In the before times pre-COVID, I had everything booked to attend the 2020 Berkshire Hathaway AGM in person, again. I have gone several times now and I go for three reasons: 1) to learn about finance and investing from Warren B and Charlie, 2) to meet new people, and 3) to, most importantly, eat a lot of Berkshire Hathaway-owned See’s Candies Peanut Brittle. This stuff is absolutely delicious and not available in Canada. As the AGM was virtual this year I refused to miss out again on my beloved snacks. Fun Fact: You can order directly from See’s and will ship to Canada, but the shipping is ridiculous. Still worth it.
Anyway, on to more important matters. Berkshire Hathaway held their annual shareholder meeting virtually last week, and we have put together the key highlights. It was great to see Warren and Charlie both doing great. They must be taking their B12 because they are as witty as ever. We hope you enjoy!
A Key Highlights from Berkshire Hathaway’s 2021 AGM
#1 Loose Lips Sink Ships – Charlie Munger accidentally confirming Greg Abel (Eventually) Replacing Warren B
As Steve Jobs once said, “isn’t it funny, a ship that leaks from the top?”
Post-meeting Warren Buffet confirmed Greg Abel (of Edmonton; go Canada!) will be Warren Buffett’s successor. Here’s the quote, which was done reluctantly and only after Charlie Munger accidentally let it slip during the meeting. Here’s Warren’s post-meeting interview quote:
“The directors are in agreement that if something were to happen to me tonight, it would be Greg who’d take over tomorrow morning,” Buffett said. He praised Abel and Vice Chairman Ajit Jain, who runs all of Berkshire’s insurance operations. https://www.cnbc.com/2021/05/03/when-warren-buffett-eventually-steps-down-as-berkshire-hathaway-ceo-greg-abel-will-succeed-him.html
While it is a slip (but not an unexpected answer), the larger answer Charlie provided about how Berkshire will go forward is more interesting.
I don't think we're getting too big to manage, because we're different from practically every other big corporation in the united states in that we are so excessively decentralized. We have decentralized so much and we have so much authority in the subsidiaries that we can keep doing it for a long, long time, as long as it keeps working. I would say so far our decentralization has caused more benefits than defects. But nobody seems to copy us. (Buffett: Well that’s absolutely true, but I would say this – decentralization won’t work unless you have the right kind of culture accompanying it). Yeah, but we do, and Greg will keep the culture. (Buffett: If we had a culture of people trying to make a lot of money for themselves in the next five years at the top, it would not have worked). No, of course not. The culture is part of it. Assuming we keep the culture, it can go on a quite a ways. Long, long time. In fact, I think it will amaze everybody. And by the way the Roman Empire worked as long as it did because it was so decentralized. (Buffett: As Charlie says to me, you won’t know!). Here’s the time stamp - https://youtu.be/gx-OzwHpM9k?t=15859
It should be noted that Warren’s hesitation is understandable. There have been a few possibilities of successors over the years and pre-announcing just pigeonholes the Board. Can you imagine they announced who they thought the successor would have been twenty years ago? We can’t forget the David Sokol hiccup in 2011 – a former top pick for the job who left in 2011. https://dealbook.nytimes.com/2011/03/30/sokol-resigns-from-berkshire-hathaway/
Inflation – Fire It Up
From raw material purchases by Berkshire subsidiaries, are you seeing signs of inflation beginning to increase?
We’re seeing very substantial inflation. It’s interesting. We're raising prices. People are raising prices to us. And it's being accepted. Take-home building. We've got nine home builders in addition to manufactured housing operation, which is the largest in the country, so we really do a lot of housing. And the costs are just up, up, up. Steel costs too. You know, just every day they’re going up. And there hasn't yet been [wage inflation], because the wage stuff follows. I mean, if the UAW writes a three-year contract, you've got a three-year contract, but if you’re buying steel at General Motors or someplace you're paying more every day. So it's -- it's an economy really -- it's red-hot. And we weren't expecting it.
All our companies thought when they were allowed to go back to work or various operations – when we closed the furniture stores, they were closed for six weeks or so on average – and they didn't know what was going to happen when they re-opened. They can't stop people from buying things. And we can't deliver them. [The customer is saying] “well that's okay, nobody else can deliver them either and we will wait for three months.” The backlog grows. And then we thought it would end when the $600 payments ended around August of last year. But it just keeps going, and it keeps going, and keeps going, and keeps going. And I get the figures. Every week we go over day by day what happened at three different stores in Chicago, Kansas City, and Dallas. And it just won't stop. People have money in their pocket, and they pay higher prices. And when carpet prices go up in a month or two – we announced a price increase, our costs are going up. Supply chains are all screwed up for all kinds of people. But it’s almost a buying frenzy, except certain areas you can’t buy yet. You can't buy international travel.
So, money is being diverted from a piece of the economy into the rest and everybody's got more cash in their pocket, Meanwhile, it's a terrible situation for a percentage of the people. This suit -- I haven’t worn a suit for a year practically, and that means that the dry cleaner nearest me just went out of business. Nobody's bringing in suits to get dry cleaned and nobody’s bringing in white shirts at the place where my wife goes [CVI note: Interesting that they still run errands themselves]. If you didn't have takeout and delivery services for restaurants, you got killed. On the other hand, if you've got takeout facilities then – same store sales at Dairy Queen are up a whole lot. They adapted. But it's not a price sensitive economy right now at in least, and I don't know exactly how or when one shows up in different price indices. But there's more inflation going on, quite a bit more inflation going on than people would have anticipated just six months ago or thereabouts.
Charlie Munger: There's one very intelligent man who thinks it's dangerous, and that's just the start. [CVI Note: This is likely Former U.S. Treasury Secretary Larry Summers, mentioned earlier in the talk. He thinks we are heading for the worst inflation risk in 40 years https://youtu.be/CpPg5fQTROU ].
Greg Abel: When we look at steel prices, timber prices, any petroleum input, fundamentally there's pressure on those raw materials. I do think something you’ve touch on Warren, and it really goes back to the raw materials. There's a scarcity of product of certain raw materials. It's impacting price and ability to deliver the end product, but that scarcity factor is real out there as our businesses address that challenge. And it may be some of that has arisen from the storm we previously discussed in the Texas. When you take down petrochemical plants in one state that the rest of the country is very dependent on, we're seeing that it in price but overall scarcity of product, which obviously go together. But there's challenges, that’s for sure. https://youtu.be/gx-OzwHpM9k?t=16398
Challenges indeed. We’re quite concerned about inflation here at CVI.. Our notes from a talk by Arnold Van Den Berg provides a bit of insight into why - http://www.canadianvalueinvestors.com/home/2020/9/25/arnold-van-den-berg-thinking-about-bears-bulls-and-inflation-notes-on-his-google-talk
Selling the Airlines in 2020
As we discussed back in 2020, Berkshire sold off their roughly 10% stakes in each of the big four U.S. airlines - https://www.canadianvalueinvestors.com/home/2020/4/4/why-did-berkshire-hathaway-sell-delta-air-lines-and-southwest-airlines-stock-dal-luv
This was covered in a bit more and better detail by Warren at the AGM. TLDR: The impact of COVID on the airlines is not worth trying to figure out given the airlines represented 1% of Berkshire assets, and it could have really screwed things up for the airlines if Berkshire did not sell.
Just as Charlie is the chief culture officer, I’m the chief risk officer at Berkshire. That's my job. We hope we do well, but we want to be sure we don't do terribly. We didn't sell a substantial [amount of our holdings in the spring of 2020]. We're a company with 6, probably $700 billion worth of businesses, some we own in their entirety, some we own a piece of. And I don't know whether we were sellers in maybe 1% of the value of all the businesses we had at that period, but it’s interesting to mention that the airline businesses in particular.
[Regarding the government programs] We had a few people, various areas of Berkshire, that wanted to go in for help from the government and in some cases they had minority shareholders owning a few percent. We're going to get killed by what's happening with the regulations that are being put out stopping the economy. They said, everybody's going in for them, why don't we go in? I said, Berkshire can handle it. [These programs are] for people that can't handle it so we're not applying for it.
The airlines were the most prominent beneficiaries of what took place immediately; they got $25 billion initially, most of which went to the big four, several of which went in as grants and not loans. And I think that was fine public policy. I wish it could go to every restaurant and dry cleaner and every small business that really was out of business - they were made toast of basically. But the airlines - clearly what happened was not their fault in any way, shape, or form. It wasn't like in 2008-2009 when people blamed the banks and hated to see them [get support]. Now airlines [can] operate in bankruptcy. Three of the four went through a bankruptcy. The airlines are used to operating in bankruptcy.
It was perfectly proper for the airlines to be helped. The entire airline business - you look at the figures of 2 trillion [market cap] for Apple – the entire big four airlines sold for about $100 billion almost. Very, very small. Combined they wouldn't come close to making the cut, in the top 50 [of companies]. So, anyway, they went into the government. They needed the government help or they would go bankrupt, some of them. And really congress and Steve Mnuchin too, they decided they deserved help, which I do not quarrel with at all.
But imagine if Berkshire was the 10% holder [in each airline], which we had been, and [the government said] “get [help] from Berkshire”. They might very well have had a very, very, very different result if they had had a very, very, very rich shareholder that owned 8 or 9%. They didn't have that [after we sold]. You might not have gotten the same result. In fact, you probably wouldn't. I can see the headlines, because you've seen the headlines on some companies that took 100 million, or two hundred million and really didn't need it; some of them gave it back. Most of them gave it back. But you're actually looking probably at a different result than if we had kept our stock. But in any event, an industry that was selling for less than $100 billion lost a significant amount of money. They lost prospective earning power. Right now, international travel has not come back. But I would say overall too the economic recovery has gone far better than you could have said with any assurance. We also didn’t like having as much money as we had in banks at that time and so I cut back some of the bank investment. But basically our net sales were about 1%, 1.5% [of our holdings] and looking it back would have been better to be buying.
I do not consider it a great moment in Berkshire’s history, but we’ve got more net worth than any other company in the United States under accounting principles and we've got 6 or 700 billion of generally good businesses. I think the airline businesses have done better because we sold and I wish them well. I still wouldn't want to buy the airline international business. People really want to want to travel for personal reasons, but business travel is another thing. We've [already] got a big exposure to business travel, of course, through the fact that we own 19% of American Express, and we own Precision Cast Parts, which services the air business. So we've still got a big business investment in air travel, a big commitment to it. We wish the big four the best and I think their management [teams] have done a very good job during this period. https://youtu.be/gx-OzwHpM9k?t=6223