Berkshire Hathaway's 2023 Q&A Session
Buffett and Munger answer nearly fifty questions in a five hour marathon session prior to Berkshire Hathaway's 2023 annual meeting.
Warren Buffett and Charlie Munger were in top form this weekend as they answered forty-eight questions from shareholders in a marathon five hour session. Although this number fell short of Mr. Buffett’s goal of sixty questions, shareholders had more than twice the opportunity to be heard compared to last year’s languid pace. During Berkshire’s formal business meeting following the Q&A session, shareholders re-elected the Board of Directors and defeated six shareholder proposals.
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Prior to taking questions, Mr. Buffett made some remarks on first quarter results. He projected that the majority of Berkshire’s businesses will report lower earnings in 2023 compared to last year and that the fast pace of stimulus driven spending in recent years has come to an end. Berkshire subsidiaries that did not experience much resistance to raising prices over the past two years have started to have sales.
On the bright side, Berkshire’s large holdings of short-term treasury bills will benefit from higher interest rates this year which should ameliorate the decline in earnings from operating subsidiaries. Barring major catastrophes, Berkshire’s insurance underwriting results should improve this year. Overall, Mr. Buffett expects, but cannot guarantee, that operating earnings will increase in 2023.
Prior to the Q&A session, I briefly reviewed Berkshire’s first quarter results on Twitter. I will write a more detailed article about the quarter now that I have had time to analyze the results, so I will not comment further on quarterly results in this article.
Shareholders asked many good questions that pertained to Berkshire directly as well as on macroeconomic and geopolitical topics that impact the overall business climate. I commented on the questions and answers in a Twitter thread during the meeting.
CNBC will soon provide a transcript of the meeting in addition to videos of the morning and afternoon sessions. Several video clips on various topics are already available. There is limited value in creating a transcription of these videos so instead I am providing my views as a longtime shareholder on a few selected topics that I believe are most important for Berkshire’s future prospects.
This article covers the following topics:
I attended my first Berkshire Hathaway annual meeting in 2000. Succession planning was already on the minds of shareholders at that time as a sixty-nine year old Warren Buffett and a seventy-six year old Charlie Munger took the stage. If you had told me then that we would be sitting here nearly a quarter century later with the same two elderly men running Berkshire, I would have found the idea ridiculous. It’s amazing to note that over 48% of Mr. Buffett’s tenure at Berkshire has been as a senior citizen!
It was arguably reasonable for Berkshire to have a vague succession policy in 2000 or even a decade later but it would not be reasonable today with Mr. Buffett approaching his ninety-third birthday in August and Mr. Munger on the verge of centenarian status. Five years ago, Mr. Buffett elevated Greg Abel and Ajit Jain to Vice Chairmen and two years ago Mr. Abel was named as Mr. Buffett’s successor as CEO.
Starting in 2021, Ajit Jain and Greg Abel have been available to answer questions from shareholders at the annual meeting. The presence of these men on stage with Warren Buffett and Charlie Munger has served to provide reassurance regarding continuity of management. This year, Mr. Abel provided general commentary on matters related to Berkshire Hathaway Energy and BNSF and Mr. Jain made several newsworthy comments related to GEICO which I will discuss later in this article.
Late in the morning session, Mr. Buffett said that Mr. Abel knows capital allocation as well as he does and will do very well in this area. As CEO of Berkshire Hathaway, Mr. Abel will be responsible for making decisions on repurchases and he indicated that he will follow the same framework established by Mr. Buffett.
Prior to his appointment as Vice Chairman responsible for oversight of Berkshire’s non-insurance businesses, Mr. Abel was responsible for Berkshire Hathaway Energy, a subsidiary that has reinvested tens of billions of dollars in recent decades. Although Mr. Abel has not been involved in repurchase decisions, he has worked closely with Mr. Buffett on reinvestments in Berkshire subsidiaries and in acquisitions.
Mr. Buffett later noted that shareholders should be comfortable with Mr. Abel knowing that 99% of Mr. Buffett’s net worth is in Berkshire and billions of dollars of future philanthropy will depend on Mr. Abel doing well. I was surprised to hear that Mr. Buffett has no second choice after Mr. Abel since I assumed that Mr. Jain would step in as CEO if necessary. I did not find that statement particularly reassuring. It would be a good idea to have a backup plan given that Mr. Abel is sixty years old.
What I do find reassuring is the fact that Berkshire’s directors have a great deal of skin in the game and that Mr. Abel made a significant investment in Berkshire Hathaway in September 2022 and added to his position in March 2023. With 228 Class A shares currently worth $113 million, Mr. Abel has built up a substantial holding. In June 2022, Berkshire Hathaway Energy purchased Mr. Abel’s 1% stake in the business for $870 million. I would not be surprised to see him make additional purchases of Berkshire Hathaway shares in the future.
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Future Voting Control of Berkshire
Warren Buffett controls over thirty percent of Berkshire’s voting power and the force of his personality and well-earned loyalty of shareholders has given him effective control of the company for decades. This has allowed Mr. Buffett to “paint his canvas” as he sees fit. However, voting control in the future is certain to change because all of Mr. Buffett’s Class A shares will eventually be converted to Class B shares with diminished voting power prior to being donated to charitable foundations.
One of the questions I submitted this year was about how voting control at Berkshire would change by 2050. My question was not selected but voting control was brought up during the meeting. One shareholder asked whether a corporate raider might be able to buy enough shares to control the company in the ten to fifteen years. Another question was about whether large financial institutions will eventually gain control.
Mr. Buffett said that he thinks about the issue but he did not appear to be very worried. He noted that Berkshire’s size limits the number of potential corporate raiders that could take control of Berkshire. In addition, he thinks that the shareholder base is unique and will reject changes to the culture. Index funds and other institutions are likely to back off when it comes to voting control if Berkshire is considered a national asset rather than a liability.
I remain very concerned about the power of institutions to impact Berkshire’s policies in the future and Mr. Buffett’s comments did not do much to alleviate my concerns.
Activist shareholders with political motivations submitted six shareholder proposals this year, all of which were defeated. If institutions and political activists are targeting Berkshire today, with Mr. Buffett in firm control, it does not seem plausible to think that they will be less aggressive in 2040 or 2050 when Mr. Buffett’s Class A shares have been converted to Class B shares and given away to foundations.
Perhaps it is too much to expect Warren Buffett to present us with a roadmap of how Berkshire’s affairs should be handled in the decades to come. This responsibility will rest with Berkshire’s future shareholders and the directors they elect. However, there are certain steps that could be taken today that might allow longtime Class A shareholders to avoid diluting their voting control by converting to B shares.
History is full of companies that lost their way in the decades after an iconic founder left the scene. Excessive fretting over the issue is unproductive. Shareholders will need to stay vigilant to ensure that their economic interests are maintained and the culture is preserved. As a longtime shareholder who hopes to remain a shareholder a quarter century from now, I hope that my concerns will prove to be unfounded. But the fact remains that I was not at all reassured by statements in this meeting.
Last week I wrote Progressive vs. GEICO: The Battle Continues which goes into GEICO’s recent troubles as well as the company’s longtime rivalry with Progressive. I was hoping for extended discussion of GEICO at the meeting and I was not disappointed. Ajit Jain fielded questions on auto insurance in general and GEICO in particular. Mr. Jain has a very direct communication style and minces no words when it comes to acknowledging past problems and outlining corrective steps.
As he has stated in prior meetings, Mr. Jain acknowledged that GEICO had been slow in adopting telematics. In addition, he noted that the company’s information systems needed significant work with hundreds of systems that don’t talk to each other. Management is working on integrating information systems and making rapid strides in telematics that should lead to better matching of pricing and risk. GEICO is now at the point where about 90% of new business has a telematics input on pricing.
Mr. Jain referred to a combined ratio target of 96% for GEICO. This has long been Progressive’s target, as I noted in my article last week, but I do not recall a target ever being set for GEICO. Mr. Jain stated that GEICO’s combined ratio for the first quarter was 93% but that he expects the combined ratio for 2023 as a whole to be just under 100%. He expects GEICO should approach a 96% combined ratio within two years.
This is good news given that GEICO has operated at a combined ratio over 100%, indicating underwriting losses, for six quarters in a row, posting cumulative underwriting losses of $2.3 billion over that period. The first quarter’s underwriting profit was $703 million. I will write more about GEICO’s results in my upcoming article on Berkshire’s first quarter earnings.
Another question had to with automakers introducing their own insurance products. I was aware of Tesla’s insurance initiative but apparently General Motors is doing the same thing. Mr. Jain acknowledged that it is very convenient for consumers to purchase auto insurance at the point of sale but that this would be very challenging for automakers. Mr. Buffett pointed out that General Motors offered auto insurance for decades and that this is not a new idea. It is hard to compete with companies like GEICO and Progressive in what is a fairly low margin business.
One of the topics that I will discuss in my upcoming article on Berkshire’s first quarter earnings is that GEICO has obviously chosen to prioritize underwriting profitability over market share. As Progressive gained policies-in-force during the first quarter, GEICO gave up business. Into this hyper-competitive mix, Tesla has come out with extremely aggressive pricing.
Like Mr. Jain and Mr. Buffett, I am very skeptical that Tesla knows what it is doing when it comes to auto insurance pricing. However, it is possible that Tesla is not concerned with generating underwriting profits and thinks of insurance as a loss leader to help the company sell more vehicles. Time will tell.
Berkshire Hathaway has been building up a large position in Occidental Petroleum over the past year. Like many shareholders, I suspected that Warren Buffett might be making these purchases in the open market as a prelude to an offer to acquire the entire company. However, Mr. Buffett made it clear that he has no intention of acquiring Occidental. He is very happy with his purchases and with the way current management is running the company and allocating capital.
As I suspected when I wrote about the situation in March, Occidental has started to redeem Berkshire’s preferred stock investment. This information was in the 10-Q filed for the first quarter and Mr. Buffett discussed it briefly during the meeting. Occidental redeemed $474 million of Berkshire’s $10 billion preferred stock investment in March at a price of 110% of liquidation value. The ten percent premium softens the blow of losing a security paying dividends at 8% per annum. Berkshire continues to hold warrants to purchase 83.86 million shares of Occidental common stock at $59.62 per share which is very close to where the stock currently trades.
Both Warren Buffett and Charlie Munger spoke about the nature of shale deposits in the Permian Basin where Occidental operates. The speed of depletion of shale deposits is extremely rapid compared to traditional wells that produced for years and even decades. Mr. Buffett’s father purchased interest in oil wells in the early 1960s prior to his death. Mr. Buffett’s sister inherited those interests and still received monthly royalty checks today! Despite the fast depletion of Occidental’s shale reserves, Mr. Buffett likes the overall economics. He expressed disdain for the politicization of energy policy and stated that it is not un-American to produce oil.
I do not recall any discussion of Chevron during the meeting, but when I reviewed the 10-Q, I noted that Berkshire sold approximately $6 billion of its Chevron position. This is interesting in light of Berkshire concurrently increasing its Occidental position and perhaps is a statement on the relative valuations of the two companies.
Berkshire Hathaway Energy and Clean Energy
There were several questions related to “clean energy” that led into a discussion of Berkshire Hathaway Energy. During the morning session, Greg Abel handed most of this discussion, emphasizing that BHE has been a very positive force in the transition to cleaner sources of energy. Mr. Abel noted that BHE has a set of goals related to reducing its carbon intensity and has communicated those goals.
It seems to me that Berkshire gets little credit for its clean energy initiatives or its efforts to communicate goals. For example, BHE recently presented detailed plans at an investor conference that included several carbon-related goals. For example, the following slide discloses BHE’s plans to retire all coal-fired plants by 2049:
Mr. Abel discussed the importance of transmission when it comes to actually getting clean energy from its point of production to where customers need the power. BHE has spent close to $7 billion on its western transmission projects to this point. Management has plans for $70 billion of known projects in the coming ten years which should be a good opportunity to deploy capital.
Mr. Buffett noted that shifting to renewable energy in the timeframe that the government has mandated is a task comparable to how the United States mobilized for World War II. During the war, the government was able to reorder the industrial base of the United States for a common purpose. This shows that resources can be marshaled, but it remains to be seen if something similar can be done in peacetime.
Later in the day, Mr. Buffett mentioned BHE’s investment in wind and solar power has not been topped by any other utility in the United States and that this has been aided by BHE not having any dividend obligations to Berkshire. All earnings have been reinvested. Capital expenditures of approximately $7 billion per year far exceed depreciation. Mr. Munger stated that even if we put aside the question of climate change, it makes sense to take steps to preserve our hydrocarbon resources. I recall that he made similar statements in years past, specifically related to the need for petroleum based resources to produce fertilizer products.
I get the sense that Berkshire Hathaway’s management is more than that a little frustrated that BHE is not getting more credit in the political arena for the steps it has taken to decarbonize and move the country toward renewable energy. I can understand the frustration given the amount of material the company has made publicly available on its website. The climate activists who constantly criticize Berkshire Hathaway and submit proposals for shareholder votes are either unaware of what BHE is already doing or simply want to make political points.
China, Geopolitics, and Apple
I have been concerned about Berkshire’s exposure to China for many years and most recently wrote about the subject in March. It seems clear that the United States and China are on a collision course and that economic tensions could easily escalate to a proxy war over Taiwan or even end up in a catastrophic military conflict between nuclear armed superpowers. This is why I submitted a question about China for the annual meeting. My question was not selected but the topic was brought up by others.
Charlie Munger repeated his prior comments about how the United States and China would be crazy to not get along. He stated that the two countries are equally guilty of being stupid and that each side should respond to the stupidity of the other side with kindness. Warren Buffett appears to be quite a bit more concerned and noted that the United States and China can destroy each other and that we need to judge how far each side can be pushed without overreacting. This is a game theory dilemma.
Mr. Buffett repeated the comments he made during a recent CNBC interview when asked about his sale of Taiwan Semiconductor shares. He had positive things to say about the company but became uncomfortable with its location. Mr. Munger thinks that Mr. Buffett should feel more comfortable with the risks associated with Taiwan.
As I noted in an article in March, Apple has significant China exposure. Although I do not recall a question that specifically asked about Apple in the context of China, Apple did come up several times. Mr. Buffett made the extraordinary statement that Apple is a better business than any that Berkshire directly controls. He noted that the Apple position is worth more than Berkshire Hathaway Energy. While he doesn’t understand the technology in the iPhone, he does understand consumer behavior and thinks that many consumers would give up a second car before giving up their iPhone.
In response to a question asking about Apple in the context of Berkshire’s portfolio of marketable securities, Mr. Buffett said that he views Apple in the context of all of Berkshire, not just as a percentage of its equity securities. The fact that Apple is owned via publicly traded shares that are quoted in the market is immaterial to him. Later in the meeting in response to a question on the automobile industry, Mr. Buffett said that he doesn’t know what the automobile industry will look like in five to ten years but thinks he has this insight into what Apple’s business will look like.
It is difficult to square Mr. Buffett’s certainty with respect to Apple’s prospects with his geopolitical concerns regarding China. Apple is highly exposed to China both in terms of its manufacturing and sales to Chinese consumers. If China invades Taiwan and the United States imposes sanctions against China similar to what was put in place against Russia after the Ukraine invasion, the consequences for Apple will be severe and it goes without saying that outright war with China would be catastrophic.
While I have highlighted several concerns in this article, I found myself in agreement with far more comments than I took issue with. Writing adulatory comments about how much I agree with Warren Buffett and Charlie Munger would not be of much use in terms of clarifying my own thoughts or for my readers. As a result, I felt that it was more productive to highlight areas of potential concern.
As the years go by, it is easy to take for granted the fact that Warren Buffett and Charlie Munger continue to show up every year to take questions from shareholders for five hours. I do not know of any other major corporation that does anything similar. The culture of Berkshire Hathaway is unique and should last for a long time.
Just as Tim Cook is not Steve Jobs, Greg Abel is not Warren Buffett. The successor of a unique and iconic founder cannot hope to exactly copy the man he succeeds, nor should he. What he can do is attempt to preserve the culture and to run the business well. Mr. Abel strikes me as similar to Mr. Cook in many ways. When the time comes, Greg Abel will come through for Berkshire Hathaway shareholders.
Looking ahead to the 2040s and 2050s, the picture gets far cloudier. To avoid morphing into a typical mega-cap company, Mr. Abel will need to someday turn over the reins to his successor and he will need to keep ESG activists and other pressure groups at bay even as the voting control of Mr. Buffett’s estate diminishes. This will be no easy task. Probably all we can say at this point is that Berkshire is better positioned to navigate these choppy waters than any other large corporation.
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