Important Takeaways From Berkshire Hathaway’s Annual General Meeting

"I do not think the average person can pick stocks."

This quote from Warren Buffett bruised many egos this Saturday. Especially of young investors who have sailed so far only in a bull market.

Mr. Buffett was addressing the Annual General Meeting of Berkshire Hathaway with his Vice-Chairman Charles Munger by the side. Both of them spent a long time answering questions on a host of issues spanning the economy, climate risks, diversity, the recent SPAC boom, Robinhood traders, taxes etc.

To top it off, they also admitted a few “mistakes” that had been committed with regard to some recent investments. It was a show stopping event in the business world over the weekend and we bring you the lowdown.

Annual Report Card

Berkshire Hathaway reported a quarterly net income of $11.7bn, a welcome turn from the loss of $49.7bn in the year prior. The company, which owns more than 60 companies, including Geico (insurance firm), Duracell (battery marker), Dairy Queen (restaurant chain) etc., also demonstrated impressive operating earnings of $7.02bn.

The company held $145.4bn in cash at the end of first quarter, sparking interest behind building a stockpile. One theory hints at potential acquisitions considering Berkshire sold more stocks than it bought during the first quarter and hence might be looking to balance the scales going forward.

Others simply believe it a sign of flourishing finances. That Mr. Buffett is simply generating funds faster than he can deploy them.

Out With the New

Mr. Buffett’s historical agnosticism towards coming-of-age investments is not unknown. He has expressed aversion towards assets such as gold, penny stocks, cryptocurrencies etc. Or those he believes “don’t produce anything”. But his partner Mr. Munger took it a step further by calling Bitcoin “disgusting and bad for civilisation”.

This is also in earshot of similar distaste the pair has had for the “killer” SPAC boom. Although Mr. Buffett says he believes it to be an ongoing stock market fad which would inevitably recede in the future, he didn’t deny that they were hindrances to Berkshire’s ability to find new businesses to buy at the right price.

Mr. Buffett is fabled for being a value investor, one who looks at companies as a whole rather than focusing on the supply and demand intricacies of the stock market. Therefore, his indifference towards market trends reliant on overvalued or less-than-pithy business fundamentals is no surprise.

When asked about the GameStop short squeeze that toppled markets a few months ago, Mr. Munger was quick to draw parallels between the Robinhood traders and racetrack bettors who, in his opinion, didn’t particularly bring good news to the stock markets. In his view, the “casinofication” of the Robinhood platform could only fan the gambling instincts of the masses, inciting people to part with their increased disposable incomes.

This has been quite stirring for Gen Z and millennials who have capitalised on the speculative gains of cryptocurrency, SPACs and tech stocks. Some have thoroughly dismissed Mr. Buffett’s statements. Others are visibly torn between their admiration for his investing genius and his unapologetic condescension towards their identity.

Redressing Grievances

Sure, company financials are promising. But relative performance of Berkshire returns has evidently dwindled. From 1965 to 2020, the company consistently posted 20% annualised gains versus the S&P 500’s 10.2%. The trend seems to have reversed over the past five years with Berkshire’s total returns at 14% and S&P’s at 18%.

This anomaly has been used as an opening by a section of the shareholders to showcase some of their grievances and suggest changes in governance.

For instance, they fault the top executives for dropping some prominent investments (like Apple and Airline stocks) PLUS, for the fact that they didn’t pocket more shares at the beginning of the pandemic. They believe it was a missed opportunity considering the S&P 500 index spiked close to 90% since the historic lows of last year.

Second. There was a proposal to publish annual reports on Berkshire’s efforts on environmental, social and corporate governance (aka ESG) issues. This was particularly focused on the subject of climate risks and executive diversity.

Third. More clarity on the company’s succession. With two nonagenarians (Buffett and Munger) at the fore, shareholders are edging closer to their appeals for a shift at the top.

Asked. Apologised. Answered.

Both the executives were quick to admit their mistakes for offloading a part of their Apple stock. However, Mr. Buffett was unfettered in his resolve not to invest in any more Airline stocks, a decision he explained was based on the larger assessment of the industry’s future (particularly owing to changes in business travel).

The proposal to increase disclosures on climate compliance was rejected. Mr. Buffett called it “asinine” and unnecessary. In fact, he went on to defend his recent investment in the oil and gas producing company Chevron, saying it benefited society in more ways than one and that he doesn’t “like making moral judgments on stocks’’.

He did admit that the key to greener electric generation is to solve the problem of transmission. To that effect, Berkshire is aiming to spend $18bn over the next decade on improving transmission infrastructure.

But is that enough? One wonders if as the leader of one of the world’s largest multinational conglomerates, Mr. Buffett’s dismissal of the climate issue was hasty, especially in light of growing American commitments to global climate policy (the US aims to cut down emissions by half by the year 2030 recently).

Berkshire had reportedly “planned” the shut down of coal-fired plants back in 2007. However, there are no disclosures on its progress so far as Mr. Buffett continues to stress on the “process happening in a systematic way”.

He remains characteristically unfazed (yet seemingly unhappy) about Mr. Biden’s recent plans on increasing capital gains taxes. As someone who admittedly does NOT leave his politics at the door but at the same time refuses to speak on behalf of Berkshire, Mr. Buffett couldn’t let go of his first instinct by referring to the tax increases as “Bernie Sanders’ victory” and putting his inner capitalist on display. “Millennials will have a lot more difficulty getting rich than previous generations,” he added.

No One Likes to Leave the Berkshire

Lack of diversity in representation at the top was a major contention among stockholders. According to Bloomberg, all six of the top leaders at Berkshire are male and five of them are white.

In addition, there are also rising concerns regarding the age of the two captains, both well into their nineties. Almost 70% of S&P 500 companies have a mandatory retirement age for their corporate directors. Although companies treat mandatory retirement norms as a tool rather than a rule by selectively lifting the age limit for some of their celebrated leaders (David Calhoun of Boeing, Roy Vagelos of Regeneron etc.), sometimes a board refreshment is deemed necessary by shareholders to prevent organisational rut.

Berkshire Hathaway is also not immune to these contentions but there was no categorical mention to this effect in the latest meeting, indicating that Mr. Buffett plans to draw out a few more years at the helm before realising he’s become too long in the tooth for it.

(Originally published May 3rd 2021 in transfin.in)