We attended the Berkshire Hathaway (BRK.B) annual meeting held on May 4, 2013 in Omaha along with about 40,000 other folks from around the globe who gathered once again for the Woodstock for Capitalists. Warren Buffett, Chairman of Berkshire Hathaway, and Charlie Munger, Vice-Chairman, answered questions from shareholders, analysts and the media. Here are some highlights from the meeting:
First Quarter Results
Warren Buffett began the meeting with a brief recap of Berkshire Hathaway's strong first quarter financial results with revenues up 15% and operating earnings up 42% (see our detailed first quarter analysis for Berkshire on our website). Book value increased 5.5% from year end to $120,525 per A share. It was a good quarter as all of Berkshire's businesses did very well. Berkshire Hathaway is now the fifth most valuable company in the country behind Apple (AAPL), Exxon Mobil (XOM), Microsoft (MSFT) and Google (GOOG).
Berkshire's railroad business, Burlington Northern Santa Fe (BNSF), also is doing very well with first quarter revenue up 6% to $5.3 billion and pre-tax earnings chugging 16% higher to $1.3 billion. Car loadings were up 4% in the first 17 weeks of the year compared to just a .4% gain for all of the company's rail competitors combined. It has helped that oil has been found near BNSF's railroad tracks. Buffett quipped, "What better place to find oil?" When asked if crude oil moving by rail still has room to grow, Buffett said he initially thought that oil rail transport was just going to be a blip. However, he now thinks there will be much rail usage for oil shipments for a long time. Buffett noted that oil can move faster by rail than by pipeline. With the flexibility of oil transport by rail, demand for rail capacity is growing. BNSF currently has 10 loading stations for crude transport with 30 destinations now and another 30 destinations in negotiation. BNSF currently transports 650,000 barrels per day and expects that to increase to 750,000 daily barrels by year end. BNSF CEO, Matt Rose, said, "BNSF is on the pathway to ship 1.2-1.4 million barrels per day."
When asked if Berkshire's returns may be impacted when Buffett is no longer around to negotiate deals based on his reputation, Buffett said his successor will have more capital to work with especially when markets are in distress. He said there is no question that his successor will have unusual capital in turbulent times. With this capital, his successor will have the ability to say "Yes" quickly to attractive deals. Berkshire is the "800" number to call when there is panic in the market, and a company needs significant capital. This happened in 2008 when Goldman Sachs and GE called, and Berkshire was able to negotiate favorable deals. It will happen again. When the tide goes out, one can see who is swimming naked. The naked swimmer will call Berkshire. Buffett believes the Berkshire brand will continue to generate attractive returns without Buffett having to be at the helm. Charlie noted that in the early days, Berkshire earned attractive returns because Buffett was a value investor who had little competition. Today, Berkshire earns attractive returns because Berkshire is a good home for good companies, again with little competition.
Charlie said that Berkshire's ability to "stay sane when others like to go crazy" is a competitive advantage. He said that as Berkshire gets bigger, they continue to use the Golden Rule with subsidiaries, which is rare in corporate America. This also provides Berkshire with a competitive advantage. Being a good partner with shareholders is another competitive advantage. Charlie chuckled, "All of this is a good idea. I wish we had done it on purpose!" Buffett recounted a story of a fellow who wanted to sell his company but did not want to sell it to competitors or private equity firms, whom he did not think would treat his employees fairly when he was gone. He called Berkshire as the "default" buyer, which is another competitive advantage for Berkshire as they can provide a permanent home to valued employees.
When asked if they believe in the "New Normal" as espoused by Bill Gross at PIMCO, whereby future market returns will be much less than in the past, Buffett said he doesn't pay any attention to macro forecasts. He doesn't make investment decisions on information that no one really knows. Buffett maintains his general feeling that America will continue to work well. He does know that BNSF will carry more carloads 5-10 years from now and that Berkshire will have an asset with incredible replacement value. To ignore what you do know versus acting on what you don't know doesn't make much sense. What Buffett does know is that people will do very well owning good businesses if they buy them at the right price.
$16 Trillion in Debt
When asked about the $16 trillion in government debt racked up following the 2008-2009 financial crisis, Buffett said the amount of deficit spending and stimulus was appropriate given the threat of the greatest panic of our lifetime. He knew things were bad when GE (GE) called Berkshire as their last stop, and Fannie Mae and Freddie Mac failed. How we get off the stimulus is a problem, but less of a problem than the austerity that would have ensued without the stimulus. Charlie said he agreed completely.
Buffett said George Bush issued the ten greatest words to describe the panic at the time, "If money doesn't loosen up, this sucker is going down." Buffett said leaders of both parties came up with policies that were useful during the panic. After World War II, our country faced a higher ratio of debt to GDP than it does today, and the country has done satisfactorily since then. "We have encountered far worse than now," Buffett added. We will do fine, but with lots of bickering. However, 10-20 years from now, things will look better.
Charlie added that the current stimulus programs are very confusing. He grumbled, "If you aren't confused, then you don't understand." He also lamented the focus on the debt/GDP ratio saying that no one ratio is in the stars as far as forecasting ability. He also noted that the off- the- book debt is worse than the debt that is on the books. Charlie said the great problems will go away if GDP were to grow at 2% per annum, but we need policies to enable us to grow at that rate.
U.S. Economic Outlook
Over the last four years, Buffett has seen a gradual improvement in the economy. It has been slow progress in the U.S. economy. While the economy has not come roaring back, it has not faltered. The overhang in housing ended about a year ago with some improvement in housing prices. He expects the economy to continue to move forward slowly. He does not see a surge, but also not a stall for the economy.
There may be four to five times in a lifetime that investors see incredible opportunities in the equity markets (like during the past financial crisis). At those times, investors need to be able to act fast both with financial ability and mental fortitude.
Buffett said he is willing to look for investment opportunities in the Eurozone. Last year one of Berkshire's subsidiaries did make a bolt-on farm equipment acquisition in Europe for about $100 million. The current Eurozone woes may create further opportunities for Berkshire to buy businesses there as Europe is not going away. The major flaw occurred when the Euro was designed. While the currency was synchronized, not much else was synchronized among the European economies. Charlie derisively exclaimed, "Letting Greece into the European Union was like using rat poison as whipping cream! It was an exceptionally stupid idea!" He further explained that Greece used "extreme fraud" in their financial reporting to get into the European Union. He concluded that Europe will muddle through its current problems in the next 10 years. Buffett added, "We would be delighted to buy a big business in Europe." Charlie quickly replied, "I hope you will call me first if it is in Greece."
Low Interest Rates
Buffett acknowledged that the problem faced by people invested in cash is brutal given the low interest rate environment. The loss of purchasing power is staggering. Savers are huge victims of the Fed's low interest rate policy. Buffett said he feels sorry for folks who have clung to short-term investments as .25% rates on a $1 million portfolio only generates $2,500 in income, not what folks would have anticipated for retirement income. Buffett believes owning businesses through stock investments makes more sense than fixed-dollar investments. This made dramatically more sense a few years ago when the stock market was down and the Fed said it would keep fixed rates low for a long time. Low interest rates make a good argument for owning productive assets.
Additional Disclosure: Hendershot Investments holds a long position in each stock presented. The content in this article should not be taken as investment advice or construed as a recommendation to buy or sell any security. Ideas expressed may not be suitable for every account, depending on an individual’s investment objective, risk-tolerance and financial situation. Information presented here was obtained from sources believed to be reliable but accuracy and completeness and opinions based on this information are not guaranteed. It should not be assumed that investments discussed will be profitable or will equal the performance of securities listed here or recommended in the past. All data, information and opinions expressed are subject to change without notice. Further information on companies mentioned is available upon request.