Gardner Russo & Quinn LLC Managing Member Thomas Russo joins Yahoo Finance Live to discuss Warren Buffett’s letter to shareholders, Berkshire Hathaway’s stock holdings, investor sentiment, and the power of compounding.
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JULIE HYMAN: Berkshire Hathaway CEO Warren Buffett published his annual letter to shareholders over the weekend. The billionaire investor shared his take on a number of topics and signaled, he's not lost his confidence in the US economy. Let's break it all down, get a reaction to the letter from one of Berkshire Hathaway's shareholders. Joining us now is Thomas Russo, Gardner Russo & Quinn Managing Member. Tom, it's great to catch up with you, as it always is on things Buffett and otherwise. Good to see you.
THOMAS RUSSO: Thank you. Nice to see you. Great to be here.
JULIE HYMAN: Buffett, as he frequently does, talked about the dangers of short-termism. Of course, his short-termism is different than everybody else's. I mean, he's talking about how the company posted a gap loss last year, an operating loss last year, because of poor stock performance. But a year is too short, of course, for Warren Buffett. So as an investor, how do you think about time, sort of, in the market here?
THOMAS RUSSO: I think our earliest introduction to Warren was in 1982. And at the time, the shares were priced at $5.00 a share, maybe $7.00, I can't quite recall. The truth is, it's been a very patient wait. It's at 19 and 1/2% compound since they kept charts of it for the Berkshire annual report. It's been a very rewarding wait.
It'll only work, however, if you start with the premise, which I think is at the core of Berkshire, which is the lack of agency costs. Agency costs the tendency of your management to try to make your money, their money, over time, and stock option grants and all sorts of other means are used to do that. It's not so in Berkshire.
There's just no other company in the world that offers as aligning of interest as does Berkshire and is prone to as little agency cost as has been Berkshire. And so what they do generate, it has the higher compound because the owners keep all of it. And that's just unusual. So agency cost is important.
The other thing is there's a principle at Berkshire which keeps it forward moving at such a steady and strong pace. And that is send the money to Omaha. All of the businesses within Berkshire excel at their competitive task. So they are best-in-class, but they don't need money all the time.
And when independent, before Berkshire acquires businesses, they often stumble because they force that reinvestment decision. In Omaha, in Berkshire's hands, that money comes straight to Omaha. And that money is then able to be directed by Warren, by Charlie, by Ted, and by Todd over a very, very broad and balanced universe.
They can invest in their existing businesses. They can add to portfolio position in the stock market. They can-- they can involve themselves in specific transactions anyways. So the deployment of capital is done by the four of the smartest investors in the world. And that relieves the operating head managers, so the duty of deploying capital when they don't have anything pressing for their business and they would likely make mistakes if they went outside their business to invest.
JULIE HYMAN: Right.
THOMAS RUSSO: Those are the three things and the balance is terribly important. And, you know, the payoff is on a year, as tumultuous as this past year has been when people who use leverage, who do different sorts of investing, suffered so deeply. Berkshire shareholders are up 4%.
So Warren often says that in order to compound over time, you just need a handful of companies at any given time that are outperforming and then the bulk of the portfolios tend to be sort of so-so. But Warren did, I think, overly penalized himself in the annual letter this year by calling his results so-so. I don't I don't think that's a fair assessment. They've been far so-- far, far beyond so-so.
JULIE HYMAN: I mean, Tom, if you bought the shares in 1982, it's been far from so-so.
THOMAS RUSSO: Far.
JULIE HYMAN: And on that front, and just to pick up on something you mentioned, something that Buffett mentions in his letter, the power of compounding. For investors out there who might not be as familiar with this-- and we have a definition up on the screen-- it's reinvesting an asset's returns to generate additional earnings over time. In other words, if you make money on that holding in the first year, you buy more of those shares, right? And so on, and so on, and so on.
THOMAS RUSSO: Yes.
JULIE HYMAN: Talk to me about the power of compounding in your Buffett investment.
THOMAS RUSSO: Compounding is what Einstein's been attributed as having said, is the most powerful force of nature. And it means that when you do keep-- when you retain something and earn on that retained, then the base upon which your compounding goes up. And you have more money at work. And as that compound continues, more money at work. And that's really how that advances.
And one of the-- when I first met Mr. Buffett years ago at the meeting he said to the investors assembled, that the only thing you should really care about is take advantage of the government's number one tax break, which is the non-taxation of unrealized gains. And so compounding is the goal.
And when you say compounding on what? The way Berkshire has invested that patient long-termism, he has held a capital gains that has not been realized of $400-and-some-- $385,000 on the shares that would have been bought in the 1980s. That whole pool of money is being invested alongside of the capital that the firm as.
So the compound that we enjoy is shareholders is on a much broader base than the shareholder money because it includes the money that other advisors would have sent back to the government by virtue of high velocity trading or just an average turnover. Berkshire's turnover is extremely low. And with that, we get a compound on the unrealized gain. A very, very important point.
BRAD SMITH: We also heard from Warren Buffett. Of course, his push back on--
THOMAS RUSSO: Hi.
BRAD SMITH: Hey, pleasure to meet you, Tom. --on buybacks--
THOMAS RUSSO: Thank you.
BRAD SMITH: --and what he thinks of that, especially calling some of those illiterate, who do not believe in the buybacks or want to put more regulation or guardrails around that. What was your general take on that? And do you believe that Warren Buffett's voice will be heard, perhaps, within Washington DC on that?
THOMAS RUSSO: It's such an important question. I think it speaks to the lack of civility and the inability today for conversations to be based on facts and based on reality. Even Warren is human, he's lured in on something like this, but very rarely, mind you.
But in this case, I think he has a voice to say, because if you have a pool of capital-- the beauty of what Berkshire's done is that they have all the money to go back to Berkshire Hathaway. And then the Berkshire knows what its share price is worth. We don't necessarily know what the share price is worth, but-- to the precise number. But Berkshire has as a sense.
And when the shares are deeply trading below that intrinsic value on a per share basis, there's a great opportunity to deploy capital when Mr. Market is most fearful in shares that are familiar intimately to Warren at prices that are compelling. And so it's-- at other times, it's appropriate to issue stock.
This happens to be the time when things are discarded that you should probably look to buyback. And if you say to anybody that when they run a race or compete in any venture, that you can only use your left hand, you can't use your right hand when the right hand is appropriate in many instances, then I think you set yourself up for failure or for at least, the very least, sub possible returns.
JULIE HYMAN: Well, we'll see if anything, any more action happens on that front or not in Washington. Thomas Russo, great to catch up with you, Gardner Russo & Quinn Managing Member. Appreciate your time today.
THOMAS RUSSO: Thank you very much, Julie. Bye.
