It was incredible to see Buffett and Munger LIVE.

And to meet so many investors from all around the world.

There’s a lot to cover, so I’m going to break the post up into two parts.

In the first part, we are going to go through everything Buffett said about the banking sector.

In the second part, I’m going to cover everything else. Their thoughts on artificial intelligence, handling inheritance, recent buys and sells and more.

Bonus: At the end, I’ll share with you tips on how to make the most of your Omaha trip and what I wish I had done differently.

Part 1: Buffett & Munger on the Banking Crisis

What went wrong?

What he saw in First Republic’s financial statements?

How will the commercial property slump affect banks?

Let’s begin.

Depositors will be safe

Even though the FDIC insure deposits up to $250k only.

The U.S. government is unlikely to let depositors lose money.

Sure, the stockholders and debt holders would lose money.

But the government will cover beyond $250k.

“And even though the FDIC limit is $250,000, that’s the way the statute reads, but that is not the way the U.S. is going to behave any more than they’re going to let the debt ceiling because the world will to go into turmoil.

And they — well, they just — I can’t imagine anybody, the administration and the Congress and the Federal Reserve, whatever it may have been, FDIC, I can’t imagine anybody saying, “I’d like to be the one going on television tomorrow and explain to the American public why we’re keeping only $250,000 insured. And we’re going to start to run every bank in the country and disrupt the world financial system.””

What went wrong at First Republic?

They were offering jumbo fixed rate mortgages to wealthy individuals.

It helped them double its assets in 4 years.

But it ended up with a giant book of low-interest mortgages.

Which took a hit when the Fed raise interest rates.

“And if you take First Republic, for example, you could look at their 10-K and you could see that they were offering nongovernment guaranteed mortgages to — in jumbo amount at fixed rates, sometimes for 10 years before they change the floating. And that’s a crazy proposition. If it’s to the advantage of the bank, they got to — they get the guy coming in and says, I’ll finance at 1.5%, then 1%.“

Bank regulators must hold CEOs and directors accountable

The stockholders and debt holders shouldn’t suffer.

They didn’t do anything.

The people directly responsible for the collapse of the banks must be held accountable.

“Both the CEO and the director should suffer. The stockholders of the future shouldn’t suffer. They didn’t do anything. It doesn’t teach anybody any lessons or anything. It teaches the lesson is that if you run a bank and you screw it up, you’re still a rich guy in the clubs don’t drop on and charity groups don’t, but asking her benefits, and the world goes on. That is not a good lesson to teach people who are holding the behavior of the economy in their hands. So I think there’s some work to be done, but I don’t think it’s — it’s not a difficult problem.”

How the Bank Holding Company Act of 1970 affected Berkshire

Berkshire might have been drastically different if it wasn’t for the Banking Holding Company Act.

Instead of insurance, they would have bought more banks.

It wasn’t difficult to run a profitable bank.

And you get the benefit of the float too.

“And if the banking Holding Company Act of 1970 hadn’t been passed, we might have ended up owning a lot of banks instead of a lot of insurance companies.

We were looking at more banks and [ Harry Keith ] was taking us around Chicago and there were other things we could do. And then bingo, they passed the 1970 Bank Holding Company Act, and we had to divest ourselves of that bank in 10 years, which we…

And we were going to buy more banks. And if we bought more banks, we probably wouldn’t the big spend on the insurance business, but the law changed, and so we divested and we’ve done okay in insurance. But banking was more attractive to us. It was bigger and there were more targets to buy and you could run a perfectly sound bank then. And no negotiable certificates and — all these things, all the inventions, they came later, and you could still run them today and you could earn — you can earn good money, very good money, and we would have found more banks, but we’re precluded from doing that.“

Why Buffett sold most of his banking stocks

Buffett sold most of his banking stocks due to the unpredictable outcome.

Exogeneous events will determine the future of the bank.

It becomes messy when politicians are involved.

Bank of America is the only bank they own.

He likes how management runs the bank.

“But in terms of owning banks, events will determine their future and you’ve got politicians involved. You’ve got a whole — a lot of people don’t really understand how the system works.

And I would say that they’ve had something less than a perfect communication between various people and the American public. So the American public is probably as confused about banking as ever, and that has consequences. And nobody knows what the consequences are because every event starts recreating a different dynamic.”

How commercial property slump will affect the banks?

The majority of people borrow nonrecourse.

Reminds me of my Brookfield Corp deep dive.

>> Become a member here to access all my deep dives.

The lender ends up taking the risk.

Real estate operators have a lot of leverage.

Banks do not want these properties.

“Well — but most people like to buy with nonrecourse in real estate. And one time I asked Charlie, there was some real estate guy we were going to. And how do they decide how much they can — a building like this is worth? And it’s — the answer is it’s whatever they can borrow without signing their name. And if you look at real estate generally, you’ll understand what the phenomenon that’s happening, if you remind yourself that, that’s the attitude of most people that have become big in the real estate business. And it does mean that the lenders are the ones at the property. And of course, they don’t want the property usually.

So then the real estate operator comes on, negotiating with them. And the banks tend to extend and pretend. And there’s all kinds of activities that arrive out of commercial real estate development, which occurs on a big scale. But it all has consequences. And I think we’re about — well, we are starting to see the consequences of people who could borrow at 2.5% and find out it doesn’t work at current rates. And they hand it back to somebody that gave them all the money they needed to build it. “

Always study the bank’s balance sheet

It tells you whether deposits could be paid.

It’s important for assets to be mark-to-market for banks.

Because their float ain’t as sticky as insurance companies.

“But the balance sheet tells you whether deposits could be paid, it tells you a lot of things. And we show it on our balance sheet. We believe in showing market values on our balance sheet. We just don’t believe in running it for the income account.

You’ve got to pay attention to whether they’ve gotten out of whack in terms of what the value of what they own and what can be demanded out tomorrow morning. And if we had all of our money that could be the matter from us tomorrow morning, we’d have to behave a lot differently than Berkshire does.“

Part 2: Business, life, and everything else

All businesses will face a tradeoff between growth and profitability

We see that playing out over the past year in tech, as they race towards profitability and growth starts to decline sharply.

At Geico, their number 1 priority is profitability.

“But instead of getting too excited about it, I think it’s important to realize that even if we reach 96%, it will come at the expense of having lost policyholders. There is a trade-off between profitability and growth. And clearly, we have — we’re going to emphasize profitability and not growth. And that will come at the expense of policyholder. So it will not be until 2 years from now that we’ll be back on track fighting the battles on both the profitability and the growth front.“

How will AI affect future investment opportunities?

Buffett thinks that opportunities are still abundant, citing Einstein:

“This has changed everything in the world, except how men think.”

And he followed up:

“What gives you opportunities is other people doing dumb things.”

Munger feels otherwise:

“I think value investors are going to have a harder time now that there’s so many of them competing for a diminished bunch of opportunities. So my advice to value investors is to get used to making less.”

Leaving inheritance behind for your children

Buffett believes it is a mistake if children hear about the will only after their parents die.

He does not sign the will until all his children have read, understand and made suggestions about the will.

The last thing you want is children suing each other.

“I probably observed as many, particularly wealthy families, the problems. And they all get very particular to the family. And in my family, I do not sign a will until my three children have read it, understand it and made suggestions.

Now my children are in their 60s. And that would not have been a great success if I’ve done the same thing at their 20s. It depends on the family. It depends on how the kids feel about each other. There’s all kinds of thing. It depends on the kind of business you have. So there’s 1,000 variables. But I do think that it’s — if the children are growing and when the will is read to them, it’s the first they’ve heard about what the deceased thought about things, the parents have made a terrible mistake.“

Why was he uncomfortable with his TSMC position?

Geopolitical risk.

Great company but he feels way more comfortable deploying his capital in Japan than Taiwan.

Taiwan Semiconductor is one of the best-managed companies and important companies in the world. And there is not — and I think you’ll be able to say the same thing 5 or 10 or 20 years from now. I don’t like its location, and I’ve reevaluated that. I mean, I don’t think it should be any place but Taiwan, although they will be obviously opening a chip capacity in this country.

But it’s a question of we would rather have the same kind of company, and there — there’s nobody in the chip company — there’s no one in the chip industry that’s in their league, at least in my view.

I feel better about the capital that we’ve got deployed in Japan than in Taiwan. I wish it weren’t sold, but I think that’s a reality. And I’ve reevaluated that in the light of certain things that were going on.

When should companies buy back shares?

Companies should buy back shares when:

– No opportunities to grow

– Stock currently undervalued

Decision to issue dividends are usually irrevocable and may weigh down on the company in the future.

“It can be the dumbest thing you can do or it can be the smartest thing you can do. And to make it more complicated than that and start getting into all these — obviously, do what the business needs to do. First, the opportunities are there. Grow your present business, buy additional business, whatever it may be, and then you make the decision on dividends. That decision becomes pretty irrevocable because you don’t cut dividends and without having major effects in your shareholder base and a lot of things.

And then if you got ample capital and you don’t see that you’re going to use it all, and your stock is attractive and it enhances the intrinsic value for the remaining shareholders, it’s a no-brainer. And if it’s above the price of intrinsic value, it’s a no-brainer.“

What happens when the USD is no longer the reserve currency?

In Buffett’s view, other currencies will not replace the USD as the world’s reserve currency.

But, you want to be holding assets to fight inflation.

Also, the best way to fight inflation, is to always be improving yourself & bringing value to the table.

“I see no option for any other currency to be the reserve currency. And I think that nobody understands the situation better than Jay Powell. And I — but he’s not in control of fiscal policy. And every now and then he drops a few hints. And there was no question when the pandemic broke out, I mean, it was a semi war-like situation. But nobody knows how far you can go with the paper currency before it gets out of control, and particularly if you’re the reserve — world’s reserve, of course. like nobody knows the answer to that.

Well, that’s getting close to the edge where you don’t want to — you don’t want to hold dollars anymore. You want to hold something else. You want to hold real estate. You want to own an interest as a business. There’s a lot of good — your best defense is your own earning power. If you’re the best doctor in town, if you’re the best lawyer in town, if you’re the best teacher in town or even if you’re the 10th best or 10th — you want to make a good living.

I mean the economy is productive. And you will succeed with your talents. But you won’t succeed by hoarding dollars, you’ll just be — you’ll just succeed by the fact that your value to the community, which is a rich community overall, is sustained. And so the best investment is always in yourself. That’s the answer I would give you.“

Charlie Munger: Avoid toxic people

Few things in life wear me out as much as toxic people.

Once you recognize them, cut them out.

Charles Munger

Well, it’s so simple to spend less than you earn and invest truly and avoid toxic people and toxic activities and try and keep learning all your life, et cetera, et cetera and do a lot of deferred gratification because you prefer life that way. And if you do all those things, you are almost certain to succeed. And if you don’t, you’re going to need a lot of a luck. And you don’t want to need a lot of luck. You want to go into a game where you’re very likely to win without having any unusual luck.

Warren Buffett

I’d add one more thought, too. You need to know how people can manipulate other people, and you need to resist the temptation to do it yourself.

Charles Munger

Yes, the toxic people who are trying to fool you or lie to you, who aren’t reliable meeting their commitments. A great lesson of life is get them the hell out of your life.

Warren Buffett

Yes.

Charles Munger

And do it fast. Do it fast.

Warren Buffett

And I would add, Charlie won’t totally agree with me, to attack fully if possible, too, but do get them out of your life.

Charles Munger

Yes. Yes, I don’t mind a little tact. Or even a little financial cost, but the question is getting them the hell out of your life.

Their investment in Paramount

Buffett keeps suggesting that the film production and streaming business has horrible economics.

But still, they took a stake.

He seems reserved with sharing more details about this investment, but here’s what he said:

“And the streaming business is extremely interesting to watch because there’s — people love to use their eyeballs watching, being entertained on a screen in front of them or a phone or whatever it may be. But there’s a lot of companies doing it and you need fewer companies or you need higher prices. And — well, you need higher prices or it doesn’t work.

And you don’t lock-in people when you get them to join up for the streaming period when your serial runs.

The talent will make the money, the agents will make the money. And if you’ve got a theater, the theaters are now doing 70% of the business as they did before the pandemic. And big hits have enormous grosses, but you can’t reduce the supply. People have only got so many hours in the day. They’ve only got 2 eyeballs, and they got more choice than ever before, and they’ve got stuff that’s cheaper that offers them the same experience. And some of them like the experience, particularly the big hits are going. But it isn’t like you can double the number of people or double the eyeballs or anything like that, and you’ve got a lot of people. Because talent will always get paid. And when you essentially are packaging that talent 1 way or another and you need to get higher prices and you’ve got a lot of strong companies that don’t want to quit, that’s an interesting equation.“

Bonus: Planning your Omaha trip

Alright, now to the fun stuff!

List of events happening in Omaha

There’s a whole list of events that’s happening leading up to Berkshire’s shareholders meeting.

I’ve compiled the entire list of ongoing events here.

Should you start queueing at 5am?

We started queueing for the main event at 5am.

There’ll be a snaking long line by that timing.

There probably isn’t a need to be that early.

The seats are uncomfortable (for me) so I ended up standing.

The hall will have pockets of good seats since many others did the same.

Shopping!

On the day of the AGM, most people would shop during lunch break.

It’ll be really crowded and most of the popular items would be sold out.

Come here before the shareholder movie starts in the morning. It’s a great place to take photos without crowds!

Value Investor Conference

It was great to meet so many super investors at the Value Investor Conference.

On my blog, I have shared lessons from Chuck Akre and François Rochon and more. Check them out here:

Value Investor Conference: Chuck Akre and Chris Cherrone of Akre Capital

Value Investor Conference: François Rochon

Value Investor Conference: Lessons from Robert Cialdini & Joseph Shaposhnik

It clashed with the ValueX event which I hear was really awesome.

So I might have jumped over if I go again.

Alright, that’s all I have to share about my trip to Omaha!

Right after Omaha, I jumped on a plane and headed off to go on a hiking spree.

Rocky Mountains, Yellowstone, Grand Teton, etc.

If you like to see photos & videos of my little adventure and encounter with wildlife…

>> Click here to follow me @steadycompound on Instagram!

Cheers,

Thomas