In more than a half-century of hugely successful investing for Berkshire Hathaway, Warren Buffett, chairman and CEO, 92, and vice chairman Charlie Munger, 99, “have never forgone an attractive purchase because of the macro or political environment or the views of other people,” Buffett wrote to shareholders in a recent annual report.
Rather, when valuing companies, Buffett “analyzes if this is a product people are likely to need no matter what, or a service they’re likely to pay for no matter what,” explains Lawrence Cunningham, research professor of law emeritus at George Washington University, special counsel at Mayer Brown law firm and a Buffett business friend, in an interview with ThinkAdvisor.
Cunningham, who advises companies on corporate governance and law, is gearing up to go to Berkshire’s big annual shareholder meeting on May 6 in Omaha, Nebraska.
He’s been attending these weekend-long gatherings for more than 25 years, and his friendship with Buffett extends to cluing in the Oracle of Omaha on acquisition opportunities.
Cunningham’s new book is the 8th edition of his classic international bestseller, “The Essays of Warren Buffett” (Cunningham Group, March 2023), updated and packed with the best of Buffett’s shareholder letters.
Readers will glean Buffett wisdom and straight-shooting advice that’s likely to improve their investing decision-making and strategizing.
In the interview, Cunningham, editor of the book, expands on much of Buffett’s investing philosophy. He also forecasts how he expects Berkshire to be run by Buffett’s likely successor and other leaders.
For the last decade, in addition to Buffett, two other company executives have made investment decisions: Todd Combs, GEICO CEO and portfolio manager, and Ted Weschler, portfolio manager.
They each have a supersized portfolio and authority to make decisions on their own, according to Cunningham.
Some of Buffett’s essays echo his famed advice: “Be fearful when others are greedy and greedy when others are fearful.”
He’s certainly done exactly that: “We usually make our best purchases when apprehension about some macro event [is] at a peak. Fear is the foe of the faddist but the friend of the fundamentalist,” he writes.
Also part of the Buffett buffet are enlightening, perhaps surprising, pieces of advice like, “It’s a mistake to distinguish between growth investing and value investing.” You need to look at both when valuing a company, Buffett says.
He rejects a number of approaches to investing, insisting that “an investor will succeed by applying good business judgement [and] insulate his thoughts and behavior from the super-contagious emotions that swirl around. There are no tricks, secrets or shortcuts.”
But some of the essays forecast expected negative, though realistic, changes to Berkshire’s returns as time moves on.
That is, the company “is so big now that it’s harder to get the kinds of returns they could when they were smaller. It’s not going to be like it was in the 1970s,” says Cunningham, who at George Washington founded a boot camp for aspiring Wall Street lawyers.
ThinkAdvisor recently interviewed Cunningham by phone. He was speaking from his office in midtown Manhattan.
“Outgoing, very amusing, quick-witted,” not “a nerd or awkward — a salt-of-the-earth guy” is the way he describes the legendary Buffett.
Here are highlights of the interview:
THINKADVISOR: You’ve been attending Berkshire Hathaway shareholder meetings for more than 25 years now. What are your expectations this year?
LAWRENCE CUNNINGHAM: There aren’t going to be big changes or pivots. There won’t be big surprises; there almost never are.
After the eighth meeting I went to, Charlie Munger said to me, “So you got another dose of the catechism!”
That’s what it’s like. The basic scripture is [the same].
Let’s talk about Berkshire’s investments. Can you shed light on the fact that Berkshire bought a ton of Taiwan Semiconductor Co. stock in the third quarter of last year but sold most of it in the fourth? It also trimmed some of its Bank of New York Mellon and Activision Blizzard holdings.
Before the last 10 years, everyone knew it was Warren who was making all the [buy/sell] decisions.
But for the last decade, two [much] younger guys, Todd Combs and Ted Weschler, who have their own big portfolios — $20 billion or $30 billion each — basically have had independent authority. They can make decisions on their own and often do.
Did they make the decisions on the stocks I just mentioned?
[Berkshire] doesn’t disclose those details.
Broadly, what’s Buffett’s investment philosophy?
Berkshire has two big buckets of assets. One is publicly traded stock, where they own a minority interest. They prefer to own these stocks forever but will sell. They’ve been nimble in buying and selling.
The second bucket is their wholly owned businesses, which they’ve been much more religious about never selling even if they’re struggling, as long as they’re not hemorrhaging cash, as Buffett has put it.
In one of Buffett’s essays, he writes: “Troubled markets can be helpful to the investor if he has cash available. When prices get far out of line with values, a climate of fear is your friend. … The euphoric world is your enemy.” Please explain.
Warren is a very deep skeptic of human nature, which gives rise to people saying he’s a contrarian.
People tend to follow the crowd, and so we all make collective mistakes. He tries to stay out of that.
In another annual report, he wrote, “We usually make our best purchases when apprehension about some macro event [is] at a peak.”
What’s an example of following his own advice?
In the 2008 [financial crisis], when no one was prepared to invest a dollar in anything, he loaded up — invested tens of billions of dollars in Goldman Sachs, Bank of America, Tiffany & Co., Harley-Davidson — all of which, in very short order, brought huge returns.
“It’s a mistake to distinguish between growth investing and value investing. Growth must be treated as a component of value,” he argues. Please explain.
When he’s trying to value a company, part of it is looking at growth — what it will do tomorrow, next year and the year after that — and how much more cash they’re going to generate. So, he looks directly at that rate of change.
His next step is to [ask himself], “Can I buy this — growing or shrinking — company at a price that’s less than the value calculated based on that growth or shrinkage?”
So you need to look at both the growth rate and what you’re paying compared to what the growth rate is worth.
In the [more than 54 years] that he and vice chairman Charlie Munger have worked together, Buffett writes, “We have never foregone an attractive purchase because of the macro or political environment or the views of other people.” Please elucidate.
He means: “I can’t analyze macroeconomic or political trends, and I don’t listen to what other people say.”
But what he can do is [analyze to determine] if this is a product people will likely need no matter what or a service they’re likely to pay more for no matter what.
“If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes,” he espouses. That sounds extreme!