Halls of Shrewd'm / US Policy❤
No. of Recommendations: 21
You all may disagree but today, in part, underscores a bigger picture: Berkshire Hathaway continues its multi decade transition into a collection of operating companies, consistently reducing stock holdings relative to the overall enterprise size. Warren is teeing up OpCo Berkshire for his operating guy, Greg Abel, who will take FULL control.
Just as Charlie Munger was the architect of Berkshire Hathaway for Warren Buffett …Warren Buffett is the architect of the rapidly evolving newer Berkshire Hathaway for Greg Abel. Who, not at all coincidentally is his chief operating guy today..
Right-sizing a bloated Apple position just makes sense (though the quickness & size surprised) but Buffett’s priority this millenium is heavily tilted away from public stocks and towards the acquisition of entire businesses. This is a longer term trend. Sure if public equities crash and he can grab a fire sale he’ll always buy a buck for 50 cents.
But I look for Berkshire to continue its tilt, perhaps even more aggressively, toward acquisitions. Away from public stocks. I also think he might like to do a complete public stock buyout ala Burlington Northern and GEICO. Sure looks like Occidental may be a possibility. I think a large Insurance Company deal is also very possible. Because at its heart—this IS an Insurance business first and foremost. That’s our main engine and always has been.
The book value multiple comparisons over time have become,to me, almost irrelevant. I mean 1.4 times Coke ON TOP of several times KO book is insane valuation. That’s kinda the 1990 book. 1.4 times Burlington Northern? Conservatively rational. More 2024 type book. As we become a collection of OpCos…book multiples HAVE and should RISE over time…. Then there’s the crazy newer GAAP rules valuing stock movements each quarter. That moves Book Value multiples COMPARATIVELY from almost meaningless —to outright deceptive.
OTOH Operating Earning are now and will continue to be INCREASINGLY indicative of Berkshire’s progress and economic health. And selfishly I like that lol: they’re an easy read. Berkshire will become increasingly EASIER to value. Berkshire is doing well. Greg Abel will inherit a gem of a company.
No. of Recommendations: 18
You all may disagree but today, in part, underscores a bigger picture: Berkshire Hathaway continues its multi decade transition into a collection of operating companies, consistently reducing stock holdings relative to the overall enterprise size.
I appreciate that this is our general understanding of the firm, and I kind of buy it as a general strategic direction, but for whatever it's worth these are my figures:
Investments per share as fraction of total value of company, end 2013: 61.6%, equities as fraction of investments per share: 79%
Investments per share as fraction of total value of company, 2024-Q2: 63.0%, equities as fraction of investments per share: 76%
If there is a trend of operating earnings coming to dominate the value, it is being very cagey about betraying itself in the numbers so far.
Similarly, if I divide my "fancy" company valuation by book value to find the implied fair P/B ratio, it is not a rising trend, but if anything a slightly falling one.
Granted, operating profitability has been dire in the last couple/few years in the utilities and railroad, so maybe they are worth more than they appear because earnings are only cyclically depressed, and by extension the operating companies are a somewhat larger fraction of the value pie than I have estimated. But I've tried to estimate that, and it doesn't really change the result.
For anyone wondering what I'm talking about, here are the inflation-adjusted rolling-four-quarter after-tax earnings in the rail and utility divisions in the last 21 quarters. Try graphing the figures.
BNSF Util
6571 3272 Four quarters to 2019-Q2
6647 3372
6695 3469
6580 3396
6385 3458
6158 3675
6228 3730
6236 3861
6542 3897
6659 3952
6767 3949
6759 3918
6722 3833
6519 3869
6267 4114
6091 3735
5602 3708
5324 2561
5203 2384
5044 2664
4949 2504 Four quarters to 2024-Q2
Rolling year real Manufacturing/Service/Retail profit has risen 3.3%/year in this period, but a good part of that is the acquisitions of PCP and Pilot--the businesses are not prospering in a notable way.
Jim
No. of Recommendations: 2
Wow…that is a very interesting idea. And quite simply logical.
Brilliant.
Thank you.
m
No. of Recommendations: 5
The MULTI decade transition IS very clear, though you are right about the most recent period—which I agree shows a “flattening” which appears to look like “change” but is IMO a necessitated PAUSE.
The period you cite was a zero/ ultra low internet rate period that was not conducive to available-for-sale elephant purchases. It was a period of generally high business valuations. It paused Berkshire’s purchase activity GENERALLY…with a very nice exception—a fantastic opportunity which happened to be available in the general stock market: namely Apple. Unlike Burlington & GEICO—neither the market cap nor the corresponding low interest rate/market environment offered the opportunity, if he chose, to take it private and fold into the OpCos. So you take a period of low rates/high prices AND your opportunity-of-that-decade is a bigger company than yours, publicly owned? You buy a chunk in the stock market, yes.
The term “multi decade trend” is key. Buffett tries to remind us of this as he often prints graphs showing the trajectory of operating earnings from subsidiaries longer term and it’s a rocket launch—and a substantial flip from the business that existed just 25 years ago. Berkshire’s transitioned from a company that made money from holding stocks and some bonds-to a company that runs businesses. I think that trend re-accelerates and the perfect new CEO for such is chosen. But sure, if in the next 10 years the future Apple/Coke/Amex of 2035 is a stock quote—Berkshire will buy the stock.
No. of Recommendations: 2
I appreciate Mr Buffett's discussions of non-controlled businesses (common stock holdings) in recent letters, as well as his focus in those letters on Berkshire Hathaway's defensive nature. He's described his satisfaction with individual stock holdings which account for relatively minor portions of BRK's book value (~5%), particularly if those businesses are good enough to maintain (or improve) that proportion as time passes. And he's clearly interested in avoiding permanent loss of capital, whether due to overpaying for the stake or erosion of the business moat possessed by the investee.
Taken together, I view the recent Apple sales as a measure to reduce exposure to an increasingly expensive stock market. This holding had come to represent something like a third of Berkshire's book value, whereas it's now been reduced to the vicinity of 14%. All of Mr Buffett's comments indicate that he loves Apple's business and its management, and is perhaps comfortable with that level of concentration. I would not be surprised if he has completed his "right-sizing" of this position. There seems to be only a minor chance of permanent loss of capital from a purchase cost standpoint, as I am guessing the remaining 400 million shares have a cost basis of around $12 billion.
On the other hand, Bank of America sales may well proceed during the third quarter (at the right price). It seems to that BAC really stepped in the "pile of poo" by purchasing mass quantities of government securities having durations up to ten years(just my impression, but they seem to be running off pretty slowly) back in the days of very low interest rates, and now finds itself with a third of its capital "impaired" by today's higher rates (I doubt they'll have to sell these "held-to-maturity" securities, but who knows?!). Meanwhile, Berkshire held 333 million BAC shares (acquired subsequent to the conversion of its wonderful warrant - 700 million shares at $7.15 each!), at a cost basis of nearly $29/share. I can see a desire to reduce the holding back to the 700 million level. At that level, and a guesstimated price of $40, BAC would be a smaller percentage of BRK book value than AmEx, which as another poster commented is clearly the better business.
No. of Recommendations: 12
The MULTI decade transition IS very clear, though you are right about the most recent period—which I agree shows a “flattening” which appears to look like “change” but is IMO a necessitated PAUSE.
I don't disagree about the *strategy* of shifting to more operating earnings. There is a stated preference for buying companies in their entirety.
But I would place the emphasis on "necessitated". It is a necessitated pause, perhaps even a necessitated ending.
I think BNSF mistakenly led us to believe that the future was in elephants, but there just aren't any more that size for sale, and may never be. It was extremely anomalous. Perhaps that was the capstone, the end of the era of big acquisitions relative to the size of Berkshire.
Consider:
Most bosses and boards of firms worth over (say) $75 billion are in a position to extract vast sums of money into their own pockets regularly (perhaps earning it, perhaps not), and have no personal motivation to agree to a sale. And if there is such a company willing to be sold, they'll arrange an auction to avoid getting sued. As the saying goes, show me the incentive and I'll show you the result.
I would love to see the trend continue, to see a couple more huge and long-term acquisitions. But it doesn't seem very likely. There may never be another material one.
Jim
