🔒 BRK 2019 AGM Highlight: Munger on Amazon purchase – we’re trying to atone

JOHANNESBURG — Warren Buffett’s favourite broadcaster, CNBC’s Becky Quick, poses a question many shareholders are mulling – does Berkshire’s purchase of Amazon.com shares signal a radical change in direction? Charlie Munger is at his caustic, self-deprecating best in his response. – Alec Hogg

*This is one of the highlights from the five hours of Q&A at the 2019 Berkshire Hathaway AGM in Omaha where chairman Warren Buffett and his deputy Charlie Munger field queries from shareholders.

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This question is from Ken Scarback in Indianapolis. He says, “With the full understanding that Warren had no input on the Amazon purchase and that relative to Berkshire, it’s likely a small stake, the investment still caught me off-guard. I’m wondering if I should begin to think differently about Berkshire, looking out – say – 20 years? Might we be seeing a shift in investment philosophy away from value investing principles that the current management has practiced for 70 years. Amazon is a great company, yet it would seem its heady shares 10 years into a bull market appeared to conflict with being fearful when others are greedy. Considering this, another recent investment like Stone Co., should we be preparing for a change in the price vs value decisions that built Berkshire?”

It’s interesting that the term ‘value investing’ came up because I can assure you that both managers (one of whom bought some Amazon stock in the last quarter, which will be reported in another week or ten days) – he is a value investor. The idea that value is somehow connected to book value or low price earnings ratios or anything as Charlie has all investing is value investing. You’re putting out some money now to get more later on and you’re making a calculation as to the probability of  getting that money, when you’ll get it, and what interest rates will it be at – all of the same calculation goes into it, whether you’re buying some bank at 70% of book value or you’re buying Amazon at some very high multiple reported earnings. Amazon…the people making the decision on Amazon are absolutely as much value investors as I was when I was looking around for all these things, selling below working capital years ago, so that has not changed.

The two people who want to go and make the investment in Amazon; they are looking at many hundreds of securities and they can look at more than I can because they’re managing less money in their universe. Possibly, their universe is greater, but they’re looking for things that they feel they understand what will be developed by that business between now and judgment day (in cash). Current sales can make some difference. Current profit margins can make some difference. Tangible excess cash/excess debt – all those things go into making a calculation as to whether they should buy A vs B vs C and they are absolutely following value principles. They don’t necessarily agree with each other or agree with me but they are very smart. They are totally committed to Berkshire and they’re very good human beings on top of it, so I don’t second-guess them.

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I don’t think Charlie second-guesses me. In 60 years, he’s never second-guessed me on investment. The considerations are identical when you buy Amazon vs some bank stock that looks cheap (statistically) against book value, earnings, or something of the sort. In the end, it all goes back to someone in 600BC, who said, “A bird in the hand is worth two in the bush”. When we buy Amazon, we try and figure out whether there are 3, 4, or 5 in the bush and how long it will take to get to the bush, how certain he is that he’s going to get to the bush, and who else is going to come and try to take the bush away, etc. We did the same thing and it really – despite a lot of equations you learn in business school – the basic equation is that of Aesop. Your success in investing depends on how well you were able to figure out how certain that bush is, how far away it is, and what the worst case is.

Instead of two birds being there, only one being there and the possibilities of 4, 5, 10, or 20 being there. That will guide me. That will guide my successor’s investment management at Berkshire and I think they’ll be right more often than they’re wrong. Charlie?

Well, Warren and I are a little older than some people.

Than everybody…

We’re not the most flexible – probably – in the whole world and of course, if something as extreme as this internet development happens and you don’t catch it like others do, it can blow by me. I don’t mind not having caught Amazon early. The guy is kind of a miracle worker. It’s very peculiar. I give myself a pass on that but I feel like a horse’s ass for not identifying Google better. I think Warren feels the same way. We screwed up.

He says, “We blew it.” And we did have some insights into that because we were using them with GEICO and we were seeing the results produced, and we saw that we would bank $10 or something that might have had a marginal cost of exactly zero. We saw it was working for us so…

We could see in our own operations that Google advertising was working and we were just there sucking our thumbs, so we’re ashamed. We’re trying to atone. Maybe Apple was atonement.

When he said ‘sucking our thumbs’, I’m just glad he didn’t use some other example.