The Berkshire Beat #65: Making Moves in Japan
All of the latest Berkshire Hathaway news and my must-reads of the week!
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The latest news and notes out of Omaha…
THE INTELLIGENT INVESTOR: At last year’s annual shareholders meeting, Warren Buffett mentioned that HarperCollins was “bringing out another edition” of The Intelligent Investor. And, now, it’s official. An all-new 75th anniversary edition of the timeless Benjamin Graham classic will release on October 22, 2024. It will clock in at 640 pages — “leaving his original text untouched” — with updated commentaries from journalist Jason Zweig that explain how Graham’s incomparable wisdom still remains as applicable as ever today.
JAPAN UPDATE (PART ONE): According to a new filing, Berkshire Hathaway plans to issue more yen-denominated bonds in the near future. Some see this as an indication that Buffett will increase his investments in the five leading Japanese trading companies even further. (Berkshire currently owns about 9% of each of them.) “Berkshire’s plan to sell a yen bond is spurring speculation that the company may buy more trading-house shares,” a Daiwa Securities strategist told Bloomberg.
Buffett was full of praise for the sogo shosha in his latest annual letter: “In certain important ways, all five companies follow shareholder-friendly policies that are much superior to those customarily practiced in the U.S. Since we began our Japanese purchases, each of the five has reduced the number of its outstanding shares at attractive prices. Meanwhile, the managements of all five companies have been far less aggressive about their own compensation than is typical in the United States.”
And, last year, Charlie Munger called this trade a “no brainer” and likened it to “God opening a chest and just pouring [in] money”.
JAPAN UPDATE (PART TWO): If Buffett is planning to use the proceeds from this bond sale to gobble up more shares of the five trading companies, he will be paying a higher price per share than in the past. All five Berkshire-backed sogo shosha are off to very hot starts in 2024…
Itochu: +17.8%
Marubeni: +20.6%
Mitsubishi: +59.6%
Mitsui: +38.9%
Sumitomo: +23.5%
STILL SIRIUS: Berkshire bought 3.5 million more shares of Liberty Media Sirius XM tracking stock between April 4-8. (1.1 million shares of LSXMA 0.00%↑ and 2.4 million shares of LSXMK 0.00%↑ for a total outlay of $97.1 million.) Berkshire now owns 101.8 million shares of these trackers — as well as another 40.2 million shares of Sirius XM Holdings. These are all set to combine later this year.
LUBRIZOL: Earlier this week, Lubrizol CEO Rebecca Liebert spoke with India’s CNBC TV18 about the Berkshire subsidiary’s plans for international growth, how electric vehicles might affect the fuel additives market, and much more.
Will EVs upend Lubrizol’s traditional business (fuel additives and lubricants)? “Look, electric vehicles are here and we think electric vehicles have a place,” she said, “but we also think that the internal combustion engine isn’t going anywhere any time soon. You have to have a lot of infrastructure [for] electric vehicles — the charging stations and all that. Over time, that will build out, but it’s going to take some time. Until then, we’re prepared to invest and continue to support the additives market for lubricants and fuels. That’s a big push for us today.”
What role will India play in Lubrizol’s future? “India is about 10% of our global revenue and we see that growing dramatically over the years to come,” said Liebert. “We see the opportunity to more than double our revenue in India in the next five years.”
“India is our fastest-growing market,” she added. “And, with such a large population, we think that that growth is going to be here for decades to come.”
And Europe? “I think that Europe is going to continue to have some slowness,” she said. “We’re seeing a lot of capacity in Europe come offline. But Europe, I think, will rebalance as the global chemical industry finds its new footing … Those value-added products [that are] produced in Europe will stay in Europe and those that may be more commoditized might come from other regions.”
Any update on Lubrizol’s previously-announced $150 million investment in India? “Our $150 million investment [in India] was for CPVC that’s used to deliver clean water to homes,” said Liebert. “The investment in India in infrastructure is really fueling a lot of demand for CPVC. Now, on top of that, the opportunity in India is broad when you think about the middle class. Lubrizol has a great portfolio of products that are aimed at the middle class — whether it’s beauty care, personal care, or things like tennis shoes and consumer products.”
She also noted that Lubrizol is well-positioned for the inevitable increase in middle-class consumption of Indian families. “We have products that go into air conditioners and refrigerators — and these are items that everyone is going to want to have in India over time.”
HAPPY TRAILS, 3G: Back in 2013, Berkshire and 3G Capital teamed up to take H.J. Heinz private — and, later, merged it with Kraft Foods. 3G’s aggressive cost-cutting tactics won it few fans and, some say, directly led to some lean years for the company. And, now, 3G is out altogether — selling its entire 16.1% stake in KHC 0.00%↑ in the fourth quarter of last year. “3G has not been involved in the management of Kraft Heinz, nor have they been on the Board, for several years,” the company told CNBC. “They had continued to be an investor and were treated as we do any investor. We did learn from their recent filing that 3G exited the Kraft Heinz stock entirely in 2023.”
Berkshire, meanwhile, continues to own 26.8% of Kraft Heinz and remains “a committed long-term owner”.
AND A FEW ODDS & ENDS…
The Forbes Billionaires 2024 list is out and Warren Buffett officially ranks as the sixth-wealthiest person in the world with a net worth of approximately $133 billion. He trails Bernard Arnault (LVMH), Elon Musk, Jeff Bezos, Mark Zuckerberg, and Larry Ellison (Oracle).
Bloomberg reports that Apple “assembled $14 billion worth of iPhones in India” last year — meaning that the tech giant now makes about 1 out of every 7 iPhones there. Still a long way to go, but Apple continues to make progress in reducing its reliance on China for its flagship device.
According to S&P Global Research, GEICO slashed its advertising costs to $838.2 million in 2023 — a 35% decrease year-over-year. This cutback coincided with a 9.8% dip in the auto insurer’s policies-in-force.
A Slow Read of Poor Charlie’s Almanack
Talk 8: The Great Financial Scandal of 2003
Charlie Munger was one prolific dude.
Last time out, we looked at how he coined the term “febezzlement” to perfectly sum up how irrational thinking and behavior can be downright criminal to your investment returns. And, today, he’s back with a morality play — that he wrote by hand while vacationing in the summer of 2000 — that eerily presages the accounting scandals that soon rocked Wall Street.
If anything, he showed uncharacteristic optimism by placing his fictional example in 2003. Real life didn’t take nearly that long to fall apart. By that year, we were already knee deep in the Enron, WorldCom, and Tyco accounting scandals.
Charlie’s story whispers a warning to the Berkshire Hathaway shareholder, illustrating how a change in leadership — even at a great company with a sterling culture — can end in tears for all involved.
How greedy outsiders, more concerned with financially engineering a higher earnings multiple through the judicious use of stock-based compensation, can throw away decades of good work. And how man’s inherent dishonesty could find an all-too-willing dance partner in the vague accounting rules of that (or any) era.
Charlie ends the woeful tale of the fictional Quant Tech with a discussion between God and his chief detective, who had been tasked with delivering the party most responsible for this debacle unto Him for a dose of divine judgment. The detective offers up the security analysts who recommended the stock, the SEC commissioners who failed to catch the widespread subterfuge, even the Quant Tech officers who schemed up the whole calamitous affair.
But God brushed them all aside. Not absolving them, but urging the detective to dig deeper.
Finally, the detective settled on the true culprits: the authorities at the major accounting firms who made this whole corrupt system possible.
Reflecting upon this story years later, Charlie said: “A profession and a nation that allows unsound accounting for management cost are leaning in the same moral direction as the group that leaves most of the steel out of the concrete in erecting high-rise apartment buildings.”
Ouch.
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The Must List
Other awesome things that I read this week…
Lucky vs. Repeatable (Morgan Housel)
“Could [Jeff Bezos], starting today, without any money or name recognition, create a new multi-trillion dollar business from scratch? Maybe, but probably not. There are so many things that helped Amazon become what it is that can’t be replicated — growth of the internet, market conditions, old competitors, politics, regulations, etc. Bezos is enormously skilled in a way that is not luck. But a lot of what he did was not repeatable. Those points are not contradictory.”
Berkshire Hathaway Annual Meeting Questions
“[Berkshire Hathaway Energy] has no legal obligation to inject capital into PacifiCorp to satisfy legal liabilities or for any other purpose and it is very likely that BHE would be able to renegotiate its $13.1 billion of senior debt rather than having to actually pay it off, although perhaps at higher interest rates. Given this situation, I wonder whether BHE might elect to bail out PacifiCorp, if needed, to avoid triggering any covenants related to BHE senior debt or possibly for reputational reasons.”
15 Ideas from Seth Klarman’s Margin of Safety
“Avoid confusing the real success of a business with its mirrored success in the stock market. Just because a stock price rises, it does not mean the underlying business is doing well or that the price movement is justified. The same goes for falling stock prices and the indication that this company is struggling or the corresponding decrease in market-quoted value is just.”
The One True Lead Pipe Cinch (Mark Tobak || Hedge Fund Alpha)
“Imagine a batter with no strike zone! He can never be struck out! He would always walk … Fans would boo! Opposing teams would cry, ‘Foul!’ The strike-zone-free batter would garner no admiration, no glory. Branded a soulless cheater who ruined the game of baseball. Think it through: the strike-zone-free batter of investment is an S&P 500 Index Fund! No guts. No glory. Just effortless success while a booing crowd protests short-circuiting the investment game … But investment for the mass public should not be a gamble, a contest or a game, with many losers and few winners. It should be a sturdy, reliable vehicle to build a retirement and an inheritance to improve the lives of the many.”
Guy Spier: Reflections on his 2023 Partner Letter
“Visualizing the power of persistently compounding capital is delightful, but even more an exercise to reset one’s focus on the long term — a character trait so mandatory to make decisions today. Especially, as the default setting of human minds causes linear thinking and overweighting of short-term results, reminding oneself of the actual game we’re envisioning to play can be useful from time to time.”
I wonder if Buffett has any regrets on doing the KHC deal with 3G? 3G's reputation as ruthless cost cutters with no conscience could not have helped Berkshire in any way. Just a thought...
Dear Monsieur,
Business ís not a game in between to show who ís better in investment... But it is a ""High Level of the Intellectual Works for Money-piling" in between... to show "respect", "care" and "crucial" Diplomatics in both sides of "Great-Business-Works" to bring the happiness results for both sides, "the Provider and the Consumers."
The "Intellective Heart and Mind" in Business mushow honest and respected "each and other "to absorb attractively to giving happiness in between "This" and "That" businessman... It's the KEY TO be great successful to leverage the "business larger to worldwide productions" that you "CARE" about....
Thank you very much for your "Great Title sending to me weekly. It's so happy to me to read and learn more about,,,the area of Business...This ís also make me miss my "Grandmother"...A Princess but doing business very very successfully.
Thank you again.
Respectfully and sincerely,
E. Tunghoang