Trading Talk: Warren speaks, we listen | Berkshire highlights

Speaker 2: [00:00:57] Welcome to another episode of Equity Mates, the podcast, where we help you learn to invest in 45 minutes or less. We break down the world of investing from beginning to dividend so that you can hopefully make some returns. My name is Bryce and as always, I'm joined by my blanket Covid equity body Ren. How's it going, bro? [00:01:13][16.0]

Alec: [00:01:14] I'm good, Bryce. I'm a little bit nervous about how this episode is going to go because we're doing it on a very makeshift way. [00:01:20][6.8]

Bryce: [00:01:21] lot of moving parts to this episode. We're not in the studio. Covid Scott is good for this one bit back under the blankets and for this episode you've got a few bits and pieces to move around. So apologies if there are some audio issues, but we are doing the best we can given the circumstances. [00:01:40][19.0]

Alec: [00:01:42] And biggest apologies of all to our editor, Darren, who's going to have to piece this one together. But look, we Warren Buffett spoke and we have to listen. And we wanted to share some of the highlights of the twenty twenty Berkshire Hathaway annual meeting with everyone. And we figured timeliness was important with this episode. So rather than waiting to be able to get back into the studio and do it properly with all the right equipment, we're doing it in a little bit of a makeshift way. [00:02:10][28.8]

Bryce: [00:02:11] But it's actually hilarious. This is the first podcast that we've recorded over Zoome and I'm looking at Ren as he sits underneath his blanket and it is quite a sight but puts stop if we can. But anyway, let's move on. Ren to your point, we're going to be reviewing some of the key messages that Buffett spoke about and delivered at the Berkshire Hathaway annual general meeting. For those of you who were unaware of just how big this usually is, it's an event that thousands upon thousands of people, investors around the world hang out for and spend a lot of money buying tickets and flying across to America, where he fills out a football stadium with investors wanting to listen to him and Charlie Munger as they discuss everything that Berkshire has been doing over the previous year. He generally speaks for about eight hours. I think Ren so pretty impressive for guys that are sort of approaching their nineties. But anyway, what we've done is taken a few clips and share them with you from the twenty twenty annual general meeting. So Ren you want to kick it off. [00:03:13][62.1]

Alec: [00:03:13] Yeah. So first one, Warren has often spoken about how he always bets on America. And so to kick it off, we're going to start with some of his opening remarks where he doubled down on that message even in the midst of a pandemic. [00:03:27][13.3]

Buffett: [00:03:28] I would like to talk to you about the economic future of the country, because I. Remain convinced, as I have. I was convinced of this, uh. World War Two, I was convinced of it during the Cuban missile crisis, 9/11 financial crisis, that that nothing could basically stop America and we faced. Great problems in the past come face this exact problem. In fact, we haven't really faced any quite resembles this problem, but we've faced tougher problems and the American miracles, American magic has always prevailed and it will do so again. And I would I would like to take you through history to essentially make my case that. If you were to take one time to be born. One place to be born and you didn't know what your sex was going to be, you didn't know what your intelligence would, they didn't know what your special talents or special deficiencies would be, that they could do that one time. It would not take 1720, you would not take 18, 20, it would not 19, 20 it today and you would pick your favourite. [00:05:09][100.7]

Alec: [00:05:10] Financial power players are back. [00:05:11][1.8]

Alec: [00:06:32] So that's the first clip from Warren, even in the midst of a pandemic, believing in the American economic miracle. Any thoughts on that one? [00:06:40][8.6]

Bryce: [00:06:41] We all know that history is no indicator of future performance. Performance is no indicator of future performance. And I think America is in a very interesting place at the moment, what with that president and Covid. So will the miracle continue? I don't know, but it's certainly not I don't believe it's as strong as they used to be. What are your thoughts? Ren? [00:07:04][23.5]

Alec: [00:07:05] I think they've still got the best companies, the biggest companies, the best universities in the world and the probably the best financial system. And I think there's a lot of reasons to believe that America will be the economic powerhouse for most of our lifetimes. Obviously, that political system is a little bit scary. Right. But, you know, they've got some massive structural problems is an issue that will be a real feature of the 20s, I think. But, yeah, I you know, I'm I'm an timeworn with this one [00:07:37][32.3]

Bryce: [00:07:38] back America long the S&P 500. Yeah. [00:07:40][2.3]

Alec: [00:07:41] But look, you mentioned coronavirus and coronavirus was obviously a massive part of this annual meeting, aside from the fact that he was socially distanced from Greg Abel, who was the guy that was sitting next to him and there was no one in the crowd. But this next clip is Warren talking about how coronavirus may permanently shut up some of the businesses that Berkshire owns. [00:08:03][21.4]

Speaker 5: [00:08:04] This next question comes from Jim Johnson, who says that he's a longtime shareholder who's attended a couple of meetings. He says in an interview on April 17, Charlie mentioned that some small businesses owned by Berkshire would not reopen after the Keyes's. Can you elaborate on which businesses might be impacted? [00:08:20][16.7]

Buffett: [00:08:21] Even we have businesses within businesses at Marman. Don't have ninety seven different businesses, for example. Yeah, yeah, yeah. And there are some who are doing that well before. I'm not. I'm not. I'm not certainly. But they got a couple of them and there's a couple of them as it may be that in effect what's happened in the last couple of months has accelerated the decline of those businesses or their customers are developing different habits. I mean, people are developing different habits in retail. There's no question about that. That mean main, we haven't got a bunch of good retail businesses, but there are businesses that were that were having problems before and that have even greater problems that we don't know in our papers anymore, that we're financing the enterprise which does have them. We've actually increased our investment in the newspaper business by selling the papers to early and then refinancing their debt. And the newspaper business was having problems with both circulation and advertising before the virus came along. But advertising declines every place of accelerated sterilely dramatically. And don't the automobile industry stopped. The auto dealers don't advertise it. It's it's it's it's made certain businesses that were tough before even. For now, and there will be management of this, one of the subsidiaries as suggested to us, and so they'll be but they'll be there'll be some changes that have to businesses, but they're very small businesses, our major businesses and our dozens of intermediate size. I can't think of anything that that that's of significance that at the moment won't reopen, but it won't be any fun with them. The businesses where the world is going to change. You're seeing a lot of change on the shopping centre. You've got a bunch of tenants who don't want to pay right now at. Know the supply of demand for retail space may change fairly significantly, the demand for office space may change significantly. A lot of people learnt that they can work at Almar, but there's other methods of conducting their business. And they might have thought that from what they were doing in a couple of years ago and when change happens in the world, then you adjust to it. [00:11:01][159.9]

Alec: [00:11:02] So obviously, staying on the coronavirus and associated economic downturn track, there's obviously been a lot of comparisons to 1929, the Great Depression, one in this clip makes a point around the banking industry and just how different the support for banks was in the Great Depression. And now and I think that's a really it's a key differentiator when we talk about what could happen today. So this one is one of the lessons from the 1929 crash. [00:11:32][29.3]

Buffett: [00:11:33] One of the things I look back on that period, and I don't think economists generally like to give it that kind of importance. But but if we had the FDIC 10 years earlier, we the FDIC started on January 1st, 1934. It was part of the sweeping legislation that took place when Roosevelt came in. But if we'd had the FDIC, we would have had a much, much different experience, I believe, in the in the Great Depression. People blame it on smooth, smooth all here. And I mean, there's all kinds of things on the margin requirements in 2009 and all of those things entered into creating a recession. But if you have over 4000 banks fail, that's four thousand local experiences. Or people save and save and save and put their money away, and then some day they reach for it, that's gone and that happens in all 48 states. That happens to your neighbours and it happens to your relatives. It has an affect on the psyche. That's incredible. So it won't go very, very, very good thing that came out of the Depression, in my view, is the FDIC. And it would have been a somewhat different world. I'm sure the bank failures hadn't just rolled across this country. And the people that thought that they were savers find out that they had nothing when they went there. And that was a sign that said closed. [00:13:16][103.8]

Alec: [00:13:18] So we'll put it there. So the FDIC, for people who aren't sure, is the Federal Deposit Insurance Corporation. And Australia has a similar thing where basically bank deposits are insured. And, you know, what we also saw was the government are much more willing to step in and protect the banks and, you know, make sure there's not a run on the banks, which happened during the Depression and also that banks don't collapse. And so I think when we compare and contrast twenty nine to today, I think the solvency of our banking system is a is a big reason why we may not be in the same situation. Let's move to airlines. Smaller airlines were obviously a big discussion point. And here in this clip, Warren is talking about the sale of the airline businesses for context. I owned I think they own 10 percent of the four major airlines in America and they chose to sell them in the midst of this pandemic. And is Warren explaining why [00:14:21][62.4]

Buffett: [00:14:22] he sold six billion or so securities? And that's basically that is because we bought the stock market is going to go down or anything of this order because somebody changes their target price or they change this year's earnings forecast. I just decided that I made a mistake in value. And that's an understandable mistake. So probability. Weighted decision when we bought that, we were getting an attractive amount for our money when investing across the airlines business, so we bought roughly 10 percent of the four largest airlines, and we're probably not 100 percent of what we do next, but we probably paid seven or eight billion, somewhere between seven and eight billion to only 10 percent of the four large companies in the airline business. And we felt for that we were getting a billion dollars roughly of our hour, wasn't worth getting a billion dollars of dividends. But we got our share of the underlying earnings was a billion dollars. And we felt that that number was more likely to go up and down over a period of time, that it would be cyclical, obviously. But it was it was as if we bought the whole company what we put it through New York Stock Exchange. And we can only effectively by 10 percent roughly of the poor. And we treat it mentally exactly as if we were buying a business. And it turned out I was wrong about that business because of something that was not the fault of four excellent CEOs. I mean, believe me, I know joining and CEO of the airline, but the companies we bought were well managed, did a lot of things right. It's a very, very, very difficult business because you're dealing with millions of people every day. And if something goes wrong for one percent of them, they are very unhappy. So I don't envy anybody the job of being CEO of an airline, but I particularly don't enjoy being at in a period like this where essentially people have been told, basically not been told not to fly for a while. I'm looking forward to flying them. May not fly commercial, but that's another question. [00:16:44][142.1]

Alec: [00:16:44] I think it's definitely an example of faces changing. So as he sort of said in the clip there, that faces was I'm not sure if it was specifically not clear, but just generally he talks about the faces was they weren't sure which airline was going to win, but they were pretty confident that over time the amount of air travel would increase. And so they just wanted to be exposed to that trend. And that's why they bought as much as they could of the four major airlines. And then the face has changed. The idea that air travel would increase over time is now fundamentally being challenged in the short term by coronavirus and in the long term, potentially by changing working patterns and stuff like that. So, yeah, definitely a face has changed, I think. All right. So next one is on a similar vein, and I think it includes a discussion of airlines, but it's around why Warren refuses to hold underperforming businesses and how that is nothing new. [00:17:42][57.3]

Speaker 5: [00:17:42] It's been a long term policy of Berkshire to not sell or close any ongoing subsidiaries as long as their business prospects warrant the money haul over the last year and points out the sale of Berkshire Hathaway media. And then Charlie's comments from that interview saying that several small Berkshire sub subsidiary subsidiaries will not be opening when the coronavirus lockdown is lifted. So Shinsho shareholders assume that Berkshire has now changed its long term policy in regards to keeping underperforming subsidiaries. [00:18:09][26.4]

Buffett: [00:18:09] I think I think that policy was spelled out for maybe 30 years or so. And then actually the annual report that we have said that, that if a company open the operation, we think the prospects are that it will continually lose money in the future. But we will certainly will try to sell it to somebody else. But one way or another, we will not continue to hold it. And that is not a new policy and has not been changed. You can say, in effect, we did that with the airline industry to some extent. If we owned all of an airline now, it would be a tough decision to decide whether to sustain billions of dollars in operating losses when, you know, you don't know how long it's going to happen to occur. And secondly, you know that it's very likely that there'll be too many planes around and we know what happens in the airline pricing, what load factors go down and then and there's an oversupply of airline seats. So we did have to make that decision in terms of our own operation. It but but we did make a decision that that that's a very tough management decision to make. And the government, of course, is as well. I've had the first wave of. For the airlines, but to the airlines credit, they have very aggressively raised money, I mean, it's it's amazing to me how what a good job they've done of that. And and in the case of. I think in the case of three of them, you know, two of them, but there may be more coming and that raised equity money. I mean, they are they are saying that the. The debt holders and investors, you've got to put more money into this business if we're going to be able to continue what the government's done it and and private sources have done it. And it's going to it's exactly the right thing for the managements to be doing. But, you know, whether it's whether it makes sense, we'll find out for the investors [00:20:38][148.4]

Alec: [00:20:39] who are not not having a bar of that question, not saying that their policies have changed at all. I find the airline discussion interesting. I definitely think that was aside from coronavirus, that was the main talking point out of this meeting. And we did a video of a couple of weeks back on YouTube around the capital raisings that we were seeing in Australia and how some of them were at low prices and how some of them were interesting. I imagine an airline trying to raise capital in a coronavirus environment would have been at a steep discount to the current price. So I have got three clips to go and we'll try and punch through them very quickly. So the next one is obviously the US government is printing money like never before and the government is selling a lot of bonds, creating a lot of debt. And when when you say a number like twenty one trillion dollars in debt, you often think, you know, can the government pay this back? Are they going to default? And so Warren was asked that question and here's his thoughts on this just massive amount of debt that the US government is incurring currently [00:21:43][64.1]

Speaker 5: [00:21:44] given the unprecedented time of the economy and the debt level. Could there be any risks and consequences if the US government defaulting on its bonds go [00:21:53][8.7]

Buffett: [00:21:54] into print, buys your own currency? What happens to the currency is going to be a question because you don't default. And the United States has been smart enough and people have trusted us enough to issue its debt in its own currency. And Argentina is now having a problem because the debt isn't in their own currency and lots of countries have had that problem and lots of Covid countries will have a problem in the future. It is very painful to owe money in somebody else's currency. But listen, if I could issue a currency Covid bucks and I had a printing press, I could borrow money and I could borrow money that I would never default. So what you end up getting in terms of purchasing power can be in doubt. But in terms of the US government, I mean, Standard and Poor's downgraded the United States government. I think it was Standard Poor's some years back. That to me did not make sense. I mean, in the end, how you can regard any corporation as stronger than a person who can print the money to pay you. I just don't understand. [00:23:11][77.1]

Alec: [00:23:12] So they are not worried at all about the US debt and boffo box? Yeah, I would invest. That's the next the next crypto after Bitcoin. The second last clip. Obviously, Warren and Charlie are getting closer to retirement and there's a lot of talk about breaking up Berkshire, taking the businesses and splitting them apart. And so he was asked that question about what should happen with Berkshire and should it be broken up after they're no longer running the company. [00:23:34][22.4]

Speaker 5: [00:23:35] There's already speculation of a post about The Break-Up of Berkshire. And given the way carried by modern activists, the speculation should be taken seriously. Many long term owners see the folly in this view. Twenty five billion dollar ancillary earnings stream provides a lot of flexibility. When investing insurance float on our and your estate's behalf, could you more forcefully make the case of maintaining Berkshire current architecture? If you don't, that responsibility will fall on an unknown set of shoulders with far less. [00:24:03][27.8]

Buffett: [00:24:03] Well, if you were to if you were to sell Berkshire various subsidiaries, you would incur a very significant amount of tax at the corporate level before anything was distributed to the shareholders. You can spin off a given one or something of the sort, but the ability to break up a diverse company without tax implications, there was there was something called the General Utilities Doctrine that prevailed in various ways up until nineteen eighty six. And a lot of people seemed to comment based on the fact that that didn't happen in nineteen eighty six. And there's imaginative ways where people try to avoid taxes and can do it in some cases on certain types of transactions. Order to break up Berkshire. That would be one factor. But the interaction of being able to move capital around in terms of being able to do things with insurance that we couldn't do unless there were the back up earnings and capital employed and the other entities, there's there's enormous advantages in capital deployment. [00:25:09][66.2]

Alec: [00:25:10] So there you go. Unlikely to say host Buffett Break-Up of. So you Berkshire shareholders, which includes both of us, I believe, will likely stick together. All right. Now, lost clip. Obviously, it's a scary time to buy stocks. And Buffett is sitting on one hundred and thirty dollars billion in cash and not buying stocks. So someone pretty fairly asked him the question, why are you saying buy stocks if you want to buy? So in a final clip of this episode, we're going to hear Warren answer that question. [00:25:40][30.0]

Speaker 5: [00:25:40] Why are you recommending listeners to buy now, yet you're not comfortable buying now, as evidenced by your huge cash position? Well, as [00:25:47][6.9]

Buffett: [00:25:48] I explained, the position is not that huge. When I look at worst case possibilities, I would say that there are things that I think are quite impossible, improbable, and I hope they don't happen. But that doesn't mean they won't happen. I mean, for example, in our insurance business, we could have the world's or the countries a number one hurricane and the ever had it. But that doesn't preclude the fact we got the biggest earthquake a month later. So we we are not we don't prepare ourselves for a single problem. We prepare ourselves for problems that that sometimes create their own momentum. In two thousand eight, the nine here didn't see all the problems the first day when really what really kicked it off was when the the Freddie and Fannie that has to he's went into conservatorship in early September. And. And then when. Money market funds broke the buck admitted that there are there are things to trip other things on, and we take a very much a worst case scenario in the mind. That probably is a considerably worse case than than most people do. So I don't look at this as huge. And I'm not I'm not recommending that people buy stocks today or tomorrow or next week or next month. I think it all depends on your circumstances. But you shouldn't buy stocks unless you expect, in my view, you expect to hold them for a very extended period and you are prepared financially and psychologically to hold them the same way you would hold a farm and never look at a quote and never, never pay it. You don't need to pay attention to them. I mean, the main thing to do and you're not going to pick the bottom and you're not going to nobody else can take it for you or anything of the sort. You've got to be prepared when you buy a stock, then go down 50 percent or more and be comfortable with it as long as you're comfortable with the whole thing. And I pointed out to here maybe two years ago on the annual report or just the one before the most recent one, I pointed out that there have been three times in Berkshire's history when the price of Berkshire stock went down 50 percent, three different times, not to hold it on borrowed money. It could have been cleaned out. There wasn't anything wrong with Berkshire when those three times occurred. But if you're going to if you're going to look at the price of the stock and think that you have to act because it's doing this or that or somebody else tells you what I mean, how can you stay without them when something else is going up? Ren really you've got to be in the right psychological position. And frankly, some people are not really careful. Some people are more subject to fear than than others. It's it's like the virus that strikes some people with much greater ferocity than than others. And fear is there is something I really never felt financially. But but I don't think Charlie thought the leader. Some people can handle it. Psychology, if you can't handle it psychologically and you really shouldn't own stocks because you're Gulbis on their own dime and you should not count on somebody else telling you what you should you should do something you understand yourself. If you don't understand it yourself, you're going to be affected by the next person you talk to. And so you should you should be in a position to hold. And I don't know whether today is a great day to buy stocks. I know it will work out over twenty or thirty years. I don't know whether it'll work out over two years at all. I have no idea whether you'll be ahead or behind on a stock you buy on Monday morning [00:29:50][241.7]

Alec: [00:29:51] to have that level of conviction throughout his life. I think he knows what he's doing. That's why he's the greatest investor of all time. [00:29:56][5.0]

Speaker 2: [00:29:57] So we'll leave it there. Ren always good to chat stocks and back next week. [00:30:01][3.7]

Speaker 6: [00:30:02] Thanks for listening to Equity Mates investing podcast production of Equity Mates Media. Please remember that everything here in Equity Mates investment podcast with general advice on link content has been prepared without knowing the personal objectives, specific financial circumstances or calls. The host of Equity Mates investment podcast, May 19 is something the companies discussed before considering any investment. Please read the product disclosure statement and consider speaking to a licenced financial professional. [00:30:02][0.0]

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