My Berkshire meeting comments; Warren Buffett's Optimistic? Pessimistic? No, Realistic; Here's what you didn't see inside Warren Buffett's annual meeting; My updated Berkshire valuation: $373,000 per A-share

By Whitney Tilson

Monday, May 4, 2020
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My Berkshire meeting comments; Warren Buffett’s Optimistic? Pessimistic? No, Realistic; Here’s what you didn’t see inside Warren Buffett’s annual meeting; My updated Berkshire valuation: $373,000 per A-share

1) I had been to the last 22 Berkshire Hathaway (BRK-B) annual meetings, which for the past few years have been livestreamed by Yahoo Finance.

I’m usually invited to join the anchors as a commentator, which is what Yahoo did on Saturday as well (both before and after the meeting).

Here are links and transcripts of my comments:

Before

Video: Yahoo Finance Berkshire Hathaway pre-show: Whitney Tilson (5:49)

Transcript: Pre-Berkshire Meeting Transcript

The thing that really jumped out at me in the Q1 earnings is the complete lack of buying back their own stock.

After

Video: Yahoo Finance recaps the 2020 Berkshire Hathaway Annual Shareholder Meeting (15:32, I start at 8:10)

Transcript: Post-Berkshire Meeting Transcript

As a long-term Berkshire Hathaway shareholder, the thing you really have to worry about is Buffett’s cognitive declines… and I didn’t see any of it.

2) Andrew Ross Sorkin of the New York Times has the best commentary I’ve read: Warren Buffett’s Optimistic? Pessimistic? No, Realistic. Excerpt:

You could always count on the folksy and cheery optimism of Warren Buffett.

But if you listened closely to Mr. Buffett over the weekend during Berkshire Hathaway’s shareholders’ meeting – his annual “Woodstock for Capitalists” was conducted virtually because of the coronavirus pandemic – his words often betrayed a deep sense of concern about the immediate future. That should be a warning to all investors and policymakers.

While many of the headlines about the meeting were about Mr. Buffett’s positive aphorisms – “Nothing can basically stop America,” “You can bet on America” – underneath those long-term proclamations was a decidedly different message…

About the current climate, he said, “You can bet on America, but you kind of have to be careful about how you bet.” He added “simply because markets can do anything.”

At a time when the stock market has been buoyed by politicians pushing to reopen America and hopeful investors often willing to overlook the immediate economic carnage, Mr. Buffett sounded a note of realism about the challenges ahead.

He talked about the possibility of a second wave of coronavirus infections. He acknowledged that the world might profoundly change for years to come. And he spent a notable portion of the meeting detailing the economy’s performance since 1789, with a particular focus on the years between 1929 and 1951, a period in which the stock market took 22 years to get back to its highs.

More than his words, he spoke with his wallet. He usually relishes a down stock market to take advantage of lower prices. Not this time. He hadn’t made any purchases recently; he didn’t buy up stocks when they had fallen last month during what felt like a mini-panic: “We have not done anything, because we don’t see anything that attractive to do.”

Juxtapose that with his actions in the midst of the financial crisis of 2008. Back then, he wrote an op-ed in the New York Times a month after Lehman Brothers filed for bankruptcy: “In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary. So… I’ve been buying American stocks.”

This time, he is husbanding his capital. “Our position will be to stay a Fort Knox,” he said.

In other words, he is hoping to protect the company if things get worse, and he is clearly worried enough that it might.

He said the $137 billion he had on hand “isn’t all that huge when you think about worst-case possibilities.”

Let that seep in. He added: “We don’t prepare ourselves for a single problem, we prepare ourselves for problems that sometimes create their own momentum.”

That’s coming from the same man who once famously said, “Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons.”

In this crisis, he has done the opposite: He sold his entire stake in the nation’s four major airlines. His rationale seemed to have larger economic implications for the globe and country than simply airlines’ financial challenges…

He also said the energy, real estate and retail industries are all facing problems that could reverberate throughout the economy, and into the banking system…

One statement might have offered his most immediate insight: “This is a very good time to borrow money, which means it may not be such a great time to lend money”…

If there is a silver lining, it is that Mr. Buffett was not predicting doom and gloom, just that he wasn’t sure which way we are headed, though, of course, he is wishing for the best. If the right deal came along, he would jump, he said.

3) I also enjoyed this article by Yahoo Finance’s Andy Serwer, who was in the near-empty arena in Omaha: Here’s what you didn’t see inside Warren Buffett’s annual meeting. Excerpt:

But in the end, more like a preacher than a history professor, he was trying to lift us up, repeating on numerous occasions, “Don’t bet against America.” And again, “Don’t bet against America.”

The stamina of the man is incredible. The passion. You try talking intelligently for 270 straight minutes when you’re 89-years-old. I only saw him look at his watch once! As Whitney Tilson pointed out, he’s still got it. Abel didn’t weigh in that much (And director Ron Olson told us not to read too much into just Abel being up there, he lives nearby.) It was 95% Buffett. And you could tell Buffett missed Charlie Munger, you could see it. When Greg said he had “nothing to add.” Buffett said, “We have another Charlie here”…

You could tell this meeting was emotional for Buffett. You could hear it in his voice, and see it in his face and demeanor. And his hair was shaggy, (“not cut for seven weeks,” he said.) It’s a tough time for him, but not anywhere nearly as difficult as it is for millions of Americans – and he 100% recognizes that.

“See you next year, here,” he said to close the meeting. And then he lingered on the stage for several minutes or so with Abel, gathering his things, watching us do our post-game show and looking out at the empty arena,

And you could tell he wants it to come back. The meeting, the economy, and America too.

And it will come back. It will.

4) I’ve updated my intrinsic value calculation for Berkshire, and my latest estimate is $373,000 per A-share, meaning the stock is currently at a 27% discount.

Here are my assumptions: cash and investments were $353 billion at the end of the first quarter, to which I added 14% to the stock portfolio to reflect the S&P 500 Index’s jump in April. I then divided by 1.62 million shares to come up with $233,000 per A-share.

To this, one must add the value of the operating businesses, which had pre-tax earnings of $14,464 per share last year. I assume that operating earnings will decline by 10% this year, which results in $12,760 per share, after backing out insurance underwriting and investment profits, and adding back $1.4 billion in normalized insurance earnings.

To this, I apply an 11 times pre-tax multiple (down from 12 times at the beginning of the year, but up from 10 times a month ago), so that’s $140,000 per share in value.

$233,000 + $140,000 = $373,000.

If you assume that operating earnings fall 20% rather than 10%, intrinsic value is $354,000.

Best regards,

Whitney

Whitney Tilson

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About Whitney Tilson

Prior to creating Empire Financial Research, Whitney Tilson founded and ran Kase Capital Management, which managed three value-oriented hedge funds and two mutual funds. Starting out of his bedroom with only $1 million, Tilson grew assets under management to nearly $200 million.

Tilson graduated magna cum laude from Harvard College with a bachelor’s degree in government in 1989. After college, he helped Wendy Kopp launch Teach for America and then spent two years as a consultant at the Boston Consulting Group. He earned his MBA from Harvard Business School in 1994, where he graduated in the top 5% of his class and was named a Baker Scholar.

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