|
Berkshire Hathaway probably enjoys more shareholder loyalty and
dedication than any company in history.
Year after year, shareholders return to Omaha to hear Warren Buffett and
Charlie Munger expound on topics large and small. And Buffett and Munger are
nothing if not consistent. They have been following the same common-sense
investment philosophy for decades, and generously sharing the
"secrets" to their success with anyone who cares to listen.
As one shareholder put it in this year's introductory video, going to the
Berkshire annual meeting is a bit like going to church. Shareholders know
what they're going to hear, they already believe in Buffett and Munger's
approach, but they keep coming back to have the message reinforced.
To be sure, it's one thing to understand Berkshire's investment
philosophy and quite another to carry it out. With the goal of reinforcing
the message, here are some of the enduring lessons that came up in this
year's Berkshire Hathaway annual meeting:
It's OK to pay a fair price for a company with very
strong and growing competitive advantages.
Early in his career, Buffett was the most strongly influenced by Benjamin
Graham. His focus was primarily on finding deeply undervalued stocks; Graham
preferred companies trading for less than their net working capital balance.
However, Buffett credits Charlie Munger with teaching him that "it is
far better to buy a wonderful business at a fair price than to buy a fair
business at a wonderful price." In my opinion, investors are far more
likely to lose money by compromising on quality to buy an apparently
"cheap" stock, than by purchasing a fairly valued company with a
very strong competitive position (what Morningstar calls a wide moat),
especially if the competitive advantage is also strengthening over time (a
positive moat trend). HJ Heinz is a recent example of a company Berkshire was
willing to acquire for a seemingly rich price because Buffett believes in the
quality of the business and management.
Stay sane while others go crazy.
When asked what Berkshire's competitive advantage is, Munger's response
was that "we like to stay sane while others go crazy." Buffett has
often expressed the same sentiment as: "be fearful when others are
greedy, and greedy when others are fearful." It's as simple as that.
Buffett stated that the average investor can expect to see at least four or
five serious market dislocations in their lifetime, along the lines of the
late 1990s tech bubble or the 2008-09 financial crisis. The challenge is to
have the "mental fortitude" to take advantage of them.
Investing is about much more than just numbers.
One shareholder asked what quantitative metrics Buffett looks at before
buying a stock. The reality is that investing involves a large degree of
subjective judgement. Buffett gave the example of a basketball recruiter
trying to pick a player for his team. He might be biased against a player who
is 5 feet 4 inches tall, and he might get excited about a player who is 7
feet tall. But that information alone is nowhere near sufficient to know who
will be the better addition to the team. Buffett and Munger can't buy stocks
just based on financial ratios; they need to understand how the business
actually works. Both claimed not to know how to use a computer to screen for
stocks.
Think like an owner.
One of the most important lessons Buffett tries to convey at every
opportunity is that investors should think like business owners. Berkshire's
managers evaluate stocks exactly the same way they would if someone offered
to sell them the entire companies. Far too many people treat stocks as pieces
of paper, and investing as a form of gambling. Thinking like an owner changes
your whole perspective on stock investing. If a company has a bad quarter or
two because it is making investments for the future, that's a good thing. If
there's no change in a company's fundamental outlook, then a decline in the
stock price can be a good thing too: it allows you to increase your ownership
stake at a better price.
Management quality and culture are essential.
The quality of management can be one of the hardest things for an outside
shareholder to judge. Personally, I've found that the only way to really get
a sense for management is to follow a company over a period of years,
observing how management reacts to different market conditions and
competitive challenges, how strategic priorities are set and whether
management carries them out effectively, and so on.
Ideally, you want to find a company where outstanding stewardship is part
of a deeply ingrained culture that will live on through future management
transitions. At Morningstar, we do our best to capture our view of management
through our stewardship ratings—with our exemplary stewardship rating
reserved for companies with the most competent strategic execution and
disciplined capital allocation.
Managements should set a straightforward performance
yardstick, and then stick to it.
Buffett's preferred way to measure performance for Berkshire Hathaway is
growth in book value per share. Buffett compares this growth with the returns
of the S&P 500: if Berkshire's book value appreciates faster than the
S&P 500, Buffett and Munger are earning their keep. If book value doesn't
keep up with the S&P 500, in Buffett's words "our management will
bring no value to our investors." You would be hard-pressed to find such
a straightforward and easily verified performance yardstick at most
companies—even those that have much simpler businesses than Berkshire.
In general, book value is a terrible proxy for
intrinsic value.
While growth in book value is a decent enough substitute for improvements
in Berkshire's intrinsic value from year to year, Buffett emphasises that in
general book value is not a good measure of intrinsic value. This is because
book value is based on historical cost and occasionally arbitrary accounting
rules. Companies that make wise investments over time (such as Berkshire)
will end up with assets worth significantly more than their historical cost,
but the opposite could just as easily be true of companies that make poor
investments.
Don't do dumb things, especially in insurance.
Berkshire's primary advantage in the insurance segment is its
unwillingness to do "dumb things," in the words of Buffett. It can
be very tempting for insurers to chase market share through aggressive
underwriting. In an unfavourable pricing environment, the rational thing to
do may be just to sit on the sidelines. However, that would create an awkward
situation for most normal insurance companies, which face shareholder
pressure to show growth in premiums and would end up with 80% of their
employees having nothing to do. Munger stated that while most of Berkshire's
businesses would do pretty well under different owners, reinsurance is an
exception. Reinsurance just isn't a good business without truly exceptional
management.
Stay within your circle of competence.
For the vast majority of investors who don’t have the time or inclination
to extensively research individual securities, Buffett and Munger recommend
low-cost index funds. For their part, Berkshire's managers concentrate on
companies in the US (although they have made occasional international
investments, such as Iscar in Israel and PetroChina in China) and have no
problem passing on stocks whose future outlook they deem too hard to
understand (they mentioned the specific examples of Apple (AAPL) and
airlines).
Macroeconomic forecasts are of little use to investors.
Berkshire doesn't pay much attention to the outlook for the overall
economy. There's just too much uncertainty surrounding economic forecasts for
them to be of any use. As Buffett said, "to ignore what you know because
of predictions about something nobody knows is silly."
The United States' past and future is a story of
ever-increasing prosperity.
Buffett is a perpetual optimist. At this year's meeting, he said that he
envies a baby being born today in the United States because, "on a
probability basis, that is the luckiest person ever born." According to
Buffett, "We live far better than John D. Rockefeller did in his day,
and the same will be true of today's babies compared to us."
|
No comments:
Post a Comment