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, Financial)(BRK.B, Financial) 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 1999 afternoon session.
The price of certainty
Early in the session, Buffett and Munger were asked about investing in technology companies. In particular, the shareholder wanted to know if they would consider buying companies in a basket approach, an idea that they had previously discussed as it related to pharmaceutical companies in the early 1990s. This was Buffett's answer:
"I think we said that with the pharmaceutical companies we wouldn't have known how to pick out which one. We would have thought the industry as a group would do well… you cannot buy high tech companies at anything like levels that are commensurate with the levels that the pharmaceutical companies were selling at in 1993. Getting to the first part of your question, I think it's much easier to predict the relative strength that Coke will enjoy in the soft drink world than the amount of strength that Microsoft will possess in the software world. That's not to knock Microsoft at all. If I had to bet on anybody, I'd certainly bet on Microsoft, and I'd bet heavily if I had to bet. But I don't have to bet. And I don't see that world as clearly as I see the soft drink world. Now somebody that has a lot of familiarity with software may very well see it that way, and if it's true they have superior knowledge, and they act on it, they're entitled to make money from that superior knowledge. There's nothing wrong with that. I know I don't have that kind of knowledge. I do think that if you have a general knowledge of business over decades that you would regard the industry they're in as less predictable than the soft drink industry. Now it may also be that even though it's less predictable that there's a whole lot more money to be made, so that if you're right, that the payoff is much larger. But we are perfectly willing to trade away a big payoff for a certain payoff…"
I recently wrote about the idea of thinking about investing in terms of batting average (a high percentage of winners) versus thinking about it in terms of slugging percentage (considering the magnitude of your winners and losers, with the amount of risk of permanent loss of capital that you're willing to accept as compensation measured against the potential upside of any investment). I won't relitigate that argument, but I think Buffett and Charlie Munger, as they later conceded on Alphabet (GOOG)(GOOGL), would've probably put up stronger results for shareholders over the past 10 to 20 years if they had been willing to accept situations with lower certainty that came with the prospect of higher expected returns over the long run. That said, Buffett has put up miraculous results playing his game, and it's hard to fault him for that.
Growth of insurance float
Later in the meeting, Buffett and Munger were asked about the growth of float in Berkshire's insurance businesses over the past 30-plus years, and what investors should expect in the decades to come. Buffett said:
"Well, it's an important question, but I don't know how to give you a good answer. It's grown at a much faster rate since 1967 when we went into the insurance business than I thought it would. I didn't anticipate it would grow that way. I didn't anticipate necessarily we would get a chance to buy GEICO. I didn't know we'd ever acquire a GenRe. So, it's been very hard to forecast. What we've tried to do is grow cheap float as fast as we could. And sometimes it's been easy, sometimes it's been impossible. If you had asked me that question 30 years ago, I'd have given you an answer that really hasn't proven out very well. So, I don't know how to give you the answer now, except to tell you this: it's very much a goal of Berkshire to grow float as fast as it can while maintaining a very low cost to it. And again, you mentioned it'd be lumpy. Well, it'll be lumpy on cost. It'll be lumpy on growth rate. It's something we think about all of the time, in both our operating decisions and perhaps some big capital commitment decision. We know that if we can solve that problem of how to grow it with it costing us relatively little, it will make Berkshire a whole lot more valuable in the process. I mean, we always laid out the facts as to what we were doing, but people basically seem to ignore that. And we have had this growth rate, which we can't maintain, the numbers are too big. But it's something that Charlie and I think about all the time. We've got some good vehicles for growing it. But we don't have any vehicles that will grow it in aggregate at anything like the rate it's been grown in the past. We may get a chance to do something that adds to our ability to do it. If we get a chance and it's at the right price, we'll add it. If we won't, we'll do as much as we can internally. But the question you ask, the growth in intrinsic value of Berkshire over the next 10 years, will be determined, in a very significant way, by the rate at which we do grow it and also the added fact of what it costs us to achieve that float."
As for Munger, he said, "If we grow very low-cost float at the same rate that it's grown in the past for another 30 years, you can be confident of one thing: if you look to the heavens there will be a star in the east."
Thankfully, Berkshire's low-cost insurance float has continued to grow at an impressive clip. At the end of 1999, float at Berkshire totaled $25.3 billion. At year-end 2019, Berkshire's float totaled $129.4 billion – a compounded annual growth rate of 8.5% over the past 20 years. As shown below, that growth has been relatively consistent over that period.
"A snowball of sticky snow"
As often happens at the shareholder meetings, Buffett and Munger were asked about the keys to investment success. Here's what Buffett said:
"Start young. Charlie's always said that the big thing about it is we started building this little snowball on top of a very long hill. So, we started at a very early age in rolling the snowball down. And, of course, the nature of compound interest is it behaves like a snowball of sticky snow. And the trick is to have a very long hill, which means either starting very young or living to be very old. I would do it exactly the same way if I were doing it in the investment world. I mean, if I were getting out of school today and I had $10,000 to invest, I'd start with the A's. I would start going right through companies. And I probably would focus on smaller companies, because I would be working with smaller sums and there's more chance that something is overlooked in that arena. And it won't be like doing that in 1951 when you could leaf through and find all kinds of things that just leapt off the page. But that's the only way to do it. You have to buy businesses - or little pieces of businesses called stocks - and you have to buy them at attractive prices, and you have to buy into good businesses. And that advice will be the same 100 years from now, in terms of investing. That's what it's all about. And you can't expect anybody else to do it for you. I mean, people will not tell you about wonderful little investments. It's not the way the investment business is set up. When I first visited GEICO in January 1951, I went back to Columbia. And the rest of that year, I subsequently went down to Blythe and Company and, actually, to one other firm that was a leading analyst in insurance [Geyer & Co.]. And I thought I'd discovered this wonderful thing and I'd see what these great investment houses that specialized in insurance stocks said. And they said I didn't know what I was talking about. It wasn't of interest to them. You've got to follow your own… you've got to learn what you know and what you don't know. Within the arena of what you know, you have to pursue it very vigorously and act on it when you find it. And you can't look around for people to agree with you. You can't look around for people to even know what you're talking about. You have to think for yourself. And if you do, you'll find things."
Munger said:
"The hard part of the process for most people is the first $100,000. If you have a standing start at $0, getting $100,000 is a long struggle for most people. And I would argue that people who get there relatively quickly are helped if they're passionate about being rational, very eager, opportunistic, and steadily underspend their income grossly. Those factors are very helpful."
As someone who has worked hard for a long time to squirrel away savings while also trying to find attractive investments that would help speed up the process, I can vouch for Munger's words: accumulating that first $50,000 or $100,000 can be a long slog. That said, as Buffett noted, if you have many decades ahead of you, and you're capable of consistently saving and intelligently investing that capital, it starts to build like a ball of sticky snow rolling down a hill. With enough patience, you might just find yourself starting at a decent sized snowball.
Disclosure: Long Berkshire Hathaway Class B stock.
Read more here:
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- Ollie's: 'Our Best Quarterly Results in Our 38-Year History'
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