Berkshire Hathaway AGM 2015 – Pender’s Key Take Away Thoughts (Part 3)
We attended the Berkshire Hathaway 2015 Annual Meeting in Omaha. We like to hear first hand from two of our value investing icons. We took away four key thoughts. This is the third.
“If people weren’t so often wrong, we wouldn’t be so rich.” – Charlie Munger
At the Berkshire Hathaway AGM, someone asked Munger if Berkshire’s ownership of IBM was similar to owning value-destroying textile mills back when Buffett first took over Berkshire and whether he tried to talk Buffett out of it. Munger said he supported the purchase of IBM and noted that IBM was a very creditable company which had survived many transitions in the past, albeit it has fared through some cycles better than others. He said they owned a lot of companies in the past that have had temporary reversals (and they did just fine). Buffett said that many investors assume that they would want to talk up their book of investments when in fact the opposite behaviour makes more sense. Investors should want the price of securities they like to go down, not up, so they can buy more.
IBM has become a controversial holding for Berkshire because it has not worked out well so far. Whether or not IBM works out as envisioned, it is hard to argue with Buffett’s logic about stock prices. Assuming one will be a net saver over the medium-to-long term, it makes more sense to be happy about lower stock prices during the accumulation phase of life. Only those who plan to be net sellers of stock in the near future should be happy about rising prices. Even if investors do not directly buy more stock, they will benefit through increased ownership of a business if the company itself buys back its stock when prices are depressed. This is sound logic, but counterintuitive to many investors which prompted Munger to quip “If people weren’t so often wrong, we wouldn’t be so rich.” To be fair, Berkshire will likely always be in a position to be a net purchaser of assets because it generates a lot of recurring cash flows that need to be reinvested. Successful corporations can afford to take such a “net buyer” long view. On the other hand, time horizon on a human scale makes a big difference. A younger investor might be in a similar position as Berkshire (and should be happy about lower stock prices so they can buy more – although most are not), but older investors who no longer produce income from their labour and are living off their savings and accumulated capital would be in the opposite position.
Part 1 – “Always be open to good accidents”
Part 2 – “Hardly anything is more important than behaving well as you go through life.”
Part 4 – “If we continue with these interest rates, stocks will look very cheap”
Felix Narhi, 5 May 2015
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