The financial world’s attention over the weekend was focused on Berkshire Hathaway Inc’s 2021 annual meeting held on May 1.
More than the results and humdrum of corporate actions, they are known for a marathon of Q&A sessions both on Berkshire’s operations and the general market and economy with two famous nonagenarians, Chairman and CEO, Warren Buffett, and his long-time partner Executive Vice Chairman Charlie Munger.
They were joined on the stage by Vice Chairmen Greg Abel and Ajit Jain, both of whom alongside Todd Combs and Ted Weschler are expected to inherit Berkshire’s leadership from Buffett and Munger.
More than Berkshire’s results, I am going to focus here on their general comments around key global investment themes.
Crypto, Robinhoods, and SPACs
If you are active on social media or in general follow financial news, by now, you are aware of Munger’s harsh words on cryptocurrency and discount brokerages (Robinhood etc.) among other new trends like SPACs etc. For your benefit I am reproducing some of the headline-grabbing vitriol below:
Cryptocurrencies: “I think the whole damn development is disgusting and contrary to the interests of civilization. Of course, I hate the bitcoin success… I don’t welcome a currency that is so useful to kidnappers and extortionists”. He also questioned their legitimacy by saying they are financial products “invented out of air”.
Discount brokerages and gamification of daily trading: “Well, that is really waving the red flag of the bull. I think it’s just God-awful that something like that would draw investment from civilized men and decent citizens. It’s deeply wrong. We don’t want to make our money selling things that are bad for people.”
SPACs: “Yes, of course, I call it fee-driven buying. In other words, it’s not buying because it’s a good investment, they’re buying it because the advisor gets a fee, and of course the more that you get, the sillier your civilization is getting, and to some extent, it’s a moral failing too, because the easy money made by things like SPACs and returned derivatives and so on, and so on."
You push that to excess, it causes horrible problems with the civilization and reflects no credit on the people who are doing it and no credit on the regulators and voters that allow it. So I think we have a lot to be ashamed of current conditions.”
This shouldn’t surprise anyone who follows Munger. At the same time, Buffett (again very much in character) was a lot more balanced on these new trends. He pushed back against labelling them as immoral and rather pinned these trends to the strong “gambling impulse” of people.
He said that gambling is a “human instinct” and it’s natural for people to seek more “action” when they have money in their pockets. In fact, he chose to not comment at all on cryptocurrencies and set Munger lose on that topic.
As a Graham disciple, I have deep respect for Buffett and Munger, but I do think one should take their criticism of cryptos with a pinch of salt.
I interpreted Buffett’s silence as apprehension to comment on relatively new technology; in fact, they have famously admitted multiple times that they missed the tech wave because of lack of context and understanding.
During the meeting, Buffett acknowledged that Google, Microsoft, Apple etc. “are incredible companies, in terms of what they earn on capital. They don’t require a lot of capital, and they gush out more money.”
They only invested in Apple in 2016, and although they have profited handsomely from the investment so far, it was relatively late in Apple’s journey.
Having said that, I felt their warnings regarding discount brokerages and SPACs were fair. Novice retail investors dabbling in calls and puts doesn’t sit right with me either – writing options is inherently risky and can have disastrous consequences.
Active investing and quants
Buffett reiterated a core tenant at the meeting – “I do not think the average person can pick stocks.” In his trademark style, he backed it up with some simple illustrations.
He pointed out how none of the top 20 companies by market cap in 1989 is in the top 20 today. He also highlighted that even in a booming industry like automobiles, there were over 2000 defunct companies in the last century.
By 2009, there were just three left, of which, two had to be rescued from bankruptcy by the US government. He backed his age-old recommendation for retail investors to simply invest in an S&P 500 index fund.
“…there was a lot more to picking stocks than figuring out what’s going to be a wonderful industry in the future.”
On quants, both Munger and Buffett acknowledged that Jim Simons’ Medallion Fund (managed by Renaissance Technologies) was “very, very smart.” Even the usually parsimonious-with-praise Munger, didn’t hold back – “very smart and very rich, yes."
However, they noted that it was not for them as they didn’t know how to “make money trading stocks” and didn’t trust anyone else to do it for them.
It is part of my core belief system (and the reason I started Upside AI) that humans are not great investors. History and research show that even professional fund managers are unable to beat their benchmarks over sustained periods.
Fear, greed, and inherent emotional bias erode even the soundest investment frameworks. In fact, it applies to experts in most fields, even a science like macroeconomics. During the meeting, Munger chided them for being too sure of themselves.
“…professional economists, of course, have been very surprised by what’s happened. It reminds me of what Churchill said about Clement Attlee. He said, “He was a very modest man and had a great deal to be modest about,” and that’s exactly what’s happened with the professional economists. They were so confident about everything and it turns out the world is more complicated than they thought.”
Despite their misgivings, I like to believe that if Buffett or Munger (or Graham) started their investment careers in the 1990s/2000s rather than the 1940s/1950s, they would be firm technologists, both for their investee companies and investment operations themselves.
Hence, it is important for us to view their comments in that context and absorb the principle behind them rather than the literal implications.
(The author is Co-founder, Upside AI, a SEBI registered PMS Company)Disclaimer: The views and investment tips expressed by the investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.