OB Report
June 2020
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Homeschooling for Investors

zicherman By Steven Zicherman MBA, CFA, Equity Analyst

Each year we look forward to the Berkshire Hathaway shareholder meeting. It’s an opportunity to reset and come back to some stalwart investment principles. This year’s meeting was unusual, to say the least. There was no pilgrimage to Omaha, no 6:00 AM lineup to get a decent seat and no Charlie Munger. Instead, we tuned in online to see Warren Buffett and Vice Chairman Greg Abel sit six feet apart in an empty convention centre.

The lead-up to the meeting was different too. As the market was plummeting in March, many wondered what Buffett was thinking. He was notably silent on the market decline and announced no plans to speak publicly until the Berkshire meeting in May. It seemed odd that he would shy away from the media during one of the fastest market selloffs in history, especially given his public appearances during the 2008/2009 Financial Crisis.

Dedicated Buffett followers recall October 16, 2008, with pride. That was the day he wrote an op-ed piece in The New York Times titled, “Buy American. I am.” (This article highlighted his much-quoted philosophy, “Be greedy when others are fearful,” which we discussed in last month’s Odlum Brown Report.)

It was a scary time back then. Financial market issues were spreading to the broader economy. People were anxious as unemployment shot higher and weaker business activity dominated the headlines. Sound familiar? Buffett’s response to the doom and gloom, as his title suggested, was to buy U.S. stocks. Admittedly, he was early. The U.S. stock market continued to decline before bottoming on March 6, 2009. Still, it was an inspirational moment and one of several occasions where Buffett solidified his reputation as a dependable voice of reason. So, we waited with bated breath for the 2020 Berkshire meeting to glean more wisdom from the Oracle himself.

There was one hint prior to the meeting that Buffett’s appetite for risk was less than enthusiastic. Charlie Munger noted in an April interview with the Wall Street Journal that “Warren wants to keep Berkshire safe for people who have 90% of their net worth invested in it. We’re always going to be on the safe side.”

Berkshire Hathaway always discloses quarterly earnings on the morning of its annual shareholder meeting. Investors who were expecting significant new equity investments or share repurchases woke up to disappointment. The results showed that Berkshire was relatively inactive in the quarter ending March 31. Action (or inaction) really does speak louder than words, and it was clear that Buffett was preserving capital rather than being greedy.

When the U.S. market took a nosedive in 2008/2009, Buffett was buying – so why not now? Warren Buffett is a master investor because he assesses opportunities in the context of probabilities. In other words, he considers what’s most likely going to happen. And when those probabilities are in his favour, he takes bold action. When he talked at this year’s meeting about the impacts of COVID-19 on the economy, he described the uncertainty as an extraordinary range of outcomes. It’s a reasonable observation; any number of things could happen. Some savants are predicting a V-shaped (or similarly configured consonant) recovery, implying that we will be quick to return to “normal.” But the truth is, nobody knows what happens next when global economies are nearly completely shut down. Not even the Oracle of Omaha.

To consider the future, Buffett turned to the past. He opened the meeting with a 60-minute review of American financial history. He noted how people were scarred for decades following the Great Depression and that many living in 1930 had no idea they were in the early days of tougher times ahead. While he emphasized the long-term resiliency of the United States, his tone was unmistakably cautious. What lies ahead for the economy in general is unknown, but Buffett did speak specifically about some of Berkshire’s holdings and how the pandemic is affecting them.

Insurance
Berkshire does not expect to incur any COVID-19-related insurance losses. While litigation is likely to be a concern in the industry going forward, Berkshire’s primary exposure is to auto insurance, which is actually benefitting from the current situation. As people are driving less, claims are also declining. Overall, Berkshire shareholders should rest easy knowing that the company has a long history of conservative insurance accounting.

Airlines
Adding to the defensive and cautious tone of the meeting was news that Berkshire Hathaway sold its airline investments. In 2016, the company bought shares in the four largest U.S. airlines: American, Delta, Southwest and United Continental. Berkshire paid roughly $7.5 billion for a 10% stake in each company, and sold the positions in April 2020 for $6.5 billion.

Buffett’s sell discipline is impressive. His thinking around the airline business is also instructive. While he doesn’t know what the airline businesses will look like in three to five years, he is realistic enough to appreciate that the equity in those businesses can be wiped out entirely if the travel industry is slow to come back. The opportunity to compound wealth quickly disappears when money is lost. Buffett’s willingness to change his mind when the facts change is no easy task and sets him apart from others. It’s a trait all investors should embrace and emulate.

Share Buybacks
Buffett’s comments on share repurchases underscored the notion of safety over risk. He said, “I don’t feel that it’s far more compelling to buy Berkshire shares now than I would have felt three months, or six months, or nine months ago.” Buffett went further, essentially saying that Berkshire shares appear less attractive than the option value of money. He is clearly comfortable holding onto Berkshire’s $137 billion in cash.

Succession
Also on stage was Berkshire’s Vice Chairman of Non-Insurance Operations, Greg Abel. While Charlie is irreplaceable, we were impressed with Abel’s commentary. Like Charlie, his candor was refreshing. And, he’s Canadian, eh! In terms of succession, we would be quite comfortable if Abel took over management of the company.

Reflections
Having digested the experience, this year’s Berkshire meeting was one of the best we have had the pleasure to attend – or stream, in this case. Each year, we highlight the key takeaways, which are important in any market environment, but perhaps even more so today.

First, when the odds are not in your favour, create value by doing nothing. Second, the most powerful means of compounding returns is not to lose money in the first place. Finally, for those investors with a long-term horizon, holding high-quality companies should generate a reasonable return over time.  



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