Berkshire Hathaway held its annual meeting April 30th, and there are a few things you need to know.
Warren Buffett is the chief executive and primary shareholder. He gave what he considered to possibly the most important investment lesson in the world.
He spoke of being cautious of fees, negative interest rates, and Berkshire’s derivatives portfolio.
S&P 500 index funds VS Hedge Funds
Buffett blames poor returns on consultant’s actions saying “the underperforming managers were consuming the personal capital.”
He made a charitable bet in 2008 to prove his point. It compares Vanguard Group Inc fund and hedge funds through 2017.
The Hedge Funds returned 21.9 percent. S&P 500 index fund returned 65.7 percent.
— The Capitalist (@Capitalist_Site) May 4, 2016
Fees you may not realize
Management fees vary due to track record. An average management fee is 2 percent. As well as the deduction of other costs. Be wary and aware of where your money is going.
Here are a few ways hedge funds are known to spend your investments:
- Performance fee. This fee can be as much as 20% annually.
- Legal Fees.
- Accounting fees.
- Travel, entertainment or consulting arrangement used to help gain new investors.
- Events used to attract new investors and impress seasoned investors.
Ups and downs of Berkshire Hathaway
During the 1950s and 1960s, Buffett ran a partnership similar to a hedge fund. He later became and had remained the primary shareholder in Berkshire.
He has developed it into dozens of subsidiaries. They hold interest mainly in the United States in areas such as transportation, energy, retail, and manufacturing.
Berkshire Hathaway has seen an 11 percent increase this year in New York trading. The 2016 first-quarter report shows the company has grown 8.2 percent. This increase brings the gains to $ 5.59 billion in the manufacturing segment alone.
While there are noticeable gains, there are some surprisingly faltering areas. BNSF railroad reports a significant decrease in earnings. The decline is expected to continue to fall due to the falling volumes of coal.
Reinsurance business also showed low bond yields. He mostly blamed this on hail storm claims.
Both of the aforementioned are part of Berkshire’s largest units.
Small and negative interest rates
Buffett also expressed concerns over the negative and low-interest rates. He stated anything Berkshire will be affected by any action that reduces value as they have a lot of it.
Mostly the borrower gets paid to take on debt. The issuer is then paying to loan their money.
According to Bloomberg, $ 7 trillion of government bonds offered negative interest rates as of February. That is more than a quarter of all issued sovereign bonds.
The first sighting of negative interest rates was when the European Central Bank pushed for it in 2014. They were used to stimulate the debt-ridden economies of Europe.
Low to negative interest rates affect retirees, insurance companies and people with fixed investments that had not calculated them into their initial plan.
Derivatives and the unknown
Derivatives cause a problem because no one knows how to value them. Warren Buffett called them weapons of mass financial destruction.
He cited 9/11 when asked about the problems with derivatives at this annual meeting. It creates a discontinuity that leaves gaps in the positions. He claimed they had a potential to be time bombs.
Situations that can cause concern include
- Cyber attacks
- Nuclear attacks
- Biological attacks the country
- Any other unforeseen act of terrorism
While derivatives can be dangerous, they are an essential part of a day to day operations for any large corporation.
Buffett’s criticism aimed towards derivatives that were critical during the financial crisis and speculative bonds.
The introduction of derivatives into the financial world in the 1970s was to manage risk and create a form of protection against the downside. The recession of 2007 was due to the risky use of the derivatives.
Berkshire and day to day purchases
If you’ve ever doubted the power of Berkshire products, here’s something you might find interesting. You can live daily on Berkshire Hathaway products alone.
A video produced by Yahoo Financial ran a video proving just that during the live stream of the annual meeting.
In case you missed it here are a few key products and companies that make it possible:
- Fruit of the Loom
- Johnson & Johnson
- Burger King
- Wells Fargo
Berkshire Hathaway and the Euro
The Oracle of Omaha made note of the corporations ties with the Euro. Berkshire Hathaway is long with the Euro due to its volume of business done in Europe.
The Europeans collected Payments in euros. He stated Berkshire Hathaway has additional interest expense when the Euro goes up. If it goes down, they have less.
The future of Coca-Cola
When asked by Andrew Ross Sorkin to defend Coke, Buffett concluded that he has yet to see proof that eating broccoli and drinking water will increase chances of living to be 100.
He also noted that he believes all junk food will stay around. While the world seems to be turning to more health conscious decisions, Buffet made a sharp observation.
He rarely sees smiles on people’s faces when shopping at Whole Foods. As we all know, the same cannot be said for candy stores.