Thread by @rationalwalk

1) In this thread, I will comment on Berkshire's Q&A Session which starts at 9:15 am central time which I am watching via CNBC's webcast.

$BRKA $BRKB #Berkshire2023

2) CNBC's "pre-game" coverage has started and is available at cnbc.com/brklive/

3) The meeting begins with Buffett going over Q1 earnings which were released this morning. My thread on Q1 earnings is here based on a (very) quick review.

https://twitter.com/rationalwalk/status/1654847020807655424

4) Buffett says that the majority of Berkshire businesses will report lower earnings in 2023 compared to 2022. He mentions the stimulus as boosting consumer spending in recent years.

"That period has ended."

5) Buffett: "Now we will start having sales when we didn't need to have sales before."

Although noting is ever "sure" in business, Buffett thinks Berkshire is positioned well with respect to investment income due to higher rates on short-term investments (t bills).

6) Buffett bought $3 billion of T Bills at 5.9% -- I think he's referring to the 4 week bill auctioned on Thursday that I commented on a couple days ago!

I guess Buffett isn't too worried about the "debt ceiling" either...

https://twitter.com/rationalwalk/status/1654427772306214913

7) Barring some massive super-cat, sounds like Buffett expects better insurance underwriting results in 2023 compared to last year.

He expects, but can't promise, that operating earnings will be greater in 2023 vs. 2022 overall.

8) Berkshire retains earnings and therefore one should expect operating earnings to increase over time. It is no great triumph when the numbers move up.

Buffett shows a slide showing operating earnings over the past four years, from $24 billion in 2019 to $30.9 billion in 2022.

9) At $505 billion, Berkshire now has more shareholders' equity than any other company in the U.S. -- doesn't mean Berkshire is the most valuable company since other companies could have retained that much but chose to repurchase stock, etc...

10) Correction to an earlier tweet: My thread on Q1 earnings appears here:

https://twitter.com/rationalwalk/status/1654818700145627141

11) Buffett comments on the superiority of float when it is cost free. It can't disappear in a hurry and finances the asset side in the same way as (expensive) stockholders' equity or debt. Berkshire has $165 billion of float.

12) Buffett shows a slide highlighting repurchase activity over the past four years. Berkshire had 1,624,958 $BRKA equivalents at the end of 2019 vs. 1,450,152 at 3/31/23. This is a 10.8% reduction.

13) On to the Q&A session ... Buffett restricted himself to just 22 minutes of pre-Q&A comments this year.

14) First Q is about Silicon Valley Bank. He's basically saying that the $250K FDIC insurance limit is just statutory language and that "he can't imagine" anyone losing a deposit.

Effectively he is advocating unlimited deposit insurance, at least that's what it sounds like.

15) Q2: Do you ever make emotional investment decisions?

Buffett says he had made bad investment decisions but he can't recall a time in the history of Berkshire where he made an emotional decision.

Buffett asks Munger: Have we ever made emotional decisions? Response: "No".

16) Backtracking a bit, Buffett says that he might have allowed emotion to influence his behavior toward managers who slip in performance. Mentions Louis Vincenti of Wesco as an example. But things were on auto pilot and worked out ok anyway...

17) Q3: GEICO and BNSF underperformance.

Ajit: GEICO has made rapid strides on telematics. Now reached a point where ~90% of new business has a telematic input on pricing decisions. Still haven't started to realize true benefits. GEICO's tech needs a lot of work.

18) Ajit: GEICO has 600 systems that don't talk to each other (OMG...) and they are trying to shrink this to a much smaller number. Ajit mentions improvements in Q1 results with a ~93 combined ratio. Mentioned prior year reserve releases and Q1 being seasonably strong.

19) Ajit states a combined ratio target of 96 for GEICO and hopes they reach that by the end of 2024. Thinks CR for 2023 will be just a little better than 100. But should be on track in two years. So Ajit thinks results will be worse than Q1 over the next three quarters...

20) Greg concedes that BNSF has work to do. BNSF is well aware of precision scheduled railroading. They strive to be more efficient balanced with needs of customers. There were efficiency gains in recent years. That didn't stop in 2022 but they had to "reset the railroad" ...

21) BNSF prioritized long term performance in 2022, reset, for longer term performance. Expresses confidence in the long run. This got a tepid applause ... Buffett had to ask for applause.

22) Buffett mentions Todd Combs and gives him credit for making big changes in multiple ways at GEICO. Buffett would not trade places with other insurance companies, especially those that pose as "tech companies"...

23) Buffett mentions Berkshire Hathaway specialty as a big "startup" success created by four people. Took on the whole industry and now they have 1500 people worldwide. Only Berkshire could supply the capabilities to do this. Didn't cost a dime to enter. Unmatched by IPOs.

24) Q4: As AI/Robotics advance, what are the positive and negatives on both stock market and society as a whole. Companies that will be most impacted?

Charlie: If you go to BYD's factories in China, you'll see a lot of robotics. He's skeptical of some of the AI hype.

25) Buffett: There won't be anything in AI that replaces Ajit. AI can do amazing things. Bill Gates showed Buffett some things but AI can't tell jokes. AI can do all kinds of things, and Buffett gets worried because we can't "un-invent it". Mentions atom bomb as example.

26) Buffett has always been more concerned about nuclear risks than almost anyone else, and I share his concern. By comparing AI to nuclear weapons in terms of risk, you can tell he's concerned, jokes aside.

27) Q5: What's going on in commercial real estate?

Munger: Berkshire has never been very active in the field since it works better outside the corporate structure. He does think that the hollowing out of downtowns is going to be unpleasant -- I totally agree.

28) Buffett: What's a building worth? Whatever you can borrow on a non-recourse basis. A very good way of thinking about it.

We are starting to see consequences of people who could borrow at 2.5% and we are now in a different environment.

29) Q6: What's the future of value investing in the age of AI ... any recommendations for investors?

Charlie: Value investors will have a harder time now that there are so many of them competing for a diminished bunch of opportunities. Get used to making less.

30) Buffett: Charlie has been saying this since they have known each other (1959) ... He argues that there will be plenty of opportunities and tech won't change that. Think of tech changes since 1942 when he started investing.

Charlie as Debbie Downer, Warren to the Rescue!

31) Buffett: If you don't run too much money (which Berkshire does) the opportunities will be greater in the future. He's always differed with Munger on how gloomy the world is... lol.

32) Charlie is making good progress on his first box of peanut brittle.

33) Buffett would love to be born today with not too much money that he could turn into a lot of money. And Charlie would find something to do, maybe not exactly as before, but he would have a big pile.

Charlie says he would not like to give up his big pile to start over.

34) Q7: Question related to AIG reinsurance deal from several years ago and how Berkshire liabilities are sensitive to interest rates, etc...

Warren: We got handed $10 billion (in a retroactive reinsurance deal). Were not restricted to putting that into bonds...

35) This is the power of Berkshire. They do NOT feel constrained to match the duration of assets to projected liabilities. No other insurance company can do this. That's basically what Buffett is saying. Berkshire's balance sheet is unique and provides flexibility.

36) Buffett: Payments on the AIG deal has run slightly below what they expected to pay at inception, so far. Berkshire won't see large deals like this very often. Others will take smaller deals but some deals only Berkshire can take.

37) Ajit explains how actual payments differ from expected payments at inception of the deal. So far, actual payouts are 96% of what they had projected to pay out at this point in time. Good but not great. Net, they are happy with the deal. Cautiously optimistic.

38) Munger: Berkshire's insurance operations have 4x the shareholder capital behind premium volume. So of course Berkshire sees the big deals. Who would you trust?

Buffett: Diversified source of income at Berkshire outside insurance is also a major advantage.

39) Q8: If an estate includes a family business, most parents fail to do succession planning for when the founder isn't there to run it. More of a speech than a question ... but it's a good speech so I don't mind.

40) Buffett has seen many situations like this. He never signs a will until his children read it and make suggestions. Depends on the family, relationships, etc. A thousand variables. Buffett says there should be no surprised in wills ... terrible mistake.

41) Munger on his estate planning approach: He just tells his family to hold the stock (Berkshire). That's his instruction to his family... lol!

42) Buffett: If you want your kids to have certain values, it's important that you live those values and talk about it. Wills have to change as children get older, the estate changes, etc.... All common sense (and good) advice.

43) Q9: Alleged BNSF violations on tribal land. What is Warren doing to ensure that BRK subsidiaries fulfill ethical responsibilities.

Abel: Acknowledges that BNSF breached contract on maximum trains to move over tribal land. Looking to resolve the issue ...

44) Abel hopes that they can come to a resolution fair to the tribe and BNSF. On derailment, worked very closely with the tribe to mitigate the issue instantly, or over a reasonable period of time. Both sides were responsible. No long term environmental impacts.

45) Abel: How to prevent derailments, how to detect them, responding properly. They will occur and response must be timely.

Buffett notes that there are 1000+ derailments in the industry every year. BNSF is a common carrier that must take hazmat, etc. Railroading is difficult.

46) Buffett: BNSF will make mistakes. Derailments will occur decades from now, can't avoid them, they must carry hazmat they wish they didn't have to carry. Better than BNSF used to be but still can improve ...

47) Q10: Thoughts on continued development of "new energy" -- I think the questioner means renewables.

Buffett says BHE has been a positive force... hands over to Abel. BHE has outlined goals (yes, they have on the BHE website).

48) Abel: Spent close to $7 billion on western transmission -- absolutely necessary to move renewable energy. He's speaking about something few people discuss -- transmission rather than the energy generating resources.

49) $70 billion of known projects in the coming ten years ... good business opportunity for deploying capital. Dependent upon evolution of technologies, etc...

50) Buffett refers to how the country got the best and the brightest to solve the problem of fighting WWII. Reordered the industrial enterprise of the United States backed by the power of government and ingenuity of business. Very successful outcome.

51) Can we do this in peacetime with 50 states for rebuilding the energy infrastructure --- Buffett seems skeptical that we can do this. Lack of unity of purpose and machinery that worked in WWII. Harder to do this in peacetime.

52) Q11: Who's currently behind Ajit and Greg in their respective roles?

Buffett: That will be a question that Greg will have to determine succession plans once he is in charge. They know Ajit's opinion on insurance but Greg will make final decisions.

53) There aren't that many people who can run a business like Berkshire ... but you don't need that many. You need the right operating managers and the right capital allocator at the top. Wouldn't be smart to name decisions now, although they have names in mind.

54) Q12: Questioner was a Salomon employee when Buffett saved it in the early 1990s. He thanks Buffett. Question -- risk to the U.S. and what would be the factors that undermine the country?

55) Buffett: 🇺🇸 Discussion of American history, how young the country is, a miracle. How do we keep the good parts of the system and deal with defects? Net the U.S. is a better place to live than when Buffett was born by a huge factor.

56) Goes on to mention nuclear war ... he comes back to this often. How many other people mention nuclear risks? Very few. No one thinks about it. Buffett does. This is very reassuring as a shareholder.

57) Buffett thinks partisanship has moved toward tribalism... Can lead to mob rule. But still wouldn't choose to be born anywhere else and no better time to be born than now. Notes that the flaws in society are more obvious than in past due to communication.

58) Charlie is "slightly less optimistic"... Charlie says the best road to human happiness is to expect less and that it'll get tougher. So many people in wealth management is a terrible development.

59) Q13: Will a corporate raider buy enough shares to take over Berkshire in the future once Buffett's voting control no longer protects against this (10-15 years after his death).

Buffett: He thinks about it but doesn't worry enormously. In long run, depends on performance.

60) Buffett thinks Berkshire's size limits the number of players who could come close to taking control of Berkshire. He thinks Berkshire should be regarded as a national asset.

(I do not find this reassuring -- one of the questions I submitted to @BeckyQuick was similar).

@BeckyQuick 61) Charlie isn't worried about what will happen in 50 years because he will be dead.

Sorry that is not reassuring to me. I'll be exactly Charlie's age in 50 yrs in the very unlikely event that I live that long. Many of us have a time horizon extending decades into the future.