For over a decade, more than 30,000 people from around the world have descended into the small town of Omaha, Nebraska in the USA to listen to arguably the best investor of modern times, Warren Buffett.
Buffett, often referred to as the “Oracle of Omaha”, is the CEO and largest shareholder of Berkshire Hathaway, the largest investment company in the world. The Berkshire Hathaway AGM is held in April every year and has slowly become the “Woodstock for Capitalists”, as shareholders of Berkshire Hathaway are able to pick the brains of Buffett and his investment partner Charlie Munger for several hours.
The investment philosophies of Warren Buffett have influenced many people around the world, including us here at Farnam Investment Management. You may not realise our name comes from the street where Warren continues to live; Farnam Street, Omaha!
Buffett doesn’t like banksWhile the festivities of the event have started to outshine the investment knowledge (companies in Berkshire’s large portfolio set up a huge market stall next door to the AGM to sell thousands of Warren and Charlie themed products), keen participants will always be able to find a few golden nuggets of information from the minds of these two brilliant investors. So what did we learn this year?
Despite maintaining a generally bullish view of the US and global economies, Buffett said that the use of derivatives complicates the process of valuing banks, and they could represent a “potential time bomb in the system”. Buffett concluded his thoughts by saying that out of the 50 largest banks in the world, he “wouldn’t even think about” investing in 45 of them.
However, this may not be an indictment on Australian banks, as the Oracle has said in the past he would feel “safe” investing in our banks. This is likely because the vast majority of their capital comes from residential and commercial loans, and they have less exposure to the futures, options or warrants that make Warren nervous. The Australian banks are also required by APRA to hold a higher amount of regulatory capital than international banks, which is designed to make them “unquestionably strong”.
Ethical investing is on the agenda
Over the years there has been numerous questions focusing on the ethical values of investing, and how Berkshire Hathaway’s investment philosophy is impacted by these ethical concerns. Once again Buffett and Munger were forced to defend the company’s investment in Coca-Cola, as their sugary soft drinks are responsible for elevated levels of obesity and other diseases around the world. Buffett responded by accurately pointing out that Coca-Cola produced a wide range of beverages, many that don’t contain any form of sugar.
A question about Valeant Pharmaceuticals also allowed Munger to take aim at unethical business practices. Valeant is a drug company that has come under fire from regulators for acquiring the production of medicines and dramatically increasing their prices. With the share price down 85% over the past year, Munger wrapped up his response to a question on the company by stating “Valeant, of course, was a sewer. Those who created it deserve all the opprobrium that they got.”
Buffett was once famously quoted as saying “I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.” Unfortunately for Warren, Berkshire Hathaway now controls vastly more than $1 million and the types of companies that he would prefer are unable to be invested in due to size.Buffett still prefers smaller companies
When asked why recent Berkshire Hathaway acquisitions have moved from businesses that make capital to businesses that require capital, Warren answered “It’s one of the problems of prosperity. The ideal business is one that takes no capital but still grows. But most of those are not of a size that they would move the needle at Berkshire Hathaway.”
While he would still love to buy businesses with low capital expenditures, this quote likely explains why Berkshire Hathaway has focused on regulated industries such as utilities and rail in recent years, where the return on capital is much more stable.
Charlie Munger doesn’t know where commodities are going more than you do
Late in the day the investment duo was asked whether Berkshire’s investment in Phillips 66 was a “bet” on the price of oil. Buffett answered that “We are not two fellows who think we can predict the price of soy beans or corn or oil.”
He further confirmed that no one within Berkshire Hathaway considers the movement of commodity prices when making a decision. If a business can’t survive without favourable commodity prices, it is not one that Warren or Charlie will consider.
Once again Munger wrapped up the conversation by quipping about oil prices, “I’m even more ignorant than you are.”
In a sign that the 85 year old Buffett and 92 year old Munger may be preparing for life beyond Berkshire Hathaway, 2016 marked the first AGM ever that was livestreamed across the world.
For over 7 hours of investment nirvana, you can find a recording of the AGM on Yahoo! Finance here.