Berkshire Trip 2018

May 31, 2018

In early May, I attended the Berkshire Hathaway shareholder meeting in Omaha, Nebraska. The event, dubbed “Woodstock for Capitalists,” attracted more than 40,000 attendees from around the world.

I made my first trip to Omaha with a friend back in 2010. We had both become fascinated with investing and decided we couldn’t miss the chance to see Warren Buffett and Charlie Munger in action. We were a couple of broke college kids who had no interest in shelling out a few hundred dollars for a plane ticket — so we drove twenty-three hours from Gainesville, Florida. We each had three “Class B” shares to our name (worth about $75 each at the time). It wasn’t much, but we were the proud owners of a small piece of Berkshire Hathaway.

As an investor, in the years before that first shareholder meeting, I wandered along aimlessly. My investment portfolio consisted of a few solar panel manufacturers and other businesses that I didn’t understand. The allure was the seemingly endless opportunity in front of these companies. How could you lose if you invested in something that was clearly going to change the world? That conclusion was encouraged by their skyrocketing stock prices and the talking heads on TV.

What I didn’t appreciate was that these companies did not have the financial capacity to weather any short-term pain (which became apparent during the financial crisis). In addition, they traded at optimistic valuations that would require much to go right in the years ahead. Finally, I had no way to intelligently assess if these companies had a sustainable competitive advantage that would enable them to create long-term value for their owners. I didn’t know it at the time, but all I could really hope for with these “investments” was that a greater fool would come along and bid their stock prices even higher.

Looking back, many of the companies I owned during that period have since gone bankrupt. First Solar, widely considered an industry leader at the time (the safe bet), is still about 70% lower than where it traded in 2008 (by comparison, the S&P 500 has more than doubled over the same period). The “endless opportunity” that investors saw a decade ago went up in flames.

Roger Morris (Alex’s dad) and Alex Morris, CFA with Warren Buffett’s “stand-in”

Looking back, I didn’t have the tool kit or requisite knowledge needed to be an investor. At the time, concepts like competitive advantage and intrinsic value were foreign to me. That first Berkshire Hathaway shareholder meeting marked a turning point in how I thought about investing. It was suddenly clear that there was a better way. From that perspective, losing a large percentage of my savings in those early years was really a blessing in disguise. Warren Buffett and Charlie Munger, among others, have been instrumental in my education as an investor.

Susan Morris (Alex’s mom), Ted Weschler (one of two investment guys selected by Buffett in the last few years), and Alex Morris, CFA

The trip to Omaha has become an annual tradition. While I still enjoy the shareholder meeting, what I’ve found over time is that the content has become somewhat predictable. Often, the question and answer session rehashes what has been asked in previous years. Ironically, the meeting itself has probably become the least important part of the weekend for me (especially since Berkshire began simultaneously streaming the event online in 2016).

But there’s still plenty of value to be found in Omaha. The trip is an opportunity to network with investors from around the world. It’s a chance to see old friends and make new acquaintances.

Interestingly, among the people I interact with, I’ve found that they all have their own take on the art of investing. They all seem to have a unique perspective on security selection, portfolio construction, and other investment related considerations. If there’s a shared belief among this group, it’s the importance of continuous improvement and learning. In a world that seems to be moving faster than ever before, that commitment feels imperative for long-term success.

Berkshire Hathaway is the epitome of that idea (getting better one day at a time). Starting with a failing New England textile mill, Warren Buffett and Charlie Munger have built one of the most valuable companies in the world. They’ve adapted their approach over time to deal with the realities of their situation (most notably becoming a larger firm). They didn’t get there with a master plan. They achieved long-term success through continuous improvement, by staying rationale across market cycles, and by boldly seizing rare opportunities when they appeared.

It’s worthwhile to think about what they didn’t do as well. They did not spend their waking hours studying macroeconomic indicators or trying to “time the market.” Instead, they focused on buying good businesses run by honest and able managers, when those businesses were cheap. When they couldn’t find anything to buy, they did nothing. That’s about it.

As Charlie Munger once noted, there’s real value in this simple idea:

“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid instead of trying to be very intelligent.”

As it relates to the services we offer clients, I think there’s an important takeaway from this: there’s value in simplicity. There are no bonus points in investing for difficulty or complexity.

There’s also value in taking the road less traveled. We think maintaining a long-term perspective differentiates us from many market participants. The reason is straightforward: investing for the long-term is difficult. When done successfully, it requires in-depth research that enables you to stick with an investment through inevitable periods of volatility and temporary weakness in the business. The easier path during these difficult times is to head for the exits, regardless of how cheap the stock becomes. It’s not worth the risk of looking or feeling dumb, particularly for investors that are more focused on career risk than on the results they deliver for their clients. That creates opportunities. This is often where we find businesses trading at a discount to fair value.

As you can see, the concept is simple: invest when you can buy something for less than it’s worth. It’s the implementation that trips up many investors. We work hard to put ourselves in a position where we can think and act long-term in the best interests of our clients. We hope that notes like this one help you understand what we’re trying to do behind the scenes. If we’re successful, we will be able generate reasonable results over the long run that will help you meet your financial goals.

AUTHOR:

ALEX MORRIS, CFA, MBA