We’ll continue today with my summary of Berkshire’s annual meeting, and the most important things an investor should remember and learn from Warren Buffett and Charlie Munger.
If You Want A Formula, You Should Go Back To School
On a question seeking a mathematical explanation of how to pick stocks, Munger said that investing cannot be put into a formula because they are always wrong. As always, investing is about commons sense.
For Munger, Costco at a PE of 12 was simply extremely cheap even if the price to book was around 3. This leads to another interesting topic about asset light businesses.
Today’s Successful Businesses Are Asset Light
On a question touching on corporate profits and how Buffett once wrote that he doesn’t expect them to be above 6% of GDP on average where they are currently at 8 to 10% of GDP since 2008, Buffett discussed how things have changed.
The 4 largest companies today don’t need any tangible assets to operate and this is making this an asset light economy which allows for higher returns and shares in GDP. Further, he doesn’t think people have processed what’s going on in the market and that those companies will make even more money.
Buffett said how he didn’t see that coming in 1999, but this group of companies that doesn’t need tangible assets at all is changing how things work today in comparison to how things worked when Carnegie was ramping up his steel plant.
Buffett doesn’t like non-productive assets which means that you need to find a fool that will pay more for them to make a profit. He stated that whatever is there that depends on somebody else paying more for it usually ends up badly, just as was the case with tulips and other things, and that cryptocurrencies will come to a bad ending.
The point is that the cheque or any other thing you use to transfer money has to be costing zero or close to zero, which isn’t the case with cryptocurrencies.
401K Plans – Do What I Say, Not What I Do
It’s widely known that Berkshire employees don’t have many options for how to invest their 401k money. They can only pick actively managed high cost funds even though Buffett advocates index funds to be the best long-term investment.
Buffett says they don’t discuss this with their managers and the employees might discuss that with their HR department. It is up to the managers.
For me, this is another example of Buffett saying something and doing the opposite.
Missing Out On Amazon
Buffett thinks what Jeff Bezos has done is a miracle and that he doesn’t like to invest in miracles. He has been following the company from the beginning, but he never invested.
This shows how Buffett is first about not losing money no matter what the possible return is. This means that even if Amazon gave a 1,000-fold return for some shareholders, it was probably a worse than 1-in-a-thousand bet that it would succeed.
We now see that Amazon chart and ask ourselves why we didn’t invest, but investing is all about risk reward and you need better than market odds to invest into something, and it is even better when what you can lose is close to zero. Amazon and other investments aren’t really a safe investment and that is why Berkshire hasn’t invested in it.
Buffett looks like a likable grandad who wants to help everyone, but don’t be fooled. If you dig deeper into his doings, you will see that he is first and foremost one of the best businessmen in the world and there is no mercy in what he does, it is all about return on capital and proper allocation.
The short answers to the tricky questions in this conference or putting it all onto the management on which he has no influence shows how there is a lot behind the scenes that we don’t really see.
However, the good thing behind this shark attitude is that I would prefer to be invested in Berkshire than in any other basket of stocks as the loyalty to shareholders regarding capital returns over long periods of time is what really separates Berkshire from any other form of investment.