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Buffetty Highlights From the Annual Meeting

Chris Hill, The Motley Fool

This past weekend brought the event that a handful of finance dorks were eagerly awaiting in Omaha, Nebraska. On today's episode of Market Foolery, host Chris Hill talks with Motley Fool analyst Jason Moser about the highlights of Berkshire Hathaway's (NYSE: BRK-A) (NYSE: BRK-B) annual meeting. Buffett can't be thrilled about his investment in the continually troubled Kraft Heinz (NASDAQ: KHC), but he doesn't seem too concerned by it. Nor does he seem worried about some potential insurance competition from Tesla (NASDAQ: TSLA), which is probably the right way to bet on that proclamation. Also, the hosts talk about an oopsie on Game of Thrones that was serendipitous for Starbucks (NASDAQ: SBUX), as well as some downsides and risks to the oft-praised index fund investing plan.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

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This video was recorded on May 6, 2019.

Chris Hill: It's Monday, May 6. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio today, Jason Moser in the house. Thanks for being here!

Jason Moser: Hello!

Hill: We're going to dip into the Fool mailbag. Let's start with the Berkshire Hathaway meeting, which always gives us a couple of headlines. Have you ever been? I've never been. 

Moser: I have. I think it was just once I went. Of course, when you go with us, you have the press badge and you sit up on the top, and you get spoiled with the lunch and everything's easy. Like, there's no way I'm topping that experience, ever, so there's no way I'm going all the way out to Omaha just to wait in line to hear some guy say something I heard him say five years ago. You know what else? You can follow it on Twitter now. It's so robust. It's like you're there. I was thinking, it's just like, I don't watch a lot of baseball anymore. I love the Red Sox, but man, I tell you -- follow the Red Sox on Twitter. That's a great baseball Twitter presence right there. You can do so much. 

Hill: Also, I think Yahoo! Finance has done the live stream for people who are looking to watch the video. I've talked to other analysts around here, like, "Are you going out to Omaha?" "No, I'm just getting up and watching it in my pajamas."

Moser: Really, a lot of clips are still floating out there. You can go over and over and over again. 

Hill: Let's get to a couple of the headlines. First up is Kraft Heinz. It's impossible to read Warren Buffett's mind, but I'm wondering to what extent, if any, he's regretting the participation in Kraft Heinz. Kraft Heinz came out and said that they're going to restate their earnings for 2016 and for 2017 due to misconduct on the part of some employees. They say it's not going to be material. And I'm just going to go ahead and grant them the benefit of the doubt and say, OK, it's not material. If you look at the stock, it's not falling through the floor. So clearly, smarter, more invested people -- literally more invested people than me -- are taking them at their word. 

Moser: Well, it's not falling through the floor any more. I mean, it's been an awful year to date.

Hill: It's basically been cut in half.

Moser: It's been a horrible 12 months, and it's really been a horrible existence ever since the merger in 2015. At some point or another, the floor has to set itself. I start thinking about this with Buffett. There was this one point, I don't know, years ago, where my wife basically called me out on something. As married couples do, you talk with each other, and sometimes the words are just going in one ear and out the other. So whenever that would happen with me, I would say something like, "Oh, how about that?" 

And eventually, my wife figured out that "how about that?" meant, "I'm not listening," so she called me on it. So now I can't do that anymore. With Buffett, it's starting to feel like whenever he's like, "Oh, we're just going to give them the benefit of the doubt," it's kind of like the words are going in one ear and out the other, because he does the same thing with Wells Fargo, essentially, he's doing it with Kraft Heinz, he kind of tends to do that. And that's fine. He's got billions. It doesn't really matter at the end of the day. But I do wonder how much this grinds his gears. It has been, obviously, an awful existence since the merger. It is a very Buffett-style investment. I understand his perspective, when he was asked about the long-term value of this company in regard to the brands. That's what he fell back on, was the brands. I don't know that I necessarily believe that going forward, though. I think those brands are in a bit of a bind. 

Red flags, yes, in having to restate things. Perhaps it's nice to see they're actually getting out in front of this and resolving it all. But I don't know that I'm looking at this as an investment. I don't want to have anything to do with it anyway. 

Hill: Let's move away from Kraft Heinz for a second. When you see a company that you own shares of come out and say, "Hey, we blew the math. We have to go back and restate." Is it on a case by case basis? I was looking at this and thinking through my own holdings, and thinking to myself, you know what? Depending on which company I own, if they came out and said, "Oh, we're going to restate two years' worth of earnings," depending on which stock it is, I'm either rolling with it and saying, "OK, you blew it, but it was lower-level employees, and you're on top of it, great;" whereas other stocks I own, I would think, "Boy, I don't know. This is one more check against you."

Moser: I think it is a case by case basis. But I will say, we talk about these companies a lot on the show, it feels like -- for a while, it was Bank of America, then it was Wells Fargo. There are companies that get out there and are really in the spotlight and they can't get out of their own way. Facebook is another one. It seems like every week, we could just have that one segment of the show where it's like, "This week in Facebook Screwing Up Again... " 

Hill: [laughs] This Week in Privacy...

Moser: Right. Eventually, you get a little bit tired of it. So then you have to ask yourself, is this really a company worth owning? Again, it's a case-by-case thing. When I look at something like a Kraft Heinz, I mean, I just don't see any kind of a competitive advantage there with the business to begin with, so this certainly would not be one I would gloss over, it'd be one more reason to probably not want to own it. 

Hill: For this next story that comes out of the annual meeting, it's worth remembering that last month, Elon Musk said on Tesla's earnings call that Tesla was going to be launching its own insurance product in the month of May. Not surprisingly, Warren Buffett was asked about that at the annual meeting, and said point blank, "It's not an easy business." There are people online today saying, "Boy, he really called Musk out." I don't know that I want to ascribe that to Buffett, but the most generous interpretation of what Buffett said regarding Tesla getting into the insurance business is, "Good luck!" But he did go out of his way to say, "I'm not worried about them," because Berkshire Hathaway owns Geico; he said, "I'm not worried about them; I'm worried about Progressive."

Moser: I mean, listen, given Elon Musk's track record of behavior, is this really someone you want to be getting your peace of mind from? Seriously? Do you want to buy insurance from that guy? I don't think so. I mean, I'm a big fan of Elon Musk. Listen, let's be very clear, I support what he's doing. I love his big picture thinking. I'm rooting for the guy. There are points in time where I feel like, that's kind of silly. Candy? I think that was probably pretty silly. And apparently, that candy's still coming out. Listen, insurance is hard. That's why we like great, reputable insurers. It requires a lot of capital, there are a lot of regulations, and it's not easy. 

It was interesting, I thought, when he was asked about this potential insurance product. He noted that they would be writing these policies based on data. I mean, well, duh? All good insurance companies write their policies based on data! There's an entire industry, actuaries, that get out there and figures risks out based on data. 

I think that when you look at what Musk is trying to do with Tesla, with SpaceX, Solar City somewhere in there as well --

Hill: Batteries.

Moser: Yeah. Is insurance really worth squeezing? I don't think it is. I love the back and forth. You've got yesterday vs. tomorrow in Buffett and Musk, two guys I really appreciate and honestly love as an investor. But there's no question that insurance is a very difficult business to run. I have to believe that if they were going to be writing an insurance product, it would be with another partner that actually does insurance. And then, I would imagine it would be basically just for people who have a Tesla. If you don't have a Tesla, I don't know why you would get insurance from them. But I mean, hey, he says a lot of stuff. 

Hill: What about a dating app? 

Moser: [laughs] Why not?

Hill: I feel like owning a Tesla, that's a bar to clear socially. Start matching people up, Tesla owners? I don't know, I'm trying to be helpful!

Moser: Sure! Instead of swiping left and swiping right, Musk, I'm sure, would add a dimension. Instead of that, it'd be like, swipe diagonally. Swipe 4D. Something of that nature. He's always throwing a bit of a forward-looking twist on things. 

Hill: Starbucks got a surprising promotional boost this morning, Twitter was all abuzz about Sunday night's Game of Thrones episode. That is to be expected because it's the final season of Game of Thrones. What was not expected is the fact that apparently, a cup of Starbucks coffee made its way into the episode of Game of Thrones.

People were posting video of this and screen caps of this. I have to believe there's a production assistant who is in the process of getting fired today for leaving a cup of Starbucks coffee on there. Unless -- I don't watch Game of Thrones, maybe there was a storyline about the first Starbucks opening up in Westeros. I don't know. But that's amazing because you hear the phrase all the time, "You can't buy that kind of publicity." I would say the majority of times someone says, "You can't buy that kind of publicity," if you step back and look at a given situation, no, you really can. This is a situation where really, Starbucks couldn't have bought this. 

Moser: Yeah, I feel like sometimes there are situations where things like this are not accidents. They're planned out, but they are made to look like accidents. 

Hill: You think this was planned? 

Moser: Well, no! That's what I'm saying. I don't think it actually was. I think in some cases, these types of things are. It does feel like this was genuinely just, someone missed this. Now, I don't watch Game of Thrones, which is fascinating because I have HBO and I love it. And for whatever reason, I just never got into Game of Thrones. But it strikes me that of the rabid fan bases out there, Starbucks and Game of Thrones are two very rabid fan bases. To tie these two together, there is some serendipity here that I think is going to work out for both entities. I don't think there is a downside for either. Now, maybe there is a production assistant out there who's out of a job today. I don't know. We won't even go there. But I don't think there's really any downside to something like this happening. 

Hill: Not for Starbucks! I mean, product placement has been around for decades, and if someone had the idea to go to the producers of Game of Thrones like, "Here's $10 million -- we just want a Starbucks. " Of course the producer would be like, "No! That doesn't make any sense!'

Moser: But, now all of a sudden, we're thinking, "OK, is there some type of time warp here in Game of Thrones that didn't exist that possibly now does? Is this how they continue to tell that Game of Thrones story after the end of this season?" Who knows? I mean, we as the viewer -- or potential viewer, and I tell you, like I said, I don't watch it, but now I'm feeling like I may want to start, because who knows what could develop from this? But I have to believe they're going to milk it for all it's worth. 

Hill: By the way, belated happy birthday to our man Ron Gross!

Moser: Oh, wow!

Hill: Celebrating a little birthday this weekend.

Moser: Was it a round number?

Hill: I don't believe it was a round number.

Moser: So it wasn't a special --

Hill: No. I don't think he turns 70 for a couple of years. Our email address is marketfoolery@fool.com. Question from Brock Briggs, who's 26 years old and just started investing a year ago. Brock writes, "I'd like to hear about the dangers and potential long-term downsides of index funds. Every book on finance I read, including several from my idolized investors, rave about index funds. Yes, they are good in the long run and provide an easy way to grow your money without spending time watching news and reading 10Ks. But it seems like they have some gaping flaws that people don't talk about. So much of the money in the market has to be dumped into these indexes that when top-level managers of the funds make moves to buy and sell, they have to do so much buying and selling that it may create unnatural spikes or dips in prices. Also, with big fund companies like Vanguard and BlackRock owning so many shares of all these companies in the indices, what happens if a company like Vanguard gains enough voting rights to make an impact on the company they own via their voting rights? Thank you for all that you do."

Thank you, Brock, for a very thoughtful question. What do you think? 

Moser: Yeah, there are a lot of different angles here. First off, let's just make sure we understand what an index fund is. An index fund essentially is like a mutual fund. It's a portfolio constructed to match or track the components of a particular financial market index. The one that we always talk about is the S&P 500, that's Standard & Poor's 500 Index. But as you can imagine, there are many, many different indices out there. There are lots of them. I think that his point is true, that not all indices -- are we saying indices or indexes? I'm not sure. I waffle there. I want to be consistent. I'm just going to go with the indices. If I'm being pretentious, you'll tell me after we finish taping.

Hill: Don't I always? 

Moser: Well, yeah, you do. That's what I love about you, your honesty. So, as you can imagine, just like stocks, not all indices are created equal. Some indices are pretty easy, pretty reliable, something like the S&P. But if you look at something like the Russell 2000, which is made up of small caps, that could be construed as being riskier because it's made up of small-cap companies. Perhaps an emerging markets index would be something that would be riskier, as well. So understanding the index in which you're invested is important. 

But ultimately, the fund changes when the index changes, and the index change is typically a weighting thing. When we talk about weighting, it's the amount that each company counts in the index. There are a few different ways that these can be done. If you look at the S&P, the S&P 500 index is a market capitalization weighted index, versus the Dow, which is a stock price weighted index. You remember when Apple made it to the Dow, and then they had that split --

Hill: A 7-for-1 split.

Moser: Yeah, because they had to get that share price down to something that was a bit more in line with the rest of the companies in the index. But the point is, ultimately, that the main reason you see an index change is just due to the weightings, which would be a day-by-day thing based on stock price or market capitalization. And then these institutions will adjust their weightings as that happens. 

Now, in regard to institutions that might gain enough shares to actually have a material voting impact, technically, I guess that's true. Institutions have a lot of money to throw around. But that's also kind of the thing. They have a lot of money to throw around, and it needs to be thrown around to a lot of different companies. A couple of examples, if you look at Wells Fargo, which is one of the biggest banks out there, Vanguard owns about 7.3% of the shares outstanding in Wells Fargo. If you look at Boston Beer, which is considerably smaller, just a $3 billion beer company, Vanguard owns about 8.1% of those shares outstanding. So typically, they're not going to ever have enough money to plow into one of these businesses to gain any kind of a material voting impact anyway. And in a lot of cases, companies are designed so that large shareholders can't get in there and do that in the first place. So typically, that's not really a concern. 

But I think he brings a lot of very good points in that, when we talk about index funds, they're not all created equal. Make sure that you understand what you're really trying to get out of that index before you start plowing money into them blindly. 

Hill: One more email before we wrap up. From john Martin, with the subject line, "Thanks From a Dad." John writes, "Dear Fools, my car automatically connects to the most recent podcast. As a result, Market Foolery usually comes on when my kids get in the car." Those poor kids.

Moser: Yeah, but they're going to be smart when they get older. 

Hill: "It's great that your program is clean and my 11 year old can listen. He's been listening for a few years, but recently started having interest in investing. We talk about investing, about the companies you discuss, and he even started tracking some stocks. Thank you for the programming choice to keep it clean, and for giving us another conversation connection. PS, my teenage daughters think it's stupid."

"That's either an insult or compliment, but I'm guessing they'll have no problem accepting their inheritance that your program influences. Sincerely, John." John, thank you so much! That's a fabulous email!

Moser: That's a great story!

Hill: To Landon, his son, Landon, thank you for listening! Way to go! You've started your investing journey much younger than I did. You're on your way!

And to Landon's sisters, I guess I would just say, I get it. We're not everybody's cup of tea. That's OK! Thank you for putting up with this show for the benefit of your dad and your brother! The other thing I'd say is, there's a podcast out there for you, whatever you're interested in. Maybe you're interested in Game of Thrones, or sports, or entertainment, or history, or politics. Whatever it is, there's a podcast out there. Go find it. Find your own podcast that you want to listen to. And last but not least, whenever you're ready, ladies, we're going to be here. At some point, you're going to start thinking about investing. Maybe when you're in college, maybe when you get your first job. Whenever that time happens, The Motley Fool will be here, and we will help you however we can. 

Moser: Amen!

Hill: Jason Moser, thanks for being here!

Moser: Thank you!

Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery! The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Chris Hill owns shares of Starbucks. Jason Moser owns shares of Apple, Starbucks, and Twitter. The Motley Fool owns shares of and recommends Apple, Berkshire Hathaway (B shares), Boston Beer, Facebook, Starbucks, Tesla, and Twitter. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.