Warren Buffett’s letter to shareholders began with a tribute to Charlie Munger and the same was true at the Berkshire Hathaway annual meeting.
For the first time, the company movie was included in the webcast, no doubt because it was meant to honor Mr. Munger’s life and recognize his contributions to Berkshire Hathaway’s success. It was a fitting tribute and Mr. Buffett had some additional comments about Mr. Munger before he turned to first quarter results and the Q&A session. Charlie Munger would have wanted the show to go on as usual, and the format of the Q&A session was unchanged from prior years.
I am not planning to write about Berkshire’s results in a comprehensive manner, as I explained last month, but I have decided to share a few observations based on the Q&A session. CNBC will soon add the full video and transcript for the meeting to the Warren Buffett Archive, so there’s not much value in transcribing the Q&A.
I took notes but did not attempt to write down questions or answers verbatim. While I do not think that I misheard or misunderstood anything important, it is possible that I have. If so, I will update this article once the transcript is released. What follows should be viewed as a set of informal notes about a few topics that came up at the meeting along with my own commentary.
Apple
Berkshire sold ~13% of its enormous stake in Apple during the first quarter. This move follows a much smaller reduction in the fourth quarter. The sale was not made in order to fund other investments and the proceeds were added to Berkshire’s cash holdings which Warren Buffett thinks might reach $200 billion by the end of the second quarter. This news follows Apple’s announcement of a $110 billion repurchase authorization last week. Mr. Buffett notified Tim Cook about the sales last week.
Mr. Buffett noted that corporate taxes could go up in the future from today’s 21% rate. This played a role in the decision, but it is probably not the primary factor. After all, Berkshire has a large number of appreciated securities to choose from if it wants to realize capital gains to be taxed at a relatively low rate. Mr. Buffett said that Berkshire is likely to still own Apple when Greg Abel takes over and predicted that Apple will still be Berkshire’s largest equity holding at year end. However, Apple could be sold down to a $35-40 billion position and still qualify as Berkshire’s largest holding. I doubt he will go that far, but he left himself quite a bit of room to maneuver.
Warren Buffett is not about to show all of his cards when it comes to activity in marketable securities. He is not unaware of the potential impact of his first quarter sales on Apple’s stock price. In my opinion, the less he says about his plans, the better.
Berkshire Hathaway Energy
Warren Buffett turned most of the discussion about Berkshire Hathaway Energy over to Greg Abel. This was very appropriate given Mr. Abel’s background in BHE and his oversight of all non-insurance operations. I wrote about my concerns regarding BHE is much detail after the annual report was released.
Mr. Abel handled the questions in a reassuring and logical manner, insisting that Berkshire will not throw good money after bad in situations where regulators and politicians are hostile to BHE earning acceptable returns on capital. Enormous investments will be required in the coming years to support higher demand for electricity, much of it based on data centers supporting the growth of artificial intelligence. Electricity demand could double in Iowa and triple in Nevada by the mid to late 2030s. BHE is ready to invest heavily to support this, but only if management expects to earn acceptable returns on invested capital.
It is unreasonable for utilities to bear all of the costs of wildfire damages. Mr. Abel pointed out that the recent $30 billion claim at PacifiCorp involves massive non-economic damages, that this litigation will be challenged, and that it will be many years before the matter is resolved. Historically, BHE’s utilities prioritized keeping the power on during storms in order to support provision of electricity for critical needs such as hospitals. However, keeping lines energized has the tradeoff of greater wildfire risks. In the future, BHE will de-energize lines during periods of higher risk and technology has been put in place to accomplish this objective.
The public power model is an alternative that certain states could opt for. Mr. Buffett noted that someone is going to have to pay for the investments needed, and that climate change risks will be borne by the public power model, if that is the route states decide to take. Both Mr. Buffett and Mr. Abel said that Utah has a more logical approach than Oregon. The overall tone of the discussion was candid and, like Mr. Buffett’s letter, was a clear message to regulators and politicians. BHE stands ready to make massive investments needed by society in exchange for a fair return. If that fair return is not forthcoming, states are free to opt for public power and Berkshire will invest its capital elsewhere. Hopefully the message will be received loud and clear.
Artificial Intelligence
Warren Buffett recently encountered a “deep fake” video of himself in which he made comments that he knows he never made. Obviously, this experience impacts his overall sentiments when it comes to artificial intelligence. He compared AI with the development of nuclear technology, noting that you cannot put the genie back into the bottle. I don’t think that this comparison was made lightly. He is justifiably worried about the potential for AI to facilitate massive fraud. For example, a deep fake of a relative could be sent to someone asking for an urgent money transfer. There is no way to know if what you are seeing is real or fake in today’s world. It makes me even more happy than usual to be completely unknown. Imagine being a celebrity, or even a moderately well-known executive, under these conditions!
To what extent should the precautionary principle be used when it comes to AI? It seems like Mr. Buffett would err on the side of caution. This is not very different from the views of Elon Musk and others far more familiar with technology. This is in stark contrast to the views of Marc Andreessen, the subject of an article I wrote last year. Mr. Andreessen went so far as to call the precautionary principle “deeply immoral.”
Warren Buffett is not a technology expert but I think his instincts about AI should not be taken lightly. Incidentally, AI currently leaves much to be desired. AI is only as good as its training data. Recently, the X/Twitter AI tool known as Grok thought that Ajit Jain was designated as the next CEO of Berkshire Hathaway and reported that Warren Buffett and Charlie Munger would be answering questions today. Since Grok’s training data is comprised of the “information” on X/Twitter, it is no surprise that it produces faulty results. Much of the information on X/Twitter is factually incorrect.
Garbage in, garbage out.
GEICO
A shareholder asked about GEICO’s competitive position relative to Progressive. This was a subject of one of my articles following the annual report. Ajit Jain previously acknowledged that GEICO fell behind Progressive on technology that allows underwriters to properly set rates based on risk. GEICO’s lagging performance in telematics has cost the business significant market share in recent years. Mr. Jain thinks that GEICO should be caught up on this front by the end of 2025 at the latest. This is certainly reassuring news.
Warren Buffett emphasized that GEICO’s problems are not really related to its ability to post profits and noted that the company’s expense ratio is far below competitors. Still, it was obvious that he would prefer to see gains in market share in the future. His priority has clearly been profitability rather than market share. The issue is that GEICO had to shrink in order to return to profitability while Progressive has been able to pick up share. Time will tell whether Mr. Jain’s predictions on telematics turn out to be correct. In the meantime, it will be interesting to see when GEICO starts investing more heavily in advertising. This should happen once management is more confident that rates are adequate. I hope to see more of the gecko soon.
Succession Plans
Warren Buffett made it clear that he expects Greg Abel to work well past normal retirement age. Mr. Abel is 61 years old. In extended comments on the subject, Mr. Buffett spoke about his desire for Berkshire’s CEOs to have long runs, perhaps even two decades or longer. Of course, Mr. Abel’s tenure as CEO will depend on when he takes over, but he would be into his eighties if he’s going to have a two decade run. Few wealthy individuals would want to work that long.
It seems presumptuous for shareholders to assume that Mr. Abel wants to work into old age, but it is obvious that he has signed up to do so based on Mr. Buffett’s comments. This is reassuring. My main concern with succession has long been who will take over for Mr. Abel. If we do not have to worry about that until the late 2030s or early 2040s, there will be much more time for Berkshire to develop candidates.
There are succession plans in place for Ajit Jain although Mr. Buffett tells us that there is no real replacement for what Mr. Jain does. This is similar to his previous statements. I suspect that Berkshire will not take as many unusual large risks under Mr. Jain’s successor. I still think that Mr. Jain remains a potential CEO candidate for Berkshire Hathaway if Mr. Abel is unable to step into that role, for some unexpected reason. I very much like Mr. Jain’s direct, no-nonsense manner of answering questions, although Mr. Abel has a much broader background across Berkshire’s array of businesses and has rightly been designated as Mr. Buffett’s heir apparent.
I found it interesting to hear that Mr. Buffett gets very few calls from managers these days. This means that the structure put in place in 2018 with Mr. Jain and Mr. Abel is working as intended. According to Mr. Jain, Mr. Buffett adroitly deflects managers who try to do end-runs around the Vice Chairmen. I’ve always thought that it would be difficult for Mr. Buffett to cede control, but he has proven that he is willing to do so over the past several years. I think he’s happy focusing on capital allocation.
Capital Allocation
Warren Buffett was asked whether Greg Abel, Todd Combs, or Ted Weschler would run Berkshire’s investments once Mr. Abel is CEO. Mr. Buffett made it very clear that Mr. Abel would be responsible for capital allocation and expressed a high degree of confidence that Mr. Abel’s overall business acumen would translate well into having responsibility for investments more generally.
From some of the commentary online, it seems like this statement was taken as lack of confidence in Mr. Combs and Mr. Weschler. However, I think that the point was that Mr. Abel, as CEO, must have overall responsibility for all of Berkshire’s capital allocation. In my opinion, it is likely that Mr. Abel will delegate some responsibility to Berkshire’s investment managers, just as Mr. Buffett has done for over a decade. But that will be a decision to be made in the future, in consultation with the board.
Perhaps some of the online chatter is related to a recent article in the Financial Times that attempted to estimate the returns attributable to Mr. Combs and Mr. Weschler. Berkshire does not report the individual performance record of managers, the subject of one of my articles last year. It is difficult to distill the value of these managers to Berkshire based on their own results alone since they have provided ideas to Warren Buffett that are reflected in his own portfolio. As I observed in my article, Mr. Buffett’s huge bet on Apple was due to discussions with his managers:
Apple is an interesting case of “reverse coat tailing” in the sense that Warren Buffett took an investment thesis first developed by others and was able to gain enough conviction to take a much more massive position with the funds he manages. In the years since 2016, Berkshire has profited handsomely from the Apple investment that is part of Warren Buffett’s portfolio, but this performance is not part of the direct investment record of Todd Combs or Ted Weschler.
I would like to know individual track records, but I am confident that the managers would not be employed by Berkshire if Warren Buffett lacked confidence in their abilities. Whether Greg Abel will feel the same way in the future remains to be seen.
Another Year …
At the end of the Q&A session, Warren Buffett thanked shareholders for attending, said that he hoped they would attend next year, and joked that he hoped he would be there as well. At ninety-three, there are obviously no guarantees but Mr. Buffett said that he’s feeling fine. That’s great to hear.
Warren Buffett’s performance on stage for five hours, answering dozens of questions with only one break, is a feat that few men in their fifties or sixties could accomplish. Next year’s meeting will mark the sixtieth anniversary of Mr. Buffett taking control of Berkshire. I’m hopeful that he will be leading Berkshire for many years to come.
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