Berkshire Bits: 003

The latest Berkshire Hathaway news and my must-reads of the week!

Happy Friday and welcome to our new subscribers!

Gather round for the latest haps out of Omaha:

• Berkshire Hathaway pared back its position in BYD even further at the tail end of last month. Warren Buffett and co. sold another 1.55 million shares to reduce its ownership to 12.9% (from 13.04%) of the Chinese EV maker’s H-shares. Since last August, Berkshire’s overall stake in BYD has decreased by approximately one-third. Due to Hong Kong regulations, the next filing will come if (or when) the position drops under 12%. Stay tuned.

• Exciting news: Stripe Press announced that it will re-publish Poor Charlie’s Almanack in 2023! This “iconic collection of Charlie Munger’s speeches [and thoughts]” has long been out of print (and, as such, typically costs a pretty penny). If nothing else, this is wonderful news for my wallet. Stripe Press has also created a full digital experience to accompany the re-release, including a 3+ hour fireside chat between Munger and Stripe co-founder John Collison.

• Speaking of Charlie Munger, the Berkshire vice-chairman came out swinging this week with an op-ed in the Wall Street Journal entitled “Why America Should Ban Crypto”. Agree or disagree with him on this, the man is not afraid to take a stand. Here’s an excerpt: “A cryptocurrency is not a currency, not a commodity, and not a security. Instead, it’s a gambling contract with a nearly 100% edge for the house, entered into in a country where gambling contracts are traditionally regulated only by states that compete in laxity.”

• American Express recently announced that it will hike its dividend by 15.4% in 2023. With Berkshire owning 20.3% of the financial services giant, its quarterly dividend check will now increase from $78.8 million to $90.9 million.

• After AXP 0.00%↑ announced its Q4 2022 earnings, CEO Stephen Squeri spoke to Yahoo Finance’s Brian Sozzi about Berkshire’s large stake in the company. “It’s sort of like a Good Housekeeping seal of approval,” said Squeri. “Warren and Berkshire are iconic investors and to have him speak about the brand and speak about the company and speak about the direction that we’re going [in] so enthusiastically is important.”

• Berkshire’s next big move might be hiding in plain sight. Remember: In Q1 2023 — which, for the calendrically challenged, is right now — Berkshire will purchase an additional 41.4% of Pilot Flying J “for a value TBD, based upon Pilot’s adjusted earnings in 2022 and its net debt at 12/31/22”. This will boost Berkshire’s stake to 80%, with the Haslam family retaining the other 20% and remaining involved with the company that they founded.

• Apple reported Q1 2023 earnings last night after the bell and… the numbers weren’t great. AAPL 0.00%↑ missed on profit, revenue, iPhone sales, and more as a wretched combo of supply chain issues, foreign exchange headwinds, and dreary macro environment hurt its holiday quarter results. One particular bright spot: The Services segment — viewed as a potential growth area — grew revenue by 6%. Berkshire owns 5.73% of Apple (on a diluted basis) and is in this one for the long haul. No worries here about this minor bump in the road.

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In the Spotlight: Giverny Capital Asset Management Q4 2022 Letter

When David Poppe writes a letter to his clients, he shows great restraint and humility.

Unlike so many others in the money game, he resists the urge to opine on uncontrollable macroeconomic events or offer hazy predictions on what comes next. Instead, he drills down into any investment decisions that he made during the previous quarter — explaining his thought process in particularly clear-eyed fashion.

I learn so much more when an investment manager walks his or her readers through practical examples of actual investments, rather than holding court on such unknowable topics as interest rate changes and soft landings.

Even the best of those takes are mostly guesswork.

Poppe says as much near the end of his letter:

If you have read this far in hopes of reading insightful commentary on the myriad macroeconomic and geopolitical challenges we face, well, huh. You may have stumbled upon the wrong letter. I can only say what I always say, which is that our country seems to careen from crisis to crisis and we will never run out of things to worry about. And yet, in fits and starts, the world gets wealthier; scientific advances improve health and the quality of life; creative entrepreneurs and managers bring innovations to market that delight us and improve our lives. I believe the best moment to be alive in the history of humanity is right now, although not every day is an easy one.

Knowing all of this, the right answer to most investment questions is to own great companies and tolerate volatility.

Okay, on to the main event.

Berkshire Hathaway (Class B shares) ranks as the ninth-largest holding in GCAM’s portfolio.

Here’s what Poppe had to say about our favorite conglomerate:

Berkshire remains the not-so-little engine that could. I’ve been telling clients for years that while Berkshire creates great ballast in a portfolio, one shouldn’t expect it to drive outperformance. CEO Warren Buffett is now 92 years old, many of the assets inside Berkshire are mature and the company must make enormous acquisitions to move the performance dial even a little. Yet Berkshire outperformed the S&P 500 index by about 20 percentage points last year, and with that now boasts performance over the past 10- and 15-year time periods superior to the S&P 500. That’s outstanding for a giant enterprise and, frankly, beyond my expectations.

In my opinion, Berkshire remains good ballast. It has tremendous asset diversity, giving us exposure to a railroad, a leading utility, varied insurance operations and, of course, Apple. [Berkshire’s giant holding of Apple shares amounts to about 18% of Berkshire’s market capitalization.] It holds enormous cash reserves, giving it buying power whenever quality assets go on sale. And while it did not outperform during the go-go years of super low interest rates, it just demonstrated its ability to shine in a downturn.

While Poppe seems to appreciate Berkshire most for its defensive qualities, 2022 proved that this “not-so-little engine that could” still has plenty of big moves left in it.

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More Must-Reads

Other awesome things that I read this week:

Everything You Can’t Have (Morgan Housel)

• “Your brain doesn’t want stuff. It doesn’t even want new stuff. It wants to engage in the process and anticipation of getting new stuff. This is similar to Will Smith’s description of fame: Becoming famous is amazing. Being famous is a mixed bag. Losing fame is miserable. The change, not the amount, is what matters.”

In Search of the Buffett Premium

The Rational Walk

• “In the very long run, how the Berkshire Hathaway story turns out is not knowable. I have a great deal of confidence in how the company will be run in 2030, but not much confidence in what the situation will look like in 2050 or 2060. It is too much to expect Warren Buffett and Charlie Munger to ensure the future of Berkshire Hathaway decades after they are no longer in the picture. Anyone who has prepared a personal estate plan knows that it is neither possible nor wise to try to fully control events decades in the future from the grave. That’s even more the case for the future of a major enterprise like Berkshire Hathaway.”

• For more on this topic, check out my recent article: Will Berkshire Hathaway Survive — and Thrive — After Warren Buffett is Gone?

Netflix: An Industry Changing Quarter? (Alan Soclof)

• “One thing that analysts have been spot on about is the fact that streaming is an awful business right now. Why? Creating additional content, building up tech stacks, keeping subscription costs low and advertising the service costs some good money. Believe it or not, streaming was once an awful business for Netflix too. Yet, for some reason, [Wall Street] had a long term perspective with the company while not cutting the same slack for legacy players.”

• That’s an important point to keep in mind ahead of Paramount’s Q4 2022 earnings report later this month. Netflix bled cash for years on end, while Wall Street cheered on the company’s strong subscriber growth. Now, the market has seemingly decided to punish legacy players for going through the same process.