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Woodstock for Capitalists: The Berkshire Hathaway AGM

To my understanding, Woodstock was an iconic rock concert that represented the Zeitgeist of America’s hippie era. There was a re-do in the 90’s where there ended up being riots – nonetheless, this is what Warren Buffett has coined the Berkshire Hathaway annual general meeting.

As we approach the AGM for BRK.A and BRK.B shareholders, we can share our experiences at the event. While in full finance nerd mode as investment banking analysts where staying until 4AM was fun to tell your friends about and site visits to Pennsylvania (economy because the flight is less than 4 hours, just to see if the power plant is “there”) were exciting, we decided that it would be a good idea to buy a few thousand shares of BRK.B to be admitted to the festivities.

We did that and got a flight to Omaha over the weekend. Try to book the flight early as there are fairly prominent people who go every year (hedge fund managers, mutual fund managers, retail investors, investment bankers), and the ones who do not fly by private jet will tend to book coach class.

Observations on BRK.B Stock

There are two classes of Berkshire Hathaway shares, Class A and Class B. Buffett’s philosophy is well known – no dividends, no stock splits. Dividends are taxable and profits are better reinvested in the company or as a war chest for acquisitions in the form of cash. If Buffett and Charlie Munger feel that the intrinsic value of Berkshire is higher than the current market value, they will participate in share repurchases.

As one would surmise, this leads to a very high stock price. Combined with much better capital allocation (and higher return on invested capital) plus a sort of double leverage from the large GEICO insurance float and reasonable balance sheet debt, Berkshire stock has regularly outperformed the S&P 500. One share of Berkshire Hathaway Class A today is over $300,000.

Most people do not have $300,000 that they can invest into a stock, and those that do will not find it convenient to purchase in such large blocks. As such, hedge funds were contemplating purchasing BRK.A stocks and selling fractional interests to retail investors for a spread / profit. Buffett, the folksy champion of the investing public who also regularly speaks to his disdain for the asset management industry and investment bankers, would not allow this dynamic to exist and as such the Class B share was born.

Our shares of Berkshire B have since outperformed the S&P index funds that we hold by some margin, and have been without any annoying tax events from dividends.

Holding Berkshire Hathaway Forever

Buffett himself has opined that BRK cannot keep outgrowing the S&P on a returns basis like it has in the past. At some point, at the same higher growth rate, the company ends up becoming the stock market.

Today, with Amazon, Google and Apple zooming ahead of Berkshire, this does not seem to be as big of a problem in the past, but it still comes with growth challenges that would exist as a behemoth, as acquisitions need to be much larger in scale to be material, and more established companies tend to trade at higher multiples and accordingly provide lesser returns than smaller companies. As such, the ability to identify a company with a competitive moat that can check all the boxes becomes a more challenging task.

Berkshire and OPM – Other People’s Money

Depending on what news source you read, Berkshire is the world’s biggest hedge fund or Buffett is the world’s greatest stock picker. Buffett is a value investor and makes great efforts to select stocks that pay a sustainable and growing dividend while the business profile has an economic moat.

The cash from dividends that he gets from Coca-Cola, Wells Fargo, American Express and other stocks every quarter is massive.

However, as we have illustrated in several other posts in the past, his true returns are amplified by leverage. So instead of getting a 10% return, a private equity firm can layer on debt and achieve a 25% IRR for a growing business. Berkshire Hathaway does that too – but their leverage applied also comes by way of float instead of by debt.

With property and casualty insurers (of which GEICO, one of the largest Berkshire subsidiaries is one of them), premiums are collected upfront while claims are settled later. After all, you do not buy car insurance and crash your car immediately after. The longer the tail for claim settlement, the longer this cash is kept on the balance sheet. Berkshire does not let this cash sit idly – it invests it in income stocks and bonds to generate more cash.

Now this is a simplification – there are reserves that have to be held that will be “safer” securities than stocks and it means that GEICO has to be conservative and disciplined with insurance underwriting (to have a combined ratio below 100% – this means that they make more money than they pay out in selling insurance). The conclusion is that Buffett is getting these additional returns for “free”.

Getting into Omaha for the Berkshire AGM

That is more or less what I read from the hefty annual report that they send to shareholders each year. There is also the paper copy of the shareholder letter than Buffett pens every year – it is a good read, and many value oriented hedge fund and mutual fund managers have read every year’s letter. They are all available on the Berkshire website free of charge. Many of Buffett’s thoughts have proved prescient and lucrative for shareholders, especially when he outlined that he would bet on America after the financial crisis.

Anyways, we hopped on either Delta or United from Toronto and ended up in Omaha late Thursday night. The airport is quaint and sells Omaha Steaks that you can take home. We ended up connecting with a bunch of Creighton University business fraternity folk who drove us in a pickup before taking us to our hotel outside of downtown. They were raving about Doug McDermott which tells you the exact year that we went.

So first lesson, Omaha, Nebraska is not an alpha level world city and to get the best networking effects, everyone who is there for the event stays Downtown. Everyone important books the downtown Omaha Hilton well in advance. Buffett bashes price gouging by hotels year after year at the event and encourages locals to make money by putting their homes up as AirBnBs (safe return, value investing keeners are unlikely to be violent criminals or not pay).

Day 1 of the Berkshire Hathaway AGM

We woke up Friday to engage in Berkshire tourism – the actual AGM is on Saturday at Centurylink Center (now the CHI Health Center Omaha). Warren Buffett broke out that his two favorite restaurants in Omaha were Gorat’s and Piccolo’s. Both are steakhouses and he usually goes there with Bill Gates. Bill Gates is our favorite person in the world so we wanted to take a chance and breathe the same air as him.

Gorat’s was the best steak that we had ever had at the point – possibly enhanced by the magic of being part of some value investing powwow but definitely better than Hy’s and Ruth Chris. Now since then there have been some bonus nights and closing dinners at Jacob’s & Co., Harbour Sixty, Barberian’s, Bardi’s, Peter Luger and Gotham’s and it is impossible to do a side by side tasting but nonetheless a very enjoyable experience for a fraction of the cost. So stop by at Gorat’s if you eat red meat.

The event is a three day Berkshire love fest where all of the various portfolio companies of Berkshire (such as See’s Candies, GEICO) have products available for sale while Heinz has special edition bottles with Warren and Charlie on display. Everyone is eating a Dairy Queen dilly bar (which is owned by Berkshire and also owns Orange Julius) and some people buy books about value investing and Warren Buffett. Hedge fund managers from around the world will also use Friday to catch up with each other and discuss stocks.

At the stadium, Buffett participates in newspaper toss and gets celebrities to play ping pong with him. Bill Gates also plays ping pong. There is a mini-carnival and everyone has a good time before retreating to the downtown Hilton. Chinese businessmen and investors have a tremendous respect for Warren Buffett and each year the Chinese contingent grows – Buffett also happily hosts groups of Chinese students from Tsinghua and Peking University at Gorat’s or Piccolo’s. Buffett also has started to invest in China – his most prominent investment that he has made a bunch of money on being BYD.

Day 2 of the Berkshire Hathaway AGM

This is the day of the actual AGM. First they go over what happened in the actual company (which people generally care less about, everyone can read the financials and BNSF is such a stable business).

Then the fun part happens when Warren Buffett and Charlie Munger start their comedy routine and answer questions from shareholders. They are very good and there are no sacred cows as they dissect everything from value to politics to rising sovereigns. Any shareholder can ask a question and answers are very thoughtful and somewhat provocative. This is where we found out that we had very similar views to Buffett pertaining to the education system and some of America’s ills.

All sorts come out – longtime Berkshire shareholders who knew Warren from a long time ago and have since become multi-millionaires with just a few shares, endowments and charities where the stock funds their activities, a large Chinese contingent and plenty of finance people.

We sat next to a guy with a Goldman Sachs notebook, blue blazer, beige pants, Ferragamo loafers and a Patek. He was about 25 but was trying to grow out a wispy beard to look more mature.

Buffett eats Kit-Kats and drinks Coca-Colas throughout the Q&A.

For serious finance professionals, we think it is definitely worth going once – especially because we do not know when Warren Buffett will pass away (he does live on Kit-Kats and Coke). For asset management professionals, it may become a regular business trip. However, for those not inclined to stake out in Omaha for a weekend, you can get 80% of the experience because it is webcast on Yahoo! Finance every year.

After the event, we walked around the Hilton to be admitted to one of many parties. Whitney Tilson from Kase Capital threw an event to pick the brains of smart young folk eating his food. We were talking when we were shoved aside by two nerds.

“I work for Morgan Stanley Distressed Debt!”
“I work directly for Jeremy Grantham at GMO!”

I was so angry.

“Well, I’m on the FIG team at TD Securities…”

Whitney ignored us and started to hear their mirror-perfected stock pitches. We had another steak dinner – a staple of the Midwest United States and then we said goodbye to Omaha.

CultureDo The Hours Get Better in Investment Banking? · Paying it Forward – the Investment Banking Coffee Chat · Poker and Finance, Poker and Investment Banking · Woodstock for Capitalists: The Berkshire Hathaway AGM · Why Investment Bankers Are Bad Investors · Are Investment Bankers Good Investors? · The Investment Banking Staffer · A Very Investment Banking Christmas · Other Phenomena in the Investment Banking Jungle · Compliance at Large Banks · Hangover Banker · Some Investment Banking Things · Business Golfing Primer – Beginner to Scratch Golfer to Sergio Garcia · Sports and the Trading Floor · Why Do Investment Bankers Work So Much? · Do Investment Bankers Get Sick? · Participating in Office Fantasy Football (And Other Games) · What Does A Bad Week In Investment Banking Look Like · Checking Your Work in Investment Banking · Do Investment Bankers Do Drugs? ·
ex investment banking associate

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