Berkshire investor shares AGM highlights

Further, the weakness of BNSF railroad isn’t a major concern, says Jeff Hull, senior advisor at Manulife Securities Incorporated. Hull, who has invested in Berkshire for 23 years and who attended the shareholders meeting, says, “Buffett prides himself on his railroad division. So, he’d actually like to find another railroad that he could buy. His railroad did earn significantly less than in past years, but this was in part due to the lack of coal moving around the U.S., and the slowing down of fracking and oil movement.”

Further, despite the dip in Berkshire’s underwriting business for insurance, Hull says Buffett held up GEICO as a winner in the space.

Overall, the main attraction of the shareholders meeting, says Hull, was Buffett’s discussions about the economy and the companies he’s watching. For example, even though Buffett’s not invested in Amazon, “He mentioned that he admires Amazon and what the company has been able to achieve, given it now has a market cap that’s bigger than Walmart’s.”

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In contrast, both Buffett and Munger voiced their disapproval of Valeant’s business model. And, in a follow-up interview for CNBC, Buffett elaborated on his reasons for speaking against Valeant. He noted the company “jacked up [drug] prices dramatically, and unbelievably, for certain drugs that people had no substitutes for.” Also, he told CNBC, “I would say this: I don’t think you’d want your son to grow up and run a company in the [way] that Valeant was run.”

Tips for investors

Buffett cautioned investors against two areas of the U.S. market: real estate and the banking sector.

In particular, Buffett said he’s not afraid of a nationwide bubble in housing prices and that real estate won’t be a source of broad economic problems in the near term. But, even though some housing markets continue to offer sensible prices, real estate is less attractive than it was a few years ago. For example, Buffett says current low interest rates are encouraging people to buy homes at elevated prices, and those buyers may eventually lose money.

Read: Where to invest in the U.S.

When it comes to the banking sector, Buffett says the derivatives contracts that big banks hold on their books can make the institutions hard to evaluate. He’s comfortable with Berkshire’s investments in Wells Fargo and Bank of America—and says Berkshire uses a portfolio of derivatives to cover for losses and credit risks—but concedes that derivatives can be dangerous in large quantities.

For this reason, he told shareholders that he won’t ever agree to a derivatives contract that Berkshire can’t easily pay back. Munger added the U.S. economy would have fared better in 2008 if banks had been prohibited from using derivatives.

Buffett also discussed interest rates and how those affect portfolios. The key, Buffett told shareholders, is to consider how interest rates affect stock valuations. “We are dealing with a situation where we’re very close to zero interest rates. And the nature of [this] is you pay more for a business when rates are [near] zero than if rates are higher […] These are unusual times.”

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Buffett on the presidential election

Buffett has long supported Democrat Hillary Clinton. So one shareholder asked what might happen to Berkshire if Republican Donald Trump were elected.

To start, Buffett reassured shareholders that Berkshire will prosper regardless of who’s elected, adding that most U.S. businesses will continue to adapt and thrive just as they have under other past presidents that haven’t been great.

Read: Anger over economy will make Trump president, says Gundlach

However, he noted the outcome of the election will be important for the global economy and for America’s global ties.

Buffett’s succession plan

Buffett and Munger spoke at length about Berkshire’s culture and its plans to replace Buffett, given he’s 85 and still leading the company.

Buffett has no plans to step down, but is confident Berkshire’s culture will endure when he does. He reminded shareholders that the following plans are in place: Berkshire will split his job into three parts, meaning the company will be led by a CEO, chair and several investment managers. Buffett’s son, Howard, will become chairman after he is gone.

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Says Hull, “Howard will be the steward of the culture of Berkshire.” Hull adds Buffett confirmed at the shareholders meeting that there’s no manifesto explaining the company’s culture, but executives such as Howard will be there to carry on Buffett’s wishes.

Further, “In case Berkshire hires the wrong CFO or CEO down the road, Howard would be able to punt them out as needed,” says Hull. “He wouldn’t make decisions on a day-to-day basis, but would be there to preserve the culture and ensure Berkshire doesn’t veer off the rails.”

Buffett added the company has several internal candidates for CEO, but has refused to name them. So far, says Hull, it’s rumoured that top execs such as Ajit Jain are in the running (Jain heads part of Berkshire’s reinsurance operation). But, “I’m not convinced Jain would be chosen, since Warren tends to surprise. Still, Jain is [knowledgeable] about the culture and all of Berkshire’s businesses.”

To further comfort shareholders, Buffett told them Berkshire takes a hands-off approach to managing the companies it owns, unless there’s a problem.

Hull says, “When Buffett acquires a new company, he doesn’t parachute in a team take it over. He buys companies because he loves them as they are. He allocated capital to businesses to help them out,” and assists in solving problems.

So, even though succession is an issue, adds Hull, he’s not “overly concerned” as a shareholder and remains confident in his investment. Also, even though Berkshire is growing, Hull thinks the company will endure.

At the meeting, says Hull, Buffett admitted that “size can be the enemy of performance,” in response to mentions of Berkshire being a massive conglomerate. “One of the things [Buffett] talked about is how some people say large companies should be broken up, if the parts are worth more than the whole. But, even though that’s normally the case, he said Berkshire has been able to make it so the whole is worth more than its parts.”

This is the case, adds Hull, because Berkshire encourages subsidiaries to innovate and build individual brands. It mainly assists with acquisitions and companies’ reporting requirements.