Before we get into our post today, I hope you check out the most recent episode of the Sinica Podcast, one of my favorite pods out there, where I chop it up with Kaiser Kuo and Paul Triolo on all things China when it comes to semiconductors, AI, the cloud, and more. Feedback and critique all welcome!
Ever since I started pursuing investing full-time, I developed a new habit: listen to the raw recordings of past Berkshire Hathaway annual meetings whenever the market gets volatile or does strange things. There is a wonderful feed on Spotify that has recordings dating back to 1994 – no editing, no intro/outro music, no commentary by some other “investment guru”, just the raw audio.
Whenever I do this, I don’t look for anything specific. I just pick a random year, while I’m driving to the gym or the grocery store, or while cleaning the house and doing other chores, and turn it on. It is more of a meditation or a trick I play on myself to stay calm and do nothing, while still (sort of) doing something “investing related”. (Buffett and the late Munger’s voices have a soothing effect on me.)
This and last week’s market has had no shortage of volatility. On top of that, I am also in the process of making a big move to a new city – packing, cleaning, loading U-haul boxes. So I have not been in the best frame of mind to put together my usual essays. However, I have been listening to more Berkshire meeting recordings as I do these choirs and navigate the volatility. And even though I don’t listen for anything specific, I always pick up small gems of information and wisdom.
So instead of my normal essay, I thought I would share some of these gems (in raw transcript form) in today’s post, covering a wide range of interconnected topics, from powering data centers and money manager compensation, to US-China relations and the notion of deserved trust.
Powering Data Centers
A few months ago, I wrote the post “Greg Abel Will Power AI”, where I discussed what Greg Abel, Warren Buffett’s successor, shared in the most recent 2024 Berkshire meeting on Berkshire Hathaway Energy’s expansion plan to power the massive AI data center build out that is happening in states like Iowa, where much of AI was “born”.
Little did I know, 10 years ago, during the 2014 Berkshire meeting in the afternoon session, Abel shared similar insights on this topic, long before generative AI was a thing. Here is the passage, when Buffett tagged him in to talk about MidAmerican Energy (now called Berkshire Hathaway Energy):
“WARREN BUFFETT: Greg, you might comment, just a minute, I think they’d find it interesting, on what’s happening in Iowa with the tech companies, simply because of what we’re doing in the electric field. Or not simply, but in part because of what we’re doing in the field of electricity.
GREG ABEL: Right. So when you look at the tech companies and the data centers that exist, if you just go across the river, we service Google in Council Bluffs.
They’ve got a site that was initially a relatively small data center. They’re looking at taking it to 40 to 50 megawatts, which is a small size of a power plant. But the reality is they’re talking about ultimately building that to 1,000 megawatts. And we’re seeing that replicated time after time in the state.
And it’s really due to two things. One, we’ve got these exceptionally low rates. And then the fact that a significant portion of our energy, as Warren highlighted earlier and I touched on, comes from renewable energy. They want those credits, they want to be associated with a utility that’s producing green power.”
Even back in 2014, Google’s huge appetite for energy to expand its data centers in Iowa was already ferocious. And Berkshire’s MidAmerican Energy has been right alongside them in fueling that growth. It continues to do so today.
There is a lot more to why MidAmerican Energy, being a subsidiary of Berkshire Hathaway rather than a standalone energy provider, is structurally advantaged in qualifying for renewable energy credit from a corporate taxation perspective, which I will spare you today. But needless to say, the “energy bet” on secular cloud data center growth turbo charged by AI that has been so en vogue this year, has been staring at me for at least 10 years, if only I knew where to look earlier.
How to Pay Investment Managers
Todd Combs and Ted Weschler are the two investment managers that Berkshire brought on over the years to help manage its ever-growing cash pile. During the 2012 Berkshire meeting in the afternoon session, Buffett shared details of how each of them were compensated to best align incentives and foster cooperation:
“WARREN BUFFETT: But these two are perfect, and we pay them each a salary of a million dollars a year, and we give them 10 percent of the amount by which their portfolios beat the S&P.
So that if they beat the S&P by 10 points, they get one point, for example, and we get nine points. But we do it on a three-year rolling basis so you don’t get the seesaw effect.
And each one gets paid 80 percent based on their own efforts and 20 percent based on the other person’s, so that they have every incentive to operate in a collaborative way rather than sit there jealously guarding their own ideas and hoping the other guy doesn’t do very well.
So it’s a — I don’t think we could have a better — it’s the same structure on pay, basically, that we had with Lou Simpson for 20-some years, except he did not have a partner.
To the extent that they employ people underneath them, that comes out of their performance record, and it’s worked far better than either Charlie and I had hoped, and we had pretty high hopes.
We had 1 3/4 billion with each of them at year end, but we’ve added another billion each on March 31, so they’re running 2 3/4 billion apiece.”
Now that I’m starting my own fund, I think about incentives alignment a lot. How do I align my incentives with that of my investors? How do I do the same with myself? My family? My daily behaviors, habits, and psychological needs and foibles?
How Berkshire compensated Combs and Weschler provides an interesting reference point of alignment engineered for the long term, especially the part where their 10-point carry is being paid out on a three-year rolling basis to minimize the outsized effect of one really good year followed by successive mediocre years.
Of course, no example should be blindly copied. I am nowhere near the ability to pay myself, or anyone, a million dollars in salary (nor do I think I ever want that). But incentive alignment is an important art and crucial part of successful long-term investing, so hearing an example done by the best of the best shared so candidly offers a precious perspective.
US-China Relations
Buffett’s investment in BYD is well-known. Close followers of his track record would also remember an earlier investment in PetroChina. Munger’s special relationship with Li Lu, his admiration of BYD’s founder Wang Chuanfu, and his self-admittedly disastrous investment in Alibaba in his waning years are also well-investigated fodders, when the dynamic duo of value investing intersects with China.
Yet, I still find this passage from Munger during the morning session of the 2015 annual meeting wise and prescient. More interestingly, this answer was in response to a questioner asking about how Buffett feels about the possible risks of chemical, nuclear, biological, and cybersecurity attacks on the US and the country’s future prospects:
“WARREN BUFFETT: And we need an extremely vigilant security operation in the United States, and we will have threats. I can’t — I do a little bit about those things in a few ways — but that’s something we live with.
But we also live in a country that is going to do extraordinarily well. And if we successfully ward off those threats, or at least minimize their impact on us, I still maintain that the luckiest person ever born in history, on a probabilistic basis, is the baby being born in the United States today. (Applause)
Charlie?
CHARLIE MUNGER: Well, of course, we were a favored place, and we’ve had a favored outcome, and we’ve been lucky too.
I think I probably lived in the most ideal era that any man in human history could have been born into. I think you have, too, Warren.
WARREN BUFFETT: Right.
CHARLIE MUNGER: But I don’t think we should get too smug. China has come up a lot faster than any other big nation ever came up, and —
WARREN BUFFETT: But that’s good for us.
CHARLIE MUNGER: Oh, I think — I can hardly think of anything more important than future close collaboration between the United States and China.
I think you’re talking about the two most important nations in the world going forward. And I think it is very important that we like and trust one another, and have very good relations, and work together to avoid bad consequences that come from other people’s mistakes and misbehavior.
So I’m — (Applause)
I think both China and the United States would be crazy not to collaborate and increase trust.
I don’t think there’s anything more important that we could do for our respective safety and for the general benefit of the world. (Applause)”
Those are wise words indeed. Sadly, the relationship between the US and China have only gone downhill in dramatic fashion since Munger uttered those words. Perhaps he saw or sensed something back then and wanted to speak out on it.
For what it’s worth, 2015 was also the year when I noticed US-China relations starting to go south. I don’t claim to be nearly as wise or prescient as Munger. Listening now to his words on this matter offers only some small solace and much desire for a brighter, wiser path ahead.
Deserved Trust
The last bit I’ll share today is a passage on “deserved trust”. This part happened during the morning session of the 2011 meeting, when Buffett was asked about how he raised money when he first started his investment partnership in 1956. (As a new fund manager, you can imagine my ears perking up when I heard this question.):
“WARREN BUFFETT: in my case, I’d moved back here from New York in March or so of 1956, and a few members of my family said we’d like you to manage our investments just like I did when I was selling securities out here before I went to New York. And I didn’t like being in the securities selling business, partly because if I sold somebody a stock at 20 and it went down to 10, I wanted to buy more, but I couldn’t face the idea of people that had bought at 20 and, based only on confidence in me not because they understood it, and now they were feeling depressed, and it was — it just wasn’t — it wasn’t very satisfactory.
I could not do as well managing money if people were watching every decision as I could if I did it in a room all by myself.
So I just told these seven members of the family — one of them, actually, was my roommate in college and his mother, they came in also — I said, you know, if you’d like to join up in a partnership, I’m not going to tell you what’s going on, but I will tell you that I will be doing with my own money what I’m doing with yours. Later on, I put all my own money in.
And it just was very slow.
A few months later, Graham-Newman, that I’d worked for, was liquidating, and a fellow named Homer Dodge asked Ben Graham what he should do with the money he was getting out of Graham-Newman. He said, “This kid used to work for me and he’s OK.” And so he came out and went in with me.
And another fellow, late in the fall, had seen the notice of partnership formed in some legal paper and he said, “What’s this?” and came in with me. It’s just — we just stumbled along.
And for almost six years, I operated out of my house, no employee. I kept all the books, I filed the tax returns, I, you know, went out and picked up the stocks personally and stuck them in a safe deposit box.
…
WARREN BUFFETT: And he was actually asking about attracting money.
CHARLIE MUNGER: Well, of course, it helps if you conducted yourself in life so that other people trust you. (Laughter)
And then it helps even more if —
WARREN BUFFETT: You can see why I was so slow and he was so fast. (Laughter)
CHARLIE MUNGER: And then it helps even more if other people are right to trust you. So the formula is quite simple. First one, then the other.”
Both Buffett and Munger started humbly in their investing journey, even though in hindsight they already have the preternatural talent and instinct to do very well. From their perspective, starting slow and “stumbling along” is the way it should be, because being trusted to manage someone else’s money is a huge responsibility. And that trust must be earned and deserved over a long time, not be sold or “marketed” in a short time.
As I embrace all the challenges and humbling moments of slowly starting my own fund, these words bring both comfort and perspective to the daily grind. I aspire to deserve the trust of every investor I bring on and every dollar I earn.