By Stephen Grocer and Peter Eavis
Greetings from Omaha where the Berkshire Hathaway annual meeting just wrapped up. I questioned Warren Buffett and Charlie Mungeralong with other journalists, analysts and shareholders. Here’s a cheat sheet to the day’s highlights. (Was this email forwarded to you? Sign up here.)
Welcome to the ‘Woodstock for Capitalists’
It’s that time of year again when Omaha becomes the center of capitalism for a weekend.
Tens of thousands of shareholders from around the globe filled the CHI Health Center in Omaha (formerly called CenturyLink) on Saturday for the annual meeting of Warren Buffett’s Berkshire Hathaway.
Over the decades, the meeting has grown from a small gathering in the cafeteria of National Indemnity into a weekend-long event also known as “Woodstock for Capitalists.”
The biggest draw was again the marathon question-and-answer session with Mr. Buffett and Charles T. Munger, Berkshire’s vice chairman, about everything from the conglomerate’s business to the economy to politics and whatever else crossed their minds.
DealBook provided analysis through it all.
Today’s DealBook Briefing was written by Stephen Grocer and Peter Eavis in New York.
Tim Sloan and Wells Fargo
Mr. Buffett and Mr. Munger took a question on the misdeeds at Wells Fargo, which included deceiving customers with fake bank accounts, unwarranted fees and unwanted products. Berkshire holds a significant stake in the bank. The questioner asserted that Mr. Buffett had not been as critical of Wells Fargo as he had been many years earlier of Salomon Brothers, the Wall Street firm that was embroiled in a trading scandal in the early ‘90s. Berkshire had a large stake in Salomon.An independent press needs your supportDiscover the impact of our journalism with unlimited access to The Times
On Saturday, in responding to the question, Mr. Buffett said, “When you find a problem you have to do something about it, and I think that’s where they probably made a mistake at Wells Fargo, and they made it at Salomon.” He also suggested that senior Wells Fargo officers overlooked an early report, by The Los Angeles Times, about some of the bank’s misconduct. “Somebody ignored that article,” he said.
Mr. Munger offered some support for Timothy J. Sloan, who stepped down as Wells Fargo’s chief executive in March. “I wish Tim Sloan was still there,” Mr. Munger said.
Mr. Buffett added that Mr. Sloan had been a “piñata.”
Who controls the big banks?
Berkshire owns stakes in several big banks, including Wells Fargo, Bank of America and J.P. Morgan. A questioner asked if regulators now effectively run the big banks.
Both Mr. Buffett and Mr. Munger said regulation could be irksome, but was necessary. Mr. Buffett noted that insurance, one of Berkshire’s biggest businesses, has long been subject to regulation. “Regulation can be a pain in the neck generally, but we don’t want a lot of charlatans operating in insurance,” he added.
Mr. Munger said banks enjoy implicit government backing through deposit insurance, so it is part of the bargain that banks have to operate under regulation. “You can’t be too crazy with the money,” he said.
What about Kraft Heinz?
Mr. Buffett and Mr. Munger were asked if they have changed their view about the long-term potential of Kraft Heinz, whose brands appear to be losing some favor among consumers.
Mr. Buffett did not answer the question directly. Instead, he said there was a constant battle between the brands that belong to retailers, like Costco’s Kirkland Signature, and those brands that belong to producers, like Kraft Heinz. Mr. Buffett said some retailers had “gained some power,” particularly Amazon, Walmart and Costco.
Berkshire teamed up with 3G Capital, the Brazilian private investment group, to buy Heinz in 2013 and then merged it with Kraft in 2015. Berkshire holds a 27 percent stake in the combined company.
Last year Kraft Heinz stumbled badly as 3G’s strict cost-cutting strategy appeared to be showing diminishing returns. That weighed on Berkshire’s 2018 results.
One criticism of the company is that its management, steered by 3G Capital, did not spend enough on marketing and developing products to try and attract consumers in a changing market. Mr. Munger disputed that, saying, “I don’t think the problem was that they cut research.”
Mr. Munger reiterated a point Mr. Buffett had made early this year about Berkshire and 3G having paid too much for Kraft.
Berkshire revealed on Saturday that Kraft Heinz was causing new headaches. Berkshire said its first quarter financial results did not reflect its share in Kraft Heinz’s earnings. The reason: Kraft Heinz had yet to file its annual financial results with the Securities and Exchange Commission, and it had not made its first quarter financial results available to Berkshire.
Berkshire’s stake in Kraft Heinz is worth $10.6 billion, down from $14 billion at the end of last year.
Kraft Heinz said in February that last year it had received a subpoena from the S.E.C. related to an investigation into the company’s accounting and controls.
Not ‘inconceivable’ that Berkshire will partner with 3G again
Berkshire’s partnership with 3G Capital has drawn criticism ever since the two firms teamed up to buy Heinz in 2013.
So it is not surprising given Kraft Heinz’s woes that Mr. Buffett and Mr. Munger were again asked about the relationship.
Berkshire shareholders have often questioned whether 3G’s management style is in step with Berkshire’s. Mr. Buffett has fostered a reputation for allowing the businesses that Berkshire purchases to operate with little interference and hasn’t pushed for big job cuts. 3G is known for its ruthless cost-cutting.
But when asked if Berkshire might still consider doing deals with 3G, Mr. Buffett said, “It is not at all inconceivable that we could be partners in some transaction in the future.”
Mr. Buffett has defended 3G and Berkshire’s involvement with the firm. He has also pointed out that, like Berkshire, 3G doesn’t just look to buy and build businesses but also looks to hold them. He has argued that 3G and Berkshire don’t have contradictory views on cost-cutting, they only differ on the type of deals they pursue. 3G, Mr. Buffett has written, has acquired businesses that “offer an opportunity for eliminating many unnecessary costs.” Berkshire has typically avoided buying bloated companies.
He added Saturday that 3G is more comfortable than Berkshire in using debt to acquire companies and is willing to pay higher prices, but he added that 3G in certain cases may be a better operator.
It should be noted that 3G’s strategy of buying companies in need of a turnaround has also provided Berkshire with a new category of megadeals at a time when Berkshire has struggled to make large acquisitions.
Tech stocks, finally
Mr. Buffett, perhaps the most famous value investor, had famously avoided investing in tech companies for years because he didn’t understand them. But that stance seems to have evolved in recent years. Mr. Buffett told CNBC Friday that Berkshire had made its first investment in Amazon.
Berkshire has also become one of Apple’s biggest shareholders with a roughly $40 billion stake.
Todd Combs and Ted Weschler, the two investment managers whom Berkshire had hired in the past decade, are behind the push into tech stocks. Mr. Buffett credited the pair for Berkshire’s Amazon and Apple investments, but hasn’t said which one.
At last year’s meeting, Mr. Buffett addressed a question about why he hadn’t bought Amazon early on:
“The truth is that I’ve watched Amazon from the start, and I think what Jeff Bezos has done is something close to a miracle. The problem is if I think something will be a miracle, I tend not to bet on it.”
Mr. Munger made that point again at this year’s meeting, but added, of Berkshire’s decision not to buy shares of Alphabet, Google’s parent company, early on: “We screwed up.”
‘I’m a card-carrying capitalist’
Capitalism has come under increasing criticism while support for socialism has grown in the United States. One shareholder wanted to know what Mr. Buffett, as a lifelong Democrat, thinks of these shifting views and whether they could affect Berkshire.
Mr. Buffett responded:
“My position at Berkshire is not to further my political beliefs.”
He then added:
“I’ll just say it: I’m a card-carrying capitalist. You don’t have to worry about me changing in that matter. But I also think capitalism does involve regulation. It involves taking care of people who are left behind.”
Mr. Munger said:
“We’re all in favor of some kind of government social safety net in a country as prosperous as ours.”
About Berkshire’s stock buybacks
The first question Mr. Buffett faced had to do with stock buybacks.
Berkshire bought back $1.7 billion of its own stock during the first quarter, but the shareholder wanted to know why Berkshire didn’t buy back more.
Mr. Buffett didn’t answer the question directly, but offered his general views on buying back Berkshire’s stock.
“We will buy stock when it is trading below a conservative estimate of its intrinsic value,” he said. “We want to be sure when we repurchase stock that those that have not sold are better off than they were before.”
Mr. Buffett had largely eschewed buying back Berkshire stock. But as the price to acquire big companies rose over the past few years and Berkshire’s cash pile swelled, Mr. Buffett’s reluctance to buy back Berkshire’s stock began to fade.
After loosening the requirements on when Berkshire’s stock could be bought back, the company repurchased $1.3 billion of its own stock over the final six months of 2018.
The company was not alone. Flush with cash from the $1.5 trillion tax cut, American companies bought back a record $806 billion of their own shares in 2018. By reducing the number of shares outstanding, buybacks can bolster a company’s stock prices. And companies often buy back their shares when they believe they have nothing better to do with their money than return capital to shareholders.
Critics of the surge in buyback activity argue that companies should spend more on building the business and on raising wages.
But Berkshire’s buyback activity is likely only to increase in the future.
“I predict we will get a little more liberal in repurchasing shares,” Mr. Munger said.
One idea for what Berkshire could do with its cash pile
One questioner asked whether Berkshire should have invested a large proportion of its more than $110 billion cash pile in a stock market index fund. Such a move could have produced significant extra returns for the company over the bull run of the past 10 years.
Mr. Buffett didn’t dismiss the idea, saying it might make sense in the future. But he added that having more than $100 billion available allowed Berkshire to take advantage of large investment opportunities when they come up.
“They’ll come in clumps and when other people don’t want to allocate capital,” Mr. Buffett said.
Tesla’s possible foray into insurance
Elon Musk, Tesla’s chief executive, came up again as a topic at the Berkshire annual meeting.
A year ago, DealBook’s Andrew Ross Sorkin relayed a question from a shareholder about Mr. Musk’s assertion that “moats are lame.” It was a criticism of an economic principle that Mr. Buffett had articulated in 1999.
This year an investor, through Mr. Sorkin again, asked if Mr. Buffett and Mr. Munger were worried about Tesla potentially selling auto insurance, something Mr. Musk had floated recently.
The short answer is that they are not too worried. Mr. Buffett said the likelihood of an auto company successfully getting into the insurance business was about as likely as insurance companies successfully getting into the auto business.
Who are you going to call? Berkshire.
Earlier this week, Berkshire Hathaway committed to help Occidental Petroleum compete in a bidding war for Anadarko Petroleum.
Under the terms of the deal, Berkshire would invest $10 billion in new preferred shares that have an 8 percent annual dividend.
Asked if shareholders should expect more such deals, Mr. Buffett said yes. He then added, the deal was evidence that when companies need a lot of financing fast, Berkshire continues “to get the call,” and that this is something that is likely to continue.
“If somebody wants a lot of certain money for a deal, they’ve seen that I can get a call on Friday afternoon, and they make a date with me on Saturday, and on Sunday it’s done,” he said.
What about Brexit?
The uncertainty surrounding Britain’s possible departure from the European Union, known as Brexit, appears to be reducing business investments in the country, but Mr. Buffett said on Saturday that he’d jump at the chance to do a big deal in Britain.
“I am not an Englishman, but I have a feeling it was a mistake to vote to leave, but it doesn’t destroy my appetite in the least for making a very large acquisition in the U.K.,” he said.
Mr. Munger said Brexit struck him as a “horrible problem.” But in referencing Britons, he said: “Those are my kind of people; I understand them.”
A future target for activists?
Will Berkshire be vulnerable to activists after Mr. Buffett and Mr. Munger are gone and their holdings are distributed? (Mr. Buffett has committed to gradually giving away much of his Berkshire stock to the Bill and Melinda Gates Foundation.)
This is a question that the pair have gotten at previous meetings. On Saturday, Mr. Buffett said that Berkshire needs to prove itself over time.
“There are no perpetuities,” he said, but then added that the advantage of keeping Berkshire together “will likely be significant over time.”
Mr. Munger joked that if Berkshire becomes a target, it would be long after he had passed away, so he isn’t too worried about it.
Vote for Charlie
Succession, understandably (Mr. Buffett is 88 and Mr. Munger is 95), is a perennial topic at Berkshire’s annual meeting.
This year, Mr. Buffett had some fun with the topic. He had pins made with slogans that said “If I was 18 I’d vote for Charlie” and “Stick with the proven, vote Warren.”
And he opened the meeting by jokingly saying that Mr. Munger was trying to stir an insurrection backstage.
On a more serious note, Mr. Buffett said that there had been discussions about Berkshire’s vice chairmen, Ajit Jain and Greg Abel, joining Mr. Buffett and Mr. Munger on stage.
At the start of 2018, Mr. Buffett promoted the two longtime Berkshire executives to oversee Berkshire’s businesses.
Surging earnings, on paper
Warren Buffett warned in his annual letter in 2018 that a new accounting rule would “severely distort Berkshire’s net income figures and very often mislead commentators and investors.”
That has certainly been the case. On Saturday morning, Berkshire reported soaring earnings for the first quarter because of those accounting changes. The new rules require Berkshire to include in its earnings the gains and losses on the stocks it holds but has not sold.
In the first quarter, Berkshire’s earnings jumped to $21.7 billion, compared with a net loss of $1.14 billion a year earlier. Berkshire’s earnings last quarter were bolstered by a $15.1 billion gain in the company’s huge stock portfolio.
Given the new accounting rule, Mr. Buffett has urged shareholders to focus on the performance of Berkshire Hathaway’s broad array of companies, which include insurers, energy firms, railways and manufacturers.
Berkshire reported its operating earnings rose 5 percent from a year ago to $5.6 billion.
Berkshire’s cash pile continued to grow. At the end of the first quarter, it stood at $114 billion, up from $58 billion just three years ago.
As long as it stays at its current levels, Mr. Buffett is going to face questions about how he plans to spend it.
Thanks for reading!