Legendary investor Warren Buffett is finding it difficult to get an investing idea that can move the needle for his portfolio. At his company’s annual shareholder meeting, the Berkshire Hathway chief executive officer aired the challenge of finding a large deal on which to spend some of a USD 100 billion cash pile; the size of his portfolio means that only a chunky transaction will make a difference.
The key learning here for an investor from the patience Buffett - showing with the Berkshire riches - is the willingness to wait for the right opportunity to buy rather than climb into a market rally.
In fact, when last year, Buffett made a USD 37 billion acquisition (of Precision Castparts), its largest ever, it had waited a full six years since it had made a buyout of a similar size (when Berkshire bought Burlington North Santa Fe for USD 34 billion in 2010).
As usual, the Berkshire Hathway annual meeting was loaded with important lessons for investors. We bring you some key learnings from the interactions that took place during the meeting.
Identifying the ‘Sweet spot’ in investing
To a question by an audience member on how to find your ‘sweet spot’ in investing, Buffett replied that they like companies where its inherent advantage looks set to last for at least a couple of decades.
“We are looking for more See’s Candies, only a whole lot bigger” he said.
Buffett was referring to his purchase of See’s Candy in 1972 when he bought the small California-based candy manufacturer for USD 25 million when its sales were around USD 30 million and profit USD 4.2 million. But now the company generates a profit close to USD 100 million every year and barely needs capital to grow. Buffett and his partner Charlie Munger have often cited See’s Candy as one of their favourite stock picks.
This year too, Munger said See’s Candy has been his favourite investment not for the money but for the learning. Munger said that without See’s investment it isn’t clear if Berkshire would have taken its big stake in Coca-Cola.
The message here is to invest in great companies at good prices - these can grow on their own and do not need regular fund inflows.
Buffett breaks down the consumer goods business when he says 'Buy commodities, sell brands' has long been a formula for business success. It has produced enormous and sustained profits for Coca-Cola since 1886 and Wrigley since 1891.
India too has many companies that buy commodities and sell great brands but the problem is that one has to wait for a long time to buy these companies at the right price as these are normally on the buy list of smart investors.
Simplifying the business idea
Many analysts describe Apple Inc. as a technologically advanced company which manufactures high quality computers and mobile phones. Analysts and market commentators analyze and compare the company’s technology with that of its competitor threadbare.
However, Buffett looks at it as a consumer product company, which is not affected even when competition resorts to price reduction.
Great investors have always liked simple businesses which give steady returns, generate positive cash flows and do not need regular growth capital. Buffett's greatness lies in the fact that he can see through the maze at the essence of the business.
Not owning the best stocks is fine
Buffett and Munger are considered to be among the best brains in investing, yet they could not figure out how technology was going to change the world. They missed out on investing in great companies like Google and Amazon.
Buffett was candid in the meeting when he said that he had plenty of ways to educate himself on the subject but ‘I blew it.’
On a question as to why Berkshire didn’t ever buy into Amazon.com, Buffett said that he was ‘too dumb’ to realize what was going to happen. Buffett added that he thought that Jeff Bezos was brilliant but he ‘didn’t think he’d be where he is today when I looked at it years ago’. But, he added, the company always looked too expensive.
Munger added that he had no regrets about missing out. He said that Berkshire has missed out on a lot of things, but their ‘secret’ is that they ‘don’t miss them all.’
For an investor it is important that even if you miss the leader in the group, there are other stocks in the group that would be available at better valuation and also gain from the general bullishness in the sector.
Review your portfolio – daily
To a question on how much time is spent on reviewing the portfolio, Buffett replied that he did it daily. Not all fund managers do that on a daily basis. Keeping a tab on the portfolio given the fast changing dynamics is mission-critical.
Technological advancement would need a shift in portfolio. Buffett pointed out that with driverless cars becoming more common it would mean that the overall economic cost of auto-related losses would come down and that would drive down the premium incomes of insurance companies.
Though autonomous vehicles taking over from drivers is still long way off, the fact that Buffett has identified a headwind to his main business of insurance shows the level of thinking that goes behind portfolio management.
Differentiating the trees from the woods
Buffett has been quoted as saying ‘Only buy something that you’d be perfectly happy to hold if the market shuts down for 10 years.’ He reiterated this point when a member of the audience asked about negative news on some of Berkshire’s holdings including the Wells Fargo client acquisition fiasco, passenger problems at United Airlines, declining soda consumption and Coca Cola.
Buffett pointed out that all businesses have problems. He said that they never bought any of those firms thinking they’d never have problems or competition. But the differentiator is that they have ‘durable competitive advantage’. Buffett went over his principle of having a ‘moat’ around a business which takes care of such eventualities.
Compare this line of thinking with a sell recommendation by analysts on even a small blip in the external environment. Demonetisation was a clear example where a sell call was given by most commentators only to find the market making new highs within a short time.
Perhaps a cool head with a long term view is what differentiates a Warren Buffett and Charlie Munger from other experts.