For decades, Berkshire Hathaway’s Warren Buffett and his vice-chairman Charlie Munger have been entertaining investors with their homespun humour and investment wisdom at annual meetings in Omaha – and this year anyone will be able to share in the fun via a webcast.
Buffett has embraced technology for pragmatic reasons. Berkshire’s meetings – more than 40,000 attended last year – have outgrown the capacious CenturyLink stadium’s facilities and Omaha’s accommodation.
There’s another reason, he explains in his annual shareholders’ letter: “Charlie is 92, and I am 85. If we were partners with you in a small business . . . you would want to look in occasionally to make sure we hadn’t drifted off into la-la land.”
Fat chance of that! Over the last 40 years, they have grown the now massive, diversified group at a compound rate of more than 20% a year – or twice the growth of the S&P 500. (This is despite the last volatile decade producing only 5% a year compound – and below the broad S&P500, as Buffett has long been predicting).
While everyone has been enjoying hours of “aw shucks” fun at the annual Omaha jamboree, those two old fogeys have been able to successfully grow what is now arguably the most diverse conglomerate we have ever seen.
Berkshire Hathaway now ranks in the top 20 in the S&P index’s market capitalisation (just below oil giant Chevron and just ahead of IT group Oracle).
It hasn’t been driven by ego or empire building but by what Buffett calls its biggest problem – finding ways to handle its “endless gusher of cash.” Perhaps a few other large company boards might profit from Berkshire’s rules for expansion.
First, it will only make friendly acquisitions. “At Berkshire, we go only where we are welcome.”
Second, it concentrates on excellent businesses and prefers part of a wonderful company to owning 100% of a so-so business. “It’s better to have a partial interest in the Hope Diamond than to own all of a rhinestone.”
Third, it is prepared to be flexible in allocating capital, often investing large sums in passive investments as an alternative to takeovers. Buffett jokes this follows a Woody Allen adage: “being bi-sexual . . . doubles your chance of finding a date on Saturday night.”
The acquisition rules are in addition to the long-standing Berkshire blueprint to build its per-share intrinsic value:
- constantly improve the basic earning power of its subsidiaries;
- further increase their earnings through bolt-on acquisitions;
- repurchase Berkshire shares when they are at a meaningful discount from intrinsic value; and;
- make an occasional large acquisition, preferably for cash and not shares.
A lot of other investors in major companies would love their acquisition-happy boards to adopt this approach to maximise value for shareholders. (One catch: Berkshire doesn’t pay dividends.)
Buffett, renowned as a long-term investor, has no time for current pessimism in the US. “Many Americans now believe that their children will not live as well as they do. That view is dead wrong: the babies being born in America today are the luckiest crop in history,” he says.
For those investors worrying about big threats (which Buffet defines as successful cyber, biological, nuclear or chemical attacks on the US), he notes that Berkshire shares this risk with all American businesses.
While it’s a small probability in a short period, it approaches certainty in the longer run, he adds helpfully. “If there is only one chance in 30 of an event occurring in a given year, the likelihood of it occurring at least once in a century is 96.6%.
On climate change, he says even if there is only a 1% chance the planet is heading toward a truly major disaster, inaction now is foolhardy. “Call this Noah’s Law: If an ark may be essential for survival, begin building it today, no matter how cloudless the skies appear.”
To view the meeting, to be held in Omaha on April 30, click here. It starts at 9 a.m. (US Central Daylight Time) or midnight May 1 on the Australian east coast. The Yahoo! webcast will begin with a half hour of interviews with managers, directors and shareholders before Buffett and Munger start answering questions.
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