Every year, we at Fortis make the trek to Omaha to learn from the best investment minds alive today: Warren Buffett and Charlie Munger.
Beyond the extensive networking events that allow us to meet other fellow value investors and share our latest investment ideas and strategies for growing our firms, the highlight of the weekend is usually the 5 hour Q&A session with Warren and Charlie.
In two 2.5 hour increments, the 86 and 92 year old billionaire duo take questions from the media, analysts and other stockholders in a rotating fashion. Many topics were brought up this year from the impact of the low interest rate environment to the health aspects of Coca-cola to the morality of Valeant Pharmaceuticals. As always, what stands out most about these two brilliant men is their humor, wit and ability to cut through all the noise to get at the heart of a matter.
Warren and Charlie are certainly two of the most impressive men of their age alive today. In the words of Gerard Albanese Jr. (Chief Underwriting Officer for Markel Corp.) "what I'm most impressed with is their bladders of steel for men of their age. I got up 3 or 4 times in the morning session alone!" Beyond their bladder control though, their mental prowess is par none. At one point in the meeting, Buffett ripped off a mental math problem about the amount of money saved by not selling a certain amount of kilowatt hours back to the grid in Nevada at an above market price... He multiplied some massive number by 365 in no time in his head. Paul and I were trying to keep up (and we are arguably pretty good at mental math, Paul much more than me) and we were left in the dust. It was a subtle statement about his mental capacity; even at his age, he has not lost his touch.
On Sunday morning, we attended the Markel shareholder meeting (Markel is a smaller insurance company run and structured very similar to Berkshire Hathaway) and the CFO made a great point when asked about her favorite part of the Berkshire meeting. She said "Ya know, Tom always reminds me that you don't usually go to church every week to learn something new, you go to reinforce what you already know and believe. That's what the Berkshire meeting does for me."
I think this is spot on and is exactly how I feel. We have read tons and tons of material written by Warren and Charlie, including all of their letters to shareholders, partnership letters, books about them, books they recommend reading, watched many interviews with them, etc. There isn't a ton they are going to say that we haven't heard them say before. However, there is something about listening to their approach that reminds you about the right way to invest and run your business. Their principles are so simple, but so true. Here are a few of the best reminders from the weekend:
- Invest as if you are buying a whole business, not just a stock. When managing money it is very easy to get short-term oriented and focus on short-term events such as quarterly earnings, recent press releases, product launches, etc. And while these are good things to follow and thoroughly understand, it would be very unlikely that something short-term in nature like those would ever cause you to actually sell or buy an entire business in the private markets. When you buy a private business, you can't simply click a button to sell it, there is much more involved. Therefore, when you decide to buy or a sell an entire business in the private markets, you would likely be thinking about it in 5-10 year timeframes at least. You would only feel confident buying the business if you believed it would be earning substantially more money 5-10 years from now, and you wouldn't sell it simply because of a bad quarter or short-term fluctuations in the numbers. Additionally, you would have to really trust the management team that was going to run the business before you put your hard earned money into it. This kind of long-term orientation focuses you more on the long-term durability and competitiveness of the business, the integrity and skillset of the management team and less on whether the upcoming election will hurt the industry sentiment, or whether a small increase in interest rates may cause the business to report a short-term decline in earnings.
- Macro bets are too hard, focus on buying businesses. There were probably a dozen times when Warren and Charlie were asked about their outlook for interest rates, the US dollar, the US economy, etc. and every time they noted that they "aren't smart enough to know the answer" to those types of questions. Well if Warren and Charlie who have spent 70-80 years reading and learning about these things every day aren't smart enough to wager money on these kinds of forecasts then we certainly aren't and shouldn't try.
- Don't complicate things for the sake of boosting your ego and justifying your paycheck. Buffett mentioned over and over again at the meeting to be wary of "consultants". He warned of consultants in many facets, such as consultants that help design compensation schemes, help you find investment managers and those who help you decide whether you should sell your business. Often leaders want to utilize these consultants so that they can make it seem like their job is more complicated than it really is (and therefore justify a fat paycheck) and to have someone to blame when things don't work out. Buffett doesn't believe in this approach. He believes in using your own common sense to solve problems and accepting personal responsibility for outcomes you can control.
- Future generations born in America will continue to have better lives than those born before them. American progress will continue because this country is great and has been endowed with a capitalist system that incentivizes humans to solve problems and increase their standard of living. Buffett is very confident that the standard of living will be significantly higher 30 years from now than it is today. As he has said many times, kids being born in America today have hit the genetic lottery. How much of your lifetime income would you give up to be born in America rather than, say, some part of sub-Saharan Africa? I imagine it would be significant.
- Incentives drive business. Buffett and Munger both discussed incentives a number of times and how you must have employee incentives aligned with the outcomes you desire as a leader because employees will end up doing whatever they are incentivized to do. Munger has spoken before about how he is probably in the top 5% of people who understand incentives and has still consistently underestimated the impact they have. At the meeting they specifically discussed how they incentivize employees of GEICO from a financial perspective. However, there are both financial and emotional (such as title, recognition, praise, etc.) incentives and a good manager will look at all of them and align them with his or her desired outcomes for the business.
- Reputation is everything. While Buffett's investment skillset is second to none, the aspect of it that is most impressive is not his ability to crunch numbers or synthesize data, it is ability to judge people. Much of his success is based on the people he has chosen to run his businesses. People who will continue to build the reputation of Berkshire and add value to it, rather than tear it down. As a result of Berkshire's stellar reputation, it has access to opportunities other firms don't, and it can add value to certain acquired businesses that others wouldn't be able to. Every year at the meeting he shows a video of a speech he made to Congress after taking over leadership of Solomon Brothers, and in it is one of his best quotes on this subject: "If you lose money for the firm I will be understanding, but if you lose even a shred of reputation, I will be ruthless." Berkshire's reputation is what breed's significantly more success than would otherwise be possible.
While these are fairly straightforward lessons we have heard Warren and Charlie discuss before, they are good reminders of the ways in which we should invest and conduct our business. The Berkshire Hathaway shareholder meeting is a great experience and if you haven't gone before, you should consider going with us next year.