Berkshire Hathaway Annual Meeting 2020
Berkshire Hathaway - Warren Buffett & Charlie Munger
Does every product have an expiration date?
Go to Berkshire Hathaway's website. Seriously. Sort of love it right? It couldn't be more old-school. Inspect the page. It's written with less than a page of HTML and CSS.
It's the time of year: the annual gathering of Burning Man for Capitalists, also known as the Berkshire Hathaway Shareholders' meeting. Unfortunately, there will be no flocking to Omaha for a weekend of fun. Only the broadcast, which anyone and everyone can tune into Saturday at 3 pm CT on YahooFinance.
I listened to the persistent voice of one of my best friends from college and, at last, attended last year. I had a blast. The whole weekend from the minute you step on the plane to Omaha to the flight home is a buzz for value investing. People are in great spirits. The value investing approach resonates with my core Midwestern sensibilities, and the results speak for themselves for those who practiced the craft to perfection, like Buffett and Munger.
Lately, though, people have raised a few questions. Did Berkshire miss the boat with technology investing? They own up to wishing they had bought Microsoft and Apple much earlier. And how has value investing held up to growth indexes? Not very well over the last 10 years. Time period choice always matter, of course.
There are so many books and resources that you could spend the next couple months just focused on reading old Berkshire letters, the several biographies of Warren Buffett, and Poor Charlie's Almanack. I'll spare you my recount here.
Traditionally at the annual meeting, a large portion is dedicated to Warren and Charlie sitting on stage and fielding questions from a panel of journalists and then shareholders who are standing by a microphoned platform. I was seated in the back of the area but with a straight-on view of the stage, and there were plenty of screens to get in on the action. To my left were a group of Nebraskan octogenarian women who had invested in Berkshire most of their lives and to my right were a few financial advisors from Pasadena, California. Everyone was happy to be there. Last year, most questions and answers were thoughtful, interesting, useful.
But one answer, on one question, didn't sit right with me. And, it didn't sit well with others either. That was the one on Warren Buffets' stance on Wells Fargo. And, yeah, it's hard. As a shareholder, are you actually incentivized to hold all of the management accountable when it likely means taking on management, breaking up the parts of the bank, and potentially destroying the value of your shareholding, at least in the short term?
Here is ProPublica's recounting of the question and answer:
One of the Well Fargo’s chief champions is legendary investor Warren Buffett, whose conglomerate, Berkshire Hathaway, is Wells Fargo’s largest shareholder. The highlight of the annual Berkshire Hathaway shareholders’ meeting in Omaha, Nebraska, comes when Buffett and his vice chairman, Charlie Munger, take questions from their adoring fans, tens of thousands of whom attend the event each year.
The questions tend to be friendly, but at the most recent shareholders’ meeting last May, a retired police officer named Mike Hebel asked Buffett a question about Wells Fargo. Hebel wanted to know why Berkshire, the company he trusted with his own savings, was invested in a bank that has been helping itself to its customers’ money with persistent enthusiasm for the past 20 years or more.
Buffett is easily the most beloved figure in American business. The Sage of Omaha, as he is known, is the face of good capitalism in America, an exemplar of the old-fashioned values of foresight, integrity, leadership and success. His company has a market cap of more than half a trillion dollars and as of last November boasted the largest hoard of cash held by any U.S. corporation: $128 billion. Berkshire is also the biggest publicly traded financial services company in the country, and its 7.82 percent stake in Wells Fargo is currently worth just under $12 billion, a drop of 22 percent since Feb. 17.
Hebel’s question was:
The Star Performers Investment Club has 30 partners, all of whom are active or retired San Francisco police officers. Several of our members have worked in the fraud detail, and have often commented after the years long fraudulent behavior of Wells Fargo employees—should have warranted jail sentences for several dozen, yet Wells just pays civil penalties and changes management.
As proud shareholders of Berkshire, we cannot understand Mr. Buffett’s relative silence compared to his vigorous public pronouncement many years ago on Salomon’s misbehavior. Why so quiet?
Here was an ordinary investor, a cop, who—despite having made money on his Berkshire investment—noticed that something very wrong was happening at Wells Fargo and demanded ethical and legal accountability from a couple of the country’s most famously admired and trusted, most apple-pie-American billionaires. Buffett responded at length, with several zingers:
At Berkshire … we have 390,000 employees, and I will guarantee you that some of them are doing things that are wrong right now.
And:
Wells has become, you know, exhibit one in recent years. But if you go back a few years, you know, you can almost go down—there’s quite a list of banks where people behaved badly.
And:
I don’t really have any inside information on it at all. … I don’t know the specifics at Wells.
That was interesting because there were plenty to know. The House Financial Services Committee had held hearings about these very specifics only a few weeks before that shareholders meeting. The hearings, called “Holding Megabanks Accountable: An Examination of Wells Fargo’s Pattern of Consumer Abuses,” went poorly for the bank, and CEO Tim Sloan had stepped down shortly afterward.
Good Jobs First’s Violation Tracker lists 136 separate fines and penalties paid by the bank since 2000, totaling about $17.3 billion.
So, that's what was said in the meeting. Charlie Munger said a lot more about Wells Fargo, and was a lot more direct, in an interview with the Wall Street Journal published around the same time. He throws the book at the predecessors to Tim Sloan. From Munger:
Kovacevich was there first. He never stops talking. And he’s full of himself. He would not learn anything from anybody. [Editor’s note:Former Wells Fargo CEO Richard Kovacevich declined to comment.]
And the new guy, the next guy, was almost as bad but not so loud and persistent. [Editor’s note:A lawyer for John Stumpf, Mr. Kovacevich’s successor as Wells Fargo’s CEO, declined to comment on his behalf.] And nobody had done any good. So we don’t, I can’t think of a time—we do try to talk people out of things if we think we’ve got a chance.
Q: So Wells Fargo wouldn’t listen to advice?
A: Kovacevich never listened to anybody. He talked. And the next guy didn’t talk all the time, but it just didn’t get through to him that the incentives were too tough. He just had—it was a cognitive glitch, not a malevolence.
And that is an interesting question. My own personal opinion is that more damage to the world comes from the cognitive glitches than does from malevolence.
Warren made his career initially on being quite an active investor. And yes, I know, his philosophy on investing in good companies run by terrific management teams and getting out of the way. But, clearly, that hasn't been always the only strategy. He features prominently in Jeff Gramm's excellent book Dear Chairman: Boardroom Battles and the rise of shareholder activism. Warren has a chapter where he stewards American Express out of the fraud in their great salad oil swindle. In The Outsiders: Eight Unconventional CEOs and their radically rational blueprint for success Warren features heavily in the case study on Katharine Graham and the Washington Post and at the end in his own chapter of 'The Investor as CEO'. In that book, there is a table with names and dates of 11 major blue chip public market investments where he's taken a meaningful stake in a company at a time of crisis, reframed the strategy, and often changed the CEO. GEICO in 1976, Coca-Cola in 1988, etc. His private market strategy is to generally leave the CEO alone. "Hire well, manage little".
Why do I push on this? Let me go back to the top of this section. Does every product have an expiration date? At some point, probably at this point, Warren Buffett has limited appetite to take on these hands-on, full-focus necessary company restructuring interventions. Is that what is behind the non-intervention at Wells? Or, if no board can govern Wells Fargo and no CEO is up to the task, shouldn't it be broken up? If you were a big shareholder in Wells Fargo today, I understand why that move doesn't correlate with returns for your shareholders. But if you are an average American and/or you are thinking about the truly long-term shareholding, isn't a massive overhaul inevitable? Either that or it becomes a utility. Somehow, the future of Wells Fargo may likely be something that eventually a different generation will have to reckon with because clearly neither Buffett or Munger have the appetite.
What do we have to look forward to this weekend? We live in interesting times and many have speculated what Buffett will do with his pile of cash. When will he make a move? What move will he pick? Bloomberg asks a few of the same open questions:
Apart from Berkshire’s day-to-day operations, investors are left wondering what Buffett’s been up to. During the recent bull market, Berkshire underperformed the S&P 500 Index as Buffett struggled to find large companies to buy. Now, valuations have plummeted, creating an opening not seen in more than a decade.
Munger said that he and Buffett are being careful. Companies aren’t begging Berkshire for capital because most people are frozen as they try to figure out how to navigate this “typhoon,” Munger told the Wall Street Journal.
Buffett and Munger are patient and prudent. We'll just have to wait and see.