Pierce’s Perspective on… The Woodstock for Capitalists
It was another packed house at Berkshire Hathaway’s annual “Woodstock for Capitalists”. Tens of thousands of shareholders flocked to Nebraska last Saturday to hear from the fabled Oracle of Omaha, Mr. Warren Buffet. This event brings people from all over the world, including luminaries and celebrities such as Bill Gates, Tim Cook, and Bill Murray. But a key ingredient was missing this year – Buffet’s long time friend and Vice Chairman, Charlie Munger, who passed away last November at the age of 99. This year’s shareholder extravaganza had a somewhat solemn mood due to his absence. The event began with the traditional movie, which this year was focused on the memory of Charlie Munger’s wisdom, humor and enduring legacy he left behind. This was the first time the opening video was live streamed to audiences not attending in person, which I certainly appreciated. As the video came to an end, the CHI Health Center arena erupted in a standing ovation to honor the “architect” of Berkshire Hathaway, a title which Buffet affectionately gave to Munger on the opening page of his letter to shareholders this year.
Buffet wrapped up the first page honoring Munger, saying “Charlie was the “architect” of the present Berkshire, and I acted as the “general contractor” to carry out the day-by-day construction of his vision… In the physical world, great buildings are linked to their architect while those who had poured the concrete or installed the windows are soon forgotten. Berkshire has become a great company. Though I have long been in charge of the construction crew; Charlie should forever be credited with being the architect.”
In the wake of Munger’s absence, his legacy reverberates through the halls, a testament to his profound impact on Berkshire Hathaway and beyond. Although things felt a bit different this year, it was still business as usual. Below are 5 of my favorite highlights from this year’s annual Berkshire Hathaway shareholder meeting.
HIGHLIGHTS FROM THIS YEAR’S ANNUAL SHAREHOLDER MEETING
Succession (A Look to the Future)
It was no surprise that after Charlie Munger’s passing, all eyes were on the future leaders of Berkshire Hathaway. Buffett was joined on stage by the two men who are effectively running the company currently, Greg Abel and Ajit Jain. Buffett has emphasized Abel’s future role as Berkshire’s CEO, but during Saturday’s meeting, he revealed a shift in his perspective on managing the company’s investment portfolio. Previously, Buffett had proposed assigning this task to two investment managers handling small portions of the portfolio. However, on Saturday, he endorsed Abel for the position, in addition to overseeing operational aspects and potential acquisitions. “He possesses a deep understanding of businesses, which translates into a grasp of common stocks,” Buffett remarked. While the final decision rests with the board, Buffett jokingly hinted at haunting them if they diverge from his endorsement. Buffet praised Berkshire’s current organizational structure, where noninsurance entities report to Abel and insurers to Jain, noting the effectiveness of this system. With Abel and Jain providing substantial guidance, Buffett revealed he receives fewer managerial inquiries, indicating a smooth operational transition. Buffett expressed confidence in Berkshire’s continuity in his absence, and concluded optimistically “This place would work extremely well the next day if something happened to me.” Succession is important to Berkshire Hathaway shareholders because Buffett and Munger were known for a particular brand of business savvy and partnership. Many are seemingly looking to see if the company can maintain its success after Buffett, and it appears that all the pieces are in place for the company to continue its upward trajectory long after he is gone.
Berkshire Hathaway Performance in 2023
In his annual letter to shareholders, Warren Buffett discussed the performance of Berkshire Hathaway in the only way he knows how to do: Honestly. In the section called Operating Results, Fact and Fiction, Buffett discusses among the financial earnings disclosures, “many owners, along with financial reporters, will focus on page K-72. There, they will find the proverbial “bottom line” labeled “Net earnings (loss).” The numbers read $90 billion for 2021, ($23 billion) for 2022 and $96 billion for 2023.” But Warren Buffett feels “uncomfortable” with these reported numbers because this net income figure is “worse-than-useless” . He follows up by saying “At Berkshire, our view is that “earnings” should be a sensible concept” to be used “only as a starting point in evaluating business. Accordingly, Berkshire also reports to… you what we call “operating earnings.” Here is the story they tell: $27.6 billion for 2021; $30.9 billion for 2022 and $37.4 billion for 2023. The primary difference between the mandated figures and the ones Berkshire prefers is that we exclude unrealized capital gains or losses that at times can exceed $5 billion a day.” This shows the kind of man Warren Buffet is, and the kind of company he (and Charlie) created. While most companies hide behind the net earnings, Warren Buffet aims to expose the less than transparent number for what it is and provide an honest review of the company’s performance (which is still incredible!) He goes on to clarify that capital gains are a very important component to Berkshire Hathaway’s value accretion during the decades ahead, but should not be included for the purposes of yearly performance.
Apple Holdings Decrease
Surprisingly, Berkshire Hathaway reported in its Q1 earning report that the company had trimmed the value of its Apple holdings about 13%, from roughly $174.3 billion to $132.4 billion. Berkshire Hathaway first bought Apple in 2016, because Buffett had came to the realization it was a consumer goods company with strong pricing power and devoted customers. This was an break from his usual tech-sceptic point of view. Despite reducing their stake in Apple, Warren Buffett praised the company by saying it was an “even better business” than two of Berkshire’s oldest and largest investments, American Express and Coca-Cola. Some investors have voiced their concerns that Apple was too large of a concentration in the Berkshire Hathaway portfolio, but Warren Buffet confirmed it would remain his companies largest stock investment. This I’m sure was a relief to Tim Cook, who was sitting in the audience during the hours long meeting of shareholders.
Cash is King
Berkshire Hathaway’s eye popping cash position commanded quite a bit of attention last weekend. Between the sales of stocks, most notably Apple and Chevron, and its robust earnings, Berkshire’s cash position has surpassed $182 BILLION. Buffet noted “Our cash and Treasury bills were $182 billion at the quarter end, and I think it’s a fair assumption they (could) go up to $200 billion at the end of this quarter.”. A question I imagine was on everyone’s mind was, why is this not being invested? The Oracle of Omaha answered the question by saying “I don’t think anyone sitting at this table has any idea how to use it effectively, and therefore we don’t use it. We only swing at pitches we like.” He went on to say “I don’t mind at all under current condition building the cash position. When I look at the alternatives, what’s available in equity markets and the composition of what’s going on in the world, we find it quite attractive.” This simple, yet profound answer is the reason Berkshire Hathaway has realized the level of success it has. I’ll be sitting on the edge of my seat eagerly waiting to see where this cash is deployed in the future.
AI’s Enormous Potential
Warren Buffett made clear once again his distrust of AI. Doubling down on his cautionary words from last year, Warren Buffett, noted the burgeoning threat of artificial intelligence scams, dubbing it potentially “the growth industry of all time.” Expanding on his previous warnings, Buffett shared a recent encounter with the darker side of AI, highlighting a disconcerting incident where he watched fabricated video impersonating him. The resemblance was uncanny, leading even Buffett himself to acknowledge the potential for such technology to deceive, expressing concern over the possibility of being tricked into illicit transactions. The renowned investor emphasized his apprehension that scammers could exploit AI advancements, foreseeing potential ramifications outweighing the benefits society might glean. He reiterated an unnerving point he made last year by saying “we let the genie out of the bottle when we developed nuclear weapons and that genie has been doing some terrible things lately and I don’t know how to get the genie back in the bottle. The power of that genie is what scares the hell out of me, and on the other hand, I don’t know any way to get the genie back in the bottle. And AI is somewhat similar.” Reflecting on his limited comprehension of the subject, Buffett underscored the immense dual potential of AI for both constructive and detrimental outcomes, admitting uncertainty about its eventual trajectory.
In Closing…
This year, Warren Buffett closed out his annual shareholder meeting in a hilarious way, leading to a thunderous standing ovation. In what seemed like an echo of his long-time business partner, the Berkshire chief executive officer wrapped up the meeting with a joke.
“I not only hope that you come next year, but I hope I come next year,” he said with a laugh.
If you would like to read the Berkshire Hathaway annual shareholder’s letter (which I highly encourage), please click HERE
TAKING PERSPECTIVE…
Proper Perspective: In our hectic and often hard to comprehend world, it is very easy to lose perspective. You may agree it is sometimes difficult to see the big picture. The media often doesn’t help with this, but unfortunately instead encourages us to see things in a most negative light. Here is hopefully a pause to gain positive perspective.
When you find a truly wonderful business, stick with it. Patience pays, and one wonderful business can offset the many mediocre decisions that are inevitable. – Warren Buffett
Famous Quote For Today: “Success is not final; failure is not fatal: It is the courage to continue that counts.” — Winston Churchill
What Happened On This Day, May 9, 1941 – The Royal Navy captured German U-boat U-110 in the North Atlantic, recovering an Enigma machine, its cipher keys, and code books that allowed Alan Turing and his colleagues at Bletchley Park to crack the German code, turning the tide of the war.
ECONOMIC UPDATES
Global Economic Indicators & Analysis:
POSITIVE INDICATORS
ADP Jobs Numbers Still Strong: U.S. businesses created 192,000 new jobs in April, paycheck company ADP said, and more industries hired people last month in a sign of ongoing labor-market strength. The ADP payroll estimate showed somewhat slower job creation compared to last year, but hiring was still pretty robust. Businesses are posting fewer openings after a big surge in hiring in 2022 and 2023. And most of the new jobs have been concentrated in just a few areas such as government, health care and hospitality.
Case-Shiller Hit Record Highs: Home prices in the 20 biggest U.S. metropolitan areas inched up to a new record high, as home-buying demand continued to outpace the availability of properties for sale. A broader measure of home prices, the national index, rose 0.4% in February and also was up 6.4% over the past year.
The 20-city and the national index are both at all-time highs. The way home prices are trending masks the pain that participants in the housing market are experiencing, including home buyers and the real-estate industry. As a result of the ongoing lock-in effect, home prices continue to go up even as mortgage rates rise over 7%. But home sales are slowing, because the number of properties on the market continues to be constrained. This increases competition, all while prices and borrowing costs rise as rates inch up.
WEAK INDICATORS
Jobless Claims Spike: Initial jobless-benefit claims rose by 22,000 to 231,000 in the week ending May 4, the U.S. Labor Department said this morning. That’s the highest level since last August. Economists polled by the Wall Street Journal had estimated that new claims would rise to 214,000. Last week, claims rose a revised 1,000 to 209,000, compared with the initial estimate of an unchanged reading at 208,000. There was a big surge in claims in New York and California. The rise in claims fits with other data showing that the labor market is softening, but economists will want to see more data before jumping to conclusions.
Consumer Credit Slows: Total consumer credit rose at a much slower pace in March, the Federal Reserve reported Tuesday. Consumer credit rose at a 1.5% annual rate, down from a 3.6% rate in the prior month. The sharp pullback in consumer borrowing raises red flags, but more data is needed before making any sweeping statements about the health of the consumer.
ISM Service Sector Weakens: The Institute for Supply Management said last Friday that its service-sector PMI dropped sharply to 49.4% in April from 51.4% in the prior month. The service sector has been the bedrock for the economy in the face of higher interest rates. The surprising decline could be the tip of the iceberg of a slowdown. It might build the case for a Federal Reserve rate cut on bad news grounds.
April Jobs Report Shows Slowing: The economy created just 175,000 new jobs in April to mark a six-month low, perhaps a sign of a long-predicted slowdown in hiring that could bolster the case for the Federal Reserve cutting U.S. interest rates later this year. The increase in hiring was the smallest since last September. Economists had forecast 240,000 new jobs last month
U.S. Trade Deficit Near One Year High: The trade deficit was flat in March at a nearly one-year high, capping off a first quarter in which a bigger shortfall acted as a drag on the official measure of U.S. economic growth. The deficit totaled $69.4 billion in March, virtually the same as the $69.5 billion reading in February, government data showed. The February gap was revised up. A trade deficit subtracts from gross domestic product since it means the U.S. is buying relatively more goods and services from foreign suppliers instead of American producers.
Job Openings Fall: The number of job openings in the U.S. fell to 8.5 million in March and touched the lowest level in more than three years, suggesting the demand for labor is slowly waning. Job postings fell from 8.8 million in February. Many openings are never actually filled. Still, the trend in job postings gives clues on the health of the labor market and the broader economy. The jobs market is not as hot as it was a few years ago. Yet lots of companies are still hiring and unemployment is low.
Feds Keep Interest Rates Steady: The Federal Reserve held its ground on interest rates, again deciding not to cut as it continues a battle with inflation that has grown more difficult lately. The federal funds rate has been between 5.25%-5.50% since July 2023, when the Fed last hiked and took the range to its highest level in more than two decades. At the post decision news conference, Chairman Powell said “Inflation is still too high. Further progress in bringing it down is not assured and the path forward is uncertain.”
ISM Manufacturing Reverses Gains: A closely-watched index that measures U.S. manufacturing activity fell 1.1 points to 49.2% in April, according to the Institute for Supply Management. Any number below 50% reflects a shrinking economy. The key index for new orders dropped 2.3 percentage points to 49.1% in April. Prices paid rose 5.1 percentage points to 60.9 in April. That’s the highest level since June 2022. Economists have been predicting a rocky recovery for the manufacturing sector.
Consumer Confidence Declines: Consumer confidence fell in April for the third straight month and touched a 21-month low due to the high cost of food and gas and and fresh worries about the jobs market. The consumer-confidence index sank to 97.0 this month from a revised 103.1 in March, which is the lowest level since July 2022. Consumer confidence tends to signal whether the economy is getting better or worse. Confidence has retreated since the start of the year and sits well below the pre-pandemic high.
Chicago PMI Plummets: The Chicago Business Barometer, also known as the Chicago PMI, dropped sharply to 37.9 in April. That is the lowest level since November 2022. Readings below 50 indicate contraction. This is the fifth consecutive reading in negative territory.
Employment Cost Index Swiftly Accelerates: The cost of labor for U.S. companies accelerated in the first quarter at the fastest pace in a year and a half, complicating the Federal Reserve’s effort to get inflation fully under control. The employment cost index rose 1.2% in the first three months of the year from 0.9% in the fourth quarter, the government said last Tuesday. Compensation costs have slowed from a multidecade high of 5.1% in 2022, but are still far too high for the Fed’s comfort. Wages and benefits rose at a 4.2% pace in the 12 months ending in March, unchanged from the fourth quarter. The Fed wants to see the annual increase in compensation slow to pre-pandemic levels of less than 3% a year to keep inflation down.
Call me if you have any questions. I am always happy to help!
For my Market Monthly podcast, click on the link below. I provide a review of global stock market highlights over the past month and preview of the month ahead. Forward insights and perspectives are based on current financial market and economic trends with an emphasis on relevant developments in various areas from Fed policy to company earnings announcements.
Blackhawk Wealth Advisors employs a collaborative, multi-generational model by using tax efficient and risk mitigation strategies to maintain your current lifestyle while meeting your long term needs and goals. BWA brings together all aspects of your financial life with the expertise of ERPE and BAM.
Blackhawk Asset Management
At BAM, we take the research we obtain from ERPE and utilize it to manage our clients’ assets. Our founder, John Gardner, CFP®, CPM®, offers high net worth investors experienced investment portfolio management based on a disciplined methodology. John is one of the nation's approximately 400 Certified Portfolio Managers and has managed billions of dollars in equity portfolios over his professional career since 1984. He has created four effective, proprietary portfolios: Thematic Growth, Strategic Income, Diversified Value, and Global Opportunity, which have helped clients prosper.
More Info
Equity Research & Portfolio Evaluation
Equity Research & Portfolio Evaluation (ERPE) utilizes its propietary approach in analyzing investments. Its proven success researching equities is based on a blend of fundamental and technical analysis. ERPE's time-tested Top 10 Tenets guide the investment process to achieve Portfolio Optimization: This is through minimizing risk without sacrificing return.
