In 2018, CNBC launched the Warren Buffett (Trades, Portfolio) Archive, “the digital home to the world’s largest video collection of Warren Buffett (Trades, Portfolio)." The website includes complete video footage from every Berkshire Hathaway (BRK.A, BRK.B) shareholder meeting since 1994, in addition to video clips from Buffett’s appearances on CNBC dating back to 2005.
As discussed previously, my goal in this series is to share key takeaways from the meetings. I will select a handful of quotes from each section that I think are most insightful for investors. With that, let’s take a look at the 1998 morning session.
When to sell
Early in the session, Buffett and his partner Charlie Munger were asked what developments would lead them to consider parting ways with an investment. Here’s what they said:
Buffett: “The best thing to do is buy a stock that you don’t ever want to sell. That’s what we’re trying to do. And that’s true when we buy an entire business. I mean, we bought all of GEICO or See’s Candy or The Buffalo News. We’re not buying those to resell. What we’re trying to do is buy a business that we will be happy with if we own it the rest of our lives, and we expect to with those. It’s the same principle applied to marketable securities. You get extra options with marketable securities. You can add to holdings. We can never own more than 100% of a business, but if we own 2% of a business and we like it at a given price, we can add to 4% or 5%. So that’s an advantage. Sometimes, if we need money to move, we will trim some holdings, but that doesn’t mean we’re negative on those businesses at all. We think they’re wonderful businesses or we wouldn’t own them at all… You sell if you need money for something else. You may sell if you believe valuations between different kinds of markets are somewhat out of whack. And we did a little trimming last year in that manner. But that could well be a mistake. The real thing to do with a great business is just hang on for dear life.”
Munger: “Yes, but the sales that do happen. The ideal way is when you found something you like immensely better. Isn’t that obvious that’s the ideal way to sell?”
Buffett: “And incidentally, the ideal purchase is to have something that you already liked be selling at a price where you feel like buying more of it. We probably should have done more of that in the past in some situations. But that’s the beauty of marketable securities. If you’re in a wonderful business, you do get a chance, periodically, maybe to double up in it, or something. If the stock market were to sell a lot cheaper than it is now, we would probably be buying more of the businesses we already own. They would certainly be the first ones that we would think about. They’re the businesses we like best.”
While I agree with Buffett's perspective, I also think it’s important to recognize where he’s coming from. He approaches the question from his position as the chief capital allocator of Berkshire Hathaway, meaning that he’s operating under the assumption that he will constantly need to allocate the cash flows generated by Berkshire’s operating businesses. For that reason, I think you can reasonably argue that his approach to investing could differ from someone who was managing a fixed pool of capital.
That said, he does make a good point about wholly-owned businesses. If you owned the best business in the world, and you were not offered a daily offer from Mr. Market to buy or sell some of that investment, then it makes the decision easier. It’s the ability to buy or sell when Mr. Market offers a compelling price that makes life more difficult in public markets.
As an example, does it change the calculation when you own a very good business but Mr. Market is appropriately accounting for its greatness? I think reasonable minds can differ on their conclusion. Personally, I am not sold on the idea that you should completely disregard Mr. Market’s offer. Put differently, when you’re offered a price that’s too good to pass up, I think you should be willing to sell, as I am – even if it’s a great business. (Determining that price is where it gets really tricky.)
The silver bullet
Later in the meeting, Buffett and Munger were asked about some of the risks that Berkshire Hathaway faces in the long run. Specifically, the shareholder wanted to know what keeps them up at night. This was their answer:
Buffett: “That’s a good question. And it’s one I always ask the managements of our subsidiaries, as well as on any new investment. I want to know what their nightmare is. Andy Grove, in his book “Only the Paranoid Survive,” talks about the silver bullet for a competitor. If you only had one silver bullet, which competitor would you fire it at? And it’s not a bad question. Your question’s a little broader. If you only had one worry that you could get rid of, what would it be? I would say that we really don’t worry. We will do the best we can, and when we have capital to allocate, sometimes it’s very easy to do. Sometimes it’s almost impossible to do. But we’re not going to worry about it because the world changes. And if we had something we were worried about in the business, we would correct it. We can lose $1 billion on a California earthquake, but I’m not worried about it. If you’re worried about something, the thing to do is get it corrected and get back to sleep. I can’t think of anything I’m worried about at Berkshire…”
Munger: “Well, in the 30-some years I’ve been watching you, I would say what it takes to make you not sleep at night is an illness in the family. Short of that, Buffett likes the game. I like the game. And even in the periods that look tough to other people, it’s a lot of fun.”
Buffett: “We define tough times differently than other people. Our idea of tough times is like now. We don’t feel it’s tough times when the market’s going down a lot or anything of the sort. We are having a good time then. We don’t want to sound like undertakers during a plague or anything. But it really makes no difference to us whether the price of Berkshire is going up or down. We’re trying to figure out ways to make the company worth more money years down the road, and if we figure that out, the stock will take care of itself. And usually when the stock is going down, it means other things are going down. And it’s a better chance for us to deploy capital, and that’s our business. So, you will not see us worrying.”
As a Berkshire shareholder, this is what I love to hear. It speaks to the nature of the two men running it, which aligns with my own. They are not focused on the short-term, fleeting opinion of market participants. Instead, they are solely focused on the long-term value of the enterprise. In addition, they run Berkshire such that they - and their fellow owners - never have to worry about the sustainability of Berkshire. Personally, as someone who has a large allocation to Berkshire in their investment portfolio, knowing this is something that allows me to sleep well at night.
Repurchases at “high” prices
Late in the session, Buffett and Munger were asked by a young Bill Ackman (Trades, Portfolio) how they feel about recent share repurchases at The Coca-Cola Company (KO). At the time, Coca-Cola was trading at a much higher valuation than it had traded at in prior years. Here’s what Buffett said:
Buffett: “Well, it sounds like a very high price when you name it in terms of a [40x] price-to-earnings ratio. But I would say this: Coca-Cola’s been around 112 years, and there are very few times in that 112 years, if any, when it would not have been smart for Coca-Cola to be repurchasing its shares. Coca-Cola is, in my view, among businesses that I can understand, it’s the best large business in the world. I mean it is a fantastic business… All I can tell you is I approve of Coke repurchasing shares. I’d a lot rather have them repurchasing shares at 15x earnings, but when I look at other ways to use capital, I still think it’s a very good use of capital. Maybe the day will come when they can buy it at 20x earnings - and if they can I hope they go out and borrow a lot of money to buy a ton of it at those prices. I think we will be better off 20 years from now if Coke follows a consistent repurchase approach. I do not think that is true for many companies… When we own stock in a wonderful business, we like the idea of repurchases, even at prices that may give you nose bleeds. It generally turns out to be a pretty good policy.”
Munger: “Well, I think the answer is that in any company the stock could get to a price so high it would be foolish for the corporation to repurchase its shares… There’s all kinds of excess that is possible, but the really great companies that buy at high P/E’s, that can be wise.”
Buffett: “Our interest in GEICO went from 33% to 50% without us laying out a dime, because GEICO was repurchasing its shares. And we’ve benefitted substantially. But we benefitted a lot more, obviously, when prices were lower. Our interest in The Washington Post company went from 9% to 17% over the years without us buying a single share. But The Post or Coke or any number of companies don’t get the bargain in repurchasing now that they used to. We still think it’s probably the best use of many in many cases.”
As my long-term readers may have already guessed, I’m torn on this one. Like Munger, I agree that, by definition, there has to be a price where it would be foolish for a company to repurchase its shares. That said, the decision is not as simple as just looking at the current price-earnings ratio.
In the case of Coca-Cola, we can see in hindsight that repurchases in the late 1990’s has not proven to be a particularly effective use of capital. Since that time, the stock has meaningfully underperformed long-term treasuries (inclusive of reinvested dividends). As Buffett says, it “generally turns out to be a pretty good policy” for wonderful businesses to repurchase their shares regardless of price; but in the case of Coca-Cola, that has not played out as expected.
Disclosure: Long BRK.B
Read more here:
- PepsiCo: Strength in Snacks
- Berkshire Hathaway Meeting: 1997 Afternoon Session
- Berkshire Hathaway Meeting: 1997 Morning Session
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