Some Takeaways from Warren Buffett's Last Annual Meeting

1. “It’s been about six years now since our Japanese investments. I was just going through a little handbook that probably had two or three thousand Japanese companies in it. One problem I have is that I can’t read that handbook anymore – the print’s too small. But there were these five trading companies selling at ridiculously low prices. So I spent about a year acquiring them. And then we got to know the people better, and everything that Greg and I saw, we liked better as we went along.”

   Before executing what the late Charlie Munger called a “genius stroke” — issuing long-term bonds to purchase the five trading companies and pulling off a masterfully elegant arbitrage — Warren actually flipped through a handbook of 2,000–3,000 Japanese companies. He did this at the age of 88, with a net worth north of $100 billion.

   It’s inspirational to see how hard Warren works. I probably won’t be able to work as hard as Warren, but it certainly motivates me to work my tail off in the most heroic fashion personally possible.

   At the same time, Warren probably didn’t understand a good portion of these Japanese businesses in that handbook — but the five ridiculously cheap trading companies simply jumped out. It must have felt like reliving his youth six decades ago, or perhaps reminiscent of flipping through the Korean stock handbook two decades ago.

   The common theme here is: go to an out-of-favor market, and read everything that is publicly traded there, find the most ridiculously undervalued securities, and make a basket.

   Incidentally, I also run into Ted Weschler during the morning break. We discussed his successful investment in Dillard’s Inc — Ted’s first reaction was to explain that the position was simply too small for Berkshire; apparently, his fiduciary gene runs deep. Then we discussed his not-so-successful investment in Optical Cable. He expressed that he was disappointed with the management team, and said he was “sorry the idea did not work out” with tremendous humility. I asked him how he discovered this idea, to which he said he knew the company and the management team 25 years ago (when he just started Peninsula Capital Advisor), and he has followed this company since. The more I learned about Ted, the more I feel he’s like a younger version of Warren (and he has also been intricately involved in work-outs such as W.R. Grace’s asbestos-induced bankruptcy).

2. It’s one thing we’ve really never talked about here, but I spend more time looking at balance sheets than I do income statements. Wall Street doesn’t pay much attention to balance sheets, but I like to look at balance sheets over an 8 or 10 year period before I even look at the income account because there are certain things it’s harder to hide or play games with on the balance sheet than with the income statement.

   Neither one gives you the total answer on anything, but you should understand what the figures are saying and what they don’t say and what they can’t say and what the management would like them to say that the auditors wouldn’t like them to say. You learn more from balance sheets in my view than most people give them credit for.

   This probably shouldn’t come as a surprise for those of us who understand Buffett’s early “cigar-butt” years. Personally, I also focus a lot on balance sheet, in addition to the cashflow statement. Warren mentions income statement rather than cashflow statement, but he does use “owner’s earnings” when few on the Wall Street focused on the cashflow statement, which is a proxy for free cashflow.

   However, a lot of times, as a part-time “cigar-butt” hunter, I focus a lot on liquidation value, net current asset value, and other Graham-type metrics, while Warren is clearly perusing the balance sheet in a more systematic and nuanced fashion. The second paragraph says a lot about what accounting gimmicks he pays attention to, and what we should keep in mind as we go along examining the balance sheet.

3. Charlie and I went to Will Steinberg’s office in New York – he was a marvelous guy. He was handling things for Mrs. Anenberg, whose husband had been the partner of Ben Rosner, but he had died, and Ben got kind of tense about working with her.

   So he offered us this business at a bargain price – $6 million. It had $2 million of cash, a $2 million piece of property on Market Street in Philadelphia, and it was making $2 million a year pre-tax.

   Ben Rosner was there, and he was upset about doing business with his partner’s widow. She was extremely wealthy. He said to me and Charlie, “I’ll run this business for you until December 31st, and then I’m out of here.” Charlie and I went out in the hallway, and I said, “If this guy quits at the end of the year, you can throw away every book on psychology I’ve ever read.”

   That began a wonderful relationship. We bought the company and had a great partnership. People in the East had a stereotype in their mind of what people from the Midwest were like. Ben had been married first to a woman from Iowa, and he just figured that anybody from the Midwest was okay.

   For anyone who has studied Buffett’s early investments, the price he paid would be ridiculously lower than the intrinsic value. The best investments in life simply do not need a calculator and do not require a CFA or sophisticated financial models. When we bought TK Group, it was trading at 1 billion HKD, with a net cash balance of 1 billion HKD, generating 200mm HKD of net profit, and returning half of that back to us shareholders. It’s always refreshing to hear about Warren’s early investments, and recast these mental frameworks to fit our present opportunities.

   On the other hand, Warren also has a growth mindset in addition to a proclivity of focusing on “cigar-butts”. For instance, Alice Schroeder, the author of Snowball, shared a fascinating story of Warren’s investments (stock + senior secured) in Mid-Continent Tab Card in the 50’s, and how he compounded capital at 30%+ over the next 18 years. The Carroll press machine generates sufficient gross profit to cover the initial capital investment in 1 year, and sports a net profit margin of 40%. As Warren likes to say, “growth and value are joined at the hip”.

4. I found that when I was very young, I would drive around to various companies all over the country. Because I was very young and these were offbeat companies, they didn’t have investor relations departments then, almost every CEO would see me because they figured they’d never see me again. And they weren’t getting calls like that.

   I would ask them two questions. I would explain to them – it’s not a bad idea, incidentally – if you’re going to walk into somebody’s office and you say you want 10 minutes of their time, take an hourglass and stick it on the desk of the person you’re talking to and turn it up so it’s going to go for 10 minutes. You say you’re going to leave in 10 minutes unless they ask you to stay. That sets the terms.

   But once you have that, if they’re in the coal business, which happened to be one that I was interested in 70 years ago or so, you just ask them one question: if they were to be stuck on a desert island and they had to own only one of their competitors’ stock during the 10 years they were going to be on that island, which one would it be, and why? And then after they give you that answer, you ask the same thing if they were to short one of their competitors’ stock, which would it be and why?

   Because every manager likes to talk about their competitors. They’re like little school kids when they get into talking about their competitors. I probably learned more about various industries by just making sure that they didn’t think I’d stay too long and that in the meantime they would have the floor and talk about their competitors. I kept my own mouth shut in those days. That’s a lesson I’ve lost somewhere along the line.

   One reason I think Warren is extremely difficult to replicate is the duality in his personality. On the one hand, he quietly sits in the room and reads thousands of pages of the Moody’s; on the other hand, he gets all fired-up and socialize as if there is no tomorrow. I think I have learned these lessons from Warren based on other sources, but it’s just refreshing to listen to the words coming out his own mouth in real time. I have used his approach to ferret out the best natural gas and oil players back in 2020, and I am currently using his approach to obtain valuable information on the truck-load players, an industry that I believe will inflect in the next 2-3 quarters (more on this topic in later articles).

   

   Without Warren’s admonishments, I probably won’t end up at the headquarter of Werner Enterprises playing a L3Harris truck-driving simulator. Boy, these trucks are difficult to maneuver, and I have to confess that I accidentally run into a “skate punk”… When the CFO of Werner, without the slightest trace of hesitation, told me that a holding of ours will survive and likely thrive, with (in his view) no possibility of going under, that was surely relieving!

5. This is a takeaway from Tom Gayner’s Markel shareholder meeting on Sunday morning. Tom said he usually lumps five years of earnings into a block to assess the profitability of a business. This approach allows him to ignore temporary economic losses, especially for cyclical names. Being able to look through the cycle, rather than anchoring one’s valuation of an asset based on depressed earnings and losing sight of the upside which can be particularly costly (though the cost of omission is often not immediately apparent), can be particularly helpful for someone who seeks to invest across cycles. Furthermore, this approach inherently avoids high leverage, thereby circumventing unnecessary bidding wars with the cheap capital wielded by numerous private equity firms.

Berkshire Hathaway is the greatest miracle in the annals of capitalism, period. Warren fundamentally changed so many people’s life (including mine), and he will be remembered as one of the greatest corporate finance & strategy teachers of all ages, just as he desires. Deep respect, and farewell, Omaha!

Picture taken from the side of Council Bluff, and here is the Buffett quote on Council Bluff from this year’s annual meeting: “I have trouble planning a trip to Council Bluffs, which is just a few miles from here. But thank you for the invitation (to visit Mongolia).”