This past weekend, a cadre of Fools -- Joe Magyer, Scott Phillips, Brendan Matthews, Matt Koppenheffer, and Rex Moore -- and I took a value sojourn to Omaha, taking in the Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B) annual meeting, Markel shareholders' breakfast, and part of the Value Investing Conference. The annual meeting, the proverbial value big top, was rife with the usual fanfare and wisdom. A few of my favorite nuggets, and musings from yours truly, follow. (You can also check our full, exhaustive coverage of the meeting via live blog here.)
1. Breaking Bad, Arnold, and 30,000 people: For those unfamiliar with The Berkshire Big Top's usual course of affairs, each annual meeting starts with a movie -- one part tongue-in-cheek jokes and one part advertisement for Berkshire's operating businesses. For its always-amusing quality, one thing stuck out: The number of celebrities who agreed to appear at no cost: Bryan Cranston of Breaking Bad and Arnold Schwarzenegger, to name two. As my Foolish colleague Joe Magyer noted, this, alongside the very impressive attendance figure of at least 30,000, raises a very practical question, which bear Doug Kass touched on: Is Berkshire's mass appeal a contrary indicator?
At 1.4 times book value, I don't think shareholders pay an outrageous sum for the operating businesses or future investment returns. In short, the market's calling for 13% returns on equity and 3% growth in perpetuity. Not dirt cheap, but not hugely expensive, either.
2. On QE and its challenges: Among the hot-button issues among market sooths these days, QE, or quantitative easing, is high on the list. In lay speak, the Federal Reserve's bought a lot of bonds, and in doing so, pushed interest rates down. A lot. To multigenerational lows. The list of concerns is wide-ranging: selected asset bubbles, eventual inflation, and other sundries to this effect. Buffett tackled the topic head-on: "Interest rates and asset prices are like gravity is to the apple. When there are low interest rates, there is a small gravitational pull on asset prices. We've see people make decisions differently when they can borrow at very low rates... ."
In short, he's acknowledging it's been at least selectively inflationary. And at another point, he acknowledged the possibility of wider-spread inflation: "I have tremendous faith in Bernanke, but I don't know if he is affected by the fact that his term will run out -- he can just pass a few trillion on the balance sheet to the next guy. But, this could turn out to be very inflationary, and it hasn't so far. If you run up debt, it is measured by nominal GDP, and the easiest way to run nominal GDP is to inflate. And, some Fed members might be disappointed that they haven't seen inflation yet. Inflation, when it appears, is likely to be the shot heard around the world."
Ray Dalio, founder of the world's largest hedge fund company and another intellectual giant, presents an alternative explanation in this paper. In short, he argues that the federal government can subsidize private sector debt reduction by "printing money" and/or buying interest rates down without inflationary risk, because it's negating deflationary risks. He also acknowledges the possibility for too much of a good thing. QE and recreational drug use aren't so dissimilar. The question remains: Have we gone too far?
This answer's not easy. But for investors, there's an easy solution: Buy cheap stocks. (And for what it's worth, Buffett still believes stocks are reasonably priced.)
3. On succession and investments: With Buffett's aging, there's been semi-continuous talk of Berkshire's inability to act as the world's ATM of last resort (once the Oracle leaves). Many will recall that, on account of Buffett's brand equity, Berkshire lent to a host of blue-chip companies at stellar rates -- Goldman Sachs, GE, Harley Davidson -- at almost punitive prices. Likewise, on account of Berkshire's unique position -- a hands-off provider of permanent capital and liquidity for business owners -- it can act like a huge private equity firm. In that regard, it has no competitors.
Asked whether this practice is sustainable in a post-Buffett world, the man contended that Berkshire's strength is not Buffett but its balance sheet. It can step up where no other firm can. That's not going to change when he leaves.
4. Berkshire, the special situation? Designated bear Doug Kass raised a very valid point: Should Berkshire's disparate enterprises be broken up? Buffett and Munger more or less demurred, saying they don't think it smart.
For my part, I see compelling cases on either side. Berkshire's heavily fortified balance sheet affords an advantage to its capital-intensive subsidiaries, MidAmerican and Burlington Northern Santa. The two fund capex internally, but they almost assuredly benefit from Berkshire's financial strength, borrowing cheaper than otherwise and, in turn, generating higher returns to shareholders. Likewise, the ability for Berkshire to reinvest profits across segments greatly expands its opportunity set.
On the other, managing an empire of 70-something companies is a little harder than long division. And it'll only become harder with Buffett's eventual retirement and the passage of time. On that basis, it's not hard to argue that performance may suffer or a conglomerate discount may arise.
My take: Expect a spin-off. Not now, and not in five years. But sometime.
5. The genetic lottery, Gladwell, and the role of randomness in success: For his exceeding brilliance, and against-all-odds success, Buffett retains a certain humility: "Being born in the United States (and male) was a huge advantage. The timing could've been a little better... I envy the baby being born in the US today -- that's the luckiest baby ever born. It will do very well on a probability-adjusted basis." It's Buffett's turn at playing Malcolm Gladwell. My takeaway: You're (and me, too) not so smart, and success (or failure) isn't a foregone conclusion. Randomness, circumstantial factors, and any number of immeasurable variables play a role in outcomes small and large. In moments of introspection, that's something to remember.
6. And one quotable that [almost] stands on its own: "I've never succeeded doing something I didn't like doing." -- Warren Buffett: Passion matters, our days are limited, and life hands us enough mundane inanities. Why bother wasting more years than necessary on the boring? Save that for trips to the DMV."
It was a great weekend. And we'll be back next year.
