Over the weekend I checked off a major bucket list item by attending Berkshire Hathaway's (NYSE:BRK-A)(NYSE:BRK-B) annual meeting in Omaha. It was spectacular. From the meeting itself to the post-meeting Dilly Bar liquidation sale, I couldn't have asked for much more.
The hours-long Q&A session with Warren Buffett and Charlie Munger left me with three major takeaways.
1. Still the sharpest investors around
If there were any doubt that old age has left Buffett and Munger incapable of managing Berkshire Hathaway, think again. I think the best display of Buffett's sharpness came early in the meeting, when he was discussing Coca-Cola's business.
Buffett noted that the soda company sold about 1.9 billion servings of product a day, then quickly worked out that it amounted to 693.5 billion servings a year in his head. He even made a joke that his math was off, since 2016 is a leap year.
Big deal? No. It's just mental multiplication problem (or multiplication, division, and subtraction, if you prefer), but it was a really good sign that Buffett's no mental slouch, even at 85 years of age. Buffett and Munger seemingly ended the meeting with just as much energy that they had at the beginning, which is no small feat for men their age.
2. Built for succession
One of my favorite anecdotes from this year's meeting had to do with incentives, specifically how Berkshire uses incentives at GEICO to incent behaviors that create wealth for shareholders.
GEICO's incentive program for its employees is relatively simple -- it's based on a table with policies in force on one axis and the profitability of the business on another axis. Where those two numbers for any given year meet ultimately determines the bonus pool for employees.
GEICO employees thus have incentive to grow the business, and do it profitably -- a win-win for GEICO's stakeholders and sole corporate shareholder, alike.
It's an anecdote, but it says something about how important incentives are in managing the behavior of Berkshire's many far-flung business units. With the proper incentives in place at every portfolio company, the next CEO of Berkshire will step into a position where the heavy lifting has already been done.
I left with the sense that Buffett and Munger, both of whom have spent years explaining the importance of employee incentives, are spending a lot of their time to leave Berkshire with systems that will guide it for years and decades to come.
3. The importance of share buybacks
It's no secret that Berkshire will likely repurchase shares of stock when it trades for less than 1.2 times book value, Buffett has said as much. Not surprisingly, it was the subject of an analysts' question, who asked why Berkshire didn't buy back stock given it had traded below 1.2x book value in January and February.
Buffett was quick to note that Berkshire hadn't actually traded below 1.2x book value, but that it had gotten very close. He also made it very clear that the company would have been buying back stock if it had traded below that threshold.
To the Oracle of Omaha, Berkshire's capital allocation is as much a promise as it is a policy.
He also went on to say that the buyback program essentially guarantees a better outcome than a policy in which Berkshire pays out dividends. If Berkshire commits to buying back stock at 1.2x book value, a dollar on its balance sheet is essentially worth $1.20 or more to the share price. Shareholders should obviously prefer $1.20 in share price to $1.00 paid out as a dividend.
Buying Berkshire at or very near to 1.2x book value may be the very best risk-reward proposition on the stock market.