Jun 042020

Berkshire Hathaway Annual Meeting

May 2, 2020


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


Warren Buffett (89) began the virtual meeting (Covid-19 pandemic) with a statement that lasted approximately 1 hour and 45 minutes. Greg Abel (59) was also present. He thanked Dr. Fauci and Bill Gates for educating and informing him about the Covid-19 pandemic. In 2008-and ’09 our economic train went off the tracks and there were some reasons why (weak banks). But this time we just pulled the train off the tracks and put it on a siding and I don’t know of any parallel in terms of one of the most important countries in the world. This is quite an experiment and we may know the answer to most of the questions reasonably soon, but we may not know the answers to some very important questions for many years. So it still has this enormous range of possibilities.  We have faced many problems (World War II, Cuban Missile Crisis, 9/11) and the American miracle has always prevailed, and it will do so again.

He mentioned that Berkshire had invested between $7 and $8 billion to own roughly 10% of each of the four major airlines. As a result of the pandemic and the negative outlook for the airlines, Berkshire sold the airlines at a substantial loss.

The formal business meeting was then held (votes counted from previously submitted proxies).

Thousands of shareholder questions were previously submitted to three business journalists: Andrew Ross Sorkin (CNBC and the New York Times), Becky Quick (CNBC), and Carol Loomis (Retired Fortune). The three journalists previously agreed on which questions would be asked by Becky Quick. Additional questions were submitted to Becky Quick during the annual meeting.

Q1. Becky Quick: What are the names of the airlines that Berkshire sold?

Buffett: They are the four largest U.S. airlines:  American Airlines, Delta Airlines, Southwest Airlines, and United Continental. The world has changed for the airlines. But it’s always a problem if there are things on the lower levels of probabilities that happen sometimes, and it happened to the airlines. And I’m the one who made the decision.

Abel: Really nothing to add, Warren.

Buffett: Okay. We got another Charlie here.

Abel: I didn’t intend to use that line. But you have covered it well.

Q2. Quick: Why are you recommending listeners to buy now, yet you’re not comfortable buying now as evidenced by your huge cash position?

Buffett: We take a worst case scenario into mind that probably is a considerably worse case than most people do. I’m not recommending that people buy stocks. It all depends on your circumstances and if you have a long time horizon. Fear is like a virus. It strikes some people with a greater ferocity than others. If you cannot handle fear psychologically then you should not own stocks.

Q3. Quick: What did Berkshire spend the $426 million on equities in April? Was it adding to existing positions or was it initiating new positions?

Buffett: I don’t remember but that number includes both Todd Combs and Ted Weschler.

Q4. Quick: In the last financial crisis Berkshire acted as a lender of support in eight different deals. Why have we not acted as a lender of support this time?

Buffett: We haven’t seen anything attractive.

Q5. Quick: Would Berkshire send cash to its operating companies?

Buffett: We have sent money to a few of our companies but will not if the future does not look good.

Abel: Very few of our companies have actually required funds.

Buffett: Anything can happen and we want to be prepared for anything, but we also want to do big things.

Q6. Quick: Berkshire had 391,539 employees at the end of 2019. Which areas of our operations have already been hardest hit or will be by the coronavirus pandemic?

Buffett: Our employment could be reduced, but not by much.

Abel: Our businesses have adjusted. Some have had to adjust more. See’s stores will reopen . At that point we reemploy the folks. Five years from now we see our employment numbers being far greater than they are today. And that we see great prospects within the operating businesses as a whole.

Q7. Quick: In an interview on April 17th, Charlie said that some small businesses owned by Berkshire would not reopen after the pandemic eases. Can you elaborate on which businesses might be impacted?

Buffett: There were businesses that were having problems before and that have even greater problems now. When change happens in the world, you adjust to it.

Abel: One company that will be impacted is a food service group which sells equipment to a variety of restaurants.

Q8. Quick: Has Berkshire changed its long term policy in regards to keeping underperforming subsidiaries?

Buffett: If a company will likely lose money in the future, we will try to sell it.

Q9. Quick: How is Precision Castparts handling the severe slowdown in the aerospace industry?

Abel: The defense business remains very strong within Precision Castparts. The commercial business depends on demand from Boeing.

Buffett: Boeing is one hell of a company and it’s important. It’s a huge exporter and it affects a lot of jobs and some of them are with us.

Q10. Quick: Do you think Geico will experience unusually high profitability in 2020 due to the reduced amount of driving, even after giving customers a 15% credit?

Buffett: Geico is the second largest auto insurance company. We are giving back $2 ½ billion over six months. We are letting pour policyholders delay their payments. This could be a significant cost to us.

Q11. Quick: What is the risk to Berkshire’s insurance businesses from COVID-19?

Buffett: We will have litigation costs, but proportionately it’s not the same with us as with some other companies which have been heavier in writing business interruption as part of a commercial, multiple peril policy. We have reserved on the conservative side.

Q12. Quick: Will Berkshire offer pandemic coverage in future insurance policies?

Buffett: We would be willing to write pandemic insurance at the right price.

Q13. Quick: Would Berkshire make favorable deals with companies in urgent need for capital after Warren and Charlie are gone? (Question directed to Greg Abel.)

Abel: The culture at Berkshire will not change without Warren and Charlie at the helm. We will still have the ability to act quickly and the business acumen to evaluate transactions.

Buffett: Between Greg and Todd and Ted, we’ve got three extraordinarily good buyers in terms of allocating capital.

Q14. Quick: Has Berkshire or any of its businesses participated in any of the bailouts from the Fed or the Treasury?

Buffett: No.

Abel: No. We would not be participating in any of those programs.

Q15: Quick: Has any of Berkshire’s smaller businesses such as Oriental Trading and Nebraska Furniture Mart applied for PPP loans or participated in the CARES Act? If not, how will Berkshire make sure they can continue to employ their employees?

Buffett: None have participated in the government programs. Both Nebraska Furniture Mart and Oriental Trading have a fine future.

Abel: Our businesses are in sound shape.

Buffett: But the future course of the virus is unknown and what impact it will have on businesses.

Q16. Quick: What are your thoughts on investing in an S&P 500 index fund for someone with a 10 year time horizon? Active managers have been saying the days of the index fund are over.

Buffett: I have not changed my will and it directs my widow would have 90% of the funds in index funds. You don’t make a lot of money advising an S&P 500 index fund. If one side charges high fees for picking stocks and the other side has low fees, I know which side is going to win over time. Jim Simons has produced an extraordinary return with brainpower but they are going to charge a lot of money and maybe close their fund because they can’t do it with large amounts of money compared to how the record was established in the past. There’s a lot more money in selling than in managing if you look to the essence of investment management.

Q17. Quick: Why has Berkshire underperformed the S&P 500 over the past 5, 10, and 15 years?

Buffett: It is difficult to outperform the S&P 500 with large sums of money. But I have 99% of my money in Berkshire. And most members of my family have close to it.

Abel: We have the assets and the people to have a good chance to outperform the S&P 500.

Buffett: Our book net worth at Berkshire at the quarter end was $370 billion which is greater than the book net worth of any corporation in the U.S.

Abel: We have great prospects and have three really great core businesses.

Buffett: We are better positioned than anybody in the energy business just because we don’t have dividend requirements. We retained $28 billion of earnings over 20 years. You can’t do it if you run a normal public company. We can do things in insurance that nobody else can do.

Q18. Quick: Earlier I noticed that you did not mention Ajit Jain when you mentioned Greg, Todd and Ted. Is Ajit out of the picture?

Buffett: Ajit is not in the capital allocation business. He evaluates insurance risks and he possesses a rare talent. He is an incredible asset.

Q19. Quick: A question for Greg Abel on capital expenditures on energy.

Abel: We focus on providing incremental capital to incremental wind, incremental transmission and renewable solar. This will drive incremental growth in the energy business.

Buffett: We get decent returns on capital not super returns.

Q20. Quick: A question about Berkshire’s investment in Occidental Petroleum that has not worked out so far.

Buffett: Investments in oil companies depend on the future price of oil. Since oil prices went down a lot, so did the value of Occidental.

Q21. Quick: Is there a risk of permanent loss of capital in the oil equity investments?

Buffett: There certainly is. It will affect the banking industry to some degree (bank loans). There’s a lot of money that’s been invested that was not invested based on a $17 or $20 or $25 price for WTI, West Texas Intermediate oil.

Q22. Quick: Could you bring us up to date with the status of your equity put contracts?

Buffett: In 2006 we wrote about 50 contracts. The shortest was 15 years and the longest was 20 years. We received roughly $4.8 billion. The contracts were based on one or more of four indices. They were European style puts that were payable only on their expiration dates. We did not have to put up any collateral. They probably had an original nominal value of $30 billion or $35 billion if everything went to zero. (DJIA, FTSE, Nikkei and one other). A number of those have run off. So we now have about $14 billion nominal. We haven’t paid out anything significant. We bought back a few of them. The final one comes due in 2023.

Q23. Quick: Could there be a post-Buffett breakup of Berkshire?

Buffett: There would be major tax implications for Berkshire if it split up its companies. Under the current structure, we can move capital around between businesses. We can do things in insurance that we couldn’t do unless there were the backup earnings and capital employed in the other entities. Berkshire’s current structure will be around for a long time. Wall Street will propose breakups because of the fees they would generate.

Abel: The main advantage of the current capital structure is the ability to move capital among our businesses.

Q24. Quick: How would Berkshire’s insurance companies respond if interest rates became negative in the U.S.?

Buffett: With negative interest rates, you should own equities (not fixed income).

Q25. Quick: Question about Berkshire’s capital intensive businesses.

Buffett: Increased corporate taxes would have a negative impact, especially on capital intensive businesses. You really want a business that doesn’t take any capital and keeps growing. The largest 5 companies account for $4 trillion in a $30 trillion market They don’t take much capital. Our energy and railroad businesses require a lot of capital. But our insurance businesses do not. It requires having capital available, but we are able to invest that money in things we own anyway. So we’re particularly well suited for the insurance business and it’s really been the most important factor in our growth over the years.

Abel: Our capital intensive businesses can earn a good rate of return and provide protection in an inflationary environment as a result of regulatory formulas and arrangements with our customers.

Buffett: We have invested a lot of capital in our railroad but it will be a solid business for many decades to come. We will invest the capital if we can earn decent returns and we have the capital.

Q26. Quick: Is there a concern about the U.S. government defaulting on its bonds?

Buffett: No If you print bonds in your own currency. Our debt gets refunded. The trick is to keep borrowing in your own currency.

Q27. Quick: (THIS IS MY QUESTION) “This question comes from David Kass. He is a clinical professor of finance at the University of Maryland and he says, Berkshire has invested in many companies with stock buyback programs. Recently there has been a backlash against buybacks. What are your views on this subject?”

Buffett: Buybacks are a way of distributing cash to shareholders. Whether a company should buy back their stock depends on two things. One, is they should retain the money they need for intelligent growth prospects. Second, they should be buying their stock back at a price below what they think it is worth. We will buy back shares when it is to the advantage of the continuing shareholder to do so. There should not be the slightest taint to buying back shares any more than there is to paying cash dividends.  People now say how terrible it was that companies bought back shares but they didn’t say it was terrible for them to pay dividends. These companies would have more money now, but they were doing what was intelligent at the time and I hope they continue to do it as intelligent as they go forth.

Abel: Obviously we are supportive of buybacks but there are companies that used financial engineering – just a little extreme and too cute that effectively you’re using every ounce of your balance sheet to buy back stock at a time where you are really creating no cushion for your business for any type of event or bump in the road. Therefore, you get some backlash, but there are still companies that do it right.

Buffett: I don’t think stock buybacks are immoral. We favor companies that take care of all their requirements for growth, maintain sound balance sheets, and leave a margin for error. And if they find their stocks selling below what the business is intrinsically worth, I think that they are making a big mistake if they do not buy in their stock.  Now it is a political football. But Berkshire is going to do what it thinks makes sense for shareholders. And we like investing in companies that think that way too. And then not all companies do.

Q28. Quick: A question about Berkshire splitting it’s A shares to minimize a tax liability by a shareholder

Buffett: You can convert your A shares into B shares which is what I do when I give shares away.

Q29. Quick: When you read financial reports how do you decide whether a bank has done dumb things?

Buffett: The banks are in much better shape today than in 2008-09. We decided to shut down part of the economy in a big way and it was not the fault of anyone that it happened. But the banks need regulation. They benefit from the FDIC but must behave well. The banks are going to have problems with energy loans. Some with consumer credit. But they know it, They are well reserved and well capitalized for it. We own a lot of bank stocks.

Abel: We do not know how long the pandemic will last or if there will be a second event. The risks are unknown. The banks will have to continue to manage that as businesses do.

Q30. Quick: Why didn’t Warren repurchase more shares of Berkshire in March when they dropped to a price that was 30% lower than the price he had repurchased shares for in January and February?

Buffett: It was a very, very, very short period where they were 30% less. But I don’t think Berkshire shares relative to present value are at a significantly different discount than they were when we were paying somewhat higher prices.  As Keynes said, “when the facts change, I change my mind. What do you do sir?” But I don’t feel that its far more compelling to buy Berkshire shares now than I would have felt three months or six months or nine months ago. We’ll see what happens.

Abel: We approach it when we see it is the right thing for our shareholders to be repurchasing..

Buffett: The value of certain things have decreased. Our airline position was a mistake. Berkshire is worth less today because I took that position.

Q31. Quick: Why are credit card interest rates so high and what forces might drive them lower in the future?

Buffett: Credit card rates respond to competition and loss potential which has gone up significantly in the last few months. People should pay off the interest on their credit cards. (18% in an example mentioned by Buffett)

Q32. Quick: What’s your opinion regarding the Payroll Protection Plan?

Buffett: It’s a very good idea to take care of the people who are having terrible troubles taking care of themselves in a period like this. But a large program like this must be very difficult to administer. I give credit to both Congress (and Treasury) for acting quickly.

Q33. Quick: Question from Bill Murray, the actor who is also a shareholder of Berkshire. How will our country take care of the pandemic frontline healthcare, food supply, and delivery people?

Buffett: Our society should take care of those people.

Abel: We should also take care of our teachers. I greatly appreciate our delivery employees in our businesses.

Q34. Quick: Many people in the press and politics are questioning the validity of capitalism. What can you say to them that might prompt them to take a look at capitalism more favorably?

Buffett: The market system works wonders and it’s brutal if left entirely to itself. The market system needs government and it is creative destruction. I think we can keep the better parts of our market system and capitalism, and we can do a better job of making sure everybody participates in the prosperity that it produces.

Abel: Capitalism is the best system out there and it needs some fine tuning.

Q35. Quick: Warren mentioned that Ben Graham is one of the three smartest people he’s ever met. Who are the other two?

Buffett: I may not be one of the smartest, but I am smart enough not to name the other two. Smartness does not necessarily equate to wisdom. It’s interesting that IQ does not always translate into rationality  and behavioral success or wisdom. I know people who are extraordinarily wise who would not be in the top three on an IQ test. But if I wanted their judgment on some matter, even if I wanted to put them in a position of responsibility someplace, I might prefer them to, we’ll say one of the three.

Buffett: (Closing statement) We’ll see you all next year and we’ll fill this place.  Never bet against America.



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