Introduction
On Saturday there were two useful omens for long-term investors. For the ninth time, one of my sons and I attended the Berkshire Hathaway celebratory annual meeting. I also watched Justify win the Kentucky Derby on television. I detected messages or inputs from both to aid in making long-term investment decisions. Both have already received substantial press reviews. As many of our regular subscribers have come to expect, I see or perceive things differently than most others. I will mix in additional thoughts from my current readings.
Berkshire Hathaway Annual Celebration (Annual Meeting)
For the past nine years we have gone to Omaha to learn more about Berkshire, get general investment lessons from Charlie Munger and Warren Buffett, gain insights into specific areas of the economy, and see many of the great value-oriented managers from around the world.
One of the lessons that I’ve learned from my racetrack handicapping experience is that the way one handles one’s money is in the long run even more valuable than individual selection of specific bets. One of the big advantages that Warren Buffett has is that he is in a position to make selectively big bets through his securities investment accounts and in his insurance risk facilities. In terms of the latter he is willing to accept unusual concentrated risks that could total $400 Billion in aggregate to cover severe storms and extreme crypto risks. His expectation of individual risks is limited to perhaps 3% of global underwritten risks.
Berkshire’s current float is $116 Billion, which is part of the over $325 Billion in its investment accounts. This suggests that if an opportunity appears, Buffet could commit over $200 Billion. He has not totally given up his “cigar butts” training from Ben Graham and is likely to become more aggressive if lower prices or better values appear. However, he does recognize that Ben Graham lived long enough to see many of his views invalidated.
The same occurrence happened to that great Nobel Prize winning scientist Stephen Hawking. This week I read that at his death he no longer believed the universe had no boundaries. He previously believed there were no boundaries.
These realizations are critical for us investors who believe in the immutable power of various investment theories. Charlie Munger’s approach to buying good companies at a fair price produces better results than buying at only cheap prices.
On an operating basis he is encouraging GEICO to expand its share of market, expecting significant initial losses to later translate into substantial profits. In a similar approach, in the near term Buffett does not expect dividend growth to result from growing earnings at the utility operations of the parent company. He also expects to grow their life reinsurance business on a regular basis and the casualty reinsurance business only if he sees favorable prices.
Both the stock market and the global economy are structurally changing. One of the points that Warren Buffett made at the meeting was that the five largest market value companies in the S&P500 are not capital-intensive businesses. At this stage of its development Berkshire-Hathaway does not need external capital. Thus to some degree it has escaped the discipline of the market place. To my mind this makes the policy of indexing into the S&P500 more risky than active portfolio management.
Justify Winning “The Derby” Lessons
During a driving rain storm dropping 3 inches of rain on the track, Justify ran away from the other 19 horses in the race. Justify was the favorite, which proves that occasionally favorites do win, suggesting that current market leaders (as is often the case) won’t disappoint.
From a tactical standpoint there were many horses that were in the second phalanx which could not catch the winner in the homestretch, proving that positioning does not always work well. The winner was unusual in a number of respects. First, Justify did not race as a two year old, which was unusual. From an investment standpoint the most significant factor is was that the winner was bought for $500,000 by a Chinese syndicate. Interestingly, the only foreign language translated at the Berkshire meeting was Mandarin. In addition, there were a large number of Chinese at the meeting and they asked a significant number of questions. This is not so surprising. For sometime, Charlie Munger has felt that there are more opportunities for sound investing in China than in America. Mr. Buffett echoed those thoughts.
Next week’s blog will continue the topic of Investment in China and will come to you via Hong Kong where I am chairing a meeting of the International Stock Exchange Executives Emeriti).
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