Semper Augustus Investments' commentary for the fourth quarter ended December 31, 2024.
Introduction – Kindness And Trust
A community lost Charlie Munger in November 2023. Warren Buffett lost not only his business partner but his best friend of six decades. I don’t think anybody in Omaha or watching at home knew what to expect that morning of the first Saturday in May last year when Warren assumed his usual place at the dais, his familiar, inseparable companion no longer seated at his left shoulder, munching peanut brittle and sipping Diet Cokes.
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The day wound up being extraordinary. Greg Abel and Ajit Jain, Berkshire Vice Chairmen with Charlie, nicely fielded questions in Charlie’s absence. Warren, then at 93, was as sharp and witty as ever. Always self-deprecating, he was candid, and he taught. It was also inescapably obvious to those in attendance that he grieved. Perhaps it required the ceremony of the Berkshire Hathaway annual meeting for the emotion of missing Charlie to finally wash in. We grieved with him. It was a fitting tribute, and for the first of my meetings in attendance since 2000, it was memorably emotional.
Upon fielding and answering an early question, Warren reflexively turned to his left and called for additional input, “Charlie…?” Instead, he found Greg. What a moment. Warren’s comments throughout the day were poignant, especially his answers to a series of questions as the closing afternoon session wound down.
The first asked Warren to address his estate plan directing most of his wife’s inheritance be invested in a market-capitalization-weighted S&P 500 index fund rather than an equal-weighted fund, given that the “Magnificent Seven” tech stocks comprised more than one-quarter (now closer to 35%) of the capweighted index. Two components of Warren’s answer were noteworthy. He explained, “I wanted to leave plenty of money to take care of my wife beyond anything she’ll ever spend (Astrid apparently doesn’t know my wife),” and “it wouldn’t make any difference to her in life whether she beats the S&P or anything else.” The second part of the answer confirmed a point I’ve made for years, “And the trustee doesn’t have to worry about getting sued or anything else.” The message here is an irrevocable trust will be established upon Warren’s passing for Astrid’s benefit as beneficiary. The trust’s investment assets, much like a foundation account, will legally require diversification. In other words, regardless how diversified Berkshire itself is, the trustee would be required to not own Berkshire either entirely or in a too-large proportion.
Warren’s answer then morphed into a discussion having nothing to do with the investment merit of not owning the capitalization-weighted index. Instead, Warren explained that he revised his will every three years or so, getting “little thoughts from time to time.” In doing so, he cautioned against the use of codicils to a will. His comments are better in the original and not summarized:
People do interesting things. I’ve been around probably as many rich people as almost anybody, and for a fair number I know what they’re doing or have done with their funds. And the idea that you can have a huge amount of money and leave everybody very rich and have people liking each other less when it all happens… Humans are really… they are interesting to watch. Some of them handle it beautifully, and others do terribly. The one thing lawyers will always tell you is don’t use codicils. In other words, when you change your mind on a will, just write a new one, but tear up the old one. Don’t do it by just adding codicils.
But I believe I’m correct…I’ve certainly read it…that Paul Getty, who was the richest man in the world, presumably at one point in the 1950s or 1960s, and was a very interesting guy to read about, and he had five wives, and he’s the one whose grandson was kidnapped, and they sent Paul Getty an ear of the child and everything. I mean, it’s not a happy life when you get through it. But the one thing he did that was kind of interesting, he actually liked to use codicils because I think he had like 25 of them. And it was kind of his way of writing, “Well, I’m taking you out of the will because…” And so he sort of delighted in explaining through his will how he felt about all these people.
You really get some strange things revealed in a will. I just read about a will of a fellow that made a whole lot of money and was leaving it to his, I don’t know whether it was children, grandchildren, whatever it may have been, but in any event, his opening line in his will is, and this was done some years ago, but I know something about the family. His opening line, in effect, said, “I’m writing this will while I am flying in the economy section of Eastern Airlines, number such and such.” I mean, he believed in getting right to the point about what the people who were recipients, how they should live, and he was going to be judging them. It’s just so darned interesting to watch people’s wills. But one guy left a lot of money to his wife on the condition that she remarry, so that at least one man would mourn his passing.
The next especially meaningful comments were in response to a question regarding the opportunity cost of working long hours at the sacrifice of family and whether, if given a new start, would Warren set his priorities any differently. The question lacked discretion and taste, but Warren handled it beautifully, noting he’s not perfect, but also:
I don’t believe in a lot of self-criticism or being unrealistic about either what you are, or what you’ve accomplished, or what you’d like to do. You do a lot of things, and who knows with somewhat different tradeoffs, you don’t know where the paths would have led. I don’t think there’s any room in beating up on yourself over what’s happened in the past. It’s happened, and you get to live the rest of your life, and you don’t know how long it’s going to be. And you keep trying to do the things that are important to you.
Warren proceeded with wise words for all of us to aspire to:
If I was a doctor, or if I was in all kinds of different professions, I might do different things, but I really enjoy managing money for people who trust me. I don’t have any reason to do it for financial reasons. I’m not running a hedge fund or getting an override or anything, but I just like the feeling of being trusted. Charlie felt the same way. You know, that’s a good way to feel in life, and it continues to be a good feeling.
So, I’m not really looking to change much. And, you know, if I’m very lucky, I get to play it off for six or seven years, and it could end tomorrow. But that’s true of everybody. Although the equation isn’t exactly the same. But I don’t believe in beating yourself up over anything you’ve done in the past. And I don’t believe in, well, I believe in trying to find what you’re good at, what you enjoy. And then I think the one thing that you can aspire to be, because this can be done by anybody, and it’s amazing, it doesn’t have anything to do with money, but you can be kind. You can be kind, and then the world is better off. I’m not sure that the world will be better off if I’m richer, but there’s no question that…I mean, you know, kind people…and in the end, aspire to be more kind. I’m sure many of you are kind yourself, but just aspire to be more so.
The meeting ended from there with one final question via moderator Becky Quick, asked of a close friend of both Warren and Charlie, Devon Spurgeon. Warren caught his breath at the mention of her name, knowing what was coming next was likely going to be emotional. Who knew it would tie together Warren’s earlier tangential comments, warning against the use of codicils to wills:
Becky: This question comes from Devon Spurgeon. “On March 4th, Charlie’s will was filed with the County of Los Angeles. The first codicil contained an unusual provision. It reads, “Averaged out, my long life has been a favored one, made better by duty, imposed by family tradition, requiring righteousness and service. Therefore, I follow an old practice that I wish was more common. Now, inserting an ethical bequest that gives priority not to property, but to transmission of duty.” If you were to make an ethical bequest to Berkshire shareholders, what duties would you impose, and why?
Warren: I’d probably say, “Read Charlie. I mean, he’s expressed it well, and I would say that if they’re not financially well-off, if you’re being kind, you’re doing something that most of the rich people don’t do, even when they give away money. But that’s on the question of whether you’re rich or poor. And I would say, if you’re lucky in life, make sure a bunch of other people are lucky, too.
On that thought, Warren then closed the extraordinary day with the following, holding up a sign for the audience to see, the quote in brackets:
Okay. Just in case…so you know what my advice to myself would be and has been during this period. [Holds up and reveals self-facing placard: “SHUT UP”]. So, we only got 33 questions, or whatever it is. But thank you very, very much for coming, and I not only hope that you come next year, but I hope I come next year.
What a day. What wisdom. What a life. What a friendship. We will never again experience an ovation like that. I look forward to seeing everyone in Omaha on the first Saturday this May.
In the Letter
Won’t get fooled again. It would be a stretch to believe Roger, Pete, John and Keith warned against the perils of speculating or investing at a secular peak. Who? The lads rather sang of governments lying to the people and abusing freedom. But this is an investment letter, and we’ve had scams and bubbles aplenty to occupy our time in sidestepping, so let’s not touch the third rail of politics. With every bubble there is a changing of the guard, after all.
Intrinsic Value Update – And History Ain’t Changed contrasts an undervalued, actively-managed Semper portfolio with the capitalization-weighted S&P 500, concentrated in a shrinking number of highly-priced shares like never before. Into our second quarter century, we find ourselves likely at a secular peak rivaling the one so dangerous when we launched the firm at the height of the tech bubble in the late 1990s.
Three Ways You Can Go Broke compares today’s stock market with secular peaks throughout the last century. The hazards of holding too much cash, certainly for too long, is illustrated with some eyeopening simple math. Leverage kills, as the section title suggests, and we analyze debt across time and moral hazard encouraged by Federal Reserve policy. Excessive leverage is the single largest threat facing the economy and capital markets.
Two sections, Bogleheads and When Seven is Greater than Four Ninety-Three, combine our five-factor investment return attribution work in evaluating past and unfortunately grim expectations for much of the stock market, breaking the S&P 500 down by 7 presently magnificent constituents and 493 others, themselves far from magnificent, but not unlike the 7, far from cheap. But don’t take our word for it alone. The strategy folks at Vanguard are out with their own work suggesting that not only is past performance not indicative of future results, but prospective returns are likely to fall far below both recent and the long-term experience. You won’t find the grim strategy conclusions in advertisements.
The letter’s traditional book and music recommendations make a return in Books and Tunes for Walking.
Our ongoing analysis of Berkshire Hathaway can be found in the letter’s customary final section, Berkshire Hathaway: Getting in Tune. It’s meaningful that so many of our clients and countless Berkshire watchers find our work on the company useful. We are grateful to so many of you who express your appreciation for our sharing the work each year. Through it all, having analyzed the company since 1996, and owned it since 2000, instead of the hours spent on analysis and digging into the nuances of the operation, we could have just as easily relied on Warren’s message to the uninitiated or financially unsophisticated shareholder. It’s important to be trusted. I like to be trusted. Chad likes to be trusted. We have an extraordinary team at Semper who feel the same way. Like Berkshire, we’d never run the company or our clients’ investment capital in a way that permanent harm could come to it.
Last year’s introduction to the letter reflected upon the loss of four individuals who meant so much to me, my mom, Charlie, Jimmy Buffett, and Brian McGregor, my high school football coach. Coach Mac was way more than just that. Lifelong friend, mentor, and mostly father figure. Delivering his eulogy meant the world to me. But spending time this year with some of his grandchildren was like having him with me.
2024 brought the passing of my other Coach Mac, Bill McCartney. I didn’t have the same lifelong relationship with Coach Mac after playing for him in college, but his impact on who I am and on so many others was extraordinary. Coach Mac stumbled in life before taking the Colorado job in 1982. He turned to a deeper faith, and for it, became an example and role model on how to live for everyone in his world. Coach Mac was the golden rule. In a football sense he was an extraordinary leader. He instilled confidence, discipline and toughness in his players. In life, he instilled compassion, morality and respect for others, including for oneself. Coach Mac would have agreed with Warren’s sentiments on trust and kindness. RIP, Coach.
I don’t think my description of Mr. Buffett’s comments at the outset of this introduction does justice to the message or the emotion of the day. Anyone interested is encouraged to watch the afternoon session of Berkshire’s 2024 annual shareholders’ meeting found at the Warren Buffett archive section of CNBC’s website. Berkshire donated video recordings of the entirety of every meeting from 1994 to the present. Audio recordings of the meetings can also be found as a stand-alone show on all of the major podcast apps.
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