Notes on Berkshire Hathaway's 2023 Annual Shareholder Meeting

“You should never have a night when you’re worried about investing.”

May 08, 2023

Happy Monday and welcome to our new subscribers!

As Warren Buffett noted on Saturday morning, this year’s Berkshire Hathaway annual shareholder meeting found itself up against some compelling counter-programming from across the pond. (For the non-Anglophiles among us, he was referring to King Charles III’s coronation ceremony.)

But, Buffett quipped, “We have our own King Charles here today,” gesturing towards his longtime business partner, Charlie Munger.

The two legendary investors then held court for more than five hours in front of tens of thousands of Berkshire shareholders packed into the CHI Health Center Arena in Omaha — with many more watching from home via CNBC’s livestream of the event.

Buffett and Munger took questions from all corners on subjects ranging from the banking crisis and tension between the United States and China to the slowing economy and the now-controversial practice of share buybacks.

Neither man knew any of the questions in advance or even what topics would be broached, making their quick recalls and substantive answers all the more impressive.

If I’m half as alert and coherent as they are when I’m in my nineties, I’ll be well pleased.

(Actually, I just hope I’m still alive…)

OPERATING EARNINGS: A few hours before Warren Buffett and Charlie Munger took the stage for their marathon Q&A session, Berkshire Hathaway released a strong Q1 2023 earnings report.

The company’s operating earnings — Buffett’s preferred performance metric — increased by 12.6% to $8.06 billion, fueled by much-improved numbers out of the insurance segment. BNSF and BHE, on the other hand, declined year over year.

Overall, Berkshire reported $35.5 billion of net earnings — though the vast majority of that comes from unrealized gains in the company’s stock portfolio. Berkshire ended the quarter with $127.6 billion of cash on hand.

Still, despite the impressive results, Buffett struck a note of caution about the coming months. “Perhaps the majority of our businesses will actually report lower earnings this year than last year.”

“It’s a different climate than it was six months ago,” he continued. “A number of our managers were surprised [by the deteriorating environment].”

But, thanks to the rising tide of insurance (both underwriting and investments), Buffett thinks that Berkshire can withstand these economic headwinds. “I would expect — but I can’t promise — that our operating earnings will be greater [in 2023] than last year.”

INSURANCE: Even if the slowing economy takes its toll on most of Berkshire’s owned businesses, Buffett believes that insurance will prove a resilient exception. “Insurance underwriting does not correlate with business activity.”

“On a probability basis, we’re likely to have a better year in underwriting than we had last year,” he added. With the caveat that one big super-cat event (like an earthquake or hurricane) could change all that. Such is life in the insurance game.

After six consecutive quarters of losses, GEICO rebounded in a big way and returned to profitability. The auto insurer reduced its combined ratio by nearly ten points.

But vice chairman Ajit Jain isn’t popping any champagne (yet) in celebration of these Q1 results. “GEICO is still a work in progress,” he said.

“Even though we have made improvements in terms of bridging the gap [with Progressive] on telematics, we still haven’t started to realize the true benefit … GEICO’s technology needs a lot more work than I thought it did.”

Jain also pointed out that prior-year reserve releases and a seasonal tailwind boosted GEICO’s quarterly results. Taking that into account, he estimates that the year-end combined ratio will come in “just south of 100%” — above the company’s 96% target.

For the time being, GEICO must trade growth for profitability. “It will not be until two years from now that we’ll be back on track fighting the battles on both profitability and growth,” Jain said.

APPLE: On a recent Investing the Templeton Way podcast, professor Aswath Damodaran revealed that he gets uncomfortable when one individual stock becomes an outsized portion of a portfolio. And he mentioned Apple — which accounts for a mind-blowing 45.9% of Berkshire’s stock portfolio — as an example.

So, is Apple too big a part of the Berkshire portfolio?

Munger pounced. “I think he’s out of his mind,” he said to loud laughter.

Buffett, though, tackled the question another way. He doesn’t view the Berkshire portfolio as just a collection of purchased stock — but also the railroad, utilities, See’s Candies, and everything else owned by the company. “They’re all businesses,” he said.

Of course, the Apple position currently makes up more than 20% of Berkshire’s entire market cap, so it is still an absolutely mammoth piece of the overall puzzle.

[Apple] just happens to be a better business than any we own. We put a fair amount of money in it, but we haven’t got more money in it than we’ve got in the railroad. Our railroad is a very good business, but it’s not remotely as good as Apple’s business. (Buffett)

And, with Apple set to embark on $90 billion of share repurchases in the months and years ahead, Buffett is thrilled to see his stake in the Cupertino-based tech giant get bigger and bigger. “We don’t have anything like Apple,” he said, “but we’re very, very happy to have [5.8%] and we’re delighted with every tenth-of-a-percent that goes up.”

BANKING CRISIS: Both Buffett and Munger have spoken on this quite a bit in recent weeks, so I won’t belabor the subject here.

Buffett’s main point is clear: Despite lots of confusion and fear-mongering, American depositors have nothing to fear. He firmly believes that the FDIC will backstop all deposits — even those above the current $250,000 limit.

“The messaging has been very poor,” he said. “It’s been poor by the politicians … It’s been poor by the agencies and it’s been poor by the press.”

If the FDIC had not made depositors whole after the failure of Silicon Valley Bank, Buffett said the result “would have been catastrophic”. As such, the FDIC will surely pull whatever levers necessary to allow banks to retain the faith of the public.

In short, depositors will be just fine.

Investors? Ehh… that’s another story.

“We don’t know where the shareholders of the big banks … or the regional banks — or any bank — are heading,” he said. He’s not bailing on Bank of America, though.

LIFE LESSONS: Warren Buffett and Charlie Munger’s investing track records speak for itself. But it’s the many life lessons and timeless pieces of wisdom that they freely impart to others that help to explain why they remain so widely revered and admired.

Here are a few of the top contenders from Saturday…

“You should write your obituary and then try to figure out how to live up to it,” Buffett said. “That’s something you get wiser on as you go along.”
“Don’t make any mistakes that take you out of the game or come close to taking you out of the game,” Buffett said. “You should never have a night when you’re worried about investing.”
Buffett credited the late Tom Murphy with two important pieces of advice: (1) “You can always tell someone to go to hell tomorrow.” (2) “Praise by name, criticize by category.” He also mentioned that, in fifty years of friendship and business, he never saw Murphy do anything unkind.
“You need to know how people can manipulate other people — and then you need to resist the temptation to do it yourself,” Buffett said.
“The toxic people who are trying to fool you or lie to you — who aren’t reliable in meeting their commitments — the great lesson of life is [to] get them the hell out of your life,” said Munger. “And do it fast.”
“I’ve never known anyone who was basically kind who died without friends,” Buffett said. “I’ve known plenty of people with money who have died without friends — including their family.”

OCCIDENTAL PETROLEUM: For the second year in a row, Buffett broke big news during the Q&A session.

In 2022, he revealed that Berkshire had raised its position in Activision Blizzard to over 9% in a merger arbitrage play ahead of its (possible) acquisition by Microsoft. And, on Saturday, he ended any suspense surrounding Occidental Petroleum by declaring that he’s not interested in purchasing the oiler outright.

“We will not be making any offer for Occidental,” Buffett said, “but we love the shares we have. We may or may not own more in the future, but we certainly have warrants on a very substantial amount of stock at around $59 a share. Those warrants last a long time and I’m glad we have ‘em.”

During March 2023, Oxy redeemed $474 million of Berkshire’s preferred shares. We knew this was coming, but it still stings. Approximately $9.5 billion of the high-yielding preferred still remains.

“In the last few months, they’ve reduced our preferred — which we don’t like — but we’d be disappointed in them if they didn’t reduce it,” said Buffett. “It’s intelligent from their standpoint.”

“Of the $10 billion preferred, we’ve got maybe $400-500 million retired at 110% of par.”

USA & CHINA: After Buffett’s about-face on his $4 billion TSMC investment in the latter half of 2022, many wondered whether rising geopolitical tensions played a role in his surprising decision.

He went to great pains to praise TSMC as a company, but nevertheless admitted that it’s tough to invest in Taiwan these days. “I feel better about the capital that we’ve got deployed in Japan than Taiwan,” said Buffett. “I wish it weren’t so, but that’s the reality.”

As part of the larger superpower standoff between the United States and China, both Buffett and Munger preached patience and understanding.

“Everything that increases tension between [the USA and China] is stupid, stupid, stupid,” said Munger. He called for each side to respond to the other’s stupidity with “reciprocal kindness”.

ACTIVISION BLIZZARD: It’s been a rough few weeks for Microsoft’s $68.7 billion acquisition of Activision Blizzard. And it seems that Warren Buffett feels as bewildered as I do that British regulator CMA would block the merger.

“[Microsoft] has met the opposition … more than half way,” he said on Saturday.

“I don’t know how it turns out,” Buffett continued. “But if it doesn’t go through, I don’t think it’s through any shortcoming by either Microsoft or Activision. Not everything that should happen does happen.”

“I think the British government is making a mistake in this case — but that’s life in the big city, as Charlie would say.”

During CNBC’s halftime show, Becky Quick spoke with Activision CEO Bobby Kotick and he confirmed that the CMA’s “nonsensical decision” will be appealed.

But, with the merger now completely up in the air, Kotick also made the case for Activision Blizzard as a standalone company. “If [the Microsoft deal] doesn’t get completed, by the end of the year we’ll be sitting on probably $17-18 billion of cash.”

He also pointed out that Activision owns some of the most beloved franchises in all of gaming. That’s not going to change — Microsoft or no Microsoft.

Kotick explained it in a way that Berkshire fans will understand. “Call of Duty is Coca-Cola and Candy Crush is American Express.”

QUICK HITS: There were plenty of other newsworthy moments from this weekend’s annual shareholder meeting. Including…

During Q1 2023, Berkshire was a net seller of stocks — with $13.3 billion of sales and only $2.9 billion of purchases. (Not gonna lie, this kills some of my buzz for next week’s 13F.) A close study of the 10-Q also tells us that Berkshire sold approximately $6 billion of its Chevron stake in the quarter.
Charlie Munger on AI: “I am personally skeptical of some of the hype that has gone into artificial intelligence. I think old-fashioned intelligence works pretty well.”
Did Buffett announce that a new edition of The Intelligent Investor is coming out or was I hearing things?
Higher interest rates are paying off for Berkshire’s heavy investment in short-term Treasury bills and bank deposits. This aspect of the company’s insurance operations shot up by 595.7% year over year to $1.1 billion.
- Insurance float also increased to $165 billion. And, thanks to Berkshire’s $1.2 billion gain in underwriting, the “average cost of float was negative”.
Berkshire spent $4.4 billion on buybacks during the first quarter. That’s not only the highest amount since Q4 2021, but the $3.4 billion spent in March alone was more than any whole quarter in 2022. Class A equivalent shares dropped from 1,459,733 to 1,450,152.
- “[Repurchasing shares] can be the dumbest thing you can do and it can be the smartest thing you can do,” Buffett said. It all depends on valuation and price.
- The Rational Walk
  noticed another interesting point — Berkshire appears to have bought back 323 more Class A equivalents between 3/31 and 4/25.
Buffett still has Garanimals fever. After mentioning the children’s clothing brand (which Berkshire owns) several times during his recent CNBC interview from Tokyo, he gave Garanimals several more shoutouts on Saturday.
Munger on his estate planning advice for Berkshire shareholders: “Just hold the goddamn stock.”
Jazwares, the maker of Squishmallows, knows how to make a great first impression. The toymaker — owned by Alleghany Corp. — unveiled special Warren Buffett and Charlie Munger plush toys this weekend to commemorate its first annual meeting as a member of the Berkshire family.