I attended the Berkshire Hathaway annual meeting along with Adrian Lane and 40,000 or so other shareholders. Adrian commented on something that is near and dear to my heart:
I am hooked, but not because I want investment ideas – instead I am fascinated by an incredibly simple investment philosophy, that involves an incredibly complex set of rational models, that forms the foundation of their decision process. Both men are contrarians – they choose to invest in a method that for decades people thought was a fluke. Berkshire has been called a 6-sigma outlier. They have been derided for not investing in tech companies during the tech boom – a profound critique when you consider Apple, Google, and Microsoft are some of the fastest-growing and 3 out of of 5 of the largest companies in the world. They have been mocked in the press as being “out of touch” when the market was going crazy during the whole mortgage/CDO fiasco. But they have stayed the course, despite fickle and fashionable trends, on their way to become the most successful investors in history. Berkshire is now one of the top 5 companies in the world, but ultimately their approach to decisions is what fascinates me.
That captures the essence of what I spoke about last year at the SIRA conference on how related the investing mindset and security mindsets are. People are wired to get excited and rush into things (whether its trying to guess the next Google or cram new features into an app), but a rational decision making process should consider the downside not just the upside. Buffett's teacher, Ben Graham pioneered the approach where you first look at the downside and then only consider the upside potential for those that pass the downside test. This is the exact opposite of how most people invest, or how most people build and deploy software for that matter. But the permutation matters, the discipline of analyzing the downside first leads to a more robust process.
To me, the practice of information security can be improved by learning from the defensive, value-oriented approach to investing - investors should first make sure the Balance Sheet is safe and not over leveraged before looking at projected future earnings; security people should review the Threat Model before looking at the benefits of the new features the business wants to roll out.
As to the rest of the meeting, there sure is not much technology. Buffett and Munger are pretty technophobic, neither has a computer on their desk, neither runs a computer screen for stocks, Buffett does not even have a calculator on his desk, he does the math in his head.
There was a question on Twitter, and Munger replied that he is avoiding it like the plague, adding that when he observes his grandkids doing social media they are multi tasking and most jobs done as multi tasks are done poorly. There was a question on bitcoin, Buffett disclosed "Of our $49 billion, we haven't moved any of it to Bitcoin."
This year was the first year (and I assume first shareholder meeting ever) that had a bear who was short the stock asking questions. This was a great idea because it showed Buffett and Munger's willingness to challenge their own ideas rather than talk a PR game which is how most every annual meeting operates. Instead they invited a bear, gave him a seat on the panel and mic and let him poke holes in the company, live in front 40,000 people.
Berkshire owns Business Wire which is a source for public companies making announcement, there was a question about the future of Business Wire with the SEC now allowing for disclosure via Twitter, Facebook et al, Buffett's response was "The key to disclosure is accuracy and simultaneity. If I'm buying Wells Fargo, for example, I do not want to have to keep hitting their web page and hoping I'm not ten seconds behind somebody else." Personally, I was kind of surprised the SEC acted so quickly in letting social media serve as a place to distribute official releases. It will interesting to see what if any impact this has on Business Wire's business.
Munger was asked to sum up Berkshire's competitive advantage in a way the questioner's 13 year old daughter could understand, he said "We've always tried to stay sane when other people like to go crazy. That's a competitive advantage."
There were some mentions of banking practices, Munger continues to be worried by the derivatives used at some financial institutions "The more bankers want to be more like investment bankers and less like bankers, the worse I like it."
Five years ago, Buffett bet a hedge fund called Protege Partners $1M that a plain vanilla S&P index fund would outperform a group of hedge funds. As of now, the S&P is +8.69% vs the group of hedge funds +0.13%. As Jack Bogle says - hedge fund provide excellent hedge against getting capital gains! You can track through longbets. The other lesson is the seductive details of a hedge fund's complex, proprietary models do not necessarily lead to better returns than anyone else can get through a boring index fund, though they certainly lead to higher fees!
On Sunday, we attended another highlight of the weekend - the Markel annual shareholder breakfast. They are a so-called baby Berkshire, a small insurance company that follows a similar approach: conservatively investing insurance float. Markel writes niche insurance policies. They eschew property, casualty and other areas where big name insurers play, Tom Gayner (Markel's CIO) describes their business this way:
An ongoing challenge in these arenas is that unlike life insurance where the statistics are "disturbingly known", Markel has to piece together a hodge podge of sources to make decisions on how to write policies, and coming full circle on the theme of this post when Steve Markel was asked for an example of this challenge of managing risk absent optimal data, the example he gave was one of Markel's products - Cybersecurity and Data breach insurance.
Cocktail party definition of Markel if someone asks about Markel, its an insurance company that they've never heard of. Well an easy way to think about that is if you have an insurance policy that you can get easily and quickly, well we wouldn't do that. We do the sorts of insurance where people go 'Oh no. We've got a problem or we've got a situation' This isn't to disparage the other insurance companies, we all have a role in life. What GEICO says yes to is not going to be the same thing that Markel says yes to. What Markel says yes to isn't going to be the same thing that GEICO says yes to. Its a different organization and orientation.
We do 100 different forms of insurance - everything from children's summer camps that are out in the middle of nowhere, that have teenagers supervising teenagers and no fire departments nearby, kids jumping on trampolines and being out in canoes, all the sorts of exposures that go with that