It's really a joy to watch through the Berkshire Hathaway annual meeting; some takeaways:
- Why Berkshire become fear in early 2020 by selling shares: we didn’t sell a substantial amount. I mean, we’re a company with six, probably $700 billion worth of businesses. Some we own in their entirety and some we own a piece of, and I don’t know whether we were sellers of maybe 1% of the value of all the businesses we had at that period. But the airlines, just interesting with the airline businesses in particular, and then I’ll get to what was done at fiscal monetary policy. But we had a few people at various subsidiaries of Berkshire that wanted to go in for help from the government and some cases they had, minority shareholders who owned a few percent and they said, “Well, we’re going to get killed by what’s happening with the regulations that are being put out and with stopping the economy.”...... But in any event, an industry that was really selling for less than a hundred billion dollars, lost a significant amount of money. They lost perspective amount of money they lost, perspective earning power. Right now, international travel’s not a come back, but I would say overall to them, the economic recovery has gone far better than you could say with any assurance. So we didn’t like having as much money as we had in banks at that time. So I got back some of the bank investment, but basically our net sales were about 1%,or one and a half percent. And looking back now, a little bit better be buying, but I did not consider it
- What happen in March 2020: right before the fed acted, we hit a point where two calls came in, but it was two or three days of nothing could happen, when Jay Powell acted as he did. That was incredibly important. I should say, the fed acted as they did, but they moved with speed and a decisiveness on March 23rd, that changed the situation where the economy had stopped. The government bond market was even disrupted. Berkshire Hathaway probably could not have gone out with a debt offering the day before that. It didn’t get a lot of publicity time, but there was a run on money market funds, a very substantial run. And if you look at the daily numbers on that, it was a repeat of September 2008. And this time I give great credit to what Bernanke and Paulson did, but this time, the fed knew that saying whatever it takes, and saying it and demonstrating it, which they did on March 23rd, they took a market where Berkshire couldn’t sell bonds on the day before, and turned it into one where Carnival Cruise Liners managed to sell it to a day or two later. And there was its record issuance of corporate debt, and companies losing money, companies that were closed, whatever, it was the most dramatic move that you can imagine. And at the time it was, I remember the chairman saying, “How about a little help on the fiscal front?” And then Congress acted very, very big again.
- Has the focus on ESG becomes irrational: I would say that people that are on the extremes of both sides are a little nuts. I would hate to have all hydrocarbons banned in three years, or you wouldn’t want a world that, it wouldn’t work. And on the other hand, what’s happening will be adapted to, over time, just as we’ve adapted them to all kinds of things......I used to see ads in our paper from financial companies where I knew they were terrible, it’s a very tough thing to decide whether you get in or out of a business. It’s a very tough time to decide what companies benefit society more than others? I think Chevron’s benefited society in all kinds of ways and I think it continues to do so, and I think we’re going to need a lot of hydrocarbons for a long time and we’ll be very glad we’ve got them, but I do think that the world’s moving away from them, too, and that could change. I don’t like making the moral judgments on stocks, in terms of actually running the businesses, but there’s something about every business that you know that you wouldn’t like.
- Berkshire Hathaway's actual commitment to ESG: if I talk about what we’re doing in high voltage transmission, we’re doing more than any company in the country. The president talked about what the government’s going to do and how important that is. We have a record that overall is incredibly good, but we have a group of organizations just generally, and they’re nice people, but they want us to answer a bunch of questionnaires their ways. So they want us to go to Dairy Queen and Borsheims, and all those people have them fill out reports that show a bunch of figures, when the reports that count are the reports that Greg gets on Berkshire Hathaway Energy and the railroad. And they talk about three of our companies and you’ve covered 95% of it. And it’s asinine, frankly, in my view. Now we do some other asinine things, because we’re required to do them. (Why is the Company recommending to vote against reporting ESG metrics?) We would not collect a whole lot of things that don’t mean anything to us, to satisfy people who actually don’t own any stock themselves, and in many cases, I can tell, they haven’t read our annual report, even ...... So we have an investment in what makes this country move and work. 15% of the interstate goods move on our railroad, and we’re building transmission. And we started in 2006 or seven, planning how we would close coal plants, but then you can’t close coal plants until you get the electricity from where it’s generated to the customer. And if you’re going to generate it in Wyoming, and it’s going to go to Las Vegas or someplace, and previously they had a coal plant near the place, because that was the way it was done 50 years ago, or 75 years ago, you’d better have the transmission. There’s no sense having the wind blow in Wyoming, and people can’t turn on the lights in Las Vegas...... each year we’ve presented really a plan and a strategy around how each of our businesses in BHE, but each of our regulated entities, how they’re going to transform. And the whole transformation has been around decarbonization, managing that risk on behalf of our stakeholders, in our many states, our customers that we serve, and ultimately managing that risk for Berkshire Hathaway’s shareholders. Now, as you go through those presentations, there’s a common theme, and Warren touched on it already. You have to build the foundation first, and that foundation is around building the high voltage transmission system. Warren touched on it in his annual report this year, in the letter he highlighted that at Berkshire Hathaway Energy, we’ll be spending, just in the west, $18 billion on transmission. 5 billion of that’s already been spent, as we sit here today. And that 13 billion will be spent over the next 10 years. That’s the foundation that then allows us to build incremental, renewable resources and move it to our many states that we serve at Berkshire Hathaway energy, and well beyond that. I would highlight, while we’ve been building the transmission infrastructure in place, we have been building renewables. If you look at our investment through the end of 2020, we’ve invested $30 billion, or in excessive $30 billion into renewables, and have really completely changed the way our businesses do business, i.e. our utility businesses. They’ve been decarbonizing and delivering a valued product to our stakeholders, to our customers.
- Risks from underwriting losses: clearly contract certainty is an issue for us in the insurance industry. It is an issue that cuts across not only the long tail lines that you mentioned, but even short tail property focused lines. The most recent example is business interruption, which is an integral part of any property insurance policy that is bought and sold by corporations. It is a risk every time we issue a contract that either because of sloppiness, in terms of how that contract is written, or because of the regulatory environment we all have to live in, that the words in the contract may be tortured, too. And normally when they are tortured, they ended up going against the insurance industry, not in their favor. So it is a risk, it’s an unknown risk, in terms of how bad it can be. I hope we price for it, when we price for the product, we throw in something for the unknown unknowns, if you will. And we try and aggregate our exposures by major risks categories. Hopefully, that’ll give us some comfort in terms of having some boundaries on what the exposure really can be. Most of the surprises in insurance, practically, all of them are unpleasant. I mean, you get the premium upfront that’s pleasant, and then from there on you get some very imaginative losses that come through, and you get some that you’ve taken on. We are willing to lose, in terms of sort of the outside limit, we think, we’re willing to lose $10 billion in a single event. And we want to get paid very appropriately for that, but we’ve got the resources to do it. But we don’t want to lose 10 billion in something where we only thought we could lose 50 million or something like that
- Pricing risk (for the insurance business): Progressive has had the best operation in recent years, in terms of matching rate to risk, and I mean, that’s what insurance is all about among other things. But I mean, you have to have the right rate. If you think that 90 year olds and 20 year olds have an equal chance of dying, I mean, you’re going to be out of business very quickly, the life insurance business. And you will get all the 90-year-old risks and the other guy will get the 20-year-old risks. And the same thing applies in auto insurance. I mean, there’s a huge difference between 16-year-old males, and how they drive, and 40-year-old, married, employed people. So companies that do the best job of actually having the appropriate rate for everyone of their policy holders, is going to do very well, and Progressive has done a very good job on that. both Progressive and GEICO were started in the ’30s. I believe I’m right about Progressive on that, and we were started in ’36. We have had the better product for a long, long time, I mean, in terms of cost. And here we are 80, 85 years later, in our case, and we have about 13% or so of the market, whatever it may be, and Progressive as just a slight bit less. So the two of us have 25% of the market, roughly, in this huge market, after 80 something years of having a better product. So it’s a very slow changing, competitive situation, but Progressive has done a very, very good job recently. We’ve done a very, very good job over the years, and we’re doing a good job now, but we have made some very significant improvements. And if you looked at, you don’t want to look at the quarters too much, but our profitability in the first quarter was good, but we gave back more money under our back arrangement, when the virus broke out, we gave two point eight billion on our give back program that was larger than any company as well. It was the largest, I think, in the country. And GEICO and Progressive are both going to do very well in the future.
- General thoughts on "high-flying" stocks: we don’t think they’re crazy. But we don’t… at least I… Charlie… I feel that I understand Apple and its future with consumers around the world, better than I understand some of the others, but I don’t regard prices, and that gets back, well, it gets back to something fundamental in investments, I mean, interest rates, basically, are to the value of assets, what gravity is to matter, essentially. And on the way out here, I tore out a little clipping from the Wall Street Journal yesterday, I’m probably the only one that read, it’s so small and having trouble finding it. But anyway, on Thursday, the US treasury sold some four week notes, treasury bills, and the price was in, if you looked at your Wall Street Journal down in a little corner next to last page in my paper, in the very bottom corner, here it is, the results of the treasury auction, a little tiny thing. They had applications on the four-week treasury bill for 100 and some billion. They accepted bids for 43 billion worth. And it says average price. Okay. 100.000000, six zeros. And essentially, people were giving 40 some billion dollars to the registry, and they offered to give 130 billion or something, whatever the amount tender, and the treasury received the money at zero. And Janet Yelen has talked a couple of times about the reduced carrying cost of the debt. I think in the last fiscal quarter, US government, which owes a few billion, a few trillion dollars, I should say, few trillion dollars more than a year ago, their interest expense was down eight percent. So you’ve had this incredible reduction in the so-called super risk-free group, the short-term treasury bill, and that is the yardstick against which other values are measured. I mean, if I could reduce gravity, it’s pull by about 80%, I mean, I’d be in the Tokyo Olympics jumping. And essentially, if interest rates were 10%, valuations are much higher. So you’ve had this incredible change in the valuation of everything that produces money, because the risk-free rate produces, really short enough right now, nothing. It’s very interesting. I brought this book along, because for 25 or more years, Paul Samuelson’s book was the definitive book on economics. It was taught in every school and Paul was… he was the first Nobel a prize winner. It’s sort of a cousin to the Nobel prize, they started giving it in economics, I think, in the late ’60s, he was the first winner from the United States, Paul Samuelson. Amazingly enough, the second winner was Ken Arrow, and both of them are the uncles of Larry Summers. Larry Summers had the first two winners as uncles....... Paul Samuelson, brilliant man, after a couple of hundred years, we’ve had of kind of studying economics, basically. He said, “You can conceive perhaps of negative interest rates, but it can’t ever really happen.” And that was in the 1970s, this wasn’t back in the dark ages. And no economist wrote up and said, “This is a terrible line to have in a book,” or anything. And here we are in this world where we had zero interest rates last year, I mean, last week on or this week, on a four-week note, and Berkshire Hathaway, which has more than this, but let’s say we had $100 billion in treasury bills, we have more than that. Before the pandemic, we were getting about a billion and a half from that a year. At present rates, if it’s two basis points, we’d get 20 million. Imagine your wages going from $15 an hour to 20 cents an hour, so it’s been a sea change. And it was designed to be that. I mean, that’s why the Fed moved the way they did. They wanted to give a massive push, just like Mario Draghi did in Europe, in, whenever it was, 2012, when he says, “Whatever it takes,” and they want the negative rates. And the Fed has said, it doesn’t want to go the negative rates, and I think the Treasury actually has got some small bar. But if present rates were destined to be appropriate, if the 10 years should really be at the price it is, those companies that the fellow mentioned in this question, they’re a bargain. I mean, they have the ability to deliver cash at a rate that’s, if you discounted back and you’re discounting at present interest rates, stocks are very, very cheap. Now, the question is what interest rates do over time. But there’s a view of what interest rates will be based in the yield curve out to 30 years and so on.
- SPACs: These SPACs generally have to spend their money in two years as I understand it. So they have to buy a business in two years. If you put a gun to my head and said, you got to buy a big business in two years and I’d buy one, but it wouldn’t be much of one. It’s we’d look and look, and now there are, I don’t know how many, whether it’s hundreds and there’s always been the pressure from private equity funds. I mean, if you’re running money for somebody else and you’re getting paid a fee and you get the upside and you don’t have the downside, you’re going to buy something. I had a very famous, I had a call from a very famous figure many years ago that was involved in it, and wanted to learn about re-insurance. And I said, “Well, I don’t really think it’s a very good business.” And he said, “Yeah,” and he says, “If I don’t spend this money in six months, I’ve got to give it back to the investors.” So it’s a different equation that you have. If you’re working with other people’s money, where you get the upside and you have to give it back to him, if you don’t do something, and frankly, we’re not competitive with that. No, that won’t go on forever, but it’s where the money is now, and Wall Street goes where the money is and it does anything basically that works. And SPACs have been working for a while and you stick a famous name on it. You can, sell almost anything. And it’s an exaggerated version of what we’ve seen in, in kind of… Well, gambling done type market
Source: Yahoo Finance
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