It's that time of year again when Omaha, Nebraska, becomes the center of capitalism for a weekend.
Tens of thousands of shareholders from around the globe have filled the CHI Health Center in Omaha on Saturday for the annual meeting of Warren Buffett's Berkshire Hathaway.
Over the decades, the meeting has grown from a small gathering in the cafeteria of National Indemnity into a weekend-long event also known as "Woodstock for Capitalists."
The biggest draw, of course, is the marathon question-and-answer session with Buffett and Charles T. Munger, Berkshire's vice chairman, about everything from the conglomerate's business to the economy to politics and whatever else crosses their minds.
Pie Funds relationship manager Mark Bull, who travelled to from NZ to the US for the AGM, said "The captivating nature of both Buffet and Munger live is hard to summarise in words. They're so different but clearly complement each other."
Buffet was disappointed with the performance of banks globally. And in a comment that the Pie Fund manager found especially pertinent after the Australian Royal Commission and regulatory heat on both sides of the Tasman, Buffet added that when a bank gets to where it needs government assistance, the responsible CEO should lose his net worth and his spouse's net worth.
As usual, the Berkshire Hathaway CEO had the audience eating out of the palm of his hand, Bull said.
He related how a nine-year-old at the conference asked a question and said, "This is my third year."
Buffet's response: "You should be rich by now".
Berkshire is no longer staying away from tech stocks
The youngster's question was, "Should you develop your models to include more tech stocks?"
Buffet responded, "We won't go into something because somebody else tells us it's a good idea. The main thing to do is make sure our batting average is high."
The Berkshire Hathaway founder, perhaps the most famous value investor, had famously avoided investing in tech companies for years because he didn't understand them.
But that stance seems to have evolved in recent years. Buffett told CNBC Friday that Berkshire had made its first investment in Amazon.
Berkshire has also become one of Apple's biggest shareholders with a roughly $40 billion stake.
Todd Combs and Ted Weschler, the two investment managers whom Berkshire had hired in the past decade, are behind the push into tech stocks. Buffett credited the pair for Berkshire's Amazon investment.
Combs made Berkshire's first purchases of Apple shares. He was also a key player in Berkshire's health care joint venture with Amazon and JPMorgan.
That led one investor to ask if Berkshire's shareholders should prepare for a change in how Berkshire evaluates stocks.
Buffett said no. He added that all investing is value investing, and that Combs and Weschler are following those principles.
'We screwed up'
Later, when asked if he was concerned about how potential regulation could affect Apple's stock, Mr. Buffett responded that he would like Apple's shares to go down so he could buy more at a better price.
At last year's meeting, Buffett addressed a question about why he hadn't bought Amazon early on. "The truth is that I've watched Amazon from the start, and I think what Jeff Bezos has done is something close to a miracle. The problem is if I think something will be a miracle, I tend not to bet on it."
Munger made that point again at this year's meeting, but added, of Berkshire's decision not to buy shares of Alphabet, Google's parent company, early on: "We screwed up."
Munger: "I wish Tim Sloan was still" at Wells Fargo
Buffett and Munger took a question on the misdeeds at Wells Fargo, in which Berkshire has a significant stake. The questioner asserted that Buffett had not been as critical of Wells Fargo as he had been many years earlier of Salomon Brothers, the Wall Street firm that was embroiled in a trading scandal in the early '90s. Berkshire had a large stake in Salomon.
On Saturday, in responding to the question, Buffett said, "When you find a problem you have to do something about it, and I think that's where they probably made a mistake at Wells Fargo, and they made it at Salomon." He also suggested that senior Wells Fargo officers overlooked an early report, by The Los Angeles Times, about some of the bank's misconduct. "Somebody ignored that article," he said.
Munger offered some support for Timothy J. Sloan, who stepped down as Wells Fargo's chief executive in March. "I wish Tim Sloan was still there," Munger said.
Buffett added that the former Wells Fargo CEO had been a "piñata."
Does Berkshire still believe in Kraft Heinz?
Buffett and Munger were asked if they have changed their view about the long-term potential of Kraft Heinz, whose brands appear to be losing some favor among consumers.
Buffett did not answer the question directly. Instead, he said there was a constant battle between the brands that belong to retailers, like Costco's Kirkland Signature, and those brands that belong to producers, like Kraft Heinz. Buffett said some retailers had "gained some power," particularly in the case of Amazon, Walmart and Costco.
Berkshire teamed up with 3G Capital to buy Heinz in 2013 and then merged it with Kraft in 2015. Berkshire holds a 27 per cent stake in the combined company.
Last year Kraft Heinz stumbled badly as 3G's strict cost-cutting strategy appeared to be showing diminishing returns. That weighed on Berkshire's 2018 results.
One criticism of the company is that its management, steered by 3G Capital, did not spend enough on marketing and developing products to try and attract consumers in a changing market. Munger disputed that, saying, "I don't think the problem was that they cut research."
Munger reiterated a point Buffett had made early this year about Berkshire and 3G having paid too much for Kraft.
It was also revealed Saturday that Kraft Heinz is causing Berkshire new headaches. Berkshire said its first quarter financial results did not reflect its share in Kraft Heinz's earnings. The reason: Kraft Heinz had yet to file its annual financial results with the Securities and Exchange Commission, and it had not made its first quarter financial results available to Berkshire.
Berkshire's stake in Kraft Heinz is worth US$10.6 billion, down from US$14 billion at the end of last year.
Kraft Heinz said in February that last year it had received a subpoena from the SEC related to an investigation into the company's accounting and controls.
Not 'inconceivable' that Berkshire will partner with 3G again
Berkshire's partnership with 3G Capital has drawn criticism ever since the two firms teamed up to buy Heinz in 2013.
So it is not surprising given Kraft Heinz's woes that Buffett and Munger were again asked about the relationship.
Berkshire shareholders have often asked whether 3G's management style is in step with Berkshire's. Buffett has fostered a reputation for allowing the businesses that Berkshire purchases to operate with little interference and hasn't pushed for big job cuts. 3G, the Brazilian private investment group, is known for its ruthless cost-cutting.
But when asked if Berkshire might still consider doing deals with 3G, Buffett said, "It is not at all inconceivable that we could be partners in some transaction in the future."
Buffett has defended 3G and Berkshire's involvement with the firm. He has also pointed out that, like Berkshire, 3G doesn't just look to buy and build businesses but also looks to hold them. He has argued that 3G and Berkshire don't have contradictory views on cost-cutting, they only differ on the type of deals they pursue. 3G, Buffett has written, has acquired businesses that "offer an opportunity for eliminating many unnecessary costs." Berkshire has typically avoided buying bloated companies.
He added Saturday that 3G is more comfortable than Berkshire in using debt to acquire companies and is willing to pay higher prices, but he added that 3G in certain cases may be a better operator.
It should be noted that 3G's strategy of buying companies in need of a turnaround has also provided Berkshire with a new category of megadeals at a time when Berkshire has struggled to make large acquisitions.
Is the growing popularity of socialism a threat to Berkshire?
Capitalism has come under increasing criticism while support for socialism has grown in the United States. One shareholder wanted to know what Buffett, as a lifelong Democrat, thinks of these shifting views and whether they could affect Berkshire.
Buffett responded: "My position at Berkshire is not to further my political beliefs."
He then added: "I'll just say it: I'm a card-carrying capitalist. You don't have to worry about me changing in that matter. But I also think capitalism does involve regulation. It involves taking care of people who are left behind."
Munger said: "We're all in favor of some kind of government social safety net in a country as prosperous as ours."
(STORY CAN END HERE. OPTIONAL MATERIAL FOLLOWS.)
Why didn't Berkshire buy more stock back?
The first question Buffett faced had to do with stock buybacks.
Berkshire bought back US$1.7 billion of its stock during the first quarter, but the shareholder wanted to know why Berkshire didn't buy back more.
Buffett didn't answer the question directly, but offered his general views on buying back Berkshire's stock.
"We will buy stock when it is trading below a conservative estimate of its intrinsic value," he said. "We want to be sure when we repurchase stock that those that have sold are better off than they were before."
Buffett has largely eschewed buying back Berkshire stock. But as the price to acquire big companies rose over the past few years and Berkshire's cash pile swelled, Buffett's reluctance to buy back Berkshire's stock began to fade.
After loosening the requirements on when Berkshire's stock could be bought back, the company repurchased US$1.3 billion of its own stock over the final six months of 2018, joining the buy-back boom in corporate America.
Flush with cash from the US$1.5 trillion tax cut, American companies bought back a record US$806 billion of their own shares in 2018. By reducing the number of shares outstanding, buybacks can bolster a company's stock prices. And companies often buy back their shares when they believe they have nothing better to do with their money than return capital to shareholders.
But the surge in buyback activity has become controversial. Critics argue that companies should spend more on building the business and on raising wages.
Sens. Chuck Schumer, D-N.Y., and Bernie Sanders, I-Vt., have pushed to limit buybacks for companies that do not pay their workers at least a US$15 an hour, among other criteria. Sen. Marco Rubio, R-Fla., has called for changes to the preferential tax treatment of buybacks.
Buffett in the past has criticized buybacks done for an "ignoble reason: to pump or support the stock price." He has often said he favors repurchases only "when two conditions are met: first, a company has ample funds to take care of the operational and liquidity needs of its business; second, its stock is selling at a material discount to the company's intrinsic business value, conservatively calculated."
But Berkshire's buyback activity is likely only to increase in the future.
"I predict we will get a little more liberal in repurchasing shares," Munger said.
A future target for activists?
Will Berkshire be vulnerable to activists after Buffett and Munger are gone and their holdings are distributed? (Buffett has committed to gradually giving away much of his Berkshire stock to the Bill and Melinda Gates Foundation.)
This is a question the pair has gotten at previous meetings. On Saturday, Buffett said that Berkshire needs to prove itself over time.
"There are no perpetuities," he said, but then added that the advantage of keeping Berkshire together "will likely be significant over time."
Munger joked that if Berkshire becomes a target, it would be long after he had passed away, so he isn't too worried about it.
Vote for Charlie
Succession, understandably (Buffett is 88 and Munger is 95), is a perennial topic at Berkshire's annual meeting.
This year, Buffett had some fun with the topic. He had pins made with slogans that said "If I was 18 I'd vote for Charlie" and "Stick with the proven, vote Warren."
And he opened the meeting by jokingly saying Munger was trying to stir an insurrection backstage.
On a more serious note, Buffett said that there had been discussions about Berkshire's vice chairmen, Ajit Jain and Greg Abel, joining Buffett and Munger on stage.
At the start of 2018, Buffett promoted the two longtime Berkshire executives to oversee Berkshire's businesses.
Don't read too much into Berkshire's surging earnings
Buffett warned in his annual letter in 2018 that a new accounting rule would "severely distort Berkshire's net income figures and very often mislead commentators and investors."
That has certainly been the case. On Saturday morning, Berkshire reported soaring earnings for the first quarter because of those accounting changes. The new rules require Berkshire to include in its earnings the gains and losses on the stocks it holds but has not sold.
In the first quarter, Berkshire's earnings jumped to US$21.7 billion, compared with a net loss of US$1.14 billion a year earlier. Berkshire's earnings last quarter were bolstered by a US$15.1 billion gain in the company's huge stock portfolio.
Given the new accounting rule, Buffett has urged shareholders to focus on the performance of Berkshire Hathaway's broad array of companies, which include insurers, energy firms, railways and manufacturers.
Berkshire reported its operating earnings rose 5 percent from a year ago to US$5.6 billion.
One note on Berkshire's first quarter results: They do not include Berkshire's share of Kraft Heinz's earnings. Kraft Heinz, in which Berkshire has a 27 per cent stake, has not yet reported results for the first three months of the year. Kraft's stumbles last year weighed on Berkshire's performance in the fourth quarter of 2018.
Berkshire's cash pile continued to grow. At the end of the first quarter, it stood at US$114 billion, up from US$58 billion just three years ago. As long as it stays at its current levels, Buffett is going to face questions about how he plans to spend it.
© 2019 The New YorkTimes