"Welcome to Omaha", reads the small sign in the airport which greets you when you land there. Walking through the cobbled streets of the Old Market district, it is hard not to conjecture up images of the saloons of the old west. Shops sell cowboy hats and cow skins. Nebraska steak is the food of choice here and it something for which the state is famous. Dine in a swanky London steakhouse, and it is likely they will serve steak from Nebraska, with a somewhat excessive markup.
Whilst in population terms, it is "small" with around 400,000 inhabitants, it occupies an area quarter of the geographical area of New York City, which boasts nearly 20 times the number of people. When it comes to finance New York City, the image of Wall Street looms large. Most banks have moved out of Wall Street, nearby in downtown or more commonly in midtown. Meanwhile, hedge funds are dotted all around Manhattan and further afield in Connecticut. Yet, it is still Wall Street we associate with the finance industry. Sitting here in a Starbucks in Omaha, writing up this note, Wall Street seems far removed from Nebraska. At the same time it is to this city, that the folks flock to each spring, to hear the Sage of Omaha, Warren Buffett and his business partner, Charlie Munger at the Berkshire Hathaway shareholder meeting talk. Visitors to the meeting included Bill Gates, who is on the board.
This was the first time that I have attended the Berkshire Hathaway meeting. The obligatory downpour whilst queuing to enter did little dampen my spirits, nor my fellow shareholders (to attend, a single stock is sufficient, or you can pick up tickets from eBay). As well as the shareholder meeting, there is also an exhibitor hall, where you can see products from companies owned by Berkshire Hathaway which range from industries as diverse as railroads to candies and buy souvenirs (Warren Buffett is rarely one to give up a business opportunity). The exhibition area is also probably your best chance to catch a glimpse of the great man himself. I managed to sneak in the photo above in the exhibition area, which was the closest I came to actually meeting him (!), amidst a scrum of selfie seekers and photographers.
The shareholder meeting lasts all morning and much of the afternoon, starting with the Berkshire Hathaway movie, which included all sorts of celebrity cameos. Whilst nearly 20,000 shareholders attended the meeting in person, for the first time ever, Yahoo streamed this one online out to a worldwide audience.
The meatier part of the event, began with a brief review of Berkshire Hathaway's performance recently. Throughout, Buffett, stressed that he was always keen to look at long term performance, rather than short term fluctuations in particular with respect to their derivative exposure.
Next, Buffett and Munger answered questions from both journalists and the audience, which discussed a wide range of subjects on their business. What came across was Buffett's enthusiasm to see investing through the prism of owning a business. As Buffett put it:
Figure out what makes sense. when you buy a stock, think about it as a business. Don't get into a stupid game just because it's available.
Both Buffett and Munger relished the microeconomic element, in understanding particular companies rather than macroeconomic element of investing, which obviously still impacted their businesses during cycles. Buffett and Munger confessed that it is very difficult to predict macroeconomic trends. Munger quipped, that "Microeconomics is what we do, macro is what we have to put up with!" For someone with a particular interest in currencies, like myself, if anything, it is the macro part which I find exciting!
In terms of making decisions, Buffett has more often than not, been on the right side. He attributed a lot of this in the ability to pattern recognition both in terms of picking the right investment but also avoid bad ones. He gave a specific example of Valeant, which he did not invest in (and which proved popular amongst some in the hedge fund community). Munger was more blunt calling Valeant a "sewer".
Answering a question on why he believed he was successful Buffett said that:
I owe a great deal to Ben Graham and Charlie. Also been around a lifetime looking at businesses see how some work and some. Yoga Berra said you can see a lot by observing.. Recognise what you can't do (such as department stores in my case)
He also said noted that, smart people are not averse to making mistakes, saying that:
You don't need IQ in investment business that you need. You do need emotional control. Seen very smart people doing something stupid, for example successful people over leveraging.
The difficulty with success in trading that it can lead to overconfidence, and hence the temptation to overleveraging.
In terms of his longer term expectations, listening to Warren Buffett was like hearing the antithesis of Zerohedge! Whilst he noted that his businesses would be impacted by the business cycle, in the long term America's businesses would do well. He noted that during the period of low rates, whilst savers investing would have picked up very little, returns for investing in American businesses had been healthy.
Buffett stressed was importance of compounding returns, which can have a massive effect in the long term, even if in the short term the impact might seem less significant. Indeed, Buffett has benefitted significantly from this. He was also scathing of the use of advisors, who might make suggestions purely for the sake of a change. He noted that changes in the way that he does his due diligence would not have prevented mistakes he has made. Buffett said:
We made plenty of mistakes in acquisitions and in not making them, mistakes about future conditions of economic, sector etc. I've not found a due diligence list that gets at real risks of a business. None of our mistakes would have been cured about doing more due diligence. Bad apples are out there. You won't find these with checklist.
Another element to Buffett's success is being able to use his insurance company as a massive float, has helped to fund the rest of his business, something he discussed at length during the meeting. He did note that persistently low rates could have an impact on his insurance business. He has already reduced exposure to European reinsurers, noting the negative rates at present in the eurozone.
Obviously, not all of us have Buffett's advantages of having a very long term investment outlook. Also everyone has their own way of investing and particular niche, which might not fit the Buffett template (including mine, which are tilted towards macro assets . However, if more investors followed his advice, I suspect they'd be much happier. When asked where both Buffett's and Munger's sense of humour came from, Munger joked:
If you see the world the accuracy it's bound to be humorous because it's ridiculous
I suspect that is the line that I will take away from my visit to Omaha! If you do get an opportunity to go to the 2017 meeting, I would thoroughly recommend going!
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11 May - Frankfurt - Thomas Wieki - Predicting out-of-sample performance and building multi-strategy portfolios using Random Forests
12 May - New York - Luis Seco - Are Negative Hedge Fund Fees on the Horizon?
13 May - Budapest - Saeed Amen/Paul Bilokon - Thalesians workshop on algo trading at Global Derivatives
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