April 23, 2019
The Berkshire Hathaway Annual Meeting in Omaha is upon us! This annual pilgrimage to Capitalist Mecca, a.k.a. the “Woodstock of Capitalism,” is in just two short weeks!
Many of you know of my deep admiration for all things Berkshire Hathaway, including for Chairman and CEO, Warren Buffett and Vice Chairman, Charlie Munger. While I held them in regard for many years, I didn’t always know a heck of a lot about them. Then came my first attendance in 2016, at which time I became an immediate convert. So much so that I purchased BRK shares as soon as the landing wheels hit the runway upon my return! I then proceeded to write a three-part series about it.
Anyone who has looked at BRK’s performance over the past 23 years since going public–or even dating back to 1964 when one could first buy into Berkshire Hathaway–can’t help but be impressed by their astounding results: That $1000 back then could be millions today is mind-blowing.
What’s equally impressive is that over almost any 10-year period since going public, BRK outperforms the S&P. By almost, I mean I’ve researched the data, and since their going public in 1996, there have been only forty-three days (43!) where the 10-year performance of BRK was less than that of the S&P.
However, all 43 of those days have occurred since mid-September. That sort of performance highlights a shorter time-horizon blip in BRK:
This short-term dip has led to a lot of hand-wringing about whether Warren still has “it.”
What many fail to recognize is there are several critical factors that have made it increasingly difficult to outpace the S&P consistently over time. Factors that are directly tied to BRK’s enormous scale:
1) Big on Big: At their current size, it’s near impossible to generate actual dollar returns that convert to the percentage returns required to outpace the market. As Business Insider puts it, if BRK grew over its second 50 years as it had during its first 50 years, it would end up with a value of $7,400 trillion in 2068. That’s 30x the combined wealth of every person in the entire world. Not. Gonna.Happen.
2) Private/Public: Warren has increasingly gone outside of his private company “comfort zone” to put money to work, making sizable bets on large public companies. That has not been his historical bread and butter, and those largest public companies have underperformed vs. the market in the past decade, thus dragging down BRK’s overall performance.
BRK’s public holdings were valued at $208B at EOY 2018. 80% of that (over $166B) was spread across just 10 companies. And, see that performance table above? Well, let’s add BRK’s public company performance across those 10 companies to the table…
Does Warren Still Have It?
Without getting into the weeds with weighted averages and BRK net of public holdings, as well as the likely oversized impact of the Kraft-Heinz accounting errors and BRK’s $3B write-down, it’s obvious these large public holdings are having a significantly negative impact on BRK’s overall performance.
The real question is: Can Warren continue to put this insane cash hoard to real work–with a relative level of nimbleness akin to his investments from 10, 15, 20 years ago–and is there a way to do so on the private markets, where he has that Midas touch? Or, are we now at a point where we’re relying on him to be a better public company stock picker?
If it’s the latter, I’m more concerned. It’s just not how he became Warren “the Oracle” Buffett (I’d still never bet against him.)
An Unhealthy Obsession?
Over the past several years, I’ve spent a likely unreasonable amount of time thinking about BRK, including the aforementioned three-parter and a super-deep dive into the economics of Berkshire Hathaway in 2017. I’m profoundly committed to understanding how it makes so (so so) much money, and what might be next for them.
Last year I shared some thoughts in a recap of the meeting that focused on some of Warren’s key messages. This year, I thought I’d briefly touch on those same messages in advance of the BHAM, and reflect to see what has transpired in the 12 months since Warren and Charlie last set foot on stage in Omaha:
1) Technology: They continue to eschew it. Remember they consider Apple to be a consumer products company. Also, worth noting the NASDAQ is up 12% since the last BHAM. In fact:
BRK will continue to avoid pure tech (though perhaps something is afoot with Crypto–read below), but obviously the tech sector is integral to every company of size these days, so they will always be just one degree removed from these NASDAQ companies. I will be very interested in their response to what I’m sure will be a question next week on their lack of tech investments. I mean, look at what the NASDAQ has done!
2) Cyber: In this year’s annual investor letter, Warren once again focuses on the potential for a “super-cat” event. What I found interesting is that he broadened the conversation a bit. In 2018, the discussion was based around the potential for a cyber/human-made event. In 2019, he now clarifies that the super-cat can be a natural disaster (hurricane/earthquake/etc.) that dwarfs Katrina, or human-made, such as a cyberattack or the like.
He also points out that his companies are not writing a lot of cyber insurance policies, and he is hoarding cash in advance of the super-cat event so they can weather the storm. The combination of these two points to a clear perspective: not only that he thinks it’s coming, but that he’s really only comfortable playing on the natural side of the coin. He doesn’t think the market knows how to adequately price for the man-made event, and is staying away. Loss of short-term premiums now in exchange for lack of exposure on the back end. To me, it might be an indication that he thinks the human super-cat event is more likely to happen in the short-term, though he has never said as much.
3) Crypto: Buffett has famously referred to Bitcoin and related currencies/exchanges as “rat poison,” and those that invest in them as “delusional.” Strong words. What’s fascinating is that in October, he invested $600mm in two different fintech companies, one in India and the other in Brazil. The Brazil investment followed announcements by that country’s powers-that-be, announcing they would soon launch Bitcoin and Ethereum exchanges.
$600mm is not a huge sum for BRK, but it’s not exactly chump change either. Might this be a signal of the shifting of Warren’s mindset? Or a gradual changing of the guard as Warren looks to hand off the reins? Might also this be the path toward the next wave of BRK’s private company investments? It will be fascinating to find out.
4) Healthcare: There was some buzz at last year’s meeting about this three-headed hydra of BRK, Amazon, and JPM. They were allegedly going to revolutionize healthcare in the U.S., starting with their 1.2mm combined employees. Since then, we’ve been given a CEO for the venture, and then last month, a name (Haven) and a website. Not much else.
Understandably, BRK is taking its time on Healthcare, but I have to believe that whatever they’re going to do, has to be developed in the context of the U.S. political and healthcare reform climate. It makes no sense to go down this path when you’re not sure the assumptions will hold 18 months from now. Such is the conundrum with our healthcare system and the politics around it (a topic for another blog post!).
All the announcements and interviews–mostly by and with Warren–have been around the altruistic nature of Haven, a non-profit, and the goal to improve healthcare for all in the U.S., using the aforementioned 1.2mm employees as a testing bed for how to address healthcare problems at large.
Where it goes from here is anyone’s guess. Given the timing of the announcements, and hiring and information dissemination, I’m not holding my breath for anything anytime soon.
Those were the biggest themes of last year’s BHAM, and they haven’t gone away – in fact, arguably all four of them have taken on increasing importance and have received even more attention since then, so I’d expect them to be front & center again next week.
On top of that, the more recent performance of BRK vs. the market that we outlined above will have to be discussed in some way.
Beyond that, it’s anybody’s guess. It has always been Warren & Charlie’s party, and they’ll eat their brittle and drink their Coke and opine on whatever it is that they want to opine upon. The fact that we’re invited to listen in is worth its weight in gold (but not bitcoin; definitely not bitcoin).