The Berkshire Beat: June 30, 2023 🇺🇸

All of the latest Berkshire Hathaway news and my must-reads of the week!

Happy Friday and welcome to our new subscribers!

Special thanks, too, to those who recently became paid supporters! ❤️

The latest news and notes out of Omaha…

• Berkshire Hathaway’s stake in BYD continues to get smaller and smaller. On Monday, a new filing out of Hong Kong revealed that Berkshire recently reduced its interest in the Chinese EV maker down to 8.98% (as of June 19, 2023). In all, its total has dropped from 225 million H-shares to 98.6 million since last August. Due to Hong Kong regulations, the next filing will come if/when Berkshire’s position dips under 8%.

• Can’t stop, won’t stop: Warren Buffett and co. purchased 2.13 million more shares of Occidental Petroleum over the first three days of this week — at prices ranging from $56.49 to $57.25. This $122.1 million outlay boosts Berkshire’s stake in the oil-and-gas giant up to 25.1%.

  • We learned something else from Wednesday night’s Form 4, too. Oxy redeemed another 1,568 of Berkshire’s preferred shares since the last filing on May 30. Berkshire still holds 91,964 of these high-yielding preferreds (via the Anadarko financing deal), though I expect Oxy to keep whittling away at them in the coming months.

• 🤑 Today is a big dividend day for Berkshire — with over $350 million rolling into Omaha from two of the conglomerate’s biggest holdings. Berkshire will receive $227.2 million in quarterly dividends from Bank of America and $130.2 million from Kraft Heinz. That’s a lot of capital to allocate — but something tells me that Buffett is up to the challenge.

• Speaking of Bank of America, CEO Brian Moynihan granted a wide-ranging interview to CNN earlier this week. “We think it will take [Fed officials] all of this year and all of next year and into 2025 before they get inflation in line with their long-term [2%] target.” He also predicted a mild recession starting “in the first part of next year”.

  • More Moynihan: “The [banking] industry has great, strong capital and strong liquidity. These specialized businesses (like Silicon Valley Bank) had a problem that went through the system, but the system recovered and you’ll see in the earnings reports this quarter, good earnings.”

• The long, drawn-out saga of Microsoft’s $68.7 billion acquisition of Activision Blizzard might finally be coming to an end. What end, though, remains unclear. For the past week, the two companies have sparred with the FTC inside a federal court room over a temporary injunction that could scuttle the whole deal. A decision from the judge should come next month — and, as Reuters points out, might be the final word on the matter. “In the past, the side that lost in federal court often conceded and the in-house [FTC] process was scrapped.”

• On Monday, I reviewed the seventh edition of Security Analysis. The next day, Seth Klarman of the Baupost Group (and editor of the new Security Analysis) hopped on CNBC to promote the book and share his thoughts on the market. “[Security Analysis] has some important reminders for people about the dangers of speculation and the importance of remembering what kind of environment you’re in … You have to look at the moment you’re in and say, ‘What of this is real?’”

  • Klarman also tackled the value vs. growth stock debate. “Warren Buffett has shown all of us the value of growth. He thinks hard about some of the highest-quality businesses in the world — but only buys them when they’re at attractive prices.”

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Don’t Bet Against America 🇺🇸

On Tuesday, the stock market will be closed in observance of Independence Day.

So I decided to dedicate this section to our newsletter’s (living) patron saint, Warren Buffett, and his unwavering faith and optimism in the United States of America.

Almost every year in his annual letter, Buffett waxes lyrical about the prosperity created here since 1776 — and how the American Dream remains alive and well for anyone still seeking it.

Whether you live in the United States or just invest in companies based here, we’re all beneficiaries of what Buffett calls the “American Tailwind” — propelling all of us into a better (and more profitable) tomorrow.

In 2020, Buffett’s annual letter took readers on a tour of select Berkshire Hathaway subsidiaries that he felt best exemplified the opportunity on offer in America.

🍬 See’s Candies:

Success stories abound throughout America. Since our country’s birth, individuals with an idea, ambition, and often just a pittance of capital have succeeded beyond their dreams by creating something new or by improving their customer’s experience with something old.

Charlie [Munger] and I journeyed throughout the nation to join with many of these individuals or their families. On the West Coast, we began the routine in 1972 with our purchase of See’s Candy.

A full century ago, Mary See set out to deliver an age-old product that she had reinvented with special recipes. Added to her business plan were quaint stores staffed by friendly salespeople. Her first small outlet in Los Angeles eventually led to several hundred shops, spread throughout the West.

Today, Mrs. See’s creations continue to delight customers while providing life-long employment for thousands of women and men. Berkshire’s job is simply not to meddle with the company’s success. When a business manufactures and distributes a non-essential consumer product, the customer is the boss.

And, after 100 years, the customer’s message to Berkshire remains clear: “Don’t mess with my candy.”

🚗 GEICO:

In 1936, Leo Goodwin, along with his wife, Lillian, became convinced that auto insurance — a standardized product customarily purchased from agents — could be sold directly at a much lower price. Armed with $100,000, the pair took on giant insurers possessing 1,000 times or more their capital.

Government Employees Insurance Company (later shortened to GEICO) was on its way.

By luck, I was exposed to the company’s potential a full seventy years ago. It instantly became my first love (of an investment sort). You know the rest of the story: Berkshire eventually became the 100% owner of GEICO, which at 84 years of age is constantly fine-tuning — but not changing — the vision of Leo and Lillian.

There has been, however, a change in the company’s size. In 1937, its first full year of operation, GEICO did $238,288 of business. Last year, the figure was $35 billion.

🛋️ Nebraska Furniture Mart:

The company’s founder, Rose Blumkin (“Mrs. B”), arrived in Seattle in 1915 as a Russian emigrant, unable to read or speak English. She settled in Omaha several years later and by 1936 had saved $2,500 with which to start a furniture store.

Competitors and suppliers ignored her, and for a time their judgment seemed correct: World War II stalled her business, and at year-end 1946, the company’s net worth had grown to only $72,264. Cash, both in the till and on deposit, totaled $50 (that’s not a typo).

One invaluable asset, however, went unrecorded in the 1946 figures: Louie Blumkin, Mrs. B’s only son, had rejoined the store after four years in the U.S. Army. Louie fought at Normandy’s Omaha Beach following the D-Day invasion, earned a Purple Heart for injuries sustained in the Battle of the Bulge, and finally sailed home in November 1945.

Once Mrs. B and Louie were reunited, there was no stopping NFM.

Driven by their dream, mother and son worked days, nights, and weekends. The result was a retailing miracle. By 1983, the pair had created a business worth $60 million.

Mrs. B, it should be noted, worked daily until she was 103 — a ridiculously premature retirement age as judged by Charlie and me.

NFM now owns the three largest home-furnishings stores in the U.S. Each set a sales record in 2020, a feat achieved despite the closing of NFM’s stores for more than six weeks because of Covid-19.

A post-script to this story says it all: When Mrs. B’s large family gathered for holiday meals, she always asked that they sing a song before eating. Her selection never varied: Irving Berlin’s “God Bless America”.

🏠 Clayton Homes // 🚚 Pilot Flying J:

Each company was started by a young man who graduated from the University of Tennessee and stayed put in Knoxville. Neither had a meaningful amount of capital nor wealthy parents.

But, so what? Today, Clayton and Pilot each have annual pre-tax earnings of more than $1 billion. Together, they employ about 47,000 men and women.

Jim Clayton, after several other business ventures, founded Clayton Homes on a shoestring in 1956, and “Big Jim” Haslam started what became Pilot Travel Centers in 1958 by purchasing a service station for $6,000. Each of the men later brought into the business a son with the same passion, values, and brains as his father.

Sometimes there is a magic to genes.

Horatio Algers, the lot of ‘em.

Buffett signed off this ode to the American heartland with a killer line that doubles as his patriotic mission statement:

Our unwavering conclusion: Never bet against America.

It’s not a popular sentiment in some circles, but I love that Buffett unabashedly preaches the good news of American capitalism — and the critical (and beneficial) role it has played both here and around the world. Long may that continue.

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More Must-Reads

Other awesome things that I read this week…

What Matters In The End?

Tom Morgan

• “I think it’s pretty intuitive that your time and attention are valuable. It’s why we use financial metaphors for paying attention and spending time. ‘Wisdom’ is just one way of describing how we can get increasingly better at focusing on what’s important. It is therefore unsurprising that the pursuit of wisdom strongly correlates with flourishing, growth, meaning, and pretty much everything else we’d want in our lives.”

From Hustle to Scale (Ian Cassel)

• “All great companies started out as small companies. The smaller the company, the more important the CEO, founder, management becomes. The smaller the company, the more hats the founder is forced to wear which amplifies his or her impact on the business. Bad decisions can destroy a small company. Great decisions have a compounding effect on a small company. If you don’t believe that founders and management are important to small companies like micro-caps, just wait a little longer. You will.”

Graham and Dudville (The Brooklyn Investor)

• “I remember watching the Michael Jordan documentary and someone said something about building the team and the culture at the Chicago Bulls that goes beyond just one player. Well, I think it’s obvious now that this one player was a huge part of it. This does not bode well for the post-Buffett, post-Munger world. Is it Buffett? Or is it [Berkshire’s] culture? I would tend to argue, like the Chicago Bulls and Jordan, it’s Buffett / Munger. But the good thing about BRK is that it’s not just about investing in stocks. It’s a bunch of operating businesses, too, so there may be talent on the operating side that can continue to do well and add value.”

A Few Questions (Morgan Housel)

• “Whose life do I admire that is secretly miserable? What do I believe is true only because believing it puts me in good standing with my tribe?”