Berkshire Hathaway Inc. held its annual meeting of shareholders in Omaha, Nebraska on May 4, 2019, hosted by Chairman and CEO, Warren Buffett along with Vice Chairman, Charlie Munger.
The meeting went on for almost seven hours with them discussing a wide variety of issues with shareholders. However, these are 5 key takeaways from the meeting that we can apply in our investment decision making process:
1. Buying of Amazon.com
Berkshire Hathaway has made a surprising move by including stocks of Amazon in their portfolio. Given its sky high PE ratio, this has caused many Berkshire stock holders to wonder what inspired to decision to purchase shares of Amazon. According to Warren at the meeting, he mentioned that the decision to purchase Amazon was not his idea nor decision. Instead, according to him, it was purchased by “one of the fellows in the office that manage money”. Buffett went on to explain that he can assure that the managers at the office including the one that bought Amazon is a value investor. This goes to show that not all value investors share the same circle of competence. Buffett could not understand how Amazon worked but one of his managers did which inspires the decision to buy the stock. Therefore, it is important to always stick within your circle of competence.
2. Kraft Heinz
Kraft Heinz has been one of the worst purchases of Berkshire Hathaway. The company lost billions and Warren has openly admitted that he overpaid for the company. But the legendary investor has not sold his interest in the company. At the meeting, he mentioned that the current operations have been improved under the current management overall. This shows the level of confidence he has over the company. Many investors after receiving a string of bad news for Kraft Heinz, sold their shares in disappointment and panic. But Warren decided to stay cool and assess the situation from multiple angles. But to continue to hold on to the company displays confidence and we now know how important it is to strengthen our holding power.
3. New accounting rules effect
The new GAAP accounting rule now requires Berkshire to include all paper gains and losses from its investment portfolio into its income statement. Because of this, he told all stock holders that this will cause the net profit to be totally unpredictable. What Buffett is explaining is that the stock market in general is unpredictable. He could not tell what share prices would be the next time he releases the company’s earnings. Investors should therefore never attempt to predict the stock market and accept that anything can happen in markets.
4. Size is the enemy of performance
A stockholder at the meeting raised concerns that the stock of Berkshire has lagged the S&P500 Index for much of the last 10 years to which Buffett replied that “size is a drag on performance”. He added that the company will not be the highest compounder as compared to other businesses. In other words, the bigger your portfolio gets, the harder it is to find meaningful acquisitions that can give sufficient returns. Most companies are too small or not large enough for Berkshire to purchase and even upon purchasing and the stock price of these companies exploded by 500%, it will not cause much of an impact to Berkshire’s portfolio.
5. Buffett not announcing succession plans yet
Buffett has repeated acknowledged his 2 top operating managers, Ajit Jain and Greg Abel for their outstanding performance. According to Buffett, “ you could not have two better operating managers than Greg and Ajit”. Many stockholders have been speculating that they might be the successor to Warren and Charlie however Buffett declined to announce any formal succession plans. He made it very clear that he intends to continue being the public face of Berkshire Hathaway and allocating seats for Greg and Ajit alongside with him and Charlie was unnecessary.
Disclaimer: All facts and opinions presented are for educational purposes only. This is not a recommendation to buy or to sell. The author involved in the writing of this message has no vested interest in the companies. Please consult a professional for expert financial or other assistance or legal advice.
This article was written by Team VIC
Team VIC is formed by experienced and well-trained individuals from Value Investing College (VIC). The team has been consistently studying the latest stocks market trend in order to focus on educating the layman on investment principles and techniques.