Notes From the Berkshire Hathaway 2021 Annual Meeting – May 1, 2021

Berkshire Hathaway Annual Meeting

May 1, 2021

 

(Notes taken by Professor David Kass, Department of Finance, Robert H. Smith School of Business,
University of Maryland)

 

The Berkshire Hathaway 2021 virtual Annual Meeting was held in Los Angeles. Present were Chairman Warren Buffett (90) and the three Vice Chairmen Charlie Munger (97), Greg Abel (59), and Ajit Jain (69).

Warren Buffett mentioned that none of the top 20 companies by market capitalization in 1989 are on the list of top 20 companies today (30 years later). How many companies on today’s list will be on there 30 years from now? Probably very few. The world can change in some very dramatic ways. This is a great argument for index funds. In the early 1900’s there were at least 2,000 automobile companies in the U.S. In 2009 (financial crisis), there were only three left, two of which went bankrupt.

Thousands of questions were submitted by shareholders to Becky Quick of CNBC.

Q1. Becky Quick: Why was Berkshire so fearful in 2020 even after it was assured through the CARES Act that the government would provide a robust backstop to the financial markets?

Buffett: I am chief risk officer. We sold only 1% of the $700 billion in assets (totally owned and partially owned companies). If we had not sold the airlines with our 10% stakes, instead of the government bailing out the airlines with $25 billion, Berkshire may have been called upon. We wanted to reduce our investment in banking. But looking back, I do not consider it to be a great moment on Berkshire’s history. Berkshire still has a large investment in business travel with a 19% stake in American Express and its ownership of Precision Castparts. Berkshire could have deployed $50 or $75 billion. There was a run on money market funds just before the Federal Reserve acted on March 23. Congress came through on the fiscal side We can’t buy stocks as cheap as we can buy our own. So, we’ve been able to do that with a fair amount of money. But looking back, I feel definitely we could have done better things. We would have sold airlines and cut back on banks regardless. Whether we should have bought something else at the same time is another question.

Q2. Quick: After a 15-year period of underperformance of Berkshire, should longtime shareholders continue holding their stock or diversify the risk across an index?

Munger: I personally prefer holding Berkshire to holding the market. Our businesses are better than the average in the market.

Buffett: I have recommended the S&P 500 for a long time. I’ve never recommended Berkshire to anyone because I do not want people to think that I am giving them a tip. The average person is not good at picking stocks.

Q3. Quick: Since you have directed the trustees of your estate to invest substantial assets into an index fund, is that a vote of no confidence in your managers?

Buffett: This is less than 1% of my estate. 99.7% is going to charities or the government. Berkshire is a good thing to hold. But for an individual, particularly my wife, the best thing is to put 90% in the S&P 500 index fund.  It’ll be her livelihood and she will have all the money she needs and way beyond it.

Q4. Quick: Question about Berkshire’s purchase of Chevron stock.

Buffett: Chevron is not an evil company and I have no compunction in the least about owning Chevron. And if we own the entire business, I would not feel uncomfortable about being in that business.

Munger: I agree. If a young man marries into your family, and he is either an English professor at Swarthmore or he works for Chevron, which would you pick sight unseen? I’d take the guy from Chevron.

Q5. Quick: Please explain Berkshire’s “Against” recommendation for the shareholder proposals regarding the reporting of climate related risks and opportunities as well as the proposal regarding diversity and inclusion reporting.

Buffett: Overwhelmingly the people who bought Berkshire with their own money voted against those propositions. Most of the votes for it came from people who have never put a dime of their own money into Berkshire. We would not collect a whole lot of things (from over 60 companies) that don’t mean anything to us to satisfy people who don’t actually own any stock themselves.

Abel: Berkshire Hathaway Energy is investing a lot in renewables. Berkshire is planning to close its coal units over time. BNSF has also been very active in managing its carbon profile.

Buffett: We spent far more than any utility in terms of renewables and transmission in the U.S.

Q6. Quick: Concern about higher than expected insurance losses.

Jain: I hope we price correctly including something for the unknown unknowns. There are 50 state regulators who we have to deal with in terms of pricing.

Buffett: I think we have the best insurance operation in the world. And Ajit is the guy who created it.

Q7. Quick: It looks like Charlie and Warren have some different opinions recently, like Costco and Wells Fargo. Where’s that taking Berkshire?

Munger: Warren and I don’t have to agree on every thing we do. We’ve gotten along pretty well.

Buffett: We have never had an argument. In 62 years we’ve never gotten mad at each other.

Q8. Quick: How do Buffett and Munger interact with each other (with respect to the future generation of managers)?

Jain: The relationship Warren has with Charlie is unique. And it is not going to be duplicated – not by me and Greg. Greg and I have known each other for a long time. We do not interact with each other as often as Warren and Charlie do, but every quarter we will talk to each other about our respective businesses and update each other on our respective businesses.

Q9. Quick: Why do GEICO and BNSF operate at lower profit margins than their main competitors, Progressive and Union Pacific, respectively.

Buffett: In the first quarter the BNSF/Union Pacific numbers have gotten better. We have had higher earnings in the past, but Union pacific has passed us. In 5 or 10 years it would be an interesting question as to which railroad has the higher earnings. Going back to the previous question. In three years, Charlie will be aging at one percent per year. New companies with 25 year-olds are aging at 4 percent a year. So we have the slowest aging management by far percentage wise of nay American company. Progressive has had the best operation in recent years in terms of matching rate to risk. GEICO has 13% of the auto insurance market (Todd Combs has gone there) and Progressive has slightly less. Together we have 23% of the market.

Jain: Progressive is a machine. They are very good at what they do. About a year ago Progressive had margins that were almost twice as much as GEICO’s and growth rates that were almost twice as much as GEICO’s. Now, Progressive is still crushing it In terms of growth relative to GEICO but GEICO has caught up with Progressive in terms of margins  and hopefully that gap will be non-existent in the future. GEICO was late to appreciate matching rate to risk via telematics.

Bufffett: State Farm is still the largest insurer but I will predict that 5 years from now the top 2 will be GEICO and Progressive and in which order we will see. Both companies will do well. GEICO had done well but Progressive was better at setting the right rate and we are catching up.

Jain: With respect to branding, GEICO is ahead of Progressive, and in terms of managing expenses as We well.  I think GEICO does a much better job than anyone in the industry.

Q10. Quick: Why did Berkshire sell some of its Apple shares?

Buffett: Berkshire owns 5.3% of Apple. It was probably a mistake to sell and Charlie agrees it was a mistake. Tim Cook is one of the best managers in the world. He’s got a product that people absolutely love. There’s an installed base of people and they get a satisfaction rate of 99%. A car costs $35,000 and I’m sure with some people if we asked them whether they had to give up their Apple ($1,000) or give up their car  and really make the choice for the next five years, who knows what they would do?

Munger: I would not like to see our present giants (tech companies) brought down to some low level by some anti-competitive reasonings. I don’t think they’re doing a lot of harm anti-competitively.

Q11. Quick: How do you assess if the high flyer growth stocks are worthy of your investment?

Buffett: We don’t think they are crazy. I feel I understand Apple and its future with consumers around the world better than I understand some of the others. Interest rates are to the value of assets, what gravity is to matter. We have near zero interest rates on Treasury Bills. If you discount back future cash flows at present interest rates, stocks are very, very cheap. The question is what interest rates do over time. Eighty-five percent of the people will get a $1,400 check. This causes stocks to go up, businesses to flourish, and an electorate to be happy. Google, Apple, and Microsoft are incredible companies in terms of what they can earn on capital. They don’t require a lot of capital, and they gush out more money.

Q12. Quick: What’s your opinion about modern economic theory (MMT)?

Munger: If you just keep doing it without any limit, it will end in disaster.

Q13. Quick: Question about borrowing money.

Buffett: The value of the float has gone down dramatically because everything is off of interest rates. When a country can borrow at negative interest rates, you get into something that’s akin to the St. Petersburg paradox.

Q14. Quick: What impact does the rise of so many new SPACs have on Berkshire’s ability to find and close new acquisitions?

Buffett: These SPACs generally have to spend their money in two years. If you are running money for somebody else and you are getting paid a fee and you get the upside and you don’t have the downside, you are going to buy something. The big stuff is being done with other people’s money. They are going to beat us.

Munger: This is fee driven buying. It’s not buying because it is a good investment. They’re buying it because the advisor gets a fee.

Buffett: But it’s where the money is.

Munger: It’s shameful. I don’t mind the poor fish that gamble. I don’t like the professionals that take the suckers.

Q15: Quick: If you deem stock prices to be overvalued do you think it’s best to keep your money in cash while waiting for prices to come down to a fair price?

Buffett: We’ve got probably 10-15% of our total assets in cash beyond what I would like to have just as way of protecting the owners. But conditions change very rapidly sometimes in markets. We may be unhappy about the $70 billion, but we’re very happy about the other $700 billion, so it’s not like we should complain. We work with the quantities of money where if we put $50 billion at the things that I’m so, so about, but that are better than Treasury Bills .. I’m not wildly comfortable about that even though it can be undone.

Q16: Quick: A prominent Senator recently categorized share buybacks as a form of market manipulation. You have often said that repurchasing shares at prices below intrinsic value benefits continuing shareholders. Could you elaborate on the higher order effect that these share repurchases have on society?

Buffett: Buybacks are essentially a way of distributing capital to the people who want the cash when the co-owners mostly want to re-invest, and it is a savings vehicle. There are two ways of distributing cash to shareholders. We can pay dividends to all four of us, but three of us don’t want it. And we can repurchase the shares at a fair price. If it was just the four of us, we pick out a fair price and the fourth one gets bought out of his interest. I find it almost impossible to believe some of the arguments that are made that it’s terrible to repurchase shares from a partner. A great majority of Berkshire shareholders voted against a dividend. We have savers.

Munger: If you are repurchasing stock because it is a fair thing to do in the interest of your shareholders, it’s a highly moral act, and the people who are criticizing it are bonkers.

Q17: Quick: What impact would a 43.4% capital gains rate have on Berkshire’s stock repurchase program vs. cash dividends.

Buffett: 97% of our shareholders voted against a cash dividend. Our shareholders will own a larger percentage of Berkshire when we buy back shares.

Q18: Quick: What are your thoughts on the new administration’s capital gains, corporate tax, and stepped up basis tax increases?

Buffett: I don’t want to use the meeting to give a lot of views about taxes.

Munger: It is a mistake to be basically anti-capitalist. Capitalism is what raises GDP for everybody.

Q19: Quick: Charlie, with people leaving California because of high taxes and cost of living, what keeps you in California?

Munger: I wouldn’t move across the street to save my children $500 million. But I do think it is stupid for states to drive out their wealthiest citizens, the old people who don’t commit any crimes, they donate to the local charity . Who in the hell in their right mind would drive out the rich people? Florida and places like that are very shrewd and places like California are being very stupid.

Q20. Quick: How will a 25 to 28% corporate tax rate affect Berkshire’s companies?

Munger: I don’t think it is the end of the world. We’ve adapted to the tax rate, whatever it is.

Buffett: If they raise the tax rate, the federal government’s owning a larger percentage of business. They get a percentage of the earnings. We pay more taxes and it hurts the Berkshire shareholders if rates are higher and that may be quite appropriate.

Q21. Quick: With the Biden proposal to treat unrealized gains as sold and taxable at death at a 43.4% rate, would that change the amount of stock required to be sold for payment of taxes upon your death?

Buffett: 99.7% of what I have when I die will either go to philanthropy or to the federal government.

Q22. Quick: Mr Jain, what has Covid 19 taught us about systemic and correlated risk? And is there anything that we will do differently from now on?

Jain: We were aware of the fact that pandemic risk is a risk factor. It was totally underpriced by all of us in the industry. Several of us thought that it happens at most once in a hundred years. The industry will become a lot more sophisticated in terms of thinking through what is the impact of pandemic risks across the entire portfolio.

Buffett: It is not a huge factor for Berkshire.

Q23: Quick: What’s  your best estimate of Berkshire’s insurance claim exposure from the COVID-19 pandemic?

Jain: In terms of reserves we have put up $1.6 billion. Geico had fewer accidents which has resulted in a huge tailwind. The industry reserved 25 to $30 billion for Covid-19. Industry pundits say the industry losses will equal $100 billion. So there is another 70 – $75 billion of Covid -19 losses. Our number of $1.6 billion is going to be a lot higher, but it is not something that we cannot manage completely.

Buffett: It’s one of the great human catastrophes of all time, but it was not that big in insurance.

Q24: Quick: What does the combination of Kansas City Southern with either Canadian Pacific or Canadian National mean to BNSF in terms of competition?

Abel: We will feel competition. The standard to be applied by the Surface Transportation Board (STB) is that competition has to be protected or enhanced. So that is our opportunity to protect our franchise on behalf of our customers. We will be active in the approval process.

Buffett: It affects both Union Pacific and BNSF to a small degree. Itis the job of the STB to do what is best for the shippers in terms of price being paid. The merger price would not be paid under a different interest rate environment. Either Canadian Pacific or Canadian National is very likely to get it.

Abel: The STB voted 4-1 on an initial trust structure for Canadian Pacific.

Buffett: They now have two opposing trust proposals  I don’t see they’ll allow two proposals.

Q25: Quick: Do you think the valuation that they are paying for Kansas City Southern is worth it?

Buffett: We looked at buying Canadian Pacific. We would not pay this price. It implies a price that is even higher than what it Union Pacific is selling for. But there is only one Kansas City Southern.

Munger: They are buying with somebody else’s money.

Buffett: The investment bankers are cheering you on at every move.

Q26: Quick: Question about Berkshire’s purchase of Precision Castparts.

Buffett: I made a mistake in calculating PCC’s future earnings which resulted in Berkshire overpaying. It’s a terrific company but GE doesn’t need as many engines as we thought they would need. Boeing had troubles with the 737 Max. We’ve got some wonderful deals and some terrible deals. GEICO, they are doing 15 times as much business as when we bought control in 1996. You actually end up getting a greater concentration in the ones that work out. We started with three businesses. Berkshire was textiles. Diversified Retailing was a department store and trading stamps (Blue Chip). All three of the original businesses failed. But the number one risk factor is if a business gets the wrong management.

Q27: Quick: Do you still think cryptocurrencies as worthless artificial gold.

Buffett: I’m going to dodge that question because we’ve got hundreds of thousands of people watching this that own Bitcoin, and we’ve got two people that are short. We’ve got a choice of making 400,000 people mad at us and unhappy and/or making two people happy. That’s a dumb equation.

Munger: I hate the bitcoin success and I do not welcome a currency that’s so useful to kidnappers . The whole damn development is disgusting and contrary to the interests of civilization.

Q28: Quick: Question about Elon Musk has stated the Berkshire’s energy proposal for Texas spending more that $9 billion is wrong. (Power was cutoff for four days in Texas in February).

Abel: They paid 10 times in energy costs over those four days than they paid in the past, so a very substantial event for Texas. We’ve gone to Texas with what we believe is a good solution. The big difference between a battery proposal and our proposal is that we will have power that can be generated continuously for seven days.

 

Buffett: We are also willing to put up $4 billion that if we do not deliver when we say we are going to deliver. Texas is a terrific place to do business. We’ve got one solution and other people may have other solutions. We will cheer when a solution is reached of any kind, and we will cheer a little louder if it is ours.

Q29: Quick: If Elon Musk wants insurance to insure a SpaceX heavy rocket capsule, payload, and human capital on a mission to Mars, would you underwrite any portion of a venture like that?

Jain: No, thank you. I’ll pass.

Buffett: I would say it would depend on the premium. I would probably have a different rate if Elon was on board or not onboard.

Jain: In general, l would be very concerned about writing an insurance policy where Elon Musk is on the other side.

Buffett: Tell Elon to call me and set up Ajit.

Q30: Quick: Since Berkshire has invested in high margin businesses such as Apple and Snowflake, will Berkshire be making more investments like those particularly as Todd and Ted take on larger roles?

Buffett: Companies that require very little capital and grow a lot include Apple, Google, Microsoft, and Facebook. Apple has $37 million in property, plant, and equipment. Berkshire has $170 billion and they are going to make a lot more money than we do. They are in a better business. Microsoft’s business is a way better business than we have. (See’s Candy is a better business that does not require much capital.) They are the best businesses, but they command the best prices.

Q31: Quick: Will Todd and Ted be made available to shareholders at future meetings?

Buffett: They are both absolutely terrific and that is one reason I don’t want people quizzing them on stocks. There is no reason for them to be out educating other people on how to compete with us.

Q32: Quick: Charlie, what are your current thoughts on China and whether the Communist leaders will allow businesses with strong leadership to flourish in decades to come?

Munger: I think the Chinese government will allow businesses to flourish. It was one of the most remarkable things that ever happened in the history of the world when a bunch of committed Communists just looked at prosperity at places like Singapore and said “we’re going to copy what works. They changed Communism. They accepted Adam Smith and added it to their Communism. We have China with a free market with a bunch of millionaires. They lifted 800 million people out of poverty fast. There was never anything like it in the history of the world.

Buffett: Of the 20 most valuable companies in the world today, three are Chinese.

Q33. Quick: Is President Biden’s $1.9 trillion American Rescue Stimulus Plan inflationary?

Buffett: We don’t know what will happen from the President’s policies. The best thing to do is recognize you don’t know and proceed in a way where you get a decent result, no matter what happens.

Q34: Quick: Could you please explain why you decided to exit most of your bank stocks in 2020 except for Bank of America? What’s your view on the future of the banking industry?

Buffett: I like banks generally. I just didn’t like the proportion we had in it compared to the possible risk if we got bad results that so far we haven’t gotten. We were over 10% of Bank of America.  I like Bank of America and Brian Moynihan. We didn’t want to go above 10% in any of the other banks. The banking business is way better than it was in the U.S. 10 or 15 years ago. But when things froze for a short period of time, the biggest thing the banks had going for them is that the Federal Reserve was behind them. The Federal Reserve is not behind Berkshire. It’s up to us to take care of ourselves.

Q35. Quick: What’s your thinking behind your recent large stake in Verizon.

Buffett: We are not in the business of explaining why we own the stock.

Q36: Quick: Senator Josh Hawley recently unveiled a new antitrust proposal that would ban mergers and acquisitions by firms with a market capitalization of over $100 billion. What would happen to Berkshire over the long term if it was prevented from making large acquisitions?

Buffett: Everybody knows that if you change the antitrust laws it could change things at Berkshire. The main thing about Berkshire is how they preserve the culture. Make sure that if you get the wrong person, you can do something about it. And I have been on 20 boards and this has happened more than once. Sometimes it is a terrible problem to get rid of them.

Q37: Quick: Why does Warren say Berkshire’s ability to ensure enormous risk quickly is a less valuable asset than it used to be?

Buffett: Well, because the demand is less.

Jain: In addition to the demand side, the supply side has become a lot more competitive as well. A lot of people who can put big limits, not as much as we do, but they can syndicate a program and put up a billion dollars easily. So that competitive advantage we had, we still have, but it’s no longer as big a deal as it used to be.

Q38: Quick: What are your current and longer term views on Kraft Heinz prospects?

Buffett: Greg’s on the board. We entered a semi-formal partnership with 3G many years ago when it was just a Heinz deal. We went on to acquire Kraft. We are the financial partner, they are the operating partner, although we participate to a degree in any big decisions and they would listen to us.

Abel: We are very comfortable with the fact that they put a strong manager in place in Miguel (Patricio) and he’s put a very good team in place at Kraft Heinz. So we are pleased with the leadership and management team in place. They are managing down their debt structure. We are pleased with the path forward.

Q39: Quick: What happened to the joint venture with JP Morgan, Amazon and Berkshire to reduce health care costs? Are there any lessons to be learned from your effort? We are paying 17% of GDP on health care. No other major country spends more than 11% of GDP. We have had a death rate from Covid way higher than the rest of the world.

Buffett: We learned a lot about the difficulty of changing around an industry that is 17% of GDP. We found inefficiencies so we got our money’s worth.

Munger: The cost of health care in Singapore is 20% of what it is in the US and their medical system works better.

Buffett: We are fighting a tapeworm.

Q40. Quick: Is there a point at which Berkshire becomes too large to manage?

Buffett: Well it’s too large to do certain things. We can’t spend our time looking at $100 million acquisitions. We are repurchasing our shares so our shareholders own more of our companies.

Munger: Decentralization has caused more benefits than defects, but nobody wants to copy us.

Buffett: Decentralization won’t work unless you have the right kind of culture accompanying it.

Munger: And Greg will keep the culture (indicating that Greg Abel will likely be succeeding Warren Buffett as CEO of Berkshire.)

Buffett: If we had a culture of people who were trying to make a lot of money for themselves in the next five years at the top, it would not have worked.

Munger: By the way, the Roman Empire worked as long as it did because it was so de-centraiized.

Q41: Quick: How do Ajit and Greg spend their days? What do you read and how do you review investment decisions?

Jain: I spend a lot of time reading deals that brokers and people send us, reading what they are proposing. Trying to analyze them. 90% of my reading is on what is going on in the insurance business.

Abel: I read about the industries our businesses are in and trying to understand what our competitors are doing. What are the fundamental risks to our businesses, how they are going to be disrupted. Are we allocating our capital properly to those businesses relative to the risks.

Q42: Quick: What is your opinion of Robinhood and other trading apps or Fintech companies enabling all ages and experience to participate in the stock market?

Buffett: I’m looking forward to reading the S-1 on Robinhood. What is their source of income since they say they do not charge the customer anything. 12 or 13% of their “casino” participants were dealing in puts and calls. Their customers are gambling on the price of Apple over the next seven days or 14 days. There is nothing illegal about it. There is nothing immoral. Robinhood is selling their order flow. I hope we don’t have more of it.

Munger: It’s deeply wrong. We don’t want to make our money selling things that are bad for people.

Buffett; But we’ve got the states doing it with the lottery.

Munger: No, but that’s bad too. The states are just as bad as Robinhood.

Buffett: They are taxing hope.

Munger: The states in America replaced the mafia as the proprietor of the numbers game. They pushed the Mafia aside and said, “That’s our business, not yours.”

Q43: Quick: Are you seeing signs of inflation beginning to increase from raw materials purchases by Berkshire subsidiaries?

Buffett: We are seeing very substantial inflation. We’re raising prices. People are raising prices to us and it’s being accepted. Steel cost are going up in homebuilding. People have money in their pocket and they pay higher prices. There is a lot more inflation going on than it would have been anticipated 6 months ago.

Abel: There is pressure on raw materials prices such as steel, timber and petroleum.

Q44: Quick: What do you think of quants (Jim Simons Medallion Fund)? Will you consider hiring a quant at Berkshire alongside Ted and Todd?

Buffett: No.

Munger: The quant fund (Jim Simons Medallion Fund) did fabulously on the short term trading. Long term the record was not nearly as good. And in the short term, they found that they tried to do it too much and they destroyed their own advantage. So there was a limit on the amount they could make.

Buffett: We are not trying to make money trading stocks. We don’t think we know how to do it and we really do not trust anybody else to do it for us.

Q45: Quick: Why has there been a much greater turnover in the equity portfolio recently?

Buffett: I don’t think there’s been that much turnover.

Munger: But there is too much.

Buffett: The truth is our businesses are equities, so we own $400 or $500 billion maybe more in businesses. We don’t turn them over at all. We don’t resell businesses. But as Charlie says we’d do better if we had done less.

Q46: Quick: In Warren Buffett’s 2013 letter he made a prediction that in the next decade there will be really bad news about pensions. Would Mr. Buffett like to comment or revise his 2013 prediction?

Buffett: Covid-19 improves the situation since you have fewer pensioners. But the pension situation is terrible in a great many states. It is not so bad at the corporate level. Pension managers get more and more desperate as interest rates go down. An individual can move to another state particularly if you are rich and old and retired and you can take away an asset and give it to another state that doesn’t need it as much. So you will get adverse selection over time.

Q47: Quick: What’s the biggest lesson both of you have learned during the past year?

Buffett: My biggest lesson has been to listen more to Charlie. He’s been right on some things that I’ve been wrong on.

Munger: We’re in uncharted territoryBuffett: This past year has reinforced our desire to figure out everything possible we can do to make sure that Berkshire is 50 or 100 years from now every bit the organization and then some that it is now.

Quick: That is the last question.