Liam Dann reports from Omaha after hearing Warren Buffett deliver his message at the Berkshire Hathaway AGM in Omaha at the weekend.
Liam Dann joins the faithful as they throng to Warren Buffett's 'Woodstock of investors'
"That's sounds random," said a friend when I told them I was going to Omaha, Nebraska.
To the uninitiated, it probably is. But for many thousands of investors around the world, the trek to Warren Buffett's hometown for the Berkshire Hathaway annual general meeting is a yearly pilgrimage.
Omaha, population 450,000, sits on the edge of the Missouri River, smack in the middle of America's mid-West.
Explorers Lewis and Clark passed through the spot on their pioneering trek west and thousands of settlers followed along the Oregon trail.
It now has rustic charm to burn. Old brown brick buildings, in various states of repair, dot the city centre, the streets are wide, the sky vast. Train whistles blow in the distance and it's a great place to eat if you love steak.
But Omaha is also home of the world's most celebrated investor.
Buffett, who started in business here at 15 (leasing pinball machines to barber shops), never stopped and never left.
He has built his investment firm Berkshire Hathaway to an asset value of US$550 billion ($801 billion) and his own net worth is nearly US$70 billion.
In the past 49 years he has made many fellow shareholders in the company very rich and developed an almost cult-like following of investors seeking to learn the secrets of his success.
The fact that he has always been happy to share those secrets is one of the reasons he draws tens of thousands to Omaha every year for the Berkshire AGM.
From Wall Street heavy hitters to small town "mom and pop" savers, to fund managers from all over the world, they have one thing in common — they've trusted their money to Warren and he has delivered.
I travelled with the team from Takapuna's Pie Funds, who have become regular attendees in the past few years.
Founder Mike Taylor admits that the first time he went it was because Buffett was his idol.
"I wanted to see and hear from him in the flesh," he says. "I have returned because it's such a great experience and given their ages, it could end at any time.
"It genuinely is like a pilgrimage, and they don't call him the Oracle of Omaha for nothing."
Boston-based portfolio manager Drew Beja said he had been attending for about a decade.
He describes the meeting as "wonderfully grounding". It "provides such rich reminders of what I seek in great investments". It's also a great weekend for networking and "swapping stories and ideas with like-minded individuals".
Fans wear giant Buffett and Charlie Munger heads. Photo / Bloomberg
If you want the good seats, you get in early. So at dawn, as heavy and icy rain bucketed down, we joined the queue huddled under an overbridge outside the venue. It's the kind of dedication usually reserved for rock stars, and running into the stadium with an excited crowd amid blaring music really does give the event the feel of a concert. It's no surprise that this has been dubbed "Woodstock for investors".
Eventually, with seats claimed, the show starts with the annual Berkshire Hathaway movie. As well as premiering new ads for Berkshire companies like Coca-Cola and Brooks sports shoes, it is full of skits and cameos from Buffett, his management team and some major Hollywood stars, including Arnold Schwarzenegger.
To a roar of applause, Buffett and his longtime business partner Charlie Munger take the stage. Buffett runs through a few slides on earnings — this is an AGM, after all — but he keeps it very simple.
"Our goal is to increase normalised operating earnings every year," he says. "We just focus day after day, year after year and decade after decade on sustainable earnings power." Then the marathon, five-hour question and answer session begins.
Microeconomics is business, it's what we do; macroeconomics is what we endure.
The headlines from the AGM this year inevitably revolved around Buffett's handling of questions about Donald Trump and the debate on sugar consumption, in relation to Berkshire Hathaway's major stake in Coca-Cola.
On the first, Buffett says Berkshire Hathaway will do just fine if Trump is President — but America's problems will grow. On the latter, Buffett remains a firm believer that the joys of sugary treats outweigh the downsides.
But the pair covered off a vast range of topics, from terrorism, to renewable energy, to the secret of happiness and the future of business.
Buffett laughs off attempts to get him to predict what oil prices might do. Both he and Munger claim to be uninterested in macroeconomics.
"Microeconomics is business, it's what we do," Munger says. "Macroeconomics is what we endure."
But some responses do give clues to their current thinking about the state of the global economy.
A question on why they sold out of European reinsurance businesses Munich Re and Swiss Re last year evolved into a discussion on a world with negative interest rates.
"Anything that reduces the value of having money is always going to affect Berkshire because we are always going to have a lot of money," says Buffett. In fact, Berkshire holds a cash float of nearly US$60 billion in bonds.
"It's not just a problem for insurance companies; it's a problem for retirees, it's a problem for anyone with fixed rate investments," he says. "But the difference between a quarter per cent and minus a quarter per cent is not that great. It's almost as painful." The problem was the length of time rates had stayed this low.
Low rates were also making businesses more expensive to buy.
Warren Buffett playing bridge with Bill Gates. Photo / Bloomberg
The double act
Buffett, now 85, is the legend, but Munger is less well known, to New Zealanders at least.
At 92, the Berkshire Hathaway vice-chairman is in some ways the star of the show. Wearing spectacles so thick they magnify his eyes to almost comical proportions, he sits quietly beside Buffett on stage nibbling See's Peanut Brittle (the product of another Berkshire Hathaway company).
But when he's thrown a question from the floor, Munger reveals a brain that's still razor sharp and a wit that's even sharper.
It is fascinating to hear men of their generation talking about disruption and the internet economy.
"We were slow on the internet because the phone still worked well for us," Buffet jokes.
He says the full force of the internet is yet to be felt in business but believes Berkshire is well placed to adapt. It is in businesses that wouldn't feel the most immediate impact.
"If I owned a bunch of shopping malls I'd be worried about that," he says. To which Munger adds: "We are lucky we found out we were so bad at retailing when were young."
Charlie Munger. Photo / AP
Buffett says Berkshire doesn't have a strategy to get into tech stocks — or not to get into tech stocks.
"We don't have an industry focus," he says. "We are guys with capital to allocate." The aim was always to put that money where it would be most able to create more, wherever that may be. "We don't make any decision on investment without thinking about how the world will look in five to 10 years."
No matter how specific the question, Buffett and Munger's answers are always underpinned by their tried and true business philosophy and to a certain extent their philosophy on how to live a good life.
"It's important to recognise what you can't do," Buffet says. "You don't need the IQ in investing that you need in other areas of life, but you do need emotional control."
Asked for some of the investment tips that many of the pilgrims have come for, Buffett says: "We've generally tried to only swing at things in the strike zone. It really hasn't been much more complicated than that."
Investor Sekhar Paruchuri, the Pie Funds team of Mike Taylor, Chris Wright and Brenden Hall, and Liam Dann.
Financial 'time bomb' still ticking
Financial derivatives remain a threat to the global system, Warren Buffett says.
Buffett called them "dangerous and confusing" in 2008 after the global financial crisis and was asked at this week's AGM about Berkshire's growing investment in banks which hold them.
He wasn't backing down on his concern. "It's still a potential time bomb in the system," he said.
A derivative is a secondary financial product that derives value from an underlying asset — a commodity, currency or stock.
In 2008, derivatives based on mortgage debt were largely blamed for causing the global financial crisis.
Buffett said he aware of growing valuation mismatches in derivatives that had the potential to cause big problems.
"I know one that would blow your mind," he said. It was an "incredibly mismarked position — that doesn't affect any of our operations — it staggers the mind. Some of these things get so complicated that they are very hard to evaluate."
The great danger in derivatives was market discontinuity, Buffett said. Any kind of disruption to markets, whether it was a stock crash or something more serious like war or terrorism, could make derivatives "real poison".
"There can be enormous gaps in things that you thought were protected. So I regard very large derivative positions as dangerous and I think it continues to be a danger to the system."
Berkshire Hathaway didn't hold large derivative positions because he wouldn't sleep well, Buffett said. But he said he was comfortable with Bank of America and Wells Fargo's positions on derivatives.
Through various trades over the years Berkshire was in the "awkward position" where it would probably make about US$20 billion from derivatives, Berkshire vice-chairman Charlie Munger admitted. "We'd prefer if they were illegal, it would be better for the country," he said.
• Liam Dann travelled to Omaha courtesy of Pie Funds
What I learned from Warren Buffett
Liam Dann
Investing is about EQ, not IQ Buffett doesn't claim to be a genius or to have great insights.
He is an observer and a thinker but ultimately puts his success down to admitting what he is not good at, his discipline and an avoidance of self-destructive behaviour.
Patience and opportunism Charlie Munger's recipe for investment success: Don't rush, but when a chance presents itself, be sure to take it.
Continuity We need to keep evolving and adapting, but change for change's sake can be self-destructive — get the fundamentals right, find good people to work with and stick with them.
Mike Taylor (NZ) - Founder of Pie Funds
Many different things over the years. Apart from the fact that drinking Coke and eating candy won't kill you, these points stand out:
• Buy quality and you won't regret it.
• Top management and their integrity are very important.
• Keep it simple. The best ideas are the obvious ones.
• Bet big when you have the odds, and the rest of the time don't (a Munger quote).
• Doing what you love (so you never need to retire) and having good friends leads to a happy life, which in turn leads to longevity.
Drew Beja (US) - Granahan Investment
Asking for the biggest lesson I've learned from Buffett is a bit like asking my favourite spot in New Zealand — there are so many to choose from. That said, one of my favourites is the concept that if a potential investment is too complicated or outside their areas of core competency, it quickly is relegated to their "Too Hard Bucket".
