Berkshire Bits: 006

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

Happy Friday and welcome to our new subscribers!

We’re just 24 hours away from the release of Warren Buffett’s annual letter to shareholders. (But who’s counting?)

Until then, here’s the latest news out of Omaha…

• Berkshire Hathaway handily beat the S&P 500 in 2022. This year, though, has been a somewhat different story. Through February 23, Berkshire is down 2.17% — compared to the benchmark index’s 4.9% gain. Let’s see if the 10-K this weekend causes any movement to the upside.

• Saturday also marks the one-year anniversary of Warren Buffett’s decision to start buying Occidental Petroleum common stock. “I read every word [of the company’s 2/25/22 earnings call] and said this is exactly what I would be doing,” he told CNBC last year. “We started buying … and we bought all we could.” Twelve months later, Berkshire owns 21.4% of the oil giant.

• Louisiana-Pacific was, surprisingly, Berkshire’s biggest (investing) purchase of Q4 2022. Berkshire now owns 9.8% of the Nashville-based building materials company — but it accounts for just 0.1% of the overall portfolio. Such a small position suggests that this is a Ted or Todd pick. And, earlier this week, we got even more evidence to support that. Cosimo de’ Medici on Twitter astutely noticed that some of the LPX 0.00%↑ shares were purchased by Precision Castparts Master Trust, a PCC employee benefit plan. I’ve read before that Combs and Weschler handle the pension accounts for Berkshire’s subsidiaries, which all but confirms Louisiana-Pacific as one of theirs.

  • In fact, a Financial Times article from 2016 specifically mentions the Precision Castparts fund as (likely) being under their purview.

• Thank you to everyone who liked and shared my transcript of Charlie Munger’s Q&A at the Daily Journal annual meeting! I’m beyond thrilled by the wonderful reception it has gotten. Putting it all together took A LOT of time, so it’s very gratifying to know that so many people found it so useful. (And *shudder* I’m trying not to think about how long it will take to transcribe and annotate Berkshire’s meeting in a few months…)

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From the Archives: “Will the Real Warren Buffett Please Stand Up?”

This Forbes article from 1990 grapples with one of the most remarkable aspects of the Warren Buffett experience: his ability to seamlessly shift between different investment strategies to reap the biggest rewards for Berkshire Hathaway shareholders.

Most folks find a winning strategy and keep riding it for too long. Buffett’s sensitive antennae have saved him from that — so far.

The authors trace Buffett’s career from devout Ben Graham disciple to Washington Post & Capital Cities/ABC media maven to (by the time of this article) white knight helping embattled companies fend off unwanted takeovers… for a price.

In the late 1980s, when leveraged buyouts were all the rage on Wall Street, Buffett frequently rode to the rescue with an intriguing offer. Sell convertible preferred shares to Berkshire — with a hefty dividend attached — and you can remain free. The likes of Salomon Brothers, Gillette, and USAir all readily agreed to those terms.

Forbes asked Buffett if these moves weren’t just common stock investments in another cloak? Nope, said the Oracle.

“I wouldn’t have bought any of them on an equity basis. This [buying convertible preferred issues] is lending money, plus an equity kicker.”

Why draw such a distinction?

The magazine explained:

The convertible is much safer than the stock because it carries the option to put it back to the company as a fixed-income investment. It can be a stock or a bond — at Buffett’s option. If Gillette’s earnings fall apart, Buffett doesn’t convert the preferred stock, and it retains value as a fixed-income investment.

Always stacking the odds in his — and Berkshire’s — favor.

Plus, a few interesting tidbits on Buffett’s event arbitrage strategy:

• “The name [of the companies involved] doesn’t make much difference,” he says. Just a calculation of the potential return and the probability that the merger, liquidation, etc. will actually happen.

• In 1987, Berkshire ran an arbitrage play on Southland and turned $2.7 million into $3.3 million — in just ten days. That’s good for a 740% return on an annualized basis.

• Overall, in 1987, Berkshire earned a 90% return on arbitrage activities in what was otherwise a bad year for the stock market.

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More Must-Reads

Other awesome things that I read this week:

What Buffett Thinks About Stock Market Crashes

Compounding Quality

• “There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions.”

Templeton & Phillips Capital Management 2022 Annual Letter (Lauren Templeton)

• “Value investors understand that once these levels of ‘maximum’ pessimism are embedded in share prices, stocks can represent attractive bargains for long-term holders. The future is uncertain — for better or worse — but history has repeatedly demonstrated that companies are remarkably adaptive organisms. Share prices offer investors not much more than a set of expectations for the future, and when expectations become extremely dire, the only catalyst needed is for the future to be less bad than the markets fear.”

Apple Makes Major Progress on No-Prick Blood Glucose Tracking for Its Watch (Mark Gurman // Bloomberg)

• “The goal of [Apple’s] secret endeavor — dubbed E5 — is to measure how much glucose is in someone’s body without needing to prick the skin for blood. After hitting major milestones recently, the company now believes it could eventually bring glucose monitoring to market, according to people familiar with the effort. If perfected, such a breakthrough would be a boon to diabetics and help cement Apple as a powerhouse in health care. Adding the monitoring system to the Apple Watch, the ultimate goal, would also make that device an essential item for millions of diabetics around the world.”

Letter #53: Walt Disney (1966)

A Letter a Day

• “Many people have asked, ‘Why don’t you make another Mary Poppins?’ Well, by nature, I’m a born experimenter. To this day, I don’t believe in sequels. I can’t follow popular cycles. I have to move on to new things — there are many new worlds to conquer.”