Motley Fool Hidden Gems Investing - What Buffett Is Selling and Saying

Episode Date: May 6, 2024

When Warren Buffett talks, investors listen. We unpack the quotes and commentary from the market’s most anticipated annual meeting and check in on the state of Berkshire Hathaway.   (00:13) Jim Gillies and Dylan Lewis discuss: - Berkshire’s past and future succession-- planning. - What Buffett’s cash stack and shrinking Apple position might signal about his view of the market and tax policy.  - Why investors shouldn’t be looking at Berkshire on strictly a total-return basis. Companies discussed: BRK.A, BRK.B, AAPL  Monarch Money free trial offer: www.monarchmoney.com/fool Host: Dylan Lewis Guests: Jim Gillies Producer: Ricky Mulvey Engineers: Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

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Motley Fool Money starts now. I'm Dylan Lewis, and I'm joined over the airwaves by Motley Fool analyst Jim Gillies. Jim, thanks for joining me. Thanks for the invite, Dylan. We're spending all day digging into Berkshire's annual meeting and all things Buffett. And Jim, kind of a bit of a working weekend for us following the action in Omaha. Appreciate you putting in the extra hours for our listeners. Not a problem.

I was going to do it anyway. I get made fun of entirely too often in this house because it's like, it's Berkshire meeting week. And, you know, Lulu just looks at me and goes, what the heck, man? This is our time. This is our time. This is what we're paying attention to. Typically, we don't see a lot of this stuff on the weekends, but we make an exception here.

Yes, we do. A lot of different things to dive into. Berkshire's annual meeting is usually where we get Buffett at his most Buffett in the Q&A section. And in his address, he's often most quotable. I think just to set the stage, any lines that really jumped out to you this year? A number of things. I thought it was a more somber meeting than it has been in the past for some somewhat obvious reasons we'll get into. I found it interesting. I'll give you the takeaway, and we might have to unpack it a little

bit. I'm going to paraphrase here, but the story of Berkshire the way Buffett told it is essentially to increase earnings and decrease shares outstanding. That's interesting to me because long-term Berkshire holders, and I am one, not as long-term as I wish I was, but I think I'm at 25, 26 years from my original purchase. That's pretty good. Starting to get up there, starting to get up there. I bought it many times over the years subsequently, and I've no intent to sell. For years, Buffett has eschewed capital returns to his investors. He always said, basically, the inference was that Buffett could invest the

capital flows at Berkshire Hathaway better than returning it to shareholders in the form of dividend or even in the form of share buybacks. Buffett always said, if you want to buy back, he says, you can sell a little bit if you want, make your own buyback thing. But as well, he always viewed it a little bit as potentially taking advantage of shareholders. In other words, he had more information that maybe the shareholder did, and it's an asymmetric bet. I'm buying your shares from you. Maybe it's a market downturn and you're scared. Maybe you shouldn't be doing that. Anyway, and then about, I think it was 2011 or 2012, they brought in a policy, as like the cash pile started growing and the capital flows and Berkshire started

becoming this really big giant pile of cash and businesses, he brought in the, hey, we'll buy back stock, but only below 1.1X book value, which I said at the time, it's just basically guaranteed that Berkshire Hathaway will never again trade below 1.1X book value. Buffett puts that floor there. If it ever got close to that number, by the way, it never has, So I'm going to take that one as a win. There's locked in demand. Yeah. But also too, people would anticipate, oh, Warren's going to buy shares back. They would run in as the stock got down to 1.1 book times book value. So a couple of years later, he bumped it to 1.2 times book value, the floor, the bottom. Again, moved the, well, I guess it'll never trade

below that valuation again, number down there. So he did do a little bit of buybacks this quarter, I think about $2.6 billion worth. We know there's been some subsequent, just by looking at the share count in the File 10Q. We know that there's been some additional repurchases in April. $2.6 billion is not a lot, frankly, for Berkshire, but they're now doing it. It's about 1.4, 1.5 times book value. Again, it's that mindset where increasing earnings and decreasing shares outstanding the problem is the divergence is they're increasing earnings a lot faster than they're decreasing shares so the the giant cash pile growing ever larger that is a problem that is not going away now i say problem oh that we all have that problem of too much cash lying around

but still as an investing vehicle it is kind of a problem so yeah it's it's not too surprising to me in some ways that Berkshire has had to change their approach over time simply because they've gotten so much bigger. You mentioned the cash pile. Let's dig into it, Jim. $190 billion, $189 billion if you want to be specific, for Q1 2024. That is an all-time high, roughly double where they were seven years ago. Buffett was getting some questions about that from shareholders saying, what's the plan? What are you guys going to be doing with this? In his very Buffett way, he was like, I don't know that we see anything out there to put this to work with. Previously, when they talk about the cash pile, they've said, well, okay, first off,

look, we're a fortress. We're never going to risk the company. Lots of companies play risky games and earn risky prizes. And like you say, it's $189 billion. Now, if you take out the cash associated with the railroad stuff, it's $182 billion. I mean, really, what's $7 billion between friends? He flat out said it'll probably be over $200 billion by the end of the second quarter, the present quarter. The tonal shift is that they essentially said, I'm paraphrasing, yeah, we don't know what to do with the money. Previously, I was always saying, well, we've got our elephant gun and we're going hunting for if something presents itself and yada, yada, yada. Now it's, yeah, they basically said, yeah, we don't have to deal with it, which is interesting

to me for a couple of reasons. One, because in the current rate environment, I think they said They're getting about 5%, 5.5% on cash. So, look, you got $200 billion lying around gathering dust. That dust comes in the form of $10 billion in cash a year, which, you know, there's worse things, I suppose. So, it kind of becomes self-perpetuating. But I don't wonder. This is going to be my first speculative move today, which is guaranteed, of course, to be wrong because humans are terrible at making predictions. But we insist on doing it.

And we can't help but do it, Jim. And we can't help. Exactly. When we are hearing from someone like Warren Buffett, who we are always – it's like listening to Chair Powell. We are always looking for things to draw conclusions from based on what they're saying. Exactly. And so, there's a lot of talk about succession when your CEO is 93, almost 94. I suppose that is to be expected.

There's a lot of talk about succession, a lot of talk about – and very reassuring. It will be a good hands with Greg Abel and Ajit Jain and Ted and Todd, the financial managers. And the Berkshire culture will go on with Howard Buffett, his son, as the non-executive chair to kind of maintain the culture. But I think things are going to be different. I think things are going to be slightly changed. And it would not shock me in the absence of things to buy with the elephant gun. And even if you unload the elephant gun to buy something, I'm going to be wildly speculative here, just to be silly. They go buy Disney and put Disney shareholders out of their Bob Iger misery. The cash pile is just going to keep going and going. If they don't

unload the elephant gun, I'm not sure in the immediate wake of, say, Buffett's departure from the stage, I'm not sure you're not going to see a one-time giant special dividend with potentially a regular dividend beyond that. Of course, Buffett is famously eschewed paying a dividend forever. But times change. We already talked about the buybacks and how the buybacks have changed. It wouldn't shock me to see a dividend finally be... I know they'd like to do buybacks more, and it's certainly more tax-advantaged to do buybacks, but it wouldn't shock me of a one-time special to shareholders at some point. To your point, Jim, 5% on about $200 billion. That's certainly enough for their buyback program as it currently stands,

that $2.7 billion you threw out there. That leaves a little bit left over if they wanted to do something else and return some money to shareholders as well. One of the things that's interesting is, as Berkshire has gotten bigger, their largest holding is one of the biggest holdings out there. It is Apple. They've had an incredibly successful run as a major shareholder. We got a little bit of a check-in on that position with their 10Q and with some comments from Buffett during the annual meeting, they're reducing that position down a little bit. And they're taking that, I think it was about a 13% reduction down on Apple.

Is there anything to read into there? There is. And it may or may not have been articulated there. Some of this is inference. But behavior is a language, as they say. And he went out of his way to, of course, praise Apple, praise Tim Cook. Tim Cook was at the meeting, CEO of Apple. He had informed Tim Cook apparently the day before that Berkshire had reduced their stake.

It's a massive stake for them. It's still by far their largest holding. From the Apple perspective, I could point to last week's earnings report out of Apple, where iPhone sales fell 10%. It's a company that's gone X growth a little bit. there's not a lot of top-line growth, they're doing well on services, they're still a cash engine. But five years ago, just over five years ago, you could buy Apple for 10 times cash flow, you're buying it for eight or nine times operating profit. Today, it's about 22, 23 times operating profit, and like I said, growth has slowed. This may just be Buffett saying, I've got a giant position, I'm going to call some of it because it has really significantly

re-rated. If you were a buyer in late 2018, early 2019 of Apple, and I was, you're very, very happy. You've got a multi-bagger out of one of the world's largest companies, which should not happen. But it did, and we're very happy. Buffett did, and he's very happy. That said, I took away, and again, with the overall tone of the meeting, there was a couple of things that stood out to me about the Apple sale. First, he framed it alongside talking about taxes. We're happy to pay taxes because we've done well and we are in America and the capitalist system. Yay, red, white, and blue, says the Canadian analyst. I love America, you guys know that. I appreciate you. Well, we refer to you as Canada's pants,

of course, and you refer to us as America's hat, so it works. America's hat. There you go. A lot of it was taxes. You could almost read into his commentary that he thinks tax rates, capital gains tax rates, might be going in a specific direction in the future. That direction is not down. He inferred that, well, maybe you might be happy with us in a few years because Apple is still going to be our largest holding. He says, I almost guarantee it, but he's taken some off the table. But then the second part of that, the reason for taking it off the table, and again, I might be reading tea leaves that are always going to be a little dim anyway, it felt like he was raising cash. Dylan, I submit to you in the form of a

question, why do investors raise cash? Because either they want to be buying something else or because they don't want their money where it currently is. You can make an inference with people raising, because again, Cash is not Berkshire Hathaway's problem, right? Again, $189 billion lying around, be over $200 billion by the end of this quarter. I think you can make the inference that he thinks things might be cheaper in future. I well remember, and maybe a few listeners remember, 2008, 2007, the world beat a path to his door. The world in times of crisis beat a path to Berkshire Hathaway's door. Buffett's a very kindly old gentleman, grandfather, lovable Uncle Warren.

no buffett's a killer buffett's a killer i mean buffett handed you know goldman sachs and harley davidson came to berkshire during the credit crisis in 08 and 09 and said you know please help us uncle warren he said sure that'll be a 15 vig uh i mean like you know they were drowning and he's holding handing them an anvil right like but they paid it and so to be clear there have been times where berkshire's cash hoard has gone down and it's been during periods where valuations were incredibly attractive yes so well as he says you know when it starts raining money don't put out thimples put out wash tubs right so to me to me i just think combined with the loss of charlie which did cast a bit of a somber paul like like look charlie may we all be so lucky to go out

one month shy of our 100th birthday universally beloved by the people in the industry to which we have dedicated our lives. Like, you know, like there's no tag days for Charlie Munger going out at 99, almost 100, right? But you're still sad about it. And Warren is clearly sad about it. At one point, like the old familiar routine at the meeting of, you know, Warren would give a long expansive answer and then throw it to Charlie to do a one or a two line, you know, acerbic remark that usually would gather a laugh. Well, that dynamic was still in play. But, you know, for anyone who watched the meeting or watched parts of the meeting, if you saw the part where Buffett finished a long answer and then he said, Charlie, and Charlie is

not there, it's Greg Abel, the heir apparent, the successor, and he quickly realized his error, but like, you know, it's like, oh, yeah, like, things have changed, they're not coming back, it's the end of an era. And you know, I mean, it was kind of, you know, Greg Abel laughed it off. Of course, he says, it's a great honor to be referred to as Charlie, but it's just a reminder of what's gone and a reminder that it's going to be a little somber, I think, as like Carol Loomis was there, the writer from Fortune who's edited every letter and report from Buffett from Berkshire over the years, since I think 1977. I believe Carol Loomis is in her mid to late 90s as well. There are some titans who are going to be departing,

who have already started departing the stage in the not too distant future. I took that a little somberly and then you see how Buffett's talking about his fears. He mentioned AI, he mentioned nuclear weapons, which has been a very popular one over the year, Andy's raising cash and he's already got a giant cash pile that he fully admits don't really know what to do with it. Like it was just, it was a bit of a different environment. I thought this time around. We're going to keep the conversation going on Berkshire in just a minute, but first a quick ad read. You just found out that your sales team is at risk of missing quota. Don't panic. Just ask Rippling AI. Since it's built on your real-time people and business data,

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full visibility and take complex actions across your entire organization. That's r-i-p-p-l-i-n-g dot a-i slash f-o-o-l. Sign up for exclusive access today. rippling.ai slash fool. Okay, so earlier in the show we were talking about Apple, a very successful investment for Buffett and for Berkshire. We also got some commentary on some of the other investments, some that haven't necessarily worked out, Jim. We got some commentary from Buffett on Paramount and Berkshire's stake there. He put it pretty well, I'm smarter and poorer for the experience, kind of acknowledging

that this was one that did not work out, but also, I think very interestingly, owning that one as his investment decision, being very clear that it was him and not anyone else from the investment team that was driving that decision and the company being in the portfolio. There's a lot to unpack there, as there often is. The first thing is just the character of Buffett. Buffett has always been someone who disseminates credit and hoards blame. What you've just talked about him saying, yes, it's my fault, that is non-surprising for any long-term Berkshire follower. The second thing is, I think it's a really good case study of, again, I said earlier, behaviors of language. Buffett has this famous air about him that he holds everything forever.

He's owned Coca-Cola since 1988. He's owned Apple since the mid-2000s, I think 2012 or 2013. He's owned American Express since I think the earlier mid-1960s whenever the salad oil scandal happened. He famously is a long-term investor. He's famously said things like, our favorite holding period is forever. Buffett trades far more than anyone ever really wants to acknowledge. How's the IBM position going? How's the position in the airlines going? Buffett will kill some. How's Wells Fargo, which at one point was one of the great own never sell positions? It's all gone now, you know, and should be. And Bank of America replaced it in his favors. So he saw that this wasn't, he's actually, and you know, and since everyone loves confirmation bias, his reason for

selling Paramount was essentially what I've been saying for a couple of years on the streaming services. It's an arms race and racing to the bottom. So thanks, Uncle Warren, for finally catching up with my opinion. That's fantastic. But like, it's, you know, it's unsurprising. Also, too, in a quarter in which they've just taken a large capital gain on their Apple shares, they've lost money. But I think the lost money over here is going to offset some of that gain. Just going to put that out there. But no, nothing about this sale surprised me. I will argue it is the eminent logical thing to do. Nothing grinds my gears more than when I hear someone, an investor, who's bought a position in something that they clearly don't know. It's no sin to have losses.

I mean, if you've got time, I'll give you a list of mine. It's no sin to have losses. All investors, a good stock picker is going to be wrong 40% of the time. That's just the way the world works. Everything is uncertain. We see through a glass half-darkly, whatever. But the idea of, okay, things are not proceeding according to what you foresaw, things are not proceeding according to your thesis, I will argue vehemently, the rational position is to exit and figure out what you did wrong. It's not to sit around and hold on going, well, I'm a long-term investor. My evidence for that would be, for those of you who purchased, I don't know, a couple of little tiny companies called Intel and Cisco in the tech bubble at their peak. How are you doing,

by the way? You're still down today, a quarter century later. I think this is eminently logical and, again, very Buffett-esque. The fault is mine. But when things go well, he says, Ajit Jain this, Greg Abel that. Our managers are fantastic. This is very standard Buffett. I like you noting maybe a little bit of tax loss harvesting happening there, too. I think it's important to keep that stuff in mind. As we wrap, I do want to take a step back. It seems like a great opportunity for us to check in on Berkshire, the investment itself. You look over the last 1, 3, 5, 10 years on a total return basis. Berkshire versus the S&P has essentially been a coin flip. I think Berkshire outperforms on the three-year,

but otherwise the S&P is ahead, but they're relatively close and they trend fairly similarly. at an $870 billion business, how should people be thinking about Berkshire at this point? And is that total return basis comparison fair? It's fair. It's what it is. Your record is what your record says it is, right? But I'm going to suggest to you Berkshire has actually outperformed on the most important measure here. What is Berkshire to investors? What should be Berkshire to investors. I see all kinds of people speculating on things like they were talking about Geico and the insurance and how the rise of robo-taxis is going to gut these. Get out of here with that nonsense. It's like whatever. This is a bedrock holding for a portfolio.

Berkshire Hathaway has matched the S&P 500 by holding about 15% to 20% of its market cap in cash the entire way up. On a risk-adjusted basis, I submit to you that Berkshire is actually done better than the market because the companies that make up the S&P 500, strip up Berkshire, but the companies that are part of the S&P 500 do not hold 20% of their market cap in cash, waiting for optionality, waiting for things to deploy that on. From the perspective of, I like my portfolio to have a wide diversity. It's what I recommend in my service at Gems Canada. Sometimes we go with a bedrock company, sometimes we go with a growth at a reasonable price company, sometimes we go with a wild speculation that we probably should rethink later,

sometimes a special situation, values, whatever. But you have to have a variety of companies in your portfolio to protect and give you the best performance for your portfolio that we can give. From a bedrock, from a Bulwark perspective, that is Berkshire for me. Personally, it is my largest personal holding. It's also my longest-term personal holding. I don't see that changing anytime soon, certainly not while the Oracle is still in charge. Jim Gillies, thank you so much for walking through all things Berkshire with me today. We'll do the same thing, same time, same place, next year. Sounds good to me. Thanks, Dylan!

As always, people on the program may own stocks mentioned, and The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Dylan Lewis. Thanks for listening! We'll be back tomorrow. Thank you.