The Berkshire Beat: June 23, 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…

• Big stuff to start the week: Berkshire Hathaway increased its ownership interest in the five largest Japanese trading houses — Mitsubishi, Itochu, Mitsui, Marubeni, and Sumitomo — to over 8.5% of each (on average). Berkshire made these purchases via its wholly-owned subsidiary, National Indemnity Company, and reiterated its intention to hold these positions for the long term. And it doesn’t sound like Berkshire is done, either. “Mr. Buffett and Mr. Abel continue to be delighted with the investments and hope, eventually, to own 9.9% of each of the five companies.”

• On June 14, the International Longshore & Warehouse Union and the Pacific Maritime Association reached a tentative agreement that promises to end months of labor turmoil at the West Coast ports — and, potentially, unsnarl our supply chain. And this could mean big (and busy) times for the BNSF Railway — with increased amounts of intermodal volume expected in the coming months as the ports get back to something akin to full operations. “We are beginning an exciting chapter in the future of the West Coast ports — and BNSF has made key investments over the past several years in preparation to support both immediate and long-term volume growth for intermodal, our largest segment with the most growth potential,” says BNSF CEO Katie Farmer.

  • What is intermodal? It involves the transportation of crates/trailers by rail, but with either water or truck movement at one or both ends. In this case, a container is offloaded from a shipping vessel at the West Coast ports and then carried by the BNSF to its final destination.

  • Tom Williams (BNSF’s vice president of consumer products): “We’re creating an integrated intermodal network, both physically and digitally, to ensure we are a supply-chain partner of choice into the future.”

• This week, Warren Buffett converted 9,129 of his Class A shares into 13.6 million Class B shares so as to donate them to charitable foundations. Buffett still owns 218,287 A shares (and 344 B shares). “During the [past] seventeen years, I have neither bought nor sold any A or B shares — nor do I intend to do so … I have no debts and my remaining A shares are worth about $112 billion, well over 99% of my net worth.”

  • “Nothing extraordinary has occurred at Berkshire,” Buffett continued. “A very long runway, simple and generally sound decisions, the American tailwind, and compounding effects produced my current wealth. My will provides that more than 99% of my estate is destined for philanthropic usage.”

  • After this latest round of charitable giving, Buffett now controls 30.5% of the aggregate voting power and 15.1% of the economic interest at Berkshire.

• Buffett is among the regulars at Allen & Co.’s uber-exclusive retreat in Sun Valley each summer. The biggest names in media and business rub elbows at this “summer camp for moguls” — with plenty of time on the agenda for frank discussion and deal-making. Besides Buffett, here are some other invitees from the Berkshire orbit: Tim Cook (Apple), Bobby Kotick (Activision Blizzard), Kenneth Chenault (Berkshire director), Shari Redstone (Paramount), and Becky Quick (CNBC).

  • Fun fact: In 2015, Buffett bought Precision Castparts while at Sun Valley. Precision CEO Mark Donegan flew to Idaho to meet with Buffett, who offered him $235 per share for his company. And the rest, as they say, is history.

• Berkshire Hathaway is a no-drama kind of company. And it sounds like some of that might be rubbing off on Coca-Cola (of which Berkshire owns 9.2%). Manuel Arroyo, Coke’s chief marketing officer, pledged that the soft drink maker will stay out of the culture wars. “As it relates to potential political controversy … it is a very simple answer: We don’t play in that. From a brand safety standpoint, we have very, very clear guidelines. We’re going to stay away from any major controversy.”

  • More from Arroyo: “Ultimately, what we’re saying is we’re a simple beverage. We’re just a soft drink. You don’t expect too much of a soft drink, right? Just enjoy it. Have fun and enjoy the pleasure of it.”

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More on the Sogo Shosha 🇯🇵

Earlier this week, I wrote about Warren Buffett’s highly-profitable bet on Japan. And, today, I’m back with some more (hopefully) interesting details that might help to explain his newfound interest in these venerable old trading houses.

First up, Chamath Palihapitiya marveled at how Buffett structured these deals — brilliantly pulling the levers of finance to create virtually no-lose propositions for Berkshire Hathaway. (h/t Sebastian on Twitter)

[Buffett] found a group of companies that had very low volatility, grew earnings predictably, had a good dividend yield, and — in most cases — were buying back their stock.

But it’s what he does next which is so awesome.

As far as I can tell, he issues Japanese debt at very low rates, uses the proceeds to buy the stocks, and then uses the dividends he gets from owning these stocks (which are greater than the interest rates he’s paying to borrow in the first place) to pay the coupon!

What’s left over is a near-risk-less bet where he’s borrowed trillions of Japanese Yen for free to buy billions of dollars of companies growing earnings in the mid-teens.

And, over a 10-20 year holding period, he becomes insensitive to currency vol and so really can’t lose money. He locks in the earnings gains over this period along with whatever spread he keeps between his dividends and his coupons.

The only way this trade blows up, I suppose, is if the Japanese economy totally craters — but these companies are sufficiently exposed to the rest of the world that this outcome is pretty unlikely.

It’s inspiring to see folks act this intelligently at scale. That’s why he’s the 🐐.

I’ve also tracked down a couple more comments from sogo shosha executives about their much-publicized meetings with Warren Buffett and Greg Abel back in April.

Masayuki Hyodo, CEO of Sumitomo:

I recently had the opportunity to have a conversation with Mr. Warren Buffett, of Berkshire Hathaway, and he has a very disciplined approach in his investments and there were many valuable insights, which reminded me of the importance of having these engagements and conversations with our shareholders and investors. I want to continue [this] practice as we strive for further growth.

And an unnamed exec from Marubeni:

Our current cash position gives us some flexibility, [but] we have learned from our experience with Berkshire Hathaway that it is a big mistake to think that only holding a lot of free cash is admirable. The right business approach is not to leave money idle, but to draw on your wisdom and search hard to find good investments — and allocate cash to them. We will keep the lessons we learned firmly in mind as we go forward.

Finally, both Itochu and Marubeni started out life as textile merchants.

Just like Berkshire itself.

I imagine that Buffett sees a little bit of the Berkshire story — transitioning out of a dying industry and diversifying your way to lasting success — in these two companies.

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More Must-Reads

Other awesome things that I read this week:

Jim Cramer and the Art of Being Wrong (Kevin Dugan // New York Magazine)

• “Cramer has made some particularly notable, high-profile bad calls that helped inspire and propagate the meme. A small selection of his all-time whiffs includes telling viewers to buy Silicon Valley Bank just weeks before it crashed, the time he compared Sam Bankman-Fried to the banker J.P. Morgan, and the time he told ex-Theranos CEO Elizabeth Holmes — who reported to federal prison for fraud in May — that it was ‘reasonable to compare you to Steve Jobs’.”

• More: That Time Jim Cramer Got Called Out in “The Intelligent Investor”

Attributes of a Great Business and a Simple Investment Checklist

John Huber

• “My dad once worked with someone who bought McDonald’s stock in 1965 shortly after the IPO. He bought 100 shares of MCD 0.00%↑ because he liked the food, he was impressed by how cheaply he could feed his family for a dinner out, and he thought other customers would soon recognize this value as well. In short, the business had a great product that was likely to grow for a long time … Those 100 shares (after thirteen stock splits and a 2% stock dividend) are now 74,358 shares. The $4,000 investment is now worth nearly $22 million.”

The Markets, BRK Annual Meeting, AI Mania, etc. (The Brooklyn Investor)

• “Can you imagine being Buffett’s partner back then, and he puts all that capital into [American Express] during the scandal? We would be like, are you nuts?!?! Reminds me of the Druckenmiller (alleged) statement, what’s the difference between falling out of a 3rd-floor window and a 100th-floor window? (You’re dead either way, so if you are going to swing for it, might as well go big!)”

Thoughts on Apple’s Vision Pro

The Rational Walk

• “I am not an early adopter of technology. I am very unlikely to purchase a Vision Pro within the first few years of its unveiling, and I might never choose to buy one. However, this is how I felt about the iPhone when it first came out as well. Today, I am the owner of a iPhone 13 mini and would replace it instantly if it is lost or broken. My connection to the online world is through my iPhone, iPad, and MacBook Air. So, never say never. I might be writing an article using Vision Pro in five or ten years.”

The Bulls Are Back In Town (Of Dollars and Data)

• “This is the most concentrated bull market maybe ever. Even though a new bull market is upon us, it’s being driven by an exceptionally small number of stocks. As S&P Global recently noted, so far in 2023, the entire gain in the S&P 500 can be explained by just seven companies … It’s quite apparent that our current rally is a major outlier in terms of its lack of market breadth. In other words, a very small number of companies are driving all of the gains and that isn’t normal.”