Berkshire Hathaway AGM Update – What is Buffett buying and selling anyway?

Provided to subscribers May 21st.

Here’s the latest from Canadian Value Investors!

• Berkshire AGM update

• Todd Combs interview

• A beginner’s guide to researching microcap stocks

• A reminder that interest rates are not actually high

• The dangers of concentrated sales and big bets

Berkshire Hathaway AGM Update – What is Buffett buying and selling anyway?

We had the opportunity to once again attend the Berkshire Hathaway AGM in Omaha, Nebraska! Buffet and Munger were in top form (for two gentlemen in their 90s). If you missed the event, you can watch it here - https://www.youtube.com/live/UKw_NjWtg5w

That’s a lot of finance nerds.

We have watched so many of the AGMs (back to the 1990s thanks to YouTube) and so for us here at CVI it is really just going back to church to remember the basics. However, every year there is an interesting nugget or two. This year two were:

-Buffett on the previous small sale of Apple shares. It was tax advantageous for the capital gain that year but “a dumb decision”. 

-The Japanese bet on five companies (see our previous post; table provided again below) was supported by the Japanese yen notes they issued. https://www.bnnbloomberg.ca/warren-buffett-s-berkshire-sells-1-2-billion-of-yen-debt-after-big-japan-bets-1.1907592 Buffett spoke remarkably plainly about the trade – to paraphrase Buffett they are getting a 14% earnings yield in yen vs borrowing at 1% in yen, and now have a potential door into doing larger deals with the Japanese keiretsus. Not a bad trade.   

What are they buying and selling today over at Berkshire anyway?

The key highlights for us were:

1. Buffett is quite bearish on banks (after having a big bet for a number of years). He made comments about his negative outlook for banks in general at the AGM, and has been exiting pretty much everything except for Bank of America.

2. Full exit of Taiwan Semiconductor - “I don’t like its location, and I’ve re-evaluated that. I feel better about the capital that we’ve got deployed in Japan than in Taiwan. I wish it weren’t sold, but I think that’s a reality.” We never made a position either due to the Taiwan issue.

3. Buying a bit more Paramount, trimming Activision, fully exited RH – We had RH (Restoration Hardware) on our list of companies to look into. We have taken it off…

Todd Combs: Meeting Munger, Buffett and Joining Berkshire

Coinciding with the AGM, Todd Combs (one of two money managers working at BRK under Buffett) did a great interview for I AM Home. A call to Charlie Munger ended up with him getting a job at Berkshire 6 months later.

https://podcasts.google.com/feed/aHR0cHM6Ly9pYW1ob21lLmxpYnN5bi5jb20vcnNz/episode/MzMyY2VkNzktY2FhZC00ZTA4LWI1NmMtYTFjZGE4NmZmM2Vi  

Todd is multi-billion-dollar investment manager with Berkshire Hathaway and is also the President and CEO of GEICO. Today, we’re sitting down with Todd to talk about all the things that led him to Berkshire Hathaway. From sitting in a lecture hall at Columbia University listening to Warren Buffet give a lecture to meeting Charlie Munger in the California Club to accepting the job at Berkshire Hathaway.

A Beginner’s Guide to Researching Microcap Stocks

Just starting in investing? Check out this presentation by Ian Cassel and Michael Liu, “A Beginner’s Guide to Researching Microcap Stocks”.

https://youtu.be/gDcHGiIixLw

A reminder that interest rates are not high, they are just higher than they have been recently.

Inflation is also running hot in Europe still (and much stickier here in Canada too than the Bank of Canada’s original “transitory” view…

The dangers of concentrated sales and big bets – Structurlam

We came across this Chapter 11 / CCAA and find it to be a good reminder – beware of companies making big bets or beholden to large contracts. Structurlam is based in B.C. and has been around since 1962, but a big bet on a building contract with Walmart blew up the business.

They are a leading North American mass timber manufacturer and entered US Chapter 11 proceedings on April 27 with a connected Canadian filing. The company was involved in various headline projects across North America, such as the University of British Columbia Brock Commons (tallest wood structure at the time at 18 stories), Microsoft Silicon Valley Campus, and several Google campuses. These sound like the kind of high-profile projects you want. However, Structurlam entered a contract with Walmart in 2019 worth about $100 million, leading to a liquidity crisis when Walmart terminated the contract in January 2023 due to manufacturing problems. Long history and lots of experience, but the project was a bet the company type of deal and they lost.

https://www.alvarezandmarsal.com/structurlam

Initial filing here - https://www.alvarezandmarsal.com/sites/default/files/canada/Filed%20Petition%20%28S233209%29.pdf

CVI Portfolio Update – March 2023, Three Special Situations

Here’s the latest from Canadian Value Investors!

• Portfolio Update

• PBR Petrobras – Quick Note

• Three Special Situations – YI, MTCR, MAXR

• Charlie Munger at the 2023 Daily Journal AGM Notes

Favorite chart of the week – Fastest IPO bankruptcies of the SPAC boom. Some of these are just egregious. For example, Electric Last Mile IPO’d at a market cap of $1.4 billion through a reverse SPAC. https://www.cnbc.com/2021/06/28/electric-last-mile-is-the-latest-speculative-ev-company-to-go-public.html If you are curious what investors were told, here is the S-1 filing for the IPO. https://www.dropbox.com/s/f6w9oyfyjovc58s/20230304%20Electric%20Last%20Mile%20Solutions%20Inc._S-1A_2021-03-31_English.pdf

Portfolio Update

Petrobras NYSE:PBR.A – Quick Note

See our February 13th post in the website archive for full background of this position.

Since our purchase and post, Petrobras announced their quarterly dividend of R$2.7457336, or roughly 10% for the quarter, albeit a bit of a complex mechanism. We plan to spend our dividend cheque on a Pabst Blue Ribbon family pack. 2022 production was higher than target (2.674MM boe/d vs target of 2.6MM), refinery usage hit five-year highs, methane emissions intensity continues to decline, and they are running the largest offshore carbon capture program in the world. They are also trading at a 2-3x forward P/E. However, we expect this holding will be a rocky ride. https://www.reuters.com/business/energy/lula-bashes-petrobras-dividends-says-firm-invested-almost-nothing-2023-03-02/

Financial reporting, transcript, and presentation are here - https://www.investidorpetrobras.com.br/en/results-and-announcements/results-center/

For example, the government just announced a temporary suspension on asset sales, which does not have any material impact but provides an indication of their mindset. More importantly, the Lula administration also announced a temporary 9.2% export tax on crude for four months, which will eat up about $400MM of that expected cash flow (earnings of ~US$34 billion in 2022 and market cap of US$69B). The political risk is real, but the bet is coming off the table fast.

We are watching the new CEO (government appointed as usual) closely. Here are some Q4 conference call highlights of new CEO Jean Paul Terra Prates responding to tough questions:

Responding to Luiz Carvalho at UBS “how to avoid conflict of interest between the controller, shareholder minorities, politicians and the company best interest in the decision-making process?”

Luiz, first of all, try to change the orientation. You are the sell guy, change that. Well, I think the challenge here, and this question is very good, because it's very common, Luis. Because of the recent past and the not so recent past as well, it is fair to have this kind of impression or conclusion that Petrobras will be subject to politicians, et cetera, et cetera. Not that it was not subject to this in the recent years as well. We had and we have to remember that. We have very recently, 2019-2020, politicians and government making Petrobras to surrender market share in fuels and leaving refineries at half of the capacity. So this is not something that doesn't happen here and there.

Now, the big challenge that we have altogether is to turn the participation of government in Petrobras into our favor, not against us, make our investors have the certainty that to be a partner of the Brazilian state is not a disadvantage on the contrary. It's good.

It gives us good leads to things. It gives us good dialogues and less risk when we go to a new area, to a new horizon when we discuss legislation, regulation when we are present in the regions, when we have to deliver new projects with the communities, with the mayors with the city councils, et cetera, et cetera. This has to be an advantage.

Since it's a reality, and it's not going to change. If somebody doesn't want to be a partner of the state of Brazil, it has other options. People have other options. Then you will be right to say sell. But right now, this is a reality for us, and it never changed. It didn't change on the Lula and the Dilma, on the Bolsonaro, on the Tamar and it will not change with Lula now for sure. So Petrobras will still have the Brazilian state as a majority partner.

That being said, we have to deal with that reality, the best way we can. So this is part of our business.

…

So upstream oil and gas will keep being our main focus, this represents already 83% of our investment portfolio. So it may stay about that. I could try to guess, and this is my responsibility individually that we would not, in the short term, not even in the midterm, go over 20% to 25% of that amount in investments into other things, including refineries transformed into biorefineries or natural gas into new segments, but also on offshore wind or bio whatever components in fuels, et cetera, et cetera, renewables in general. This will not be a transition that will make very fast, but certainly has to be a transition that we effectively have to be done -- doing. We cannot stop one day to think about the energy transition. That doesn't mean that we are going to do the transition, all of a sudden. There's a big difference between these two things.

…

Petrobras is Petrobras, it's a huge vehicle of investment and investors should look at Petrobras as a secure investment. It may be not the high heat of every day in the markets, but it must be the most secure destiny of the money of our investors. The one that people can trust. The one can -- people can give -- probably can give shares to their sons and run funds.

Maybe we will one day give our shares to our children. In the meantime, announcements like this were expected by us and aren’t helping.

Petrobras on letter from the Ministry of Mines and Energy

—

Rio de Janeiro, March 1, 2023 – Petróleo Brasileiro S.A. – Petrobras informs that it received Official Letter 166/2023/GM-MME from the Ministry of Mines and Energy (MME) yesterday requesting the suspension of the sales of assets for 90 (ninety) days, due to the reassessment of the National Energy Policy currently underway and the establishment of a new composition of the National Energy Policy Council (CNPE), respecting the Company's governance rules, commitments made to government entities and without putting Petrobras' interests at risk. The Board of Directors will analyze the ongoing processes, from the standpoint of civil law and within the rules of governance, as well as any commitments already made, their punitive clauses and their consequences, so that the governance bodies assess potential legal and economic risks arising, subject to the rules of secrecy and other applicable governing rules. Relevant facts will continue to be disclosed to the market. Facts deemed relevant will continue to be disclosed to the market.

Special Situations - YI, MTCR, MAXR

Charlie Munger at the Daily Journal AGM

Another great event with Charlie Munger. Highlights below. https://www.youtube.com/live/9VVPO3KWj3A

"California is trying force it's wealthy people and wealthy corporations out of the state, and I must say it's working fine, they're leaving one after another."

On crypto - "Sometimes I call it crypto crappo, sometimes I call it crypto shit. It's just ridiculous that anybody would buy this stuff."

He used leverage for Alibaba and other ideas recently. -

This question comes from Michael Gallagher he says according to company filings it appeared that Alibaba shares were purchased with leverage and when the stock price fell last year he was seemingly forced to sell he being you can you ask Charlie to confirm that it was bought with leverage and if so why would he do that, as it seems to go against his philosophy?

Well yes it's true I operated with no leverage for long stretches of my old age and Warren's the same way. Recently I did use a little bit of leverage here and in another place because the opportunities were so ridiculously good I thought it was desirable to do that. You're right, it's unusual for us. By the way, if you go back early in my career I used some leverage. I sometimes ask myself a mental question; “what is the appropriate percentage of your net worth that you should put in a stock if you think it is an absolute cinch?” If you are the kind of fellow who is right when you think something is a cinch, the answer is 100%, maybe 150%, but nobody teaches people to think that way in finance. But if the opportunity is great enough, the logical answer is 100%. Or maybe 200%.

Q: You have said the three things that ruin people are ladies, liquor, and leverage, so why would you use leverage if that is one of the three things that can destroy somebody? Well, I used a little leverage on my way up and so did Warren by the way. The Buffett Partnership used leverage regularly every year of its life. What Warren would do is he would buy a bunch of stocks, and then he’d borrow against those stocks and used it for event arbitrage liquidations. That was like an independent banking business and Ben Graham name for that was Jewish treasury bills; it always amused me that that is what he would call them. Warren used leverage to buy Jewish treasury bills on the way up and it worked fine for him. Berkshire has stock is Activision Blizzard – whether it will go through or not I don’t know – but that is a Jewish treasury bill. We sort of stopped doing it because its such a crowded place. But here is little Berkshire doing it again and Munger using a little leverage at the Daily Journal Corporation… “The young man knows the rules and the old man knows the exceptions.”

On Alibaba - "I regard Alibaba as one of the biggest mistakes I ever made ... ln thinking about Alibaba, I got charmed by their position in the Chinese internet and didn't stop to realize, 'they're still a God-damned retailer."

"If you're just not crazy, you have an advantage over 95% of the population…If I had to name one factor that dominates human bad decisions, it would be what, I call denial. If the truth is unpleasant enough, their mind plays tricks on them, and they think it is really happening. Of course, that causes enormous destruction of business.”

Is he worried about the future of Berkshire? “I don't worry about it too much because I'm  going to be dead."

“Dumb is forever”.

Charlie Munger and The Daily Journal AGM 2022 Full Video - Charlie is looking good!

The Daily Journal just held their annual AGM. This little-known company’s annual shareholder meeting has turned into a mini-Berkshire Hathaway AGM for the super nerds like us out there, because its Chairman is the brilliant and blunt Charlie Munger, who also happens to be Vice Chairman of Berkshire Hathaway and Warren Buffett’s right hand man. We have been before and hope to attend in person again soon.

We were happy to spend a few virtual hours with him and glad to see he is doing so well even at the age of 98! Worth the watch.

To start at the Q&A —-> https://youtu.be/8RxLj9OVqLo?t=1509

Friday Quick Note: Having trouble focusing? “Focusing is about saying no” (Steve Jobs 1997)

Here at CVI we are always looking for systems and nudges to help us be more focused. Back in 1997 Steve Jobs provided a very thoughtful answer on he importance of focus when he was asked about OpenDoc, a now defunct software framework. The key to success of Apple, Steve Jobs, and many entrepreneurs is their unrelenting focus. Warren Buffett is an expert at it (and also an expert at saying no quickly). Investing is hard, unstructured, with long lead times and weak feedback loops. We need all the help we can to stay focused. We hope you are also inspired by Steve:

I know some of you spent a lot of time working on stuff that we put a bullet in the head of. I apologize. I feel your pain … Apple suffered for several years from lousy engineering management. There were people [at Apple] going off in eighteen different directions doing arguably interesting things in each one of them… And what happens is you look at the farm that has been created with all of these different animals heading in different directions, and it doesn’t add up. The total is less than the sum of the parts. So, we had to decide, what are the fundamental directions we’re going in and what makes sense and what doesn’t. Microcosmically they might have made sense. Macrocosmically they made no sense.

And you know the hardest thing is... you think focusing is saying yes! No. Focusing... is about saying no. Focusing is about saying no. And you've got to say no no no no and when you say no you piss off people, and they go talk to the San Jose Mercury and they write a shitty article about you. You know? And it's really a pisser, because you want to be nice. you don't want to tell the San Jose Mercury the person is telling you this was asked to leave, or this or that. So, you take the lumps. And Apple has been taking their share of lumps for the last six months in a very unfair way, and it's been taking them like an adult and I'm proud of that. And there's more to come I'm sure. I read these articles about some of these people that have left. I know some of these people, they have done it in seven years, and they leave and it's like the company's going to fall apart the next day. I think there will be stories like that, they come and go, but focus is about saying no and the result of that focus is going to be some really great products where the total is much greater than the sum of the parts.

Here's to focusing your energy on the right investments!

 Note: We found the original article Steve referenced (titled "The Two Faces of Steve Jobs"...). Apple has had an unbelievable track record from the point Steve Jobs returned to today with Tim Cook. Yet back in 1997, “Steve’s best skill is his magician’s skill, ” said one Apple executive who left the company earlier this year. “It’s amazing how he gets people on board. And it’s also amazing that he can live with himself.” They can knock you down, but they can't knock you out.