Selling Apple stock — $7.4 billion worth — last year was “probably a mistake,” Warren Buffett said at the Berkshire Hathaway annual shareholders meeting on Saturday, which, like last year’s, was a virtual affair, only this time from Los Angeles. With him were partner and vice chairman Charlie Munger and vice chairmen Greg Abel and Ajit Jain.
The 50-plus-year-old conglomerate has only in the last few years begun to focus on investing in high tech. Apple occupies 44% of the portfolio.
Buffett also owns shares of Amazon — whose stock he began buying in 2019 — and cloud computing company Snowflake, in which Berkshire invested $735 million last September.
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But that doesn’t mean Buffett has abandoned his traditional strategy of owning lower-tech companies, as Adam Mead, CEO and chief investment officer of Mead Capital Management, who just released a 766-page book on Berkshire, points out in an interview with ThinkAdvisor.
In our conversation, he discusses Buffett’s own labels for the Berkshire companies: “great,” “good” and “gruesome.”
“The Complete Financial History of Berkshire Hathaway: A Chronological Analysis of Warren Buffett and Charlie Munger’s Conglomerate Masterpiece” (Harriman House-April 13), explores Berkshire’s development year by year, with Mead digging deep into the firm’s development from “a dying textile company” to the enviable success it is today.
One gem that it owns outright is See’s Candies, which this year had its “best first quarter ever,” CEO Pat Egan noted at Saturday’s meeting.
A question about cryptocurrency, and Bitcoin, specifically, brought an “I’ll dodge that” response from Buffett; but Munger, 97, had no hesitation, answering bluntly:
“ …The whole damn development is disgusting and contrary to the interests of civilization,” he said.
Last year, Buffett sold a number of stocks, including every airline equity and more of his long-held position in Wells Fargo, the latter now reportedly only 0.6% of the Berkshire portfolio.
In the interview, Mead opines on why Buffett’s firm likely cannot grow at its former rate; the Oracle of Omaha’s regret over not buying Google stock; Berkshire’s roughest patch; and Buffett’s writing $4 billion worth of credit default swaps during the 2008 financial crisis.
ThinkAdvisor interviewed Mead on April 26. He was speaking by phone from Derry, New Hampshire, where his practice is based. A former commercial loan officer, the advisor writes a monthly newsletter, Watchlistinvesting.com. He mentioned that after sending Buffett a copy of his book, he received a thank-you note, now framed, with “really good praise.”
Here are highlights of our interview:
THINKADVISOR: In his 2007 shareholders letter, Chairman Warren Buffett described Berkshire Hathaway’s businesses as “good,” “great” and “gruesome.” Please explain.
ADAM MEAD: He said that a “great” business earns good returns on capital and can grow; for example, See’s Candies — though it doesn’t grow as much as some others. A “good” business might earn a good return on capital, such as those in Berkshire’s utilities sector. They have predictable, regulated returns; and as they add money to the business, there’s a return on that additional capital. The “gruesome” ones are, for instance, Dexter Shoe Co. and what had been Berkshire’s dying textile business. Dexter was almost like a shadow of that — production was in America and not as competitive with overseas manufacturing.
Do those three classifications ever change?
No. One company that went through all three was The Buffalo News. It was a “great” company; but as the years went by, competitive dynamics of the newspaper business changed, and it became a “good” company, which ended up a “gruesome” business. Last year Berkshire sold all their newspaper businesses because the industry had been decimated by competition, especially the internet.
Buffett reportedly has sold nearly all of his position in Wells Fargo after holding the stock since the 1980s. Please discuss.
Buffett and [vice chairman] Charlie Munger stood by Wells when it had the accounts-opening scandal. Their position was that Wells had learned its lesson — they paid the price for the [sales] incentives they had put in place. But, then, when other things were happening at Wells, they [finally] said, “We’re not comfortable with this.” And their attention shifted to Bank of America, which they saw as a better investment.
What’s the lesson learned from Wells Fargo?
Maybe it’s that you really have to continue to evaluate investments — which can and will change over time — even though you’ve held something for multiple decades. If the time comes to sell, that doesn’t mean you don’t sell it.
Has Heinz Kraft, of which Berkshire owns 26%, been a good investment?
Heinz is a very good business. But Buffett has readily admitted that they overpaid for Kraft. They paid a lot for it because they thought they could get better margins out of the business. That didn’t happen to the full extent they would have liked. So the Heinz part was good, but the Kraft part was not so good. Taken together, though, they’re still very good businesses.
Last year, many observers thought that Buffett had lost his mojo. Was there anything to that, do you think?
Yes and no. It’s accurate only insofar as Berkshire’s size prevents it from growing as much as it had in the past. Berkshire has largely continued the same playbook over the years. They stick to their knitting, [but] the world changes. So some thought Berkshire might have lost its way.
What about the growth aspect?
The universe of companies that fits their criteria has shrunk, and it’s really hard to grow [a conglomerate so large] especially when they retain all their earnings and haven’t paid out a dividend, although they repurchased shares this past year.
By “shrunk,” do you mean that there aren’t many lower tech companies around of the kind in which they like to invest?
Berkshire has this reputation for buying lower-tech companies. If they don’t grow or if they’re cyclical or boring, it really doesn’t matter so much as how they’re doing in terms of earning returns on the capital they’ve [deployed] — it’s the cash that an investment can give you. Berkshire has picked up companies that might not be exciting — like Acme Brick, really low tech — but that throw off cash and are generally secure in their economic position.
But Berkshire now has big investments in high tech; Apple, in particular.