5 Critical Takeaways From Buffett In Omaha (You’ll Be Disturbed By #4…)

The first Saturday in May it happens.

Forty-thousand or so people book a hotel room, pack their bags, jump on a plane and come to the vacation hot-spot that is Omaha, Nebraska.

I know, it sounds crazy doesn’t it?  Nobody vacations in Omaha…

The reason that they all do this is even more bizarre.

All of these people do it to sit quietly and listen to a 93 year old and an 86 year old share their thoughts and opinions!

Warren Buffett in stadium

I think it is safe to say that there is nothing else like this on our fine planet.

These two very senior citizens are not your average retirement home residents.

They are Warren Buffett and his longtime partner in crime Charlie Munger.

Together they have turned Berkshire Hathaway from being a near worthless textile mill in the late 1960s into a conglomerate with a $410 billion market cap today.1

The event that brings so many people to Omaha is Berkshire’s annual shareholder meeting.  In addition to the 40,000 in attendance there are more watching the livestream on the internet.

It is the wisdom that these men share at the meeting each year that brings all these people together.  It is the wisdom of these two men that make all these people do something very unusual.

They all just sit there and listen.

Here are the key things that 40,000 plus listeners learned this year.

Need to Know #1 – $9.5 Billion Reasons Buffett Should Love President Trump

As he has gotten older Buffett has gotten somewhat more political.  He was a very vocal supporter for President Obama in both of his victories and this time around he was publicly in the corner of Hillary Clinton.

Warren Buffett with Hillary Clinton

While Buffett bet on the wrong horse in the election, I would have a hard time saying that he didn’t win.

And win big at that.

President Trump’s plan to reduce the corporate tax rate to 15 percent will be a huge benefit for Berkshire Hathaway and Buffett personally.  Thanks to Buffett’s incredible long term investments in companies like Coca-Cola, American Express and Wells Fargo, Berkshire sits on over $95 billion in unrealized capital gains.2

According to Buffett, if the corporate tax rate were to drop by 10 percent Berkshire’s value would immediately increase by $9.5 billion thanks to the reduced future tax owing on all of those unrealized gains.

Even for Berkshire that is a huge amount of money.

On top of that will be another multi-billion bump in cash flows that come with a reduced annual tax burden.

Not a bad consolation prize for when your candidate doesn’t win!

Need to Know #2 – Self-Driving Vehicles Will Permanently Damage These Businesses

Investing is all about predicting the future.  The better that you are figuring out what is going to happen the better you will be as an investor.

Buffett has excelled because he has focused on companies with giant competitive moats around them.  Powerful brand names like Coca-Cola which generate much more predictable future cash flows.  That has allowed Buffett to accurately predict the future.

On the horizon Buffett sees a major threat to two of Berkshire’s core business.

The threat is in the form of self-driving cars and trucks.  While he doesn’t exactly know when such vehicles will become widespread, Buffett admits that they are going to do serious damage to Berkshire’s auto-insurance (GEICO) and railroad businesses (Burlington Northern).

Buffett’s personal belief is that autonomous cars are definitely coming, but it will be a long way into the future.

You may want to keep that in mind should you be tempted to own companies operating in these specific industries.

Need to Know #3 – $96 Billion In Cash And More Arriving Every Day

There are high class problems and then there are Buffett-class problems.

For Buffett and Berkshire, the problem is having too much cash, with more arriving each and every day — making the problem even bigger.

As of the end of the first quarter Berkshire was sitting on $96 billion of cash and cash equivalents.  Berkshire’s wide network of operating subsidiaries sends more cash to corporate headquarters constantly.

For Buffett that means he must regularly be pulling out his elephant gun and bagging himself some major acquisitions.  To just keep the cash pile from growing, Buffett will need to find $30 billion in acquisitions in 2017.

And that is easier said than done.  There aren’t that many elephants running around.

This is the kind of problem that we all wish we could have and it reminds me why I love yield paying investments.  Having that passive cash flow stream constantly arriving in the bank is a beautiful thing.

Need to Know #4 – Healthcare Costs Are The Giant Tapeworm In America’s Economic System

President Trump’s big proposed tax cut is obviously getting a lot of attention.  For what truly is the number one drag on American businesses, however Buffett says that we need to look somewhere other than the current tax regulations.

According to Buffett it isn’t the tax burden that is killing corporate America, it is rising health care costs…

On this issue Buffett didn’t just provide opinion, he provided some data (which I verified):

“If you go back to 1960, or thereabouts, corporate taxes were about 4% of GDP, I mean they bounced around some. And now, they’re about 2% of GDP. At that time, health care was 5% of GDP, and now it’s about 17% of GDP.”3

U.S. health expenditures share of GDP

Buffett described rising healthcare costs as being the “tapeworm” that is hindering the competitiveness of American business.  A look at that chart would make a person have to agree.

And like a tapeworm the problem keeps getting worse putting American manufacturers at a huge disadvantage.

Need to Know #5 – Too Much Index Fund Investing Could Result In Market Chaos

Despite being an incredible investor Buffett has advised his wife to put the vast majority of what she inherits from him into an index fund.

While confident in his own investing ability, Buffett is no fan of the mutual fund and hedge fund industries because of their high level of fees.

Buffett’s belief is that those fees, especially those of the “2 and 20” hedge funds make it virtually impossible for managers to outperform the overall market.

If fact at this year’s meeting Buffett took the time to single out Vanguard’s Jack Bogle (who was in attendance) for saving investors hundreds of millions of dollars with his index funds.

Interestingly, at the meeting Bogle made some interesting comments about the potential dangers of too much indexing.  He explained that if everyone indexed and there was not active management of capital it would result in utter chaos, or catastrophe for the stock market.4

The problem with too much indexing is that index funds allocate capital with no thought given to valuation.  In other words, there is no price that an index fund wouldn’t be willing to pay for a company.

Some (like me) might suggest that there are already disruptions happening in the market today because of the flood of cash into index funds during the current bull market.

You will hear more on this in the future.

(BONUS) Need To Know #6 – Warren And Charlie Hold The Secret To Your Happy Retirement Life

The single most important takeaway from the Berkshire shareholder meeting for me this year is the same as it was last year (and the year before).

At 86 and 93, respectively, both Warren and Charlie are absolute marvels.

They are both still sharp as tacks and haven’t lost a step.

The reason for this is no mystery to me.  They both love what they do and get out of bed every day excited to keep learning and find the next big investment.

This isn’t unique to Warren and Charlie.  I’ve noticed the same thing through Buffett’s entire circle of lifelong investing and business friends/associates.

These people remain active and passionate about what they do into their eighties and nineties, and they retain a remarkably high quality of living because of it.

So there you have it…

The secret to a rich retirement is following two of the best investment minds alive — something we’ll keep you ahead of here at The Daily Edge.

And, the secret to a happy retirement is to find something you love that also keeps your mind fully engaged.

This is something we should all learn from.

Here’s to looking through the windshield,

Jody Chudley

Jody Chudley,
Chief Credit Analyst, The Daily Edge
EdgeFeedback@AgoraFinancial.com


1Berkshire Hathaway Inc. Form 10-Q, United States Securities and Exchange Commission
2Official Home Page, Berkshire Hathaway Inc
3Historical Data, Centers for Medicare & Medicaid Services, CMS.Gov
4Bogle Says If Everybody Indexed, Markets Would Fail Under Chaos, Sonali Basak, Bloomberg

The Daily Reckoning