2. The use of cash held on the balance sheet of companies: Buffett seems to like stock buybacks and doesn’t prefer dividends. Munger feels that buying other companies via large-scale mergers is usually a disappointment. They both complained about the way private equity investors have bid up deals that might come to Berkshire otherwise.
3. The effect of technology on moats: “Elon says a conventional moat is quaint, and that’s true of a puddle of water,” Munger, said. “It’s ridiculous. Warren does not intend to build an actual moat. Even though they’re quaint.”
Smead Capital Management’s Feelings
1. Some industry experts believe we have the most over-lap with Berkshire Hathaway’s stock holdings of any large-cap equity mutual fund. Buffett and Munger had very positive things to say about our holdings BRKB, AXP and WFC. In past meetings they have raved about Bank of America (BAC), another common holding.
2. Buffett and Munger spoke very little about the psychology of the stock market. We believe it is because of their size. Buffett needs to put $10-20 billion into each idea and we put a small fraction of that into each company. The Berkshire Hathaway stock market universe is narrower, so they are less interested in what Mr. Market is saying to his partner and more interested in getting a call from a company seeking to go private. We have numerous stocks to purchase with historically strong moats, which are threatened and live with some uncertainty. Buffett and Munger have said many times, “Uncertainty is the friend of the value investor.” The current investment environment could put its mirage in the way of today’s value investors, including Buffett and Munger.”
3. Munger pointed out that cheap money helps the “undeserved” wealthy, like Buffett and Munger, in society. This voting machine effect is in place today pushing securities higher as rates stay historically low. He noted that he hopes they (meaning Berkshire) continue to benefit.
We at Smead Capital Management don’t believe this is the benefit that Charlie should be seeking, because, although they have benefited in the short term, it may be hurting them in the long term. Low rates cause marginal players to enter the market because funding costs are low. Scott Galloway of NYU says that high price-to-earnings tech companies have a “zero cost of capital.” The longer this goes on, the higher the probability there will be a money-losing entrant invading your industry. Each time that has happened in recent history, existing industry participants feel the blues.
As Buffett noted, it feels like moats appear more penetrable today. His feeling might be the illusion that this environment won’t change. We believe cheap money is like a mirage. It always vanishes and you end up with a lack of liquidity, just when you desperately need it. We believe Munger and Buffett are being tricked by the mirage. Our portfolio managers have a combined 73 years of experience in the investment business and we’ve learned that the only guarantee is that things will change. In this era of growth stock popularity, it appears even the “Oracle of Omaha” and his brilliant sidekick, Charlie Munger, are affected by this mirage of feelings tied to investment size, low interest rates and stock market popularity.
William Smead is CIO and CEO of Smead Capital Management. Tony Scherrer, CFA, is director of research and portfolio manager at Smead Capital Management. Cole Smead, CFA, is managing director and portfolio manager at Smead Capital Management.