by William Smead, Smead Capital Management
The 50th annual meeting of Berkshire Hathaway with Warren Buffet as Chairman was filled with sugar and spice and everything nice. We at Smead Capital Management always look for three key takeaways from the annual meeting of Berkshire Hathaway. This year we think we can sum it up by using the 19th Century nursery rhyme.
We want to learn whatever we can from the investment wisdom (sugar) of the most successful stock pickers and asset allocators of all time. Second, we seek to understand their limitations and human fallibility (spice), with an eye on improving our own. Finally, we try to glean whatever vision (everything nice) these two experienced business owners will share of the next five to ten years for comparison sake.
Sugar was everywhere at this year’s annual meeting. Berkshire owns Coke (KO), Dairy Queen, Heinz and See’s Candy. One shareholder wanted to know why Berkshire is so heavily committed to companies which make most of their money peddling sugar-heavy ingredients in a world which recognizes its damaging health effects.
This was a perfect opportunity for Buffett and Munger to teach shareholders about addictive products, temporary fads, stellar brands and human nature. Today’s millenials probably think that they are the first health-conscious age group to ever come through the pipeline. Have they heard of the prohibition of Alcohol in the 1920’s and 1930’s? What about taking cigarette advertisements off of television in the 1960’s, or the Atkin’s and North Beach diets which were popular with Gen Xer’s in 2003?
Here is how Buffett and Munger responded to the following question from a shareholder:
Shareholder Question: “Over the last fifty years we have been long sugar consumption. Have we reached an inflection point for Coke and Heinz?”
Buffett: “They have a wide moat, but things are always changing. All food and beverage companies will adjust to the expressed preferences of their consumers. Twenty years from now there will be more Coke consumed than there is now. I am one quarter Coca Cola by calories consumed. All that sugar has helped me live longer because it has kept me happy. If I’d have eaten broccoli and Brussels sprouts, I would have eaten in a prison. I don’t see smiles on the faces of the people at Whole Foods!”
Munger: “Sugar is a wonderful substance, it prevents softening of the arteries and it keeps me from living a few years drooling in a nursing home.”
Smead Capital’s Interpretation: Just because some people change their habits doesn’t mean there won’t be new humans who come along who want their taste buds to make the choice for them. Long-duration, wide-moat companies all have some adapting to do over the years, but eating habits are pretty predictable by the time folks are fifty years of age.
A shareholder questioned the business practices of a Berkshire-owned business creating the spice at the meeting. The shareholder wanted to know what Buffett and Munger thought of the scathing investigative report from The Seattle Times on the lending practices of Clayton Homes, a wholly-owned subsidiary of Berkshire Hathaway. Buffett’s answer was straight out of our first criteria for stock selection; Clayton meets an economic need.
Buffett: “Clayton follows a pattern that is exemplary in lending. We have no interest in selling a house to someone who defaults. Manufactured homes are purchased by people who have low FICO scores. Three per cent fail each year. We help them with our own money at risk. If the loan fails, we lose money. The article didn’t include expenses. We have a lender board which shows a variety of lenders for buyers to consider.”