Warren Buffett (Berkshire Hathaway Chairman/CEO) – 88th Birthday Interview (Aug 2018)

Chapters

Abstract

Warren Buffett: Investment Strategies, Market Insights, and Personal Perspectives

Engaging the World of Finance: Buffett’s Annual Charity Lunch and Investment Philosophy

Renowned investor and Berkshire Hathaway CEO Warren Buffett’s annual charity lunch with the Glide Foundation auction winner, a much-anticipated event, saw this year’s winner contributing $3.3 million for the exclusive dining experience. These lunches, known for their expansive discussions ranging from family to business, rarely touch upon stock picks, yet provide a unique insight into Buffett’s investment mindset. Buffett, emphasizing long-term stock investments over short-term market fluctuations, holds a firm belief in the superior returns of stocks compared to fixed-income securities. This philosophy underlines his approach to investments, including his substantial stake in Apple, Berkshire Hathaway’s largest holding. Buffett prefers to discuss topics such as family and raising children, rather than solely stocks or business, with lunch companions.

Economic and Market Perspectives: Valuation, Volatility, and Retail Investors

Buffett acknowledges the high valuation of stocks in the current market yet suggests they are relatively cheaper compared to other asset classes like real estate. He acknowledges that stocks are currently expensive but emphasizes the long-term attractiveness of stocks compared to fixed income securities. A basket of American stocks, representing businesses earning high returns on capital, is a better investment than a 30-year bond with a fixed return of approximately 3%, according to Buffett. Buffett highlights the attractiveness of stocks compared to other investment options such as real estate, duplex rentals, farmland, and fixed income instruments. He emphasizes the superior earning potential of American businesses over time due to their ability to reinvest earnings and grow their value. Buffett explains that stocks provide a higher long-term return compared to bonds because companies reinvest a portion of their earnings, leading to increased value over time. While stocks may offer a lower dividend yield compared to bonds, the reinvestment of earnings and share repurchases contribute to overall growth.

The economy’s sustained growth and increase in household wealth over the past nine years have led to Buffett’s optimism. He noted that businesses across the board have performed well during this period. However, he acknowledges the challenges posed by tariffs and inflation, particularly in sectors like steel and building materials. Buffett emphasized the difficulty in attributing inflation solely to tariffs, as some increases were already evident before the tariff situation. He also spoke about the importance of the Federal Reserve’s role, praising Jay Powell as an excellent chairman and expressing appreciation for his expertise and commitment to doing what is best for the American economy over time. Buffett expressed his preference for quarterly reporting, stating that it provides valuable information for investors. He criticized the practice of earnings guidance, viewing it as a game that can lead to negative consequences. He believes that quarterly reporting should continue, allowing investors to receive regular updates on companies’ financial performance.

Buffett on Industry Dynamics and Berkshire’s Strategy

Buffett’s views extend beyond individual stock picks to broader industry trends and company strategies. He expressed satisfaction with his holdings in the airline sector and discussed the challenges of maintaining ownership levels due to share repurchases. He cannot add to his airline stock positions as he already owns 9.9% of the four largest airlines and doesn’t want to go above 10%, except in rare circumstances. His comments on Campbell’s strategic initiatives, including the sale of certain units, reflect his keen understanding of the packaged goods industry’s changing dynamics and the complex considerations in company valuations. Buffett commented on Campbell’s Soup’s announcement of selling off its fresh foods and international units. He mentioned that the sale may not change the overall picture much, as the company would likely receive fair value for the assets. Buffett expressed uncertainty about whether other companies would be interested in acquiring Campbell’s due to the assets being sold and the challenges in offering a significant premium for a packaged goods company.

Significantly, Buffett revealed a shift in Berkshire’s share buyback policy, moving from a fixed book value threshold to a focus on intrinsic business value. This approach, discussed infrequently with his long-time partner Charlie Munger, highlights their aligned philosophy in enhancing long-term shareholder value. Buffett announced that Berkshire Hathaway is changing its approach to share repurchases. Instead of using a fixed threshold of 120% of book value, the company will now tie share repurchases to intrinsic business value. He explained that intrinsic business value is a better measure of a company’s worth and that Berkshire will buy back shares when they are trading at a discount to this value. Buffett mentioned that Berkshire has already bought back some shares under this new approach.

Buffett’s Economic Outlook and Impact of External Factors

Buffett’s economic outlook remains positive, citing the consistent growth and increase in household wealth in the U.S. over the past decade. He commented on the current consumer environment, noting that it has progressively improved since the fall of 2009, although it started from a low base. He observed that the economy has been in a recovery phase, but the initial conditions were challenging. However, he acknowledges the challenges posed by tariffs and inflation, particularly in sectors like steel and building materials. His admiration for Federal Reserve Chairman Jay Powell and the importance of quarterly reporting in investment decisions further illustrate his nuanced understanding of economic and regulatory factors.

Personal Perspectives: Technology, Mentorship, and Celebrations

Despite his extensive financial insights, Buffett maintains a limited engagement with technology and social media. He prefers an iPad for checking financial information but avoids frequent tweeting, considering it potentially detrimental. Podcasts, though occasionally consumed, take a back seat to reading, a more efficient method for him to absorb information. Buffett attributes significant influence to his mentors, particularly Tom Murphy and Charlie Munger, and recently celebrated his 88th birthday with a custom-made Coke cake, reflecting his investment in Coca-Cola and his appreciation for personal gestures.

Warren Buffett’s stance on social media is clear: he does not tweet and sees no reason to do so. He believes that the CEO’s frequent tweets, like Elon Musk’s, may not be beneficial. Buffett finds it dangerous to comment on Berkshire daily and prefers to focus on other activities. Buffett does not typically listen to podcasts due to the time commitment. Buffett uses an iPad during the day to check financial markets and look up information. He finds computers and the iPad enormously useful for accessing information. Buffett has learned valuable lessons from Tom Murphy since meeting him in 1968 or 1969. He considers Murphy a better person and a role model for business and life. Buffett emphasizes the importance of choosing the right heroes and admires Murphy’s positive influence.

The Essence of Buffett’s Investment Approach

Warren Buffett’s investment strategies, market insights, and personal perspectives offer a comprehensive view into the mind of one of the world’s most successful investors. His emphasis on long-term value, understanding of industry dynamics, and personal discipline in technology and communication set him apart as a unique figure in the financial world. As he continues to navigate the complexities of the market, his insights remain invaluable for investors and business professionals alike.

Notes by: Hephaestus