Podcast: Special Appearance [Stocks for Beginners] The Berkshire Report

Phil Muscatello:

Hi, and welcome back to Stocks for Beginners, I’m Phil Muscatello. Warren Buffett’s Berkshire Hathaway holds its annual shareholders meeting in Omaha. It’s known as the Woodstock for value investors. A recent guest on this podcast, Phil Weiss, mentioned that he was attending, and I asked if he would return for a Berkshire report. Hello Phil.

Phil Weiss:

Hi Phil. How are you?

Phil Muscatello:

Good. Thank you. Philip Weiss is the principal of Apprise Wealth Management, and we’ll give you some details a bit later, but just tell us how it was. Was it a bit of a burning man for value investors?

Phil Weiss:

Yeah, it’s really a good experience going there for me anyway. It’s been a while since I’ve been there. It’s been a while since the company has met, too. The meeting wasn’t in person for the last two years because of COVID. It’s a chance for me to see some old friends, to talk about investing with a lot of other knowledgeable investors, and to get some good food, too.

Phil Muscatello:

Okay. So how long has this event been going for and when did it kind of achieve cult status?

Phil Weiss:

Buffet bought Berkshire in the ‘60s. As far as I know, they’ve always had a shareholder meeting. I’ve been a shareholder since 98. The first time I went was in 2013, but it had already started to reach cult status before that. I think it was probably in the early 2000s that it started to get this cult status where at its peak about 40,000 people came. I don’t know that there were that many this year, but that’s how many they estimate – at peak attendance.

Phil Muscatello:

Before we went online, you mentioned that Charlie Munger was also there. So where are Charlie and Warren in the Pantheon of the value investing gods?

Phil Weiss:

Oh, they have to be right at the top, and they’ve been doing it for a long time. Charlie was really influential, I think, for Warren in some ways, because he added more of a quality element to his approach. Warren started out with the cigar butt approach – the idea that there’s a cigar butt, on the street you pick it up, and there are one or two good puffs left in it. And that was kind of his investing approach initially. Charlie really brought the quality element more into Warren’s game. And I think that made a huge difference.

Phil Muscatello:

So, to attend the meeting you have to have a certain number of Berkshire shares in the company and there’s Class A and Class B. Can you just talk us through how that works?

Phil Weiss:

So, there are two classes of shares. The class A shares are several hundred thousand dollars each – $468,469 in midday trading on June 6^th – and that was originally all that there was. And then in 1996, they offered the B shares for the first time, and they were set up at that time at one 30th of the value of the Class A shares. Class A shares must have been around $60,000 back then, because I know it was like $2,000 for a B share. Then when they bought Burlington Northern, the B shares split further because they paid for part of that purchase with shares. So, now they’re much less than that $2,000 on a per-share basis. They’re like $300 and something per share – $312.03 in midday trading on June 6^th.

Phil Muscatello:

What is it about going to the annual meeting that seems so special for people?

Phil Weiss:

I think it’s a few things. One is, as you referred to it as kind of a Woodstock for capitalists or Woodstock for value investors, either one can work. It’s different than any other shareholder meeting that I think that you’ll go to because of the fact that you have Warren and Charlie who are still going fairly strong. Their combined age is 190 and they still sit there for five hours. There was an hour break, but they sit there for five hours, and they answer questions. This year was a little bit different than other times that I was there. In the past, you had questions that came from Becky Quick, from CNBC, and some analysts. They would alternate between those and the audience. This time it was just Becky Quick and the audience alternating with questions. They didn’t answer as many questions because their answers were a little bit longer than they’d been in the past. But companies don’t do that where they take all those questions from shareholders. It’s somewhat unique too because most companies they’ll talk to the street or the analysts, whatever you want to call them. Buffet doesn’t do that. Berkshire releases earnings on Saturday morning, typically, when the market’s not open. The view being that that gives everybody a chance to see earnings while the market’s not open and digest them before it opens again. Nobody gets any information earlier. So, it’s a special occasion in terms of getting to communicate with the company and hear what they have to say about the company and its performance. Plus, they answer all these questions, which are not just about the company. A lot of them are about investing and life in general. So, it’s a really good opportunity for that. And many people go year after year. This was my fourth time, but the first time since 2016 for me. The people that I saw – I did make some new friends – but a lot of them were old friends that I had seen the other years that I went. People make arrangements to go year after year. A lot of people will book the room for the next year as they’re leaving the current year’s meeting. There are a lot of really good people and a lot of really good investors. So, it’s a good opportunity if you like investing. Not everybody that’s there is a professional. There are many people there that are individuals that just want to go. But I think this year one of the reasons the number of people was lower is still probably pandemic related because we noticed that there typically are a lot of people that come from China. There really weren’t that many because China’s got such a severe lockdown right now. So, that’s probably one of the things that held the crowd down a little bit.

Phil Muscatello:

Charlie and Warren, they’ve got an incredible history behind them and they’ve seen so many market cycles and they’ve been in and out of fashion 70 times. And over the last few years during all of the growth stock bubble, they have been put aside to a certain extent, but they must be roaring back right now into relevance.

Phil Weiss:

Yeah. Value investing in general has done better recently. It’s been the first time in a while. Because as you said, growth stocks have really performed strongly. They went through this before. Like I said, I purchased shares in ‘98 for the first time. And that was probably a little bit of an out of favor time for the company back then because we had the internet bubble that was just starting to brew back then, and every time growth goes crazy growth stocks really perform well. There are people that talk down value investing and Berkshire, but it does seem to keep on ticking.

Phil Muscatello:

I just wanted to get back to the price of stock in Berkshire and how it’s hundreds of thousands of dollars’ worth now for the Class A shares. That’s because they’ve never done a stock split that many companies have. Apple has done so many stock splits over the years, but they’ve never done a stock split. They don’t see this as necessary.

Phil Weiss:

I think the closest they came was when they offered the B shares (and again after they purchased Burlington Northern). And it’s just, I think partly because they became so expensive with the hundreds of thousands of dollars, not many people can approach purchasing a share. Part of the reason that they don’t talk to the analyst community is that they believe in long-term shareholders. I think there was a time during the meeting that Warren made reference to the idea that these companies that are out there doing road shows and all these other things and analyst meetings, it’s like, what’s wrong with the shareholders you have? Or why are you trying to get new ones? Berkshire would rather have shareholders for a long time. And part of it was that, and there are people that have held these shares for many, many years longer than I have. And that’s important to them. It’s a part of the culture. And in that culture, you don’t need to split shares.

Phil Muscatello:

So, talk us through this year’s event.

Phil Weiss:

For me, I fly into Kansas City and rent a car, and I drive to Omaha. I like to get there on Thursday. I got there Thursday this year and had dinner with some friends and then Friday, there are a lot of events going on the whole time Friday, I went to a breakfast that was hosted by Vitaliy Katsenelson, who’s written several books on the markets, and he’s written a new book, which is actually not about finance, but he was there. I went to the breakfast that he had, and he’s from Russia, so he had some interesting perspectives on the situation in Ukraine as well. And then from there, Mario Gabelli, his firm was hosting something. I went and caught part of that. And I went to a lunch that somebody else I know hosted. Then we went shopping for Berkshire-related goods. Actually, there’s a lot of shopping. It’s a big weekend for Berkshire in terms of sales because in the same facility that they have the meeting in, there’s a space down below that’s very large, and a lot of the Berkshire companies come in there and they sell their wares. And some of them let you learn more about the company and what it does. And I always find that interesting, too. It’s not just about purchasing stuff, but they have knowledgeable people from different units of the company, and you can learn more about what they do, how their products or business works, and all those kinds of things. This year, I talked to somebody from the part of the company that makes some medical devices and they talked about the different metals that they use and why they use them and things like that. And then there was another section that I went to where there was somebody to talk to us about some of the machining tools and products that they have and how, when you think about it, it was kind of interesting. The gentleman was saying that when you can knock a couple of seconds off the time it takes to make a product – when you’re making so many products – it can really add up to a huge benefit for the person that’s buying the product. If you can simplify their process and knock seconds off, in something that’s a repeatable process it makes a big difference. And that’s kind of the incremental value that they can add. And then they had See’s candies during the meetings that they had. I think it was 11,000 tons, or that’s too much, maybe it’s 11 tons, but 11 tons of See’s candy. I don’t think it was 11,000. I think it was 11 tons, but that’s still a lot.

Phil Muscatello:

Hey, he loves these candies, doesn’t he?

Phil Weiss:

Yes, he does. I mean, they sit there. He and Charlie, when they’re up on the stage, there’s always peanut brittle. It’s Warren’s favorite. You can always see them with the peanut brittle that they’re eating. Some people say it’s to keep them awake.

Phil Muscatello:

Good thing it doesn’t come up in the amounts.

Phil Weiss:

That’s right.

Phil Muscatello:

Okay. So, we’re still on Friday and the meeting itself is on Saturday, isn’t it?

Phil Weiss:

Yeah. One thing that was different this year, people still started lining up as early as 4:30 in the morning, I’m told. I’ve done that in the past. I did not do that this year because we didn’t think it would be as crowded and the doors open at seven. And they started with a film at 8:30, which you only see if you attend the meeting. They live stream the meeting, but you don’t see the film during the live stream.

Phil Muscatello:

What was the film? Sorry, before we go on.

Phil Weiss:

Really, it’s a lot of commercials. It’s all different companies that Berkshire either has shares of like American Express and Apple and Coke. It’s also things about Berkshire products as well. It usually lasts about a half-hour and there are a couple of little skits and bits in there too. But most of it is really commercials for products and Berkshire itself. And then the meeting starts, and they answer questions for three hours and then there’s an hour break. Most people go get lunch. In that area where I said that they have the goods for sale, a lot of people go down there. Some people buy stuff, some people walk around, and they have things to see. Like Clayton Homes. They have a modular home that you can walk through. They have a NetJet, they had a flight simulator there this year. They have, I forget the line, but they have some super large mobile homes that you can use and go with the people that like to go on those really long trips across the country. And then they can park at a camping ground and sleep in it. They’re very nice. The accommodations are pretty nice. They have those types of things. And then after that, then they go for another three hours, and then they have a shareholder meeting.

Phil Muscatello:

Yeah. Well, let’s get down to the nuts and bolts of the meeting and what’s of interest to investors this year.

Phil Weiss:

So, there were a few things. I wrote a blog where I talked a little bit about some of the things that I thought were of particular interest to me,

Phil Muscatello:

We’ll put a link in the show notes for it.

Phil Weiss:

That would be great. They talked about stewardship of client assets and how important that is to them. And that’s something as a financial advisor, that’s important to me as well too, because I know when somebody hires me to work for them, they’re depending on me. And we’ve had a difficult market and it’s not pleasant to watch the value of assets go down, but they talked about that. They also talked a little bit about all the mania that’s been going on between Robinhood and the meme stocks and things like that. They had some harsh words for that. There were certainly the obligatory questions around cryptocurrency, which anybody that follows Berkshire at all knows that Charlie’s not a big fan. And Warren had a really good example as to why they don’t like cryptocurrency. The basic reason if I skipped through to the bottom line is that it doesn’t really provide a return. It’s hard to value and it doesn’t provide a return. He gave an example. He said if somebody told him that they owned all the commercial real estate in the world, and they’re going to give him 1% and he was going to pay $5 billion, it doesn’t really matter the amount, he said, yeah, I’d probably do that because I know what I’m going to get from it, and it seems like a good investment. There was another example. He used two examples. He said, but then if somebody came and said that they had all the crypto in the world or all the Bitcoin in the world and wanted $25 for it, I don’t think I’d give it to them. Because I don’t know what it’s worth. And I don’t have any way to know that I’m going to get a return from it. There were questions around, they’ve got such a good track record and they say that they can’t market time. And Warren said “I don’t market time. I’m not good at it. If I really was, I would have bought in March of ’20, and I wasn’t buying then. The answer was more to reinforce the idea that long-term investing is what it’s about. Buying good quality companies that you can hold for the long-term. That’s always part of the message that comes out of Berkshire. They also talked about the idea that I brought up before about the importance to them, of long-term ownership and culture. And that’s one of the things that they think will allow Berkshire to endure after they’re gone because that culture should remain. I mean, one thing I do wonder about is if they will continue to have this kind of meeting when they are gone and they have added a Ajit  Jain who runs the insurance businesses, and then Greg Abel, who’s in charge of Berkshire-Hathaway Energy. They were part of the panel in the morning, but not in the afternoon. There’s a big difference between the two of them and Warren and Charlie. Ajit is probably a little bit more like Warren and Charlie in terms of how he answers things. Greg, his company was a public company before Berkshire acquired it, so he may be a little bit less open than they (Warren and Charlie) are on certain things.

Phil Muscatello:

I just wanted to get back a little bit to the structure of Berkshire. And it’s always been the insurance business that’s provided the cash flow for them to be able to buy the assets that they’ve wanted. He calls it the float, doesn’t he? Am I correct in saying that?

Phil Weiss:

That’s correct. Yeah. And what that float really is, is think about it this way. When you get an insurance policy, you pay the premium today and it may be years or never at all until they have to pay anything out. So that money that they have, those premiums that they haven’t paid out, that’s really what makes up the float. They have a lot of insurance that has long tails, so that gives them that extra money to invest. And that’s one of the things that makes Berkshire’s insurance business different from everybody else’s because most insurance companies just buy bonds and fixed income investments and things like that. And Berkshire actually uses it to buy stock and buy businesses. And those businesses provide additional cash flow to them. If it’s stocks that pay dividends, that becomes cash for them and then their businesses themselves also provide cash flow. And one of the things that’s neat about that whole conglomerate structure that they have is that it allows Berkshire to basically be self-funding. If a business needs capital, it doesn’t have to go outside to a bank. There’s another business within Berkshire that can provide that capital.

Phil Muscatello:

And it’s all about the accounting, isn’t it? I mean, that’s what been Warren’s passion. His whole life has been reading balance sheets, hasn’t it? It’s an accountant’s eye for what’s good value in a business.

Phil Weiss:

That’s certainly part of it. I think he just loves cash flow. Companies that throw off good cash flow are really important to him. Accounting is an interesting topic for him too. He has criticized, and rightly so at times, the idea that accounting used to show just about everything at historical cost. And then they put some changes in and some things that used to be at historical cost, now they get written up to fair market value or down to fair market value, especially like these investments in stocks. We know that the market goes up and down and so that can lead to different levels of fluctuation in Berkshire’s earnings than we’ve seen in the past. The bottom line is that if you don’t sell, that fluctuation doesn’t matter that much, yet it does impact their earnings.

Phil Muscatello:

And he doesn’t really like the idea of EBITDA does he?

Phil Weiss:

No, he does not. If you buy an asset, you’re sort of spending cash and if you borrow money, it costs to borrow. So why should those be excluded?

Phil Muscatello:

Really? It’s a revelation for many people. It was a revelation for me, reading a couple of Warren’s books about how simple investing should be. But then so many times we have complicated it haven’t we?

Phil Weiss:

We do, we want to find good high-quality businesses that generate cash flow. A lot of times that’s all it is, but you have to know that it has stable cash flow, and a lot of what makes it so simple for him is he probably reads more annual reports than anybody else that we know, so he can make decisions pretty quickly. Because he knows exactly what he’s looking for.

Phil Muscatello:

Yeah. Because he’s got his own checklist, really? He knows straight away.

Phil Weiss:

Yeah.

Phil Muscatello:

Was there any discussion about the current inflationary environment that we’re going through at the time?

Phil Weiss:

Yes. It was definitely a topic of discussion at the meeting because it’s high on everybody’s list of things to worry about, think about, however you want to put it. And I thought his answer was interesting because it was not a conventional answer at all. First of all, I’ll tell you that the person asking the question was really trying to get a stock tip and that’s something that Buffett’s never going to do nor Munger. They just don’t do that. But I thought his answer provided some really good suggestions, especially if you have kids. And the idea was the best you can do is be exceptionally good at something, whatever that is. And the best investment is anything that allows you to develop yourself, so it’s about education. So, figure out what you’d like to be, find somebody who does it well, determine what it is that made them successful, and then try and do that. And the idea behind that is if you can find something that you do really well and it’s something that people need, that’s how you combat inflation. Because if you have those things going for you, then you’re going to be in demand and you’re going to be able to work your way through it.

Phil Muscatello:

So, you can deal with inflation by being able to generate your own income. Is that the lesson of that?

Phil Weiss:

That was basically it. Find something that you can do, do it well, learn how to do it, and find out what will make you successful at it. And then if you can do that, you’re always going to be in demand. And that means that even if there’s inflation, then you’ll still have some income coming in and that’s how you can combat it.

Phil Muscatello:

The market hadn’t started its downturn a couple of weeks ago, really headed at that stage.

Phil Weiss:

It was down, but not as much as it’s been down since. And I will say that at the beginning of the meeting, before he got to questions, and he was talking about the company and its performance during the first quarter, Berkshire was very active in the market. Some people may know that they announced the purchase of Allegheny, which is another insurance company. And he did take some questions on that. And then he kind of told this story about how that came to be during the meeting. But they also took a significant stake in Occidental Petroleum and Chevron. They bought some more Apple. Those are the main ones that I know, but I believe the number was that they bought about $50 billion worth of stock. Now those are not always Warren’s decisions because he has put two gentlemen, Ted Wexler and Todd Combs in charge of a certain piece of the portfolio because they’re the ones that are going to be running that part of Berkshire when he and Charlie are gone, usually, they make the smaller purchases, and the bigger ones are Warren.

Phil Muscatello:

Just moved $50 billion

Phil Weiss:

The purchases were pretty big. Most of that $50 billion, probably Warren was behind it, but the smaller ones are usually the other guys. And they also had bought a stake in Activision-Blizzard, which there was an acquisition announcement (by Microsoft). It hasn’t been formally approved yet that Berkshire was buying Activision-Blizzard and that started in December. And then they continued a little bit into the first quarter as well. The bottom line for me is that if you’re a shareholder or if you know somebody that is or if you’re a fan of investing, I recommend that you try to get there before it’s too late. Every shareholder can get four tickets. Going to the meeting is a good experience. Now it’s changed. Like I said before this, this was the first time that they held this since 2019. The biggest difference I noticed was that a lot of people decided to live stream, even though they were there, they live stream because they could be more comfortable than they could in the arena. So, there were a number of people that live stream the event instead of going. But then I met the niece of John Templeton who started Franklin-Templeton. She is a money manager and I met her, and she actually blogged about attending the meeting for her firm. She and her husband run a firm together, but they brought their daughters. They all attended the meeting. In the post I mentioned, she wrote about how she would love to connect with other parents and have more kids come because it’s really important for financial literacy.

Phil Muscatello:

I think there are a lot of parents that do bring their kids along as well. If they just sit, they can hopefully learn something about investing.

Phil Weiss:

There are some now in the group that I am with, but most don’t, but I know that there are some, and I’ve talked about it with my kids. Actually, my kids are a little bit older and one of my sons would love to go, but he has finals coming up, and it was too close to finals for him to be able to come with me.

Phil Muscatello:

So, Phil, just before we finish off, tell us a little bit more about Apprise Wealth, so we can just hear about you again and what you offer clients.

Phil Weiss:

Well, thank you. Apprise Wealth is a fee-only registered investment advisory firm. I am based in Maryland about 20 miles north of Baltimore, though I have clients all over the country because we can meet virtually and that’s something that’s become a lot easier to do and more accepted since the pandemic. My firm is fee-only. That means that I don’t sell products. I don’t earn commissions. I provide my clients with a fiduciary oath because it’s important to me that my clients understand that it’s my goal to work in their best interest and put their interests out of my own. I work a lot of professional women. I lost my mom to cancer when she was 53 and finances in my house growing up were a mess. I view it that I’m trying to help my mom by helping these other people. She’s no longer here, unfortunately, but I can still try and help people like her.

Phil Muscatello:

And you’re very active on Twitter as well. I’ve noticed excellent posts there as well to follow. What’s the handle on Twitter.

Phil Weiss:

It’s @AppriseWealth I blog weekly. And you can find my blog on my website, which is apprisewealth.com. And you can schedule a meeting, or you can sign up for my blog or just check it out. There’s a search tool. If there’s a topic that’s of interest to you, you can search my blog to see if I’ve written about it or shared. I alternate my content between things that I’ve written myself and sharing things that others have written that I think are worth sharing.

Phil Muscatello:

Great. Well, all links will be in the episode notes so you can just check them out below this episode. Phil Weiss, thank you very much for joining me again today.

Phil Weiss:

Thanks so much for having me, Phil. It’s a pleasure speaking with you.

Phil Muscatello:

If you found this podcast helpful, please tell a friend, especially if it’s someone who needs to start thinking about investing for their future, you’ll be helping them and helping me to keep this show on the road. And thank you for listening to my podcast.