This year, the Oracle flew over to Los Angeles and ran the AGM with Charlie Munger, Greg Abel (upcoming Chairman), and Ajit Jain. And of course, plenty of insights are revealed at every meeting so let’s jump straight into it.
The Twenty Largest Companies
Buffett started out the meeting with educating new investors. He showed the twenty largest companies by market cap on 31 March 2021.
This was followed by the slide on the twenty largest companies by market cap in 1989.
Notice that none of the top companies in 1989 made it to the list in 2021. How many of the top companies of today will still be here 30 years from now?
Also, notice that the market cap of the largest company has risen from $104 billion in 1989 to $2.05 trillion in 2021. Even for the smallest company in the list, it has risen from $30 billion in 1989 to $336 billion in 2021. Capitalism works and we need to jump on this ship (by investing in the stock market). Don’t count on people knowing which ship to get on—most people would be better off investing in the index.
Being Right on the Industry ≠ Good Investment
Stock picking is more than just being right about the future of an industry. It was clear that automobiles were going to take over the world, yet when more than 2,000 companies entered the industry in the early 1900s, only three remained by 2009, and two of those three went bankrupt.
Buffett shared a slide of the many companies that entered the automobile industry, but because there were so many, he could only fit those with names that begin with M.
The same goes for the 1999-2000 internet bubble and the railroad bandwagon in the 1800s, but not many survived.
We may be right about the prospects of the industries, be it electric vehicles, cloud, AI, etc, but that does not necessarily mean they will make a good investment.
On Current Big Tech Valuations
Warren Buffett doesn’t think that our big techs like Facebook, Google, Amazon, and Microsoft current prices are crazy. These companies have very high ROIC, they are making money with very little cost.
For example, Apple has $37 billion in property, plant, and equipment (PPE). Berkshire has over $170 billion in PPE, and they make way more money than Berkshire. It doesn’t require much working capital—receivables and inventories. It’s just a much better business.
Furthermore, interest rates are like gravity, and with interest rates at these levels, these companies certainly don’t look overpriced to him.
On the SPACs Frenzy
It’s definitely hurting Berkshire’s prospect when it comes to looking for acquisitions. And the issue with SPACs is that they are required to buy a business in two years, otherwise they would be required to return the money back to investors. This creates an extremely perverse conflict of interest.
The managers of these SPACs are pressured to invest in anything they can get their hands on within these two years.
Buffett proceeded to share the following quote: “Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.” — John Maynard Keynes, The General Theory (1939)
Since COVID-19 started, there have been a lot of new investors treating the stock market like casinos. When there’s so much cash gushing into the stock market, it will create an illusion that it’s easy money. But nobody is there to warn that when the clock strikes 12:00, everything turns into pumpkins and mice.
These SPAC managers are playing with other people’s money and they’re definitely going to beat Berkshire Hathaway when it comes to aggressive acquisitions of companies.
Charlie calls this fee-driven buying, in other words, people are not buying because it’s a good investment.The SPAC managers are buying because they get a fee.. it’s immoral and shameful.
“I don’t mind the poor fish that gamble. I don’t like the professionals that take the suckers.”—Charlie Munger
On China’s Increased Regulations on Tech
Munger feels rather optimistic about China tech despite the increased regulations, the Chinese government will allow businesses to flourish. Ever since the CCP witnessed the prosperity of Singapore, they’ve decided to do away with the traditional ways of a communist party and copy what works.
They changed communism and incorporated Adam Smith theories into the model which created a free market with a bunch of millionaires and lifted 800 million people out of poverty fast. Charlie loves it that the Chinese actions reflect the quote, “I don’t care whether the cat is black and white, as long as it catches mice.”
Munger hates the Bitcoin success and he doesn’t welcome a currency that creates value for rogues such as kidnappers, etc., nor does he like that its shifting billions around simply because somebody just invented a new financial product out of thin air.
Robinhood has become a significant factor in attracting gamblers into the stock market. Buffett is concerned with how they derive their source of income when they don’t charge their customer anything. There’s a large amount of puts and calls since Robinhood gained traction.
Both Munger and Buffett associated Robinhood with the state lottery—just as bad, and they’re taxing hope on the poor.
They’re observing very substantial inflation at a lot of places and people are accepting the price increases. The cost for their products such as home building, furniture, etc. are going up, the supply chain is messed up and it resembles a buying frenzy.
Greg Abel added that there’s a lot of price pressure on raw materials such as steel prices, timber prices, and petroleum.
On Selling The Airlines
Buffett was questioned why he sold airlines at the bottom and this was his response, “And I think the airline business has done better because we’ve sold, and I wish them well, but I still wouldn’t want to buy the airline business. People really want to travel for personal reasons. And business travel isn’t everything, and we’ve got a big exposure to business travel, of course, through the fact that we own 19% of American Express. And we own Precision Castparts, which services as the air business. So we still got a big investment in air travel, a big commitment to it.”
He added that the airlines were unlikely to be bailed out if Berkshire was the largest shareholder, and a very wealthy one at that. Things would have turned out very difficult if they had continued to hold on to the airlines.
Do check out the video here, and it’s always a delight to hear from Buffett and Munger!