BRK 2021 Annual Meeting

So, like many of you, I watched the BRK annual meeting (replay) as usual. It was nice to have Ajit and Greg join Buffett and Munger on the stage. Buffett and Munger both looked great, and it was good to see that duo in action again. 

There were a few interesting things this time. This is by no means a summary of the meeting or anything close to it; I will just talk about things that stood out to me or things that I thought about. I know I've said that before and then sort of ran through the various topics that came up. But in this post, really, I don't mention most topics that came up.

Opening Statement 

The first interesting thing was Buffett's comments before the Q&A started. He showed a couple of interesting tables. The first one is the top market cap companies of the world as of March 31, 2021. Here is the list: 

He pointed out that the top 5 out of 6 companies are U.S. companies. People who think the U.S. is on the decline should take note of this. The U.S. has a system that works etc.  He said that in 1790, we had 3.9 million people in the U.S., 600K of whom were slaves. Ireland had a larger population, Russia had 5x more people, Ukraine had 2x more people etc...  And yet, here we are in 2021 with 5 of the top 6 companies around the world U.S. based.

And then he talked about indexing and how pros are often wrong. He asked, of the top 20 largest companies on the 2021 list, how many will still be there 30 years from now. Then he showed us the list of top global companies in 1989 and pointed out that none of them are on the list today. 

Here is the 1989 list:

This is kind of scary because at the time, there were all these books out there, like Japan as Number One and many others that basically said that Japan has the industrial / political structure, hard-working, obedient and highly educated work force and many other traits that make them an inevitable force that will take over the world. Well, that didn't quite work out. 

So it does scare me a little what might happen to the top 20 list today. Buffett meant to show the greatness of America by showing us the top 20 list of today, but I don't know if he realizes that showing us the 1989 list may actually be telling us that we are peaking in our U.S. dominance. That would be a more consistent message from looking at these two tables.

 

Being Right on Industry Doesn't Equal Easy Stockpicking

The other thing he pointed out is that being right about the future of an industry does not lead to easy investment decisions. People are all excited about electric vehicles and whatnot, but he points out that the automobile in the early 1900s was the future too, and yet, I think he said more than 2,000 companies entered that field back then, and there were only three by 2009; and two of those went bankrupt. 

He showed a slide of some of the many companies in the auto business, but since there were so many companies, he only showed a single slide of companies whose names started with "Ma" (there were too many to list even just companies starting with the letter "M").

The same argument was made in the 1999-2000 internet bubble. People (I think Buffett / Munger too) pointed out that there were many, many railroad companies that jumped on the railroad bandwagon in the 1800s, and only a few survived. 

So being right about the future in terms of industries does not guarantee success, whether it be electric vehicles, cloud, AI, alternative energy or whatever... 

 

BRK vs. S&P 500 

Someone asked what the argument is for owning BRK over the S&P 500 after 15 years of underperformance. Munger said that he prefers BRK as it owns above average businesses. Buffett said that he has never recommended owning BRK. If you can't evaluate or analyze businesses, you should just own the S&P 500 index. He pointed out that he has always said this, and even has it in his will. 

That made me think about this for a second too. Why own BRK over the S&P 500 index? 

Well, let's think about the two things that Buffett always tells you to do. When evaluating a business, you have to answer two questions:

1. Is it a good business?
2. Is it fairly valued?

We never evaluate businesses based on how the stock price performed in the past. Well, in this case, there is some need to evaluate that. But hold off on that for a second. 

If you look at BRK, the answer to question 1 is probably, yes. It's a good business. It is certainly a collection of above average businesses. And 2? Probably yes there too. Definitely not overvalued by any measure. 

How about the S&P 500 index? Is it a good business? Well, it is average, at best. Right? And then how about question number 2. Is it fairly valued? Well, this can get tricky. I tend to believe we are not in bubble territory on the index overall, and a P/E in the low 20s in the current interest rate environment is not expensive at all. 

But there are pockets, maybe even big pockets of egregious overvaluation in the index. Like, say, TSLA.  I tend to think the large tech companies are not overvalued (not cheap either). But OK, many think the S&P 500 index is overvalued. 

So where does that leave us? The BRK is an above average business trading at a reasonable value whereas the S&P 500 index is an average business possibly trading at above reasonable value, or even at best, reasonable value. 

Here, you have to be with Munger. It's BRK; no-brainer. 

What about the past underperformance? Well, Munger calls it an accident of history. He believes that a collection of superior businesses will do better than a collection of average businesses over time. That makes total sense. 

So when you put it like that, and you sort of break it down like the above, it makes sense to own, or keep owning BRK despite it's long term underperformance. Too much Kool-Aid for me?

Now, I am sure there are others here that would actually prefer the S&P 500 index; especially the tech lovers who think BRK is a dinosaur. That is not a totally unreasonable view either. It's a matter of taste, to some extent. And it's true that over time, an index will evolve (S&P survived past century) and it is not at all guaranteed that an individual company will (GE?).

Kraft-Heinz / Myths

In response to a question about Kraft-Heinz (he said he is not in a position to give advice on KHC), Buffett started to talk about the problems caused by myths created about organizations. These myths can be handed down to the next CEO and on and on. This can lead to enormous errors. It happens all the time in business and goes beyond business. This is a possible topic for a future letter to shareholders, he said. 

Munger added that when you prattle on all the time, you pound ideas back into your head even if it's wrong. One of his favorite quotes is by Sir Cedrick Hardwicke, 

I have been a great actor for so long that I no longer know what I truly think on any subject.

Munger said it happens to a lot of people, and to virtually every politician. It is totally embedded in corporate world.

It makes you wonder what you are pounding into your head every day all the time, and what of those may actually be wrong. And it makes me wonder what the cases are that Buffett has in mind, and what they might have been at KHC (although we may guess it has to do with cost management etc.). 

For me, two things stand out that I used to pound in my head early on but revised over the years. One was the aversion to technology investing driven by what Buffett always said. But I have sort of been more comfortable with technology. I would not have touched them in the 1990s (and didn't), but have been much more open to them. 

The other thing is valuation. For a long time, I was also old-school valuation, looking at P/E ratios and things like that, and insisting on things below 20x P/E. But I quickly realized that there are not that many great companies at that kind of valuation, so I was more willing to pay up for businesses I really like. The way I tempered the risk and satisfied my aversion to high values was to simply not put too much money into expensive names. This allowed me to enjoy some decent growth while not having my P/L swing wildly every day. This is not a recent thing for me, this goes way back as I have been an early investor in CMG, for example.

The other one that is making me think hard right now is buy-and-hold forever. This is also one of those hard rules that a lot of us follow, although when things get really stupid, I do sell things. In a market like today, it makes you really think hard about everything you own. 

This may not be exactly what Buffett is talking about with corporate myths, but these things popped up in my head when he talked about myths.

Anyway, as usual, if you have time, check out the replay. It is pretty good. Mostly t he usual stuff, but it's free to watch (and fun). 

Coronavirus, Munger etc.

Munger
Munger is looking and sounding great at the DJ annual meeting (I wasn't there; just watched the video). His 'wretched excess' seems to be more about private equity and venture capital than the public stock market. In fact, he said that tech stocks now are not like the Nifty Fifty stocks (he mentioned Home Sewing (?) trading for 50x earnings, and said that the current big tech companies are better businesses).

TSLA
Munger also said he would never buy or short TSLA. As I wrote in a response somewhere on this blog, I can't believe how many people got caught in a short squeeze on this stock. If people don't care about the valuation of a company, then obviously, a really expensive stock can get much more expensive. Trying to short that is like trying to short soybeans during a drought. You know with 100% confidence that the price will mean revert at some point, but there is no way to tell when it will revert and how high it can get before reverting. I saw this in Japan in the 1980s, in the U.S. in the late 1990s etc.

Bubble
I've said this here many times before, but for the stock market to be in a real bubble, at these interest rates, the P/E ratio would have to get up to 50x or some such. Who knows, this might even happen. One of the greatest traders of all time recently said that this might happen; the NASDAQ could double from here if we have another late 1990s-type bubble, which is possible with the current, ongoing massive stimulation combining low rates and huge budget deficits. How can this massive stimulation on a historical scale not be matched by an equivalently massive bubble?

Of course, I would not invest with that expectation, but if it happened, it would not surprise me at all. Remember, from my previous analysis, I would find it completely normal and not at all out of line if the market P/E averaged 25x over the next 10 years... and that may include times the market trades at 50x P/E, and times it trades at 10x P/E. But we just can't know when these levels are reached; only that it is probable that they will be reached.

Again, this is not my prediction at all; I would not invest expecting such an outcome. I am just making a single statement that seems reasonable from the data I've seen.

Coronavirus
The market seems to fluctuate with each breaking news about the coronavirus, but I view it as a non-event. As value investors, we care about what a business is going to be worth five, ten years out, so it doesn't matter how bad this coronavirus gets. Well, unless it gets really, really bad. I didn't take any action, but my instinct during SARS was to just buy all the Asian stocks that were hit hard, especially airlines (Cathay etc.).

I feel the same way now. If the market tanks further on coronavirus (well, I know we are at highs recently but...), just stay sane and buy what becomes cheap and available. As Munger says, keep your head as others lose theirs (well, he was quoting Kipling).

But wait, I am no expert, so let's just say this does get really bad, like the 1918 Spanish Flu.  That was bad. 50 million people died around the world back then including 675,000 Americans.  Quick googling shows that the world population at the time was around 2 billion, and the U.S. population was around 100 million. So the flu killed 2.5% of the world population and 0.7% of the U.S. population. A similar event now would kill 193 million people around the world, and 2.3 million Americans. 

That would be quite a shocking event.  By the way, did you know that the flu has killed 12,000-61,000 per year since 2010 in the U.S.? Between 291,000 - 646,000 people die of the flu around the world each year. I don't mean to trivialize the coronavirus. We have to do what we can to stop it, of course.

Anyway, let's take a look at the economic impact of such a worst case scenario (well, I know, there can be worst cases than 1918, of course. I am a big fan of The Walking Dead, 28 Days Later, World War Z, Shaun of the Dead etc... )

This is the chart of deaths from the 1918 flu from the CDC website. Not easy to read, but I think the deaths peaked in the 4th quarter of 1918.

Deaths from the 1918 Flu

Now, hold this image in your head while you look at the next chart. I couldn't find anything to take a close-up view of this, but if you look at GDP from 1915-1920, there is no real visible blip.

Same with the stock market. Close-up views of the market between 1915-1920 also doesn't really show much worth responding to in terms of stock market activity.  There really is no visible or actionable blip as far as I can see. Again, you can google for a close-up and you won't really find anything, I don't think.

Of course, coronavirus is a terrible thing and it is disrupting a lot of people's lives. There is no doubt there is a huge impact to many people all over the place.

But as investors, we have to keep our cool and not freak out over every new data point. There is no doubt that the numbers will rise over time, and I honestly don't believe at all that there is no coronavirus in NYC, for example. I think the odds of that are ZERO. There is no way that there is no coronavirus here. It's just that we don't know yet how many we have, as apparently, NYC still doesn't have a test for it so has to send samples down to Atlanta. Plus, most people I know do NOT go to the hospital for a fever and a cough. I certainly don't, unless there is a reason to do so, or else I am told to.

So honestly, nobody knows how much is already here in NYC, and how much it is spreading. We won't know for a long time, and we may never know.

This can get worse, may peak out soon, or they may come up with a vaccine soon too. Who knows.

Many argue that the globalized supply chain will make the impact of this flu worse than previous cases, but there are positives about globalization too, like communication and technology, that might make responding to the virus much more effective. But again, who really knows.

I just don't think it's worth spending too much time on.

Bullish
Well, actually, I am not bullish or bearish. I just am. But if I had to guess, I tend to think these 'events' are hugely bullish. This is sort of true for most exogenous events. Why? Because governments / central banks tend to overreact. We are so afraid of negative economic impacts that they will overcompensate. This often leads to bubbles, which is usually not good.

Think about the bubble in Japan in the 1980s; much of that was a response to the yen-shock (Plaza accord of 1985); the fear that the strong yen will destroy the Japanese economy contributed to the bubble in the late 1980s there. In fact, the same sort of FX bickering between the US and the UK contributed to the 1920s bubble. Greenspan's fear of Ravi Batra's Great Depression contributed a lot to the bubble in the late 1990s (and the various meltdowns from Russia, Turkey, Asia, LTCM etc. all of these contributed to the bubble as the Central Bank(s) overcompensated).

This happened again after the Great Recession, and will now happen again due to fears that the coronavirus will plunge us into a recession (and was sort of happening due to fears that the trade wars will kill the economy).

So every time something bad happens, it has just been enormously bullish, every time. Of course, this can't go on. At some point, we will start pushing on a string, and the old tricks will stop working. That is also a certainty. And bubbles will pop every now and then, but only after a bubble becomes a real bubble, usually.

But, we can't really know when this (the end) will happen. Unless you are sure that we have reached the end of the line, you have to asssume that these negative events will just be hugely and incorrectly overcompensated for resulting in huge rallies everywhere.

Anyway, this is not really a bullish proclamation on my part. I will remain neutral (but invested), but just an observation.