The Berkshire Beat: November 10, 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…
The Charlie Munger interview tour continued last week as the 99-year-old spoke with Karen Langley of the Wall Street Journal for two hours.
Will Berkshire Hathaway make another big acquisition under his and Warren Buffett’s watch? “It’s at least 50/50. Venture capital has made it so difficult for everybody. They keep bidding the prices up and up and up — and, of course, that makes the results go down, down, down.”
Has Apple gotten too expensive to remain such a big part of Berkshire’s portfolio? “I don’t think we’ve got any rules about what we do at Berkshire. If it makes sense at the time in a rough kind of way, we do it. That’s our system. I would argue that Berkshire would have less advantageous future prospects if we didn’t have our Apple [holding].”
What cognitive biases should investors guard against? “There are lots of cognitive biases that are very significant. One is the constant tendency to overrate your own intelligence and skills in deciding what to do and what not to do.”
Should the average investor dabble in stock-picking? “Most people probably shouldn’t do anything other than have index funds. That is a perfectly rational thing to do for somebody who just doesn’t want to think much about it and has no reason to think he has any advantage as a stock picker. Why should he try and pick his own stocks? He doesn’t design his own electric motors and his egg beater?”
On Wednesday, Whitney Tilson released his current intrinsic value estimates for Berkshire: $582,000 for Class A shares and $388 for Class B shares. “The stock is currently trading at a 10% discount to my estimate of its intrinsic value … I still like it because it’s still somewhat undervalued, incredibly safe, and its intrinsic value is growing nicely.”
🤑 Today is yet another dividend day for Berkshire Hathaway — with $90.96 million coming in from long-time holding American Express.
Berkshire also pocketed $2.27 million in quarterly dividends from Mastercard on Thursday.
Occidental Petroleum’s Q3 2023 earnings of $1.2 billion beat expectations, but nevertheless fell well short of last year’s results due to lower oil prices. Oxy spent $600 million on common stock repurchases in the third quarter, which boosts Berkshire’s stake in the O&G giant up to 25.9% — and triggered $342 million in preferred stock redemptions.
Which, in turn, cuts the quarterly dividend that Oxy pays on the preferred from $200 million (at the start of the year) to $169.8 million now. No doubt Vicki Hollub and co. are thrilled to finally chip away at this sizable obligation.
CFO Rob Peterson warned not to expect further redemptions in Q4: “It’s unlikely that cumulative distributions to common shareholders will be above the $4 per share trigger again this year, primarily due to the concentration of share repurchases in the second half of 2022.” Of course, he said the same thing last quarter and we saw how that turned out — so who knows.
Oxy and BlackRock also announced a joint venture to develop the STRATOS Direct Air Capture (DAC) plant in Texas — with BlackRock kicking in $550 million to push the project along. STRATOS is about 30% complete with commercial operations set to begin in mid-2025.
Hollub: “This joint venture demonstrates that Direct Air Capture is becoming an investable technology — and BlackRock’s commitment in STRATOS underscores its importance and potential for the world.”
According to a new filing, Berkshire is planning to sell more yen-denominated bonds in the near future. Which could, of course, be the prelude to Warren Buffett increasing his investment in the five leading Japanese trading companies even further. Stay tuned.
Buffett’s strategy seems pretty simple: issue cheap yen-denominated debt and then buy shares of the sogo shosha with the proceeds. Charlie Munger recently called this a “no brainer” and likened it to “God opening a chest and just pouring [in] money”. Sounds pretty good to me.
And, in other news, all five of these trading houses raised their full-year profit forecasts over the past two weeks.
On Tuesday, BNSF and J.B. Hunt launched a new premium intermodal service that claims to bring some of the reliability of trucking to the rails. Up until now, intermodal offered lower costs — at the expense of on-time delivery and speed. This new Quantum service, though, promises to change that. “Trucks provide on-time service to shippers 95% of the time or more,” intermodal analyst Larry Gross told Trains. “If intermodal can provide that level of reliability while saving shippers money, many more will be willing to trust their freight to the rail and intermodal’s share of the market will grow.”
For the second time in the last few years, ProPublica has set its sights on Berkshire. In 2021, leaked IRS data revealed the eye-popping size of Ted Weschler’s Roth IRA (which, if anything, should be viewed as an endorsement of his investing ability) and, now, is back to cast aspersions on Warren Buffett’s activity in his personal portfolio. In the interest of fairness, I recommend that any Berkshire or Buffett fan read the ProPublica story — but, based on its contents, this seems like a tempest in a teapot.
Back in 2016, this very subject came up at the Berkshire annual meeting and we learned that there was some small overlap between Buffett and Munger’s private portfolios and Berkshire’s much-larger one. Munger admitted that he (obviously) owned Costco stock — and so did Berkshire (at the time). “There are two or three little overlaps like that [in our personal portfolios].”
I wouldn’t be surprised if we see Buffett release a letter on the Berkshire website — like he did for the Activision Blizzard situation — in the coming days to respond to ProPublica’s story.
Odds & Ends from Berkshire Hathaway’s 10-Q
Berkshire Hathaway’s quarterly earnings always take a little while to sift through and digest. If you want an overview of Berkshire’s Q3 performance, I recommend checking out my article from earlier in the week — or this one from
.But, while re-reading the 10-Q over the past few days, a few more items caught my eye…
IMC (International Metalworking Companies) — which includes ISCAR — increased revenues by 8.2% in the third quarter, but earnings were nevertheless “relatively flat”. Most importantly: “A large portion of IMC’s products are manufactured in Israel. To date, IMC’s operations in Israel have not been significantly impacted by the terrorist attack on Israel on October 7, 2023, and the ongoing conflict.”
Pilot’s pre-tax earnings fell by 59.5% due to significantly lower fuel prices. Lower sales volume, too, as Pilot sold 12.2 billion gallons of diesel fuel, gasoline, etc. through the first nine months of 2023 — compared to 13.6 billion gallons in the same period last year.
The rapid rise of home mortgage interest rates took a toll on Berkshire’s building products group, with revenue declining by 11.2% and pre-tax earnings by 5.6%. Over at Clayton Homes, new home unit sales dropped by 17.5% through the first nine months of the year. As a result, Clayton’s pre-tax earnings sank 14%.
Berkshire’s aviation services unit — NetJets and FlightSafety — boosted its revenue by 8.3% in the third quarter due to higher rates, increased number of aircraft at NetJets, and a year-to-date increase in flight hours across NetJets’s various programs.
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More Must-Reads
Other awesome things that I read this week…
“Reading requires a lot of effort and patience. Hearing language versus reading it engages different mental processes. Reading forces you to move more slowly. If an author explains an idea to you, the constraints of natural conversation mean that you can’t just pause for ten minutes while you think deeply about what he or she just said and then subsequently resume the discussion. Books enable you to do that.”
“An addiction to news is a combatant to boredom. Over the decades, news has mutated from a largely localized distribution to one that is global in scale. On a local level, not much interesting happens weekly. On a global basis, there is bad news every single day; which we are now subject to. In the market, if you are looking for an opinion, you will find one, because the rate of hyperbolic discussion about nothingburgers has exploded too. Increasing your consumption of news will not make you a more informed investor, it will make you a more anxious one.”
Dividends Are a Return on Investment and a Return of Investment
“If you bought Microsoft at the end of 2012, you paid $26.71/share. You’d have received $19.08/share in dividends. Investors who owned Microsoft for over ten years have received over 70% of their original investment back in the form of dividends. Dividends represent a return on investment and a return of investment.”
How Pilot Strategizes For Its $1B New Horizons Program (C-Store Dive)
“Pilot employs artificial intelligence during the planning phase, [COO Brad] Anderson said — using advanced analytics and other data sets to scope out which stores it needs to remodel, taking into account things like fuel gallons sold, positioning along highway routes, and demographic information for each location. Once it selects a location, Pilot then uses its own in-house data sets, such as first-party sales and customer data, to outline the remodel.”
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Always excellent ✨