Last year we wrote about timeless lessons from Benjamin Graham in a piece titled ‘Forgotten Lessons’. This year we are revisiting timeless lessons from Berkshire Hathaway annual meetings. While many of these appear old-fashioned, they have stood the test of time and remain fundamental to sound investing. At Oldfield Partners we think it would be a mistake for investors to forget these enduring lessons. Berkshire Hathaway is one of the largest holdings in the Global Strategy today.

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Valuation

“The economic value of any asset, essentially, is the present value, [calculated with] the appropriate interest rate, of all the future streams of cash going in or out of the business. And there are all kinds of businesses that Charlie and I don’t think we have the faintest idea what that future stream will look like. And if we don’t have the faintest idea what the future stream is going to look like, we don’t have the faintest idea what it’s worth. So, if you think you know what the price of a stock should be today, but you don’t think you have any idea what the stream of cash will be over the next 20 years, you’ve got cognitive dissonance.” ^[1]

Lesson 1: At Oldfield Partners, we are steered by where we can see value based on earnings, cash flows and/or assets.

Circle of competence

“If something is not very predictable, forget it. You know, you don’t have to be right about every company. You have to make a few good decisions in your lifetime. The important thing is to know when you find one where you really do know the key variables — which ones are important — and you do think you’ve got a fix on them.” ^[2]

Lesson 2: At Oldfield Partners we focus on variables, businesses and industries that are knowable.

“…I would not try to teach them to think they could do the impossible…probably on the final exam I would take an internet company, and I would say the final exam, the question is, “How much is this worth?” And anybody that gave me an answer I would flunk.” ^[3]

Lesson 3: While the world has changed since this comment in 1998 and certain internet companies have matured, we believe that many remain un-investable.

Returns

“Well, if U.S. GDP grows at four percent, five percent a year, with one or two percent inflation, which would be a pretty — would be a very good result — I think it’s very unlikely that corporate profits are going to grow at a greater rate than that.
So, if you really have a situation where the best you can hope for in corporate profit growth over the years is four or five percent, how can it be reasonable to think that equities, which are a capitalization of that corporate — of corporate profits — can grow at 15 percent a year? I mean, it is nonsense, frankly. And people are not going to average 15 percent or anything like it in equities. And I would almost defy them to show me, mathematically, how it can be done in aggregate.” ^[4]

Lesson 4: Over the last 10 years returns in the S&P 500 have been over 13% per annum whilst over the last century, the ‘American Century’ they have been 10% per annum. Future returns are likely to be lower.

Patience & Greed

“It was always interesting to me how few people — everybody read [Benjamin] Graham’s [book] — and they didn’t really disagree with him. They just didn’t like following him because it didn’t promise enough, in a sense. I mean, people really wanted something very quickly.” ^[5]

Lesson 5: At Oldfield Partners, we stay true to the lessons taught by Graham and revisit them regularly to remain focused. We explained this in a thought piece in 2021 titled ‘Forgotten Lessons’.

“When farmland ...tripled here in the late ’70s, without any real change in yields per acre or the price of the commodity. Are we going to sit around and stew because — we didn’t buy farmland at the start? Are we going to stew because all kinds of stuff — uranium stocks in the ’50s — or you can go back — all kinds of things that have — the conglomerates in the late ’60s, the leasing companies, I mean, you can just go down the line. And we’re not in that game.” ^[6]

Lesson 6: There are always bubbles in markets be it Uranium stocks, Internet stocks, Japanese stocks or cryptocurrencies. At Oldfield Partners we focus on valuation and we therefore tend to avoid these bubbles (even though it can be painful for relative performance while such bubbles inflate).

Changing your mind

“But it is interesting that a wrong decision has been made to work out so well. We’ve done a lot of that, scrambled out of wrong decisions. I’d argue that’s a big part of having a reasonable record in life. You can’t avoid the wrong decisions. But if you recognize them promptly and do something about them, you can frequently turn the lemon into lemonade, which is what happened here. Warren twisted a lot of capital out of the textile business and invested it wisely. And that’s why we’re all here.” ^[7]

Lesson 7: Making mistakes is part and parcel of being an investor. The question is, what you do when you make them and how you learn from them?

Accounting

“The one figure we regard as utter nonsense is the so-called EBITDA. I mean, the idea of looking at a figure before the cash requirements [interest, tax and capital expenditure] and merely staying in the same place — and there usually are — any business with significant fixed assets almost always has with it a concomitant requirement that major cash be reinvested in order simply to stay in the same place competitively and in terms of unit sales — to look at some figure that is before — that is stated before those cash requirements, is absolute folly and it’s been misused by lots of people to sell lots of merchandise in recent years.” ^[8]

Lesson 8: As we wrote in a thought piece titled ‘Show us the money’ in 2022, the number of companies talking about EBITDA has been increasing steadily over the years. Although justified in some cases, we generally consider this a warning sign.

“If you overuse stock options the whole thing is sort of a chain letter. In Silicon Valley there was one company that practically paid everyone in stock options and as long as the chain letter galloped it worked in terms of the income account as nothing went through expense.” ^[9]

Lesson 9: As we wrote in a thought piece titled ‘Where is the money going?’ in 2022, the use of stock-based compensation is at an all-time high, particularly among US companies. At Oldfield Partners, we focus on economic profits after stock-based compensation.

All dollars are the same

“A dollar earned from a horseshoe company is the same as a dollar earned from an internet company, in terms of the dollar. So it is not worth more, [if] it comes from somebody named dot-com, or somebody named, the Old-Fashioned Horseshoe Company. The dollars are equal.” ^[10]

Lesson 10: Many investors want to pay higher multiples to participate in the latest craze. However, it is the money that is earned that matters, whatever industry the company operates in.

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The lessons learnt from these quotes are particularly relevant today. In particular, the importance of valuation, the use of appropriate accounting, not straying from what you know and returning to first principles when investing. At Oldfield Partners, these themes are core to our investment approach. This is the case even when they are out of favour by the rest of the market. It is an approach that we believe to be the safest way to protect and grow capital over time.

Sources
1: 1994 Berkshire Hathaway annual meeting - https://buffett.cnbc.com/1994-berkshire-hathaway-annual-meeting/
2, 3, 8: 1998 Berkshire Hathaway annual meeting - https://buffett.cnbc.com/1998-berkshire-hathaway-annual-meeting/
4, 10: 1999 Berkshire Hathaway annual meeting - https://buffett.cnbc.com/1999-berkshire-hathaway-annual-meeting/
5, 9: 1997 Berkshire Hathaway annual meeting - https://buffett.cnbc.com/1997-berkshire-hathaway-annual-meeting/
6, 7: 2000 Berkshire Hathaway annual meeting - https://buffett.cnbc.com/2000-berkshire-hathaway-annual-meeting/