Reading Between the Lines at Berkshire Hathaway
This year’s Berkshire Hathaway (NYSE: BRK-B) annual meeting in Omaha provided CEO Warren Buffett to tackle really one main topic — The Goldman Sachs Group (NYSE: GS).
Buffett, always the teacher, explained the transaction at issue, analyzed what Goldman did and what it should have done (which were the same thing) and said the entire episode was nonmaterial to the future of Goldman. Buffett spent more time talking about Goldman than any other topic.
It was not the only thing he talked about, however. During the roughly five-hour meeting, Buffett addressed dozens of topics. Here, taken from two legal pads worth of notes I took at this year’s meetings, is a synopsis of the four most important things Buffett discussed — and what they could mean to investors.
Expect more acquisitions.
A lot of Wall Street saw Berkshire’s purchase of Burlington Northern Santa Fe, which was completed in February, as the capstone of Buffett’s long career, a great way to go out on a high note. But Buffett isn’t dead and he isn’t going anywhere. He loves his job and certainly loves his place in American business, and the fact is that Berkshire’s acquisitions aren’t over.
This is true for two main reasons. First, Berkshire earned $8.4 billion in 2009 and another $3.7 billion in the first quarter of 2010, to say nothing of its access to $60 billion in insurance . Letting that cash lay idle drives Buffett nuts. And the second reason we should conclude that significant acquisitions aren’t over is that Buffett said they weren’t: “We’re as interested as ever,” he said in Omaha on Saturday. “I would love it if on Monday morning my phone rings with some big deal. If I get the call on Monday and it’s a $10 billion deal, I will say yes and figure out a way to do it.”
Buffett knows the time will come that he won’t be able to grow Berkshire any more. At some point, he said Saturday, Berkshire will be unable to translate a dollar of retained earnings into a dollar of market capitalization. Then the only logical thing to do is to begin handing the dollars directly back to shareholders. Buffett will resist this will all his might — he wants to invest those dollars, not pay them out, and that’s why Berkshire doesn’t pay dividends. Currently, a dollar of retained earnings is translating into about $1.30 of market value, Buffett said Saturday. The acquisitions will continue until that’s no longer true.
Charlie Munger sees great promise in solar.
Buffett wants a sensible return on invested capital forever. That’s how he builds value over the long term. Vice Chairman Charlie Munger, Buffett’s alter ego and longtime business partner, has a slightly different approach. He wants to find companies with a strong track record and an indication of an extremely bright future. Munger was the driving force behind Berkshire’s investment in BYD, the Chinese battery manufacturer and automobile maker. Munger saw the technology and was so impressed that owning the company was the only course of action he thought was reasonable. Munger, who sees all of the significant problems mankind faces essentially as energy problems, said Saturday that BYD had accomplished things that it shouldn’t have been able to accomplish.
He said solar was inevitable and clearly had a place in the nation’s energy portfolio. This is a significant statement, because energy is a big part of Berkshire’s business. Mid-American Energy, which comprises the lion’s share of Berkshire’s energy portfolio, is one of the largest wind power concerns in the country. It has found a way to include these assets into its production.
The one significant problem with solar is its relatively high cost. Munger said that it didn’t matter if solar was twice as expensive as the nation was accustomed to paying — that would merely be an economic “blip.”
With Munger’s love of energy, a willingness to pay for it and his track record of pushing tech-related deals that Buffett normally might not have picked, I think it’s possible that a solar-related acquisition is in the works or might someday be in the works. Munger likes the future of solar in the sense that it is clearly the inevitable future. Buffett would cotton to solar because it takes up a lot of capital and produces a steady stream of income over time without the allocation of additional capital.
Investors who are interested in this space should begin to study the leading solar companies. The largest industrial-scale solar company in the United States is First Solar (Nasdaq: FSLR). Berkshire’s acquisition guidelines require that a business has about $200 million in net earnings a year, and First Solar comes close to that.
The government’s probe into Goldman Sachs spells great opportunity for investors.
Buffett, clearly an expert in the field, has voiced his concerns over the suit against Goldman and categorically supported the investment bank and its CEO, Lloyd Blankfein. Berkshire’s history with Goldman spans nearly a half century, and while his viewpoint may be clouded by his affinity for the firm, he wouldn’t associate Berkshire with any organization that had engaged in any type of wrongdoing. When Buffett briefly ran Salomon Brothers, he gave testimony in 1991 before Congress, which was looking into the bank’s practices. Buffett said he had told the members of the firm that he did not mind if they lost money for the firm, but lose a shred of reputation, “and I’ll be ruthless.”
Buffett has invested $5 billion in Goldman preferred shares. “We love the investment,” he said Saturday. Goldman shares took a big hit when the suit was announced and have lost more ground as the Justice Department has said it will begin its own investigation of the firm. The shares are not for the weak of heart, but they are certainly on sale. Investors who truly regard Buffett as the Oracle of Omaha and are willing to bet on his long expertise should be buying Goldman shares.
David Sokol is the likeliest contender for the top job at Berkshire.
When Buffett dies (or if he retires because of ill health) his job will be split into two roles, a chief executive and a chief investment officer. Guessing who his successor will be is a revered Wall Street parlor game.
The smart money is on David Sokol, who brought Buffett Mid-American Energy. Sokol was the man Buffett sent to China to look at BYD to assess Munger’s enthusiasm, and Sokol now runs NetJets, Berkshire’s fractional aircraft ownership company, and has turned it into a profitable company, reversing years of losses. Buffett gave Sokol high praise for this at the annual meeting.
I’ve long thought Ajit Jain, who runs Berkshire’s reinsurance business, would be the ideal candidate, but I now think the job is Sokol’s, though I predict he’d create a role for Ajit that would put him in charge of all of Berkshire’s insurance businesses.
Sokol is a good candidate. He’s an Omaha boy with ties to Buffett friends Peter Kiewitt and Walter Scott. He has vast operational experience, extremely high integrity and Buffett clearly values his judgment. There is no way for investors to make money betting on who the next CEO is. It really doesn’t matter who it is, because one thing is true: It won’t be Warren Buffett and the stock will take a dive.
And that, as morbid as it sounds, is the opportunity for investors. Berkshire’s board has signed off on the new CEO, whoever it is. If Buffett is comfortable with it and the board is too, as Buffett said Saturday, then the only thing for investors to do is to be patient and wait for opportunity — classic Buffett advice.