Buffett is arguably the best investor in banks.
He explains:
– Why he sold most of his bank holdings
– What caused this banking crisis
– Who’s losing their pants
Plus, he talked about Berkshire’s recent portfolio moves & more.
Here’re my notes from this 160 min interview:
What caused this banking crisis?
Occasionally, banks do dumb things.
This time, they’ve mismatch assets in a big way.
They could’ve covered the risks, but did not.
Well, I, I would say that the, some of the dumb things that banks do periodically well has, have become uncovered during this period. And as one of, a banker told me one time, he says, “I don’t know why we keep looking for new ways to lose money when the old ones are working so well.” And they made the same mistake, some banks, in this period by they haven’t made as many mistakes, they expect to make some mistakes in making loans, but they haven’t, and particularly here in the credit card loans I mean, that’s just part of the game, but they haven’t made the same sort of mistakes that they made back in 2008 or 2009. But they have mismatched assets so — and bankers have been tempted to do that forever, and every now then and then it bites ’em in a big way.
Why did Buffett sell off most banking stocks?
Buffett sold down USB, Goldman Sachs, JPMorgan, PNC, & more.
Bank of America is the only large position left.
In event of a banking crisis, stockholders will be the first to be wiped out.
He doesn’t like it when banks focus excessively on short term earnings.
Well, we sold a number of banks. I mean, we had, we had held some of ‘em for 25 years. But I don’t like it when people get too focused on the earnings number and forget what my view of pacing banking principles.
Stockholders may lose their shirt, but not depositors
Buffett is certain that no depositors will lose their money.
But this doesn’t mean that the banking crisis is over.
Banks like First Republics aren’t a steal.
Depositors will be saved. Not the stockholders.
No. They’re not gonna save the stockholder. I didn’t say the deposit is saving the stockholder. I didn’t say saving the debt of the holding company. You know, people really don’t understand it when they look generally at a bank when it says, “Debt,” it’s usually the fact that the shareholders own the bank on margin. You know, they borrow, they borrow money from a holding company and all that. And that’s a different game. But with, they should lose money. I mean I don’t have any problem with people losing money because if they if they do dumb things.
Banking moral hazard
This isn’t the first time banks have gotten into trouble.
That’s because no bank executives are punished beyond losing their job.
They still get their pension.
Buffett suggests they dont get pension, and for the directors to give back all their fees.
I mean, in 2008 all kinds of trouble was caused by the banks, but no bank executive the CEOs that made those decisions, they all continued to live fine. You know, they may have lost their job but they get their pensions so they bore no res– and then the bank later would pay billions of dollars, a bunch of shareholders’ money, that had nothing to make to do with making those decisions. So I would absolutely suggest and I had some friends in banking, I may not have any by the time this program is over, but I would suggest that anybody that’s CEO anybody that’s CEO of a bank that screws up and cost shareholders a lotta money that in effect, you know, they get no pension from the bank. They go back to living, you know, like a person that works on the production line of Ford or something like that. They don’t deserve anything special. And I would suggest to the directors of the bank that sat there for five years and listened to people come in and give reports and all that sort of thing, that they give back all their director’s fees. And they I mean, there’s gotta be consequences to the people who make the decisions and penalize the shareholders later on by having billions of dollars worth of fines paid to the government, you know
Why sell Taiwan Semicon?
It was Buffett’s decision to buy & sell TSMC.
They’re the best at what they do.
But he isn’t comfortable with the geopolitical risk from China.
But that was my decision. And I think Taiwan Semiconductor is one of the best well, it’s the best in that field, and it’s one of the best companies in the world. It’s a fabulous enterprise. And Apple buys a lotta the products from ‘em. I mean, they’re good and they’re coming to the United States. And we’re actually I mean, maybe even building for one of our subsidiaries, helping build to sell these for ’em. But I do think that there is a danger there to some, I don’t have any idea. There’s actually a danger of seismic action, I mean, and where they’re located. But that’s a low probability and they, you know, they’re smart people but would I rather have it, there was a U.S. domicile company than be a subject of who knows what, depending on conditions outside their control? I’d rather, you know, I’d reevaluate that part of it, but I didn’t reevaluate the business, the management, or anything of the sort. It is a fabulous company.
What about Apple?
But wait.
Apple does a lot of business in China, isn’t he worried?
He’s confident of Apple’s utility.
It’s less likely they’ll face challenges that TSMC may face.
And he loves the way Tim Cook is running Apple.
But Apple is if somebody if you’re an Apple user and somebody offers you $10,000 but the only proviso is you’ll never be able to they’ll take away your iPhone and you’ll never be able to buy another, you’re not gonna take it. If they tell you if you buy another Ford Motor car, they’ll give you $10,000 not to do that, you’ll take the $10,000. You’ll buy a Chevy instead. I mean, it’s an incredibly valuable utility.
Why sell BYD?
Buffett beats around the bush for this one.
He hinted that he’s uncomfortable with the risk of owning a large stake.
Well, we’ve been selling it because the company our interest in it is being valued at well, the interest we had is being valued at, you know, 6.5 billion, whatever it may be. And I think it’s an extraordinary company. And I think the fellow that runs it, who’s run it right along ever since we purchased it, you know, 14 years ago or something, is an extraordinary person. Been over there but I think that the, we’ll find things to do with the money that I’ll feel better about. But we haven’t sold all our BYD by a long shot. We are not in a hurry to sell it, but my job is to allocate the capital and within Berkshire Hathaway the way I would do it for my sister because she is a big shareholder. And that’s the way I feel about all the millions of shareholders we have.
Why buy Paramount?
Berkshire recently invested in Paramount.
Buffett kept saying what a lousy business it is for shareholders.
When asked why he bought it even though it sounded like thrash when he describes the business:
“Well, we’ll see what happens.”
Streaming that, you know, it’s not really a very good business. And, you know, it the people in entertainment that make lots of money, the shareholders really haven’t done that great over time. And supplied the money, it’s a glamorous business. And I had some friends in Hollywood, you know? And they look for — and they find ’em. I mean, it’s like it attracts people. And—
It’s a great way to meet girls for all I know. Well no, I mean, but the is it fundamentally that good a business, when it was distributing or producing movies or and you’ve got some people that have got deep pockets that aren’t gonna quit. And the product they’re offering people, the chance to watch all those movies, you know, for peanuts and all that. But can they — we’ll find out. But so far, they haven’t been able to. They’ve been able to attract subscribers, but they attract ’em at a terrible price.
Buffett invests in Japanese stock
Buffett puts his stamp of approval in Japanese equities.
A lot of these companies are cheap & are likely to keep growing.
I mean, I was confounded by the fact that we could buy into these companies and, in effect, have an earnings yield of maybe 14% or something like that with dividends that would grow, that they actually grew 70% during that time. And the people were investing their money in a quarter of a percent or nothing. And a quarter percent, if they put it out for many years, wasn’t going to grow, and the 14% was more likely to grow than not. And if that didn’t look like something sensible to me, you know, that’s as easy as it gets. But it’s turned out to be better than I thought it would be.
Why Buffett doesn’t meet management in the US
Buffett finds meeting management a waste of time in the US.
Everybody will be screaming how they’re a good buy.
Even when it’s flat out not true.
Well, no, you know, they send investor relations people, and basically every company comes in and says, “We’re the best buy in the world,” and it just isn’t true, and it’s ridiculous on its face. These people just – I mean, we’ve read the report – or I read the reports at that time, and then Greg got interested right away. And they told us a lot of things that helped us further our understanding of how they thought, where they were going, so, we came away smarter than when we came in, and that’s unusual.
Berkshire’s incredible moat
Buffett also took the opportunity to flex Berkshire’s economic moat.
It’s nearly impossible for someone to copy Berkshire.
– Tremendous resources
– Fast decision making on deals
– Freedom for founders to continue running business
We’ve got a unique organization which now has tremendous resources. And we’ve got and nobody really can copy our style. I mean, in in the end, I mean, where else can they get an answer in five minutes, you know, whether we’re interested in the business and where they can get the kind of freedom now, they gotta — in every case, and they can be more lax with me than they could with Greg. Greg just, you know, says it. If there’s no need for them any of our subsidiaries to keep any cash around, we’re the best bank in the world. We’ve got $100 billion-plus, and Greg’s better at enforcing that sort of thing than I am.
Greg Abel increased $100m of Berkshire stocks
Greg (successor) increased $100m stake in Berkshire with his own money.
It’s hard to see these nowadays, where executives are willing to share both the upside and downside with shareholders.
Any other places only structure it such that the CEO gets the upside.
Greg Abel: Yeah, obviously, when I monetized the position in Berkshire Hathaway Energy, that provided an opportunity to purchase shares of Berkshire. And had I done that sooner, I would have owned the shares in Berkshire earlier, so that was always the intention. And, yes, I always will continue to invest in Berkshire. I strongly believe in Berkshire. I believe in what’s been created, and I strongly believe, equally, that we have a great path forward.
Warren Buffett: Becky, how many managers in the United States have put $100 million of their own money, not getting a share of the discount, not getting any special deal on it or any of the sort or having an incentive to come, expert to come around and do as instructed, which is to arrange it so that the CEO gets the upside but doesn’t share the downside? Now I can hardly think of a case where anybody’s put anything like $100 million of their own money in and gotten the exact same deal as the shareholder gets. If they make money, they make money. If they lose money, they lose money. And that’s just the way we play it at Berkshire. You don’t find it anyplace else.
Getting rich VS staying rich
Buffett isn’t going to take any risky gamble.
He’s already rich and he’s the steward of many people’s money.
Risk management is something he oversees personally.
In one way or another, are gonna bite you. And I’ve get 99 and a fraction percent of my net worth in Berkshire, but I’ve got all my relatives in. I’ve got everybody in. If I thought that I wasn’t going to be able to do a decent job of managing the risk, a better than decent job, I’d be crazy to take on that responsibility. Why in the world do, you know, I’ve got all the money I need, so why should I do something that could destroy me internally, and my sisters, and my cousins and all these people unless I felt that I could do the job of managing risk really as well as anybody can do. And it is a complex organization, and I worry about things nobody else worries about. But I can’t solve ’em all. I can’t solve if the pandemic starts but anything that can be solved, I should be, I should be thinking about that. And Charlie thinks about it, too. I mean, we’ve talked about it forever.
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