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

What is Berkshire Hathaway buying and selling during a pandemic? (And really, how busy is Warren Buffett anyway?)

What can you learn from Warren Buffet and friends over at Berkshire Hathaway on how to respond to a market panic? We’ll give you a hint - Focus More. Panic less.

How did Berkshire react to the downturn? (Lesson 1: Panic Less)

We always track BRK’s trades in their $250+ billion portfolio, which can be found in their 13-F filings. For those new to the game: 1) Berkshire Hathaway is required to disclose their trades in publicly listed stocks and 2) Trades consist of Warren Buffet, but also Ted Weschler and Todd Combs, who each run separate standalone portfolios. To know who is buying what can often be figured out, but we will leave that for another day.  

Here’s the raw data (Note: these tables are through Q3 as Q4 isn’t available yet and won’t be for awhile, but reflects the full initial panic-period of COVID-19):

How does this compare to historical activity? Well, they’re active, but it really isn’t significantly different than previous years. Compare this to a lot of other active investors reacting to COVID-19 and it looks downright boring.

When you strip out trades related to existing positions (i.e., removing trades that are adding to an existing position or continuing to reduce an existing position) it is even lower, with the big BRK only trading stock in 27 net companies so far this year. It’s even less when you consider some trades can be grouped and be considered one trade, like Berkshire’s sale of the airlines were also bought as a group – We covered this back in 2018 http://www.canadianvalueinvestors.com/home/2018/6/4/investing-in-north-american-airlines-why-did-berkshire-hathaway-buy-airlines-anyway

Finally, keep in mind this is the trading activity of three separate money managers. Ted and Todd run their own separate portfolios while the OG Buffett makes the big-time decisions, like Berkshire’s $120 billion Apple inc. position.

Lesson Two: Focus More (Concentration is Key) – What does Buffett do all day anyway?

When we say focus, we don’t mean that you should invest in a zen-like meditative state. We mean that you should focus your investing into fewer concentrated positions (assuming you really do know what you’re doing). We’ll walk you through why.

“The strategy we’ve adopted precludes our following standard diversification dogma. Many pundits would therefore say the strategy must be riskier than that employed by more conventional investors. We disagree. We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort-level he must feel with its economic characteristics before buying into it. In stating this opinion, we define risk, using dictionary terms, as “the possibility of loss or injury.” — Warren Buffett, 1993

Despite Berkshire Hathaway’s absolutely massive size, they run an extremely concentrated portfolio when you compare it to the average active fund, even a small fund. As shown in the chart below, their top ten positions typically account for 80% of the value of the entire portfolio. To contrast that with a “active fund”, we took a look at [SHAME BY CATEGORY] ~$10 billion Active ETF, and their top 10 holdings accounted for ~20% of the portfolio, and the next 10 were much less. The opposite approach of Berkshire – being extreme diversification, or closet index investing – is a great way to reduce volatility versus the market while collecting fees but doesn’t add any value. We’ll show you why.

Why run a concentrated portfolio?

You need to concentrate on your best ideas where you have an edge - If Warren Buffett is coming up with only a few a year (and a major one even less so), I think it is unlikely I will find significantly more. As Charlie Munger has said, “How could one man know enough [to] own a flowing portfolio of 150 securities and always outperform the averages? That would be a considerable stump.”

If you do not concentrate, it becomes statistically improbable, if not impossible, to outperform the market – We recommend you read Concentrated Investing, Strategies of the World’s Greatest Concentrated Investors. It has a lot of great stories of great investors (including Warren and Charlie), but the following two charts are key (apologies for the potato-image-from-paper-copy quality).

The lesson is clear – The more positions, the harder it is to outperform and quickly becomes statistically impossible. Of course, it means that you will have higher volatility versus the market, and a greater chance of blowing up. The key is to buy a few things you know extremely well.

“My own inquiries on that subject were just to assume that I could find a few things, say three, each which had a substantial statistical expectancy of outperforming averages without creating catastrophe. If I could find three of those, what were the chances my pending record wouldn’t be pretty damn good. I just sort of worked that out by iteration. That was my academic study – high school algebra and common sense… It would not be too much to say it was obvious to me that I could not have a big edge over everybody else and all securities. In other words, it was also obvious to me that if I worked at it, I would find a few things in which I had an unusual degree of competence.” – Charlie Munger

Indeed Charlie.

For more, check out our Value Investing 101 Page - http://www.canadianvalueinvestors.com/value-investing-101

Quick Note: Why hasn’t Warren Buffett bought stocks? – Thoughts from John Huber on the Acquirers Podcast

We have followed John Huber of Saber Capital for a few years now. We enjoy his interesting articles (he used to run Base Hit Investing but rolled the blog into his fund) including one on financial panics in hindsight (TLDR: Go for a walk!) - http://sabercapitalmgt.com/market-panics-in-hindsight/

 He recently did an interview on the Acquirer’s podcast with Tobias Carlisle. It’s a good watch and it also covers a question we have been pondering – Why didn’t Berkshire buy stocks in this downturn? They were actually a net seller, getting out of all the airlines.

John’s thoughts:

I think Buffett is cautious because I think he doesn't want to see the boat that he's spent 50 years building start to develop holes when he's 90 years old. Many times in the past he's talked about all sorts of different debacles like the LTCM (Long-Term Capital Management) debacle in the late 90s, which was a famous example of sort of greed gone haywire or greed on steroids or something, where so much leverage was used by extremely smart people to produce more money that they didn't need. He's got this quote that basically says you know once you're already rich you don't need to get rich again basically.

And so I think the issue with Berkshire right now is he could, and this is just my complete speculation - I don't know that this is the case, but I think he could be looking at the environment and seeing potential for significant litigation in business interruption insurance, potentially workers compensation, which Berkshire is a big underwriter of. In fact there's one court case in in France last week where AXA is going to have to - basically the French Court ruled that they are going to have to reimburse certain restaurants for two months of revenue. I think if you if you start to violate contract law and even if it's clear that these contracts do not, you know, pandemic is carved out you - if you're just going to start to override that then then who knows. How do you handicap that, who knows what the lawsuits could be – it could be a hundred billion. I think Buffett has said before that Berkshire is fit to withstand a $250 billion dollar hurricane season or even more, which would be multiples of the worst hurricane ever. I forget what damage Katrina caused but it would be multiples of that, and Berkshire wouldn't even see its see any hit to its capital, so it's an extreme fortress. I don't think there's any doubt it still is an extreme fortress but I think when you have the uncertainty of the pandemic possible litigation it's hard to know what the what the claims will end up being when the dust settles from this.

The other thing Buffett said, it didn't get a lot of publicity, but I think he tipped his hand a bit when he said there's no law that says a major storm can't come during a pandemic. So if you have a Katrina this summer and you combine it with all of the possible claims from the pandemic it could be it could be sort of a once in a 500-year flood and I think he just wants to be prepared for that. And I think he probably views that as a tail risk that's probably got one or two or three percent or even lower odds, but he said before that he doesn't want to take even a 1% chance of something bad happening so I think that's more likely the reason why he wasn't more aggressive in buying stocks.

Worth the full watch!