The Last Time Buffett Did This Was 1999 — It's Happening Again

the market reaching new all-time highs again, but Warren Buffett seems to be betting against it. And the last time this happened, he was right. Joining us now is James Early with Curia Financial to talk a little bit about what we can gain from Warren Buffett right now. You just came back from the Bergkshire Hathway annual meeting that was in Omaha, just a couple hours away from where we're headquartered in South Dakota. And there's some key takeaways we're going to cover, but I also want to talk about in this video. Is Warren Buffett getting the market right right now or is he completely missing the boat? There's a lot to cover in this video today, James. We're also going to share one of your favorite more Buffett friendly stocks towards the end of the video that is a really good buy right now. We'll have that recommendation at the end. But we're going to talk a lot about what is happening in the market and whether or not Buffett is doing things right or totally missing this kind of AI story that's happening. So James, let's start out with why is this Berkshire Hathaway annual meeting such a big event every year? >> Well, first of all, Bridget, it's great to be here in South Dakota in this lovely new market studio. Bergkshire draws about 40,000 people to Omaha every year. The arena seats about 19,000 because Bergkshire has returned roughly 4 million% since 1965 when it started, you know, as Warren Buffett's holding company. So that's the power of compounding and that has rightfully built a cult. >> Yeah, a huge cult because there's been so much success with Warren Buffett. The question here is whether this is still the winning strategy today or if that strategy has shifted. So we're going to dive into that, but I want to talk a little bit about some of the key takeaways you saw from this annual meeting in particular. >> Yeah. Well, it was the first meeting Bridget run by Greg Ael, the new CEO of Birkshire. He's had all of three months as CEO. Nobody can replace Warren. Nobody can replace Charlie Monger. And that's that's just an honor. You can't replace the irreplaceable. He's kind of a regular corporate guy. The meeting was not as exciting. People weren't asking about marriage advice, things like that. But on the topics, he's actually pretty solid. I'd say maybe about 8,000 fewer people came. But his business, his job is to run the company, not necessarily to run an awesome annual meeting. So, it was like eight out of 10, not 10 out of 10, but still pretty good. >> Well, let's talk about running the company. That's the main thing to talk about here. And it's starting to be really obvious that Bergkshire Hathway, it has so many followers because it's had such a strong performance. But it's becoming more obvious that Berkshire Hathaway's, you know, strategy isn't working right now. Let's talk about that portfolio performance right now. >> Yeah. So, so right now depends on, you know, perspective, right? It has been phenomenal for the past, you know, 50s something years, right? But over the past 10 years, Bergkshire has just about matched the S&P 500. Over the past 3 years, it's underperformed. Over the past one year, it's underperformed the S&P by 39 percentage points. That is pretty bad. >> That is the question, and that's really what I wanted to focus on in this video is is Warren getting this wrong? Why are we seeing such a massive underperformance in Berkshire Hathaway compared to the rest of the S&P? >> Well, the answer is the mag seven or mag 10. Charlie Mer would say invert, always invert. So if we invert your question, I would say if you look back to 1999 2000, the tech bubble, Warren Buffett was underperforming pretty massively then. People said, "Hey, has Buffett lost his edge?" Well, he had for a few years, but actually he hadn't because then he missed the crash. He alluded he alluded Bridget to the fact that we could see a crash in the market. We're at pretty high PE ratios. The market is betting very heavily that this AI capex will pay off. So, I would say it's too soon to tell yet if Buffett has lost his t or Abel now has lost his touch. We don't know. It's certainly not looking good at the moment. >> Yeah, there's so much to unpack in that question and one thing we're going to get into is talking about the portfolio performance because we want to talk about um the kind of stock that Burkshire Hathway still has in their portfolio, why it's underperforming. We'll get into that in a minute, but you touched on something that I think is more important to talk about right now and that's preparing for a crash. I think the other key thing that came out of the meeting um over the weekend is that they have record cash on hand, which clearly tells me they're preparing for something, right? >> Actions speak a lot louder than words. They have roughly $400 billion, just under in cash. The market cap is about a trillion dollars. So 400 billion is a lot, but it's it's basically 40% of the market cap is in cash. and they did a little bit of buyback in terms of their own shares, but it's just it's $200 million, which frankly a small change compared to $400 billion. And Buffett also said directly, he said, "Look, the market is always a mix of a church and a casino." And right now, we still have more people in the church, but the casino has been getting a little bit more attractive lately. >> Yeah, there seems to be more of those speculative stocks. I mean, we have tons of viewers on our channel here who love to hear about the speculative names because they have such massive returns. We've heard stories in the last year, returns over 2,000% in a year, 1500% gains in one year. And that's the kind of casino story where you can win big, you can also lose really big, but we haven't seen too many of those losers yet. So, that's the big question is what Warren Buffett is bracing for a possibility. I want to look back at the the990s.com stage that Warren Buffett lived through and kind of what happened then, how he won then, and whether or not history could repeat itself. >> Yeah, you're making me feel bad, Bridget, with these 2,000% returns. I mean, my portfolio's never done anything like that. I I think I mean, look, if you look at earnings growth, compare the MAG 10 or MAG 7 compared to the rest, the S&P over the past several years, it's actually been pretty similar. The market though has applied double the multiple to the Mag 7 as the rest of the market. In other words, they're paying a lot more for those earnings because they're expecting a lot more. So, the jury is still out. My bet though, if you look at any new technology, right now it's AI. In the old days, it used to be cars. We've had 2,500 car companies come and go in the US. In the '9s, we had 900 e-commerce companies. We have, I don't know, 18,000 cryptocurrencies. Right now, we don't need that many. So you're going to see a lot of fall-off in the smaller AI names. There's going to be a huge death rate. So odds are like you're probably going to get burned on the small end, but I think the bigger companies will have a the strength to prevail and b the cash to acquire the smaller companies that that will survive in the end. >> Well, let's talk about the cash strategy of holding cash, especially the amount that we're talking about today. Was that Buffett strategy back in the 90s during the dotcom days? And how did that work out for him? Yeah, it worked out very poorly for one year. It is Buffett's strategy. 1999 was the only year, I believe, in the history or recent history of Berkshire Hathway that they actually had negative returns. They've underperformed the market, but but usually they don't lose money. So, in 99, they did. You saw all these headlines as Buffett lost his touch. It wasn't but a year, year and a half later, the market crashed and he was vindicated basically. And yes, he loves to make opportunistic acquisitions when there's blood in the streets. That's exactly why they're holding that cash. >> Do you think we could have blood in the streets now or what does that tell us about the potential for that kind of crash happening given what's happening in the AI investing world today? >> I think it's possible. I think it's possible. You hear these stats like 50% of recently contracted data centers have been uncontracted because there not enough materials available for completion or like where I live in Virginia that the people in a county kind of rallied together to block a data center being constructed. So, you know, the AI story is one thing. The AI economic reality is probably not going to be up to the story. So, I don't know if there's a crash. If there's a crash in the market, it means something's happening. People are selling one thing and doing something else with that cash. I'm not sure what that something else is now, right? What's the better alternative? Uh so we still have a giddy market. I would say a lost decade or a lost 5 years is more likely than an outright crash. >> Yeah, we still have lots of activity in the market is exactly true. I mean to see Buffett and his company holding all this cash waiting for a crash at a time when the market is at all-time highs and that demand really is there when you look at AI. As you mentioned, there's the supply chain issues with getting all of the demands actually met and figuring out some of these legal battles. We just had a video on talking about Nimi, not in my backyard and those kinds of things happening right now. But there is demand. The AI story shows uh there's tons of investment happening. We saw that in the Mag 7 earnings report where they're investing, the demand is there. Uh the chip stocks have tons of demand. So much so that they're struggling to meet that demand. the companies that are helping to build the data centers have so much demand and such a backlog that that really is the question of can they meet that demand and so when you have this much demand it seems like the investment is is still there the money is still there >> it's there but again it's all predicated on things coming together in a way that they haven't come together yet and you know we got AI data centers in space at least being talked about right I mean the hype is great the story is great people have seen this movie before new technology comes along It changes everything. But the other perspective might be has have LLMs reached a plateau like have we squeezed the juice out of that lemon? Is this all we're going to get? Is there a step change between this and the next technology in terms of usability value add to the world? Maybe, maybe not. Like I'm, you know, it's above my pay grade, but traditionally people tend to get a little too excited at the beginning. Then they get overly pessimistic and then they underestimate the long-term benefit. So those all kind of come together. It's a social science. It really is in the end. >> Yeah, we've seen that play out in the market a few times and we're going to get into some of these names. You mentioned space a little bit and AI stocks. These are names that are noticeably missing from the Bergkshire Hathway portfolio. So, we're going to get into that. Before that, if you are interested in those space stocks, those most speculative stocks, make sure to check out our special report. These are on the top space stocks to buy before the SpaceX IPO. Our market beat analyst Thomas Hughes wrote this report and these names are some of the ones seeing those incredibly impressive returns right now. So if you want to check out that list and get some other stock tickers to look at right now, make sure to scan the QR code or click the link in the description to get that free report right now on marketbeat.com. All right, James, let's get back to this discussion of these space stocks, these AI stocks, all of the names that are seeing these impressive returns. Again, noticeably missing from the Berkshire Hathway portfolio. That's kind of the point Buffett would say or now Greg Ael would say he famously avoided technology because he doesn't understand it. And recently though, semi-reently, he hired two guys, Todd Colmes and Ted Wesler to to help manage the public equity side of the portfolio. Bergkshire has a privately held company portfolio and a publicly held company portfolio. They actually got rid of Todd Combmes recently, but one or both of those guys put Buffett into Apple roughly 2019. uh last quarter they bought some Alphabet. Prior to that they'd bought Amazon. Apple has contributed more to their portfolio than any other stock. So, ironically, for a company that has been anti-technology, they're sure benefiting from technology, but it's, you know, if you look at the public holdings in general, they're halo kinds of stocks, bricks and mortars, and they've got some energy stocks, and that's really helped them a lot lately, but that's more idiosyncratic. Generally speaking, the broader question for someone looking at Burkshire Hathaway now thinking, should I buy this stock or not? is well if you're a big believer that tech is going to change the world. No. And let me give you an abstract point and then I'll uh move on. But someone living 6,000 years ago for example had a probably a similar life to someone living 5,000 or 7,000 years ago. But we've had an exponential progress in this world. Someone living a hundred years ago will look at us now and say, "Wow, that's so different." So you could argue that technology is adding more and more value over time. So, the Buffett strategy may have worked great in the 50s and 60s and 70s, but it might be missing something looking ahead. >> Yeah, I'm really curious to see what viewers are going to have to say about that because like you said, there's a cult following for Warren Buffett investing strategy. You're one of those people who's a huge fan of the Buffett strategy, but I think that's such an important point that it once worked, but the world is changing so rapidly. Can you ignore technology simply because you don't understand it and still have success in the market? And I think right now what we're seeing when you look at what the Buffett portfolio looks like compared to the regular market, it's not working. It's not correct. It's not a winning strategy right now. >> Yeah. And the guardrail is, you know, the famous saying this time is different is the most dangerous phrase in investing, right? Because it's temporarily different but not. So the market though is trading at a higher multiple. there are some legitimate reasons for valuations to be elevated compared to let's say 40 50 years ago when we had a a debt heavy industrialized commercial base so the market is changing uh you know capital light things are evolving in the market so some things are legitimately different and some things aren't and Birkshire Hathaway is kind of like a mini case study in finding out what are the permanent changes and what are going to be the things that don't change so >> yeah speaking of things that don't change I mean their whole portfolio of Berkshire Hathway has a lot of companies that haven't done a lot of innovation at all in their last 50 years of existence. There's railroad companies, there's other insurance companies, things that haven't done a lot of anything. Do you think that that is part of the problem is that there all these companies that aren't advancing with the time? >> Yes and no. I mean, in general, you kind of want and as someone who ran a dividend research service for 10 years, I respect the idea of betting on things that don't change. In general, in general, it works. But the problem is sometimes the world changes too much. This is going to sound like a cheap shot, but when I was watching the Birkshire meeting, hearing about these people who've been managers of Bircher for 30, 40 years, and that's great, a lot of experience, but it kind of reminded me of the US Congress. If you've seen a congressional hearing, especially with a tech CEO, it's almost a little embarrassing because a few of the people were prior tech entrepreneurs and they're smart with the questions, but a lot of these people have no idea how this stuff works, right? Um, I can't help but wonder are some of the Bergkshire managers just out of the demographic of being techsavvy and Buffett himself when he was more active managing these companies famously prioritized marketing spent over IT spent and so probably just monetarily but also culturally these companies are probably a little behind the waves. Yeah, I want to talk a little bit more about can you make value investing principles still work today. But first, I want to talk about how that concept of companies being behind the wave is showing up in Berkshire Hathway's private companies, the private companies they own. We're seeing that show up there too, not just in their portfolio that's invested. >> Absolutely. Private companies like Gary Queen, uh, Precision Cast Parts, uh, Lubresol, NetJets, there's about 60 roughly private company. Burlington Northern Santa Fe uh is a famous one. Geico insurance, those are probably two of the most known to to average people. They're not like terrible investments, but if you look at the the rates of return uh based on when we do get valuation information, they're kind of like mid single digits, maybe upper single digits for some of them annually, which is not bad, but not nearly as good as the public equity portfolio. And Greg Ael gave us a tell. He said Burlington Northern Santa Fe is maybe 10 years behind market leader Union Pacific in technology. Ditto for Geico. Progressive is a competitor that was one of the f I think the first insurance company to sell online in the mid to late 90s. They're way ahead of Geico now. So these other companies, they're using tech. They're using AI, no doubt. And Bergkshire is trying to catch up. Greg Able mentioned AI, but by my rough calculations, 80% of his word count was about the risks of AI, not the potential, not the promise. So, they seem more scared of it than embracing it. >> And as you can see in businesses, if you look at the the data that's out there, when a business embraces new tech and brings AI into their company and helps incorporate it into their business, they do well, their earnings are better, their growth is better, uh their customer base grows as well. And so I think when you see that model, it's hard not to look at that as an investor or anybody running a company and not implement what is working. >> Yeah. You know, it's it's hard to know. You don't want people jumping on the latest bandwagon trend and it blows up. But it's looking like AI is a little bit more than a bandwagon. It's it's there's some staying power there. I got to be honest, like yeah, there is a lot of Kool-Aid at that annual meeting and in general it's a good cult. I think a bircher is a benevolent cult, but I own shares. I'm not going to sell. But I I felt a little more likely to sell after this meeting. Just seeing the Kool-Aid, seeing how people, the audience in some of these private meetings I was in, resisted the idea of any kind of criticism of Buffett. When you have that, you have an investor base that's not thinking rationally. You can have that in meme stocks. You can have that in crypto. I guess you can have it in value stocks, too. >> I think that's a really telling point that you've been a Buffett fan most of your life, and this is giving you a positive question. Another thing that stood out to me, you're talking about this AI thing is going to be real. people aren't realizing the impact. I'm sitting here thinking and comparing this to the internet days. You know, this seems like companies back in the early 2000s were like, "We don't need a website. This whole internet thing isn't going to take off." And that's laughable today for companies to have thought about, oh, we won't need a website. This this internet thing is not going to be a real thing. And I feel like we're we're there and more with the AI story. >> Yeah. And more. Nobody knows exactly how much more. That's the hard part, right? But I I still have some news clippings. Internet may be a passing fad. Uh Amazon was down 94% at one point. It's in general it's still up I think about 60 or 70,000% from its IPO including that 94% drop. But we had a boom and we had a bust as investors as the world tried to figure out this new thing called the internet and how much was it really going to change our society. We're kind of at that right now yet with we haven't had that drop yet. I think we will. I don't again I don't think it's going to be a massive plunge, but I think expectations are probably a little bit too high in the short term, but then in the long run, it's still going to change our lives more than we think. So, yeah, if you're a company, probably have to get with the times. >> Yeah, absolutely. As investors, too, does getting with the times mean ignoring the value investing uh principles that Warren Buffett has preached and lived all his life that has led to so much success. Can you still find success as an investor kind of following that Warren Buffett playbook? >> Me, you, probably every investor watching owes Warren and Charlie some debt of gratitude. I don't say that in like a guilt- tripping way, but he really popularized this idea of fundamental investing when it investing was kind of like an arcane concept for institutional people before. And Buffett and Mer popularized the idea of looking at companies, finding good ones and ruling out bad ones. that like discrimination that process is very good for an economy having individual investors not just buying a blanket market fund but saying you know this company is bad this company is good I want to allocate my capital this way so yes value investing fundamental investing should always be a part of society and if too many people don't do it it creates great opportunities for the few people who do do it uh the question is how much do the rules need to change in an AIdriven economy again we don't know yet, but I I think Berkshire is a little behind the times. But the other thing is there are a whole bunch of companies out there, Bridget, who will still use AI, but don't have to be AI companies. You midsize companies doing some industrial thing that's moderately affected by AI. And I think a lot of those have kind of been forgotten about. If you look at the S&P, the capital weighted S&P has pretty significantly outperformed the equal weighted S&P over the past couple of years. And over the long run, multiple decades, that's not the norm. Usually equally weight does better. So Bergkshire aside, like I'm waiting for the time to pounce on some of these like midcap boring companies that have been just forgotten about with all the focus on AI. >> Well, speaking of those companies, you do have a stock pick for us today. You're still looking at the Warren Buffett strategy, which is looking at the fundamentals, looking at the value of the company. Uh this is a stock that's trading down right now that you are very interested in. So let's share that with our viewers today. >> Sure. Constellation software. It trades on the Toronto Stock Exchange, but it also has an ADR or ads here in the US. This is kind of like a Warren Buffett of SAS company, which sounds weird, but they've acquired between 500 and a thousand SAS companies over their life. Founded by Mark Leonard, this reclusive former venture capitalist. If you Google, you'll see what I mean. He's got this big beard, you know, he looks like a he's a character, basically. He just he stepped down recently for health reasons. Mark Miller, the new president, was actually at a Bergkshire event I was at. Constellation has gotten hammered because of AI fears. I'm betting the baby is getting thrown out with a bathwater because these are vertically integrated software companies they buy. If a company tries to replace these with AI, even if they get 90 or 95% of that correct, that 5% could derail a big company. It's not worth it. It's too big of a risk. These companies have lots of relationships. Again, vertically integrated means they operate at different parts in the company's value chain. That sounds wonky, but it makes it harder to rip that company out. Just replace it with some guy's vibe coding. So, I think the SAS beatd down is overdone and constellation is the most buffety way to play that SAS beatdown being overdone. >> I want to talk a little bit more about the SAS beatdown and how it plays into this AI value investing story. But first, I want to add this stock uh to my Bridget Spy watch list. If you are following along with our videos, I have a paper trading watch list on marketbeat.com. Just markbeat.com/bidget or you can scan the QR code now to follow along with the different stocks that we talk about on this channel. I usually add one stock per video to this watch list to see how it moves over time. And James, I am really excited to add this one to the watch list because I want to see if the software story continues on this downtrend or if it is this short-lived down, you know, overblown downturn. And this is an interesting way to look at investing in software. There's individual companies that we've had many different guests on the show who've talked about specific software companies that they think have a strong future, others that are ones that you would stay away from right now. How is this one different? Talk about this company in particular. I >> I like it because in a Warren Buffett way, they look for the very highest quality software companies to buy. And these are like tiny little companies. You and I would not know the names or at least I wouldn't. I'm not deep into the software, but I know Constellation itself. They want companies that are founderrun, uh, high returns on capital, uh, long-term contracts, renewing renewing contracts. So, quality companies with good relationships with their customers. That all sounds boring, right? But quality has been kind of like out of style in investing lately. So, I think it's a relatively good time to be allocating capital. This you got to have patience though because again, we're not in a market environment that likes a company like Constellation Software. A, it's quality focused and B, it looks like it's in AI's crosshairs. Again, investing is a social science, though. You don't make money doing the same thing everyone else does, at least over the long run. So, you have to be willing to take a contrary to position to be a lone wolf. And for me, constellation is one of those lone wolf picks. >> Well, this does sound a lot like the strategy that Warren Buffett and Bergkshire Hathway are doing right now when it comes to AI. They're doing that contrarian approach. But I want to talk about the risk that can come with that whether it's with the stock that you just recommended or with the approach that Warren Buffett is taking with this AI story right now. There is a risk there too. >> Yeah, there's definitely risk. I mean without risk there's no potential for return, right? I I think with constellation I'm taking aim or I'm trying to jump in and buy something the market has really beaten down which yeah that's Buffetty itself because of AI fears. I think Warren Buffett I think Bergkshire Hathway Greg Ael more specifically that company is vulnerable to AI also in the sense of you know railroads for example could be replaced by autonomous trucks if I were to criticize Burkshire they're more sticking their head in the ground like an ostrich basically and saying look we'll get to AI one of these years we're we're starting to look at it now but it's a little bit day late in a dollar short so if I if Bergkshire stock were more depressed I would be buying it as an kind of AI casualty play uh right Now I'm more likely to sell it and allocate money to constellation software. >> All right, thank you for sharing that stock pick and for the great conversation on Warren Buffett. I would love to hear your thoughts in the comment. Are you a Buffett fan who has a very different opinion on what is happening at Berkshire Hathway right now? Or do you agree with this kind of contrarian view on whether Warren Buffett might have the market wrong right now? Let me know your thoughts in the comments. And if you are interested in that contrarian approach on software investing too, make sure to check out this video. It has a list of three software stocks that you want to be looking at right now and two names that are important to avoid. You can catch that video