Warren Buffett (Berkshire Hathaway Chairman/CEO) – I Was Wrong On IBM (Aug 2017)

Chapters

Abstract

Warren Buffett: A Comprehensive Insight into His Investments, Concerns, and Charitable Endeavors

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Warren Buffett’s Philanthropic Commitment and Glide’s Impact

Warren Buffett’s dedication to Glide, a San Francisco-based charity supporting marginalized individuals, reflects his philanthropic nature. His long-standing association with Glide has led to raising over $25 million through their annual charity lunch auction over 18 years. Buffett’s admiration for Glide’s founder, Cecil Williams, and the organization’s extensive services, including meals, housing assistance, and addiction recovery programs, inspired his involvement. Glide’s impact extends beyond feeding; it offers a lifeline to those forgotten by society, helping them rebuild their lives. Buffett’s personal connection with Glide stems from his recognition of Cecil Williams as a man who never gives up on anyone. He was initially skeptical about Glide’s approach but was won over by the tangible impact it had on the people it served.

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The Economic and Insurance Implications of Hurricane Harvey

Buffett’s concerns extend to the devastating impact of Hurricane Harvey in Texas and Louisiana. He acknowledges the catastrophic property damage, loss of life, and the urgent need for support. As Berkshire Hathaway’s GEICO insures a significant portion of Texas vehicles, Buffett anticipates substantial losses, comparable to the impact of Hurricane Sandy. This disaster highlights the challenges faced by the National Flood Insurance Program and the insurance industry. With projected insured losses reaching $20 billion and uninsured losses potentially reaching $150 billion, Buffett’s observations underscore the selective nature of flood insurance and the implications for risk diversification. Buffett’s company, Berkshire Hathaway, exited the supercat insurance market due to declining rates and increasing risks, resulting in a reduced exposure to reinsurance losses compared to a decade ago. The trend of decreasing rates in supercat insurance has attracted more capital from outside the insurance industry, such as CAT bonds. Buffett emphasizes the importance of appropriate pricing in insurance to avoid long-term losses. Hurricane Harvey’s impact on GDP is expected to be moderate, not reaching a full percentage point reduction for a year. However, Buffett highlights the long-term effects of wealth destruction caused by uninsured losses, despite the U.S. being a wealthy country with a high wealth creation rate.

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Berkshire Hathaway’s Strategy in Supercat Insurance and Economic Insights

Buffett’s insights into Berkshire Hathaway’s shift away from the supercat insurance market, due to declining rates and increasing risks, demonstrate his strategic approach to business. He discusses the company’s past role in covering catastrophic events and the current market challenges. Additionally, Buffett’s comments on the U.S. economy, including the steady 2% GDP growth since 2009 and the surprising persistence of low interest rates, provide a nuanced understanding of economic trends and his confidence in the nation’s wealth-creation capabilities. Buffett expresses surprise at the sustained low interest rates, particularly the 10-year U.S. Treasury yield reaching 2.1% recently. He reflects on the “Widowmaker” trade in Japanese 10-year bonds in 1991, where investors suffered losses due to persistent low rates. Berkshire Hathaway originally purchased approximately 10 million shares of a company through one of its employees, Todd or Ted. Buffett later bought a significant number of shares in the same company. In the recent quarter ending June 30th, the employee sold some of his shares, while Buffett bought more, resulting in an overall increase in Berkshire’s holdings. Buffett has never sold any shares of this company and continues to hold his position. Buffett acknowledges that IBM may perform well in the future, but he admits to making a mistake in his initial analysis. He had expected better prospects for IBM in the past five or six years, which did not materialize. As a result, Buffett sold many shares of IBM, as he felt more confident about the future prospects of other companies, such as Apple. Berkshire Hathaway converted its warrants into shares of Bank of America, making it the largest shareholder in the bank. Buffett expressed confidence in Bank of America’s business, valuation, and management, indicating a long-term investment horizon. He acknowledged potential negative headlines and issues at Wells Fargo, comparing it to the Solomon Brothers scandal. Buffett emphasized the importance of addressing problems and implementing corrective measures, but he maintained his faith in Wells Fargo’s long-term potential.

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Nuclear Threats and Global Stability

Buffett’s deep concern about nuclear threats, particularly the proliferation of nuclear weapons and the rising capabilities of countries like North Korea, underscores his global awareness. He stresses the importance of responsible leadership and vigilance in preventing nuclear conflicts, citing historical examples like the Cuban Missile Crisis. Buffett’s apprehension about the unpredictable nature of leaders and the catastrophic potential of nuclear warfare reflects his understanding of global security dynamics. The rise of China and the potential for catastrophic damage if nuclear weapons were used were also mentioned by Buffett, emphasizing that even a 0.1% chance of a nuclear event would be disastrous. Buffett cited North Korea’s development of an ICBM capable of reaching the United States as an example of the growing nuclear threat. He also expressed concern about the unpredictability of leaders and the potential for future generations to make decisions that could lead to nuclear conflicts. Buffett emphasized that the proliferation of nuclear weapons among various countries and groups increases the likelihood of a nuclear event.

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Buffett’s Investment Strategies: From Technology to Banking

Buffett’s investment choices, such as his 2.5% stake in Apple and transitions in holdings from IBM to Apple, indicate his adaptive investment strategy and his confidence in Apple’s future prospects. Despite being the largest shareholder in Apple, Buffett stated that he was not sure if Berkshire Hathaway was the largest shareholder. He expressed a positive outlook on Apple as a holding, stating that he had initially purchased around 10 million shares of the company. His involvement in the banking sector, with significant investments in Bank of America and Wells Fargo, shows his enduring faith in these institutions despite challenges. The discussion extends to Berkshire’s stock transactions, highlighting Buffett’s and his associates’ strategic decisions in managing their portfolio. Buffett clarified that a potential merger between Kraft Heinz and Mondelez would not significantly strengthen their negotiation power with retailers, and he dismissed the notion of a hostile takeover of Unilever. Buffett believes that the strength of a brand is more important than the number of brands a company owns when negotiating with retailers. Having a group of big powerful brands does not necessarily translate to more bargaining power. Buffett does not think Kraft Heinz would acquire Mondelez because the additive factor of having 10 big brands versus one is not significant. Having a group of brands doesn’t translate to that much more bargaining power. Kraft Heinz will not make hostile takeover offers. The previous attempt to acquire Unilever was a misunderstanding and not intended to be hostile.

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Retail Sector Dynamics and Kraft Heinz’s Market Position

Buffett acknowledges the competitive pressures in the retail sector, particularly the impact of Amazon’s acquisition of Whole Foods on grocery retailers. He notes the struggle between brands and retailers, with a growing advantage for strong retailers like Walmart, Costco, and Amazon. Regarding Kraft Heinz, Buffett clarifies that a potential merger with Mondelez would not significantly strengthen their negotiation power with retailers, and he dismisses the notion of a hostile takeover of Unilever. Buffett discussed the ongoing struggle between brands and retailers, particularly in the grocery sector. He noted the pressure faced by grocery stores due to Amazon’s acquisition of Whole Foods and its price-cutting strategies. Buffett highlighted the importance of brands and the efforts of retailers to gain the upper hand in negotiations. He pointed out the recent shift in power toward retailers, especially strong ones like Walmart, Costco, and Amazon. Buffett emphasized the impact of advertising and the challenges faced by packaged goods in building brand loyalty in recent years.

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Political Engagement and Personal Reflections

In the political arena, Buffett maintains a reserved stance, underscoring the importance of a functioning government and expressing his intention to participate in future political campaigns. His reflections on living through 15 U.S. presidencies and his consistent investment approach under 14 of them illustrate his long-term perspective and adaptability. Buffett has been silent about his political views during the Trump administration. He believes in working with the president and the government to maximize the country’s progress. Buffett has lived under 15 presidents and bought stocks under 14 of them. He emphasizes the importance of government function and cooperation between the government and the private sector. Buffett will take a position in the 2020 and 2018 campaigns, but he won’t say if he will support the winning candidate.

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Buffett’s Multifaceted Influence

In summary, Warren Buffett’s diverse engagements – from his philanthropic efforts to his insightful observations on various economic sectors and global issues – paint a picture of a multifaceted individual. His strategies in investments, concerns about global stability, and commitment to social causes demonstrate not only his business acumen but also his deep sense of social responsibility and global awareness. As he celebrates his 87th birthday, Buffett continues to influence both the financial world and broader societal issues. Smith & Walensky celebrates Warren Buffett’s 87th birthday with a cake featuring his favorite things.

Notes by: ZeusZettabyte