By Ben Rundle and Robert Miller| Portfolio Managers at NAOS Asset Management
NAOS Asset Management attended the 2018 Berkshire Hathaway Annual Shareholders Meeting on Saturday, May 5 2018 in Omaha, Nebraska. During the 6 hour meeting, Warren Buffett and Charlie Munger answered questions from journalists, analysts and shareholders, of which 40,000 were in attendance.
Five of most important takeaways from the meeting in our view were the following;
1. Trade Wars
Recently, headlines have been dominated by trade war talks between the US and China which has contributed to an increased level of volatility in financial markets. It is the view of both Warren and Charlie that if two dominant countries are jostling for a leading position in the global economy you will always have some tension between the two.
Despite this however, they both believe that the US and China can and will operate alongside each other without huge conflict. They believe that the two countries are too smart to do anything very detrimental when it comes to trade wars.
2. Newspaper Decline
Berkshire Hathaway own significant interests in traditional newspaper businesses. Warren and Charlie have been surprised at the rate of decline in newspapers, noting that newspapers are even declining in small towns where they had expected them to be more resilient.
Warren noted that papers including the Wall Street Journal, The New York Times and the Washington Post have viable economic models given their presence in the digital world, but their traditional print businesses will almost certainly continue to shrink.
The decline has happened much faster than they thought it would. News is what you want to know that you don’t know, it is a fundamental societal change that traditional daily newspapers are no longer a primary source for this.
3. Crypto Currencies
Crypto currencies are a non-producing asset. Gold is also a non-producing asset. If you had bought gold at the birth of Christ, the compound rate of its value between then and now is awful. Any time you buy a non-productive asset, you are relying on someone else to buy the same asset from you at a higher price.
We have seen it before with tulips and other non-productive assets, you can collect stamps and make money but you are relying on someone else to see more value than you & that person is relying on someone else to see more value than them. You make your money on productive assets. It is pure speculation when you buy something simply hoping that its value will be higher the next day.
It usually comes to a bad ending and crypto currencies will come to a bad ending. Bubbles like these encourage Charlatans and the mania then feeds on itself, it never ends well. Charlie summed it up, quipping that “someone else is trading turds and you decide you can’t be left out.”
4. The World is Going More 'Asset Light'
Corporate profits compared to GDP are much higher now than they were 20 years ago. The top 4 companies in the S&P500 require very little in the way of tangible assets to produce very high levels of profitability.
Those 4 companies combined make up almost 10% of the value of all publicly traded companies. They are hugely profitable. They are also going to make even more now that corporate tax rate has gone down, in Warren’s view people may be underestimating the effect of that.
Buffett went on to admit they had made the wrong decision on Google by not investing, they didn’t understand it and he underestimated what Bezos could do with Amazon, he described it as a miracle.
5. Reputation Gets a Better Price
When Berkshire Hathaway makes an acquisition it is usually a family owned private business with the management team staying in place. When buying they promise the acquired company 3 things;
i. Permanence (i.e. they will not sell),
ii. Automation (i.e. they will not interfere with operations) and
iii. Decentralisation (i.e. they will operate separately from Berkshire Hathaway).0
Due to their reputation in upholding these 3 promises they are often able to buy businesses at a cheaper price than someone else. Warren Buffett summed up his views on reputation with the following quote “Lose a dollar for our business and I will be understanding, lose a shred of reputation and I will be ruthless.”
After more than 50 years of running Berkshire Hathaway the wisdom offered by both Warren Buffett and Charlie Munger is of significant value to investors around the world and NAOS believe that continuing to learn from investment masters is an important part of improving our investment process.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
Published: 7 May 2018