Hill: Did you?!
Koppenheffer: At the end of the race, yeah.
Hill: Nice! That's better than the medal you get at the end of the race.
Koppenheffer: It's much better than the medal.
Hill: What was your take of the meeting? I know you didn't go this year, but obviously, he and Charlie Munger do the big Q&A session. A lot of talk, I think -- and probably rightly so, given how recently Apple reported earnings -- a lot of talk about Berkshire loading up on shares of Apple, 75 million additional shares now that they've got.
Koppenheffer: Back when, it was a question of, is this a Todd and Ted thing? Now, there's no question about that whatsoever. This is Buffett, and he's going whole hog on Apple. He's loving the buybacks that Apple is doing, too. Buffett and Munger haven't always talked very highly of buybacks, but they love that because it'll give them a larger position in Apple's stock over time. He makes a good point about Apple being a consumer-oriented business, that he has the potential to be able to understand better than other technology companies, like, say, IBM?
Hill: Yes. [laughs]
Koppenheffer: But it's still a technology company.
Hill: By the way -- clearly, I didn't read through a transcript of the whole Q&A -- did Munger do any gloating about the fact that Berkshire has gotten rid of the IBM position? Because, remember, it was two or three years ago, it was the rare public break between Munger and Buffett. They're such good friends and work so well together. I was struck, two or three years ago, when Munger basically came out and said, "Yeah, I think this is a mistake, but this is Warren's call on IBM. He wants it, I don't, I think it's a mistake." Did he do any gloating?
Koppenheffer: If he did, I missed it. I was watching some of the videos from the meeting. I didn't see it. Maybe he did, and I just didn't see it. He doesn't seem, from what I've seen, to be against the Apple investment, either. But, I mean, this is still a technology company. If you think of the other consumer businesses -- Coke, Kraft Heinz, those kinds of companies -- this is still very different. But, on an earnings basis, in an expensive market, this looks like a cheap stock. Probably even more importantly, it's huge. Berkshire's portfolio, getting darn close to $200 billion. If you add in the cash they have, they're well above $200 billion. You can't just invest in anything at that point. You have a very small pool that you're fishing from. Apple checks a lot of those boxes, so I think it makes sense from a lot of different perspectives. But, looking back at what happened with IBM, you have to wonder a little bit, is this going to be a different story? Or is Buffett putting his thumb in where it doesn't belong?
Hill: One thing that Apple has that Buffett has talked about as being maybe his favorite quality he likes to see in a business, is pricing power. Apple has defied many critics, and probably 100% of history, in terms of consumer-facing technology, where over time the prices always come down. They have been able to maintain a pretty high price point for the phone.
Koppenheffer: Yes, that's true. The reason that the multiple on a stock right now is so low is, I think people are saying basically the same things that I would say in terms of the bear case against Apple. You have a hits-driven business here, it has to keep innovating, it has to keep at the forefront. And, by the way, ten years from now or even five years from now, will we be using smartphones? Will we be using phones at all? Will we have chips implanted in our heads where we're just communicating through signals that our brain is sending?
Hill: One thing before we move on, you mentioned Buffett historically not being crazy about stock buybacks. Why is that? Is it because a lot of companies are just sort of bad at them?
Koppenheffer: Yeah. They're stupid. So many stock buybacks are stupid. Munger actually did say this during the meeting, they use the stock buyback to prop up the stock. A stock buyback is great when it's used the way you'd buy any stock. When the stock is low, you buy the stock. When the stock is high, you don't buy the stock. Good capital allocation has a company spending on the stock when the stock is priced low. If you look at Apple's price today, again, on an earnings basis, at least, you could say, the stock is priced low, good time for a buyback.
Hill: Buffett also got a little attention during the Q&A session firing back at Elon Musk, because on his own conference call for Tesla last week, one of the things Musk was talking about was the idea of moats. He was saying that moats are lame, and the pace of innovation is so much more important, and that sort of thing. Buffett kind of fired back at that idea. What did you think of that?
Koppenheffer: Look, I love Buffett. I also have a ton of respect for Musk. But on this one, I'm with Buffett. Sure, Musk is going to say that. I think innovators always want to think that innovation is the pinnacle, innovation is what's going to get you ahead and keep you ahead. But when you look at history, it really is the moat that's kept companies around. Writ large, in the big, big picture, innovation is a really big deal. But, radio companies, TV companies, even auto companies, it's the moat that individual companies were able to build around ability to manufacture, size, brand. These are the things that kept them around and made them so successful. Ideally, if you're investing in a company, pair innovation and moat.
And, I think, you also don't want to get hung up on the analogy itself. Yeah, a moat can be kind of lame. It's just a ditch in the ground, I think, is one of the ways that Musk described it. But that ditch in the ground is usually combined with a big castle, a big army in there, boiling oil coming down, arrows coming down --
Hill: Right, flaming arrows.
Koppenheffer: Yeah. So, you have the small band of innovators crossing the moat, but, sure, what are they going to do about the boiling oil being dumped on their heads?
Hill: I also like that the business within the Berkshire portfolio that Buffett cited in his response was essentially See's Candy, saying, "I don't think Musk wants to take us on in candy." And of course, Musk couldn't let that pitch sail by. He's like, "Yeah, no, we're going to start a candy company. I'm super serious about this." [laughs]
Koppenheffer: [laughs] As a side note, I won't back Buffett up on everything. [laughs] He has to let the See's Candy example go. Everything that comes up ever, he goes back See's Candy. And it's like, OK, it's a great business, but it's a tiny business in the grand scheme of things. That said, I'd love to see Musk take on Buffett in candy. [laughs]
Hill: I think it's also because See's Candy has just worked out so well. When we talk about stocks in our own individual portfolios that we've held for, if you're old enough, you've held them for decades at a time, and eventually your cost basis become so tiny -- that's obviously the thing that Buffett is thinking about when he looks at See's. "My cost basis for that purchase that they made," God knows how many years ago, "is just so tiny now."
Koppenheffer: Right, right.
Hill: Let's talk about a bigger business in the portfolio, and that's the Berkshire Hathaway HomeServices, which is really seeming like it's making some inroads in Germany.
Koppenheffer: Yeah. They just signed up their first franchisee in Berlin, which is where I just moved back from. I would love to say that the takeaway from it is, "Oh, Buffett loves Berlin!" or, "Buffett loves Germany!" and that's where the message is here. Unfortunately, that's not really the case.
But I think this is another great sign of the way that Berkshire is leveraging its brand. For so many years, the Berkshire name and the Berkshire brand were in the background. You never heard it unless you were a real stock nerd like we are. Now, they're starting to put the Berkshire brand onto things, and the real estate business is one of the prime ones. You drive around anywhere in the U.S. now, and you see those signs on people's yards, it's Berkshire, all over the place. And now, they're extending this to Berlin.
In particular, they're going to be going after wealthy clients that are coming to Berlin to invest in Berlin from other countries. The Berkshire brand associated with Buffett is a huge selling point for people with a lot of money from different countries investing. So, I think that's one big takeaway. The other is, the general global thinking from Berkshire overall. At its size, this has really been a very U.S.-focused business. But, at its size, they're going to need to think more and more global as time goes on, and this is another sign of them doing that.
Hill: Why do you think they rebranded? I want to say that the business that they bought a few years back, it was something like American Homes, or something like that. And then, relatively quickly, they rebranded it with the Berkshire Hathaway name. And they've done that in a couple of other spots. I think they've done that with part of the energy business, as well. But, clearly, they're not doing that with Geico. They're not doing that with See's Candy or, obviously, Kraft Heinz.
Koppenheffer: Berkshire Hathaway ketchup. [laughs]
Hill: Yeah. Is there some sort of calculation that they've done where they look at not just the Berkshire Hathaway name, but Buffett himself, and essentially calculate, "This is going to be a net positive for us, if we rebrand this with the Berkshire Hathaway name."?
Koppenheffer: I think that's a great point. I don't know of any particular work that they've done, but the brands that you've mentioned are super strong brands on their own. Kraft, Heinz, Geico, these are all brands that drive their own thing. Geico in particular, the amount of money that they spend on advertising, that would be a disaster.
But, in some of these other businesses where the brands themselves weren't quite as strong, when you think about what Buffett's done for his own brand in the past five to 10 years, I don't know that anybody's on CNBC as often as Buffett is. He's built that brand, and the Berkshire brand by extension has benefited from that, so it makes a lot of sense to leverage that. And, I don't know, if you look forward five or ten years, what's the opportunity that they have to use that brand for other things?
Hill: Let's stay in Germany. I think the last couple of times you've been in this studio, we've talked about Volkswagen. For those with short memories, the diesel emissions scandal that hit Volkswagen in the fall of 2015 was huge news, and rightly so. It continues to play out in the headlines, because just last week, Martin Winterkorn, who was the CEO, who resigned pretty quickly after that scandal broke in late 2015, he has been formally charged with conspiracy.
Koppenheffer: Yeah, that was a pretty big announcement. Another related announcement that I saw was, the new CEO will have safe passage in the U.S. Basically, he can come to the U.S. and not worry about it, which is nice for him. We were joking before the show, I said, "This is nihilism, Chris! Nothing matters! Companies can do anything, they can do these terrible things," because we have this announcement about that, but Volkswagen's results have bounced back, sales of the cars have bounced back, and people with short memories, it seems like there are a lot of them. That's what it seems like.
But, I think, on the other hand, the way this is playing out, it's kind of interesting because if the management team did have knowledge of what was going on and they were driving this and they were encouraging this, or at least they were not saying, "No, this is something we should not be doing," this would be cool, if they were held responsible for that. In the meantime, Volkswagen itself makes cars that people like. They don't like the fact that they were cheating the emissions scandals. We don't want cars that are polluting more than they should be. But the brand, people like the brand. People like the other owned brands from Volkswagen like Audi. Audi is a hugely popular brand. So, it would be kind of nice to see that the bad actors were punished without killing a company that has brands and goods that people want to buy.
Hill: And is also, in terms of Germany's economy, it's an incredibly important component.
Koppenheffer: [laughs] That's true, too. Particularly for certain regions in Germany, Volkswagen is hugely important. So, the German government, obviously, wouldn't want to see that be brutally damaged.
Hill: It's really good to see you.
Koppenheffer: You, too, Chris!
Hill: I'm glad you made the trip. Thanks for coming! As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!
Chris Hill has no position in any of the stocks mentioned. Matt Koppenheffer owns shares of Apple and Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Apple, Berkshire Hathaway (B shares), and Tesla. The Motley Fool is short shares of IBM and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.
