This is Part 2 of my visit to Berkshire 2019. Part 1 is here.
#6 Going for Customers First and Profits Later Is OK Depending on Your Investors
There was some discussion about Amazon and ecommerce.
In particular, there was a discussions about the strategy of going for customers first and profits later. He mentioned Amazon can do this because it 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 need to learn about consumer behavior as it unfolds. Right now Americans are shifting from single family homes to rentals. And this impacts furniture sales.
#7 He Is Not Excited About Alternative Investments.
Overall, he is not excited about alternative investments.
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.
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 just too much demand 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 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.
#8 Why Berkshire Invested in Amazon
Berkshire’s investment in Amazon was a pretty big surprise. The company is not traditionally tech focused.
When asked about this, he gave the same vague valuation explanation he always gives. He talked about valuing a company by counting the birds in the bush.
- How many birds will appear? 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 also 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.
Overall, I think they invested in Amazon based on a solid prediction for:
- Worst case scenario.
- The minimum case for future growth (i.e., birds in the bush).
#9 You Need to Be a Specialist
Buffett often gets asked about being a specialist versus a generalist. Munger’s answer has been evolving I think.
There were a couple of comments about this topic.
- 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. Even though they didn’t. There’s just more competition. He said nobody wants a doctor who if half dentist and half proctologist.
#10 Consumer Preferences Can Impact Growth in Weird Ways
Buffett talked about Sees Candies 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. That is strange consumer behavior for a premium product.
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 mostly remained on the West coast of the USA.
Buffett talked about how consumers have strange preferences for things like chocolate.
- West Coast people like Sees chocolate, but they don’t in the East.
- Hershey’s 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. This can have a big impact on the long-term trajectory of a business.
#11 Insurance Is Almost All About Management Performance
When asked about insurance, he explained the float again. Even though it is due back to customers, it tends to last for a long time in practice. So it is effectively investment capital for management.
He says reinsurance is a particularly 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 the 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.
#12 You Want to Be Able to Identify the Extremes of Human Behavior
He got asked about aging and 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.
In particular, you want to be able to identify the extremes of human behavior. You can see them on TV every day.
#13 What the Problem Was in the 3G and Kraft Heinz Investment
He said 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 (Kraft Heinz). 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 protect 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.
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.
Munger commented that a lot of problems come from taking a good idea and pushing it to excess.
Last Point: Why Apple Is Berkshire’s Largest Holding
Charlie said the iPhone is the last thing his grandchildren would give up.
That’s it for the visit. It was pretty great (as always).
- Can ByteDance Breach Alibaba’s Infrastructure Moat and Become An Ecommerce Giant? (Tech Strategy – Podcast 82)
- Alibaba Takes Over Sun Art Retail. Is It Going to Take Off? Or Is It Infrastructure? (pt 1 of 2) (Asia Tech Strategy – Daily Update)
From the Concept Library, concepts for this article are:
From the Company Library, companies for this article are:
- Berkshire Hathaway
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