The Digest #20

Published on May 6, 2020

In Today’s Issue:

  • Warren Buffett Seems Worried
  • The Psychology of Masks 
  • Jim O’Shaughnessy Interviews Chris Arnade
  • New York City in 1911

To read last week’s newsletter please click here.

Warren Buffett Seems Worried

The Berkshire Hathaway annual meeting took place on May 2 in an empty arena in Omaha, with Warren Buffett joined by Vice Chairman Greg Abel in a four and a half hour marathon session covering a broad array of historical and current topics.

The annual meeting was webcast live by Yahoo! Finance and remains available in its entirety and conveniently categorized by subject area. Last week’s newsletter provided a number of links with useful background information regarding the meeting. 

Buffett opened by commenting on the absence of Charlie Munger, his business partner of sixty years, who prudently chose to avoid travel during the pandemic but reportedly remains in good health. Vice Chairman Greg Abel took Munger’s place at a table several feet away in order to maintain appropriate social distancing. Coca-Cola and See’s Candies products were visibly displayed, as usual.

Although reactions to the meeting varied widely, my overall impression is that Berkshire is being managed in the most conservative manner of Warren Buffett’s tenure as Chairman and CEO. His opening presentation took the viewer through decades, actually centuries, of American financial history demonstrating the country’s resilience and capacity for long term economic growth. But Buffett spent a great deal of time talking about the Great Depression and seemed to dwell on the illusory nature of the initial recovery of the stock market in 1930. We know that the majority of the pain of the Depression was ahead, but Buffett pointed out that the people living in 1930 didn’t realize that they were only at the start of the Great Depression. 

When the discussion turned to Berkshire Hathaway after more than an hour of financial history, it was clear that Buffett views the current environment to be extremely uncertain in terms of the range of possible outcomes over the next several months. His decision to sell all of Berkshire’s airline investments was obviously driven by uncertainty regarding whether air travel will return to pre-pandemic levels anytime soon. Also significant was his decision to halt repurchases of Berkshire shares after March 10 even as the stock continued to decline.

Berkshire reported first quarter earnings prior to the annual meeting. The headline loss of $49.7 billion was primarily driven by losses in Berkshire’s massive investment portfolio. Operating earnings actually increased compared to the first quarter of 2019. Berkshire’s 10-Q report notes that most subsidiaries were only impacted starting in March and it seems clear that the second quarter will be significantly worse. Nevertheless, the relatively muted impact of COVID-19 in Berkshire’s insurance operations, which posted an underwriting profit for the quarter, provides some clarity for shareholders who were worried about much larger potential COVID-19 impacts on the insurance operations.

Several transcripts of the annual meeting have been posted, such as this useful transcript that allows you to replay the relevant sections of the meeting. If you’re looking for information on a specific topic, you can search the transcript and then see the specific clip of Buffett or Abel speaking. 

The Psychology of Masks

On April 3, the Centers for Disease Control and Prevention updated their prior guidance on the use of masks and recommended that everyone should wear cloth face coverings when going out in public. Previously, the CDC did not recommend the widespread use of face coverings.

Human behavior varies widely across cultures, can be highly resistant to change, and is impacted by many psychological factors. When the COVID-19 pandemic first appeared in Asia, we all saw the photos and videos of people in China and other parts of Asia with almost universal mask use. The social norms in Asia encouraged mask use. In the United States and most western countries, social norms were exactly the opposite. Mask wearing bore a stigma. 

Social proof is one of the most powerful determinants of human behavior and is often used by businesses and government to obtain compliance. In the case of mask wearing, we started from the baseline of social proof discouraging mask use. By mid-April, social proof reinforced the use of masks in many public settings. What happened to change this?

In The Psychology of Masks, published on The Rational Walk earlier this week, I take a look at the topic of social proof as applied to mask wearing in the United States over the past several months. Unfortunate statements by government officials discouraged the use of an effective tool to contain the spread of the virus. But finally the evidence became overwhelming, recommendations were changed, and mask wearing became the norm.

Jim O’Shaughnessy Interviews Chris Arnade

Chris Arnade left his job as a trader on Wall Street in 2012 to focus on the plight of the poor in America. While still working as a trader, Arnade had a habit of taking long walks through New York City. His willingness to talk to the drug addicts, prostitutes, and homeless people he encountered formed the basis for a more in depth examination of what he calls “the back row” of American society – those left behind in our modern economy.

Perhaps even worse than being left behind, Arnade believes that the back row is misunderstood and belittled by the “front row” elites, and this misunderstanding crosses racial, ethnic, political, and geographical lines.

In 2019, Arnade published Dignity: Seeking Respect in Back Row America which documents his travels and interactions throughout the country. I found the book very interesting when I read it late last year. Although this isn’t a book about how Donald Trump came to power, it does help to get a sense for the dissatisfaction that makes people willing to make Hail Mary attempts to shake up the system. In a recent Infinite Loops podcast, Jim O’Shaughnessy interviewed Chris Arnade. The wide ranging discussion covered topics from Wall Street to the role of McDonalds in society. I follow both Jim (@jposhaughnessy) and Chris (@Chris_arnade) on Twitter and both often post interesting content.

New York City in 1911

“Past is dead Future is uncertain; Present is all you have, So eat, drink and live merry.” — Albert Einstein

Imagine taking a walk through New York City soon after the turn of the twentieth century. That would qualify as an amazing experience. We can get a sense of what that would be like by viewing A Trip Through New York City in 1911, a colorized video showing people at work, at play, and on the streets in an environment totally foreign to New York City today. 

As Warren Buffett said at the annual meeting, no one in 1930 knew that they were living at the start of the Great Depression. Neither do the men, women and children shown in this video know that the United States would enter World War I in 1917, that the country would face a disastrous pandemic in 1918, and that this would be followed by the Roaring ’20s and the Great Depression. 

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Copyright and Disclosures

Nothing in this newsletter constitutes investment advice and all content is subject to the copyright and disclaimer policy of The Rational Walk LLC. 

The Digest #20