Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio) hosted Berkshire Hathaway’s (BRK.A, Financial)(BRK.B, Financial) 2023 annual shareholder meeting on Saturday, answering investors’ questions on a variety of topics from the macroeconomic situation to the recent bank collapses, artificial intelligence and more. Shareholders also got the chance to splurge on See’s Candies, Squishmallows and other goodies from Berkshire’s vast collection of retail businesses.
Once again, the Oracle of Omaha and his right-hand man provided a wealth of insights on how Berkshire, which is often seen as a bellwether for the U.S. economy, is navigating the current economic environment. While the duo admitted that the end of the easy money environment is already resulting in reduced outlooks for most of Berkshire’s operating businesses, there are still plenty of ways the conglomerate and its investors can boost long-term results.
Finding opportunities in a more difficult economy
Buffett said he believes the “extraordinary period” of excessive consumer spending that was the result of pandemic-related stimulus measures and easy money policies has come to an end, creating a more difficult economic environment for businesses. He warned that many of Berkshire’s businesses have inventory build-up as they were not expecting demand to decline so soon.
“It is a different climate than it was six months ago," he said. "And a number of our managers were surprised… Some of them had too much inventory on order, and then all of a sudden it got delivered, and people weren’t in the same frame of mind as earlier. Now we will start having sales when we didn’t need to have sales before.”
As a result of the pullback in the U.S. economy, Buffett estimated that “perhaps the majority of our businesses will actually report lower earnings this year than last year.” Nevertheless, the guru said he thinks Berkshire is well-positioned overall for two main reasons: its $130 billion in cash (mostly in the form of Treasury bills) should benefit from higher interest rates, and the insurance business has been quick to rebound.
When Munger expressed worries that there are too many value investors chasing too few opportunities these days, Buffett countered there will always be ways to profit from others’ mistakes. Nevertheless, Buffett has also noted in recent years that there are fewer big value opportunities on the market than there used to be, and this is the driving reason behind Berkshire’s sizeable cash position.
It is notable that Berkshire’s cash balance has not grown much since 2020. At the very least, it seems Buffett and Munger were not keen on accumulating Treasuries at record low rates, spending money instead on certain stocks, such as Occidental Petroleum (OXY), and acquisitions, including insurance company Alleghany in October 2022 for $11.6 billion.
Berkshire has also upped its share buybacks once again, spending $4.4 billion to repurchase shares in the first quarter of 2023, up from $2.6 billion in the previous quarter. In his letter to shareholders, Buffett noted that Berkshire repurchased 1.2% of its outstanding shares throughout the course of full-year 2022, stressing, “Every small bit helps if repurchases are made at value-accretive prices.”
Continuing to grow the foundations of Berkshire
Aside from buying back its own shares and buying the stocks of other companies, Berkshire is also continuing to grow through acquisitions, most notably its acquisition of Alleghany, which builds upon one of the core foundations of Berkshire’s business: insurance float. Insurance float has been key to Berkshire’s success under Buffett’s guidance, as he can invest insurance float in stocks.
In his latest letter to shareholders, Buffett described the benefits of the Alleghany acquisition as follows:
“A second positive development for Berkshire last year was our purchase of Alleghany Corporation, a property-casualty insurer captained by Joe Brandon. I’ve worked with Joe in the past, and he understands both Berkshire and insurance. Alleghany delivers special value to us because Berkshire’s unmatched financial strength allows its insurance subsidiaries to follow valuable and enduring investment strategies unavailable to virtually all competitors.
Aided by Alleghany, our insurance float increased during 2022 from $147 billion to $164 billion. With disciplined underwriting, these funds have a decent chance of being cost-free over time. Since purchasing our first property-casualty insurer in 1967, Berkshire’s float has increased 8,000-fold through acquisitions, operations and innovations. Though not recognized in our financial statements, this float has been an extraordinary asset for Berkshire.”
At the shareholder meeting, Buffett also discussed how the insurance division’s quick recovery, especially auto insurer Geico, helped drive Berkshire’s first-quarter operating earnings up 12.6% year over year. Customers were tolerant of pricing increases and, overall, profit from insurance underwriting rose to $911 million, up from $167 million in the year-ago quarter. This marks a promising turnaround because last year, Geico suffered a $1.9 billion pretax underwriting loss as it lost market share to Progressive (PGR), which Berkshire’s vice chairman of insurance operations Ajit Jain primarily blamed on Progressive’s telematics.
Takeaway
Berkshire’s 2023 annual meeting provided investors with several key insights on how Buffett and Munger are assessing and dealing with the ongoing economic downturn. While the legendary investors continue to find value opportunities rarer than they were in the past, there are always opportunities to benefit from others’ mistakes, especially in a bear market. In these times of uncertainty, the legends have been primarily investing in those rare value stock opportunities as well as buying back Berkshire’s shares at a discount and investing in expanding its foundational insurance business via the acquisition of Alleghany.
