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The Berkshire Beat: November 3, 2023
All of the latest Berkshire Hathaway news — including an unexpected Charlie Munger interview — and my must-reads of the week!
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The latest news and notes out of Omaha…
Berkshire Hathaway’s stake in BYD continues to get smaller and smaller. On Tuesday, a new filing out of Hong Kong revealed that Berkshire reduced its position in the Chinese EV maker’s H-shares down to 7.98% (as of October 25). Due to Hong Kong regulations, the next filing will come if/when this number dips under 7%.
Remember: That doesn’t mean Berkshire owns 7.98% of BYD as a whole. Just 7.98% of the company’s Hong Kong-listed shares.
And, in other BYD news, the EV maker reported Q3 2023 earnings this week and — as expected — totally crushed it. BYD’s quarterly earnings hit a new all-time high of $1.42 billion, an 82.2% increase over a year ago. Not bad at all.
Last week, Warren Buffett bought 3.92 million more shares of Occidental Petroleum at prices above $60 per share. But that’s not the only thing we learned from that October 25 filing. Oxy has now redeemed over 15% of the preferred shares that Berkshire received in 2019 as part of the Anadarko deal.
Back in August, Oxy reported the preferred share count as 88,312 — and now it has dropped to 84,897 (as of September 29). That means 3,400+ of these high-yielding shares have since been redeemed at $110,000 a piece. From this, I believe we can infer that higher oil prices led to enough Q3 share repurchases to keep Oxy above the $4 mandatory redemption line.
Any time Oxy distributes more than $4 per share to stockholders over the trailing twelve months, it triggers a mandatory dollar-for-dollar redemption of the preferred shares.
I’m not a lawyer (nor did I stay at a Holiday Inn Express last night), so I won’t even attempt to weigh in on the legal merits of Pilot’s lawsuit against Berkshire. Other than to say that, as a Cleveland Browns fan, I have a healthy distrust of all things Haslam. For more on this situation, I strongly recommend checking out this article byfrom earlier in the week.
Here’s a quick excerpt: “I find it inconceivable that Warren Buffett has done anything underhanded in this matter. Mr. Buffett was probably not pleased to pay a high price for the 41.4% stake in January 2023 and might not be happy with paying a high price for the remaining 20%, but it makes little sense that he would manipulate the terms. After all, this is a man who completed a tender offer for XTRA shares on September 11, 2001, even though he had a legal ‘out’ since the stock market had closed due to the terrorist attacks and it was clear that stocks would be down substantially when markets reopened.”
Some late-breaking earnings updates from notable names in the Berkshire orbit:
Kraft Heinz raised its full-year earnings estimate for the second time this year after beating profit expectations by nearly 10 cents per share in Q3.
Paramount Global impressed the market by cutting its streaming losses to just $238 million — as compared to $424 million in the second quarter. CEO Bob Bakish took a victory lap: “In Q3, we successfully grew Direct-to-Consumer revenue and Paramount+ subscribers while narrowing DTC losses over 30%. In fact, we now expect DTC losses in 2023 will be lower than in 2022 — meaning streaming investment peaked ahead of plan. Looking ahead, we remain on the path to achieving significant total company earnings growth in 2024.”
Apple beat expectations on both the top and bottom lines, but sales declined for the fourth quarter in a row. iPhone 15 looks good, though. “If you look at iPhone 15 for [this quarter] and compare it to iPhone 14 for the same time in the year-ago quarter, iPhone 15 did better than iPhone 14,” CEO Tim Cook told CNBC.
The Wall Street Journal spoke to Alex Rodriguez, the fourteen-time Major League Baseball all-star, about the best advice he ever received from Warren Buffett: “It’s just the long term. No shortcuts. Always be a gentleman and pick your lane. Go narrow and deep and master that. But really think about nothing short term.”
Berkshire Hathaway insured A-Rod’s $252 million contract with the Texas Rangers in 2000, which led the 25-year-old star player to cold call Buffett — and the pair quickly bonded over their shared love of baseball.
A dust-up in Wyoming over rising electricity prices has put Rocky Mountain Power, a subsidiary of Berkshire Hathaway Energy, in the state’s crosshairs. Residents angry over a proposed 21% price hike (which could grow to 29%) blame the shift to renewable energy — in particular, wind farms — while Rocky Mountain Power counters that spiking net power costs are the true culprits.
Tensions are running high, with one state representative threatening especially drastic action: “I’m not too sure that the state shouldn’t take over your business, buy you out, and deliver the electricity to our people.”
Gary Hoogeveen of Rocky Mountain Power: “Net power costs for [us] are akin to gasoline for a gas station. If a gas station’s third-party suppliers raise their cost, the gas station will pass that increase along to its customers in the form of a higher price per gallon.”
Berkshire will release its Q3 2023 earnings report bright and early tomorrow morning. Set your alarm clock for 8 a.m. ET! I’ll have a full write-up on the results coming your way on Monday.
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In the Spotlight: Charlie Munger on Acquired
Well, this was a nice surprise.
On Monday morning, the excellent Acquired podcast released an hourlong interview with Charlie Munger — which dove deep into the legendary investor’s career and his unique outlook on life.
And, as always, the 99-year-old minced absolutely no words.
I’ve pulled out many of his best comments down below, but I’m particularly struck by how often Munger returned to the idea that it’s really hard to find great investments. And that, if anything, it’s only getting harder.
So, on that upbeat note, let’s dive in…
On safety vs. leverage:
Warren still cares more about the safety of his Berkshire shareholders than he cares about anything else. If we had used a little bit more leverage throughout, we’d have 3x as much now. And it wouldn’t have been that much more risk, either. We just never wanted to [have] the least chance of screwing [this] up.
On how Berkshire treats its subsidiaries:
Our people know that we’re not trying to discard them to the highest bid. If some asshole investment banker offers us 20x earnings for some lousy business, we don’t sell. If it’s a problem business that we’ve never been able to fix, we’ll sell it — but if it’s a halfway decent business, we never sell anything. That gives us this reputation [for] staying with things, which helps us.
On the increasing difficulty of finding great investment opportunities:
There was a lot of low-hanging fruit in the early days of our operation. You don’t have any low-hanging fruit that’s easy [to find] right now.
The low-hanging fruit for the idiot is not gone, but it’s very small.
On betting big on your best ideas:
You may find [a once-in-a-lifetime company] five years after you bought it. These things might work into it or your own understanding may get better. But when you know you have an edge, you should bet heavily. They don’t teach that in business school. It’s insane — of course you’ve got to bet heavily on your best bets!
On the types of companies that he likes to study:
I only study two kinds of companies: (1) I’m enough of a Ben Graham follower that if something is really cheap, even though it’s a crappy company, I’m willing to consider buying it — for a while, anyway. I do that occasionally. I’ve done it with great success a time or two … but it’s not like I’ve done it a hundred times.
(2) The great brand companies, of course, are good — [if] you can get them at the right price. The whole trick is to get them on the few rare occasions when they’re really cheap.
Munger also dished on some Berkshire Hathaway holdings of the past and present.
See’s Candies: “We found out fairly quickly that we could raise the price every year by 10% and nobody cared. We didn’t make the volumes go up or anything like that. [We] just made the profits go up. So we’ve been raising the price by 10% a year for all these forty years or so.”
“It’s been a very satisfactory company. [See’s] required very little new capital. We had two big kitchens and a bunch of rental stores when we bought it — and, now, it’s [still] got two big kitchens and a bunch of rental stores.”
BYD: “I may be a big fan [of BYD], but I’m sort of hanging onto my hat as they lurch around the track. They make me nervous. It’s so aggressive.”
Sogo Shosha: “That [was] a no-brainer. Something like that, if you’re as smart as Warren Buffett, maybe two or three times in a century you get an idea like that. The interest rates in Japan were half a percent a year for ten years … so you could borrow for ten years ahead and buy the stock [that comes with] 5% dividends. So there’s a huge flow of cash with no investment, no thought, no anything. How often do you do that?”
“It took [Warren] forever to get $10 billion invested, but it was just like God opening a chest and pouring money [into it]. It was awfully easy money.”
Apple: “Everybody needs some significant participation in the twelve companies that do better than everybody else. You need two or three of them, at least. If you have that mindset, Apple was the logical candidate … We couldn’t find anything else [and] it got cheap. It got down to about 10x earnings when Warren bought in.”
Salomon: “If [Salomon Brothers] had all blown up and gone to zero, we would have written it off and gone on and done pretty well.”
Many thanks to Ben Gilbert and David Rosenthal over at Acquired for facilitating such a wonderful and thought-provoking discussion!
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Other awesome things that I read this week…
“Good investing is mostly ‘boring’ work with brief moments of excitement. I say ‘boring’ because the research process is boring to most people, but not to everyone. It is an endless loop of keeping up with the world and trying to understand things — a company, an industry, a trend, a technology, an event — by reading, crunching data, and talking to people. Every once in a while, things get exciting. Like when you find a great idea or when the market punches you in the face. And in exactly those moments, you have to resist and remain calm. It’s the inverse of how most people go through life: they run from the grind of mundane work and throw themselves into thrills.”
“Despite our best efforts to outsmart the market, many of our favorite ideas could prove to be mediocre investments. It could be that a single 1% asymmetric bet, left to its own devices, would come to dominate an otherwise average collection of investments. This single bet could drive the returns of the entire group such that the portfolio still outperforms the market even though the outperformance comes from a single investment.”
“One of my most healing realizations is that the more you cringe about something in your past, the more you must have grown in the interim. Otherwise, you wouldn’t cringe! Your shame is a lesson, a pain that stops you from repeating the same mistake. This means you are free to stop torturing yourself, you just have to make sure you’re acting differently.”
“Staying invested — or continuous accumulation of an index — can lead to multiples of your money … This is life-changing in so many ways but it doesn’t sound smart, nor does it sound exciting. Add to this the churn in your stomach that stock market movements bring about. No wonder most investors keep jumping in and out of markets, never reaping the gains available to them if only they believed in human ingenuity to find solutions to problems and stayed put for the markets to recover.”