If you want to read part 1, click here.
Rule of 10%
About the limit of 10% that the FED has set in terms of maximum stock position of one owner, and the recent proposal to increase to 25%, Warren says that it has “huge execution cost” because of the rules when buying and selling a security in a short period when above 10%. Also the rule to inform the market about recent purchases brings competition to buying that security.
Charlie on all those rules: “Well, one more awkward disadvantage of being extremely rich.”
Money Managers and Investors Expectations
Buffett says that one thing that worried him in 1956, was how would investors behave once they give him money to manage. So he set some rules in order to avoid panic if the market goes south.
Warren says that as he gets older he can’t do mental arithmetic as fast as before, but he now understands human behavior much better than when he was 25 or 30.
Charlie gives a mantra from Lee Kuan Ywe: “Figure out what works, and do it”
The most valuable thing in life
When asked what they “valued the most in life”, the answer from Warren was that in life we can’t buy two things: time and love. The idea of having money was precisely to control what they do with their own time.
Additionally they consider themselves lucky, because their work isn’t very physically demanding.
Information about performance
Buffett said that Berkshire performance could be easily calculated and it’s about 40% of the total value. This means that businesses owned by Berkshire Hathaway are worth the remaining 60%.
They don’t like to explain why they own stocks, because then other investors will compete with them, driving up the price. Secret is worth gold here?
Boeing MAX 737
About the crashes that happen with this plane, Warren remembers the story of how Al Ueltschi started the FlightSafety company which is basically a company that has simulators where pilots go and train.
It’s an example of a person really committed
Buffett refuses to invest in something only because someone said it’s good. He prefers “moats” (metaphor: a deep, wide ditch surrounding a castle, fort, or town, typically filled with water and intended as a defence against attack). In essence he prefers companies that have competitive advantages that are unique.
On the other hand, Buffett that “we don’t want to try and win at a game we don’t understand.”
Although is a low probability event, Berkshire may in future be a target for activist investors. Now neither Warren of Charlie are worried about those type of things, because of the large stake that they own.
Circle of competence
Munger is a strong supporter of specialization. “Nobody wants to go to a doctor that half-proctologist and half-dentist, you know?”
Buffett is strongly doubtful about “independent” directors.
I mean, if the income you receive as a corporate director — which typically may be around $250,000 a year — now, if that’s an important part of your income, and you hope that some other corporation calls the CEO and says, “How’s so-and-so as a director?” and the current CEO — your CEO — says, “Oh, he’s fine and never raises any problems,”
It’s hard to convince another person when he is being paid to not change his opinion.
Berkshire, cash and a stock index fund alternative
At the end of 2018, Berkshire had 112 Billion in cash/short-term investments. Someone estimate that if the cash was in a stock index fund (keeping the 20 Billion cushion), the final figure today would be 155 Billion.
Warren answer was basically that he believes that will have future opportunities to deploy capital in investments that will deliver a superior return than a stock index fund. Therefore the money needs to be “ready” at all times.
Charlie gives the example of Harvard that apparently invested all the money plus tuition in the stock market in the worst possible time. Thus and with this example, in mind, he prefers to have more cash and a more conservative position.
Robots and loss of jobs
The example given is from 200 years ago, where one could be very afraid of farm machinery that would erase most of the farm jobs. However, what really happened is that people started to work on other things. Thus being more productive – “That’s what capitalism does, and it produces more and more goods per person”
Warren Buffett explains that it can be hard to deal with, but is good if avoids “charlatans”. Also, GEICO went from 7 billion in revenue to 30 billion, with regulation. Thus a business can grow albeit having regulation.
Charlie gives the example of investment banks in the real estate crisis, that if without some kind of government intervention can do some “dumb things”.
Buffett likes big markets, and says that Berkshire can only invest in around 15 markets (big business investments opportunities). Munger defends that US and China should get along.
Business opportunities overseas
The problem today with Berkshire investing overseas is that the opportunity has to be sizeable. The preferred method is to invest together with other companies, because it’s hard to keep investing in small businesses that add little value.
Buffett doesn’t like to enter into auctions. It’s a waste of time.
Munger adds up that Berkshire doesn’t want to pay the high prices that are currently being paid. Competition is acquiring business with leverage, which is hard to compete.
Berkshire compounding machine
Buffett remembers that when he closed the partnership to new money about 40 years ago, that with 40 million the size will be a drag on performance. Now with $368 billion that problem has grown by a lot.
He says that Berkshire will not be the best compounding machine because of its size, but he believes will earn decent money over time.
Berkshire VS S&P
When comparing the performance of the index vs the company, Warren says that if Berkshire only owned stocks the performance would be inferior because of taxes.
He doesn’t knows if it will outperform the index. He believes that if you’ll have a bull market it will probably underperform. If the the market in 5 to 10 years is at the same level or below, Berkshire will probably outperform.
Additionally, portfolio managers Weschler and Combs are very competitive, one is beating and the other one modestly behind the S&P.
Berkshire owns 18% of Amex. Although with heavy competition, Buffett believes that Amex will continue to thrive for years to come.
Historically American Express was formed in 1850, and carried big trunks of valuables. Next was travel’s checks that turn Amex in a powerhouse with a strong and trustworthy brand.
Tesla and Auto Insurance
In this particular subject, Warren bets against Tesla being able to compete in the auto insurance business. He gives the example of General Motors, that had a company called Motors insurance.
He said that the competition offered by Progressive is much more worrisome than auto makers.
He also talks about gross margin from auto companies that is about 6% (low). Therefore not having a lot of “room in the game”.
Conflicts between Buffett and Munger
Warren says that in 60 years, they never had an argument. They can disagree on some aspects, but never had any
“So, I recommend that you look for somebody better than you are and then try to be like they are.”
Again if you want to read part 1, click here.