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Berkshire Bits: March 10, 2023
The latest Berkshire Hathaway news and my must-reads of the week!
Happy Friday and welcome to our new subscribers!
Another busy week on the Berkshire beat…
Back at it: Between March 3 and March 7, Berkshire Hathaway purchased 5.8 million more shares of Occidental Petroleum. Interestingly, most of these new shares were bought at prices above $60 — with Buffett going as high as $61.90 for a small batch on Monday. That’s the highest he’s paid for OXY 0.00%↑ shares to date. Berkshire now owns 22.2% of the Texas oiler.
On Oxy’s Q4 2022 earnings call, CFO Rob Peterson revealed that recent balance sheet improvements will reduce interest/financing costs by $400+ million per year. Also, Oxy now has less than $2 billion of debt maturing in any single year for the remainder of this decade. “Going forward, we intend to repay debt as it matures,” Peterson said. Sounds like Oxy’s focus will shift from aggressive debt repayment to returning capital to shareholders.
CEO Vicki Hollub: “I never want to go through a scenario where we would have to cut [the dividend] again.”
Today, Berkshire receives $252.7 million in quarterly dividends from Chevron. Putting my math skills to work, that means Buffett and co. will pocket over $1 billion in CVX 0.00%↑ dividends in 2023. (Assuming, of course, no sales.)
Back in September, Berkshire Hathaway Energy agreed to buy 2,000+ acres in West Virginia for a renewable-powered industrial site. Berkshire-owned Precision Castparts will develop a titanium melt there for its aerospace products, with solar power coming from BHE via a localized micro-grid. And, at last weekend’s groundbreaking ceremony, we learned that BHE’s renewable-powered micro-grid will be just for PCC’s use.
“We’ll be building out the site with additional manufacturers that we’ll bring in the near future, but they’ll be connected to the grid and not the micro-grid,” said Alicia Knapp, president of BHE Renewables. “The micro-grid is really designed to service Precision Castparts.”
On Tuesday, I published a story about Berkshire’s 80% acquisition of Pilot.left a very insightful comment on how the EV charging process could fuel additional spending inside Pilot travel centers. However long it takes someone to recharge the battery of an electric vehicle — whether that’s ten minutes or thirty — Pilot stands ready to capitalize on that down time with its many food and retail offerings.
Berkshire owns 15.4% of Paramount Global’s non-voting Class B shares. On Wednesday, PARA 0.00%↑ CEO Bob Bakish delivered a rousing defense of the company’s prospects: “We are, unquestionably, one of the premier content companies in the world. When people say [we’re] too small to succeed, I go, ‘Wait a minute, what are we missing?’ We’ve got the #1 broadcast network and the biggest broadcast portfolio in the world. We’ve got a scaled cable network portfolio that leads, particularly against younger and diverse audiences. We have the #1 FAST (free ad-supported streaming television) service in Pluto TV, which is also expanding globally. We’ve got the SVOD service Paramount+ that added more subs than anyone else in the industry in Q4. And we’ve got one of the very few 115-year-old Hollywood studios that exist out there. So you tell me, what are we missing?”
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In the Spotlight: Thomas Gayner’s 2022 Letter to Shareholders
Full disclosure: I am a MASSIVE fan of Markel Corporation CEO Tom Gayner.
So, imagine my delight when, in Q1 2022, Berkshire Hathaway initiated a small position in Markel and then added a bit more the following quarter.
(All told, Berkshire now owns 3.5% of the company.)
In many ways, this seems a match made in heaven. Markel is very Berkshire-like in nature and Gayner — from his rigorously honest stewardship of capital to his folksy and relatable annual letters — gives off major Warren Buffett vibes.
So, it’s not too surprising that some of the key points from his latest letter to Markel shareholders sound a little familiar to Berkshire students. Buffett and Gayner have been singing from the same hymn sheet for a long time.
(1) We’re stronger together
Markel is structured very much like Berkshire.
Case in point: In Gayner parlance, his company has three “engines” that power revenue and profit: Insurance, Markel Ventures (owned subsidiaries), and Investments.
It’s the Berkshire blueprint all the way down.
This entire system, of the engines working together, creates a virtual feedback loop that continuously refreshes and strengthens the whole in ways that any one of the engines could not do alone.
A rope with three interwoven strands is stronger than a single strand rope of the same size. That’s what we’ve got at Markel.
Much like Buffett and Munger, Gayner has no interest in breaking up his company into smaller pieces.
(2) Mark-to-market madness
Gayner laments that he must combine normal recurring revenue from the aforementioned three engines with unrealized losses in the equity portfolio to come up with Markel’s total revenue figure. (At least according to GAAP.)
Not out of any desire to hide investment losses, but because Frankenstein-ing together operating results with short-term market swings leaves us all worse off.
To me, it’s like talking about chocolate milk and motor oil. Both are fine substances. They both play critical roles in my life. They can both be measured in terms of fluid ounces. That said, I’ve never combined the two into one composite measurement.
“Total revenues” at a company with financial and non-financial businesses like Markel must combine these two disparate streams into one container labeled “total revenues” as mandated by GAAP accounting.
I would neither drink the contents of that container nor put it in my car’s engine.
Financial information should be presented in as clear, concise, and simple a manner as possible.
For companies like Berkshire and Markel, mark-to-market accounting accomplishes just the opposite — confusing shareholders and would-be investors alike.
It’s got to go.
(3) Be greedy when others are fearful
A declining market may not be fun while you’re in the middle of it, but as the great investor Shelby Cullom Davis once said, “You make most of your money in a bear market, you just don’t realize it at the time.”
Every time we bought shares in companies that met that four-part test, and every time we paid a lower price for the next batch, we increased the future earning power and value of Markel. It may not be obvious in this year’s financial reports, but we believe it should become obvious over time.
Gayner’s four-part test requires Markel to only invest in profitable businesses with:
Good returns on capital and not too much debt
That are run by managers with equal measures of talent and integrity
With reinvestment opportunities and/or capital discipline
At reasonable valuations
“That catechism continues to guide every equity investment decision we make,” Gayner writes.
It may not be easy to remain disciplined and calm during market crashes, but that’s where the big money is made.
Other awesome things that I read this week:
“Consider how unusual it is for [Charlie] Munger to accept the junior role despite being a brilliant thinker in his own right. It’s a testament to his respect for [Warren] Buffett: ‘There were a thousand people in my Harvard law class. I knew all the top students. There was no one as able as Warren.’”
“If you had invested $1,000 in Berkshire Hathaway in 1965, your investment would be worth $4.3 million by 2009. Buffett’s company compounded your capital at 20.46% [per year]. If Warren Buffett had set up Berkshire Hathaway as a hedge fund, however, he would have charged you 2% per year and gathered 20% of any annual gains. If you had the same performance numbers, your $1,000 would have only grown to $396,000 by 2009. Only $396,000 would belong to you, the investor. This means that, of the $4.3 million that you would have earned without fees, $3.9 million would belong to the hedge fund manager.”
“You might want to invest like Buffett, but I doubt many would like to live like him. Even Buffett himself was an imitator early on; mimicking the style of his mentor Benjamin Graham. Later, he would adopt more influence from Philip Fisher and his confidant Charlie Munger. My point is that most humans are not Buffett, and will chase these desires at the expense of paying attention to the present. In this way, life is just the mundane reality that exists between the now and the then. It’s a delicate balancing act.”