SKEPTIC’S GUIDE TO INVESTING
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Your Hosts - Meet Steve Davenport, CFA and Clem Miller, CFA as they discus the latest in news, markets and investments. They each bring over 25 years in the investment industry to their discussions. Steve brings a domestic stock and quantitative emphasis, Clem has a more fundamental and international perspective. They hope to bring experience, honesty and humility to these podcasts. There are a lot of acronyms and financial terms which confuse more than they help. There are many entertainers versus analysts promoting get rich quick ideas. Let’s cut through the nonsense with straight talk!
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SKEPTIC’S GUIDE TO INVESTING
Berkshire Raises Cash: What Signal does this Send?
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What if the financial industry’s most revered investor made a move that seemed counterintuitive? Join us on the Skeptic's Guide to Investing as Steve Davenport and I dissect the surprising decision by Berkshire Hathaway to sell half of its Apple shares and reduce its Bank of America holdings. We dive into Berkshire's intricate dual business structure, balancing wholly owned insurance operations with expansive non-insurance investments, and speculate on possible acquisitions in the energy sector, such as Occidental Petroleum or Hess, that might be on the horizon. Plus, the passing of Charlie Munger prompts us to explore potential shifts in Warren Buffett's long-term strategies and the broader implications for Berkshire’s future.
With a focus on maintaining a skeptical eye, we also cover how Berkshire's strategic actions and cash holdings serve as a buffer in uncertain economic times. Steve and I reflect on the broader market implications of these moves and consider potential restructuring efforts to unlock greater value. Wrapping up, we thank our loyal listeners for their support and encourage feedback and topic suggestions to make our future episodes even more relevant and insightful. Stay tuned for some exciting guest appearances that promise to deepen your understanding of the ever-evolving investment landscape. Don’t miss out—like, share, and stay informed with us!
Straight Talk for All - Nonsense for None
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Hello everybody and welcome to Skeptic's Guide to Investing. This is Clem Miller, I'm here with Steve Davenport and today we're going to talk about Berkshire Hathaway in light of their decisions to raise cash by in part selling half of Apple, half their Apple share, and also trimming their Bank of America position as well.
Steve Davenport:So, I'm going to talk that doesn't seem like a long-term investor.
Clem Miller:I'm going to talk a little bit first about their structure and Steve can jump in and talk about it as well. So I think people get confused about what Berkshire Hathaway is. I find that there's a lot of confusion on that point and really Berkshire Hathaway the way I look at it is Berkshire Hathaway is a combination of really two business lines. One business line is that they run wholly owned insurance businesses. Two, they have wholly owned positions and shareholdings, large shareholdings and a number of companies that are not related to insurance. So I see those as the two big business lines. For them. They're kind of a mixture of an insurance company on the one hand and a kind of private equity slash mutual fund on the other hand, or investment company, let's say, on the other hand, all sort of wrapped into one piece, into one piece.
Clem Miller:And I think that the unifying factor in all of this is the cash that they raise from their insurance business and the cash that the insurance business needs to pay claims and how they use that cash and deploy that cash in their other areas, such as the private equity and the mutual fund holdings. Private equity, where they own non-insurance related businesses, are sort of long-term holdings, let's say like very long-term holdings and the others. While they're long-term holdings, they can sell them and clearly Apple and Bank of America fall into that position. So a key question and I'm really interested in knowing your opinion on this, steve is why did they raise cash as a result of selling positions, selling half their position in Apple and selling some Bank of America? Was it because they didn't like the investment opportunities? Did they need to raise cash? Did they want to sell in order to raise cash for other opportunities? What's going on? What do you think, steve?
Steve Davenport:It looks like somebody who's as sharp as Buffett and all the people who are running his units wouldn't be acting unless there was a plan, so I don't see him becoming fearful. I mean, these trades were all done in the second quarter. So when you think about the second quarter, it was driven by this idea that NVIDIA is still going up, ai is still going up, and what does that mean for a company that's assets are really what I would call more core and industrial and lower risk insurance assets. So I'm not sure that he's really de-risking. When I look at his, you know, I think it was close to $80 billion he sold of Apple and about $10 billion of Bank of America. He sold of Apple and about 10 billion of Bank of America and I think about adding 90 billion to 180 billion that he already has in cash. And I look at that and I always thought that he would want to hold more energy assets, because energy assets, in my mind, are still at ratios. What he would find attractive are still at ratios, what he would find attractive, and I think that there's a part of me that says he realizes that these energy assets might not have a 20 or 30 year life but they might be undervalued in the short term for a five or 10 year run. So, but then you look at Oxy, which is the largest position and the whole market cap of the company is about 51 billion. So in my mind he's not sure he's not doing this cash for a buyout of of oxy. Um, I looked also at some of the other deals that are happening and I look at the hess cdx deal and I think that if that deal were to fall because of competitive, anti-competitive reasons, then I think Berkshire could step in and garner Hess and then they would have not only some oil and energy processing but they would also have the assets themselves that Hess has and energy processing. But they would also have the assets themselves that Hess has. And Hess has some pretty good exposure to the Permian and some good exposure to US energy assets, which I think, if we look at things in the Middle East and they were to get more complicated, having a company with more US energy assets I think is just the type of thing that he would want to do. So my belief is he may have some play that he wants to make in the energy space and I think that I also have heard rumors that they realize they need to unlock the value of these assets, that the multiple overall for Berkshire isn't what it should be, that their growth and other prospects should be higher. And then if you did a sum of the parts, you'd get a much higher valuation, maybe 50% higher if these assets were sold individually.
Steve Davenport:And I wonder, with the death of Charlie Munger last year, whether there's some realization that you know he needs to leave this in a better order for the next generation. And I think some of the people he's hired, I think some of the people running the businesses are great. I just wonder if this cash and this allocation would allow him to more easily segment into two, three or four businesses, whether it's one financial and insurance, two transportation, three energy and four retail. If you had those four assets and you broke them down, would they on their own give you a higher average multiple? I think they might. So I think that when we look at his planning, I think the biggest error we make is being too short-term, thinking about the next quarter, the next year. I think Buffett wants to think in five and 10 years and I think he realizes after the passing of Charlie that maybe that five or 10 years is, you know, is coming a lot faster than he thought.
Steve Davenport:I believe that the asset that you have with Berkshire is a very you know, if you think about a 900 billion total market cap and 275 bis in cash, earning 5%, that's quite a safe asset in my mind because the other businesses we know are producing cash and are not losing money. So the holdings he has are good. The underlying assets he has as private companies are good. The cash decision is a little bit unusual, but this far along in an economic rally, he's putting a lot of emphasis on, in my mind, the safest asset. And when he does that, he does that with the tradition of being right in 2000, being right in 2020, and being the source of liquidity for people who are not right, and that's something that we have to kind of give them the benefit of the doubt.
Steve Davenport:He's seen this you know picture show before. He knows how it ends and he wants to be the guy who's standing there at the end of the road offering some salvation to people who, as he likes to put it, may have gone swimming without their bathing suits on. The only way you know how is when the tide goes out. And when the tide goes out, you see what everybody's wearing, and that's what I think you know. There was a rumor on Monday that some of the volatility might have been related to some entity having difficulty. And then we look at him, you know he's usually one or two steps ahead. So I believe it's not necessarily completely a call on recession. I don't believe it's necessarily a call on a takeover. I think it's probably a combination of a lot of things, because most things are not the simple. Most things tend to be a little more complicated, and that's why we tend to go away from trying to predict complicated outcomes, because it's hard to predict simple ones.
Clem Miller:Yeah, steve, based on what I heard in Buffett's Q&A at the shareholder meeting, the sense I get from his answers is that, while he may be involved in overall strategy, a lot of the details are now being carried out by his, uh, by his people, the people who will succeed him, abel and the other fellow right, um, I think, uh so. And I by I don't mean just like implementing what he decides, I mean he's, you know they're already making decisions. You know he's making the overall strategic call. I'm sure the decision to increase cash was his, was his call, the strategic call, right. But I think that, u that what they're going to buy, uh, what they're going to use it for, I think it's all you know.
Steve Davenport:It's all at a more detailed level, sure and I I honestly believe he is thinking about you kno, I thought his comment was a little bit disingenuous when he said that you know he wanted to to sell now because the cap gains rates were lower than he expected them to be in the future. I mean, I haven't heard about you know. I think in general, we know that taxes must be going up and for him to mention that I thought it was a little bit unusual, because he usually doesn't want to stick his foot or his neck into these political arguments and then have people say, oh well, I thought you were pro-Republican and now you seem pro-market and not pro-Democrat. I mean, democrats have talked about Warren and others have talked about increasing cap gains and cap gains for millionaires and a lot of different things. Could they happen? Yes, would you make a $80 billion sale decision based on that? If he's not giving us a little bit of a look at the shiny object over here and don't notice, you know, all the other things that are going on over there, it feels a little bit disingenuous to say Cap Gaines was a reason for this.
Steve Davenport:Do you agree? I agree, it's at this point in the cycle, I'm just not sure I'm there with them. And again, the Bank of America is a very unusual sale because, as a bank, you would expect that when rates come down, their cost of funds comes down and it's going to be more economic activity and banks are going to do well. So to me, to sell Bank America as the Fed's about to start cutting is a contrary indicator to me of belief in the underlying benefit of owning a bank. I think you want to own the bank when the rates are going down. I think you've already gone through the hard part. Why would you be exiting now?
Steve Davenport:And that's what's not adding up? Something's not adding up in this, and it's because I don't have all the information, and that's what I think is the key about investing we don't have all the information.
Clem Miller:And we try to read the tea leaves and it's not that easy. Right, there was something of a boost in bank share prices in the wake of the you know, in the wake of the regional bank crises we saw last year. There was some improvement and I think that was an expectation of rates coming down earlier this year, and so I think he sold at a time when share prices were up and I think since then banks have become, I think, a little unsteady again. Maybe he didn't find the right timing to do that, but he might be concerned, in the same way I am, that you don't really know what's in a bank, uh, you have to lock a lot of trust in it.
Steve Davenport:He got those shares, um, in 2008, right, yeah, so he bought four banks. He got those shares on. Yeah, you know he already had a tremendous return, right? I'm just saying, if you say my main characteristic is I'm patient when others aren't, yeah, and then you say I'm going to sell now before I see profit come to this entity that I've held for 15 years, right? Does that? It sounds to me like if he was one or two more years patient, that entity should be able to deliver, even if we have a mild recession.
Steve Davenport:The thing that won't happen is, if they have a serious recession, then, yes, you will see a serious reaction from the banks. So, a little bit of the. You know, I'm doing this thing for Apple because of taking profits and it has nothing to do with risk. And then over here I'm getting rid of something that I've held for a long time and I've told people I really believe in and, by the way, they're about to go into what I would call a free lunch. Right, if the rates are at five and they go to three, bank stocks are going to see some benefit, right?
Steve Davenport:So something in the details here doesn't jive and I don't expect it to always. I mean, I'm a very simple mind. I can see why I don't understand a lot of the things that happen, but if I try to use logic and I try to use reasoning on his past behavior, it doesn't look like a typical. You know, be patient. He was already sitting at 180 billion 20% cash, so adding another 90 or another 10 to go to 30% cash just feels to me like he's got something up his sleeve. And he believes in the risk profile of 90 billion. Less in Bank of America and Apple is better than staying invested in those two stocks, and I don't know how they look at their allocation. I don't know how they look at their risk weightings, but based on the past, he's made a pretty big statement and I'm not sure it's an emergency.
Clem Miller:Two last things, and then we ought to conclude. One is that I have read that Chubb represents a potential opportunity for an acquisition, and that would be a big bite.
Steve Davenport:How big is Chubb?
Clem Miller:Yeah, what? How big is Chubb? I don't have it right in front of me, but it's one of the biggest insurance companies that are out there. And then, secondly, is you know just thinking about what happened in Japan with the Japanese yen and Japanese stock market on Monday? He had bought some positions in some of the Japanese trading companies, I think a year or two ago, and I'm sure he's regretting that now and may sell those positions off. Those are small positions.
Steve Davenport:Yeah, chubb is 108 market cap, yeah, 108 billion. So he would need 60 to buy it. So again, I don't know what the overall plan is. I don't know what the reaction is. I know it was very emotional at the annual meeting about Charlie's passing and I just wonder sometimes whether decisions are sometimes about stocks and sometimes they're about, you know, organizationally where do we want to be, and maybe the cash gives them more flexibility to organizationally structure things so they make more sense, or every entity would have enough operating cash to survive a reorganization, right? So I think you know I don't. I guess I would tell people I still believe in Berkshire, I still think they know what they're doing. I just think they're going to be allocated a little more conservatively and so you might want to sell it here when in fact it already is one third cash. Do you have anything?
Clem Miller:to add finish. No, I think that's about right. I think at this point we should conclude the broadcast. Steve, I think we had a great discussion here about Berkshire and I don't know, do you want to add anything else before we close up?
Steve Davenport:No, just thank you to all the listeners and please like and share. We get by and we don't have advertisers, because we want to give you as much info and as much support as we can as investors and stay skeptical.
Clem Miller:Yeah, I mean you know. I would just add to what you're saying, Steve is? You know? We welcome all of your comments. If you have any suggestions for topics, if you'd like us to cover things maybe in a slightly different way, that would be great too. We're going to have some future guests on this program and we'll keep those a surprise, and I think you know we'll close up for now. So thank you very much, steve, thank you everybody.
