This past weekend, I was lucky enough to attend my fifth Berkshire Hathaway (BRK.A)(BRK.B) shareholder meeting in Omaha. I wrote an article after last year’s meeting that got a decent response from readers so I figured I’d discuss some of the highlights from this time around.
My weekend started Thursday at the GuruFocus Conference with a presentation by Don Yacktman of Yacktman Asset Management. I’ve always been a fan of Yacktman because his approach to investing resonates with me (to put it succinctly, great companies at reasonable valuations). He often uses the analogy of a beach ball being submerged in rising water: With intrinsic value consistently moving higher over time, stable market prices are simply building in substantial catchup returns when the ball ultimately comes back to the surface.
Companies that can be expected to materially increase earnings power and intrinsic value over time offer significant protection and upside potential for investors if they’re purchased at reasonable valuations and held long term (as an example, see here and here). The long-term track record at Yacktman shows how this seemingly simplistic approach can be a meaningful tailwind to returns. His talk focused on the rationale behind his investment process, along with some relevant examples.
The other speaker on Thursday, photographer Michael O’Brien, offered a different perspective than you would normally expect at an investing conference. O’Brien told the story of the famous picture of Warren Buffett (Trades, Portfolio) atop Kiewit Plaza that ultimately became the cover photo for the hard cover copy of Roger Lowenstein’s book “Buffett: The Making of an American Capitalist.” After the photograph was taken, Buffett sent O’Brien on his way with some homework: a stack of Berkshire Hathaway annual reports. Over time, O’Brien’s appreciation of both Berkshire and Buffett started to grow (buying a few “A” shares over time has turned out quite well for O’Brien). His story of how this played out over the ensuing 25 years was quite entertaining and insightful.
On Friday, I was lucky enough to visit the team at Weitz Investment Management for the day. The visit gave me a greater appreciation for the firm’s approach to both equity and fixed income investing; more importantly, I walked away with a very good feeling about both the integrity and the intellect of the team – not just on the investment management side but across the board. Like the team at Yacktman, I take comfort in their straightforward, rational approach to investing.
The next morning was the big day, and Mother Nature tested the Berkshire faithful: from the early hours, it was raining and cold for much of Saturday. The arena was noticeably less busy this year, likely driven by the decision to offer a live feed of the event online for the first time.
Thankfully, that had no impact on the actual event: the question-and-answer session, as always, left shareholders with plenty to think about. Here are three of my takeaways from the meeting:
Utilities on the move – At the meeting, Buffett shared a slide showing that Berkshire Hathaway Energy is on track to reduce its total coal-generating capacity by nearly 60% from 2010 to 2030. This reflects a number of factors, including regulatory changes, the impact of low natural gas prices in the U.S. and Berkshire’s ability to capitalize on renewable energy production tax credits across its utility subsidiaries (the last point is one of many examples of how Berkshire’s current structure adds value for shareholders).
In the past few years, Berkshire Hathaway Energy has become a clear leader in renewable energy in the U.S. (as Buffett noted in the annual letter, BH Energy already owns 7% of the country’s wind generation and 6% of its solar generation). Based on commitments the company has already made to future investments, that’s likely to increase in the coming years. Of course, this isn’t all good for Berkshire: the structural decline of coal will have a negative impact on its railroad business (BNSF).
Repurchases at Berkshire – Over time, the gap between book value and intrinsic value at Berkshire Hathaway will continue to widen. At the meeting, Buffett was asked a question I’ve wondered about for some time: Is Berkshire’s board of directors likely to approve continued increases in the repurchase limit – currently 120% of book value – as the gap widens?
At the meeting, Buffett said that, while he, Charlie Munger (Trades, Portfolio) and the board of directors believe the stock is worth “significantly more” than 1.2x book value, he still has mixed emotions about buying out his partners at prices well below intrinsic value. Personally, I’m less conflicted: Buffett goes out of his way to clearly explain his thoughts on Berkshire Hathaway’s intrinsic value in the annual shareholder letter. If a shareholder has access to the information necessary to make an intelligent decision and still decides to sell, it’s not clear to me why that’s an issue.
Buffett said the following a few years ago on CNBC: “We want to be sure if we’re buying it back from our partners at a discount from what it’s worth that they understand what it’s worth and why we’re doing it.” I think that’s fair – but I also think Buffett has cleared that bar by a mile.
In his closing thoughts on repurchases at Berkshire, Buffett threw in one nugget: If Berkshire reaches a point where it runs out of ideas for using large amounts of capital effectively within the company, “the threshold [for repurchases] might be moved up a little.” Personally, I think that’s a pretty good sign that we’re likely to see the buyback limit moved higher over time.
On Berkshire’s culture – I think this may have been the most important discussion of the day.
Buffett:“The culture of Berkshire adds significantly to the value of the individual components ... the chances of us going off the rails in terms of culture are very, very, very slight. ... It’s going to go on a very long time.”
Munger: “I’m even more optimistic than you are. I really think the culture is going to surprise everybody by how well it lasts and how well they do. They’re going to wonder why they ever made any fuss over us in the first place. It’s going to work very well.”
I plan on holding my Berkshire shares for a long, long time. As such, there are few topics of more importance than this one. Buffett and Munger’s confidence is reassuring.
Conclusion
Like many of you, much of what I know about investing has been learned from Buffett and Munger. Unfortunately, they only have so many more good years ahead of them. For those who have yet to make the pilgrimage to Omaha, I’d highly suggest that you plan on doing so soon. I think you will agree that it was well worth the trip.
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