This issue of the Warren Buffett Shareholder was published just in time for the Berkshire Hathaway shareholders’ meeting held on May 5, 2018, which we attended along with 40,000 other Warren Buffett shareholders. I was honored to be asked to contribute an essay to this terrific book which shares wonderful stories from inside the meeting from long-time shareholders. Please find below our highlights from the 2018 meeting.

FIRST QUARTER RESULTS

Warren Buffett reported, “If you look at the figure of operating earnings, which is what we look at, we actually earned a record amount ($5.25 billion) for any quarter we have ever had. That includes no realized gains or losses on securities or on the few remaining derivatives we have. Geico had quite a good-sized turnaround in profitability and a good gain in terms of policies in force. The railroad was up significantly and most of our businesses tended to be up. We were aided in a material way by the reduction in the federal income tax rate from 35% to 21%.”

GEICO Buffett noted, “Geico is a jewel. It’s an incredible company. It has a culture all its own. It is saving its customers probably $4 or $5 billion a year against what they would otherwise be paying based on the average in auto insurance. It will be profitable on underwriting a very high percentage of the time. It’s a terrific company.“

TRADE WAR WITH CHINA

Buffett remarked: “The United States and China are going to be the two superpowers of the world economically and in other ways for a long, long, long time. We have a lot of common interests and like any two big economic entities, there will be times when there will be tensions. It is a win-win situation when the world trades basically.” Charlie Munger, Berkshire’s Vice Chairman, added, “I’m very optimistic that both nations will be smart enough to realize that the last thing they should do is have any ill will for the other.”

CAPITAL ALLOCATION

Buffett stated, “If we thought we couldn’t use capital effectively, we would try to figure out the most effective way of returning capital to shareholders. I think it would be unlikely we’d do it by a special dividend. I think it would be more likely we’d do it by share repurchases. We will try to do whatever makes the most sense.”

LONG-TERM BONDS

Buffett proclaimed, “The one thing we know is that we think long-term bonds are a terrible investment at current rates. The Federal Reserve Board is telling you we want 2% a year inflation. The long-term bond is not much more than 3%. Of course, if you are an individual, then you pay tax on it. Let’s say it brings your after-tax return down to 2 1/2%. The Federal Reserve Board is telling you they are going to do whatever is in their power to make sure you don’t get more than a 0.5% a year of inflation-adjusted income. I would stick with productive businesses or other productive assets by far.” Charlie added, “In my whole lifetime, it’s only happened once that interest rates went down so low and stayed low for a long time. It was quite unfair to a lot of people. It benefited the people in this room enormously because it drove asset prices up, including the price of Berkshire Hathaway stock. We are all a bunch of undeserving people, and I hope that we continue to be so.”

BERKSHIRE’S EARNINGS POWER

Asked about Berkshire’s normalized earnings power, Buffett responded, “I would say that what you saw in the first quarter ($5.25 billion), under these tax rates is a reasonable guess. Obviously, it depends on the economy in any given year. There’s many billions of dollars we are not showing in our earnings that are being retained by our investees. One way or another I think we will get value received out of those. You can take $20 or $21 billion (annually) under present tax rates and economic conditions, and then we should get something back and more when we get the $100 billion in cash invested. We hope it adds up to a bigger number as we go along.”

POLITICS

Buffett recounted, “Multiple times in my life, people have felt the country was more divided than ever. I’ve lived under 14 of the 44 presidents the U.S. has had. Seven have been Republicans and seven have been Democrats. One has been assassinated, one has resigned under pressure. If you’d told me at the start, that you’d have a Cuban missile crisis, nuclear weapons, a financial panic, many recessions and war in the streets in the late ’60s from a divided country, you’d say, ‘Why the hell are you buying stocks?’ And through it all, America, in fits and starts, really, really moves ahead. This is a remarkable, remarkable country. Since 1942, $10,000 invested in the stock market has turned into $51 million.” Charlie agreed, “ There’s a tendency to think our  present politicians are much worse than any we had in the past, but we tend to forget how awful our politicians were in the past.“

INVESTING FORMULA

Charlie explained, “I can’t give you a formulaic approach because I don’t use one. I just mix all the factors and if the gap between value and price is not attractive, I go on to something else. Sometimes it’s just quantitative. For instance, when Costco was selling at about 12 or 13 times earnings, I thought that was a ridiculously low value just because the competitive strength of the business was so great and it was so likely to keep doing better and better.

I can’t reduce that to a formula for you. I liked everything about it. I thought even though it’s three times book, or whatever it was then, that it’s worth more, but that’s not a formula. If you want a formula, you should go back to graduate school. They will give you lots of formulas that won’t work.”

APPLE

Asked whether Apple would do better spending $100 billion on acquisitions rather than share repurchases, Buffett responded, “They shouldn’t buy in their shares at all unless they think they are selling for less than they are worth. If they are selling for less than they are worth, and they have the money, and they don’t see an acquisition that’s even more attractive, they should buy in their shares. It’s extremely hard to find acquisitions that would be accretive to Apple. I am delighted to see them repurchasing shares. We own 250 or so million shares. I think you can say we own 5% of it. With the passage of a little time, we may own 6% or 7% simply because they repurchase shares without us laying out a dime. It’s worked for us in many other situations. They will not find $50 or $100 billion acquisitions that they can make at remotely a sensible price that really become additive to that. We very much approve of them repurchasing shares.”

CRYPTOCURRENCIES

Buffett forecast, “Cryptocurrencies will come to bad endings. Along with the fact that nothing is being produced in the way of value from the asset, you  also have the problem that it draws in a lot of charlatans and that sort of thing. It’s something where people who are of less than stellar character see an opportunity to clip people who are trying to get rich because their neighbors are getting rich buying this stuff. It will come to a bad ending.”

Charlie muttered, “Well, I like cryptocurrencies a lot less than you do. To me, it’s just dementia. I think the people who are professional traders that go into trading cryptocurrencies, it’s just disgusting. It’s like somebody else is trading turds and you decide, I can’t be left out.“

BERKSHIRE CULTURE

Buffett remarked, “I think the culture is very, very strong and frankly I think it gets reinforced by the shareholders we have. We want shareholders who are partners basically. I’ve never seen another board like ours. It’s a group of owner-oriented, Berkshire-conscious, business-savvy owners. We want people who basically think about how to run a business well for themselves and for their partners. We have managers who fit into that culture or have chosen that culture in coming with us. Sometimes we have the second, third or fourth generation – such as at Nebraska Furniture Mart – that share that. In terms of having a common, strong, positive culture, I don’t think there’s any big public company that has it better than Berkshire. I think that will continue because people opt into it to a great deal and cultures get passed along. We’ve got as good a culture as you can get. We will try to keep behaving in a way that reinforces it and doesn’t dilute it. It won’t only work for Charlie and me, but it will work for our successors as well.”

Charlie added, “Every time I come to one of these meetings and I sit in the managers’ luncheon, I feel more strongly at the end of the luncheon that the culture and values of Berkshire Hathaway will go on and on for a long time after he present management is gone. In fact, I think it will go on after all the present managers are gone. I think we started something here that will work well enough that it will last. One of the reasons it will last is that it’s not that damn easy to duplicate.”