Last month, I had the opportunity to attend Berkshire Hathaway’s Annual Meeting. This “Woodstock for Capitalists” fully lives up to its hype, drawing tens of thousands from all over the world to Omaha, Nebraska. While the event attracts its fair share of celebrities and captains of industry, it also, unlike most annual meetings, draws a great many small business owners, retail investors and students. The highlight of the weekend comes on Saturday, when the crowds fill the massive CenturyLink Center arena to listen to a multi-hour Q&A session hosted by Messrs. Buffet and Munger. The event, as one would imagine, not only draws massive crowds, but also a plenty of media coverage, as the world seeks to gain insights from two of the world’s best known investors.
Much of the attention at this meeting was on Berkshire’s forays into technology investing by way of IBM and Apple, tax and healthcare reform, as well as the issue of succession, given that Mr. Buffet is now 86 and Mr. Munger is now 93. While the two spoke at length on these issues, those curious about how the firm intends to put capital to work going forward were likely left somewhat disappointed. Currently, Berkshire Hathaway has a cash pile of over $95B, yet both men bemoaned the lack of compelling opportunities, with Buffet almost wistfully stating that “it’d be more fun if the phone would ring”. While the two recognized that this level of dry powder is an issue, they seemed to suggest that this could be remedied through share buybacks or even a dividend (a Berkshire Hathaway first), if this environment were to persist. While this was surprising to some, it provided what I feel was one of the most important takeaways from this year’s annual meeting: in frothy markets, patience becomes more important than ever.
It goes without saying that we have seen an impressive run for markets in the past 8 years, driven not only by a recovery from the global financial crisis, but also from highly accommodative monetary policy around the world. More recently, the prospect of fiscal stimulus and deregulation create the potential for a third tailwind to take shape, driving markets even further upward. In this environment, even companies with the most attractive of fundamentals lose their glimmer amidst stretched valuations and forecasts that seem just a touch too rosy. Nevertheless, companies continue to post record results, deals continue to be done and markets grind ever higher. In such an environment, it can be easy to simply decide that you will come along for the ride, despite your misgivings. Your concerns about overpaying for assets are whitewashed by the thought of where those assets could trade tomorrow, next month or next year, and you follow the crowd, no matter how misguided.
While such a path is tempting, and honestly, very easy to pursue, those who patiently sit on the sidelines generally enjoy the greater reward. Your margin of safety is wider, based upon your view of the long-term intrinsic value of the company, not your optimistic hopes for its performance tomorrow. What’s more, the companies you ultimately choose to buy will likely be of higher quality: in a market like this, the most compelling names to own will likely be bid up into the stratosphere, leaving you with less attractive choices. If you fall victim to the impulse to act, you are picking from a second-rate opportunity set, even though the only real cost to finding true bargains in the market was your time.
We recognize that lauding the virtues of patience in investing may feel awfully trite, especially as you watch seemingly “great” opportunities pass you by. Nevertheless, in the absence of truly compelling opportunities, patience may reap the best rewards. At this year’s meeting, Mr. Buffet discussed the awful temptation holding cash creates to do something, anything. This pressure may come from outside investors, or it may come from within, but regardless of its origin, it can make any investor feel as though their performance is judged solely by their volume of transactions. However, whether the dry powder you hold is measured in the thousands or the billions, it seems that in some markets, doing nothing may be your best course of action.