Warren Buffett told Berkshire Hathaway shareholders on Saturday that he had been taken by surprise by the “red hot” economic rebound under way in the US and that his sprawling investment conglomerate was being hit by inflationary pressures.
In his annual address to Berkshire shareholders, the doyen of the investing world, aged 90, said he could not have predicted the rapid bounce back in US economic activity or the “substantial inflation” that was now materialising.
“We’re seeing very substantial inflation,” Buffett said. “It’s very interesting. We’re raising prices. People are raising prices to us and it’s being accepted. Take home building. We’ve got nine homebuilders in addition to our manufactured housing . . . we really do a lot of housing. The costs are just up, up, up. Steel costs, just every day, they’re going up.”
The company, which owns the Geico insurer, Burlington Northern railroad and paint supplier Benjamin Moore, reported robust earnings earlier in the day with some divisions disclosing price hikes to keep pace with an increase in raw material costs.
“This has been a very unusual recession,” Buffett said. “Right now business really is very good in a great many segments of the economy.”
US household incomes rose by the most in recorded history in March as the country’s economic expansion accelerated, lifted by government stimulus and a healing labour market. That has sent reverberations throughout financial markets, with investors’ inflation expectations over the next decade rising to an eight-year-high this week.
“It just wont stop,” the billionaire investor added. “People have money in their pocket and they’ll pay the higher prices.”
Buffett was left to defend his actions over the past year, particularly his reluctance to strike one of the elephant sized acquisitions for which Berkshire is known, at a time when other asset managers moved swiftly to put their cash to work. One shareholder charged that Buffett had “sat on your hands” during the crisis.
The Berkshire chief executive said he could have gone out and struck a takeover, but that before the Federal Reserve intervened last March, the company was focused primarily on maintaining and financing its own businesses.
Berkshire vice-chair Charlie Munger added that it would have been “crazy” to expect the company to have made an acquisition at the nadir of the crisis.
Buffett warned that the company would continue to struggle to compete on acquisitions, a persistent theme at recent annual meetings, particularly as other well funded rivals enter the fray. Alongside traditional leveraged buyout shops, Berkshire is now vying with so-called special purpose acquisition companies as it searches out takeover targets.
“Spacs generally have to spend their money in two years,” he said. “If you put a gun to my head and said you have to buy a business in two years, I’d buy one but it wouldn’t be much of one.”
He added: “Frankly we’re not competitive with that.”
Investors also learned one reason why Berkshire sold out of its airline stakes last year, a move that has drawn ire given the bounce back in the industry’s fortunes. Buffett said he did not believe several of the airlines he had invested in, which included American and Delta, would have received the same government financing if they counted a wealthy shareholder such as Berkshire in their stockholder registry.
“Imagine if Berkshire was a 10 per cent holder of the airlines and they [the government] said get it from Berkshire,” he said. “You might not have gotten the same result and I would think they wouldn’t. You could see the headlines.”
The day was a departure from what Berkshire shareholders could expect before the pandemic forced the company to a virtual format. Buffett and Munger were joined on stage by Greg Abel and Ajit Jain, the two men tipped by shareholders as potential successors.
Abel and Jain received a greater proportion of screen time at the event, which is generally ‘the Warren show’, than ever before. But investors hoping for the same special relationship that has characterised Buffett’s rapport with Munger over the past six decades will be left wanting.
“There is no question the relationship Warren has with Charlie is unique and that it cannot be replicated by Greg and me,” Jain said, although he added he had “a lot of respect” for Abel. “We do not interact as much as Warren and Charlie do, but we talk every quarter.”
Abel joined Buffett in defending the board’s advice that shareholders vote down two stockholder proposals that would push Berkshire to disclose its efforts to tackle climate change and diversity and inclusion in the workforce.
Sitting in front of a box of See’s Candies, a Berkshire subsidiary, Abel said the company’s large energy division had already made a strong push to decarbonise its business. He noted that the unit had planned to close all of its coal-fired power plants by 2050, including 16 between 2021 and 2030.
He was less emphatic than the man he may one day replace.
“It’s asinine frankly in my view. Now we do some other asinine things because we’re required to do them,” Buffett said. “But to have the people at BusinessWire, Dairy Queen, all these places filling out reports to make a common report . . . we don’t do that stuff at Berkshire.”
The two proposals won backing from several large investors, including the California Public Employees’ Retirement System, asset manager Neuberger Berman and Norges Bank, one of Berkshire’s biggest backers. Ultimately, more than a quarter of the votes cast in the election were in favour of the first proposal on climate change disclosures.
But neither curried enough support to overcome the sway Buffett’s high vote class A stock holds. It was a reminder of who holds the reins of the $631bn conglomerate.