Morningstar markets editor Jeremy Glaser recently attended the Berkshite Hathaway annual meeting and reported back on the highlights of Warren Buffett and Charlie Munger's debates.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. There is almost always a strand of optimism running through the Berkshire Hathaway Annual Meetings, and this year was no exception, but of course, there're also plenty of downsides that Warren and Charlie talk about that investors should certainly consider.
The first one that they really talked about this year was the European banks. Really they are not very excited about the prospects of these banks being able to turn a true economic profit and to really be stable any time in the future. Unlike the US banks that really recapitalised, that took the time to get those bad mortgages off their books, the European banks really never went through that process and instead of really trying to get rid of sovereign debt they think that they could even be loading up on more sovereign debt right now.
I think that Charlie Munger talked a little bit about giving the guy on margin account even more leverage to allow him to go out and buy more stocks. If it wasn't for the European central bank’s flood of liquidity into that market those European banks will be in a lot of trouble, it's something we have talked about a lot but I think certainly Warren Buffett and Charlie Munger highlighted what a big problem this could potentially be for the global economy.
Energy policy was another big topic of discussion and although Warrant Buffett and Charlie Munger didn't exactly agree on exactly what's wrong with their energy policy, they both agreed that it's broken. I think that this might not necessarily be a short-term problem, but over the long-term investors really are going to have to be focused on energy policy, focused on how we're using our natural resources when they are thinking about what the future path of growth for the United States looks like. I think Warren and Charlie understand this. They really were talking about it I think more than they have in the past and I think it's certainly an interesting point to consider.
Another thing that they really were not very happy about and pointed out as a potential problem is the overuse of financial models to try to gauge risk and to say, oh, look, we put into this computer, we put into this spreadsheet and therefore this is a risk-free transaction, we don't need to worry about keeping this collateral, we don't need to worry about what's going to happen. They just see this as not really the way that you should manage risk in a corporation.
They say that those kinds of models just are never going to be able to give you the full amount of information. There is always going to be some tail events that you're never going to be able to consider, that you're never going to be able to fully account for and therefore you should always be conservative. You should always be thinking about how you're going to get to play that next day and how you shouldn’t be taking just these unnecessary risks because some computer model told you to.
I think that even though some companies have adjusted some of their models of the financial crisis, they are still relying on them very much and I think that if those models turn out not to really be reflecting reality, we could find ourselves in another crisis like we are in now a few years down the line if they are not really adequately capitalised, not really adequately insured for any kind of tail events.
Politics took up a surprisingly large amount of the meeting, discussion about the Buffett Rule and other political issues, and I think that the big takeaway from that from Warren and Charlie in particular was that our political system is broken, not that the United States is broken, not that capitalism is broken or anything like that, but that the current political system just isn't capable of making the compromises and making the decisions that are needed to bring the United States back into fiscal balance and to put the policies in place that could really put the United States back on a track of sustainable growth. I think this is a point that a lot of investors and a lot of people at the meeting really took to heart. I think some of the largest applause we saw throughout the entire meeting was when Warren talked about our broken political system and again there were a lot of suggestions about how to fix it right now other than some of the specific policies that Buffett has been talking about previously. But I think it just highlights the political risk in the United States at the moment.
Now, finally, Buffett's prediction for what our growth is going to look like over the next 20 years, I think it's almost certainly going to give some investors pause. Charlie Munger and Buffett think that about a 1% growth rate in real terms over the next 20 years would really be a very impressive feat and is something that they are expecting, but they think really would be almost as much as the United States could ask for. Now, certainly when you add in inflation, in nominal terms that looks a little bit better, looks a little bit more like a trend, but a 1% real growth is certainly not kind of gain-busters growth and investors were kind of expecting a bounce out of this recession, a bounce that's really going to get us back, I mean the kind of robust levels of growth that we may be seeing before the financial crisis could be somewhat disappointed if these predictions come to pass.
So though there certainly were a lot of very optimistic comments from Charlie Munger and Warren Buffett over the course of the meeting, I think certainly they are very bullish on the future of stocks and on the future of the United States' economy. I think certainly they pointed out some potential downsides that could derail growth and really could keep things more muted in the future.
For Morningstar, I'm Jeremy Glaser.
