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The Berkshire Beat: August 11, 2023
All of the latest Berkshire Hathaway news and my must-reads of the week!
Happy Friday and welcome to our new subscribers!
The latest news and notes out of Omaha…
Berkshire Hathaway reported its Q2 2023 earnings over the weekend — and Mr. Market reacted in manic fashion. Both Class A ($556,117) and Class B ($364.63) shares hit new all-time highs in the first half of this week, before trailing off a bit on Wednesday and Thursday. And, while such a jump in price is not something that Warren Buffett is apt to celebrate, it’s probably safe to say that he’s currently feeling prosperous enough to splurge on the bacon, egg, and cheese biscuit for breakfast at McDonald’s.
On Tuesday, Whitney Tilson released his current intrinsic value estimates for Berkshire: $598,000 for Class A shares and $399 for Class B shares. “While the undervaluation isn’t as great as it has been at certain times in the past, I still think [Berkshire] should be the bedrock of any conservative portfolio,” he wrote. “It’s still somewhat undervalued, incredibly safe, and its intrinsic value is growing nicely.”
Listening to Occidental Petroleum’s Q2 earnings call, it doesn’t sound like the company will be redeeming any more of Berkshire’s preferred shares in Q3 — or, quite possibly, for the rest of the year. So far in 2023, Oxy has redeemed 12% of the preferreds — saving itself over $93 million in annual dividends in the process. But the oil-and-gas giant now expects to drop below the $4 mandatory redemption trigger in the third quarter, forcing OXY 0.00%↑ to (temporarily) press pause on any further redemptions.
Any time Oxy distributes more than $4 per share to stockholders over the trailing twelve months, it triggers a mandatory dollar-for-dollar preferred redemption. That’s what happened in Q1 and Q2.
CFO Rob Peterson: “WTI prices would likely need to be higher than what the forward curve presently indicates for us to remain above the [preferred redemption] trigger for the remainder of 2023.”
Earlier this week, Chevron issued approximately 41 million shares of common stock to close its acquisition of PDC Energy. Between this share dilution and Buffett’s apparent sale of around 9 million shares in Q2, we can infer that Berkshire’s stake in CVX 0.00%↑ has dropped from 7.1% to 6.6%.
Some good news: Ever since the PDC Energy proxy solicitation on July 7, Chevron has not been allowed to repurchase its own shares. Now that the acquisition is done and dusted, CEO Mike Wirth says that Chevron plans to resume buybacks at its $17.5 billion annual rate.
🤑 Yesterday was another dividend day for Berkshire — with $90.9 million coming in from long-time holding American Express.
AXP 0.00%↑ received a special shoutout in Buffett’s latest annual letter: “Berkshire’s purchases of [American Express] were essentially completed in 1995 and … cost $1.3 billion. Annual dividends received from this investment have grown from $41 million to $302 million. Those checks, too, seem highly likely to increase.” And, of course, he was right. American Express hiked its dividend by 15% in March.
I try not to dwell too much on the quarterly earnings of Berkshire’s various stock investments, as that usually leads to overreactions based on performances over a very short period of time. In general, I aim to zoom out — not in. Nevertheless, Paramount Global recently released its Q2 results and there were a few noteworthy items: (1) Streaming losses narrowed to $424 million, (2) subscriber growth slowed with less than a million new Paramount+ sign-ups, and (3) the sale of Simon & Schuster to private equity firm KKR for $1.62 billion.
CFO Naveen Chopra on the Hollywood strikes: “We anticipate continued delays in production for the duration of the strikes and, as such, we estimate free cash flow in the back half of the year will be significantly higher than previously expected.”
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In the Spotlight: Morgan Housel x Barron’s
Anyone with even the slightest inclination to play the money game would be well served by reading The Psychology of Money. In it, author Morgan Housel demonstrates an all-too-rare ability to examine the thorny behavioral aspects of investing in a clear and accessible manner.
No surprise here that the book has sold like gangbusters — with, at last count, nearly four million copies snapped up by eager readers.
Late last month, Housel sat down with Barron’s and discussed his personal investment strategy, which company most reminds him of Berkshire Hathaway, and his next book — Same as Ever: A Guide to What Never Changes — due out this fall…
On his love for investing:
I do check my account every day. I bombard myself with financial news — but it never sways my actions. I never read the financial news and say, “I’m now therefore going to buy this and sell that.” I do it because I think it’s fascinating.
I just love how markets work. I love how they mirror human behavior. I love how the economy works. I just think it’s intellectually fascinating — even if I don’t make any changes.
On how Berkshire Hathaway brought him to Markel:
I’ve always been obsessed with Berkshire Hathaway and Warren Buffett. So much of the question around Berkshire over the past twenty years is: Why hasn’t anyone been able to copy what they did?
No one will ever be able to do exactly what Buffett did, but the company that has come the closest culturally — and has a performance to back it up — is Markel. [Markel is] a large insurance company that uses the proceeds of that insurance to buy good businesses that it’s going to hold forever — both equities and businesses as a whole — just like Berkshire.
(Disclosure: Housel serves on Markel’s board of directors.)
Other than Berkshire and Markel, he doesn’t own any other individual stocks. The rest of Housel’s money is invested in index exchange-traded funds.
On his new book:
It’s about behaviors and facts of life and trends that never change. There’s so much focus and attention on what’s going to change. What’s the next big industry? The next big company? What’s the stock market going to do next? Who’s going to win the next election?
Everything is about what’s going to change. And not only are we really bad at predicting that, but I think it actually matters a lot less than focusing on what is never going to change. So, how do people think about greed and fear? That has never changed.
November is shaping up to be quite a month for bookworms (like myself). Housel’s Same as Ever releases on November 7 — exactly one week before Stripe Press’s re-release of Poor Charlie’s Almanack. Time to clear some more space on the ol’ bookshelf.
Other awesome things that I read this week…
“I have no reason to believe that Mr. Buffett will reduce Berkshire’s ownership of Apple any time soon. He appears to view it as a quasi-permanent holding based on his comments at the annual meeting. It seems best to take a philosophical view of the situation. If Apple’s business results take a turn for the worse and/or Mr. Market assigns a lower valuation to the stock, Berkshire’s investment might morph into a double or a triple compared to its current status as a grand slam.”
“Those concessions [like a non-compete clause and other non-monetary covenants] from Dave Portnoy and his team are cute, but they still paid $0 to get Barstool Sports back. And, during Dave’s video announcing the deal, he mentioned that he will never sell Barstool again, so my guess is that Penn will never see another dollar from Barstool Sports. Dave Portnoy is now the full owner of a cash-flowing media empire that does hundreds of millions of dollars. He monetized his ownership once and then he just pulled off one of the greatest business deals of the last few decades [to buy it back].”
The slightest of corrections: Portnoy paid $1 to buy Barstool back from Penn.
“When I finish a book, the temptation is to start another one. (Don’t laugh, that’s what temptation looks like in my placid life.) But it’s useful to spend a couple more hours writing a brief summary of the book. That helps me mentally process what I’ve learned — and also serves as a useful guide later when I want to revisit the subject.”
“While most people measure wealth in terms of money, true wealth is ultimately about controlling one’s time. Time, after all, is the scarcest of resources. This concept isn’t new. Its most recent incarnation is the financial independence movement where the goal is not money for money’s sake, but money to free up time … For the majority of people, money isn’t the goal, but instead being able to spend our limited number of days as we deem best and with those we love most.”