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 2000 morning session.
The first investment primer
In the first question of the session, Buffett and Munger were asked how they distinguish between growth stocks and value stocks in their investment process. This was Buffett's answer:
Buffett: "Well, the question about growth and value. They are not two distinct categories of business. If you knew what a business was going to be able to disgorge in cash between now and Judgment Day, you could come to a precise figure as to what it is worth today. Now, elements of that can be the ability to use additional capital at good rates, and most growth companies that are characterized as growth companies have that as a characteristic. But there is no distinction, in our minds, between growth and value. Every business we look at as being a value proposition. The potential for growth and the likelihood of good economics being attached to that growth are part of the evaluation. But they're all value decisions… The first investment primer that I know of, and it was pretty good advice, was delivered in about 600 B.C. by Aesop. And Aesop said, "A bird in the hand is worth two in the bush." Now incidentally, Aesop did not know it was 600 BC. He was smart, but he wasn't that smart. Aesop was onto something, but he didn't finish it, because there's a couple of other questions that go along with that. But it is an investment equation, a bird in the hand is worth two in the bush. He forgot to say exactly when you were going to get the two from the bush and he forgot to say what interest rates were that you had to measure this against. But if he'd given those two factors, he would have defined investment for the next 2,600 years… Now, if interest rates are 5%, and you're going to get two birds from the bush in five years, versus one now, two birds in the bush are much better than a bird in the hand now. So, you want to trade your bird in the hand and say, "I'll take two birds in the bush," because if you're going to get them in five years, that's roughly 14% compounded annually and interest rates are only 5%. But if interest rates were 20%, you would decline to take two birds in the bush five years from now. You would say that's not good enough, because at 20%, if I just keep this bird in my hand and compound it, I'll have more birds than two birds in the bush in five years. Now, what's all that got to do with growth? Well, usually growth, people associate with a lot more birds in the bush, but you still have to decide when you're going to get them. And you have to measure that against interest rates, and you have to measure it against other bushes, and other equations. And that's all investing is. It's a value decision based on, what it is worth, how many birds are in that bush, when you're going to get them, and what interest rates are."
As always, Buffett gets to the heart of the matter. While the investment industry may have an interest in distinguishing between growth stocks and value stocks, the reality is that the decision that needs to be made, from an investment perspective, is unchanged: does the price that you are being asked to pay today represent a good investment in terms of the present value of the cash flows that you will receive between now and the end of time? The answer to that question is all that matters.
The long-term impact of the internet
Later in the meeting, Buffett and Munger were asked about the potential impact of the internet on the businesses that Berkshire owned. This was their answer:
Buffett: "You're absolutely right that we should be thinking all of the time about whether developments in that tech area threaten the businesses that we're in now, how we might counter those threats, and how we might capitalize in opportunities because of it. It's a very, very, very important part of business now and will become more important in the years to come, including in many of our businesses… We own a newspaper called The Buffalo News in Buffalo, New York. We own all of that. So, we're in a position to make our own decisions of an operating nature as to what we should do in respect to the internet. And believe me, Stan Lipsey, who runs that paper, and I have talked many hours, including considerable time yesterday about what we are doing on the internet, what we should be doing, what other people are doing, how it threatens us, how we can counter those threats, all of that sort of thing. And newspapers are a category that, in my view, are very threatened by the internet. The internet is terrific for delivering information. We have a product, World Book, that's terrific for delivering information. And 15 years ago, print encyclopedias were the best tool, probably, for educating not only young children, but for educating me or Charlie when we wanted to look up something on a subject. And the World Book is a marvelous product. But it requires chopping down trees, and it requires operating paper mills, and it requires binding it and printing, and it requires a delivery of a 70-pound UPS package. It was put together in a way that was, for 400 or 500 years, the best technique for taking that information and moving it from those who assembled it to those who wanted to use it. And then the internet changed that in a very major way. So, we have seen firsthand the business consequences of the improvement offered by the internet and the delivery of information. And newspapers, although not as immediately susceptible to that problem, still face that overpowering factor. When you eliminate the delivery cost - I mean, we pay a significant percentage of our circulation revenue to our carriers, and we pay additional money to the district managers, and we pay for the trucks to deliver the product out, and we pay for huge printing presses, and all of that sort of thing. And people chop down trees in order to give us the raw material to transmit information in Buffalo, about what the Buffalo Bills did on Sunday. And now you have the internet that has virtually no incremental unit cost to anything and can deliver the information instantaneously. So, it's a big factor for newspapers. And the newspaper world in my view will look very, very, very different in not that many years. And I find it kind of interesting, because the people in the newspaper business are a little schizophrenic about this. They see this. They're afraid of it. In almost all cases, they're trying to combat it on some way operationally… Coca-Cola will not be affected in any significant way by the internet. The razor and blade business won't be. Although you could dream up things about distribution or so on, but I think that it's very unlikely. But our insurance business, particularly at GEICO, will be very affected by the internet. Now, that may turn out to be a big advantage to us over time. I wouldn't be surprised if it is. But our retailing businesses are all threatened in one way or another by internet developments, and there may be some opportunities there, too. But it's a change. It's going to be a change in how the world gets information. And it is incredibly low cost compared to most of the methods of conveying entertainment and information now."
Munger: "Well, he asked if we were afraid that the internet would hurt some of our business, and I think the answer is yes."
What I find interesting about this answer is that it shows Buffett and Munger have a keen sense for how new developments are likely to create risks and opportunities for legacy businesses. They are partly able to do so because they have an expansive knowledge of business history, as well as personal experience (as Buffett notes, their experience with World Book informed their views on what was in store for newspapers). By 2000, with the benefit of hindsight, we can see that they correctly pegged some of the key changes that would emerge as a result of the internet.
Dying Businesses
Towards the end of the session, Buffett and Munger were asked about the risk of Berkshire's insurance operations becoming more like some of its peers in the industry that had left a lot to be desired (from the perspective of investors). Here's what Buffett and Munger said:
Buffett: "Average is not going to be good. Average is going be terrible in insurance over time. It's a commodity business in many respects. And if you are average, you're going to have a very poor business. You may limp along because you have a lot of capital supporting the lousy business, but it won't be a good business, per se. But I think GEICO and GenRe and our other operations - we do not have average businesses, and there is nothing about the way the industry is going that would force us or lead us to have average operations. We have special things we bring to the party that should make us considerably better than average. It'll show more in some periods than others, and it'll be different in the way it is applied at GEICO or GenRe or National Indemnity's reinsurance operation. But none of those, in my view, will be average. There will be a lot of average, by definition – and average is not going to be good. The other problem is average is not going to go away, either. So that is an anchoring effect, to some extent, on what even the skillful operator can achieve. I think insurance will be a very good business for us over time."
Munger: "Every once in a while, we have a business sort of die under us. Trading stamps is now off 99.75% from its peak volume, and we were able to do nothing to prevent that except wring all the money out and multiply it by about 100… I think it's the nature of things that some businesses die. It's also in the nature of things that, in some cases, you shouldn't fight it. There is no logical answer, in some cases, except to wring the money out and go elsewhere.
Buffett: "And that's very tough for managements - in fact, they almost never face up to that. It's very, very rare. And it's logical that it'd be rare. In a private business, you can understand why people face up to it. In a public company, if you take the equation of the manager, he or she may be far better off ignoring that reality than accepting it."
This answer points to one of the largest advantages that Berkshire has had during its half century under the leadership of Buffett and Munger. Its flexibility in capital allocation, and the ability of Buffett and Munger to effectively use that optionality, has been paramount to the conglomerate's long-term success. When they've made mistakes or found themselves in difficult situations, as they did in textiles, trading stamps, the department store business and the shoe business, they did not have to continue throwing good money after bad. They changed course, allocating to the best opportunities they saw in front of them at that time, regardless of what area it might be in – and as Munger noted, they've created meaningful shareholder value from doing so over the years.
Most companies are not so lucky. For one reason or another, their options are limited. Munger discussed this idea at the 1997 shareholder meeting:
"The beauty of our situation is that it has enormous flexibility built into it. If something were large enough and cheap enough, we could stop writing super-cats. We're measuring opportunities one against the other, and we understand the way the numbers interplay. We have a lot of different options. And that's a huge advantage. There are so many places in business life where you have practically no options at all. You're just in a channel that you have to waltz down and you don't have any options to do anything else. We have enormous options. We may not exercise them. But we have enormous flexibility."
That flexibility has played a huge role in Berkshire's success over the long run.
Disclosure: Long Berkshire Hathaway Class B
Read more here:
- Ulta Beauty: A Difficult 2020 Continues
- Security Analysis: Getting Your Feet Wet
- Berkshire Hathaway Meeting: 1999 Afternoon Session
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