Yesterday we returned from Berkshire’s annual meeting in Omaha. After two years of running In Practise, we’re grateful to have met many of you in person.

Rather than write our usual analysis on a specific company, we’ve collected our favourite quotes from the meeting and discussed our key takeaways.

It was special to be in the room with two 90+ year old guys that are having such fun. Putting aside any investment-specific takeaways, seeing Buffett and Munger laugh and joke with 30,000 people was incredible. Their love of the game and the deep trust they have with partners is something we aspire to at In Practise.

Owners and Partners

“We have a special relationship with our owners” - Warren Buffett, Berkshire Annual Meeting, 2022

The two words that Buffett repeated most often at the meeting were “owners” and “partners”. He has built such a high-level of trust with shareholders that it feels like he is sitting in his living room with 30,000+ friends.

Buffett has previously said that the trust of others is the most important thing to him. He has built this level of trust over decades of consistently behaving according to the principles he laid out in his original investment partnership 60 years ago.

The meeting showed just how seriously Buffett takes the responsibility vested in him by shareholders. His gratitude for this trust shines through in how he treats individual and institutional shareholders. He tells a story about a large institutional investor that emailed to meet him before the annual meeting to discuss Berkshire. He refused and said to us all on Saturday, ‘why should any institution get priority access over you individuals?’.

He treats shareholders as partners. This deep alignment with the shareholder base builds trust and is why Berkshire has probably the highest quality shareholder base of any public security.

Individual and institutional trust

“If I were to do this all again, I’d do exactly the same thing: I’d go to individuals and earn their trust" -Warren Buffett, Berkshire Annual Meeting, 2022

Buffett’s explicit reference to building trust with individuals is interesting. In the late 1950’s, a small group of individuals trusted him with their savings. There were no institutions that demanded certain terms, break-clauses or fees. He didn’t show complicated legal documents or seek advice to build a structure; a simple set of Ground Rules laid out how Buffett would behave. And he has abided such rules for 60+ years.

Trust is relational, and flourishes through a set of aligned values. It is far simpler to build trust with an individual than with an institution. The corporation is effectively an intermediary between a personal relationship of two individuals. This extra layer can distort the incentives of what is ultimately a human relationship. Institutions have their own customers to serve and inter-company personal dynamics can also disrupt the relationship between an institutional LP and GP.

Institutional capital is attractive because it drives scale and the unit economics of an asset management business. However, it comes with extra complexity and a higher risk of misalignment. This can reduce the durability of asset managers and is tested during periods of bad performance.

Buffett solved for this problem by focusing his partnership on individual LP’s and then running a public entity with true permanent capital. It’s unlikely Buffett planned for such a transition but the fact he states that if he started over he would only focus on individuals highlights the importance of a direct relationship with your LP base.

Another takeaway from this comment is the power of an operating business aside an asset management company. The cash flow from the operating businesses can be allocated to the asset management company as permanent capital. This reduces the pressure on the asset management business relying on third-party capital to reach scale. We often think about the opportunities a similar structure may create for In Practise.

Quality and inflation protection

‘Be the best doctor in town and you will be protected from inflation’ - Warren Buffett, Berkshire Annual Meeting, 2022

Be the best at what you do and you’ll be less impacted by inflation. The highest quality companies can pass-through price increases to customers without seeing volume decline because they add the most value.

Company selection and duration

- ‘I studied Allegheny for 60 years before making the purchase” - Warren Buffett, Berkshire Annual Meeting, 2022

Firstly, to study a company for 60 years, the company needs to last 60 years. Selecting the right companies to study is a crucial first step for investors. The longer a company lasts, the greater the opportunity to compound knowledge and build conviction on the business.

We think a lot about when and how to allocate time between sectors and companies. Return on research time is an undervalued metric for investors. By focusing on companies with long-duration, those that can stand the test of time, we extend the timeframe available to compound knowledge. This is also why Buffett can move so quick; after 60 years of due diligence, he can make an offer immediately.

If long-duration assets extend the timeframe available to compound knowledge, shorter-duration assets do the opposite. Although shorter-duration assets may become attractive throughout the cycle, they need to be continually replaced. This is one of the reasons Munger helped Buffett transition away from net-nets to quality companies with high-duration: it’s too difficult to keep finding good, new ideas.

Long-duration assets can be defined in many ways but ultimately a durable competitive advantage is required for a company to sustainably earn above its cost of capital. Focusing on these kind of companies may cause us to miss shorter-term opportunities but it maximises the return on time, our scarcest asset.

Durability is a core principle that we look for in companies we want to own and also how we build In Practise, our own business.

Not trusting forecasts

‘We don’t trust forecasts, least of all our own’ - Warren Buffett, Berkshire Annual Meeting, 2022

If arguably the greatest investor of all time doesn’t pay attention to his own forecasts, why should we care about anyone’s forecasts, let alone our own?

There were many questions asking Buffett for his grand strategy and playbook for building Berkshire. His reply: ‘we just put one foot in front of the next”.

There was no grand strategy of buying a textile mill and turning it into a $500bn company with energy, consumer, and other industrial assets. Buffett and Munger continually developed a set of principles to live by, and proceeded with one foot in front of the next.

This raw simplicity can be confusing to some. But the difficulty lies not only in choosing the principles, but having the discipline to stick to them over long periods of time.

Opportunity cost

Q: ‘In your annual letter you said you couldn’t find anything to allocate capital to. And then two weeks later you bought a large stake in Occidental. What changed in those two weeks?
Munger: “We found something with a higher return than our opportunity cost” - Berkshire Annual Meeting, 2022

Again, such a simple principle: all capital allocation decisions are compared to the opportunity cost. If it’s higher, we invest. The timing doesn’t necessarily matter. No one can forecast, so Berkshire is rigorous at sticking to the simple principle of comparing all investment opportunities to its opportunity cost.

Do things you love

“Smart people often think they can do things well that they don’t enjoy. But it never lasts.” - Charlie Munger, Berkshire Annual Meeting, 2022

One thing is for sure, Buffett and Munger are having fun. They were constantly laughing and joking during the meeting. Choosing something you love is probably the most important decision anyone can make. A love of the game is crucial for any enduring success.

It’s incredible that a 91 and a 98-year old sit in-front of 30,000+ people for 5-hours answering questions. The fact they voluntarily subject themselves to any question in such a public format suggests a high level of authenticity and integrity. Their authenticity and love of the game shined through during the meeting. This love is why Buffett is still ‘tap-dancing to work’ at 91 years old.

If we get anywhere near close to the fun Buffett and Munger are having at such an age, working with people we love, we feel In Practise would have succeeded.