- Operating revenue and income up YOY
- Investment portfolio posts mark-to-market gain
- Berkshire was not a big equities buyer in 2020
- Berkshire bought back $6.8 billion of its stock in Q1, and $24.7 billion in 2020
Berkshire Hathaway Inc. (BRK.A, BRK.B) held its 2021 annual meeting of shareholders as a livestream-only event on May 1. Seated at the same table in Los Angeles were 90-year-old Chairman and CEO Warren Buffett, his longtime top lieutenant, Executive Vice Chairman Charlie Munger, age 97, the 58-year-old Vice Chairman of Non-Insurance Business Operations, Greg Abel, and the 69-year-old Vice Chairman of Insurance Operations, Ajit Jain.
Becky Quick of CNBC sorted through the questions submitted by shareholders and other interested investors. Below are several key takeaways from Berkshire’s 2021 annual meeting and Q1 2021 earnings report, based on the livestream of that event as viewed by Investopedia and our analysis of the earnings report.
For each class A share, earnings per share (EPS) swung from a loss of $30,653 in Q1 2020 to a positive figure of $7,638 in Q1 2021. The main source of this dramatic shift was the performance of Berkshire’s investment portfolio, which recorded a loss of $70.275 billion in Q1 2020, but a gain of $5.700 billion in Q1 2021. In the webcast, Buffett noted that the paper loss in Q1 2020 was result of the “self-induced recession” caused by COVID-19 lockdowns that, in turn, caused a major stock market selloff.
Under current GAAP accounting rules, Berkshire must recognize investment portfolio mark-to-market gains and losses on its income statement. In the past, Buffett has gone on record against this new rule, which, in his opinion, makes Berkshire’s reported earnings deceptively volatile. Instead, he has advised investors to focus on the company’s operating earnings. He reiterated this advice during the 2021 webcast.
Meanwhile, Berkshire’s operating divisions collectively recorded a 5.4% year-over-year increase in revenues, from $61.265 billion to $64.599 billion. Pretax income for its operating divisions (excluding the gain and loss figures on its investment portfolio, as cited above) was up by 23.8%, from $6.926 billion to $8.577 billion.
Berkshire continues to hold a large reserve of cash, cash equivalents, and short-term investments in U.S. Treasury Bills. The combined figure as of March 31, 2021 was $142.211 billion, up from $135.014 billion on December 31, 2020, for an increase of 5.3% over the three months.
Buffett reiterated his longstanding suggestion that the average investor is best served by investing in an S&P 500 index fund, and not by trying to pick stocks. By way of illustration, he presented lists of the top 20 largest companies in the world by market capitalization, both in 1989 and today. He pointed out that none of the top 20 in 1989 remain in the top 20 today. Moreover, the largest such company today, Apple Inc. (AAPL), with a market cap of over $2 trillion, is more than 20 times more valuable than the largest company in 1989.
“Be aboard the ship,” he advised. “You couldn’t help but do well if you have a diversified group of U.S. equities,” he added. In the same vein, he made an oblique comment implying that making “30 to 40 trades a day” is not a wise way to invest.
While Buffett said that he never has recommended Berkshire to anyone, Munger asserted, “I believe our companies are better than the market.”
Elaborating on his advice to new investors that they should choose a diversified index fund rather than try to pick stocks, he also noted that few investors have been able to pick the long-term winners. “There’s a lot more to picking stocks than figuring out what will be a wonderful industry,” he said.
Using the auto industry as an example, he observed that there are more than 2,000 defunct companies in the U.S. alone. By 2009, there were just three U.S. auto makers, of which two were in bankruptcy at the time.
A shareholder asked whether Berkshire was too fearful in March 2020, when the economy tumbled into a sharp recession and stocks plunged as a result of COVID-19 lockdowns. He suggested that Berkshire should have been putting its large cash hoard to work at this market bottom, and that, in particular, Buffett was too hasty in dumping airline stocks.
Buffett noted that “airlines were the most prominent beneficiaries of government help.” However, he noted that this aid came after Berkshire sold these holdings. “We might not have gotten the same result if Berkshire still held them,” he added, opining that such aid might not have been forthcoming if deep-pocketed Berkshire had retained these positions.
Moreover, while Buffett hailed the actions of the Federal Reserve to stabilize the economy and the markets, he observed, “You can’t depend on the kindness of friends.” Specifically, he could not anticipate in advance that the Fed would act with the “speed and decisiveness” that it showed starting on March 23, 2020, having “learned a lot from 2008 to 2009.” The day before, he noted, Berkshire could not sell bonds.
Munger added, “You can’t anticipate where the market bottom is.”
In addition to an explosion of “gamblers” in the market who engage in day trading and options trading in the past year, Buffett and Munger also see negative impacts from the rise of SPACs which are bidding up the price of potential acquisitions, making them uneconomic for Berkshire. In particular, Bufffett noted that these vehicles often have very short time horizons over which they must deploy funds, such as just six months, or return them to investors and thus forgo future management fees.
Buffett called SPACs an “exaggerated version of gambling” for which investors “pay silly fees” and in which the managers often invest money to get a fee, not because the investments are good. “When the competition is paying with other people’s money, they’ll beat us on an acquisition.” Munger asserted, “It’s not just stupid, it’s shameful.”
In response to a later question about trading apps such as Robinhood, Buffett opined that they are adding to the gambling problem in the markets. He is eager to read the prospectus whenever Robinhood goes public, to see details on how they make money while not charging commissions. Munger decried these apps as “Godawful…deeply wrong… we don’t want to sell things that are bad for people…[by running lotteries] the states are just as bad as Robinhood…they pushed the Mafia aside.”
In response to a question about climate-related alarmism, Buffett said, “People on the extremes on both sides are a little nuts.” He added, “We would not collect data on things that don’t mean anything for us for people don’t own our stock.” In a similar vein, he noted, “We will not give special treatment to analysts or institutions over individual shareholders.”
Specifically regarding the shift to greener electric generation, he observed that “transmission is the big problem…you must get energy from where the sun is shining and the wind is blowing,” adding that the construction of new high-voltage transmission lines requires getting rights-of-way that cross state lines (and thus state regulatory regimes) and private property. “We have spent far more than other utilities on renewables and transmission,” he added.
Greg Abel observed that Berkshire’s energy unit already has a multi-year plan underway in which coal-burning electric generation plants are being closed.
In response to a question about proposed federal tax hikes on capital gains, estates, and businesses, Munger offered a quotation from Benjamin Franklin: “It’s difficult for an empty sack to stand upright.” He also opined that “Bernie Sanders has won,” though “he’s done it by accident.” In Munger’s view, “Millennials will have a lot more difficulty getting rich than previous generations.”
Regarding a question about the exodus of residents from California as the result of rising taxes and a rising cost of living, Munger said, “It’s stupid for states to drive out wealthy people” who pay the majority of taxes and support philanthropic and civic institutions. “Florida is shrewd, and California is stupid,” he added.
Later on, responding to a question about capitalism in communist China, Munger said, “It’s a remarkable shift that China saw what worked in Hong Kong…It’s worked like gangbusters, lifting 800 million people out of poverty fast.”
In response to a question about cryptocurrencies, Munger said, “I don’t welcome a means for paying kidnappers and extortionists.” Buffett had bucked the question over to Munger, chuckling that he didn’t want to alienate shareholders who hold such investments.
In response to a question about whether Berkshire has gotten too big to manage, Munger said that their culture of decentralization has served them well. “The Roman Empire worked so well for so long because it was decentralized,” he observed. Buffett added that the key is having excellent managers who work for shareholders’ interests.
In response to a question about the huge unfunded public pension liabilities in many states, Buffett noted that this is bound to get worse if resultant tax hikes spur an exodus of residents. Corporations with plants in such states face a much more serious problem than individuals, since they cannot pull up stakes as easily, and thus the public pension situation in a given state should be a key concern for companies when making decisions about locations.