My Notes From the 2019 Berkshire Hathaway Annual Meeting (Pt 3 of 3)


This is Part 3 of my visit to Berkshire 2019. Part 1 is here. Part 2 is here.

Question on online furniture retail and strategies where you go for customers first and profits later.

There was some discussion about Amazon. On the strategy of going for customers first and profits later, he mentioned Amazon has investors that will accept losses if sales keep increasing.

He also talked about Nebraska Furniture Mart and pointed out they do a lot of sales online with pick-ups at the store. But you don’t want the retail space to become a showroom for online sales. So you have to offer the right prices in the store.

He also mentioned how you learn about consumer behavior as it unfolds. Right now Americans are shifting from single family homes to rentals. And this impacts furniture sales.

Question on illiquid closed-end funds (i.e., alternative investments like private equity).

He said a leveraged investment will beat an unleveraged one in a good business. But the covenants that used to protect debt usage have deteriorated. And if you don’t have covenants, you will have bankruptcies. Overall, he is not excited about alternative investments.

For private equity, the supply-demand situation has changed dramatically in the last 10-15 years. You have like $1T of equity plus $2T of debt hunting for deals. It’s too much relative to supply.

Generally, if you want to work on Wall Street, it’s better to be a great salesman than a great analyst. You mostly get paid for raising the money and locking it up. When these people sell their funds to public officials at pensions funds and such, it’s not a fair fight.

Question on Amazon investment by Berkshire.

This was a big surprise for everyone as Berkshire is not traditionally tech focused. He talked about valuation and went to his valuing a company by counting the birds in the bush explanation. How many birds will appaer? 2-3? Maybe 4-5? How far away are they? How likely are they to appear? Who else is after the birds?

He also said to focus on the worst case.

He said Amazon’s CEO is a wizard (my word, not his). So it was hard to spot how successful the company was going to be. However, he blames himself for not seeing Google earlier. That was obvious.

Question on being a specialist vs. a generalist.

Buffett said Thomas Watson (IBM) used to say he was smart in spots and he stayed around those spots.

Buffett said insurance made a lot of sense to him immediately. And he had little competition at the time.

Munger says you need to specialize these. Even though they didn’t. There’s just more competition. He said nobody wants a doctor who if half dentist and half proctologist.

Question on growing See Candies.

He said it is a strange product. It is like a temple to chocolate. People love to give and love to receive Sees. But nobody buys it for themselves. It’s entirely for gifting.

He also says Sees “doesn’t travel well”. Stores on the East coast got some initial traffic but then didn’t have enough sales per square meter to stay open. It has remained on the West coast of the USA.

He talked about how consumers have strange preferences. West Coast people like Sees chocolate, but not in the east. Hersheys chocolate does great in the US but not the UK. Cadbury does great in the UK but not the USA. Dr. Pepper only sells well in the Southeast USA (note: it was founded around the same time as Coca-Cola). Consumers are strange.

Question on how to value Berkshire’s insurance business.

He explained the float again. Even though it is due back to customers, it tends to last for a long time in practice.

He says reinsurance is a difficult business. To actually cover all your risks until the end of time, you need to have tons of capital. And that makes it not a great business. Or you need to re-insure, which also makes it poor as a business. He mentioned that most all the major reinsurance companies have had near death experiences, even without major events. He said reinsurance is just not good as a stand-alone business. But it makes sense as part of Berkshire. They have capital depth to cover.

Berkshire has the best property casualty business in the world. But it’s a mediocre business for most people. Berkshire is just better at it (it’s all about management). He previously had two small insurance companies that went bust.

Question on aging.

He said there are lots of downsides to aging. But one thing you get better at is understanding human behavior. And this is something you cannot get from books.

You want to be able to identify the extremes of human behavior. You see them on TV every day.

Question on 3G and Kraft Heinz situation.

He says he has a one page agreement with Jorge Paolo of 3G, who is a good friend. He mentioned 3G is more comfortable with leverage and paying higher prices. But they are also better operators and can impact their companies (Buffett is passive). He says they paid too much on their last deal. That was the problem.

For Kraft Heinz, he says he underestimated what retailers are doing and going through. They are intermediaries that are trying to make money. Brands are what protects products from them and can be enormously valuable. But most brands are still dependent on these intermediaries. The tension between them has increased in the last five years.

However, some brands are really stable. They rise 1-2% in unit sales per year. Or decrease by about the same amount. But there is just not a lot of movement. And it has been this way for some brands for 80 years. So the volumes are predictable. And these businesses tend to have great ROICs.

However, the margins and price negotiations have become more difficult recently.

GEICO is direct to consumer, which is great.

Munger commented that a lot of problems come from taking a good idea and pushing it to excess.

On Apple being Berkshire’s largest holding

Charlie says the iPhone is the last thing his grandchildren would give up.


That’s it.


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