The Berkshire Beat #64: Charlie Munger, Febezzlement, and Lemmings
All of the latest Berkshire Hathaway news and my must-reads of the week!
Happy Friday and welcome to our new subscribers!
Special thanks, too, to those who recently became paid supporters! ❤️
The latest news and notes out of Omaha…
ANNUAL MEETING DETAILS: In less than one month, Warren Buffett will take the stage at Berkshire Hathaway’s annual meeting and field questions from all corners. For all of the details on this year’s event, check out the 2024 Shareholders Guide on Berkshire’s website. As usual, questions will alternate between in-person shareholders and Becky Quick of CNBC — who will sift through thousands of submissions for those that “she believes will have the widest interest”. In all, Buffett aims to answer 40-60 questions.
Buffett will be joined by vice chairmen Greg Abel and Ajit Jain in the morning session. After lunch, it will be just Buffett and Abel. So, if you have an insurance-related question, get it in early! “The three of us will not get so much as a clue about the questions to be asked,” Buffett says. “We know you and Becky will pick some tough ones and that’s the way we like it.”
He notes, though, that two subjects are off-limits: (1) Politics, and (2) What Berkshire is buying or selling. “Even if the information is public,” Buffett says, “we do not discuss how we arrive at our decisions.”
MONEY MACHINE: On Monday, Berkshire received $194 million in quarterly dividends from Coca-Cola and, somewhat less impressively, $3.2 million from Paramount Global. (Assuming, of course, that Berkshire didn’t sell any more Paramount stock in the first quarter.) Add in the $247.9 million from Bank of America and $130.3 million from Kraft Heinz last Friday and Berkshire has collected more than $575 million in dividends over the past week. Nice work if you can get it.
TALKIN’ BERKSHIRE (PART ONE): In his annual letter to Aquamarine investors, Guy Spier mentioned Berkshire — and how he plans to approach the post-Buffett era. “Berkshire, which accounts for about 19% of our assets, is the embodiment of steady, durable, persistent compounding,” he wrote. “My guess is that Berkshire will continue to perform well for a decade after Warren Buffett (who is 93) is no longer in charge.”
“But,” he continued, “when the time comes, I’ll need to check in to see how his successors are doing and how decisions are made. At some point, the company and its exemplary culture are likely to decay. In the meantime, I see no reason to pare back this mighty — and growing — oak.”
TALKIN’ BERKSHIRE (PART TWO): Jim Lebenthal of Cerity Partners recently named Berkshire as one of his top stock picks. “Just push the easy button [and buy Berkshire],” he said last week on CNBC. “You don’t have to worry about corrections, challenges, or anything.”
BYD: It wasn’t a great quarter for either of the EV heavyweights, but Tesla managed to wrest back the sales crown from BYD — with 386,100 deliveries as compared to the Berkshire-backed company’s 300,114. Big drops year-over-year for both — made worse by a price war in China that further pressured profit margins.
THE END OF THE ROAD? On Wednesday, Paramount Global entered exclusive talks (for 30 days) with Skydance Media about a potential merger. “The two [sides] have already agreed to terms,” the Wall Street Journal reports, but the merger cannot proceed until an independent committee of directors agrees “that the deal is good for all shareholders — not just [parent company] National Amusements”.
Earlier this week, Paramount reportedly rejected a $26-27 billion merger offer from Apollo Global Management.
At year-end, Berkshire owned 10.4% of Paramount’s non-voting Class B shares.
A Slow Read of Poor Charlie’s Almanack
Talk 7: Breakfast Meeting of the Philanthropy Roundtable
Charlie Munger: Lawyer. Investor. Guru. Wordsmith?
A couple of years after his speech to the Foundation Financial Officers group, Charlie dished out even more tough love at the Philanthropy Roundtable in 2000. And, in the process, coined a new term that sums up so many of the foibles and shortcomings of investing: “febezzlement” or functional embezzlement.
Unlike actual embezzlement — a crime punishable by the justice system — “febezzlement” mainly exists in our innate irrationality and, as such, can continue on unnoticed for years (or decades) at a time. It’s not the malicious action of a rogue employee, but a steady drumbeat of innocent missteps that nonetheless results in staggering amounts of money draining out of a company’s coffers.
“You people,” Charlie declared, “have created a lot of ‘febezzle’ through your foolish investment management practices in dealing with large holdings of common stock.”
In particular, Charlie criticized how mutual funds and investment groups constantly tinker both with their own holdings and with asset allocations between different portfolio managers. Like the old saying goes, a stock portfolio is like a bar of soap — the more you touch it, the smaller it gets.
And, among institutional investors, when one group wanders off track the rest are sure to follow. “Your mistaken professors were too much influenced by ‘rational man’ models of human behavior from economics and too little by ‘foolish man’ models from psychology and real-world experience,” he said. “It is sad that today each institutional investor apparently fears most of all that its investment practices will be different from the practices of the rest of the crowd.”
Lemming-like behavior is fertile breeding ground for “febezzlement” — and, as such, should be avoided at all costs.
Line of the Week: “I suggest than when the financial scene starts reminding you of Sodom and Gomorrah, you should fear practical consequences even if you like to participate in what is going on.”
Become a paid supporter today and receive immediate access to nine (and counting) annotated transcripts full of wit and wisdom from the top names at Berkshire Hathaway.
Paid subscribers will also continue to receive a new annotated transcript each month.
The Must List
Other awesome things that I read this week…
The Psychologist Who Turned the Investing World on Its Head (Jason Zweig)
“[Daniel Kahneman] saw everything through a child’s eyes or, as some people call it, ‘beginner’s mind’. No one else I’ve ever known has so often asked: Why? Instead of assuming the status quo is valid, Danny always started by wondering whether it made any sense.”
“My mind works with words and sounds, not with oceans of data. Finance, I finally accepted, bores me. Money on the other hand — money fascinates me. Money is a funny thing. Money does funny things to us. Money makes us do funny things. Money is also a very serious thing. Money can be the difference between freedom and servitude, even between life and death.”
“Companies experience pain and pleasure in a free market. If they go bankrupt, that’s painful. And if they make money, that’s pleasant. The management teams have clear incentives. They need to provide valuable services and goods to customers. If they don’t, they get wiped out from the market — except if they’re big banks. Governments, however, only get to experience pleasure. Whether they do a good or bad job, they will get paid. There are no negative consequences to poor policy-making. Not delivering what was promised has no repercussions, either. They can lose votes, but they will still have a stable salary … As Taleb would say, they don’t have skin in the game.”
“As the late investor Charlie Munger said, ‘The highest form that civilization can reach is a seamless web of deserved trust.’ And that seamless web of deserved trust can only happen with one fulfilled promise at a time.”
Thanks a lot for the mention!