Berkshire Bits: 004

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

Happy Friday and welcome to our new subscribers!

Not much news out of Omaha this week. But, thankfully, that’s about to change. With 13Fs due on Tuesday and then Charlie Munger’s Q&A at the Daily Journal the following day, next week’s issue promises to be packed to the gills.

Until then, here’s what I got…

• Back in December, the 🇺🇸 FTC filed an antitrust lawsuit to block Microsoft’s $68.7 billion acquisition of Activision Blizzard. This week, the 🇬🇧 Competition & Markets Authority formally objected to the deal on similar grounds — thrusting Berkshire Hathaway’s merger arbitrage play into even further doubt. But a note from Wedbush Securities suggests that all is not lost.

  • “We read today’s [CMA] release as a signal that the UK knows it has a losing legal argument. In our view, the FTC figured this out late last year, and rushed to file suit to block the merger in the hopes of being first to extract concessions from Microsoft.”

• The Wedbush analysts believe that the FTC and CMA are jostling to be the one to force concessions out of Microsoft. And, thus, get all of the credit for standing up to big business. The Xbox maker already offered to keep the uber-popular Call of Duty series on rival platforms for up to ten years — and that, ultimately, might be the “concession” that saves this deal. The note ends with a bold prediction: “We expect Microsoft’s acquisition of Activision to close no later than mid-May.”

• Speaking of Activision Blizzard, CEO Bobby Kotick told Liz Claman how pleased he is to have Berkshire on board: “There isn’t anything more flattering than having the confidence of Warren [Buffett] and Charlie [Munger].”

• Berkshire’s sell-off of BYD is picking up pace. A new filing out of Hong Kong revealed that its stake in the Chinese EV maker is now down to 11.87% after unloading 11.29 million H-shares last week. Warren Buffett and co. still own approximately 130 million shares of the company, but for how much longer?

• Not to end on a down note, but BlackRock reported that it now owns 8.0% of Berkshire’s Class B shares. That’s up from 7.8% previously. At least we’re not talking about vote-rich Class A shares, though. Buffett and BlackRock have tangled in the past, so I’d hate to see Larry Fink pick up too much voting power.

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In the Spotlight: MCJ Capital Partners Q4 2022 Letter

The main focus of M. Carter Johnson’s latest letter to his investment partners is a topic near and dear to my heart: assessing the efficacy and integrity of management.

Everyone agrees that you should only invest in companies with top-notch management who run the business in a forthright and honest way. It’s just that no one tells you exactly how you’re supposed to do that.

I don’t know about you, but my name doesn’t open any doors in Corporate America. I don’t get to hop on the phone with a company’s top brass to get lingering questions answered. I don’t get to look a CEO in the eyes before pulling the trigger on a new buy.

How, then, are we supposed to reliably discern and evaluate which managers have the right stuff? And which are just slick operators who only know how to talk the talk?

In this letter, Johnson lays out the most important questions to ask yourself before making a final decision. A few of which I’m adding to my own investment checklist post haste.

Like…

Do they plant pine trees or bamboo shoots?

Bamboo can grow as fast as 1.5 inches an hour. Pine trees grow less than one foot a year. If we have a bamboo forest, it won’t be long until the competition has its own bamboo forest. What we want is management with a forest of pine trees and a knack to keep planting more pine trees.

For example, several of our serial acquirers have spent multiple decades nurturing relationships for just that moment when the current owner is willing to part with their business. We also have businesses that have spent multiple decades securing land for geographical advantages. These are pine trees planted by management. Time is one true moat.

A long-term mindset doesn’t offer get-rich-quick results, but instead lays a foundation for success that cannot easily be usurped.

Those that forsake the fleeting glory of immediate gratification and, in Johnson’s parlance, spend their days planting pine trees are building something that will last.

Have they made capital allocation a cultural component?

Rarely is capital allocation pushed down within an organization. Superior capital allocators understand the benefit of making capital allocation a cultural component of the organization.

Johnson echoes Warren Buffett here, who has long lamented that too many CEOs ascend to the top spot without enough (or any) experience allocating capital.

While Buffett and Munger remain the chief allocators at Berkshire, the next generation of managers (from Greg Abel to Ajit Jain to Ted and Todd) possess a wide latitude to make their own decisions and commit available capital to whatever area they deem necessary.

Do they reference who they studied and how they emulate what they’ve learned?

Passionate managers are never-ending students of their game. They study other greats. They break down what they learn. They try different styles and techniques to incorporate in their own work. They experiment. They adapt best practices without ego as to who came up with the original idea.

In a sense, that’s what this whole newsletter is all about: becoming humble and attentive students of the money game.

Studying and learning from the greats of the past and present. Always searching for new tips and tools to help us better evaluate companies and manage our emotions during the inevitable ups and downs.

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More Must-Reads

Other awesome things that I read (and listened to) this week:

The Forgotten Lessons of 2008: Seth Klarman

Investment Talk

• “Each new generation of investors suffers from involuntary amnesia; not being blessed with the scars from volatile periods in the market like their more tenured peers. I was not an investor during the [Great Financial Crisis]. Despite reading about it at length, I will never have the “benefit” of knowing what that felt like. These moments, while at times costly (both to your asset values and pride) are supposed to shape you; to make you a better investor for the decades to come.”

VALUEx Presentation on Berkshire Hathaway (Whitney Tilson)

• “At a 15% discount [to intrinsic value], Berkshire isn’t a screaming, pound-the-table buy — as it has been a few times in the past two decades when it’s briefly traded at a discount of up to 50% — but it should outperform the S&P 500 by a few percentage points annually over the next five years, which would likely beat 95% of active money managers.”

Is Hunting for Moats a Waste of Time?

Value Stock Geek

• “A moat gives an investor like me the confidence to wait. Wait for the valuation to normalize. Wait to actually earn the shareholder yield. Wait for the business to grow. Wait through a troubling economic event. It’s a lot easier to wait in a company like Moody’s than in a struggling mall retailer.”

The Bizarre & Brutal Final Hours of FTX (Joshua Oliver // FT Magazine)

• “The catering staff, more accustomed to seeing the gang of crypto nerds either working or celebrating, were taken aback. ‘It felt like being at the collapse of Rome,’ one attendee said. Someone quietly asked a server to take an uneaten dessert away. The chocolate pudding topped with gold flakes seemed like something from a previous era.”

🎧 Dr. George Athanassakos on Value Investing: From Theory to Practice (Investing the Templeton Way)

• “I think we’re in a golden period of value investing because I think we’re going into a period of higher inflation, higher interest rates, and lower margins. This will hurt a lot of the growth stocks. Even if value stocks don’t do so well, the growth stocks will do so badly that the value premium will be very high.”