When Warren Buffett talks, investors listen. We unpack the quotes and commentary from the market’s most anticipated annual meeting and check in on the state of Berkshire Hathaway.
In this podcast, Motley Fool analyst Jim Gillies and host Dylan Lewis discuss:
- Berkshire Hathaway‘s past and future succession planning.
- What Warren Buffett’s cash stack and shrinking Apple position might signal about his view of the market and tax policy.
- Why investors shouldn’t be looking at Berkshire on strictly a total-return basis.
To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on May 6, 2024.
Dylan Lewis: We’re playing the hits from the Woodstock of Capitalism, Motley Fool Money starts now. I’m Dylan Lewis and I’m joined over the airwaves by Motley Fool analyst Jim Gillies. Jim, thanks for joining me.
Jim Gillies: Thanks for the invite, Dylan.
Dylan Lewis: We’re spending all day digging into Berkshire’s annual meeting and all things Buffett and Jim a bit of a working weekend for us following the action in Omaha. Appreciate you putting the extra hours for our listeners.
Jim Gillies: Not a problem. I was going to do it anyway. I get made fun of entirely too often in this house because it’s Berkshire meeting week and Lulu just looks at me and goes, what the heck man.
Dylan Lewis: This is our time. This is what we’re paying attention to. Typically, we don’t see a lot of this stuff on the weekends, but we make an exception here.
Jim Gillies: Yes, we do.
Dylan Lewis: A lot of different things to dive into. Berkshire’s Annual Meeting is usually where we get Buffett at his most Buffett in the Q&A section and in his address, he’s often most quotable, I think just to set the stage any lines that jumped out to you this year.
Jim Gillies: A number of things, I thought it was a more somber meeting than it has been in the past for somewhat obvious reasons we’ll get into. I’ll give you the takeaway, we might have to unpack a little bit but I’m going to paraphrase here. But the story of Berkshire, the way Buffett told it, is essentially to increase earnings and decrease shares outstanding. That’s interesting to me because long-term Berkshire holders and I’m one but not as long term as I wish I was, but I’m a 25, 26 years from my original purchase.
Dylan Lewis: It’s pretty good.
Jim Gillies: Starting to get up there. I bought it many times over the years subsequently and I’ve no intent to sell. For years, Buffett has issued capital returns to his investors. He always said basically, the inference was that Buffett could invest the capital flows at Berkshire Hathaway better than returning it to shareholders in the form of dividend or even in the form of share buybacks. Buffett always said if you want to buy back, he says you can sell a little bit if you want, make your own buyback kind of thing. But as well, he always viewed it a little bit as potentially taking advantage of shareholders. In other words, he had more information that maybe the shareholder did and it’s an asymmetric bet. I’m buying your shares from you. Maybe it’s a market downturn eaters scared, maybe you shouldn’t be doing that. I think it was 2011 or 2012, they brought in a policy as like the cash pile started growing and the capital flows of Berkshire started becoming this really big giant pile of cash and businesses. He brought in the, hey, we’ll buy back stock but only below 1.1 times book value. Which I said at the time as just basically guaranteed that Berkshire Hathaway will never again trade below 1.1 times book value. Buffett puts that floor there if it ever got close to that number. By the way, it never has so you all can take that one as a win.
Dylan Lewis: There’s locked-in demand.
Jim Gillies: Yeah. But also two people would anticipate, Warren’s going to buy shares back, they would run in as the stock got down to 1.1 book times book value. A couple of years later he bumped it to 1.2 times book value the floor, the bottom. Again, I guess it’ll never trade below that valuation again number down there. He did do a little bit of buybacks this quarter, I think about 2.6 billion worth. We know there has been some subsequent just by looking at the share count and in the file 10Q, we know that there’s been some additional repurchases and in April, $2.6 billion is not a lot frankly for Berkshire but they’re now doing it and it’s about 1.4, 1.5 times book value and again it’s that mindset we’re increasing earnings and decreasing shares outstanding. The problem is that they’re increasing earnings a lot faster than their decreasing shares. The giant cash pile growing ever larger, that is a problem that is not going away. Now I say problem, that we all have that problem of too much cash lying around. But still, as an investing vehicle, it is a problem.
Dylan Lewis: It’s not too surprising to me in some ways that Berkshire has had to change their approach over time simply because they’ve gotten so much bigger, you mentioned the cash pile. Let’s dig into it, Jim, $190 billion, 189 billion, if you want to be specific for Q1, 2024, that is an all-time high, roughly double where they were seven years ago. Buffett was getting some questions about that from shareholders saying, what’s the plan? What are you guys going to be doing with this? In his very Buffett way, he was like I don’t know that we see anything out there to put this to work with.
Jim Gillies: Previously when they talked about the cash pile, they’ve said, well first-off look, we’re a fortress. We’re never going to risk the company, there’s been lots of companies play risky games and earn risky prizes. Like you say, it’s 189 billion, now, if you take out the cash associated with the railway stuff, it’s 182 billion. I mean, what’s $7 billion between friends? He flat out said it’ll probably be over 200 billion by the end of the second quarter of the present quarter. The tonal shift is that they essentially said, I’m paraphrasing. We don’t know what to do with the money [laughs] cause previously he was always like, well, you know, we’ve got our elephant gun and we’re going hunting if something presents itself and yada. Now it’s yeah, they basically said we don’t have to do with it, which is interesting to me for a couple of reasons. One because in the current rate environment, I think they said they’re getting with 5, 5.5% on cash. Look, you’ve got $200 billion lying around gathering dust. That dust comes in the form of $10 billion in cash a year, which you know, there’s worst things I suppose. It becomes self-perpetuating but I don’t wonder if this is going to be my first speculative move today, which is guaranteed of course to be wrong because humans are terrible at making predictions but we insist on doing it.
Dylan Lewis: We can’t help but do it, Jim.
Jim Gillies: We can’t help it exactly.
Dylan Lewis: When we are hearing from someone like Warren Buffett, it’s like listening to a chair Powell. We’re always looking for things to draw conclusions from based on what they’re saying.
Jim Gillies: Exactly and so there’s a lot of talk about succession. When your CEO is 93, almost 94, I suppose that is to be expected. There’s a lot of talk about succession. Very reassuring, it’ll be in good hands with Greg Abel and Ajit Jain and Ted and Todd, the financial managers. The Berkshire culture will go on with Howard Buffett, his son as the Non-Executive Chair to maintain the culture. But I think things are going to a be different. I think things are going to be slightly changed and it would not shock me in the absence of things to buy with the elephant gun. Even if you unload the elephant gun to buy something, I’m going to be wildly speculative here just to be silly. They go buy Disney and put Disney shareholders out of their misery. The cash pile is just going to keep going, so if they don’t unload the elephant gun in the immediate wake of Buffett’s departure from the stage, I’m not sure you’re not going to see a one-time giant special dividend with potentially a regular dividend beyond that. Of course, Buffett is famously issued paying a dividend forever. But time’s changed, we already talked about the buybacks and how the buybacks have changed. It wouldn’t shock me to see a dividend finally. I know they’d like to do buybacks more and it’s certainly more tax advantage to do buybacks. But it wouldn’t shock me of a one-time special to shareholders at some point.
Dylan Lewis: To your point, Jim, 5% on about $200 billion.
Jim Gillies: Yes.
Dylan Lewis: That’s certainly enough for their buyback program as it currently stands, that 2.7 billion you threw out there. That leaves a little bit left over if they wanted to do something else and return some money to shareholders as well. One of the things that’s interesting is as Berkshire has gotten bigger, their largest holding is one of the biggest holdings out there. It is Apple. They’ve had a incredibly successful run as a major shareholder. We got a little bit of a check-in on that position with their 10-Q and with some comments from Buffett during the annual meeting. They’re reducing that position down a little bit and they’re taking that and I think it was about 13% reduction down on Apple. Is there anything to read into there?
Jim Gillies: There is and it may or may not have been articulated there. Some of this is inference but behavior is a language as they say. He went out of his way to, of course, praise Apple, praise Tim Cook. Tim Cook was at the meeting, CEO of Apple. He had informed Tim Cook, apparently the day before that Berkshire had reduced their stake. It’s a massive stake for them, it’s still by far their largest holding. From the Apple perspective, I could point to last week’s earnings report out of Apple, where iPhone sales fell 10%. It’s a company that’s gone X growth a little bit. They’re not a lot of topline growth, they’re doing well on services, they’re still a cash engine. Just over five years ago, you could buy Apple for 10 times cash flow. You are buying it for eight or nine times operating profit. Today it’s about 22,23 times operating profit and like I said growth has slowed. This may just be Buffett saying, I’ve got a giant position, I’m going to call some of it because it has significantly rerate it. If you are a buyer in late 2018, early 2019 of Apple and I was, you’re very happy. You’ve got a multi-bagger out of one of the world’s largest companies, which should not happen but it did and we’re very happy and Buffett did and he’s very happy. That’s set. Again, with the overall tone of the meeting, there was a couple of things that stood out to me about the Apple sale. First, he framed it alongside talking about taxes and we’re happy to pay taxes because we’ve done well and we are in America and the capitalist system. Red, white, and blue, says the Canadian analysts, I love America you guys know that.
Dylan Lewis: Appreciate you.
Jim Gillies: Well, we refer to you as Canada’s pants, of course, and you refer to us as American hat, so it works
Dylan Lewis: [laughs] American hat.
Jim Gillies: There you go but a lot of it was taxes and you can almost read into his commentary that he thinks capital gains tax rates might be going in a specific direction in the future and that direction is not down. It inferred that maybe you might be happy with us in a few years because Apple is still going to be our largest holding and he says, I almost guarantee it. But he’s taking some off the table but then the second part of that, the reason for taking it off the table, I might be reading tea leaves that are always going to be a little dim anyway. It felt like he was raising cash. Dylan, I submit to you in the form of a question, why do investors raise cash?
Dylan Lewis: Because either they want to be buying something else or because they don’t want their money where it currently is.
Jim Gillies: You can make an inference, what’s people raise. Because again, cash is not Berkshire Hathaway’s problem, like $189 billion lying around and will be about 200 billion by the end of this quarter. I think you can make the inference that he thinks things might be cheaper in future. I remember, and maybe a few listeners remember, in 2008, 2007, the world in times of crisis beat a path to Berkshire Hathaway’s door. Buffett’s a very kindly old gentlemen, grandfather, lovable uncle Warren. Buffett’s a killer. Goldman Sachs and Harley Davidson came to Berkshire during the credit crisis in ’08, ’09, and said, ”Please help us uncle Warren.” He said, “Sure, that will be a 15% big. They were drowning, and he’s hoard, handing them an anvil. But they paid it.
Dylan Lewis: To be clear, there have been times where Berkshire’s cash hoard has gone down, and it’s been during periods where valuations were incredibly attractive.
Jim Gillies: Yes. Well, as he says, when it starts raining money don’t put out thimbles, put out wash tubs. To me I just think combined with the loss of Charlie, which did cast a bit of a somber poll. May we all be so lucky to go out one month shy of our hundredth birthday. Universally beloved by the people in the industry to which we have dedicated our lives. There’s no tag days for Charlie Munger going out at 99, almost a hundred, right? But you’re still sad about it. Warren is clearly sad about it. At one point, the old familiar routine at the meeting of Warren would give a long expansive answer, and then throw it to Charlie to do a one or a two line, acerbic remark that usually would gather a laugh. Well, that dynamic was still in play. But for anyone who watched the meeting or watched parts of the meeting, if you saw the part where Buffett finished a long answer and then he said, “Charlie”. Charlie is not there, it’s Greg Abel, the heir apparent, the successor. He quickly realized his error, but it’s like, oh yeah, things have changed. They’re not coming back. It’s the end of an era. Greg Abel laughed it off. Of course he says, it’s a great honor to be [laughs] referred to as Charlie, but it’s just a reminder of what’s gone and a reminder that it’s going to be a little somber. Carol Loomis was there, the writer from Fortune who’s edited every letter and report from Berkshire over the years since 1977. I believe Carol Loomis is in her mid to late 90s as well. There are some titans who are going to be departing, who have already started departing at this stage, in the not-too-distant future. I took that a little somberly, and then you see how Buffett’s talking about his fears. He mentioned AI. He mentioned nuclear weapons, which has been a very popular one over the year. He’s raising cash, and he’s already got a giant cash pile that he fully admits don’t really know what to do with it. It was a bit of a different environment. I thought this time around.
Dylan Lewis: We’re going to keep the conversation going on Berkshire in just a minute. But first, a quick add read.
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Dylan Lewis: Okay, so earlier in the show we were talking about Apple, a very successful investment for Buffett and for Berkshire. We also got some commentary on some of the other investments, some of which haven’t necessarily worked out, Jim. We got some commentary from Buffett on Paramount, and Berkshire stake there pretty well. I’m smarter and poorer for the experience.
Jim Gillies: [laughs]
Dylan Lewis: Acknowledging that this was one that did not work out. But also I think very interestingly, owning that one as his investment decision, being very clear that it was him and not anyone else from the investment team that was driving that decision and the company being in the portfolio.
Jim Gillies: Yeah. There’s a lot to unpack there as there often is. The first thing is the character of Buffett. Buffett has always been someone who disseminates credit and hoards blame. What you’ve just talked about him say, “Yeah, it’s my fault, I did.” That is non-surprising for any long-term Berkshire follower. The second thing is, I think it’s a really good case study. Again, I said earlier behavior’s a language. Buffett has this famous air about him that he holds everything forever. He’s owned Coca-Cola since 1988. He’s owned Apple since the mid-2000s, I think 2012 or 2013. He’s owned American Express since, I think, the early or mid 1960s, whenever the Salad Oil scandal happened. He famously is a long-term investor. He’s famously said things like, our favorite holding period is forever. Buffett trades far more than anyone ever really wants to acknowledge. How’s the IBM position going? How’s the position in the airlines going? Buffett will kill. How’s Wells Fargo? Which at one point was one of the great own, never sell positions. It’s all gone now and should be. Bank of America replaced it in his favors. Since everyone loves confirmation bias his reason for selling Paramount was essentially what I’ve been saying for a couple of years on the streaming services. It’s an arms race and racing to the bottom. Thanks, uncle Warren for finally catching up with my opinion. That’s fantastic. But it’s unsurprising. Also two, in a quarter in which they’ve just taken a large capital gain on their Apple shares. Now they’ve lost money, but I think the lost money or we’re going to offset some of that gains. Just going to put that out there. But no, nothing about this sale surprised me, and I will argue it is the eminent logical thing to do. Nothing grinds my gears more than when I hear an investor who’s bought a position in something that they clearly don’t know, and it’s no sin to have losses. If you’ve got time, I’ll give you a list of mine. It’s no sin to have losses, a good stock picker is going to be wrong 40% of the time. That’s just the way the world works. Everything is uncertain. We see through glass dark, half darkly, whatever. But the idea of things are not proceeding according to what you foresaw. Things are not proceeding according to your thesis. I will argue vehemently, the rational position is to exit and figure out what you did wrong. It’s not to sit around and hold on going, “Well I’m a long-term investor.” My evidence for that would be, for those of you who purchased, I don’t know, a couple of little tiny companies called Intel and Cisco, and the Tech Bubble at their peak, how you doing by the way? You’re still down today, a quarter-century later. I think this is eminently logical. Again, very Buffett-esque, the fault is mine. But when things go well, he says, Ajit Jain, this Greg Abel, that our managers are fantastic, and this is very standard Buffett.
Dylan Lewis: I like you noting maybe a little bit of tax loss harvesting happening there too. I think it’s important to keep that stuff in mind as we wrap. I do want to take a step back. It seems like a great opportunity for us to check in on Berkshire, the investment itself. You look over the last 1,3,5,10 years on a total return basis. Berkshire versus the S&P has essentially been a coin flip. I think Berkshire outperforms on the three-year, but otherwise the S&P is ahead, but they’re relatively close and they trend fairly similarly at an $870 billion business. How should people be thinking about Berkshire at this point? Is that total return basis comparison fair?
Jim Gillies: It’s fair. It’s what it is. Your record is what your record says it is. But I’m going to suggest to you, Berkshire has actually outperformed on the most important measure here. What is Berkshire to investors? What should be Berkshire to investors? I see all kinds of people speculating on things like they were talking about Geico and the insurance and how the rise of robo-taxis is going to gut these. Get out of here with that nonsense. It’s like whatever. This is a bedrock holding for a portfolio. Berkshire Hathaway has matched the S&P 500 by holding about 15-20% of its market cap in cash the entire way up on a risk-adjusted basis. I submit to you that Berkshire has actually done better than the market because the companies that make up the S&P 500’s strip up Berkshire. But the companies, the companies that are, that are part of the S&P 500 do not hold 20% of their market cap in cash. Waiting for optionality, waiting for things to deploy that on. From the perspective of I liked my portfolio to have a wide diversity. It’s what I recommended in my service, Hidden Gems Canada. Sometimes we go with a bedrock companies, sometimes we go with a growth at a reasonable-price company. Sometimes we go with a wild speculation that we probably should rethink later. Sometimes a special situation values whatever. But you have to have a variety of companies in your portfolio to protect and give you the best performance for your portfolio that we can give. From a bedrock, from a Bulwark perspective, that is Berkshire for me. Personally, it is my largest personal holding. It’s also my longest-term personal holding and I don’t see that changing anytime soon. Certainly not while the oracle is still in charge.
Dylan Lewis: Jim Gillies, thank you so much for walking through all things Berkshire with me today. We’ll do the same thing, same time, same place next year.
Jim Gillies: It sounds good to me. Thanks, Dylan.
Dylan Lewis: As always, people on the program may own stocks mentioned, and the Motley Fool may have formal recommendations for or against, so don’t buy or sell anything based solely on what’s here. I’m Dylan Lewis. Thanks for listening. We’ll be back tomorrow.