose has laid a golden egg every week. Now, all of a sudden, that goose has changed and will no longer lay golden eggs. If you look at the past 10 year history, you’d be foolish to bet that this goose is not going to lay any golden eggs in the future. However, you can not depend on the history; you need to understand that the goose has changed fundamentally and will no longer be laying golden eggs. Similarly, the airline industry has changed fundamentally after this coronavirus outbreak. You can not just look at a chart and say that I’m going to buy because the price of this stock is comparatively low. It is the underlying business that determines the price of stock over the long term (once the noise created by news has past). Buffett sold all of the airline investments because he realized that the goose will not be laying any golden eggs.
In conclusion, it is very important to focus on the fundamentals of the business, not just the price of the business. Moreover, if you made a mistake buying a stock, you have to completely get out of that investment; there is nothing like selling portion of the investment – either you are in or out. Lastly, you need to be willing to take a loss if you made a mistake.
3. Printing Money And Negative Interest Rates
Buffett said that he was wrong to think that United States would be able to develop the way it did over the past decade without inflation taking hold. He also said that since United States is borrowing money in its own currency, United States would never default (the value of the currency would be a different story). As far as negative interest rates are concerned, Buffett pointed out that if interest rates in the United States were to turn negative, one should own equities or something other than debt. Buffett acknowledged that he does not know how the future is going to shape out while having prevalent negative interest rates, central banks printing more and more money, and countries incurring more and more debt relative to the productive capacity (GDP). Buffett said that this has been one of the most interesting questions he has seen in economics i.e. whether such market conditions can be sustained over a longer period of time without any consequences. For the past dozen years, low interest rates and Quantitative Easing (printing money) has helped the United States economy expand, and there wasn’t any noticeable inflation associated with the money creation. However, we are aggressively testing that hypothesis now i.e. if such expansion can continue without any major consequences. You can watch Buffett talk about this here.
Hope you learned a little and found this blog post helpful. We talked about the 3 key takeaways from the Berkshire Hathaway annual shareholder meeting. As always, you can sign up for our free mailing list here. You can sign up for our paid subscription services here. Like us on our Facebook page here. Thank you!
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