It All Starts Now...

Highlights from Berkshire Hathaway's annual shareholder meeting… Buffett 'doubles down' on Apple… Still bearish on gold and 'cryptos'... Do we have any eight-year-old subscribers?... Munger is super-bullish on China… Steve Sjuggerud: It all starts now…

This weekend was the annual Berkshire Hathaway annual shareholder meeting in Omaha, Nebraska...

Regular Digest readers know we've been critical of Warren Buffett and Berkshire of late. In short, we believe he and his firm have lost their way. As Porter explained in his must-read March 2 Digest...

Warren Buffett is the ultimate American business icon... His firm, Berkshire Hathaway (BRK), has made a tremendous amount of money for an incredibly long time. America loves a winner. And even more than that, Buffett has turned his plain-spoken, "folksy" public persona into a bulletproof public brand... a brand that nothing can stain. As good as Buffett is at investing, he's even better at PR.

And that's why no one has noticed... Berkshire Hathaway is being badly mismanaged.

The strategies, structure, and brilliance that created capitalism's most perfect business have been abandoned, forgotten, or lost... The heart of Berkshire still beats – it owns a collection of the world's best insurance companies. But this incredible asset is being overwhelmed by a series of disastrous investments, the damage from something which is being hidden from shareholders.

These results and Buffett's efforts to cover them up should lead shareholders to ask for him to step down as CEO...

So you likely won't be surprised to hear we believe Berkshire's annual meeting has become less valuable as well.

What was once dubbed "Woodstock for Capitalists," has largely become a Buffett-worshipping media circus...

Still, there was some news worth noting.

First, ahead of the meeting, Buffett disclosed Berkshire had "doubled down" on consumer-electronics giant Apple (AAPL) in a big way. As financial news network CNBC reported on Thursday night...

In the first quarter, Buffett's Berkshire Hathaway bought an astounding 75 million shares of Apple. That adds to the 165.3 million shares Berkshire already owned at the end of 2017...

As of Thursday's closing price of $176.89 per share, Berkshire's Apple stake was worth about $42.5 billion. Berkshire is now the third-largest Apple shareholder, behind Vanguard and BlackRock.

Apple shares surged more than 5% following the news and closed at a fresh all-time high of $183.83 per share on Friday. That put the company just $20 per share shy of becoming the first with a market capitalization of $1 trillion.

Buffett also told CNBC that his firm had finally sold the last of its shares in IBM (IBM) – officially ending its seven-year losing bet on the struggling tech giant – and denied rumors that he was considering buying "all or part" of General Electric (GE).

(Of course, the latter should come as no surprise to Stansberry Investor Hour listeners... Porter explained why there was "no way, 0% chance" Buffett would ever buy GE in Episode 45 of the show last month.)

Saturday's question and answer session with Buffett and Berkshire vice chairman Charlie Munger also provided a few notable comments...

For example, both believe the risk of a real trade war with China remains unlikely today. Said Buffett...

We will have disagreements with each other. We'll have disagreements with other countries on trade. But it's just too big, and too obvious that the benefits are huge and the world's dependent on, in a major way, for its progress...

These two intelligent countries won't do something extremely foolish. Sure, they do some mildly foolish things, and there's some give and take. In 1970, imports and exports were 5% of GDP, and now exports are 11+% and imports 14+% of GDP. I don't want the gap to be too wide, but it's not the worst thing to have someone send you goods you want and hand them a piece of paper. The world gets more claim checks on us, and the balancing item is the investments rest of world can make.

Both countries have done remarkably well with trade, and the only problem is when one side wants to win a little too much. But we won't sacrifice world prosperity based on differences that arise in trade.

Later, Buffett didn't pass up the chance to take a swipe at Tesla founder Elon Musk...

During last week's "unusual" earnings call, Musk dismissed the value of "moats" – Buffett's favorite analogy for a business's competitive advantage. "First of all, I think moats are lame," Musk said on the call. "They're like nice in a sort of quaint, vestigial way. But if your only defense against invading armies is a moat, you will not last long. What matters is the pace of innovation. That is the fundamental determinant of competitiveness."

Buffett, as you might expect, disagrees. As he said on Saturday...

The pace of innovation accelerated in recent years. There are more moats susceptible to innovation than earlier, but folks always attempt to do it.

Certainly, you should be working at improving your own moat, defending your own moat, all of the time. And Elon may turn things upside down in some areas. I don't think he'd want to take us on in candy.

There are some pretty good moats around. Being the low-cost producer is a terribly important moat. Technology doesn't always translate to the lowest cost. The technology at Geico has not brought down the cost, but its position among big companies is as a low-cost producer, and that's not bad when selling essential items.

The best question of the day came from an eight-year-old...

In fact, we can't help but wonder if she might be the youngest paid-up Stansberry Research subscriber. As the Wall Street Journal reported...

Daphne first notes that Berkshire's best investments historically have been in very capital-efficient businesses like Coke, See's Candies, and Geico. But recently, the firm has invested in companies with huge capital needs and low rates of return, such as Burlington Northern.

She asks: Could you please explain why Berkshire's largest recent investments have departed from that old capital-efficient philosophy?

Mr. Buffett's response: "You're killing me Daphne." He adds: "I'm glad she's not 9." And the crowd gives both a loud round of applause.

There simply isn't a scenario on Earth that will get a bigger applause at Woodstock for Capitalists than an eight-year old asking a capital-efficiency question.

Unfortunately, like us, Daphne was likely disappointed by Buffett's response. His reply...

We like efficient businesses that earn a terrific return on capital. [But] we can't get more money deployed in capital-light businesses at prices that make sense to us.

Wouldn't it be wonderful to run railroads without trains and tracks and bridges and tunnels and a few things? We still love a business that takes very little capital and earns high returns, but the second-best choice is still a good choice... We haven't forgone any opportunity to buy capital-intensive businesses.

Given Buffett's notoriously bearish view on gold, you likely won't be surprised he's no fan of cryptocurrencies...

Like gold, he says cryptocurrencies are "nonproductive assets" that will "come to bad endings"...

Gold at the time of Christ to now has a compound rate of a couple tenths of a percent. These assets won't deliver anything other than supposed scarcity, but so what, what does it produce itself? All this is counting on someone else later on trying to buy a nonproductive asset because they can sell it for a higher price.

Perhaps the most surprising comment of the day came from Munger...

Berkshire's vice chairman admitted he is incredibly bullish on China today, and has a "substantial" portion of his family's money invested there.

Munger said it's a "better hunting ground" for investment opportunities than the U.S., and said he believes American investors need to dig past the frightening headlines and learn more. He went even further in an interview with CNBC this morning...

"The best companies in China are cheaper than the best companies in the United States," Munger said on CNBC's Squawk Box. "I don't think it would be all that hard for any smart person to find four or five great companies in China to invest in."

Regular Digest readers know our colleague Steve Sjuggerud agrees...

But it's not just because of the huge opportunities for growth. And it's not just because Chinese stocks are relatively cheap (and hated) today. It's also because hundreds of billions of dollars are guaranteed to flow into these stocks over the next few years.

Of course, we're referring to index provider MSCI's decision to include Chinese stocks in its emerging markets index.

This decision was finalized last June...

And the first "tidal wave" of money is set to begin flowing into these stocks at the end of this month. Steve updated his subscribers on the situation late last month. From the April issue of True Wealth China Opportunities...

On May 31, 2018 – one month from now – the first local Chinese stocks will be added to MSCI's major indexes. That's never happened before. As we approach the inclusion date, you will hear a lot more about this in the news.

As I write, we're barely hearing anything about it. But I expect that will all change by May 31. You need to get your money there, first.

If you've still not taken Steve's advice to invest in Chinese 'A-shares,' he says it's still not too late...

But your time could be running out.

You see, later this week, MSCI is scheduled to announce its final list of Chinese stocks for inclusion. This is the exact list and allocation of stocks institutional investors will have to buy on May 31.

Steve believes this announcement could be the trigger for a big move higher in Chinese stocks... And his research has turned up the three stocks in particular that are likely to benefit the most.

Again, Steve says it's not too late to take advantage of this opportunity... and you can find all the details in the April issue of True Wealth China Opportunities. Click here to learn more about a subscription.

New 52-week highs (as of 5/4/18): Apple (AAPL), Automatic Data Processing (ADP), Eaton Vance Enhanced Equity Income Fund (EOI), NovaGold Resources (NG), and Okta (OKTA).

In today's mailbag: Praise for our Stansberry Portfolio Solutions product... and more on the Tesla "debate." What's on your mind? Let us know at feedback@stansberryresearch.com.

"Porter: What more can I say but 'Thanks for all the learning!' I have advanced a lot in just 2 years since I first signed up for a 2-year subscription to Stansberry's Investment Advisory. Now, I am part of the Total Portfolio family and loving it!" – Paid-up subscriber Douglas H.

"I wonder if Doug H. actually put a substantial portion of his money into Tesla's stock or bonds? Just because one likes the product doesn't mean it is going to be a viable company." – Paid-up Stansberry Alliance member Steve J.

"Perhaps the gentleman that wrote in 'to sit in one before you condemn Tesla' is missing the point. It is not about the quality of the car, but the lack of potential for income from the business. Given the fact that one can only borrow money so long without income to support, it will eventually fail. Perhaps he should review the DeLorean... " – Paid-up subscriber Stephen S.

Regards,

Justin Brill
Baltimore, Maryland
May 7, 2018