Where Warren Buffett Sees Trouble Lurking
Recapping the Berkshire Hathaway annual meeting... In honor of Charlie Munger... Warren Buffett on how to return 50% per year... Whitney Tilson's highlights... What worries Buffett today... It should sound familiar... The Fed's 'disguised plea'...
'Charlie?'...
Over the weekend, Berkshire Hathaway's 93-year-old chairman and CEO Warren Buffett held court for several hours in front of roughly 40,000 shareholders in an Omaha, Nebraska, sports arena...
As usual for Berkshire's annual shareholder meetings, Buffett shared details and commentary about his holding company's balance sheet (the company sold 13% of its Apple position last quarter) and annual performance. But this event is a cultural event of finance as much as anything – a "Woodstock for Capitalists," some have called it.
I (Corey McLaughlin) watched a stream of the meeting from home. And while I have a lot of observations I'd like to share, the most telling anecdote came early in the event's signature shareholder Q&A session on Saturday...
Buffett had finished discussing something about the energy sector, then turned to Berkshire CEO-in-waiting Greg Abel, sitting on stage next to him, and asked: "Charlie?"
This was the first Berkshire shareholder meeting since Buffett's longtime partner, Charlie Munger, passed away – at age "99.9," as Buffett put it – in November. In his honor, the only book available for purchase at this year's meeting was the fourth edition of Poor Charlie's Almanack.
"Not Charlie. I'm so used to..." Buffett quickly and earnestly corrected himself after the instinctual flub. The crowd started to applaud, noting the significance... "I'd actually checked myself a couple of times already," Buffett said. "I'll slip again."
Abel oversees Berkshire's non-insurance operations, and Buffett made clear Saturday that Abel is his preferred choice to make final "capital allocation" decisions in his place. Abel clapped along with the crowd as they cheered Buffett’s reference to Munger and said, "That's a great honor."
Stansberry's Investment Advisory lead editor Whitney Tilson was there...
If you didn't know, Whitney attends every Berkshire Hathaway annual meeting. This year was his 27th consecutive time attending in person, and we've touched on Whitney's relationship with Buffett (and Munger) in these pages before.
In his Investment Advisory debut last year, Whitney wrote about how the pair has influenced him, shared personal anecdotes about his interactions, and passed along lessons learned from Buffett and Munger.
Existing Investment Advisory subscribers and Stansberry Alliance members have access to the entire issue here, and as Whitney explained today in his free daily newsletter...
Longtime readers know that other than my parents and my wife, Berkshire CEO Warren Buffett and his lifelong business partner Munger have had the biggest impact on my life.
They didn't just help teach me investing – the reason I originally started coming to the Berkshire meetings – but in every other aspect (and the reason I keep coming to these every year): habits, how to treat people, becoming a learning machine, integrity, duty, etc.
Whitney went on to begin sharing his highlights from this year's event, starting by noting Munger's absence and a poignant opening montage about Munger that played at the meeting in his honor and included many of the snappy one-liners he was known for. You can watch it here.
Among the lines included that I noted: "If people weren't so often wrong, we wouldn't be so rich." And, about good investing, "It's not brilliance – it's avoiding stupidity."
And Whitney shared a similarly poignant highlight: advice Buffett shared in response to a young boy's question about what he would do "if you had one more day with Charlie?" As Whitney shared, for the next seven minutes (you can watch it here), Buffett eulogized Munger and ended with these wise words...
What you should probably ask yourself is that who do you feel that you'd want to start spending the last day of your life with?
And then figure out a way to start meeting them tomorrow and then meet with them as often as you can. Why wait until the last day? And don't bother with the others...
Whitney also pointed out another bit of oracle-like wisdom that caught my attention. A young shareholder asked Buffett what strategy he would use to make the 50% annual returns on $1 million that he often claimed he could've made as a "smaller" investor...
I think Buffett's answer (which you can watch here) might be particularly relevant to individual investors. As we pointed out in an issue a few weeks ago, they have the advantage of investing in smaller-sized opportunities that big Wall Street firms are too big to bother with. As Buffett said, starting with a reference to how he spotted investment opportunities as a younger man...
I don't know what the equivalent of Moody's manuals would be now, but I would try to know everything about everything small, and with $1 million you could earn 50%. But you have to be in love with the subject. You can't just be in love with the money...
Whitney will be sharing more of his highlights from the Berkshire Hathaway meeting, and insights into his travels and discussions there, for the rest of the week in his free daily e-letter. Be sure to check it out for more... Click here to sign up for free.
And while you're at it, if you're interested in receiving more of Whitney's work and recommendations in the Investment Advisory, click here to learn more about our flagship publication and how you can get started with a subscription today for only $49 for one year – that's 75% off the usual cost.
Our team just published their latest recommendation on Friday – to buy shares in a "boring" business flush with cash – and I urge you to check it out. Among other things you should know about the Investment Advisory is that the current average return among all the more than two dozen open positions as of last month was an incredible 126%.
For now, I want to add just two more observations about what Buffett said during the Berkshire meeting, which relate to today's economy and markets...
Buffett can still read between the lines...
He might be 93 years old, and he admits he's less productive and reads less per day than he used to. And he says he has handed day-to-day management over to deputies. But Buffett is still up to speed with what's happening in the world...
And he still has a sharp view and opinion on what he sees... Take this comment that Buffett made late Saturday afternoon, as the Q&A session was nearing its end...
A shareholder asked a macro question... whether Buffett was concerned about the size of the Treasury market. The questioner noted that it's six times larger than before the 2008 financial crisis and said there might not be enough interested buyers of Treasurys around the world moving ahead...
In short, Buffett said no. "U.S. debt will be acceptable for a very long time because there's not much alternative. It won't be the quantity" that's an issue, he said, but instead "whether inflation would get let loose in a way that really threatened the whole world economic situation."
Buffett said he's more concerned with another government-related influence on the U.S. and global economy and fuel for inflation: fiscal spending. Buffett said...
I worry about the fiscal deficit... I don't sit and work myself into a stew about it, but I can't help thinking about it... The fiscal deficit is what should be focused on.
Recalling the 1970s, Buffett said that era's problem with inflation stemmed not from the size of the Treasury market but from the growing "cash is trash" sentiment that "was setting up something that could really affect the future of the world."
Buffett lauded Paul Volcker, then chair of the Federal Reserve, for hiking interest rates and noted he received death threats for doing so.
Then Buffett turned his attention to the present... He didn't suggest that rates need to go any higher. He instead noted, like we did just last week, that current Fed Chair Jerome Powell has dropped hints lately that the central bank already decided it has done all it can to "fight" inflation.
And Buffett suggested he agrees with Powell.
Clearly, Buffett has still been listening closely to market chatter...
Powell, Buffett said, "doesn't control fiscal policy, and every now and then, he sends out a kind of disguised plea – 'please pay attention to [the deficit].'" This is "where the trouble will be," Buffett said, "if we have it."
One "disguised plea" from Powell that Buffett was likely referring to was a 60 Minutes interview back in February, in which he said Congress needed to have an "adult conversation" about sustainable spending. As we wrote in our February 5 edition...
The Fed chair has gone to great lengths over the past few years to avoid "getting political," but he appeared to drop his guard in portions of the interview, some of which didn't make the broadcast cut but were provided in full transcript form of the interview later...
In the long run... the U.S. federal government is on an unsustainable fiscal path. And that just means that the debt is growing faster than the economy... I don't think that's at all controversial. And I think we know that we have to get back on a sustainable fiscal path. And I think you're starting to hear now from people in the elected branches who can make that happen. It's time that we got back to that focus.
I think the pandemic was a very special event, and it caused the government to really spend to ward off what looked like very severe downside risks. It's probably time, or past time, to get back to an adult conversation among elected officials about getting the federal government back on a sustainable fiscal path.
Interviewer Scott Pelley said, "I have the sense this worries you very much." Powell replied...
Over the long run, of course it does. We're borrowing from future generations. And every generation really should pay for the things that it needs... and not hand the bills to our children and grandchildren.
I think this is, again, not controversial. But it's difficult from a political standpoint. It's not our business, really. But I do think it's pretty widely understood that it's time for us to get back to putting a priority on fiscal sustainability. And sooner's better than later.
Powell and other Fed members have issued another "plea" even more recently. As we noted in Thursday's edition...
Maybe, as Powell and other Fed officials have alluded to in recent months, the fiscal side of the equation – government spending and all the pandemic stimulus – is and was too strong to think that the central bank is the be-all and end-all when it comes to prices.
Perhaps once inflation took hold and the government started mailing checks to people and handing out loans like Halloween candy, it's hard to make things simply go back to the way they used to be.
We read this message between the lines of Powell's remarks yesterday. He maintained that interest rates were "restrictive," and he specifically mentioned that while "interest rate sensitive" parts of the economy had been influenced by Fed policy, other factors were influencing prices as well.
Consider Buffett on the side of "concerned with government spending."
And about all that cash...
In a separate answer earlier during the Q&A portion of the Berkshire meeting, Buffett also essentially thanked the Fed for 5%-plus Treasury bill rates. This generous rate has helped Berkshire grow its cash hoard by $20 billion in the first quarter to nearly $189 billion, mostly in three- and six-month T-bills, as Buffett and others making decisions don't see good value in putting much new money to work...
I don't think anybody sitting at this table has any idea of how to use [the cash] effectively. And therefore we don't use it now at 5.4%, but we wouldn't use it if it was at 1%. Don't tell the Federal Reserve that...
Something tells me the central bank must have heard the message by now.
Berkshire's income from short-term U.S. debt has been greater than its dividends from stock holdings for three straight quarters. And Buffett projected Berkshire will have around $200 billion in cash on hand by the end of the second quarter.
"We'd love to spend it," Buffett said, but he's waiting to "swing at pitches we like." And Berkshire has Uncle Sam, in part, to thank for the ability to be patient at the plate.
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One housekeeping note before we get to the mail... Our Diamond's Edge video series from Ten Stock Trader editor Greg Diamond will return here next Monday. In the meantime, existing Ten Stock Trader subscribers and Stansberry Alliance members can find Greg's latest updates here.
In today's mailbag, thoughts on Dan Ferris' Friday essay... and more of your feedback on the Fed and inflation – which also touches on what Buffett said about it over the weekend... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"I have to weigh in (pun intended) on this notion that people who are using these weight-loss drugs are going to stop eating unhealthy foods & drinks and now shares of the companies that make & sell them are going to be worth less. I think that's totally wrong. Why? 1) I'm in healthcare so I talk to patients all day every day; lifestyle changes, especially dietary changes for most folks are just as hard as quitting meth or alcohol. 2) my wife has been taking Ozempic for a few months now. She has not exercised one time. She drinks just as much soda as she did before, if not more. She has not improved her diet at all. She has however, lost 35lbs & counting.
"When people can lose weight without making lifestyle changes, they will do it; it's that simple. No one is changing their diets & the idea that junk food peddlers are doomed is nonsense." – Stansberry Alliance member Dr. F.
"In ref. to Dan Ferris' article, [Starbucks] is one of the most amazing marketing success stories in my lifetime. I lived when one could go to any restaurant and order a cup of coffee for a nickel and sit there all day and have the cup refilled for no extra. Along came Starbucks and totally sold people on their coffee experience! I have been in a Starbucks two times and only because I was with friends and had to go along. My regret is that I didn't buy their stock." – Subscriber R.J.V.
"Corey: Your comments and analysis are excellent, especially your interpretation of what Powell and other Fed officials have alluded to recently '... government spending... is and was too strong to think [that] the central bank is the be-all and end-all [for fighting inflation]'. Excessive federal government spending to fundamentally change America must end. If the Fed raises interest rates to the level necessary to get inflation under control without spending being reined in, they will drive the economy into a very deep depression... which of course plays into the hands of the people that want to fundamentally change America.
"Contrary to current thinking by some politicians, the Fed needs more independence from the political processes in Washington, D.C. When fiscal policies are far out-of-line and doing great damage to the economy as we're experiencing today, the blame needs to be put where it belongs... on the politicians.
"Also, thanks for publishing the lengthy analytical comments by Subscriber Kelly F. [in Thursday's mail]. They are refreshing, spot-on, and very welcome. For example, '[Interest rates] may be about where they belong in the long term... where savers can actually be compensated for saving without having to become stock market investors.' And Kelly further discussed some of the cogent points about what has been terribly wrong with both monetary and fiscal policies for two decades or longer now. We could also discuss the psychological impact of near-zero and zero interest rates on one to two generations of Americans as they have been conditioned to think saving is ignorant and the proper way to conduct one's life is to borrow and spend." – Subscriber Michael U.
"Kelly F. is right on! Just think, maybe parents will even start encouraging their young children to open a savings account to earn some interest. When I was six years old, my parents made a big deal out of buying a $20 war bond for me. When I was 16 and cashed it out, saving money and earning interest actually made sense to me." – Stansberry Alliance member H.B.
All the best,
Corey McLaughlin
Baltimore, Maryland
May 6, 2024