Warren Buffett on Apple, Banks, and Value Investing

In this podcast, Motley Fool senior analyst Jason Moser discusses:

• Berkshire Hathaway's first-quarter results and highlights from the annual meeting.
• Buffett's comments about Apple and the banking industry.
• Charlie Munger's warning about overdiversification.

Motley Fool senior analyst Jim Gillies talks about the vibe at the Berkshire Hathaway annual meeting.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on May 8, 2023.

Chris Hill: Omaha, somewhere in Middle America. We're going to get right to the heart of the matter of the Berkshire Hathaway Annual Meeting. Motley Fool Money starts now.

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I'm Chris Hill. Joining me in studio: Motley Fool Senior Analyst Jason Moser. Thanks for being here.

Jason Moser: Hey, thanks for having me.

Chris Hill: Let's talk a little about Berkshire Hathaway, shall we?

Jason Moser: Sure.

Chris Hill: We're going to get to the Q&A in a second. I do just want to point out, I think it's a sign of what an event the Berkshire Hathaway Annual Meeting is and how much attention is paid to the marathon Q&A session that Buffett and Charlie Munger do that we basically all, as an investment community, just basically missed the fact that they reported first-quarter earnings.

Jason Moser: That is so secondary.

Chris Hill: It's just like, oh, by the way, the results were better than expected. Geico is profitable again after a year and a half of not being profitable. Berkshire Hathaway now has $130 billion in cash. That aside...

Jason Moser: They're in a good spot, Chris.

Chris Hill: Let's get to some of the highlights from the Q&A session. And the thing that stood out to me, both as a Berkshire Hathaway shareholder and as a shareholder of Apple, is the flowers that Buffett was throwing at Apple, basically saying, this is the best business we invest in.

Jason Moser: For the longest time, they really steered clear of "tech stocks" because they just felt like it was outside of their circle of competence, so to speak. I think Apple transcends that. I have always said Apple is literally a company that could stamp its brand on a rock and sell 3 million, no questions asked. It is that powerful, and I'm not even kidding. I absolutely believe that.

Chris Hill: The iRock.

Jason Moser: People just say, hey, it's a special rock.

Chris Hill: It's an iRock.

Jason Moser: It's got some certain quality or property that that brand power alone is phenomenal. It is something that you just don't see every day. And then you add to that the fact that they make really good tech. They make really good stuff. That is just a one-two combo that is just really formidable, especially over long periods of time.

Obviously, you've seen that through the financial performance of the company. It is just unsurpassed. I just can't think of many things in our life that have had the impact on society as a whole, as something like the iPhone. He even made that point, I think, in the conversation, where you've got a family that is weighing the phone versus a second car. They're taking the phone. That phone is just integral to everything that we do, and that obviously is not going to change.

I think the biggest challenge they have is coming up with that next lightning-in-a-bottle product. That's not so easily done.

But in the meantime, what they've really done well is build this collection of really good products along the way that the sum of those parts really does. It's not something that takes the place of what the iPhone is doing. This is still a phone and a services company. It's 76% of the overall revenue that this business makes right now.

But they do a lot of things well, and I think that it makes a lot of sense when he says it's the best business that they've ever owned, because I think it's the best business that a lot of people have ever owned.

Chris Hill: In reference to the share price, he sounds very much like an investor who own shares of Apple and is thinking about buying more shares of Apple.

Jason Moser: I think that would be a reasonable thing to do. I was looking through the quarterly results here recently, and when you see the performance that the business is chalking up today -- and again, we look at it primarily through the lens of a phone and a services company.

But another story that we talked a lot about with Apple here over the past several years is China, not only from the perspective of the consumer but also from the production side. Apple is slowly but surely diversifying their supply chain away from China and more toward India.

I think that the point there with India is even more powerful from the consumer side because when you look at India today, it's around 1.5% of Apple's total business. You look at China, China's around 20% of Apple's total business. It's about $6 billion that they're bringing in from India versus something like some crazy number from China. It's to the point now where you start to see the opportunity that could exist within India.

And granted, this is a much longer time frame that you have to consider, but it shows you the potential there. When you then further look into that, and you see that Indian consumers are becoming more and more willing to pay higher prices for their phones, that plays right into Apple's wheelhouse as well.

So it just goes to show you the opportunity that's still out there on the table for Apple from a geographic perspective, and I certainly understand why he'd be considering adding more.

Chris Hill: We knew Buffett was going to get questions about banks and the banking industry, and he really seemed frustrated by the communication that's been going on from all parties. He didn't hold back from taking some shots at the way banks, like First Republic, had been managed, but he made the broader point of, look, fear is contagious, and pretty much every party involved could be doing a better job of assuring people, like, hey, your deposits are safe.

Jason Moser: It definitely feels that way. Folks like us here, we talk about this stuff a lot, so we know what the deal is. But your everyday American out their working the 9 to 5 and really focused on that paycheck. This is not the stuff that really crosses their radar all that often, and it's very understandable. You want to make sure that your money is safe.

And it was astounding. The more regulators seem to try to help, the more panic they create. Why can't they follow the George Costanza model, Chris, and just do the opposite? For whatever reason, they just can't seem to make that work.

But I'm not just blaming regulators. Clearly, this is on management as well, from the executive suites to the boards. This is all the way around. Not only putting these banks in this type of position but further, the communication that really we watched play out over the last month plus. It's just been less than ideal. We always need to be talking about this stuff because I think that's the one way we can serve folks is to help educate, let them know that this is all going to be OK.

But by the same token, you see the panic that has been created, and once you said it, it's contagious. Once it gets out there, it's really difficult to contain.

Chris Hill: We were chatting earlier today. It sounds like you enjoyed Charlie Munger's comments about diversification.

Jason Moser: Yeah, [laughs] I do. It's always interesting to square his comments with the way that we like to invest here, because really, diversification is a very good thing. I want to lead off with that. But there is a point where you can become too diversified to where you're really starting to introduce some things in your portfolio you probably shouldn't even have.

Now, he did make sure to point out that because this is what they do for a living, they tend to make fewer mistakes. They're better investors than a lot of us because they've been at this for a while. But I think one of the reasons why they're better investors, too, is they realize they don't need to be the smartest guys in the room. They realize that they're not the smartest guys in the room, and that's the point, really. It's knowing your limits. Know what you know, and know what you don't know.

I said to you earlier, before we started taping here, you look at some of these social networks. Twitter is a good example just because it's got such a strong fintech audience there, but it does feel like it's a contest here to see who can be the smartest guy, and the network effects, really, that start to snowball.

I think it's really important just to remember, know what you don't know. When you see something, when you know this is just outside of your circle, you have two choices. You can choose to dig into it and try to learn more, or you can say, you know what, that's just not really worth my time. My time is better served maybe getting a little bit smarter about something that I know really well already.

I think that was his point there, is knowing what you don't know. Diversification is good, but at a point, it can start to be bad, and he just puts it a little bit more bluntly, I guess.

Chris Hill: That's why we love Munger.

Jason Moser: That's right.

Chris Hill: He's 99. He's earned the right to be blunt.

Jason Moser: That's right.

Chris Hill: Jason Moser, thanks for being there.

Jason Moser: Thank you.

Chris Hill: We're sticking with the Berkshire Hathaway meeting in our next segment because this morning on the Motley Fool Live video stream, Nick Sciple, Jim Gillies, and Deidre Woollard share their takeaways and observations, including whether it actually is harder to be a value investor today or if that's just the case for Warren Buffett and Charlie Munger.

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Nick Sciple: Jim, since you were there, what was the vibe of the Berkshire Hathaway meeting this year? I understand you've been to some of the meetings in the past as well, so maybe how does it compare to the vibe to previous meetings?

Jim Gillies: Very optimistic, very much a party. It's very much a lot of old friends getting together, even if you've never met these old friends. There's a very definite sense of community.

I was going in with a little bit of trepidation this year. Let's be honest: Warren is 92, and I've thought the last few meetings, he's been slowing down. I thought the last few times I've seen him on CNBC recently, he's been slowing down. Charlie is 99 and is starting to look it. I was concerned and, to be perfectly honest, and part of my rationale for going was this could be the last meeting of the Warren and Charlie Show.

And I was pleasantly surprised. I thought they were both far sharper than they've been the last couple of years when I've been watching virtually, and of course for a couple of years when we all had to watch virtually. I thought they were sharper. I thought Charlie was especially sharp like rapier sharp. He cut a few sacred cows there. They did slow down in the afternoon, but then again, so did everyone else. I can neither confirm or deny there was a member of the Fool contingent who may have nodded off midway through the afternoon, and we have the picture.

I thought it was a good meeting. If you've watched any of these, you've seen it in the past, the questions are terribly new, so there's a lot of stuff that's a lot of repeats from years prior. Questions and answers.

One very common thing I think I've seen practically every time: What country does Buffett say you should bet on for capitalism? America. Buy America. I'm thinking back to, was it '99 or 2000 when the article on Fortune magazine was "Buy America. I Am." That was very popular.

Buffett has also mastered the art, I think, of occasionally answering the question he wants to answer rather than the question you just asked, which I love. So when people wanted to talk about AI, naturally, Buffett talked about the risk of nuclear.

He did compare AI to nuclear. Some things can't be uninvented. Some things can't be undone once they are known and understood, and he mentioned AI there. And then, of course, went on a bit of a talk about nuclear, and not in the power sense, Nick, which of course, what we're interested in, but in the, shall we say, the weapons potential.

They talk a little bit about value investing. Charlie, I thought was surprisingly dour about the future for value investors. They were both value investors might have to get used to lower returns because there's so many people doing it. I think there was some illusion to AI as well, I don't have my notes in front of me here, and Fools, Nick and I will be doing a session together later today for recording. It'll probably go out to various places about more digging in deep, so I'll destroy the entire show here today talking about this. But just talking about how value investors would have to maybe accept lower returns because there's so many people, there's so much competition, that was Charlie's assertion.

Warren disagreed with him somewhat and I vehemently disagree with Charlie Munger and I love Charlie Munger in fact, I might like Charlie more than Warren, frankly, because he's just more my jam, very acerbic. I very much disagreed with that assertion. But then again, I was never less than lower returns than what, that would be my question, like multi-baggers in 18 months, that's difficult to do for everything including growth or whatever, but I'm not sure I'm buying it. They talked to a lot about deals, they had Jane and Greg Abel in the morning who were talking about the challenges for Burlington Northern Santa Fe, and Berkshire Hathaway Energy and as well as as GEICO. I thought it was a really well-rounded meeting, met a lot of Fools there, a lot of folks I know via other channels as well who may or may not have a connection to the Fool. We had a lot of BFOFS show up, which was a fantastic. We had a impromptu gathering on the Friday at 4 o'clock and a lot of BFOFs made the trek, which we are still stunned and humbled by, frankly. But it might be easier if we just maybe move to Q&A rather than me riffing on the meeting, if that's okay.

Nick Sciple: Obviously, we got five hours of Warren and Charlie. We're not going to talk about all five hours, but maybe a thing that stood out. I have one that Jim mentioned, this idea of Charlie Munger says, maybe we should be expecting lower returns over the long term for value investors than you have seen previously. Warren Buffett, the other side of that exchange was the one that really popped out to me. He said quote, "What gives you opportunities is other people doing dumb things. During the 58 years we've been running Berkshire, I would say there has been a great increase in the number of people doing dumb things and they do big dumb things, and the reason they continue to do it to some extent is because they can get money from people so much easier than when they started."

There's two sides of that coin. Charlie Munger is saying you should expect lower returns over a longer period of time because there's lots of money looking for returns in the market, creating lots of competition for returns. Whereas in the past, Ben Graham before them, but Warren and Charlie could find companies that nobody was paying attention to trading for less than what you could go sell them for cash out in the market. Now, there's a lot of screeners that would probably pick those things out. If they're trading for that level, there's a reason for that.

There's other reasons, Jim is gritting, there's other reasons about liquidity and things like that to create opportunities, but there are certainly more people looking for opportunities than it would have been in the past and more tools to do it versus just flipping through the Moody's manual. But what Buffett is saying is that it's not the fact that there's lots of people looking for opportunities, it's the fact that there are as cognitive biases among those large groups of people that create those opportunities. I think there's a tweet that both Jim and I shared that our old friend John Rotonti put out there just quoting Warren Buffett as well it says, "The investing public does not learn much," was the direct quote. Munger is looking at the amount of cash floating around in the system and Buffett is looking at the people, and while the way people go about investing and things that has changed over time, people are still flawed in very predictable ways and I think that's what creates opportunities in markets. That's why I come out on the Warren Buffett side of things. But those are two very valid perspectives to have, that there is a lot more money chasing investing opportunities than there would have been 50 years ago. But they're the same types of people that are making the same types of mistakes that you can look to find opportunities in. That's an exchange that I thought was interesting.

Jim Gillies: That is excellent. I don't often disagree with Munger, I'll put it that way, but I vehemently disagreed with Munger on this one, which is a nice feeling for me. I don't care how much money is out there. I really don't. Because there's so many opportunities, particularly in small-cap space, the smaller the unloved which Buffett and Munger and Berkshire are going for the bite. They have to bring out the elephant gun, they have to go for the large. There is a company in Canada called Home Capital Group that a few years ago got into trouble. They were down 65-70% in a day. They had some issues, they were trailing down for a while, but they had some issues. I have a small club of companies that get pummeled 40, 50, 60% in a day, and those are fires I like to run to. I'm not talking bank, put banks over here, Fools, we're going to take leverage out of it, the companies that have a very bad quarter or perception of bad quarter and get sold off 40, 50, 60% in a day.

I have a shortlist of those and their six-month and one year returns are outstanding because it scares people away. Why? Because people are herd animals. Sorry, that might not be terribly appropriate to say. People are herd animals, that's why Peter Lynch can put up a what, 13-year track record of 29.2% annualized, and the average investor apocryphal pop perhaps, but the story is raised, the average investor and his fund annualized at about four. Because people buy at the top, they sell at the bottom. They wait for it to rebound, then they go back and buy at the top again, I'll argue and I'm sure going to get trouble for this one. The zebra who breaks from the herd is dinner, but investing we're, not zebras. Investing shouldn't be a herd animal sport. If you are willing to not be a herd animal and you're willing to go to places where other people aren't willing to go to, that is the essence of value investing, and I still think you're going to do all right.

Nick Sciple: Deidre, any exchanges or questions that popped out to you as extra interesting from the weekend or anything like that?

Deidre Woollard: Yeah. I tend to be a Munger fan as well just because Warren will talk for a long time and then Munger will say one sentence and it's just a perfect little jab. The thing I disagree with him about and he's done this before, Munger, about the diworsification. That's something he tends to keep hitting on, is you don't need to invest in a wide variety of things. You just need to have two or three good ideas. I tend to disagree with that, but maybe that's because I don't trust my own ideas as much as I should, but I tend to like to cast a wider net. But overall, one of the things I love from watching this, and I know they do it to leg pull on our heartstrings, but it gets me every damn time is when they have kids asking questions and they had fair dose of that this time. They had a lot of kids asking about climate change and about the future of the country and all of that. That was one of the things that I know why they do it, but I'm still a sucker for it. Just the idea that some of the kids that were asking questions, this was their third or fourth meeting and they're 13, I'm like, yes. That makes me very encouraged the future. 

Chris Hill: Remember, Motley Fool Live is available to members of any Motley Fool service. As always, people on the program may have interest in the stocks they talk about and the Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.