My wife and I spent this past weekend in Omaha, Nebraska, attending what is often called “Woodstock for Capitalists,” or the Berkshire Hathaway annual meeting. I am a Berkshire shareholder and, in 2017, arranged to sell them nearly 10% of the most recent public company I led. But this was my first time attending their shareholder meeting, which historically conflicted with my own first quarter board obligations. So, we were excited to join the approximately 40,000 other attendees in their Omaha pilgrimage to an annual shareholder meeting unlike any other.
One of the themes shared by Warren Buffett and Charlie Munger in Omaha was their observation that the stock market has taken on “casino” characteristics. To illustrate this point, Buffett discussed Berkshire’s recent acquisition of a 14% stake in Occidental Petroleum (NYSE: OXY), which they accumulated over two weeks. He showed a slide to illustrate Berkshire’s daily purchases and the daily trading volumes of OXY during his ten-day buying spree, noting that 40% of the company was held by index funds and another large shareholder. To accumulate 14% of such a company where close to half the shares are unavailable for purchase should be difficult. However, so many OXY holders are short-term in nature – either institutions that algorithmically trade or people who day trade, often having limited or no understanding of the company’s financials – that Berkshire was able to quickly accumulate its position. The liquidity afforded OXY shareholders by a “casino” marketplace, provided a buying assist to the word’s most prominent value investor.
Rapid daily trading in public equities has been encouraged by declining trading execution costs and their accompanying incentives. Munger singled out Robinhood (Nasdaq: HOOD), an investment platform geared towards younger investors that pioneered commission-free trading, as an important contributor to the growing casino environment. Commission-free trading accompanies a greater incentive to encourage frequent trading because the loss of trading commissions makes investment firms dependent on revenues derived from order flow. Unsurprisingly, many such firms elect to limit investor information that might allow them to evaluate their performance relative to that of broad passive investing benchmarks. Like casinos, they want neither clocks on the wall nor windows to the outside that allow patrons to know how much time they have spent at the tables. Munger was happy to note that Robinhood, which went public August 3, 2021 at a price of $38, rising meteorically to $85, had seen its own share price fall by nearly 90% since then. Through the first quarter of 2022, Robinhood has yet to report a profit.
You have joined me on www.thevalueequation.com because you are interested in understanding how companies create wealth and contribute to the fortunes of most of the richest people who have ever lived. If you have read my book “The Value Equation: A Business Guide to Wealth Creation for Entrepreneurs, Leaders and Investors,” you know that business models are indisputably at the center of business wealth creation. Berkshire Hathaway and other noted value investors tend to avoid investing in companies where they do not understand the underlying corporate business models. Likewise, the millions of private companies in the United States guided by entrepreneurs, leaders and investors are dependent on their business models to deliver shareholder returns. Unlike Robinhood, they do not have the luxury of operating at a loss.
I have always been a big believer in the virtues and possibilities of business. Over the past 25 years, a growing understanding of the Value Equation has made me even more so. Collectively, the equation’s six financial components of business wealth creation are what drive the efficient allocation of capital and are a major reason why free enterprise economies are better than the alternative. The world’s largest free enterprise economies, with the United States at the lead, punch well above their weight, meaning they have greater shares of global gross domestic product than they have of global population. The result is better possibilities for everyone.
I look forward to sharing continued posts with you.