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The Berkshire Beat: March 31, 2023
The latest Berkshire Hathaway news and my must-reads of the week!
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The latest news and notes out of Omaha…
Last time out, I wondered whether Warren Buffett hit pause on Occidental Petroleum while he sifted through the regional bank meltdown in search of Goldman/BoA-esque financing deals. How else to explain the lack of purchases between March 16-22? Well, either way, OXY 0.00%↑ is now unpaused. On March 23 and March 27, Berkshire Hathaway bought 3.66 million more shares of the oil giant for $216.2 million. That boosts Berkshire’s overall stake up to 23.5%.
David Deckelbaum of Cowen spoke to FOX Business about Buffett’s continued interest in Oxy: “I think he feels comfortable with the base value and returns, but sees upside from combinations for scale and longer-term growth initiatives such as carbon capture.”
And don’t forget about those warrants for 83.8 million more shares of Oxy common stock. Let’s assume for a moment that Buffett eventually exercises them at the agreed-upon price of $59.62 per share. (After all, he’s been a steady buyer at that price level.) Berkshire would then own 30.0% of the company. Plus, that should only get bigger as Oxy buys in more of its own stock. CEO Vicki Hollub announced a new $3 billion repurchase authorization in February.
The most interesting information can usually be found in the footnotes. From Berkshire’s latest Form 4: “The warrants were initially for 80,000,000 shares with an initial exercise price of $62.50 per share. On June 26, 2020, [Oxy’s] board of directors declared a distribution to its common shareholders of warrants to purchase additional shares of common stock, which … resulted in an anti-dilution adjustment to the warrants, which lowered the exercise price to $59.624 and increased the number of shares issuable on exercise of the warrants to 83,858,848.81.”
Things continue to look up for Microsoft’s $68.7 billion acquisition of Activision Blizzard (and Berkshire’s resultant arbitrage play). On Tuesday, the Japan Fair Trade Commission said the deal is “unlikely to result in substantially restraining competition” and, therefore, granted its approval. Another big win for Microsoft.
Activision Blizzard CEO Bobby Kotick provided an update on the merger in an email to employees that was also published on the company’s Substack. (Who knew ATVI 0.00%↑ is on Substack?!?) Kotick: “The good news is, regulators who initially had concerns about console competition are starting to better understand our industry. The data and evidence Microsoft has been presenting are tilting the scale.”
🤑 March 31 is a big dividend day for Berkshire — Warren Buffett and co. will receive $227.2 million from Bank of America and $130.2 million from Kraft Heinz.
Nothing new to report on my search for Buffett’s “lost” 1956 partnership letter. As soon as I learn anything — good or bad — I will share it with everyone here. In the meantime, though, I’m on the hunt for something else: Ted Weschler’s letters from his Peninsula Capital Advisors days (1999-2011). Has anyone ever seen a collection of these letters? Or know where to find them?
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More coverage of Warren Buffett, Charlie Munger, and Berkshire Hathaway. More investing lessons from the likes of Henry Singleton, Li Lu, and Walter Schloss. More transcripts of notable interviews and events.
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Berkshire Hathaway: “Growing Value”
It’s not every day that we get frank commentary about Berkshire Hathaway from one of the company’s own directors.
Christopher Davis has served on the Berkshire board since October 2021, in addition to similar positions at Coca-Cola and Graham Holdings Company. He also runs the Davis New York Venture Fund alongside fellow portfolio manager Danton Goei.
In his annual letter to clients, Davis delivers extended commentary on some of his fund’s larger holdings. One of which just happens to be Berkshire Hathaway.
In terms of conventional risks, Berkshire is built to weather almost any conceivable financial (and literal) storm. While there is a risk that the company’s stock price may decline precipitously should Warren Buffett ever step down (or worse!), we do not consider such price declines a fundamental risk, especially given the company’s substantial liquidity and willingness to buy in shares when they are undervalued. Instead, we consider the most important risk to be the degradation of the company’s outstanding and unconventional corporate culture should successor managers be tempted to pursue the sort of financial engineering advocated by Wall Street banks, activists, and other short-term investors at the expense of long-term shareholder value. We do not see any indication of this risk on the horizon, but will stay active and vigilant should it ever arise.
I’m in complete agreement with Davis about the importance of Berkshire’s culture. (And I fear that it might prove to be more fragile than the optimists believe.)
Happily, Davis’s words are yet more evidence that Warren Buffett and Charlie Munger have done everything possible to preserve Berkshire’s culture far into the future. Including stocking the board with men and women who recognize the risk of cultural slippage — and who will fight tooth and nail to keep Berkshire just the way it is.
Other awesome things that I read this week:
“Book knowledge is relatively easy to come by in investing. So is quoting famous successful investors and adopting their investment approach. What is not always easy is the discipline and awareness to stick to your process when under tremendous pressure — which is exactly the time when doing so matters most. As Mike Tyson famously said, ‘Everyone has a plan until they get punched in the face.’”
“See’s Candies taught Buffett and Munger about the value of ‘powerful brands’, an insight that would pay further dividends for Berkshire Hathaway over time; as Buffett noted at the 1997 shareholder meeting, ‘If we hadn’t bought See’s … we wouldn’t have bought Coca-Cola in 1988; you can give See’s Candies a significant part of the credit for the $11 billion-plus profit we’ve got in Coca-Cola at the present time.’”
“Since Warren Buffett took over Berkshire Hathaway in 1965, Berkshire compounded at roughly 20% per year. This means an investment of $10,000 would be worth more than $800 million (!) today.”
Davis New York Venture Fund’s Annual Review 2023 (Christopher Davis)
The Berkshire director also dropped this very interesting non-Berkshire take in his annual letter: “Given Meta’s great success in acquiring and/or building three of the largest social networks in history, we think the company has earned the right to invest a certain percentage of current profits into [the metaverse]. We would even go further to say that, in general, we are encouraged when proven managements are willing to sacrifice short-term profits to better position the company for long-term growth. If these investments don’t pay off, we have every confidence that META 0.00%↑ will cut spending to increase profits. If they do pay off, the profit potential is exponentially more. Given that the company is trading at a reasonable valuation even after making these investments and at a single-digit multiple excluding them, we consider the metaverse spending to be a free option with improbable but enormous upside.”
“I’ve always believed that one of the best principles in the market is to have ‘high convictions loosely held’. This means you do your work and are sure of it, but are willing to change, adapt, and adjust according to new information received. Act always on first principles. Ultimately, I do believe [Jerome] Powell achieved this. Now, you could say that he was slow and far too reactive rather than proactive when it came to calling inflation transitory. But when there is a systemic risk as there has been in the banking sector, level-headed patience, deep due diligence, and the willingness to solve the problem at its root are all critical to finding a long-term solution.”