Berkshire Hathaway overpaid for part of venerable food giant Kraft Heinz and failed to realise the potential of Amazon.com, snapping up stock in the internet retailer only after it had already risen by thousands of percent.
That was the assessment by Warren Buffett and Charles Munger of two recent bets, leaving them in an unusual position on Saturday: Answering shareholder questions about whether changes are needed to an approach that has made them investing legends.
At Berkshire’s annual meeting in Omaha, Nebraska, holders filtered past the Kraft Heinz booth featuring an inflatable ketchup bottle and a giant hot dog. The displays served as a reminder of a rough bet by Buffett, 88, and of questions about whether traditional consumer brands still carry weight in the age of internet stocks including Amazon, Berkshire’s latest investment.
Investors wanted to know how Berkshire’s businesses are working to stave off the risk that the world is changing faster than the conglomerate can react. For some, the questions about strategy reminded them of the days before the dot-com bubble burst or the financial crisis occurred.
“They’ve stayed relevant through lots of upheaval in their careers,” said Richard Cook, who oversees $335m including Berkshire shares at Cook & Bynum Capital Management. “He’s nimble enough and now understands that a lot of those brands have been overstretched and now are no longer as durable as they were.”
Buffett has long searched for businesses with “moats,” or a long-term competitive advantage. Facing questions on new technology and Amazon, the billionaire investor acknowledged the shifting trends and said his managers were tasked with making sure they’re staying ahead.
“The world is going to change in dramatic ways,” said Buffett, Berkshire’s chairman and chief executive officer. “Just think how much it changed in the 54 years that we’ve had Berkshire - and some of those changes hurt us,” he said, citing the namesake textile business and some shoe operations.
“But we do adjust and we’ve got a group, overall, of very good businesses,” Buffett said. “We’ve got some that will be actually destroyed by what happens in this world, but I still am a card-carrying capitalist and I believe that that’s a good thing.”
Kraft Heinz has been a headache for Berkshire. The food maker in February reported a $15.4 billion writedown and disclosed a subpoena from the Securities and Exchange Commission. Berkshire, which reported first-quarter results Saturday, couldn’t include results from Kraft Heinz, which is late publishing certain filings.
Kraft Heinz dropped in early trading Monday after announcing that it would restate some earnings and found evidence of employee misconduct in procurement. Buffett said Monday in a CNBC interview that he learned of the news from his deputies, Greg Abel and Tracy Britt Cool, and didn’t expect Berkshire to have to restate results based on the news. He said he continues to have confidence in Kraft Heinz.
On Saturday, Buffett reiterated that Berkshire and 3G Capital, which partnered on the deal to create Kraft Heinz, paid too much for the Kraft assets.
“The idea of Berkshire and 3G joining to own a consumer company has always confounded the Berkshire shareholders and it continues to,” said Lawrence Cunningham, a professor at George Washington University and author of the book “Berkshire Beyond Buffett.” The investment could still turn around, Cunningham said.
Berkshire shares dropped 2.7% to $318,957 at 9:42 a.m. in New York, the biggest intraday decline in four months. The Standard & Poor’s 500 Index dropped 1.3% on renewed threats of a trade war.
The packaged-food giant was just one focus at the annual meeting of Berkshire shareholders. Amazon was another. An investment in Jeff Bezos’s online retailer was announced days ago by Buffett, who said it was the idea of one of his investing deputies, Todd Combs or Ted Weschler. Combs and Weschler have helped Berkshire push into tech investments like Apple, and Munger, the 95-year-old vice chairperson, has credited them with having “younger eyes.”
Shareholders on Saturday asked about buying tech shares that had already exploded in price years ago, and whether that marks a change in Buffett’s well-known preference for value investing. Buffett said technology firms can be evaluated on a basis similar to other stocks. Munger, though, admitted that Berkshire missed opportunities, specifically with Alphabet’s Google.
“We just sat there sucking our thumbs,” Munger said of failing to invest in Google. “Maybe Apple was atonement.”
While Buffett has long praised Bezos, it was the growing influence of his deputies that led to the Amazon bet. Buffett mostly avoided technology stocks for years, saying he didn’t understand those operations. Since Combs and Weschler have joined, Berkshire piled into Apple, a holding that was valued at more than $48 billion at the end of the first quarter.
Throughout Berkshire’s history, Buffett favoured a decentralised model. He highlighted that Saturday when confronted with a question about the impact of changing consumer habits, saying the executives who run Berkshire’s diverse units are responsible for accommodating shifting markets.
Jim Weber, who runs Brooks Sports, said before the meeting that fast-moving consumer and digital demands are a daily challenge as he seeks to compete with the likes of Nike and Under Armour.
“Every brand, typically on the premium side, has to justify its value to the customer every day,” Weber said in an interview on Friday. “As soon as you’re not the big brand, you’re a niche player.”
International Dairy Queen Inc.’s Troy Bader said the company is working to modernise its brand, using its app to create rewards for consumers. And Benjamin Moore & Co.’s new chief executive officer, Dan Calkins, said the paintmaker experiments with some brands to make sure it’s staying ahead of the curve.
“We can’t put our head in the sand,” Calkins said on Friday.
Two of Berkshire’s managers, Greg Abel and Ajit Jain, fielded questions from shareholders Saturday in a move that allowed the new vice chairmen to have more of a public spotlight at the meeting. Abel has oversight of non-insurance operations while Jain runs the insurers. Jain explained how Geico competes with rival Progressive on certain metrics.
Buffett’s capital-allocation strategy has also been shifting. The billionaire investor has long favoured snapping up stocks of other companies or acquiring businesses outright, but that’s been hard with “sky-high” prices.
That environment has made it harder for Buffett to find ways to deploy his $114bn cash pile. But last year, Berkshire loosened its buyback policy, leading to the repurchase of $1.7bn in stock in the first quarter. At Saturday’s meeting Buffett implied that Berkshire could become a larger repurchaser of its shares.
“Twenty-five years ago that would not have been part of the thinking,” Cook said.