It is nineteen years since I attended my first Berkshire Hathaway annual meeting and heard Warren Buffett pronounce his views on the investment markets. It is a measure of how long ago that is that the attendance that day was around 250 people and failed to fill the local Omaha theatre. This weekend the same event, it is reported, was attended by 40,000 shareholders and filled the local convention centre to overflowing.
The best thing about the whole occasion, then as now, is the opportunity that it provides to gain an insight into Buffett’s thinking on a wide range of subjects. The Q and A session he hosts with his business partner Charlie Munger under guise of holding an annual meeting typically lasts for 6-7 hours. The following day he repeats the exercise, holding a press conference that tends to carry on for several hours until there are no questions left.
While no subjects are formally off limits, it is an accepted convention that Buffett mostly refuses to talk about his current investment ideas, but ranges widely in more general terms across the field of politics, business and investment. What you hear is rarely earth-shattering (though it is often funny). The value comes from sharing in the judgment of someone whose ability to think and express himself clearly is, in my experience, virtually unrivalled in business life.
Judging by the accounts that are now appearing, this year’s occasion was once again short on surprises, but long on the kind of common sense and wisdom that will help to keep the sensible long term investor out of trouble. On asset allocation, Buffett’s opinion, according to Alan Shram, a hedge fund manager who described the occasion in notes for the Huffington Post:
Risk of inflation has significantly increased because of the policies we are pursuing, and that does not bode well for either cash or fixed income. However, Buffett notes the dollar devalued by about 95 percent since he was born, and the country still did fine. He also notes the stimulating response to the financial crisis may have been necessary, but weaning the country off the medicine of massive debt may be harder than the ailment itself. They (Buffett and Munger) are generally bearish on all currencies, and believe equities are likely to give you a positive real return, and are superior to the unenticing alternatives (such as bonds and cash).
Buffett and Munger both also defended Goldman Sachs against the specific fraud suit recently launched by the SEC, pinning the blame for losses on the banks and specialist firm that agreed to take the other side of hedge fund manger John Paulson’s big subprime short in the controversial CDO that is at the heart of the SEC’s case. (Berkshire Hathaway of course has a wonderful sweetheart investment in Goldman Sachs that it acquired during the financial crisis, a preference share which pays them 10% interest a year and is convertible into shares at a price well below the current share price, even following the negative reaction to the SEC suit).
Buffett gave a detailed explanation of the nature of the much discussed ABACUS transaction, for which Goldman has been sued by the SEC. The customer was a large bank, ABN Amro, now part of RBS. They guaranteed the credit of ACA, which insured the bonds covered by said instrument, and consequently suffered a large loss. Berkshire itself often engages in similar transactions, and collects a fee for guaranteeing similar credit. Berkshire evaluates bonds and prices them, exactly as ACA did.
In this case, ABN Amro was paid $1.6 million to bear the risk on $900 million worth of bonds, which turned out to be worthless. Buffett believes many municipal bonds insurers expanded into new business such as structured credits when the margins on their traditional muni bonds business narrowed. But they were much less familiar with the new complicated securities, with unsurprising dreadful results.
Buffett has little sympathy for the bank making dumb credit decisions. ACA has no reason to complain and no one else to blame for a bad business decision they made. Buffett does not think Goldman Sachs is responsible for the losses that ensued. Responding to a shareholder question, Buffett sees no reason to replace Goldman Sachs CEO Lloyd Blankfein. He believes the Wells notices Goldman received were not material enough and therefore did not have to be disclosed.
This rather confirms my view that Goldman Sachs almost certainly have a good legal defence against a suit that looks to be highly politically motivated. But that is not really the point. The real issues are whether synthetic CDOs have any economic or social justification (answer: almost certainly not) and whether deposit-taking banks should be allowed to continue with the investment banking business model that Goldman Sachs exemplifies (answer: again, in my view, no).
I also liked Buffett’s throwaway line on Greece and the euro crisis. “It will be high drama,” he said. “I really don’t know how this movie ends, and I try not to go to movies like that”. One real lesson of the Greek crsisis is that by letting it drag on, politicians across Europe have shown that their sensitivity to domestic public opinion is greater than their understanding of the nature of the crisis. It has made the size of the bailout much greater than it might otherwise have been with more resolute earlier action, and it is a threat to the whole euro project. This article by Liam Halligan in the Sunday Telegraph is worth reading for context.