Source: Wall Street News

Starting at 10:15 p.m. on Saturday, May 4, Beijing time, Buffett, the world's most famous investor and an old man in his nineties known as the “stock god,” will take over as CEO,$Berkshire Hathaway-A (BRK.A.US)$Greg Abel (Greg Abel), the head of the non-insurance business, and Ajit Jain (Ajit Jain), the head of the insurance business, jointly answered questions from shareholders and are expected to answer 40 to 60 questions in at least 5 hours.

During the Q&A session at last year's shareholders' meeting, Buffett and his old partner Munger discussed current current events and core topics such as the potential impact of the US banking crisis on the economy in early 2023, how Berkshire's auto insurance company Geico and the railway business are dealing with competitive challenges, artificial intelligence changes in value investment and society, the future of new energy sources, whether Berkshire's major holdings with Apple are close to the upper limit of the risk range, evaluations of the Federal Reserve and the global economy, and looking forward to the future of companies in the “post-Buffett era.”

This year will be Berkshire's first Q&A session after the death of its nearly 100-year-old Vice Chairman Munger. Since Buffett will also be 94 years old on August 30, discussions on the handover of Berkshire's top management are bound to become a top priority.

However, the company's profit and growth prospects, whether to split the business or pay dividends in the “post-Buffett era,” evaluations of America's high interest rates and inflation, clarifying investment logic such as reducing Apple holdings and getting into mysterious stocks may all appear in the questions and answers.

The price of Berkshire Class A shares, which have never been split, has exceeded 600,000 US dollars per share, rising nearly 12% this year, far exceeding the cumulative increase of 6% in the S&P 500 index. The stock rose 24% in the past year, but fell 4.4% from the record high set in March. “More friendly” Class B shares stand at $400. The overall valuation is 1.54 times the average book value for the past four quarters, slightly higher than the 10-year average of 1.41 times.

Focus 1: Has the CEO succession plan changed?

Although Buffett did not clearly state his plans to retire, that is, to step down as Berkshire's chairman and CEO, it is undeniable that this ninety-year-old has worked at least 20 years longer than most corporate executives.

As Buffett is getting older, Berkshire's successor as CEO has long been the focus of investors' attention. Concerns have intensified with Munger's passing at the end of last year, and shareholders are anxious to know the details of the succession plan.

Two days before this year's shareholders' meeting, Ronald Olson (Ronald Olson), who has been a director of Berkshire since 1997, publicly endorsed Vice Chairman Abell's successor as CEO, saying that the 61-year-old Abell thinks very strategically and makes decisive decisions.

This indicates that Berkshire's succession plans have not changed. Abel was promoted to vice chairman responsible for all other businesses other than insurance in 2018. At the 2021 shareholders' meeting, Munger leaked that Abel would be his successor, which was publicly confirmed by Buffett.

According to the long-time director of Berkshire mentioned above, Abell knows all the basic principles Buffett values, such as letting Berkshire subsidiaries operate on their own, maintaining a decentralized structure, and being committed to operating in a conservative manner to preserve financial strength:

“The board knows it won't find the next Buffett and Munger to replace these two people, but believes Abell won't have a negative impact on the company. He's a digital expert who can analyze corporate balance sheets as quickly and accurately as Buffett. He's also a great listener, and people love working with him. But Abel won't be as fun as Buffett and Munger.”

The director also hinted that the board would not restrict Abel from making reasonable acquisitions to allocate capital, but the CEO's successor may not have the same freedom as Buffett to spend money on investments:

“Compared to our level of confidence in Buffett, things will change when facing Abel. I don't know how these changes in confidence will evolve when someone takes over. After all, Buffett will still be in office for a while, but once the handover occurs, it is likely (the level of confidence described above) will change.”

Other analysts believe that the 53-year-old Berkshire investment manager Todd Combs (Todd Combs) will be the CEO replacement after Abell. Coombs has a good relationship with Buffett, and also has experience outside of investing, such as joining the J.P. Morgan Chase board of directors and being the CEO of Geico, a major car insurance business under Berkshire for the past four years.

Additionally, Buffett's 69-year-old son, Howard, a farmer and philanthropist, will become Berkshire's non-executive chairman.

Focus 2: Once the stock gods are gone, where will Berkshire go in the “post-Buffett era”?

According to the well-known investment media “Barron's”, Munger's absence will only reinforce the obvious fact that Buffett's role as the head of this corporate group that took 60 years to establish may end within the next few years. Even the “stock god” himself acknowledged this. In November of last year, he wrote “Although I personally feel good, I know I'm playing overtime.”

Since shareholders' meetings may be Buffett's few public appearances this year, the company's prospects are bound to attract attention. In addition to financial metrics and whether the new management can prove to be as competent as Buffett, investors will take the opportunity to “torture the soul,” such as:

Should Berkshire, a corporate group that is too large to achieve rapid growth again, be spun off?

Should Berkshire pay dividends instead of waiting for investment opportunities while holding up vast amounts of cash in the Buffett era?

Will Berkshire speed up share buybacks? Does the slowdown in buybacks indicate views on the stock?

Buffett doesn't like the distribution of capital overseas, and will Berkshire consider expanding the scope of investment in the future?

More index investors and activist investors join the ranks of shareholders. Will the “fans” who previously followed Buffett cash out?

In a new era without Buffett at the helm, what does Berkshire need to do to maintain the loyalty and enthusiasm of its shareholders?

Wall Street generally believes that Berkshire in the “post-Buffett era” is most likely to start paying dividends, provided it is certain that no good use of all the cash can be found, and investors will no longer tolerate Berkshire holding so much cash.

At the end of 2023, Berkshire held a record $168 billion, and this cash level continued to grow for six consecutive quarters. Buffett believes that large amounts of cash give him the motivation to carry out transactions and acquisitions at any time, and that keeping the $1 sent to shareholders in his hands can create higher value.

As mentioned above, director Olson, who supports Abell's succession, said bluntly this week that the board of directors did not rule out the possibility of paying dividends at some time in the future, but Buffett will not seriously consider approving the payment of dividends when he is still at the helm.

However, Berkshire's board of directors is very friendly to Buffett, and is aware of his long-standing position. The directors may stick to Buffett's firm opposition to the company's split. He believes that the structure as a huge enterprise group has advantages, including being able to quickly use Berkshire's insurance business to deal with losses caused in the event of a major disaster, so as to obtain tax benefits.

However, although Buffett believes that the company's stock price will rise the day after his death, there is no shortage of concerns. As long-term holders cash out and investors worry that Buffett's magic will disappear, Berkshire's stock price without Buffett may drop 5% to 10%.

Focus 3: Will the secret shareholders' meeting film be screened publicly for the first time to pay tribute to Munger?

Berkshire's press release revealed that in addition to the regular live broadcast of the Q&A session on CNBC.com, the 2024 shareholders' meeting will also broadcast the secret annual meeting movie online at 8:45 a.m. Central Time (that is, 9:45 p.m. Beijing time). “In previous years, only people attending the Omaha meeting were able to watch the annual meeting video.”

Many fans speculate that this practice is to pay the ultimate homage to the late Munger, and it is also the first time in Berkshire's history that a secret film exclusive to shareholder benefits has been shown to the public.

Some people commented that this will be tear-jerking. “It will be an unforgettable year”. It may be an appropriate farewell to Buffett's legendary partner Munger, and that his “Poor Charlie Collection” will also be reprinted and sold at the annual conference.

According to reports, mystery movies of shareholders' meetings in previous years were witty and humorous, and viewers were not allowed to take pictures or videos. Buffett, Munger, and many other celebrities would make cameos. The theme of one of the movies was Buffett and Munger debating whether to invest in “internet stocks,” and the movie star made fun of Buffett's name, saying that it was written like a “buffet” that could be “whatever you choose.”

One of the most widely circulated leaked photos on the market shows that in the 2013 secret movie, the two stars of the popular American drama “Breaking Bad” were cooking the signature peanut candy company of Berkshire's candy company instead of making drugs.

Focus 4: Berkshire's Profitability and Growth Prospects?

Some analysts predict that Berkshire will generate an after-tax operating profit of 40 billion US dollars this year. The market value is expected to exceed 1 trillion US dollars after the shareholders' meeting, or become the only non-technology company in the US with a market capitalization of 1 trillion US dollars. Currently, it ranks 7th in US stocks by market capitalization.

Buffett doesn't like to use net profit as an indicator to measure a company's profitability because it includes highly variable unrealized investment gains and losses, which turned net profit in 2022 into a loss, and excluding this variable operating profit can show a longer-term growth trend.

However, in a letter to shareholders in February of this year, he acknowledged that Berkshire is already too large and is unlikely to achieve the astonishing rapid growth it once had. This kind of comment on business prospects will be more compelling than the quarterly report released on Saturday.

Buffett has said that Berkshire needs to far surpass the market return rate of US stocks over time, otherwise investors will switch to other stocks. According to media calculations, Berkshire's total return over the past 10 and 20 years has only been on par with that of S&P.

According to other analysts, Berkshire has domestic businesses involving many different industries, such as railways, insurance, energy, industry, and consumer goods, and also has an investment portfolio of about 360 billion US dollars, making the company's performance a unique window for understanding the state of the US economy.

Investors are looking forward to Buffett's evaluation of the current state of high interest rates and inflation in the US and the boom and development of artificial intelligence, and explain the impact on its investment layout and business operation strategy.

Some people claim that the Federal Reserve will keep interest rates high for a longer period of time, which will put pressure on a wide range of stock markets and corporate development, but it may be uniquely superior to Berkshire because the huge amount of cash it has is receiving incremental coupon income by purchasing US Treasury bonds:

“Berkshire was like a happy saver, and his money market funds suddenly began to pay back. If high interest rates force owners of other businesses to consider selling, Berkshire's huge cash reserves will enable it to take over.

“Changes in interest rate forecasts have made investors re-examine their risk appetite. Berkshire has a healthy balance sheet and profitability, and its reputation as a safe haven in the stock market is becoming a choice for people to store their cash.”

Focus 5: Clarifying investment strategies — mysterious stocks, reducing Apple holdings, betting on Japan starting to lose money?

Although Buffett prohibited the questioner at the shareholders' meeting from “asking us exactly what we bought and sold,” people still expect him to explain the major changes in the investment portfolio over the past few quarters.

One of the biggest questions is: What exactly is Buffett's “secret stock” position that the SEC has kept secret for two consecutive quarters?

Wall Street generally speculates that it is a bank stock because the 13F filing shows that Berkshire's cost of holding shares in the “banking, insurance, and finance” category has risen by several billion dollars. The last time Berkshire requested secrecy was to invest in Chevron Oil and Verizon Telecom in 2020.

Second, Berkshire reduced its Apple holdings by about 10 million shares in the fourth quarter of last year. This decision is surprising.

Apple has been Buffett's favorite stock for many years, and he even called this type of position the second most important outside of Berkshire's insurance business. He called the slight reduction in Apple holdings in the fourth quarter of 2020 “probably a mistake.” However, Apple was in a difficult situation this year, and its stock price fell 10%.

Some speculate that Buffett's investment deputy Coombs or Ted Weschler (Ted Weschler) may have slightly reduced Apple positions, accounting for about 1% of Berkshire's holdings. The company still holds more than 900 million Apple shares worth more than 174 billion US dollars, accounting for nearly 50% of the investment portfolio. This is probably because Apple surged 48% last year, which led them to decide to sell some to fund other investments. A similar operation was carried out at the end of 2018.

Third, Buffett's biggest bet on Japan is that the five Japanese trading companies ITOCHU Corporation, Marubeni Corporation, Mitsubishi Corporation, Mitsui & Co., and Sumitomo Corporation each take 9% of the shares, which may face pressure in the short term. Analysts expect that due to weak commodity prices, the Japanese companies' earnings in the first quarter will decline, and some expect this pain to continue for a longer period of time.

Buffett said in February that by the end of 2023, Berkshire had received $8 billion in unrealized investment income from these five companies.

In addition, investors are also concerned about topics such as how Buffett evaluates the drastic reduction in Paramount Global and Hewlett-Packard's holdings and whether there are plans to liquidate; the logic of continuing to increase his holdings in oil stocks such as Chevron and Occidental Petroleum; whether he is carrying out “merger and acquisition arbitrage” by purchasing Liberty Media's tracking shares against the New York satellite broadcaster SiriusXM; and whether he will allow some of its power companies to go bankrupt.

Buffett once said that the regulatory environment in some US states has increased the possibility of “zero profit or even bankruptcy” of Berkshire's power companies. “Berkshire can withstand financial accidents, but it will not intentionally invest large sums of money after bad debts.”

edit/lambor