The Annual Berkshire Hathaway Shareholders’ Meeting is something of a legend in the investment world. More than just an informational annual meeting, shareholders come from far and wide to listen to the musings of the Oracle of Omaha, Warren Buffett, and his partner, Charlie Munger. During the 2018 meeting, both Buffett and Munger discussed their investment philosophies and opined on a number of economic issues and trends they foresaw as influencing the future for investors.
The Power of Long-Term Buy and Hold
The meeting kicked off with Buffett discussing his strong conviction in his time-tested investment philosophy. When he made his first stock purchase in 1942, Buffett bought a few shares of a company called Cities Service. The stock declined by about a third before coming back; somewhat shaken by volatility, he exited his position for a small profit. Buffett’s initial investment in Cities Service was $114. If instead of selling due to his fear of volatility he had held onto the stock, it would be worth about $400,000 today.
“When there’s nothing to do, Warren is very good at doing nothing,” said Munger, exemplifying the power of the long-term buy and hold strategy as the key to Berkshire Hathaway’s success. The lessons of long-term buy and hold are neither exciting nor sexy and are often forgotten during large market moves over the course of a year.
A decade after the Great Recession, with unemployment below four percent and the Fed hiking interest rates, investors are starting to feel uneasy about the market cooling off and may be tempted to react to sell-offs. When a correction comes, these are exactly the times that Buffett and Munger say one should hold the course and be prepared to find value in the market for new long-term buy and hold positions.
Finishing off with a discussion on the power of compounding, Buffett predicted that the Dow would reach one million over the next 100 years. As big and bold as this might seem, it’s actually pretty conservative once you realize that the Dow Jones would only need to grow at 4 percent annually to reach this level; approximately half the historic rate of return over the past 100 years.
Cryptocurrency and Other “Trends”
Buffett and Munger warned of being seduced into hot new investments like cryptocurrencies at the expense of investing in stocks for the long run. Their concern is not about cryptocurrencies in particular, but that it is a non-productive asset. Non-productive assets don’t actually create any value or wealth, but rise based only on perceived scarcity.
They warned of the greater fool theory, that anytime you buy a non-productive asset, you are counting on someone else to buy the exact same holding for more money later. They ended the discussion by observing that “cryptocurrencies will come to bad endings.”
Buffett expressed strong views on the U.S. healthcare system. He believes spending is a problem, noting that approximately 18 percent of U.S. GDP is spent on medical costs, a growth of five percent over the 1970s. In response, Berkshire Hathaway formed a partnership with Amazon and JP Morgan designed to assist employees by lowering healthcare costs for similar services. He foresees significant resistance to broad adoption of such plans by the healthcare industry as it threatens their entranced position.
Munger went a step further and noted he thinks a single-payer medical system will eventually be adopted in the U.S. in response to rising costs.
U.S. Trade Policy
Exports have doubled since the 1970s, making up about 11 percent of GDP versus about five percent back then. Despite this increase, imports have increased as well, accounting for 14 percent of GDP today – creating a trade gap of three percent.
Buffett is concerned about this trade gap widening over the long term, as eventually we will have to pay for it.
The main theme of the annual meeting was centered on Buffett and Munger’s time tested long-term buy and hold theme. While they touched on a number of other issues, the time they devoted to this illustrates their belief in its importance relative to other matters.