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The Berkshire Beat: August 25, 2023
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…
🤑 Today, Berkshire Hathaway receives $29.2 million in quarterly dividends from Citigroup. It’s not exactly the biggest dividend check that Warren Buffett has ever cashed, but every little bit of dry powder helps the cause.
Berkshire owns 2.9% of Citigroup — at a current value of $2.2 billion.
Following the latest twists and turns of Microsoft’s $68.7 billion acquisition of Activision Blizzard has lost a little bit of its luster since Buffett exited his merger arbitrage play during Q2 2023. But, lest we forget, Berkshire still owns 1.9% of the video game maker and stands to make a tidy profit on those shares if the deal goes through. (Likewise, I imagine that either Todd Combs or Ted Weschler is also happy to keep a hold of ATVI 0.00%↑ as a standalone entity if things go south.)
This week, Microsoft restructured its proposed Activision deal in its latest attempt to win regulatory approval from the UK’s Competition & Markets Authority. In short, Microsoft has agreed to transfer the cloud gaming rights for all current and upcoming Activision games to Ubisoft for the next fifteen years. An analyst told The Guardian: “Consumers and gamers will be mystified by the new deal, but ultimately Microsoft just wants to get this $69 billion deal over the line.”
Apple has hit the skids in August, tumbling close to 10% this month. Erik Woodring of Morgan Stanley joined CNBC’s Closing Bell on Wednesday to discuss the tech giant’s recent travails: “It’s fair that Apple has gone from $190 to $175. This is a bit of a consolidation that was needed after the stock was effectively up and to the right for the better [part] of six months.”
Woodring expects the upcoming iPhone 15 cycle to be a strong one for Apple.
Earlier this week, a federal appeals court revived an antitrust lawsuit against Berkshire subsidiary Johns Manville. The manufacturer is accused of monopolizing the market for calcium silicate — a substance used in thermal pipe insulation — by coercing distributors away from a competitor’s cheaper product. This case had been dismissed, but is now back on the docket. Something to keep an eye on, I guess. (If you couldn’t tell, this was a very slow week on the Berkshire news front…)
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In the Spotlight: David Einhorn in Q2 2023
During his recent visit with NFM’s i am home podcast, Berkshire Hathaway investment manager Todd Combs made an offhand comment that caught my attention. “I wasn’t that name that had been bandied about [for a job at Berkshire],” he said. “I think David Einhorn’s name…”
Combs got cut off and never finished his thought, but this random aside jogged my memory. In the immediate aftermath of Combs’s hiring in 2010, Einhorn was mentioned (along with Li Lu) as a top-tier candidate who bowed out of the race for personal and professional reasons. The New York Times even asked: “Did Einhorn Rebuff Buffett?”
As the story goes, Einhorn chose to remain at Greenlight Capital — which he founded in 1996 — instead of pursuing an investment manager position at Berkshire. Perhaps because filling Buffett’s shoes would be an impossible (and thankless) task.
“None of the superstars are going to take this job,” legendary Columbia Business School professor Bruce Greenwald said in 2010. “If you’re a very successful investor, who needs the meshugas of following Warren Buffett and being compared to him?”
Well, before I get too far off track, Combs’s comment inspired me to read through Einhorn’s latest missive to his Greenlight partners.
It’s a short read, but I’ve pulled out a few items of particular interest:
“The Greenlight Capital funds returned 14.5% in the second quarter of 2023, net of fees and expenses, compared to an 8.7% return for the S&P 500 index.”
Einhorn’s investing career has been a rollercoaster ride of sorts. Roughly speaking, the first decade was spectacular, the second decade decidedly less so, and the jury’s still out on Greenlight’s third act. Einhorn crushed the market in 2022, beating the benchmark index by nearly 55%. Coupled with these impressive second quarter results, maybe Greenlight is back on track.
He established a position in NET Power, an energy company with a special focus on carbon capture technology. “It became public this quarter through a SPAC. What could be less popular than that these days? We think that just might be part of the opportunity. We believe that carbon capture will be a large market.”
One of the companies that NPWR 0.00%↑ has partnered with on carbon capture is none other than Occidental Petroleum.
Einhorn on inflation: “We believe inflation is stickier and more entrenched than the market is currently appraising … We think a re-acceleration of inflation and higher [interest] rates could disrupt the bull narrative, which has now obtained consensus support.”
Other awesome things that I read this week…
To Be Or Not To Be Like Buffett? (Investment News)
“When the rest of the investment world is trying to convince retirees they need to be worried about everything, we can always cite something Warren Buffett has written or said during his career that is calming and accurate in the moment.”
“In retrospect, one can appreciate how insane [Michael Burry] must have sounded to the average onlooker. Here he was, in 2006, when the majority of the market was too caught in the fantastic bull market to care, discussing the importance of diversifying counter-party risk across the nation’s largest and most established financial companies. Voicing his concerns about the ability of household names in the financial industry to pay him when the housing market collapsed.”
Intelligent vs. Smart (Morgan Housel)
“No matter what we’re talking about, Tom [Gayner] has a perfect analogy from something totally unrelated. If we’re talking about insurance reserves, Tom will say something like, “You know, this reminds me of that scene from The Sound of Music…” If we’re talking about market valuations, Tom might say, “It’s kind of like Winston Churchill used to say…” In each case, the analogy gets right to the heart of the topic at hand … Tom is a good investor because he understands how the world works — connecting dots between various fields — which is so much broader than just understanding finance.”
“The lowliest lemonade stand and the most complex conglomerate have one very important thing in common. They’re both in business to make money. Both companies (for even your neighbor’s kid’s lemonade stand is a company — albeit a very, very small one) employ capital with the expectation of receiving more capital in return. Investing is really that simple.”
“It wasn’t all plain sailing — more impairment charges followed — but the new Kraft Heinz chief unleashed cost savings, streamlined the company’s portfolio (including selling off assets), made its innovation more focused, and, crucially after the annus horribilis that was 2019, strengthened the company’s balance sheet. Patricio steps down at a time when Kraft Heinz’s organic sales growth is stronger than pre-pandemic, albeit supported by recent price increases to help offset inflation. Volumes have suffered, but it would be facile to overly criticize Kraft Heinz, as many [fast-moving consumer goods] companies have seen moves to up prices put pressure on unit sales.”
“Remember, we’re all investors in this life. No, I’m not talking about money. I’m talking about time. As the quote goes: ‘Time is a currency you can only spend once, so be careful how you spend it.’”