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The Berkshire Beat: July 28, 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…
Many thanks for the wonderful response to my Charlie Munger Q&A transcript released on Tuesday! In it, Munger discusses the student dormitory project at U.C. Santa Barbara that he designed — a full year before the whole thing became engulfed in controversy over its windowless bedroom design. He spoke about the project with such pride and excitement in January 2020, not knowing that it would eventually become a lightning rod for criticism. To me, this is one of the most interesting sections of the entire Q&A session.
Well, it sounds like the naysayers sunk Munger Hall. The San Luis Obispo Tribune is now reporting that UCSB will “construct new student dorms at the site it had set aside for Munger Hall, signaling a shift away from the contentious student dormitory that has seen extensive development delays and widespread backlash”.
In a surprise twist, Chevron previewed its Q2 2023 earnings report over the weekend — outpacing analyst expectations with $6 billion in net profit. And, while that’s far below last year’s bonanza results, CVX 0.00%↑ stock shot up about 2% in response. Three more Q2 highlights: (1) Chevron distributed $7.2 billion to shareholders during the quarter — with $4.4 billion of that spent on share repurchases. In all, the company bought back over 27 million of its own shares. (2) Record output from the Permian Basin. CEO Mike Wirth declared it “the highest quarter we’ve ever had in the Permian” as production increased by more than 50,000 barrels per day. (3) Speaking of Wirth, Chevron waived its mandatory retirement age of 65. This will allow the 63-year-old chief exec to remain on the job for the foreseeable future.
Last week, I mentioned Chevron’s impending acquisition of PDC Energy. That deal is now expected to close as soon as next month. “We will go up to about 400,000 barrels a day in the [Denver-Julesburg] Basin,” says Wirth, “which is roughly twice what it is today.”
All in all, good news from one of the heavyweights of Berkshire Hathaway’s stock portfolio.
O&G bull Cole Smead spoke to Bloomberg this week about what Warren Buffett and co. see in “old” energy: “People are missing the economics that Buffett and Munger are looking at. The returns on capital in coal, oil, and gas are off the charts compared with other sectors. And, with ESG, you can buy them cheaper than you otherwise would.”
Another Berkshire stalwart, Coca-Cola, impressed in the second quarter, too. KO 0.00%↑ beat estimates on both the top and bottom lines — with recent price hikes not impacting demand to any significant degree. Everything looks so rosy, in fact, that Coke boosted its full-year outlook by 1% for both earnings per share and organic revenue.
Last week, Berkshire subsidiary Lubrizol announced $150 million worth of new investment in projects across India. These include a state-of-the-art CVPC resin facility, a grease lab near Mumbai, doubling production capacity at another plant, and more Centers of Excellence. In all, these projects are expected to create approximately 4,000 new jobs.
CEO Rebecca Liebert: “We are building on fifty years of success in India by adding new manufacturing, lab, and R&D sites, supporting in-country innovation and adding jobs that capitalize on the great expanding workforce and business conditions in India.”
The new edition of Poor Charlie’s Almanack is getting closer and closer. To celebrate, Stripe Press shared some photos of the print edition as it begins to take shape ahead of the November 14 release. Sure, it’s abridged — which is definitely a disappointment. But, remember, Stripe will also release a three-hour fireside chat between John Collison and Charlie Munger. Hopefully that will make up for whatever previously-published material gets left on the cutting room floor.
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In the Spotlight: Sumitomo CEO Masayuki Hyodo
With the sogo shosha taking on increased importance in the Berkshire Hathaway portfolio, I’m always on the lookout for opportunities to learn more about these sprawling Japanese trading houses.
And, while Sumitomo is the smallest of Berkshire’s Japanese investments, that doesn’t make it a small company. In fact, Sumitomo boasts such varied business interests that it’s almost impossible to pigeonhole — from metal products to media and real estate to mineral resources and energy.
On November 9, 2022, Sumitomo CEO Masayuki Hyodo visited Columbia Business School and spoke to students about his company’s unique structure, its proud past, and its ambitious plans for the future.
(Many thanks to the kind reader who shared this interview with me!)
On the sogo shosha’s slow shift from trading to investing…
As you know, Japan doesn’t have any natural resources at all. Energy — nothing. Except coal mining, but now coal is gone. Because of this very slim country having no [domestic] resources, we imported goods and we manufactured in Japan and did exports. So the country of Japan, the society itself, and the whole industry of Japan needed [our] trading function after World War II.
We played — not only Sumitomo, but Mitsubishi, Mitsui, and the other trading companies — a very important role to support the industrial movement after World War II, rebuilding the country itself.
But, after the Plaza Accord, the world economy changed and it started globalization … We had to change ourself, our roles and functions, so we started our investments overseas and within the domestic market as well, so as to expand and pave our own way for the future. All of the trading companies shifted from trading to investments. Many other Japanese industries are doing the same thing.
And, of course, any mention of Berkshire catches my attention. One student asked Hyodo about his reaction to Warren Buffett’s initial investment back in 2020…
It was a surprise to receive his letter overnight before he announced [his investment]. We got a PDF message directly to me, talking about this acquisition. I was surprised — but, in a sense, it was proof that he saw the value in the company. So it was an honor, in that sense.
We periodically continue our conversation with the [Berkshire] fund managers. I think he sees the future of Japanese industries, having those conglomerates in his portfolio. He’s a serious investor and he sees the value of Japanese growth. That’s my perception.
The fact that his fund still owns those five major trading firms’ shares, I think he sees the future based on a long-term view.
Hyodo’s comments came months before Buffett and Greg Abel traveled to Japan to meet with the leadership of the five trading houses. I’d love to hear his thoughts now — after getting the chance to sit down and chew the fat with the Oracle.
Other awesome things that I read this week…
“There was one guy I was observing who felt he had absolutely no free will in the digital world. His perspective was that the internet and computers are doing this to me, and he had just completely surrendered. I found that so interesting. He would sometimes verbalize what was going on, you know, ‘That damn email,’ or he would just express frustration. And when we interviewed him, he said: ‘I let the sounds of the bells and pop-ups rule my life.’”
“Each ‘inning’ can last years. While the last few years have been characterized by market cycles that felt like someone sat on the fast-forward button, cycles can take years to unwind and have proven to be able to persistently grind higher for as long as a decade or more; catching its breath at various intervals.”
“In the words of one of my favorite scenes from Curb Your Enthusiasm, there is a time to be ‘working without working’. In a culture obsessed with the grind and the number of hours spent at the keyboard, it’s invaluable to have practices that stir catalyze creativity, unlock answers to problems, and get you unstuck. Artists, scientists, and other creatives have long known about the connection between creativity and activities like walking, sleeping, showering, or driving.”