It’s time of the year again for Berkshire Hathaway annual meeting 2021. There’s always great wisdom that we can learn from the legendary investors Warren Buffett and Charlie Munger.
I mean, people say that you can learn from what someone else was learning for 10 year by reading a book. So, I think it works the same way when it comes to the advice that we hear directly from Buffett and Munger.
We can learn so much from their decades of investing knowledge and experience. And a lot of times, we will not be able to replicate such experiences. It is living through the decades of market ups and downs that solidify one’s learning.
The recent pandemic-induced market recession is just one of the many episodes of learning.
So, here are the top 10 pieces of wisdom that I have picked up from the 2021 annual meeting, which I think can benefit you in the long run as well.
1. Substantial Inflation On The Ground: Berkshire Hathaway Annual Meeting 2021
Source: Investopedia / Inflation
Buffett said that the group is experiencing pressures of rising prices during the Covid-19 recovery, supporting the market-wide concerns of the inflationary pressures that the economy is facing.
Berkshire owns businesses in the housing sector. Cost of raw materials like steel are rising incredibly fast on the ground. As a result they are raising prices for their products and services as well, in tandem with the rising cost of doing business.
Well, inflation is something beyond our control. Be aware of it. Always invest with a margin of safety. So long as you are not overpaying for your investments, you should be ok in the long run.
2. SPACs Economics
Source: invstr / The SPAC Boom
On the question of the increasingly popular Special Purpose Acquisition Companies (SPACs), or so called blank-check companies, Buffett calls them a gambling-type market.
As these SPACs need to spend the money they raised from the public within 2 years, the pressure to spend is real. As Buffett puts it, “If you have to buy a business in two years, you put a gun to my head and said you’ve got to buy a business in two years, I’d buy one but it wouldn’t be much of one.”
What Buffett is trying to say is that, this kind of framework and restricted timeline is unlikely to produce great deals with exceptional investment returns.
In fact, these SPACs are looking for deals using someone else’s money. They get a fee and the upside with minimal to no downside. Then definitely they are going to buy something.
As such, Buffett commented that, “It’s an exaggerated version of what we’ve seen in kind of a gambling-type market.”
This is indeed something that investors thinking of meddling with SPACs need to be aware of. The objective between you, the shareholder, and the SPACs may not be aligned. Make sure you can accept the risk if you want to join in the game.
3. Modern Trading Apps And The Gambling Mentality: Berkshire Hathaway Annual Meeting 2021
Source: Best Social Trading / What can FX traders learn from gamblers
Both legendary investors are skeptical of modern trading apps such as Robinhood. They don’t think these platforms will do any good. Because they contributed to the “casino aspect” of the stock market recently.
Millennials are now accounting for 14% of calls and put options with expiration dates of 7 days. The platform has been turned into a casino.
Well, there’s nothing illegal or immoral about these trading apps. But, according to Buffett, by allowing people to trade 50 times a day without charging a commission, they are effectively exploiting individuals’ inclinations to gamble. It is not helping to build a great society.
I guess that’s human nature. But for those of you who are reading this right now, hopefully it can bring to your awareness of how the market behavior is being manipulated by these new trading apps. So just beware of the risk and volatility when investing in the stock market.
4. Don’t Worry About Your Losing Stocks
Source: investinwallstreets.com / Pinterest
We are bound to have poor performing stocks in our portfolio. That’s part of making great investment.
According to Buffett, disappointing businesses “usually becomes a smaller and smaller percentage of our business, just by the nature of things.”
On the other hand, great performing businesses “become a proportionately much more important part of our mix.” As Buffett gave an example of how a successful business like GEICO is doing 15 times the size of the business, compared to the time when Berkshire bought control in 1990.
The idea here is that don’t drag on your poor-performing stocks. Focus on your winning investments. They are more important as they will take up an increasingly larger proportion of your portfolio.
5. Bitcoin, Cryptocurrency On Our Civilization: Berkshire Hathaway Annual Meeting 2021
Source: Hedgeye / Crypto Roulette
Well, Buffett refused to comment on Bitcoin or crypto in general. He said that there’s probably hundreds of thousands of people watching this annual meeting who own bitcoin. On the other hand there’s probably two people that are short. So making 400,000 people mad and just the 2 person happy is just a dumb equation.
In short, Buffett is still skeptical of cryptocurrency.
As for Munger, he fired the crypto market with all his sharp words once again. He doesn’t welcome a currency that’s so useful for kidnappers and extortionists etc. In fact, he called bitcoin a financial product invented out of thin air. In his own words, he concluded that the whole development was “disgusting and contrary to the interest of civilization.”
Well, like Buffett, I won’t comment on this. But what I can say is, find a proven system of investing. Try not to be tempted by the latest financial products or tools that can distract you from your investment goals.
6. Extraordinary Things Can Happen – Capitalism Creates Wonder
Source: Morning Mail / Golden Goose Capitalism
Just like before, Buffett emphasized once and again how capitalism is working incredibly well for the United States.
Just 232 years ago, the U.S had only one-half of 1% of the world’s population. Ireland had more people than the U.S. And Russia had 5 times as many people.
Source: Berkshire Hathaway / Twenty Largest Companies By Market Cap – 1989
Fast forward a little bit, in 1989, only 6 of the 20 largest companies by market cap were made up of U.S corporations. The top spots were taken by Japanese companies.
Now, fast forward to the present day. 5 out of the 6 largest companies in the world comprised of U.S companies. They are Apple, Microsoft, Amazon, Alphabet and Facebook. Saudi Aramco is the only non-U.S mega-cap company in the top 6.
Invest in Capitalism, Invest in the United States
According to Buffett, this is not by accident. And he attributed the success of the United States to the capitalistic system that’s adopted for the past centuries.
Outside of the U.S, Munger commented that the Chinese government will support businesses and allow them to flourish. They learned from Singapore.
This is a proven system on how to achieve economic progress and prosperity in a country.
Well, most of us are not going to be the ones ideating and implementing national policies. But I think the key message for us is that the world can change very drastically. You need to find the right systems to ensure that you are on the right path towards success.
As for investors, there’s two key messages to take away from this. First, follow the right investing philosophies, and invest in companies, sectors or countries with the right framework. Second, do not be complacent that things will remain the same tomorrow. Keep up with the pace of change and adjust your investment portfolio accordingly. In fact, this leads us to the next point.
7. S&P 500 Index Fund Will Be A Better Bet For Most People: Berkshire Hathaway Annual Meeting 2021
Source: Hedgeye / All-Time High
According to Buffett, most investors would benefit from simply investing in the S&P 500 index fund over the long run instead of picking individual stocks, including Berkshire.
As for Munger, he said that he prefers to hold Berkshire than holding the market. Because he thinks that their portfolio of businesses are better than the average in the market.
Well this has always been the view of Buffett. In fact, to put the money where his mouth is, Buffett has arranged that 90% of his wealth, after he passes on, will go into an S&P 500 index fund.
So, track yourself over the long term. If it’s working, good for you. Keep working on it. Or else, you may want to consider parking some money in the S&P 500 index fund or something.
8. Bernie Sanders Won By Accident, But He Won
Source: Hedgeye / The Folly of Negative Nominal Interest Rates
According to Munger, low interest rates have catalyzed a surge in valuations across equities. This has offered those who invest in the market an opportunity to create tremendous wealth.
Munger said that, “one consequence of this present situation is, Bernie Sanders has basically won. Because with everything boomed out so high and interest rates so low, what’s going to happen is, the millennial generation is going to have a hell of a time getting rich compared to our generation … He did it by accident, but he won.”
What he meant was that, with the hot markets produced by the monetary and fiscal policies, it will make it harder for millenials to earn the riches of the past generations, effectively shrinking the income gap with those coming up behind them.
Well, let’s buck up, and keep improving ourselves then!
9. Chevron and Fossil Fuel Companies Are Not Perfect But It’s The Same For Other Businesses
Source: Chappatte / Fossil Fuel
Pertaining to Berkshire’s stake in Chevron, Buffett defended it even though it is a fossil fuel company.
In response to the pace of change to clean energy solutions, Buffett said, “People who are on the extremes of both sides are a little nuts. I would hate to have all hydrocarbons banned in three years. It wouldn’t work. On the other hand, what’s happening will be adapted over time just as we’ve adapted to all kinds of things.”
Just like how investing in Walmart, which sells cigarettes, is controversial. In terms of deciding which companies benefit societies more than others, Buffett says he has no problem owning these businesses.
Because “there’s something about every business that you knew that you wouldn’t like. If you expect perfection in your spouse or in your friends or in companies, you’re not going to find it.”
Then again, while Buffett defended Chevron that it is not an evil company, he expressed concerns that he will not feel comfortable owning the entire business.
Well, the takeaway I have here is that we should recognize the negative impact that oil and gas companies have on the environment. But that shouldn’t deter us from looking for opportunities and hunting for undervalued companies in the sector, so long as their intention is not evil to begin with. And so long as the data and stats inform our investment decisions.
But at the same time, do recognize the shift taking place. And that we will need to adapt to cleaner energy solutions eventually. So, your positioning and portfolio mix should adjust accordingly. That’s if you want to invest in the energy sector for the long haul.
10. Mistake of Selling A Great Business – Apple: Berkshire Hathaway Annual Meeting 2021
Source: Madison / Apple becomes first trillion dollar company
Buffett admitted that his selling of some of Apple shares last year was “probably a mistake.”
Just to put it in perspective, Berkshire still owned about 900 million of Apple shares at the end of December 2020, with a total market value of US$120.4 billion. This whopping stake was accumulated since 2016 at just about US$31 billion.
After selling some stakes in the company, Berkshire still owns about 5.3% of Apple.
Adding on, they praised Apple’s CEO, Tim Cook, as one of the best managers in the world, and that they have the brand and product that people love.
Similarly, Munger readily agreed that it was a mistake to trim their stakes as well.
What more can I say? Even Buffett and Munger can still make mistakes till today. Don’t be so hard on yourself when you make a mistake. But I guess the key message here is still to hold on to great businesses for the long term.
Source: Redbubble / Warren Buffett quote
Here we are, all the 10 key wisdoms to take away from Berkshire Hathaway annual meeting 2021.
There’s many messages consistent with many of the past annual meetings or letters to shareholders, such as mistakes are part of investing, or that most people should invest in the S&P 500 index fund etc.
But I think the most prominent message that stands out this year, relating to the recent market behavior, is on the subject of cryptocurrency, economics of SPACS as well as the gambling mentality brought about by modern trading apps.
Personally, I think a lot of these issues are affected by our cognitive bias tendency. News and reports are showing that people are becoming millionaires overnight. It is no wonder why we are all attracted to the latest SPACs, crypto or simply take advantage of the zero-commission trading platforms.
So, what I took away from this annual meeting is that we need to be humble when it comes to investing and recognize these biases. Sure, there’s people who 2x their returns in a single year or even over a couple of years, bragging about how much better they are than the market or even the legends.
But a lot of the time these can just be lucky breaks. The horizon of comparison is too short to make meaningful comparison.
Beware of Our Cognitive Biases
Source: verywellmind / What Is Cognitive Bias?
This is just like how a well established and branded tuition company is, with multiple branches across a country, dominating the market share of students seeking additional academic assistance.
Given that a large number of students go to this particular tuition company, there is a higher chance of more pupils scoring that 10As or so. The poster that you saw that a particular student scored 10As last year is not meaningful to ascertain whether their teaching methods or tutors are superior to other tuition centres.
I’m not trying to put down the work of any tuition centres per se. What I’m trying to say here is that our cognitive bias, like in the case of signing up kids to the tuition centre with a poster of a past student scoring 10As, can result in us making poor decisions when it comes to investing as well.
We need more comprehensive and fairer comparisons, to help us make better decisions.
Finding The Right Focus
Do not let the fact that a particular company you have invested in went up 100%, and be over the moon. It could just be a lucky break. Investing and compounding our wealth is a marathon.
Similarly, next time before you get all excited when you read on the news that someone 2x their returns overnight with some new shiny financial products, hold your thoughts for a while. Assess and think clearly if they are valuable investment tools for the long term.
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Keep learning and happy investing. 🙂