As always, the topics were as varied as the answers were colorful. Here are five highlights investors should know.
1. How will Berkshire spend its $96.5 billion cash hoard?
In Berkshire's first-quarter earnings report, which was released the day before the meeting, the company revealed a cash stockpile of $96.5 billion. And unlike many companies with massive stockpiles of cash, Berkshire's is mostly stashed in the U.S., meaning it could easily be put to work.
Now, Buffett likes to keep at least $20 billion in cash on the balance sheet at all times at an absolute minimum, but that still leaves massive potential for acquisitions and/or stock investments. Munger even said that Berkshire could potentially do a $150 billion deal tomorrow, if it was willing to take on some debt and/or sell some stocks.
Unfortunately, good opportunities are getting more difficult to find. In reference to Berkshire's acquisition of Precision Castparts, Munger pointed out that "this is no screaming bargain like the old days," and Buffett agreed, saying that compelling bargains are tough to find -- hence the stockpile of cash.
So, what would prompt Berkshire to start putting its cash to work? Essentially, Buffett said that Berkshire wants to acquire businesses that will have a competitive advantage over the next five to 10 years, whose management teams are strong, and that are offered at a fair price. For more color, Buffett has actually laid out Berkshire's acquisition criteria in some of his annual letters to shareholders, and you can read about them here.
Buffett also said that if there's a persistent shortage of attractive investment opportunities, Berkshire may eventually choose to increase its buyback criteria of 120% of book value or less, but he is still optimistic about finding ways to deploy Berkshire's capital.
2. What would lower business tax rates mean to Berkshire and its shareholders?
Tax reform has been a major news item since President Donald Trump took office, with a particular focus on the prospect of lowering the corporate tax rate from 35% to 15%. During the Q&A, Buffett was asked how this would affect Berkshire -- specifically, how much of the benefit would be realized by the customers of Berkshire's businesses, and how much of the benefit would go to shareholders.
Buffett said that any change in how Berkshire's investment gains are taxed would directly benefit shareholders, while some of the savings for businesses would likely be passed on to customers, with the amounts differing by business.
More importantly than what the Trump tax plan would mean to Berkshire is that Buffett is confident that Berkshire would do well in any economic climate, pointing out that Berkshire has dealt with extremely high corporate tax rates in the past -- and has thrived.
3. Buffett is still a big fan of index funds for most people
For most investors, Warren Buffett says that a simple S&P 500 index fund is the best investment that they can make. He's been especially vocal about this in recent years, particularly as an alternative to utilizing active investment managers.
In fact, Buffett has advised his own wife to invest in index funds after his death, as opposed to Berkshire shares.
When asked why this was, Buffett said, "It's the best investment for people looking for the least amount of worry." Previously, Buffett has referred to an investment in an S&P 500 index fund as a bet on American business, which is almost certain to do well over long periods of time.
Buffett is such a fan of low-cost index funds that he said that "Jack Bogle [the founder of index fund pioneer Vanguard] has probably done more for the American investor than any man in the country."
4. Airlines and railroads are two very different businesses
Berkshire surprised many investors with its investment in the four largest U.S. airlines, but there's one comparison Buffett wanted to address.
Specifically, many analysts have compared Buffett's airline investments to his railroad investments. And it makes sense -- before acquiring BNSF Railway in full, Buffett took smaller stakes in several major railroad companies. In fact, Munger recently said, "It [the railroad industry] was a terrible business for 80 years...but they finally got down to four big railroads, and it was a better business. And something similar is happening in the airline business."
However, when asked about the airline investments, Buffett rejected this logic, saying that there's no comparison between the two. Airlines simply don't have the competitive advantages of railroads. Railroads are a lower-cost option than other methods of transporting freight (such as trucks), and have lower operational expenses. Airlines, on the other hand, are in a highly competitive environment (although it's gotten better), and the fundamentals of the business aren't as attractive.
So why did Buffett buy the airlines after years of negativity? Essentially, he feels that after having gone through years of consolidation, the few major airlines that are left are positioned to grow revenue over the coming years. “It has been operating for some time now at 80% or better of capacity – meaning available seat miles – and you can see what delivery is going to be," as Buffett puts it. In addition, all four airlines Berkshire owns have been producing strong returns on invested capital and have been buying back stock fairly aggressively, characteristics Buffett loves to see.
5. All businesses have problems
Not surprisingly, one of the first questions of the meeting was about Wells Fargo and the company's now infamous "fake accounts" scandal.
As he's done before, Buffett essentially responded that Wells Fargo is still a great company, but it made a serious mistake.
As we know now, Wells' incentive structure was the big problem. "Clearly at Wells Fargo there was an incentive system built around cross-selling a number of services per customer," said Buffett. " Well, it turned out that that was incentivizing the wrong kind of behavior. We've made similar mistakes."
He also said that Wells' biggest mistake was lack of action on the part of then-CEO John Stumpf. "It had to stop when the CEO learned about it...they totally underestimated the impact" of the issue.
Later in the meeting, Buffett was asked a similar question about some of Berkshire's other investments, such as American Express and the loss of its Costco relationship, as well as United Continental and the widely publicized incident of a passenger being violently dragged off of a flight.
"We did not buy American Express or Wells Fargo or United Airlines or Coca-Cola with the idea that they would never have problems or they would never have competition. But we did buy them because we thought they had very, very strong hands."
In other words, all businesses have problems, and as long as the problems are dealt with responsibly and Berkshire's long-term investing thesis still applies, Berkshire doesn't abandon its investments because of hiccups like these.
That's an important takeaway for all long-term investors as the businesses they own inevitably run into problems. If the thesis hasn't changed, headwinds may create even more buying opportunities for those with the right mindset.