It was an unseasonably cold and drizzly Saturday in Omaha. But that didn't dampen the spirits of the tens of thousands of underdressed out-of-towners who shivered through the early-morning security lines for the novelty of being part of Berkshire Hathaway's annual shareholder meeting.
Indeed, the mood was festive at the CenturyLink Center, the site of the annual love-fest that's come to be known as "Woodstock for Capitalists." Shareholders gleefully snapped up rubber ducks crafted in the likeness of CEO Warren Buffett and Charlie Munger, the conglomerate's vice-chairman. Fruit of the Loom boxer shorts featuring the visages of the two octogenarians sold out faster than you can say "proxy statement." A scrum of fans mobbed the Oracle of Omaha and Microsoft co-founder Bill Gates (a Berkshire director) as the pair competed in a newspaper-tossing contest.
But it wasn't all silliness. There was plenty of substance, too. Buffett and Munger answered questions for five hours on topics such as Berkshire business lines and what the company will look like once Buffett isn't around. Here are a few highlights:
1. Buy what you know.
Buffett has proffered this advice many times before. But it was illuminating to hear how he put this tenet into action. For example, he hinted he wouldn't consider an investment in the auto sector. "We don't know which auto company will be knocking the ball out of the park in five or ten years, or which will be hanging on by its fingernails," he said. However, "we're virtually 100% confident" about the long-term prospects of the Burlington Northern railroad and insurer Geico, both Berkshire properties.
2. Ignore economic forecasts.
No one really knows what path the economy will take, Buffett said, so it doesn't make sense to base investment decisions on forecasts. "Charlie and I don't pay attention to macro forecasts. We've worked together now for 54 years, and I can't think of a time when we made a decision on a stock or on a company" that was influenced by a particular viewpoint on the broader economy. If investors try to time their purchases according to economic forecasts and trade when those forecasts change, they'll make a lot of money for their brokers, but not much for themselves, said Buffett.
3. Invest in businesses, not stocks.
It is crucial, Buffett and Munger stressed, to consider any stock investment as if you were buying the entire company rather than a few shares. "We're buying businesses whether we're buying 100 shares or the whole company," Buffett said. Financial ratios are useful but will never tell the whole story. What's more important is to have a deep understanding of how a company operates and the dynamics of its industry. "I don't know how I would manage money if I was just trying to do it by the numbers," Buffett said. Neither he nor Munger uses computer screens to sift out attractive stocks. "It's not like we sit there and say, 'We want to look at things that have low P/Es,' " said Buffett.
4. Consider an index fund.
Few investors, Buffett said, have the time and the temperament to study companies and industries thoroughly enough to become expert stock pickers. Most would be better off buying low-cost index funds. Such funds let you "buy into American business in a diversified way, over a long period of time." Moreover, Buffett said, you shouldn't always be impressed with the records of top-performing fund managers. They're more often the result of luck than of skill, he said.
5. Shun trendy themes.
In response to a question on whether he's interested in emerging-markets stocks, Buffett said he doesn't start his search by looking at particular regions. "It isn't like Charlie and I talk in the morning and we say, 'It's a particularly good idea to invest in Brazil or China.' " Rather, he reiterated that they focus on finding good businesses first. "When we hear somebody talking concepts of any sort, including country-by-country concepts, we tend to think they're going to do better at selling than investing."
Similarly, he said that most exotic investment products, such as hedge funds and private-equity investments, aren't worth the high fees they charge. "Anything Wall Street can sell, it will sell," said Buffett.
6. Buy Berkshire.
Over the course of the meeting, Buffett made a convincing case that he has thought through the issue of his eventual departure with as much or more care than any investing problem he's ever tackled, and that he truly believes Berkshire will stay Berkshire after he's gone. Or, as Munger more pithily put it, "Don't be so stupid as to sell these shares." Berkshire's Class B shares (symbol BRK-B) closed at $111 on May 8, up 34% since we recommended them in Fire Sale on Buffett.