Announce to Oneself
Warren Buffett greeted attendees of the 2023 annual meeting (AM) with an interesting video showcasing the equity investments and subsidiaries of Berkshire Hathaway. The CEO’s message was capped off with a call to veteran actress Jamie Lee Curtis, who recently won an Oscar with Dương Tử Quỳnh in the film “Everything, Everywhere, All at Once” (which is mostly translated in Vietnam as “Multiverse Battle”). He asked the actress to convince Charlie to quickly buy more stocks in the internet sector. Using Curtis’ language, Buffett was referred to as the “all you can eat” buffet and Charlie as “Charlie hunger.” This humorous opening set the tone for AM 2023, a symbolic event in the value investing industry led by two investment legends who have reached the “Billionaire’s Club” at 92 (Warren) and 99 (Charlie Munger) years old. The achievements and wisdom of the two men have been proven through the ups and downs of time.
Long lines of fans and shareholders also lined up outside the CHI Health Center in Omaha to attend the AM (coincidentally) as a light rain showered London, where the global coronation of King Charles III was just a few hours away. Buffett, along with Munger, entered the room with Ajit Jain and Greg Abel, two figures in charge of the company’s insurance and non-insurance business (who would later succeed Buffett and Munger), amidst a long applause from the audience. He opened with a joke, saying, “When I woke up this morning, I suddenly realized that I had to compete for attention with someone in England, where people were welcoming the new King Charles, and here we also have our own King Charles (referring to Charlie Munger).”
AM 2023 took place in a very gloomy context in the United States, with First Republic becoming the third bank to collapse in a few months, adding fuel to the anticipation of a recession. Everyone was hoping to receive some “wisdom” in this uncertain time. Berkshire Hathaway has a glorious history of beating the S&P 500 during recessions, and the organization operates extremely well when the market enters a “bear” phase (a market on the verge of decline, according to data from the Bespoke Investment Group). Since the 1980s, Berkshire’s stock has outperformed the market in six recessions by a median of 4.41 percentage points. Impressively, each time the S&P falls 20%, the organization beats the index by a median of about 14.89 percentage points. Berkshire’s compounded annual gain is 19.8% from 1965 to now (compared to 9.9% for the S&P500). The two have led shareholders through difficult waters by sticking to a long-term vision and a conservative approach, turning many who have placed their trust in the two philosophers into millionaires. Outside the room, a long line of protesters from NetJets — Berkshire’s private airline — opposed working overtime and low wages, contributing to the contrasting picture of “capitalism”. Buffett quickly reviewed the first quarter financial results of 2023: after-tax operating profit increased 13% from year to year to $8.1 billion. This increase came from the stock portfolio, higher interest income from holding cash, and higher underwriting profit. Berkshire’s balance sheet shows that shareholder equity is worth $504.5 billion, larger than any company in the United States. Another interesting figure is the $165.1 billion (at the end of the first quarter) of insurance float, which shows the difference between cash received from premiums and claims, while cash and treasury bills are $127.7 billion. Berkshire’s investment firepower is always abundant for potential acquisitions or future interest income. Berkshire bought back 9,600 Class A shares (currently priced at nearly $500k/share) of its own in the first quarter for $4.4 billion (Berkshire bought back about $2.6 billion in Q4 2022). Below are some interesting messages that the two great minds shared:
- More wisdom
To walk confidently in life, the most important thing is to spend less than what you earn. This extremely simple principle is not easy for everyone to apply, given the endless temptations out there. If you do the opposite, you will sink into debt or get stuck in it and unable to move forward in the game. Buffett mentions the exception of a mortgage, but emphasizes that spending recklessly on credit cards and paying somewhere around 12–14% interest (for example) is extremely dangerous. To earn more than that interest through investment, you may only need to look to Berkshire (Buffett’s jest).
Buffett mentions Tom Murphy, his close friend and mental partner. Tom was the CEO of Capital Cities Communications who designed the acquisition of ABC in 1985 for $3.5 billion and sold it ten years later for $19 billion. Berkshire Hathaway poured $517 million to take an 18% stake in Capital Cities/ABC. Murphy also helped Buffett acquire a $2.5 billion stake in Disney. Murphy taught Buffett more about running a business than anyone else. Buffett commented on his friend: “I have observed how he inspires imperfect individuals — including myself. Murphy never distinguishes between a pauper or a prince — he treats everyone with moderation.” When they first met, Murphy gave Buffett some very important advice: “never forget Warren, he can always send someone to hell (die) tomorrow.” In some tense situations, the wisest thing is to hold your tongue. If you lose your temper, you may do something that you will deeply regret later, sometimes irreparably (especially in today’s fast-moving viral technology world).
Separate criticisms or responses by category to respond appropriately. For example, there are some viewpoints that do not need to convince anyone to follow them. Buffett has never seen a kind person die without anyone by their side, but many people die on a pile of money without a single friend, even their own family. Buffett has observed Tom Murphy throughout his life (perhaps his son also attended AM) and has never seen him do anything unkind. We should write our own obituary and try to live rightly with the words in it.
Next, we need to stay away from toxic people and toxic activities throughout our lifetime, while understanding that some “satisfying feelings” need to be deferred, such as shopping for unnecessary clothes. If we possess these traits, success will come sooner or later, while if not, the only thing we can rely on is luck. It is also important to understand how others manipulate us so that we do not harm others in the same way or become toxic people who deceive and exploit those around us. The most important lesson in life is to avoid the bad things around us, especially those related to people. However, when toxic individuals are within our family (both Buffett and Munger were born into environments where people instilled good values in them) like in the case of John D. MacArthur’s family, leaving becomes much more challenging.
Buffett admits that he cannot learn the technical aspects of every business, but it is not necessary when looking at other aspects and continuing to learn. Apple is a classic example: “I don’t understand phones, but I have a deep understanding of consumer behavior.” The important thing to note is how a good business can slide into a bad one or what attracts customers’ attention. The Berkshire team cannot predict the future, but they can determine the value of something and the threats to the business model. Warren emphasizes: “We don’t get smarter over time, but we get a little wiser.”
2. The future of value investing
Value investors are facing many divergent paths, Munger said: “I think value investors are facing a very difficult time because there are too many people competing for a few opportunities. They will get used to making less money.” This is also what Charlie has been warning Buffett about since they first met in 1959. However, Buffett sees that there are still many opportunities (compared to Charlie): “Opportunities come when someone does something stupid. I observe that the number of people doing stupid things is increasing.” Berkshire Hathaway has the advantage of being a large organization ($719 billion), but also comes with the disadvantage of not being able to shift this large body to too many “golden” opportunities. Long-term focus always plays a crucial role in value investing. Buffett emphasized, “I still want to be born in the present era, start something with not too much money, and then transform it into a money-making machine. Charlie may be the same.” Munger, who holds $2.4 billion in assets, added, “I want my money (in the future) to maintain its position as it has been.” The United States is much better now than when the two were born. The government during Buffett’s father’s time in Congress was chaotic. The real challenge is that “cooperation has become more tribalism,” and the parties no longer listen to each other but instead growl at each other. The world is generally better now, but people are still fixated on the dark aspects (caused by modern media such as social networks). This world is both interesting and challenging, even though there are still many issues that cannot be resolved. Munger is generally less optimistic, believing that the path to human happiness is becoming increasingly narrow due to the conflicts surrounding it.
3. Chat-GPT and AI
Warren Buffett believes that AI can help screen some stocks that fall below a parameter or criteria, which always has limits for machine calculations, but it cannot tell us which stocks to buy. Bill Gates introduced ChatGPT’s functioning to Buffett, who said, “It’s very interesting. ChatGPT can translate the Constitution into Spanish in a flash, but it can’t joke around. You can’t ask it to make fun of Warren or crypto (humor is perhaps the highest intelligence). This machine can read every book, watch every TV genre (or search the entire Internet), but it can’t be funny. Next time, I’ll ask Bill to bring it over and ask it how to eliminate humans. I want to see what it says so I can unplug it before it gets too far.”
Charlie Munger remarked, “If you visit BYD’s factory in China, you’ll see robots (or automation) appearing everywhere in an astonishing way. Machines will appear more and more, but I’m always skeptical of the current hype about AI. Old-fashioned intelligence still works very effectively.” Warren added that AI could never replace Ajit (Bershire’s vice chairman, who is also an Indian) or genetic biology. AI will change everything in this world but certainly cannot surpass human intelligence. It also poses many risks similar to the development of nuclear bombs. 4> Technology (renewable energy, insurance, Apple, and Elon Musk) Abel, who heads Berkshire’s non-insurance segment that includes energy, remarks, “there is no doubt about this transition — this is a great opportunity for us.” Despite many false claims about climate change, Berkshire Hathaway Energy invests in wind power and other forms of clean energy, as well as expanding transmission lines to renewable sources (which are scattered throughout the country compared to traditional power plants). Currently, the United States is approaching renewable energy in an extremely decentralized way with inconsistent regulations and laws, and has not made a concerted societal effort. Imagine the coordinated efforts between the government and business leaders in the United States prior to World War II to steer the country’s war-supporting industrial sector. Buffett says, “the capital is already there, people are here, and the goal is clear, but we seem to lack the motivation to make a strong push in peacetime.” Berkshire’s insurance business (specifically Geico, a company in its investment portfolio) led by Ajit Jain has faced industry challenges head-on by improving the use of telematics at Geico. This is a method of monitoring the movement of assets (cars, trucks, heavy equipment, or even boats) using GPS and diagnostic methods (onboard diagnostics). Data such as distance traveled and speed allow Geico to design reasonable price policies. Geico has lost market share to Progressive in recent years because it was slow to adopt technology. Telematics was only implemented at Geico a few years ago (3 years), while Progressive has been involved for about 20 years. Apple does not make up 35% of Berkshire’s investment portfolio (as someone mentioned), as this figure does not include publicly traded businesses in the conglomerate’s portfolio. Berkshire currently holds 6% of this well-known technology company. Buffett shares, “the standards for Apple are completely different from other companies we own. The position of the iPhone in consumers’ minds has made it an extraordinary product.” This is the reason why he is extremely happy to hold Apple stocks: “Apple has a special position in the hearts of consumers, as they are willing to pay $1500 for a small phone, while having to pay up to $35000 for their second car. However, if they had to give up either this car or the iPhone, they would give up the car. That’s an extraordinary product. We can’t own 100% of the organization, but just a small percentage (6%) is already happy, and if we can gradually push ownership up by even 0.1%, that’s even better. Philosopher Omaha regrets selling shares a few years ago: “I made a mistake selling shares. There are some reasonable reasons to consider gains from a tax perspective, but it’s still a bad decision. We always want to own the best businesses and also want plenty of liquidity.”
Elon Musk is a bit arrogant but he truly has talent, a very brilliant mind. Munger believes that all his achievements are thanks to his willingness to take on extreme objectives to the point of being irrational. He is very involved in impossible missions, but Buffett and Munger only want to do easier jobs, like playing chess. Perhaps the world also needs individuals to pursue fanaticism to push the limits of certain fields, but this will make themselves extremely tortured (like the way Elon runs between multiple companies), maybe Buffett prefers his “easygoing” way of life.
4. Sell TSMC, China and Japan
Buffett sold about $4 billion of TSMC shares just a few months after buying them last year. This is the leading chip manufacturer in Taiwan. A “short-term” move like this is extremely rare for the 92-year-old veteran investor, he explained: “TSMC is one of the most important and well-managed companies in the world — this statement will still be true in 5, 10, or 20 years. However, the only thing that concerns me is its geographic location.” The geopolitical tensions between the US and China could turn Taiwan into a center of conflict. The tension between the US and China is extremely foolish. Munger emphasized this. The US should find ways to coexist friendly with China while having more free trade with developing countries.
Buffett said: “We compete vigorously but should also have wise opinions about certain limits. If we go beyond those limits, it will trigger an excessive reaction from the other side.” Buffett continues to search for other opportunities in Japan. The investments in five large Japanese trading companies have made him very satisfied. Specifically, Buffett acquired shares in Mitsubishi Corp, Mitsui, Itochu Corp, Marubeni, and Sumitomo in August 2020, on the occasion of his 90th birthday, and continued to increase his ownership to 7.4% last month (in conjunction with his visit to Japan): “Berkshire is still the largest lender (lending conglomerate) outside of Japan.
5. Banking system, dollar vs bitcoin
Buffett and Munger keep most of Berkshire’s money in cash and treasuries, both of them want to ensure that when the banking system encounters problems and has to temporarily suspend, the organization is always ready to cope. Buffett does not believe this will happen but could happen. He used very strong words when talking about First Republic Bank when it was acquired by JP Morgan Chase (after legal intervention): “This is the biggest failure in the banking industry since the 2008 crisis and the third case in the year after Silicon Valley Bank and Signature Bank. The severe punishments should be imposed on executives for their negligence. Depositors should be reassured by the government’s intervention. I see people misunderstand that the FDIC and the US government want banks to fail and personal deposits to be lost (but in fact, the opposite is true).” These failures stem from underestimating the risks of a range of banks, and they should have been cautious and closely aligned with lawmakers. Buffett recalled the story of his father, Howard, and how he lost his job during the Great Depression (1939). At the AM 2023 meeting of Berkshire, there were two message boards, “Available for Sale” and “Held-to-Maturity,” which refer to how securities are accounted for on the bank’s balance sheet. Munger adjusted the boards and emphasized: “I am a conservative and love tradition. Banks should not be involved in investment, and bank employees (bankers) should only work like engineers — specifically, focus on observing what can divert their organization — if everyone is keen on getting rich quickly, then it’s not okay.”
The public’s trust in the US dollar has decreased, but this does not mean that Bitcoin will shine. No token can replace the world’s reserve currency. However, printing more money at this time is extremely crazy. Bitcoin became famous in 2021 for its potential to combat inflation in the context of the US government printing trillions to fight Covid, but when inflation rose, its price in 2022 fell by 60%. The trend of “de-dollarization” is currently taking place along with innocent money printing, which is extremely dangerous. We cannot imagine how bad things will be when the monster is released from its cage if the public’s faith in purchasing power is shattered, they will behave in an extremely unpredictable way. The economy will change fundamentally. Regarding the reserve currency, Buffett believes: “Until now, I have not seen any currency that can do the job of a reserve for the world like the dollar.” The US fiscal policies are not under the responsibility of Jerome Powell, the chairman of the Fed (even though he understands the US debt), so the issue of the debt ceiling, although it affects the dollar, is related to political decisions of other parties in the system. The US may need to learn from Japan and tighten their belts if necessary to maintain economic stability instead of always complaining.
By: Quan Nguyen Ha
Supported by Datalac.com
