Berkshire Hathaway AGM 2020: The Covid-19 Crisis

Warren Buffett's wisdom on

- Economic future of the country
- Airlines industries
- Berkshire Hathaway Energy
- Banking industry
- Oil companies
- Huge cash positions


Thread 🧵👇
Warren - It has been a flip of the switch in terms of national behaviour, national psyche. I do think that the range of possibility has narrowed down.
- Virus is not as lethal as it might have been. We do not know exactly what happens when you voluntarily shutdown a substantial portion of your society. In 2008 our economic train went off the tracks and this time we just pulled the train off the tracks and put it on the siding.
Economic future of the country.

Warren - Nothing can basically stop America. We have faced tougher problems and the American magic has always prevailed. If you would pick one time to be born and one country to be born, you will pick today and you will pick America.
Never bet against america

Warren - Sept 3rd 1929 DJIA was 381.17. People were buying stocks on margins. In 1920’s the auto sector coming up, the day of air travel coming together and telephone going wider
- And a couple of months after the DJIA fell 48%. By next 9 months (when warren was in the womb) stock market recovered by 20% from 1929 low. But by 1932 the DJIA went to 41.22 points. The great depression lasted a lot longer in the minds of people. Today Dow is at 24000.
- We have still a long way to go in creating an even wealthier and more equitable society. Anything can happen in terms of markets. You gotta be careful about how you bet because markets can do anything. Economy got a huge tailwind but it didn't fly in my direction everyday.
- When something like the current pandemic happens, You never wanna use margins or borrowed money and buy into investments.
- People bring the attitude that you develop an opinion about the security because the securities are quoted minute by minute. Securities are part of businesses not a price which are to be moved around.
- Suppose you have a farm, you look at what the farm has produced, some years the price of the produce will be good and some years it will be bad. But you think about the potential of the farm.
On selling airlines

Warren - We sold 6 billions of stocks in the month of april because i realised that i had made a mistake in valuing when we bought airlines that we were getting an unattractive amount of money.
- We invested 7-8 billions and our share of underlying earnings was 1 billions dollars of earnings and that number might be cyclical. It turned out that I was wrong about the business.
- The companies we bought are well managed, it is a very difficult business because you are dealing with millions of people and if something goes wrong with 1% of them then they would be very unhappy.
- In the period like this where people have been told not to fly. The airline business has changed in a major way. The 4 major companies have to borrow 10-12 billions dollars each and would have to pay out of earnings.
- Future is much less clear to me. Something which was a low probability event happened and affected the theme park business, the cruise business and the airlines business
- But the airline business has a problem that if the business comes back 70% or 80%, the aircraft don't disappear so you have got too many planes and the orders that were placed a few months ago but the world changed.
On huge cash position

Warren - There are things that are quite improbable and I hope that they don't happen but it doesn't mean that it won't happen. In 2008-09 you didn't see all the problems on the first day.
- There are things that trip the other things and we take a worst case scenario in the mind. In my view you shouldn't buy the stock unless you expect to hold them for a very extended period.
- There have been three times in Berkshire history where the price of our stock has gone down 50%, you gotta be in a right psychological position. You should do something that you understand yourself.
- We will have the cash position, you can rule out the possibility of 1929, anything can happen and we want to be prepared for anything.
Fed Balance sheet

Warren - We don't know the consequences of swelling the fed balance sheet. But we definitely knew the consequences of doing nothing.
- The Federal Reserve did the right thing in this situation but that means that a lot of companies that needed money got the chance to finance in the last 5 weeks.
- In 2008-09 we weren’t buying the stocks to make a statement to the world but we made them because it seemed intelligent. But it turned out that we would have done a lot better off if we waited for 4-5 months, so my timing was terrible.
- This virus situation, no one knows what would happen in the next 1 week, month or year. This is a very good time to borrow money but not to lend money.
On lending money

Warren - We have lent money to some of our few companies. We are not going to send money indefinitely to businesses whose businesses have changed dramatically from what it was an year ago.
Operations hit by covid
Warren - There are few industries where our employment can be reduced. 5 years from now Berkshire would be employing more people.
- The virus could take off in some ways in our manufacturing businesses where the demand can be reduced and in those cases would have layoff. Supply demand for retail space and office space may change dramatically.
- We have not participated in the government bailouts packages. None of the small businesses we own have gone in for the government money. Nebraska furniture and oriental trading have a bright future.
- If we have a business that's not going to sustain itself in our hands & if we can find someone who can do a better job, we would love to have them run it.

- Some businesses just disappear, we started with departmental stores but the world has gone against such a business model
- We had a trading stamp business but the world left trading stamps behind and that's going to happen with some businesses that's capitalism. It will happen to some of the Berkshire businesses in the next 10 years.
- But we don't think that you own a great business that everyone is destined for success. That's why I suggest people buy index funds.
- There are unknowns related to covid virus, we will have to keep evaluating things as we go on.
On succession
Greg - i don't see the culture of berkshire changing after warren and charlie. We have got the talented team both at Berkshire level and within our manager.
Warren - We have managers who can bring some great opportunities. Greg, Todd, Ted three extraordinary people in terms of allocating capital. Ajit jain is absolutely one of his kind. But his job is evaluating insurance risk.
On passive investing

Warren - I haven't changed my will, it directs that my widow would have 90% of the funds in index funds. I think it's better advice than people are generally getting from experts.
- If Index funds reflect the market and it's at low fees then we know this side has a better probability of winning.
On Berkshire Hathaway energy

Greg - We try to look at what does it actually require to maintain the existing capital asset. The unique thing is that we still earn on that capital that we deploy in the business.
- Growth in the business requires capital and as we deploy capital we see it as a growth capex. We have allocated 40 billions in the period of 10 years and another 30 billions is in talks to become real business opportunities.
Warren - these are not super high returns but they are decent returns over the period of time. They take a long time, it's not a good business to get real rich but it's a good business to stay real rich.
- You are getting some rights to do certain things that governmental authorities are authorizing. Its gotta a long run ahead
On berkshire’s underperformance

Warren - The truth is I recommend S&P 500 to people. Berkshire is as sound investment as it can be, but I would bet that we would be able to beat the return of the S & P 500.
- There are some chances that few funds that really do bring something into the game but as the fund gets larger it gets a bit tougher. There are some advantages with big size but there are some disadvantages too.
On banking

Warren - Banks are in far better shape today than in 2008. This time banks are not directly involved. In the particular crisis, banks are not particularly the problem. The banks do need regulation.
- And banks have been following the regulation and are in very good shape. In the end institutions who operate with significant amounts of other people’s money and if problems become severe enough, even the strong banks can be under a lot of stress.
- Overall banking system is not going to be the problem. They are gonna have problems with consumer credit but they are not a lot of worry.
On oil companies
Warren - When you buy into huge oil production companies, how it works out is going to depend on the price of the oil to a great extent. It's not going to be a geological homeruns or super mistake.
- You don't know where you are going to store the incremental supply when the demand is low. If oil stays at these low prices then there is gonna be risk of permanent loss of capital and it will affect the banking industry too. When you buy oil then you are betting on oil prices.
On negative interest rate

Warren - If the interest rate goes negative then you better own equities. I have been wrong in thinking that you can have a development that you have had without inflation taking hold.
- Treasury bills are terrible investment overtime but they are the one thing that, when the opportunity arises, can be the only thing to pay for those opportunities with those treasury bills.
- There can be extreme consequences if pushed far enough but there could be consequences if the treasury did not act upon it
On the US govt. Defaulting
Warren - if you print bonds in your own currency. What happens to currency can be a question. Us govt. Have been smart enough by issuing the debt in their own currency. It is very painful to owe money in somebody else’s currency.
- The US govt. cannot default but what you end up getting in purchasing power can be in doubt. It's crazy to limit the debt.
- The debt is gonna be paid and the country is gonna grow in its debt paying capacity thus it can keep on increasing the debt. The trick is to borrow in your own currency.
On capitalism
Warren - we wouldn't be the country we are if the market system has not been allowed to function. Market system is marvellous in many aspects but it needs the government.
- It is a creative destruction but for the ones who are destroyed, it can be a brutal game. I don't want unfettered capitalism. I don't think we will move away from them. The market system can work in Winner takes all systems but there is an element of randomness also.
On next steps

Warren - We are not doing something big, but we are willing to do something big.

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