Tag: Commentary

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Commentary

Commentary: BNSF’s Swinomish Trial Looks Headed for a Train Wreck

(BRK.A), (BRK.B)

BNSF, a subsidiary of Berkshire Hathaway, is facing a costly lawsuit by the Swinomish Tribal Community over the crossing of its reservation in Washington state and looks ever more to be headed down the wrong track.

The lawsuit, initially filed in March 2015, claims that BNSF violated the terms of a right-of-way easement granted to the railroad by running more trains and cars than allowed under the agreement.

On March 27, a federal judge ruled that BNSF “willfully, consciously and knowingly exceeded the limitations on its right of access” from September 2012 to May 2021. U.S. District Court Judge Robert Lasnik also noted that this action was “in pursuit of profits.”

The Swinomish Tribe is concerned that the oil trains are a potential threat to their waterways, as they pass over the Swinomish Channel, which connects Skagit Bay to the south and Padilla Bay to the north.

The tribe’s historic treaty rights protect their fishing rights, and they fear that BNSF’s shipment of Bakken crude across the right-of-way in a manner and in quantities that violate the explicit terms of the easement agreement could put their way of life at risk. The Swinomish also claim that BNSF ran the trains without their consent or permission.

The railroad is facing the potential of significant damages if it loses the lawsuit.

The Swinomish Indian Tribal Community is a federally recognized tribe located in the Pacific Northwest region of the United States, specifically in the state of Washington. They have lived in the Skagit River-Delta of Puget Sound for many centuries, fishing the region’s brackish waters. The tribe’s historic treaty rights protect their way of life and cultural heritage, and they are deeply connected to the land and waterways of the region.

The tribe’s concerns about the potential threat to their waterways posed by the oil trains are not unfounded. The Swinomish Channel, which the trains pass over, is an 11-mile-long saltwater channel that connects Skagit Bay to the south and Padilla Bay to the north, separating Fidalgo Island from mainland Skagit County. Any spill or accident involving the trains could have severe consequences for the local environment, including the contamination of the water supply, harm to fish and wildlife, and damage to tribal lands.

The Swinomish’s fears were realized on March 16 when two BNSF locomotives derailed on the Swinomish Indian Tribal Community Reservation, spilling diesel fuel. In total, cleanup crews removed approximately 2,100 cubic yards of contaminated soil and 4,300 gallons of groundwater from the site.

This is not the first time that the tribe has had to fight for their rights over the use of their land. Train travel across the tribe’s land has a long contentious history, with the original track having been laid in the late 1800s without the consent of the Swinomish or the US government. The tracks cross the northern edge of the reservation, and the Swinomish, as the present-day political successor-in-interest to certain of the tribes and bands that signed the 1855 Treaty of Point Elliott, first sued the railroad in 1976, alleging a century of trespassing on tribal land. The resulting settlement led to the 1991 Easement Agreement that allowed only the 25-car train limit without the Tribe’s permission.

Despite the agreement, BNSF began running its Bakken oil trains across the Reservation without asking or even notifying the tribe, a move that the tribe views as a direct violation of the agreement. The tribe has repeatedly told BNSF to stop, but the trains kept rolling. The Swinomish have shown willingness to negotiate with BNSF, but their concerns for their environment, cultural heritage, and way of life are not negotiable.

Heading for a Costly Resolution?

The lack of respect shown by BNSF towards the Swinomish Indian Tribal Community’s treaty rights, makes it highly probable that this lawsuit will lead to a costly end for BNSF. It doesn’t require clairvoyance to foresee this outcome. The railroad seems to be on a one-way track towards an expensive train wreck.

© 2023 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell a stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

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Commentary Pilot Flying J

Commentary: Government Needs to Intervene as Pilot Flying J’s CEO Warns Union Pacific Embargo Would Have “Disastrous” Consequences

(BRK.A), (BRK.B)

With all the supply chain issues in the news this past year, one that has flown largely under the radar are mandatory Union Pacific railcar reductions (and a threatened embargo) of Pilot Flying J tank cars carrying urea for Diesel Emissions Fluid (DEF) and ethanol for automobiles.

The Class 1 freight railroad is trying to reduce the number of cars in its system by 2-3% due to congestion that has caused service problems, and Pilot Flying J is warning that an embargo of its tank cars could be “disastrous” for the long-haul trucking industry.

Union Pacific offers the sole service to a number of urea manufacturers that make the key ingredient in DEF, and DEF is required in all diesel trucks manufactured after 2010.

“A single railcar carries 21,500 gallons of DEF on average,” noted Pilot Flying J CEO Shameek Konar in his testimony before the Surface transportation Board in late April. “A single truck takes in 7 gallons of DEF every time they fill. . . .That implies a single railcar is providing 7,000 trucks of DEF fill.” He went on to note every missed railcar “reduces trucking potential mileage by 5 million miles.”

While Union Pacific maintains that it is trying to reduce the number of railcars in its system to reduce congestion, Konar feels that Pilot is being incorrectly penalized based on data that looked at increases in shipments between January 2022 and March 2022 that inaccurately reflect an increase in Pilot shipments, noting that it has not increased the number of railcars it is adding to UP’s system. Instead it has just become the shipper of record for a number of companies that previously shipped the railcars in their own names.

“The total number of cars has stayed the same,” Konar testified.

Konar noted that unless Pilot agreed to UP’s 26% to 50% mandated reduction in shipments, they have been threatened with shipping embargos. He added that he was unaware of any other company being asked to reduce their shipping that dramatically.

Pilot Flying J operates one the largest DEF supply networks in the country, and accounts for approximately 20 percent of the US’s over the road diesel supply and 30 percent of the DEF supply. It supplies 300 million gallons of DEF to truckers on an annual basis.

Konar said that UP’s actions come during a time when diesel inventories are already running 10-15% below the historic lows over the past five years, and that the railcar reductions “will likely sideline trucks and reduce trucking capacity.”

He also added that a 50 percent reduction would also raise fuel prices and cause DEF to run out at some locations.

As for the cuts’ impact on automobiles, Konar also warned that UP’s cutting ethanol railcar shipments by 50 percent for the ethanol needed to blend with gasoline to raise octane that originates at its plant in Nebraska and is shipped by UP to markets in Arizona and Nevada will “substantially reduce the amount of gasoline available in these markets.”

Konar believes that the railroad’s actions are “flawed, disproportionate and unprecedented.” He added that “the current situation is untenable for us.”

With record CPI inflation numbers reported just this past week, if there is any area that calls for the direct intervention of the heads of the Department of Transportation and the Department of Commerce this would be it.

Both the Commerce secretary Gina Raimondo and the Transportation secretary Pete Buttigieg need to directly focus on this issue before a trucking bottleneck sends inflation far higher.

Berkshire Hathaway and Pilot

In 2017, Berkshire Hathaway made a $2.76 billion investment in Pilot, obtaining an initial 38.6 percent stake in the company, and Berkshire will become the majority owner in 2023.

© 2022 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell a stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

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Commentary

Commentary: Don’t Count on Berkshire Hathaway to Buy Peloton

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With everyone from Apple to Google being talked about as a possible suitor for exercise equipment and media company Peloton Interactive, one name that should probably be struck from the list is Berkshire Hathaway.

This week, Blackwells Capital LLC, an alternative investment management firm that is a significant shareholder of Peloton sent the Peloton Board of Directors a comprehensive presentation outlining the need for immediate change in leadership and demand for the Board of Directors to initiate a strategic alternatives process to maximize value for the benefit of all shareholders.

In its presentation, Blackwells Capital called for the company to immediately put itself up for sale, and listed 18 companies as Potential Strategic Acquirers. Of the companies on that list, only seven checked all the boxes that Blackwells identified as making Peloton attractive as a strong strategic fit.

One of those seven companies was Berkshire Hathaway, which owns a number of leading athletics brands, including Spalding, Russell Athletics, and Brooks Running.

Blackwells states that “At a $75 per share purchase price, an acquisition of Peloton would be accretive to many strategic buyers with very modest cross-selling and penetration assumptions.”

With Berkshire sitting on $146.2 billion in cash as of September 30, 2021, an acquisition of Peloton’s size would barely put a dent in Berkshire’s cash hoard. However, Blackwells own presentation shows why they should not count on Berkshire riding to the rescue. The presentation state that “Peloton is worth significantly more to a strategic acquiror than as a standalone business, especially given the difficult turnaround ahead.”

It’s that “difficult turnaround” that most likely dooms any prospect of a Berkshire acquisition, as Berkshire doesn’t do turnarounds.

Don’t take my word for it, Warren Buffett stated in Berkshire Hathaway’s 2017 Annual Report that his acquisition criteria includes:

Demonstrated consistent earning power (future projections are of no interest to us, nor are “turnaround” situations)

With Peloton in dire need of a turnaround, as Blackwells itself has stated, and the company’s appointment of a new CEO and layoff of nearly 3,000 employees demonstrates, this is exactly what Buffett is not looking for.

Berkshire is looking to acquire companies that are churning out money, not losing it hand over fist.

While Blackwells may have identified companies that would be eager to get into a bidding war for Peloton (something that Berkshire also doesn’t do), it would be well advised to heed Buffett’s other aphorism about acquisitions:

“We’ve found that if you advertise an interest in buying collies, a lot of people will call hoping to sell you their cocker spaniels.”

© 2022 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

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Commentary NetJets

Commentary: The NetJets Dream of a Fleet of Supersonic Jets Gets Grounded

(BRK.A), (BRK.B)

Berkshire Hathaway’s NetJets has had its planned fleet of supersonic business jets abruptly grounded as the jet supplier Aerion has gone out of business.

Competition in the fractional jet ownership business in the fledgling supersonic airspace had been heating up as NetJets and its main competitor FlexJets prepared to spend billions on the return of supersonic flight for the business jet market.

Supersonic flight would give these companies a substantial competitive advantage over commercial airlines in their competition for first class customers, especially for long distance overseas flights.

In 2015, FlexJet became the first fractional jet ownership company to place a firm order for the jets when they ordered twenty of Aerion’s AS2 aircraft, and NetJets followed suit with twenty orders of its own.

The proposed Aerion AS2 was to be a three-engine jet with a minimum projected range between 4,750 nautical miles and more than 5,000 nautical miles. Technological breakthroughs were supposed to reduce or eliminate the sonic booms that had limited the Concorde to routes that were over water.

Aerion claimed that at speeds around Mach 1.2 a “sonic boom would, essentially, dissipate before reaching the ground.”

The potential of the Supersonic Market

Supersonic business jets would fall into an interesting category of jets that if built will have a decided advantage over other private jets, but will be too expensive for most people to own outright. While the supersonic business jet market offers opportunity, it also comes at a high cost, with the price of each jet at over $100 million. That’s the perfect opening for fractional ownership companies to plot their growth.

Only the fractional ownership companies with the deepest pockets, such as NetJets, would able to compete in this market, giving them a clear advantage over smaller charter companies, and a major capability advantage over commercial airlines.

It will be interesting to see if NetJets or FlexJets put down purchase options with any of the other companies looking to get into the supersonic airspace, but for now, the dream of cutting flight times in more than half are grounded.

© 2021 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

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Commentary NetJets

Commentary: NetJets Makes High Speed Move Into Supersonic Jets

(BRK.A), (BRK.B)

Competition in the fractional jet ownership business is getting fiercer, as the biggest players, Berkshire Hathaway’s NetJets, and its main competitor Flexjet, prepare to spend billions on the return of supersonic flight for the business jet market.

Supersonic flight will give these companies a substantial competitive advantage over commercial airlines in their competition for first class customers, especially for long distance overseas flights.

The new supersonic business jets will fall into an interesting category of jets that will have a decided advantage over other private jets, but will be too expensive for most people to own outright.

While the supersonic business jet market offers opportunity, it also comes at a high cost, with the price of each jet at over $100 million.

That’s the perfect opening for fractional ownership companies to plot their growth.

In 2015, Flexjet became the first fractional jet ownership company to place a firm order for the jets, when they ordered twenty of Aerion’s AS2 aircraft.

Now, Aerion has made an expansive collaboration with NetJets and FlightSafety International, two Berkshire Hathaway companies, which will be sure to impact the private jet market.

Underlining the long-term focus of the partnership, NetJets has also obtained purchase rights for 20 AS2 supersonic business jets.

Aerion will start production at Aerion Park in Melbourne, Florida in 2023.

With significant growth achieved through 2020 and 2021, Aerion’s global order backlog for the AS2 is now valued at more than USD $10 billion. The new AS2—the first supersonic aircraft to enter commercial service in 51 years and the world’s first supersonic business aircraft— continues to advance toward manufacturing start after concluding wind tunnel validation late last year.

“As the leader in private aviation, we constantly look for ways to be on the cutting-edge, and expanding our fleet to become the exclusive business jet operator for Aerion Connect is a thrilling next step,” said Adam Johnson, Chairman and CEO of NetJets Inc. “Together, we will be exploring the integration of the AS2 supersonic business jet into NetJets’ global network, and we are honored to be their chosen partner to enable the Aerion Connect vision.”

Aerion will explore NetJets’ becoming the exclusive business jet operator for the global mobility platform, Aerion Connect. A vision for a future global mobility ecosystem, Aerion Connect will integrate multiple, currently siloed urban and regional networks and provide a seamless point-to-point travel experience, optimized for speed and luxury across multiple modes of transportation.

In collaboration with FlightSafety International, the premier professional aviation training company, Aerion will also develop a supersonic flight training academy for civil, commercial, and military supersonic aircraft. The Aerion-branded facility will channel FSI’s comprehensive global training expertise to provide a center of excellence for supersonic flight training and education, shaping the flight crews of the future.

The supersonic planes will give corporate leaders and other high-end travelers a compelling reason to consider fractional ownership. Even cross-country travel, which draws additional concerns about sonic booms, will be faster.

Aerion claims that its Boomless Cruise flight is feasible at speeds up to Mach 1.2, depending on atmospheric conditions, principally temperature and wind.

The company hopes that the U.S. will adopt International Civil Aviation Organization (ICAO) standards, permitting supersonic speeds over the U.S. Supersonic flights are currently prohibited.

Aerion claims that at speeds around Mach 1.2 a “sonic boom would, essentially, dissipate before reaching the ground.”

The Aerion AS2

The Aerion AS2 is a three-engine jet and is larger than the originally conceived Aerion supersonic business jet. Fuselage length is 160 feet and maximum takeoff weight is 115,000 pounds. Minimum projected range is 4,750 nautical miles with the intention to achieve a range of more than 5,000 nautical miles.

The aircraft will have a 30-foot cabin in a two-lounge layout plus galley and both forward and aft lavatories, plus a baggage compartment that is accessible in-flight. Cabin dimensions widen from entryway to the aft seating area where height is six feet, two inches and cabin width is seven feet, three inches.

Carrying eight to 12 passengers, the AS2 has an intercontinental-capable range of 4,750 nautical miles at supersonic speed.

One thing that is clear, only the strongest of the fractional ownership companies will be able to compete in this market, giving them a clear advantage over smaller charter companies, and a major capability advantage over commercial airlines.

© 2021 David Mazor

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Commentary

Commentary: Think Berkshire Hathaway Is Diversified? You Don’t Know The Half Of It

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“Where can I find a list of Berkshire Hathaway’s companies?” It is a frequent question.

As someone that spends a good bit of time writing about Berkshire Hathaway’s companies, I can tell you that I’ve never seen a consolidated list of all of Berkshire’s wholly-owned companies. (This is distinct from the companies like Amex, or Coca-Cola that are in Berkshire’s stock portfolio.) Yes, there is a list of companies on Berkshire’s website, but it does not truly give you the picture of all the company that the conglomerate owns.
Why?

First, because Berkshire not only owns a lot a stand-alone companies, some of which everyone knows (BNSF, GEICO, NetJets, Dairy Queen), and others that are far less familiar (Mouser Electronics, Berkshire Hathaway E-Supply) but they also own other holding companies, such as Marmon Holdings, Richline Group, IMC International Metalworking Companies, and Scott Fetzer.

Marmon, for example, owns over 100 manufacturing companies. These are not little mom and pop shops, but major manufacturing companies in their own right. For example, Marmon owns Cornelius, the billion dollar worldwide leader in beverage dispensers. Go into a fast food restaurant, hotel breakfast bar, or gas station that has a fill-a-cup dispenser and it likely says Cornelius.

And second, because so many of Berkshire’s companies own other companies.

You may have heard of Richline Group, but have you heard of DRL Manufacturing S.A., located in San Pedro, Dominican Republic? It’s a jewelry manufacturing company with 800 employees.

Or take a look at McLane Company. In 2012, McLane acquired Meadowbrook Meat Company (a $6 billion foodservice distributor with 3,300 employees.) But that’s just the tip of the iceberg. Some of Berkshire’s companies’ companies own companies. Yes, that’s not a typo.

Speaking of McLane Company, McLane owns wine and spirits distributor Empire Brands, and Empire Brands acquired Horizon Wine & Spirits Inc. So, Berkshire owns McLane, which owns Empire Brands, which owns Horizon.

You can call them divisions or subsidiaries, but they were often stand-alone businesses when they were acquired by one of Berkshire’s companies.

Let me give you one more example of this. Berkshire owns Fruit of the Loom, and mentions them in the annual report. However, that’s just the start for understanding what Berkshire owns with Fruit of the Loom.

In 2006, Fruit of the Loom acquired Russell Brands. At the time, Russell Brands owned Russell Athletic, Brooks Running, and Spalding, among other brands. So, when you see a Spalding basketball, you are actually seeing a product of a wholly-owned Berkshire company, even though when you go to the bottom of the Spalding website it just mentions Russell Brands, LLC.

While much of the press focus with Berkshire Hathaway is whether or not Warren Buffett has acquired an “elephant” (a giant-sized acquisition), yet every year Berkshire spends billions acquiring more companies through bolt-on acquisitions to its existing companies.

This is a very wise approach, as Berkshire’s managers know what is additive to their companies. And, if Buffett agrees that this is a good use of capital, they strengthen their respective companies through acquisitions.

Note to Berkshire shareholders, this is why the Berkshire you own now is even better than the Berkshire you owned ten years ago. Its companies have continued to make meaningful acquisitions that expand their operations.

Take Clayton Homes, the leader in mobile, modular and manufactured homes. In 2016 Clayton acquired Goodall Homes, in 2018 they acquired Arbor Homes (Indianapolis’s largest home builder), and in 2019 they acquired Highland Homes. So, now Clayton is not only the leader in mobile homes, but also a growing player in site-built homes, as well.

Sometimes the acquisitions are phased in. Right now, Berkshire is a minority owner of Pilot Company, the leading supplier of fuel and the largest operator of travel centers in North America. In 2020, Berkshire will become the majority owner, and whenever you stop at a Pilot Travel Center, Pilot Food Mart, or a Flying J gas station, you will be at a Berkshire Hathaway company. But even that won’t tell you the full story on Pilot, as Pilot acquired Equipment Transport, LLC, a wellsite services company, and also runs the fourth-largest tanker fleet in the U.S.

Berkshire and its companies are like a giant nesting doll. Open one and there is often another inside.

The point of all this is that Berkshire Hathaway is not just diversified, it is really, really diversified.

© 2020 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell a stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

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Acquisitions Berkshire Hathaway Energy Commentary Warren Buffett

Commentary: Buffett Casts His Vote with Dominion Energy Assets Acquisition

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With Berkshire Hathaway’s $9.7 billion agreement to acquire Dominion Energy’s natural gas transmission and storage business, Warren Buffett has engaged in a strategy that is familiar to Buffet watchers—the choice between owning a part of a company through equities, or the acquisition of whole companies. It’s a choice that Buffett that has made for almost six decades based on which valuation he judges to be cheaper.

At this year’s annual meeting, Buffett revealed that he had bought relatively few stocks at a time when the market’s plunge had many seeing a rare buying opportunity. Buffett thought differently, and his sale of Berkshire’s entire commercial airline portfolio due to what he felt would be long term profitability issues for United, Delta, American, and Southwest, reflected that perspective.

Now, Buffett has found something he likes. It is an acquisition that makes Berkshire Hathaway a giant in natural gas distribution, vaulting it from carrying 8% of the nation’s natural gas to 18%.

The acquisition adds to one of Berkshire’s core businesses, Berkshire Hathaway Energy, which will acquire 100% of Dominion Energy Transmission, Questar Pipeline and Carolina Gas Transmission; and 50% of Iroquois Gas Transmission System. Additionally, Berkshire will acquire 25% of Cove Point LNG – an LNG export, import and storage facility in Maryland.

The acquisition includes over 7,700 miles of natural gas transmission lines, with approximately 20.8 billion cubic feet per day of transportation capacity and 900 billion cubic feet of operated natural gas storage with 364 billion cubic feet of company-owned working storage capacity, and partial ownership of a liquefied natural gas export, import and storage facility.

Demand for natural gas has risen from 4,917,152 million cubic feet in 1949 to 31,014,345 million cubic feet in 2019, according to the U.S. Energy Information Administration. And with the retirement of more and more coal-fired generating plants, natural gas is a key replacement. Even with the enormous growth of wind and solar, new gas-fired plants are being constructed as backup generation for when the winds are calm and the skies are cloudy.

By making this acquisition, Buffett adds key assets to Berkshire Hathaway Energy that will guarantee a pay-off not just in the short term, but for decades to come. And that’s exactly what Buffet likes, putting money to work for decades to come.

This is not to say that Buffett won’t return to buying equities, but for now, he has voted with his dollars that the better deal in the near term is the acquisition of a whole company.

© 2020 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell a stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Categories
Commentary Warren Buffett

Commentary: Buffett Affirms Berkshire’s 3 Pillars Stand Strong

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Berkshire Hathaway is so diversified that it’s impossible for it not to be impacted adversely by COVID-19. Automobile retailing through its Berkshire Hathaway Automotive network of dealerships, furniture retailing (Nebraska Furniture Mart, Jordan’s, Star Furniture, RC Willey Home Furnishings), and the See’s Candies retail stores, are just a few of its companies that are facing slumping revenues.

At the Berkshire Hathaway annual meeting held on May 2, Warren Buffett noted that the swift temporary closure of See’s retail stores in late-March left it with a huge inventory of Easter candy that will go unsold.

“…we were in the midst of our Easter season and Easter is a big sales period for See’s. And I don’t know whether we were halfway through, but we weren’t halfway through in terms of the volume is going to be delivered because it comes toward the end. And essentially we were shut down and we remain shut down. The malls that we’ve got 220 or so retail stores and we’ve got a lot of, Furniture Mart sells our candy. But the Furniture Mart’s closed down. And so See’s business stopped and it’s a very seasonal business to start with. So we have a lot of seasonal workers too that come in, particularly for the Christmas season. But we have a lot Easter candy, and Easter candy is kind of specialized too. So we won’t sell it. And we produced a good bit of it.”

Getting Nervous? Don’t Be

However, amidst the bad news was a key point that Buffett emphasized. The three main pillars of Berkshire Hathaway—its insurance, freight railroad, and energy business, are all strong and will continue to generate cash.

“Our three major businesses of insurance and the BNSF railroad, railroad and our energy business, those are our three largest by some margin. They’re in a reasonably decent position,” Buffett explained. “They will spend more than their depreciation. So some of the earnings will go, along with depreciation, will go toward increasing fixed assets. But basically these businesses will produce cash even though their earnings decline somewhat.”

Berkshire’s businesses are so strong because planning for the worst case scenario is at the heart of Buffett’s philosophy. Buffett explained that they even plan for more than one disaster.

“I mean, for example, in our insurance business, we could have the world’s, or the country’s, number one hurricane that it’s ever had, but that doesn’t preclude the fact that could have the biggest earthquake a month later. So we don’t prepare ourselves for a single problem. We prepare ourselves for problems that sometimes create their own momentum. I mean 2008 and 9, you didn’t see all the problems the first day, when what really kicked it off was when the Freddie and Fannie, the GSEs went into conservatorship in early September. And then when money market funds broke the buck… There are things to trip other things, and we take a very much a worst case scenario into mind that probably is a considerably worse case than most people do.”

And if that’s not enough to reassure you, don’t forget that Berkshire has $137 billion in cash.

© 2020 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway and BYD, and this article is not a recommendation on whether to buy or sell a stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Categories
Commentary Precision Castparts

Commentary: Buffett’s Cash Pile Not a Source of Ridicule Anymore

(BRK.A), (BRK.B)

Up until a few weeks ago, Berkshire Hathaway’s enormous pile of cash, which had reached $125 billion, and was growing $1.5 billion a month, was taken by many as a sign of failure on the part of Warren Buffett.

Increasing cries for a dividend, or increased buybacks (despite the stock sitting at or near record highs) was just some of the popular chatter.

What a difference a few weeks makes.

With the markets experiencing extreme volatility, and many businesses forced to close or facing plummeting demand, Buffett’s patience finally looks like it has met conditions where his value investing strategies can excel.

As share prices fall, Buffett clearly has the chance to use his elephant gun to bag his elephant, as he likes to call the acquisition of a major company, which is something he hasn’t done since acquiring Precision Castparts in 2016.

The opportunities are many, as valuations have retreated so significantly that Berkshire now holds more cash than the market valuations of more than 450 companies in the S&P 500, over 80 in the Nasdaq 100, and 11 that make up the Dow 30.

In addition to acquiring his elephant or two, Buffett will certainly have opportunities to help companies shore up their balance sheets through his favorite method—receiving preferred stock that pays generous interest, and receiving warrants for common stock purchases.

The latter, as in the case of his rescue of Bank of America during the Great Recession, pays off handsomely once the economy and stock prices have recovered. As proof, Berkshire now owns just over 9.9% of the bank.

It will be interesting to see what strategies Buffett employs, and whether there are more opportunities in the purchase of whole companies, or in grabbing generous chunks of a wide range of companies. He might even increase his buyback of Berkshire stock, because owning more of one of the world’s healthiest and diversified conglomerates makes sense at these prices.

Perhaps investors big and small should do the same, as Berkshire’s P/E ratio of sat at only 5.38 as of Friday, March 27.

Let’s not forget that in addition to being poised for Berkshire’s expansion while others are contracting, Buffett has also insured the short term and long term health of Berkshire itself. He has always held $20-$25 billion in reserve for the conglomerates own needs during the worst of times.

These might be the worst of times for some, but for Buffett, who famously said in his 1986 Letter to Shareholders, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful,” these are the best of times to invest.

In a couple of months, Berkshire’s next 13F filing will reveal just how much stock he and his trust lieutenants Todd Combs and Ted Weschler have acquired, and we may know even sooner if an elephant comes within range.

It will be interesting to see how greedy Buffett gets.

© 2020 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.