29 April 2023

Stig has invited legend investor Chris Bloomstran from Semper Augustus to teach us how to value Berkshire Hathaway on today’s show. Semper Augustus has an outstanding track record with a CAGR of 11.5% since his fund’s inception on 2/28/1999, compared to 6.9% for the S&P500. 

There is no one in the space we respect as much as Chris Bloomstran when valuing the intrinsic value of Berkshire Hathaway.

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  • What the intrinsic value of Berkshire Hathaway is
  • What the P/B of Berkshire Hathaway tells us and what it doesn’t tell us.
  • How to think about depreciation and maintenance CAPEX
  • Why the insurance business is worth approximately as much as the energy and railroad businesses combined
  • How to think about Berkshire Hathaway’s bigger equity positions
  • Where you can use Berkshire Hathaway to park cash?


Disclaimer: The transcript that follows has been generated using artificial intelligence. We strive to be as accurate as possible, but minor errors and slightly off timestamps may be present due to platform differences.

[00:00:03] Stig Brodersen: On today’s episode, I invited the legendary investor Chris Bloomstran, his company Semper Augustus has an outstanding track record compound annually at 11.5% since his fund’s inception in 1999. This is compared to only 6.9% for the S&P 500. Aside from Buffett and Munger, in my book, only Chris Bloomstran understands Berkshire Hathaway better.

[00:00:25] Stig Brodersen: The company has the largest equity position for both Chris and me and I hope you’ll enjoy this masterclass in valuing Berkshire Hathaway as much as I did.

[00:00:37] Intro: You are listening to The Investor’s Podcast where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected.

[00:00:56] Stig Brodersen: Welcome to The Investor’s Podcast! I’m your host, Stig Brodersen and as I said there in the introduction, I’m here with Chris Bloomstran. Chris, how are you today?

[00:01:07] Chris Bloomstran: Stig, I’m great. I’m great. It’s good to be doing this again this year with you and look forward to being in Omaha with you.

[00:01:12] Stig Brodersen: Chris, we are recording this April 18th and this episode will be published on April 29th or the weekend before the Berkshire weekend if, well, at least that’s what we called. I guess if you’re running in the same circles as Chris and me and today’s episode will be all about Berkshire. And Chris, I think you’ve attended the meeting since 2000, is that right?

[00:01:32] Chris Bloomstran: Yeah, we bought the stock for the first time in February 2000 after it had been cut in half close the general deal and when nobody wanted to own a real business, they were infatuated with the internet and all things tech and Berkshire was out of fashion. So we traded at about 105% of what was a fairly conservatively stated book value. So yeah.

[00:01:52] Stig Brodersen: We had a chance to talk a bit here before we hit record and we talked about like the good old days for a lack of a better word and I’ve read somewhere that Buffett used to like shake your hands with everyone who came in from abroad like back in the day and you actually had a story from, what was it your first meeting that you had the story from?

[00:02:12] Chris Bloomstran: Yeah, so we buy the stock you know, I’ve followed the company since they issued the eShares in ’96 and it finally got cheap enough to buy in any event headed to Omaha and with my business partner Chad. And you did dinner the night before and ran here to some folks that, that we knew and there was a small gathering. I mean, the NBA, the 20-something crowd really haven’t gravitated to Berkshire at that point. It probably had 11 or 12,000 at the meeting that year. So it had caught on but it was nowhere near the cult it is today.

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[00:02:50] Chris Bloomstran: You had a lot of the original shareholders, folks that had owned the stock for a long time, the Golden Bergers. In any event, so you still had to get there early enough if you wanted to get a good seat. So you queue up early and you had to line, it was I think they had one door that went into the old arena in downtown Omaha. We had not moved over to the new convention center yet and so you’ve got this line and all these festivities outside.

[00:03:08] Chris Bloomstran: They had just bought Acme Brick and so with Justin Boots there were a couple of the CEO and maybe the CFO were riding the Longhorn down the street but it started raining and drizzling. It was cold as hell and so Berkshire, they opened the doors early and I mean, this literally was like The Who concert in Cincinnati where everybody got trampled.

[00:03:31] Chris Bloomstran: All these blue hairs, the gray hairs broke rank, they broke line scrambled to the door. It was a mad rush and there at the front door stands Warren trying to shake everybody’s hand but you know, everybody’s trying to go get their choice real estate, so they blow past him. These people are scrambling with their walkers and canes and quite a million miles an hour. I’d never seen anything like it in my life and it was at that moment I realized, good lord, we’ve actually joined a cult.

[00:03:59] Stig Brodersen: What an amazing story Chris and I can’t help but ask when are you going to be in line this year? Have you decided yet?

[00:04:07] Chris Bloomstran: I don’t know. I’ve been lucky to have some younger friends that are more spry that have done the early morning. We tend to get there pretty early, my body’s breaking down. I’ve got to have joints replaced this year and so I’ve got to get a seat that has some leg room in the aisle.

[00:04:23] Chris Bloomstran: And I’ve had folks that have saved those for a few years. So we’ll be there plenty early. I mean, the sun will likely not be up and I’ve got a bunch of friends and clients coming this year for the first time. So you want to make sure you get a good seat for the meeting.

[00:04:35] Stig Brodersen: Wonderful.

[00:04:35] Chris Bloomstran: So, yeah and we’ll be in line early.

[00:04:37] Stig Brodersen: And it is. If you haven’t been, it might sound a bit odd that Chris and I would have this conversation like, oh, what time are you going to like, queue up? But it is a thing. You have to experience it.

[00:04:47] Stig Brodersen: It’s like yeah, to use Warren’s words like the Woodstock of capitalism, right. Some people camp out, they want the good seat and I’m almost embarrassed to say I was telling Chris just before we started the recording that I just, I can’t do the 4:30 anymore.

[00:05:01] Stig Brodersen: Like, I used to do that and now I’m just like, no I can’t, cause I’m plowing through the entire day with my schedule there and I die out there around like 8:00 PM if I start my day at 4:30, so kudos to you Chris for starting early.

[00:05:13] Chris Bloomstran: You can upgrade the wine selection for some of the younger folks in your circle and ply them with good food and beverage and maybe tell them in getting up and running a head.

[00:05:22] Stig Brodersen: That sounds like a good investment, Chris. I’ll keep that in mind. So Chris I wanted to jump into, to the outline here of today’s conversation. And I want to start out by saying that they say it’s easier to fall in love than to stay in love, but I don’t think that’s true for Berkshire.

[00:05:39] Stig Brodersen: And like you and so many of our listeners, I’ve read multiple books about Buffett and Munger and Berkshire Hathaway and we make this annual pilgrimage to Omaha that we just talked about just now. And you know what, a part of me feels that I might be susceptible to the liking bias. And this is something that, that Munger talked about in his famous speech, The Psychology of Human Misjudgment.

[00:06:03] Stig Brodersen: I don’t know if that’s something that you considered also, Chris, because I know you read a lot of information coming out from Berkshire, but how do we as investors stay objective to the new information that comes out from the company and whenever we read their SEC filings and so on?

[00:06:18] Chris Bloomstran: Stig, I think Berkshire is one of the few, maybe Costco, a small handful of others where it’s really as safe to drink the Kool-Aid.

[00:06:28] Chris Bloomstran: We talked about it being a cult, but you’ve got 58 years of history with Mr. Buffett running this thing and the trust is verified. It’s like the old Reagan line. What he met with Gorbachev trust and verify. He actually borrowed the phrase from a Russian proverb. And even you look at the history of how the business has been operated, how the management is compensated, the insiders have never paid themselves a restricted share or a stock option.

[00:06:56] Chris Bloomstran: The myriad amalgamation of companies that make up the public stock market with just a plethora of write-offs and write downs and abusive accounting and cultures of trying to massage Wall Street to ensure you make decor number. Berkshire’s never done any of that. You’ve got the finest collection of insurance companies on the planet and 56 years of owning national indemnity.

[00:07:22] Chris Bloomstran: And then all of the successive insurers that they acquired. Geico and Genre, Allegheny’s, collection of three insurance companies, all the little primary businesses, they’re specialty businesses. You don’t run an operation in the insurance world to make the quarter. You look at the reserve development tables, they’re just very conservative about the approach.

[00:07:43] Chris Bloomstran: They really do. When they say they walk away from business, when it’s mispriced, they do reinsurance pricing has firmed in the last couple years. They’re writing a lot more business. They’re actually writing more cat business today. But you don’t see the big one-off losses. You don’t see them having to go to the capital markets to re strengthen the insurance book.

[00:08:01] Chris Bloomstran: And for the conservatism, surplus capital has grown. So I think it really is a place where trust ISS verified, Mr. Buffett wrote about it, a manual meeting this year. He said, we’ve got these bills, you know this a lot of billionaires and sunshine millionaires who’ve owned the stock for years.

[00:08:18] Chris Bloomstran: And he said none of them go as far as to read the M D N A or they don’t read the footnotes. They don’t have to because they trust what Warren of Charlie have done for so many years now. They’re getting to the end, which is a shame for all of us. But you’ll have to watch the business analysts.

[00:08:35] Chris Bloomstran: I’ve spent a lot of time over the years trusting, been verifying there are moving parts that we watch. I’ve watched the progression of the manufacturing service retail businesses weakened over a period of time, perhaps a decade and a half. I mean, if that was a cultural thing.

[00:08:51] Chris Bloomstran: I think that was selling a business to Berkshire and simply sending the profits to Omaha and not thinking about reinvestment opportunities, not necessarily thinking about strengthening the bench. Greg’s been involved now for a few years. There he is, gotten his arms around all those subsidiaries but you know, when Warren’s gone, if you’ve got to watch Greg, they’ve got to watch whoever replaces Greg.

[00:09:11] Chris Bloomstran: And if you see a business that starts talking to the street and they start providing guidance, which most businesses do, and there’s nothing wrong with that. But you know, if you see the culture shift to one of more of a shorter-term orientation, particularly when you’re running an insurance operation, I think you’ll have plenty of, I think you’ll have plenty of red flags in their advance that the culture might be shifting.

[00:09:33] Chris Bloomstran: But at this point, you can’t kill it. They’re massively overcapitalized in insurance. There are only a few big moving parts that really matter. The railroad, the utility operations and the insurance operation make up three quarters the value of the business. You can get into the nuance of the M S R businesses, but they’re very diversified and very disparate.

[00:09:53] Chris Bloomstran: They’re unlevered, which is a margin of safety on a net basis. The M S R group doesn’t carry net debt, with the exception of, carrying some debt with the leasing operations, which is offset by assets. It’s, it really is the variable for Knox and the trust is deserved and the culture will persist for a long time.

[00:10:11] Chris Bloomstran: And so I think it’s about as worthy of parking money and putting in the top drawer and never having to worry about it as most businesses that you can find globally.

[00:10:21] Stig Brodersen: That’s beautifully sad and then want to continue talking a bit about love if we can and stay in that theme. My co-founder Preston and I, we have this ongoing joke that we are lucky to be married because it’s very hard to find a woman who can tolerate how much we’re in love with accounting.

[00:10:38] Stig Brodersen: And I wanted to share that love with the listeners and offer a perspective on the book value of Berkshire. That is often used as a shortcut valuation and there’s nothing wrong with that but investors should be aware of what the price to book tells us and also what it doesn’t tell us. You have this highlight in your wonderful letter that I will, should give a huge shout out to.

[00:11:00] Stig Brodersen: Everyone can find it for free on your website, but if you go to page 76, you talk about Berkshire’s equity portfolio, which has declined 16% in 2022, and this highlights the potential force of using price to book for valuation, especially cobbled with earnings power growth. Could you, Chris, perhaps paint some color around the performance of the equity portfolio and how they can change the gap between book value and intrinsic value?

[00:11:26] Chris Bloomstran: That’s always been the case in accounting when a public company owned shares of a company is an investment, any unrealized capital gains or offset with the deferred tax liability. So as the portfolio grows, recently we changed the marginal tax reach 21% from 35% of the United States. And so now you only capture 79% of the upside in terms of any games that are accreted to book value.

[00:11:55] Chris Bloomstran: And then conversely, there’s offset when a portfolio declines and so you have that nuance. But think about it, in 2022, you had a 300 and let’s say 50 billion portfolios going into the year declines by 15 or so percent. Book value is declining by that 15% offset by the tax shield of the tax rate. Stock price was up about 4% last year.

[00:12:18] Chris Bloomstran: So price rises the book value of Berkshire drops. And so you’ve got a higher price to book at the end of the year, but with any investment, do you want a lower price or a higher price? And so to my mind, everybody wants to run around and quote to the minute what the price to book is. But nobody really looks through to say, is this a better book value or a course book value?

[00:12:40] Chris Bloomstran: So the cheaper the stock portfolio gets, the more attractive it is, which equates to simply higher perspective returns. And so that portfolio dropped from 19 and changed times Earnings going into 2022 to under 14 times last year under decline in the overall stock market, allowed Berkshire to spend a whole bunch of money.

[00:13:00] Chris Bloomstran: I mean, they spent the next 50 billion buying more shares. So the portfolio ended the year just under 310 billion. Down from three 50, but they spent 50 billion. So you had a big loss and book value declined, but it was a more wholesome book. I mean, I had an offset in the portfolio the prior year.

[00:13:20] Chris Bloomstran: I think, when you look at a, when you look at a company that owns a portfolio of common stocks, it’s almost like valuing a cyclical business. You try to figure out what the median kind of mid cycle earning power is. So you’re trying to figure out what the portfolio’s worth. There have been times in the past where the Berkshire portfolio has been really inexpensive.

[00:13:38] Chris Bloomstran: There have been times where the portfolio has been really expensive. Go back to when we bought our shares two years prior. Berkshire’s share price had been rewarded for the first period from, 1965 to 1998, where the stock had compounded it mid-twenties, and the stock portfolio itself had compounded at a faster rate, were compounded at a higher rate, augmented by the leverage that you had from insurance, the stock portfolio with larger than book value.

[00:14:07] Chris Bloomstran: Berkshire was really an insurance operation until they diversified into Mid-American energy, and then the success of energy operations and also then into the railroad in 2010, it was very driven by insurance. You look at the value of marketable securities versus the operating earnings of the franchise.

[00:14:25] Chris Bloomstran: And it really tilted towards insurance and on insurance, you tend to carry more investment assets than you have shareholder equity. And so in Berkshire’s case, as all these years passed of conservative underwriting, not having to build reserves because you’ve misstated losses and you’ve been too aggressive.

[00:14:43] Chris Bloomstran: Surplus capital builds, you had a whole bunch of years. You had 25 years, let’s say, where there before the stock portfolio itself as a percentage of insurance reserves and invested assets was larger than shareholders equity. And so that grew to where the stock portfolio was treating very expensively.

[00:15:01] Chris Bloomstran: Coca-Cola was treating it almost 50 times earnings, and it was 35% of the stock portfolio in 1998. Berkshire had a high-class problem of the stock portfolio having done so well, but also Berkshire shares that salt having done so well that it treated at three times block. Well, that was a bad book value.

[00:15:17] Chris Bloomstran: I mean, Berkshire’s stock portfolio was worth less. Berkshire itself was worth less and so you really needed to mark both of those down. Berkshire wasn’t worth at that point, much more than 150% of book value. They are remedying some of that with their purchase of January. I won’t get into the nuances there, but you know, they spent the stock at almost three times book as currency entirely in a deal to paid 22 billion for Genre when the stock itself was only worth 11 billion and wound up ultimately Genre bring 45% of the assets to that combined merger where the shareholder of Genre only got 18% of the combined business.

[00:15:53] Chris Bloomstran: And so Berkshire bought a big bond portfolio, essentially diversified without paying capital gain taxes and selling Coca-Cola diversified in stock portfolio by buying a giant bond portfolio essentially and tripling its float. It was just a genius transaction. And so, Warren knew that the book value was not as wholesome.

[00:16:14] Chris Bloomstran: It was not a cheap book. Value was an expensive book value, and the price that shareholders were paying you that moment was an expensive price. Similarly, I sang over the course of 2022, Berkshire’s book value became more valuable, even though the book value itself per share declined. So you’ve got to think true. What are the underlying assets worth, essentially is kind of what I’m saying.

[00:16:34] Stig Brodersen: In your letter you mentioned that maintenance CapEx roughly matches depreciation expenses, and this is a relationship that has held over time and understanding maintenance CapEx is an important concept in valuation and something I would like to dig a bit deeper into together with you is this characteristic for Berkshire Hathaway in particular, that maintenance CapEx roughly match the creation expense.

[00:16:57] Stig Brodersen: I think that’s part of it. And then the other part would be, perhaps you could use the example of A B E and B N S F to provide an example of growth and maintenance CapEx.

[00:17:08] Chris Bloomstran: Yeah, it’s an important nuance, the cross, the industrial economy, in particular, the capital-intensive economy. I think that’s generally a fair way to look at the relationship between depreciation.

[00:17:22] Chris Bloomstran: An asset, a 40-year asset has to be replaced. If you have a house, you’re going to have to replace the roof every 20 years. And so if you’re buying a used home, you need to assess deferred maintenance and the price that you’re paying relative to the cost of replacing that portion of the asset base.

[00:17:43] Chris Bloomstran: And so depreciation isn’t easy. Expenses there were for a long time forever. You would write off depreciation and the analyst had to add back to depreciation charge. Much like today, a goodly portion of other intangibles are written down in some portion really new decay. Some portions don’t decay and it’s the job of the analyst to figure out what the real economic decay is.

[00:18:05] Chris Bloomstran: Well, depreciation is a real charge, even though it’s a non-cash charge if you’ve got to replace an asset and so the deprecation number sits there. It sits there in the financials. You can read about it in the footnotes your depreciation schedules, but very few companies tell you what maintenance cap CapEx is.

[00:18:23] Chris Bloomstran: And there are places where maintenance CapEx can be a lower number than the depreciation charge. We own Olin, for example, and I think maintenance CapEx, there’s probably 220 million to appreciation’s, probably 600 million. Well they’re not going to add any capacity. There’s no, there’s zero growth CapEx.

[00:18:38] Chris Bloomstran: These have been incredibly well-maintained assets, and there’s a little bit of hidden earning power there for the analysts to configure that out. In Berkshire’s case, I think that depreciation charge across all of its subsidiaries, it’s done a pretty fair proxy for maintenance CapEx. And then you, to your point, you kind of look at what they’ve done with their two big seminal diversifications away from insurance into energy and into rail.

[00:19:02] Chris Bloomstran: Well when they bought the railroad, Berkshire figured out. That the economics of the industry were changing. The industry was going to start and I’m talking class one rails now in North America, you were going to start earning more of a return on capital, less of a regulated return. So the economics were better.

[00:19:20] Chris Bloomstran: And so Berkshire figured out in the case of BNSF, that even though you’ve had 36,000 track miles from the point at which they bought it to today, there were a lot of places where they could spend a bunch of money north of what you’d call maintenance CapEx or than depreciation charges In railroads, actually, maintenance CapEx is typically a slightly higher number than depreciation.

[00:19:41] Chris Bloomstran: Simply I’d say, because some of the assets are so old, replacement cost of those assets is a higher number. You’ve got, 60-year-old assets that have to be replaced and appreciation schedules may not have been corrector over those assets. They’ve been fully depreciated for a long time. But in Berkshire’s case, they realized with intermodal the double stacking of containers that in their footprint in the west, if you were to expand corridors, Into the big port city.

[00:20:08] Chris Bloomstran: So going into LA they were able to widen from four track wide to eight track wide, to 12 track wide. You were able to blow out tunnels to accommodate the double stack of containers where tunnel size wouldn’t have fit. So there was, there were a lot of, what I would look at is growthy capacity improvements that would allow Morris through put into the system that I would categorize really in the growth bucket, where you’re going to get an economic return on being able to ship more ton miles of freight because you’ve built a better system, even though you didn’t necessarily expand track miles in your footprint.

[00:20:42] Chris Bloomstran: Now a lot of that’s run its course. And so in the early years mean if you take BNSS, since Berkshire’s owned in 2010, they’ve spent almost $50 billion in CapEx appreciation. Chargers are 25. So we’ve kind of spent it two to one. But if you look at the current cadence of spending of CapEx spending relative producing, you’re really running closer to 130 or 140%.

[00:21:03] Chris Bloomstran: So a lot of that capacity improvement to the system has run its course and under the case of the railroad, almost all of the profits that the railroad has made since Berkshire bought it for whatever it was, 36 or 37 billion, including the piece they already owned. Almost all of the profits have been dividend ended up to the parent company, and they simply financed the cash flow with debt and cash on hand.

[00:21:28] Chris Bloomstran: And that was sufficient to finance the CapEx that was needed in the utility operation. When they bought Mid-American in 2006, they’ve spent way more than $2 in CapEx cumulatively for every dollar of depreciation. Cumulatively, you’ve spent over 80 billion depreciations charged for less than 40 for the majority of this period of time that they’ve, they now own three utilities.

[00:21:51] Chris Bloomstran: They’re building all this wind capacity and solar capacity, the grid that has to go with it, they’re getting a regulated return on a lot of that asset. You’re building out the rate base at a high single digit, low double-digit return. In this case $0 of profits earned by the utilities and by the pipelines.

[00:22:12] Chris Bloomstran: The various distribution assets, $0 have been paid to Berkshire as a dividend. All of that capital has been reinvested and they have found places to economically on a tax subsidized basis in many cases. But they signed a place to click an enormous amount of money to work. I mean, last year, CapEx at BHE ran over 7 billion through the depreciation charge was about three and a half or 4 billion, spending an enormous sum of money building out capacity.

[00:22:40] Chris Bloomstran: They’re closing coal fire capacity, but building wind fired capacity. Getting a regulator recharge on those numbers. And so there, there’s a place where, Berkshire can spend three or 4 billion let’s call it 4 billion of the earnings that are, that benefit itself. Berkshire doesn’t own all of the energy operation.

[00:23:01] Chris Bloomstran: They own 92% of it and then they see, look under the hood, the BHE itself, they’ve got a number of joint ventures. They bought some dominion assets that Berkshire doesn’t fully control a hundred percent of the L N G X export terminal. They don’t own a hundred percent of. There are a number of joint ventures subsidiaries inside of BHE that aren’t fully owned.

[00:23:21] Chris Bloomstran: So that the aggregate of that business really is $5 billion. And all of that is retained. And if you understand accounting for utilities and regulated energy assets, if you understand the regulation of those assets, the regulators like to see you spend about half. Debt capital and has equity capital in the capital structure.

[00:23:42] Chris Bloomstran: So brochure’s going to retain four or 5 billion, they’re going to augment that four or 5 billion with a like amount of debt and that’s now financing all of that growth CapEx and so you’ve got a utility operation you saw valued at 87 billion a year ago when Greg’s piece got bought out and he owned 1% of the company.

[00:24:01] Chris Bloomstran: And that really matched what my appraisal was of the business. But if you look at a business that’s going to retain 5 billion a year and earn 10% on that retained earnings, plus the ongoing earnings on the capital base, this in this energy operation is going to be worth more than the railroad and two or three years because here’s a home for enormous amount of capital spending that really is growth CapEx.

[00:24:22] Chris Bloomstran: They’re improving the system, they’re improving the gigawatt they’re increasing the gigawatt hours of capacity that the utilities can sell. Into the marketplace and so. It’s a wonderful home and there’s, I think it’s a perfect example of the nuance between what I would call growth CapEx versus maintenance CapEx.

[00:24:40] Stig Brodersen: Could you paint some color around, whenever you’re talking about regulated returns, is that different projects that the government puts out there for different companies to bid on? Or is it specifically, do they call Berkshire? Like how does that process work and do they already know? It sounds like you already know it’s going to be 9% of this project or 11% of the other project. Like how does that work in practice?

[00:25:00] Chris Bloomstran: Well in electric utilities they’re largely monopolies, granted permission to operate by the various state regulatory commissions overseen nationally by ferq but when nobody would stand money you wouldn’t build a nuclear plant. You wouldn’t build a wind farm unless you knew you were going to be allowed to make a return.

[00:25:22] Chris Bloomstran: Cause if you’ve got a regulator that sets your price Essentially to get price, you’ve got to file a rate case with your regulator, and they then allow you to return based on the equity capital of the business. And so to incentivize somebody to go out and build power to sell on a price cap basis, you’ve got to allow that monopoly an acceptable charge.

[00:25:45] Chris Bloomstran: And there have been a lot of cases where regulators changed their mind. You look at somebody like scan, there’ve been, stranded nuclear plants where you spent a whole bunch of money, then you wind up not turning on the play, and the rate makers don’t let you recover. But if you’ve got good relationships with your regulators, Canada, with returners and that return is going to change based on interest rates based on capital cost of replacement.

[00:26:09] Chris Bloomstran: And so the regulators understand, kind of how much an equity return is going to be allowed and how those numbers have come down. As interest rates have come down over the last 20 years, it used to be earned kind of mid to low double digit returns on an allowed equity. And those numbers nationally are closer to eight, to nine to 10% today in Berkshire’s world, across their entire spectrum of energy assets.

[00:26:31] Chris Bloomstran: Some are non-regulated, some are regulated, some are sort of pseudo regulated. They were the group really does earn about 10 to 11% on regulated, but a portion of that’s very knowable. But you’ve got to be fair to your customers. Regulators will crack down if they think you’re overcharging, if they think you’re underspending.

[00:26:47] Chris Bloomstran: Kind of that, to that point about debt and equity, they don’t like to see you understand, because you still run- these are, even though they’re monopolies, they’re publicly traded, they’re in many cases, they’re publicly traded, they’re for-profit, they’re sending a whole bunch of dividends, so they’re shareholders.

[00:27:00] Chris Bloomstran: And you’ve got an obligation if you’re the board directors and you’re the management to make money. I mean, you’re in the business to make money, but you’re allowed to make money on a regulated basis. And so it’s really easy. Kind of back to this notion of. Running a business for short term, it’s very easy for a period of time to underspend on your assets.

[00:27:19] Chris Bloomstran: And these assets have to be maintained. Plants have to be, do you know, they have to turn around. They’ve got to, they’ve got to be repaired. And so it’s been, and you’ve seen myriad chases over the years of companies under spending on maintenance. And it’s no different than being a homeowner. How much should you spend per year to maintain your house?

[00:27:40] Chris Bloomstran: Well, if you buy an old home and nobody’s maintained it you have a lot of surprises on where the deferred maintenance was. Same thing in the utility world, like if you’re spending only, if your cap structure’s only 40% debt, the conventional wisdom is your kind of underspending on maintenance CapEx.

[00:27:56] Chris Bloomstran: And if you’re running kind of 60% debt, they think you’ve kind of gone wild and beautiful. Lost your mind on leverage and you’re overbuilding and you’re trying to overbuild kind of your rate base. The happy medium is a well-run utility has terrific relations with their regulators. And in Berkshire’s case where there’s three big utilities, Mid-American PacifiCorp and Nevada Power, you’ve actually got a fourth there with PacifiCorp.

[00:28:19] Chris Bloomstran: They on two utilities, but you know, they’re in growing markets and they’ve got good relations and those three regulated businesses earn kind of nine and a half to 10 on regulated equity that you throw in the rest of the distribution assets and that pulls the returns up a little bit north of 10%, but it’s a very noble return.

[00:28:35] Chris Bloomstran: Monopolistic businesses, if you were, if you run them well and properly, you’ll be allowed an economic return and as Berkshire’s building all this wind and solar capacity, they’re increasing the rate base on which they’re allowed to make a regulated return and so, It’s already in a very knowable fashion.

[00:28:52] Chris Bloomstran: You’ve got a very good use of Berkshire’s Capital lease, that portion of profit that’s earned by that energy business that is retained and it’s going to grow the rate base and it’s going to grow the shareholder’s equity of that business by about 10% a year. It’s where it will be the second largest piece of Berkshire, largely than the railroad here within than two or three years.

[00:29:12] Chris Bloomstran: It’ll be years before they passed the insurance operation in scope. I mean, that’s insurance operation’s worth way more than, well, it’s worth probably, it’s probably worth, well, the insurance operation’s worth probably twice as it’s probably worth as bad as much as the energy business in the railroad combined, I would say.

[00:29:30] Stig Brodersen: And what’s stopping that from growing is that because it has to grow in internally, is that just the size of the market? Is it cause of the regulation that, that they’re not our travel number or doubling down 50% whatnot on that unit?

[00:29:44] Chris Bloomstran: Yeah, I mean you, they’re only going to go build and projects they have the capital for, I mean, they’ve got an insatiable appetite. They’ve talked about spending 18 to 20 billion simply building out the grid in the west over a period of, let’s say 10 years. If they could invest in more of those projects, they would, they’re competitive but Berkshire has the capability if you do a lot of things that others couldn’t do.

[00:30:09] Chris Bloomstran: I think if they, I think if they could bid on more, they would, they tried to bid on some backup natural gas distribution, really reserve power in the Texas grid, which is in fairly unregulated or got rid is a little bit differently regulated. There’s a lot of, there’s a lot more wild chatting for power of Texas.

[00:30:27] Chris Bloomstran: Not so much a single monopoly, but more competition certainly into the industrial market and you had the freeze and you had the real issues. Three or five buy, guess it was three years ago, Berkshire bid on some assets there. They didn’t get them so terminating. It just takes a long time to get a lot of this stuff done.

[00:30:43] Chris Bloomstran: You’ve got to work with regulators. You’ve got to demonstrate, you’ve got the skillset to be able to do what they’re doing. And I think if they couldn’t do more, they would. And I think part of the mission there is to continue to find places to invest. And that’s why they were able to buy some of these assets.

[00:30:57] Chris Bloomstran: And some of these energy assets are perceived to be dirty. I mean, pipelines are a dirty asset in the E S G world. And so I think for that, they had the opportunity to buy the assets from Dominion a couple years ago. I think you’ll see Berkshire make more acquisitions on that front as the political landscape steers us more toward renewables.

[00:31:17] Stig Brodersen: Going back to Berkshire’s equity portfolio that we already talked a bit about here before in 2022, we saw only PE go from 19.1 x to 13.6, and that would equate to a 7.3 zeal that could produce. High single DTS, low double G returns, if you include multiple expansion, ongoing growth and earnings power.

[00:31:40] Stig Brodersen: In your last letter for 2021, you estimated 50 billion in all evaluation of the stock portfolio lastly, attributed to Apple. Now Apple, Inc. produced at 26.4% loss in 2022, wiping up that discount. Now, you also mentioned that 73% of the equity portfolio is Apple Bank of America, Chevron, Coca Cola, American Express.

[00:32:05] Stig Brodersen: So we probably need to have a better look at those stocks before we can make an informed opinion about the future returns of the portfolio. And I also should say that you actually say there in your letter that you don’t know if the stocks are individually or collectively expensive, but then you are also, comment on a few other stocks.

[00:32:23] Stig Brodersen: And I would say that perhaps your statement is a bit humble. At least that’s what I would say if I would put you on the on the spot. So, I don’t know, Chris, if I could ask you to share some perspective on some of the habitual stocks that Buffett owns or Berkshire owns and what we should look out for as investors.

[00:32:40] Chris Bloomstran: Well, to your point, the concentration has always been in a handful of companies. It was Coca-Cola in 1998, and from the point Warren bought tow right after the stock market crashed in 87. Over a period of a couple three years, they got 1.3 billion in it. They grew to 13 billion full. Today that position at brochures hasn’t done much.

[00:33:02] Chris Bloomstran: It’s grown kind of mid-single digit, but you’ve had to grow from a 50 multiple to earnings down to 25 multiple earnings. So over the last decade or two and a half decades, the multiple has been gotten half. Offsite by still, decent unit growth and they’ve got enormous pricing power, yet had the inflation last year, folks got the ability to pass through theirs.

[00:33:22] Chris Bloomstran: I mean, it’s immediate top line growth. They control distribution and so they’re going to grow their profitability in line with top line growth. They’re, a lot of manufacturers got massively squeezed last year. You could grow your sales, but you took massive hits in margin. Kind of like Coke was in 98.

[00:33:41] Chris Bloomstran: Apples now the 800-pound gorilla in the portfolio running between 40 and 50% of the stock portfolio. Yeah. A year ago at the end of 2021, the big tech companies had done so well. I had a section in my letter that talked about the big five. Apple and Microsoft and Amazon and Google and Facebook had compounded it something like 38% a year for the prior decade.

[00:34:06] Chris Bloomstran: They were treating collectively at 35 times earnings. Apple, which Berkshire bought. And spent mid 30 billion of dollars. I think their basis in what’s left, he trimmed and Mr. Buffett trimmed some shares a couple years ago, but they’ve still got a 31 or 32 billion basis. Well, a year ago at the end of 21, at north of 30 times earnings, that position in Berkshire was over $160 billion.

[00:34:29] Chris Bloomstran: And I thought that piece alone was overvalued. And I say, if you think about Apple being a great consumer company, they’ve got to reinvent their product line. But it’s very sticky. I’m out in the Apple architecture, I’m not going to not have an Apple phone, I’m not going to have an iPad, I’m not going to have the Mac notebook.

[00:34:52] Chris Bloomstran: Everything’s integrated on the desktop. Everywhere I am. Office at the house, the notebook. I’m not leaving that, I’m not leaving that architecture, but that makes it sticky. But. You’re going to do 400 billion in sales and almost a 25% profit margin. So Apple’s almost doing a hundred billion in profit and the stocks recovered.

[00:35:12] Chris Bloomstran: It was up, I think 31% for the first quarter and is still up 27 or 28% as we speak it. Berkshire’s overall stock portfolio was up 10 or 11%. I would guess for the first quarter. We’ll see exactly what it was. Some of these positions are, don’t exist in the 13 F where we’ve tried to reconcile that, but I’d say the stock portfolio is up about 11%.

[00:35:34] Chris Bloomstran: A whole of that gain was Apple. Apple’s back to 150 plus billion-dollar position, it’s back to 25 times earnings and it’s just not going to grow as fast. Apple can’t grow as fast for the next 15 years as it’s grown for the last 15 years because they’re doing 400 billion on the top line. So I would presume even perhaps you hold margins kind of constant where they are.

[00:35:57] Chris Bloomstran: You’re going to get a mid to high at the probably high single digit growth in dollar sales, you’re going to get maybe 10% out of it when you account for all the share purchases that are ongoing at Apple in the last 15 years, they’ve retired something like 40% of the outstanding shares. They don’t seem to be as price sensitive as you would like, but the majority of these last de of the last decade, the stock was cheap.

[00:36:20] Chris Bloomstran: I mean, Berkshire paid 12 or 13 times earnings for Apple, and a huge part of that gained from 35 million or 31 billion or whatever, up to 160 billion. Today it’s 150 billion is multiple expansion, but it’s also an enormous amount of growth. So you’ve still got more growth on Apple than you’re ready to get out of most companies, but the growth rate can’t be as fast.

[00:36:39] Chris Bloomstran: And so if you wind up growing dollar sales at five or 6%, where the world catches on that growth is not going to be at a rate at which it had been historically. It’s probably not worth 25 or 30 times and if you hold margins constant, Now I can see Apple at 20 times. I can see apple back at 15 times earnings.

[00:36:57] Chris Bloomstran: And so you drop it from 25 to 15, you’re 40% down on the multiple offsets by whatever the growth is in the business. And so apple’s back to where I would discount it in terms of its overall valuation, and it’s back to pushing. If it’s 150 billion, the stock portfolio was 309 billion going into the year up about 10%.

[00:37:19] Chris Bloomstran: So you’re going to be 300 and probably 40 billion. I think Warren said in the, I read the transcript the other night, I did not see the CNBC interview with Becky, but I think he said he bought 4 billion worth of stock in the quarter and so you’re probably going to be about 300, 345 billion will be in the stock portfolio.

[00:37:39] Chris Bloomstran: So it’s just about going to be back to the size at which it was at the end of 2021. But they’ve spent 51 billion net last year in maybe another 4 billion of the first quarter. So the other four bigs, Coke and Bank of America, American Express, and Chevron. Now, I mean, collectively, they’re all about the same size.

[00:37:58] Chris Bloomstran: If you add them up, either they’re not as big as the Apple position. And again, Apple’s the 800 pound gorilla, those others are all 25 to 30 billion positions. Coke’s not going to grow as it had. I wouldn’t pay 25 times for Coke. You essentially are going to get a mid-single digit, maybe a six or 7% out of it, but it’s conservative, 6 or 7.

[00:38:21] Chris Bloomstran: I mean, the diversity of its brand portfolio in global reaching distribution, you still have international growth. It just, it’s not going to do what, it’s not going to do what it did for Berkshire in its first decade of ownership. And then you’ve got the two banks, bank of American Express. I could not tell you how to value a big money center bank.

[00:38:41] Chris Bloomstran: The liability side of the balance sheet is knowable. The asset side of banks is never knowable. And you see that today. You’ve got a diversified stream of in investment banking and kind of non-fee revenue, which offsets some of the volatility of the bank side. But I’ve always thought you just buy banks after a banking crisis when they’re all treating in half a book and the good ones have been recapitalized.

[00:39:03] Chris Bloomstran: Berkshire probably regrets that they trimmed down the bank portfolio. By saving, yeah, I think Mr. Buffett understood he had asset liability mismatches and when you’re starting it, it does zero bound on interest rates. You can see banks that get a little aggressive with their investment portfolios and put a bunch of mortgages on the books.

[00:39:21] Chris Bloomstran: Well, they’re all learning about duration and convexity risks today, make America be fine because they’re too big to fail. Depositors will be covered, but you’ll see some, I think you’ve got ongoing bank troubles. Anytime they said goes from zero to 500 basis points on the short end of the curve, banks are levered at 10 to one.

[00:39:41] Chris Bloomstran: That’s how fractional reserved banking works. And you’re going to get asset liability mismatches. You haven’t seen credit problems yet, but if the economy devolves to where we’re in a deep recession, you’re going to augment this interest rate problem that you have this duration mismatch that you have with some banks with the credit book on portfolios.

[00:40:00] Chris Bloomstran: And that’s where you can really get into trouble. So I think we’re in the early ins of banks, but the stocks down the bunch. I mean, probably down 40% from its peak and so having sold off all of Wells Fargo, which the Berkshire had owned for years, when they massively got rid of Goldman, they sold off, even trimmed down US Vanquished.

[00:40:17] Chris Bloomstran: They still own them, but PNCs gone. M and T is gone. All those banks, they had that bank. Concentration of the portfolio was fairly high. And going into this problem, I think they saw what timing in the banking world was. I wouldn’t want to own banks broadly. And so they trimmed you down. So they still sit with the Bank of America, which is now, trading it 10 to earnings.

[00:40:37] Chris Bloomstran: They took a big reserve. Development two years ago, almost 7 billion, probably not if you’re going to have a recession properly reserved. So I’d tread carefully with the banks. Then we own American Express. It’s a really good business. They’re still impacted by, we still haven’t fully recovered the business travel international business travel but it’s all of it’s just a heck of a business.

[00:41:02] Chris Bloomstran: And at 15 to earns probably fairly valued. That collection of five is really, if you want to monitor the stock portfolio, kind of all you need to know, but I don’t think you’re going to get any wonderful returns out of the stocks going forward probably at best match the S and P 500, maybe a little more, maybe a little less, but tell me what Apple’s going to do.

[00:41:22] Chris Bloomstran: If Apple’s still trading at 25 or 30 times earnings a decade from now, you’ll have a pretty good experience. If Apple trades at 15 times earnings, the overall S and P 500 is extensive and probably more extensive than the Berkshire portfolio would be going into this year. The Berkshire portfolio is probably cheap, and that was Apple having treated down to 20 times earnings but long answer, it’s apple but it’s almost half of the damn stock portfolio.

[00:41:47] Stig Brodersen: I think the listeners should also know that some of the numbers that we refer to here, that end of 2022, but we’re also sitting here in April and there have been some changes and so you have to separate the two.

[00:41:57] Stig Brodersen: Like where are we with the numbers and perhaps on that note, we could talk a bit about valuation. You always outline four different valuation techniques in your letters and the simple average of your four village techniques and the estimate here, year end 2022, has an evaluation equivalent to a BHA intrinsic value of 421 AFAM 401 the year before.

[00:42:21] Stig Brodersen: And I wanted to talk to you about how and what drove the estimated increase but then I realized that you actually summed it up beautifully unpaid to 94 and just going to quote this for the listeners, all in all, 2022 was a great year for Berkshire in terms of driving economic earnings power higher and deploying lots of capital intelligently across the enterprise.

[00:42:42] Stig Brodersen: The media focus on Berkshire’s loss when it’s report earnings for the year will probably be on the loss Bill mentioned will be on Berkshire’s 18.1% gain in earnings power, durable, profitable growth, coupled with superb capital allocation drives intrinsic value end quote. Now, for those who are listeners who have not yet had a chance to reach a wonderful letter could you please elaborate a bit more on that paragraph?

[00:43:07] Chris Bloomstran: We have a lot of moving parts here. I have jumped through a bunch of hoops. There are several different ways that you can value Berkshire. Some I use as reconciling tools to offset the others. You look at a business on some of the card spaces. I also look at the company on a gap adjusted earning basis.

[00:43:29] Chris Bloomstran: And in terms of what I would define as economic earning power, this is kind of a normalized, taking out the volatility of the stock portfolio, taking out the volatility of underwriting, looking at the tax benefit of using accelerated depreciation in the railroads and in the energy operation, normalizing pension map, which is a charge against startups.

[00:43:52] Chris Bloomstran: In any event, Berkshire, in my in my work grew their economic earning power by about 7 billion last year. Now, the stock was up 4%. Book value and book value per share were down. They bought back 1.2% of the stock, but it was a year of capital allocation. I mean, the 92-year-old that sits there in Han.

[00:44:15] Chris Bloomstran: He’s still at the top of his game, widely criticized for maybe overstaying his welcome. He has to think that we ought to separate the chairman role from the CEO role, which they’re going to do when he’s gone but you know, the voting control rests with Mr. Buffett and he’s still awfully good. He’s taking himself out of direct recording role.

[00:44:34] Chris Bloomstran: Greg now has all the direct records and he is overseeing all of the not insurance businesses. Ajit is still doing a wonderful job with the insurance operations, but if you look at what they did last year, I’ve actually got a table in the letter that I think would be useful to see and it’s simple, but I took simply Berkshire’s cash flow from operations simply from the cash flow statement.

[00:44:55] Chris Bloomstran: And I think about that number and I back off for our conversation about maintenance CapEx versus depreciation. I back off the depreciation charge, which simply says you’ve got operating cash pro, you have to spend so much money. Effectively financing your depreciation or that’s your maintenance CapEx.

[00:45:12] Chris Bloomstran: So last year you had 40 or so billion in operating cash flow. You’ve got about nine and a half billion in depreciation. So you were less, with about 30 billion over the last five years, you’ve gone from 28 or 29 billion, up to 30 billion. So you in five years, cumulatively, Berkshire has asked, covering depreciation, had about 115 billion in operating cash flow, which is now running at a rate of about 30 billion per year.

[00:45:40] Chris Bloomstran: That’s after depreciation. That’s really the eligible cash. You’ve got to do something with that money. Right? And so we know per the discussion about the energy business that all of the retained profits, which is now running around 4 billion to Berkshire, but closer to 5 million, when you look through all the joint ventures, that’s a home for.

[00:46:03] Chris Bloomstran: Between the railroad, the energy that, that’s a home for about 5 billion. So call it 15% of the 30 billion is accounted for off the top and that’s the growth CapEx. And then if you look at what else Berkshire’s done with capital over the last five years, well, they began a shear repurchase program. And now if cumulatively bought back about 65 billion worth of stock, a lot of that was done in 2000, 2021.

[00:46:29] Chris Bloomstran: The stock was very cheap. They didn’t have much use to do anything else with capital. I think the ability to spend CapEx, the ability to do some things, was muted by the pandemic and so they bought the stock back. They had bought it back in harvest. Over this last five years, they had bought back about 11% of the company last year.

[00:46:46] Chris Bloomstran: The cadence of Sherry purchased is slow. They only bought back about 7.8 or 7.9 billion but what’d they do with the money is we talked about they spent 50 billion nets. Buying the stock. So the last five years they’ve spent about per year operating cash flow and cut a net spent cash down, which happened last year in a big way.

[00:47:09] Chris Bloomstran: They went from almost 150 billion in cash down to 128. But when they spent it on, they spent it on buying stock. They bought Chevron, they bought Oxy, they put money into the stock market, but they put money into the stock market and probably 10 or lower to earnings. And so they spent 75 billion last year against 30 billion in operating cash flow Astra depreciation expense.

[00:47:32] Chris Bloomstran: It was their biggest year on the CapEx front in a long time. Certainly way bigger than anything they’ve done individually in the last five years. So what’d they get? Well, they increase the earning power of the business by 7 billion. Now I should pause here. When I run my gap adjusted accounting, and I’ve, I get pushback on this, but.

[00:47:51] Chris Bloomstran: Berkshire has this big cash pile that’s averaged in about 12% of assets. To me, it’s not that big. Relative to 950 billion, what’s going to be pushing trillion in assets and if Berkshire grows this year, they’re going to, for the first time, have a trillion dollars in assets. On the balance sheet, there’s a portion of cash that’s kind of permanently held.

[00:48:08] Chris Bloomstran: Mr. Buffett talks about it being 30 billion. I think it’s a higher number. I think they’re going to keep cash on hand, roughly equal to one year’s worth of insurance reserves. And maybe it’s even as much as that number plus the 30 billion. So maybe it’s 90 billion or there abouts. But for any cash above, what I think would be permanent cash, I assume Berkshire’s going to put that money to work.

[00:48:30] Chris Bloomstran: And they demonstrated last year willingness to put that money to work. They’re going to put it to work at more at north of 10%, but on a time value of money basis. If they don’t spend it for five years, you’ve got a discount, let’s say a 10% returning asset back to the present. And so I assume they’re going to earn five.

[00:48:48] Chris Bloomstran: And I’d back off, or I assume they’re going to earn seven, and I’d back off from that seven, whatever the T bill rate is, which two years ago was zero. So you know, I was giving Berkshire 7% return on probably 60 million of investible cash. So north of 4 billion. I would look at as opportunity cost return on cash.

[00:49:14] Chris Bloomstran: And so when Berkshire buys a stock or they buy a business, I don’t have to jump through a bunch of hoops to say, all of a sudden Berkshire’s earning power went up but last year they put so much money to work buying stocks when they spent 11 and a half billion in Allegheny that bought a 50 billion net purchase in stocks at a 10% earnings yield.

[00:49:32] Chris Bloomstran: That adds 5 billion in earning power to Berkshire’s Ledger. The purchase of Allegheny, I mean, it was an absolute steal, we owned Allegheny. Weston Hicks, who retired as CEO a year and a quarter ago, is a really good friend of mine. He did a marvelous job. It doesn’t get enough credit for what he built at Allegheny during his run.

[00:49:54] Chris Bloomstran: It’s all business. They hadn’t myriad interest in the past but western really turned it into an insurance powerhouse for their three insurance operations. Trans three and the two specialty businesses, R S U I and Cap Specialty Berkshire paid 11 and half million for this business.

[00:50:09] Chris Bloomstran: There are a lot of things they can do with it, but I think they paid five or six times earnings for it but I think they’re getting a 20% darn near 20% earnings yield out of it from nuances. Like in a 20 million investment portfolio, Berkshire’s going to have a lot more of that capital eventually invested in stocks because they can, because of the surplus capital.

[00:50:28] Chris Bloomstran: Well, the delta there on earning 4% on bonds are earning high. Single digit, call it 10% on stocks, is an enormous number. Latent value inside of Allegheny, we had about 1.3 billion in equity capital invested in their private businesses. Allegheny Capital be similar to Markel Ventures, similar to what Berkshire’s done for all these years.

[00:50:48] Chris Bloomstran: Well, when they bought it at year end 21, those businesses with 1.3 billion in capital earned 12 on equity and in the prior years later in single digits but what we have to know is Weston had a couple guys that were sourcing deals and they were getting paid commissions. And so as those commissions ran off, you can see the profitability run up.

[00:51:07] Chris Bloomstran: Well, my understanding is last year that group probably has 1,000,000,004 in capital now, and they earned 30% pretax ROE, call it a 24 or 25% after tax ROE. I had that group charity at a 3 million valuation. Probably 5 billion today, which means they bought the insurance operation for six and a half billion dollars and the insurance operation is a better business.

[00:51:34] Chris Bloomstran: You don’t have to lay off risk in the retro recessional market back into the reinsurance world because of Berkshire’s balance sheet. What they write, they will retain. There’s just a lot of nuances. Pricing has firmed and reinsurance. So the 5 billion in premium that comes with TransRe is more profitable than it had.

[00:51:51] Chris Bloomstran: It appeared for the prior two or three years. A Berkshire stole Allegheny and that picks up a couple billion dollars in earning power that they paid 11 and half billion dollars for. That’s remarkable. What’s now the cash? So the cash, the uninvested cash, the kind of the permanent cash, which was earning zero, now it’s earning five, so all of Berkshire’s cash over a hundred billion is earning 5 billion.

[00:52:13] Chris Bloomstran: So I there I almost have no opportunity cost benefit for the cash because interest rates are so much higher. The delta between my 7% or soon return on the five is lower and the portion of cash. That investible is down because they spent so much money last year.

[00:52:30] Stig Brodersen: Thank you for sharing that, Chris. It’s so interesting to hear you go through that, that deal with Allegheny and when they were announced, I was thinking to myself, I want to where Chris feels right now, like being invested in both companies. And I came up with he’s probably not too happy.

[00:52:47] Chris Bloomstran: Well, we lost it. I had Allegheny carrying it. My intrinsic on Allegheny was over a thousand bucks a share and they went out at 842. The $8 below one 50 reflected the banking fee paid to Goldman, which was a fun story. But it will make more money inside of Berkshire.

[00:53:04] Chris Bloomstran: Yes, Allegheny’s assets are more valuable to Berkshire than they were to Allegheny but even at Allegheny persistent, we would’ve made more money out of Allegheny and now it’s a rounding era inside of Berkshire but it’s materially accretive to the insurance operation. It’s just a very good thing.

[00:53:18] Chris Bloomstran: So keep your eyes on Markel, which Berkshire has been buying as well, because they could flip that. I’m not sure they necessarily want all of Markel but Markel inside of Berkshire would be more valuable than Markel as Markel.

[00:53:32] Stig Brodersen: Yeah, that makes a lot of sense. And it is interesting that you had mentioned Markel with well, just with the story and everything that’s happened.

[00:53:38] Stig Brodersen: And whenever you saw that 13 net filing, you were like, huh, okay. It just seemed like such a logic step in so many ways. But hey, who knows? There were probably going to be a lot of speculation about that for the Markel brunch and probably also before but Chris, I wanted to talk more about your valuation’s techniques.

[00:53:56] Stig Brodersen: Like you mentioned, you have four different that you’re elaborate on in all your letters, and you also do it like more in depth in some of your previous letters. I should also mention. They all come with strength and weaknesses. We already discussed some of the short comings with the symbol prize to gap book value and also some methods are more conservative than others depending on the time.

[00:54:15] Stig Brodersen: And you have this two-prong approach that understates value today. And in contrast, you also mentioned that you will hang your hat on a recent equal waiting of some of the parts basis and gap adjusted financials, which suggest intrinsic value per share grew by 10.7% in 2022. Perhaps you could elaborate a bit on why are some of the valuation techniques more relevant than others depending on the circumstances?

[00:54:40] Chris Bloomstran: Well, we talked about price book. Even in there we talked about the nuance of how the stock portfolio works. To the extent any company is buying back their shares at north of book value, you’re going to shrink equity and you’re going to shrink book value per share.

[00:54:55] Chris Bloomstran: American expresses, book value has been written down so much because they’ve bought back 40% of the shares. Apple’s book value is diminished because they’ve bought back so much. So those returns on equity in those businesses are massively overstated relative to what replacement cost of capital would be.

[00:55:09] Chris Bloomstran: We own Starbucks. Starbucks has no book value. It’s because they’ve bought back so much stock over the last six or seven years. The two-prong approach is similarly nuanced by what the stock portfolio does. So when I say two-prong approach, meaning the Berkshire aficionados, those that have read the chairman’s letter for years, if you go back to 1995, you’ll know that Mr. Buffett gave you simple hints as to how to value in business. And he simply said, they basically have two elements of value. We have our operating earnings from everything not insurance related. And so that would be all the subsidiary cease candy, so on and so forth and what were those businesses earning? On a per share basis.

[00:55:53] Chris Bloomstran: And then you’ve got the value of the marketable securities on a per share basis. And so over all those early years, you can see the preponderance of value in the insurance operation. But again, at any given point when stocks were overvalued or undervalued, you’d have to make some kind of middle adjustment there.

[00:56:07] Chris Bloomstran: But if you would simply capitalize the operating, the pre-tax operating earnings at some number, Dan, we’d always capitalized them at about 13 and a half X when the tax code changed with T C G A in 2017. Here’s a valuation nuance that some on Wall Street didn’t get because they live in the world of EBITDA and above the line.

[00:56:29] Chris Bloomstran: If you live in the world above the interest and the depreciation and the tax line, I’m more interested in what flows to the bottom line to the benefit of the shareholder. Well, if you cut the tax rate from 35 to 21%, the shareholder earns more, and as long as that additional profit doesn’t get competed away, you’re going to pay a higher multiple.

[00:56:48] Chris Bloomstran: To a pre-tax earnings number to simply represent the delta on the tax and so we changed the multiple to both to 15 and a half times earnings to account for what was and what has been kind of durably kept on the bottom line for the benefit of the tax code change and there were nuances there. So in terms of the operating earnings, you’d include underwriting, and at the outset, Berkshire included underwriting profits.

[00:57:15] Chris Bloomstran: And then at a point they had a period of years where underwriting lost a bunch of money and that was masking because again, insurance was so large that was masking the profitability of everything else. So they kicked that number out and so just ignore the underwriting, just assume the underwrite break even, and then they put it back in.

[00:57:30] Chris Bloomstran: So we have a normalization technique in that two-prong method and also in our gap adjusted financials that simply says on what’s going to be Berkshire’s 80 billion this year in premium volume premiums earn, they’re going to earn 5% pre-tax. So at any given year, we back out whatever the underwriting result was and put in a 5% pre-tax underwriting.

[00:57:51] Chris Bloomstran: So last year the underwriting across the insurers was slightly negative. They lost, I think 90 million after tax. I’m going to give them, I’m going to give them 4 billion this year in premium volume, up at 80 billion in premium volume at 5%, that’s 4 billion, three and a three, two or three 3 billion on an after-tax basis.

[00:58:09] Chris Bloomstran: Now that’s a normalization technique. So, I’ve left ahead and that’s what I’m doing both at the subsidiary level and in my gap adjusted of angels across the spectrum is what I make adjustments for an any Berkshire shareholder that follows the business will know to look at the, look to your earnings.

[00:58:26] Chris Bloomstran: Because when you own the stock portfolio, two years ago, the end of 2021, when the stock portfolio was trading at 19 times earnings, you had. Total earnings of about 17 and a half billion dollars on the stock portfolio. Sigh a little over 5 billion of that was dividends. You had about 12 or 13 billion of that was the retained earnings.

[00:58:44] Chris Bloomstran: That was the earnings of Apple and Coca-Cola that don’t get paid in dividends, but that are retained by those businesses. And you’ve been trying to figure out the earning power of the enterprise. You have to include the earning power rules, the stock market holdings. You have over 300 billion in stock market holdings.

[00:58:58] Chris Bloomstran: Well, given the purchases last year in the stock portfolio at low multiples to durable earning power and given the net purchases of over 50 billion, now you’ve got this 309 billion stock portfolio, but it has no longer has earnings of 17 or 18 billion, but it has earnings of north of 23 billion. Your dividends are five and a half, but your retained earnings are now almost 18 billion.

[00:59:23] Chris Bloomstran: Well, that 18 billion is every bit as economical to Berkshire as the four and a half, $4 billion concerned by the energy business. It’s. You just don’t see It means it’s retained by Apple and Bank of America and American Express, but it’s very much a component of the earnings of my 53.9, 23 billion or are 17 or 18 billion of that is the retained earnings.

[00:59:49] Chris Bloomstran: And for conservatism’s sake, I’m going off on a tangent, but for conservatism’s sake of my 53.9 billion, I’m only presuming that Berkshire earns the earnings yield. So a year ago at 19 to earnings, you were, you only had an earnings yield of a little over 5% when the stock portfolio dropped. Going into this year at, as you mentioned, earnings yield of over seven, a little over 7%.

[01:00:16] Chris Bloomstran: If you only make the seven, that flows into my 53.9 billion. But if the Berkshire stock portfolio over 300 billion of it does 10% a year and not 7% a year, that’s an additional 3% return. On over 300 million rounded up to 10 billion pre-tax. That will inure for the benefit of the Berkshire shareholder if the stock portfolio does better than the earnings yield.

[01:00:42] Chris Bloomstran: If you look at the history of Berkshire’s stock portfolio, it tends to outperform the earnings yield by three or 4% a year over time. Again, I’m stripping out short term, which now throw through the p and l. Any gains and losses on the stock portfolio, whether they’re realized or unrealized, you’d always back out the realized gains as being kind of at the discretion of management.

[01:01:02] Chris Bloomstran: Again, I’m stripping out the volatility of underwriting, whether it’s wildly profitable or loss. I’m running it at a 5% pre-tax. Adding the optionality premium for cash that we talked about. The portion of intangibles that’s written down that are not economic decay. I assume 90% of that decay is genuine profitability, and that’s a little over a billion dollars.

[01:01:23] Chris Bloomstran: There are 90, you can read about this in my lab, but there are a number of techniques on that gap adjusted that apply to the individual subsidiaries. Most of that amortization write down is in the manufacturing service retail group. Obviously, the underwriting changes that I make are in the insurance group when I’m adding a billion and a half dollars for the use of accelerated depreciation, which says if you immediately write down a hundred percent of an asset this year, but it has a 40-year life.

[01:01:50] Chris Bloomstran: You’ve got two sets of books. You’ve got the gap books, and you have the tax books. When you get an immediate tax benefit, you’re paying way less in current taxes than you’re paying relative to the headline gap tax rate. And if those taxes aren’t paid for 40 years, they’re going to be paid. But you have the use of that capital because you have the tax benefit.

[01:02:08] Chris Bloomstran: In cash terms here today, that’s worth a billion and a half dollars departure. So each of the gap adjusted accounting numbers are actually done at the subsidiary level. So when I’m running some of the parts and I’m valuing the energy business and the railroad and the manufacturing service, retail and finance group, and the insurance group, each of those adjustments are nuances to each those subsidiaries, which means you should get to the same earning number at the end of the day.

[01:02:36] Chris Bloomstran: And that’s how I get to 59 or 53.9 billion presently for both. But you can do it through simply an analysis of the railroad. You can pull. Berkshire or BNSFQ’s and caves because they have publicly traded debt. And you can figure out the valuation of the rail. It doesn’t look that differently from a Union Pacific.

[01:02:55] Chris Bloomstran: And then in the energy operation, BHE and each of its subsidiaries file and so BHE files a consolidated Q and K every year. A union very granular detail on what’s going on at Pacific Corp and what’s going on at the Kern River Pipeline and what’s going on with the Dominion Asset. So what’s going on with co-point means it’s all there in the financials and it’s there in the footnotes of each of these subs.

[01:03:21] Chris Bloomstran: And so valuing those two businesses pretty easy because you’ve got a ton of data and a ton of granular. And then in the MSR Finance Group on the consolidated financial statements of Berkshire, that’s lumped into the insurance operation and they’ve got a bunch of assets and some debt. That’s held a holding company level and so you’ve got to tease some of that out, but it’s all doable.

[01:03:41] Chris Bloomstran: And so you can figure out where profitability comes from. I mean, it’s pretty easy to peel back some of that and now figure out where the equity is in the MSR group. Greg, in the last few years that he’s been on the job, I think his hands-on approach is refreshing the management. There’s a little, there’s more collaboration.

[01:03:58] Chris Bloomstran: I think there’s more focus on how we can reinvest in these businesses and the businesses back to earning 10 on equity where it was earning six on equity three or four years ago. So a lot of moving parts that are valuable on some of the parts spaces that gets reconciled through my headline gap adjusted financials, but the gap adjusted financials, anybody could do that.

[01:04:18] Chris Bloomstran: I mean, you could take the quarterly earnings, you could take Berkshire’s annual report and just apply these series of six or seven accounting adjustments. And flip from what gets reported as gap earnings to figure out what the economic earnings are. You can also look at the press release, which shows you what operating earnings are.

[01:04:35] Chris Bloomstran: But I’ve got more accounting nuances in the work that I’m doing beyond simply the gap adjusted number that Berkshire gives you. Because there are some genuine economic nuances that you’ve got to have a little better understanding of tax and accounting to get there. But they all kind of give me there to the same place.

[01:04:52] Chris Bloomstran: And I would discount the, because the stock portfolio has been so volatile, I think the book value, and I think the two prague approach are less useful statement. But the other two, my gap adjusted and my sum of the parts really is going to get you to, I think fair value is, and there are reasons why I think in both those cases, they’re more conservatively stated than understated.

[01:05:15] Chris Bloomstran: Now, is Berkshire really going to trade? At my fair value, is it really worth 950 billion today? You may just have a persistent conglomerate discount, but that’s fine because to the extent the stock stays cheap and I’ve got cash coming in and I’ve got dividends and we’ve got cash flows and clients make deposits and I’ve got to save money, I’d rather buy my shares of anything I’m buying cheap rather than expensive.

[01:05:38] Chris Bloomstran: And, God bless persistent conglomerate, a discount or whatever you call it, because I’m getting 53.9 billion of earning power for about 700 billion today.

[01:05:49] Stig Brodersen: That’s not bad. Not bad at all. And that’s also what I really like about the way that you state this, that you have to do a bit of reading yourself and perhaps also pull out a calculator if you really want to understand it.

[01:06:00] Stig Brodersen: But pick your poison. I was just about to say, you can go in there and play around with the numbers yourself and follow the steps that, that you also follow. Chris I really look forward to asking you this next question and I don’t know if this is going to land at all, but especially for those going to the event and for those who are like really into the whole Berkshire, there’s this discussion and I hear it year and year again about using Berkshire stocked pot cash.

[01:06:27] Stig Brodersen: That’s sort of like the headline of the discussion. And I think what I wanted to throw us into here is. As much a practical but also an intellectual discussion because of course you can say it’s hard to discuss the strategy without looking at the actual valuation of Berkshire’s stock.

[01:06:42] Stig Brodersen: We just talked about how it was three times book value and how Greg’s the evaluation that was and that probably wasn’t a good time to park your cast there but I guess what I found fascinating about the discussion is the arguments you hear, and perhaps we can talk about some of those arguments and relate it also to the valuation today of course.

[01:06:58] Stig Brodersen: But it’s more under the premise of can we use it to podcast, but also has the underlying premise that cannot take it out again whenever I need it. Whatever that means for you as an individual investor. And I’ve included the four categories of four arguments that are most often here for this argument about parking your cast in Berkshire.

[01:07:18] Stig Brodersen: The first one is Berkshire has a different stock because it’s less volatile. The second is that shareholders at Berkshire are better at valuing stocks compared to other investors. So it never becomes very cheap. I also hear an argument that Buffett is the best capital allocator in the world. Not that I disagree with that.

[01:07:35] Stig Brodersen: And he’s not shy about putting serious money behind buying back shares when the opportunity costs are. Right. And then the last and argument here is that the stock is more thinly traded than other major stocks. And it’s, it doesn’t require high volume before any mispricing is corrected.

[01:07:51] Stig Brodersen: That’s sort of like the framework for the question. So I guess the question to you, Chris, is what is your take on retail investors’ thoughts on parking cash and Berkshire stock, and do you think that the question’s premise should be challenged in the first place?

[01:08:06] Chris Bloomstran: I would challenge that premise. When I think about my Berkshire position, we try to make it 20% of client capital.

[01:08:15] Chris Bloomstran: It’s grown in some client accounts to be a larger percentage. When you look at my 13F filing, for example, you don’t see seven of my 10 internationally headquartered companies because we don’t have to disclose them. You don’t see any cash that various clients have laying around. Now that cash declines have laying around has utility per cash.

[01:08:35] Chris Bloomstran: If you’re a foundation and you’re giving away 5% of your money, if you’re gifting it to charity, you’ve got to have some cash on hand to make distributions. If you’re sitting in December and you give that 5% away every December, you’re going to give away 5%. Today you’re going to give away 5% a year from now, you’re going to give away 5% a year from that.

[01:08:54] Chris Bloomstran: That’s 15% going out the door in a 24-month period of time. But on a rolling basis, you’re essentially giving away 5% per year. You’ve got to have cash. I think about the Berkshire position really is a fixed income surrogate, but way better than any bond and way better than cash because of the earning power that we just talked about, that 53.9 billion in earning power.

[01:09:20] Chris Bloomstran: It is like a carrier or a battleship, it’s not going to change very much. The profitability of the energy business is very predictable. The railroad has a lot of variable cost, which means its profitability is not as impacted by the vagaries of the economic cycle. The M S R group is very diversified. The insurance operation writes seven or 8 cents on the dollar of capital in the reinsurance business, reinsurance probably has 230 or 240 billion of statutory surplus.

[01:09:55] Chris Bloomstran: And it writes, it’s going to write 25 billion this year in premium, including the five from TransRe. So you could own a big stock portfolio there. So you know, if Berkshire earns KET or 11 or 12 on, what I look at as an estimate of what would be replaced with cost of assets or even on state book value.

[01:10:18] Chris Bloomstran: It’s not going to deviate that much and so you should compound at whatever Berkshire earns and then compound again at whatever rate they can reinvest money yet but it’s not a cash surrogate. If you have an absolute need for cash, the last thing you should do is park your money at a long duration asset that has price risk.

[01:10:37] Chris Bloomstran: I mean, when we bought our Berkshire in early 2000, it had dropped by SHA from where it was. It went from expensive through almost three to book to 105%, a book when I bought it but that’s a 50% drawdown. In 1974, Berkshire was down, I think two and a half percent. 1973. In 1974, the stock was down 48 or 49% on a single year.

[01:11:00] Chris Bloomstran: It matched the decline of the Dow and the S and P 500 merchant was down 30% when the S and P was down 30%. In the March of 2020, the pandemic there was no place to hide in. The financial crisis dropped last, but you had almost a 50% drawdown in Berkshire from 2007 to the lows of the late oh eight.

[01:11:23] Chris Bloomstran: And certainly then by February of 2009. So it’s had drawdowns that you’ve got to be able to stomach and if you need your money in two years or three years, the last thing you can do is put it in a long duration asset even in a place like Berkshire. Now, for all the reasons you talk about, Berkshire is more conservatively run.

[01:11:41] Chris Bloomstran: You’re not going to wake up and read the Wall Street Journal that the company just committed fraud and they’re hanging out with Sam Beckman-Fried but that ain’t going to happen on Berkshire’s watch.

[01:11:51] Stig Brodersen: Well, with that said, Chris, thank you for giving me the handoff to talk about Greg Abel. So, Greg Abel, he’s currently the vice chairman for non-insurance operations and has been buying shares and Berkshire Hathaway here recently through the able family’s trust.

[01:12:05] Stig Brodersen: So the man may expect to be the new CEO of Dunn Insurance Operations. He now and he just looked up the share price just before we hit record, a 114 million dollars’ worth of A shares and B shares. Prior to September last year, he owned very few 5 A shares in 2,400 B shares and he received some critique from some people in the Berkshire ecosystem, community, whatever you want to call it.

[01:12:27] Stig Brodersen: Abel received 870 million before taxes for mistaken Berkshire Hathaway energy in 2022. We briefly talked about it here earlier in our conversation and he has a compensation package of 19 million-ish in basin and bonus, so with an estimated net worth of a billion dollars. How do you as an investor look at Greg Abel, I should say and this is Paul, the phrase of me, cause I’m going to quote something long here afterwards but there’s this thing from the recent proxy statement, I wanted to run by you and then ask you at the end of it how that looks or ready to Greg Abel.

[01:13:00] Stig Brodersen: But to quote from the proxy statement in particular the governance’s committee looks for individuals who have very high integrity, business savvy and owner-oriented attitude, a deep, genuine interest in Berkshire, and have a significant investment in Berkshire. Yes. Relative to the resources of at least three years.

[01:13:19] Stig Brodersen: These are the same attributes that Warren Buffett, Berkshire’s chairman, and CEO believes to be essential to be an effective member of the board of director’s end. So with all of that being said there, I know this is a very long question, but Chris, how do you look at Greg Abel and being true to, to what it says in the recent proxy statement?

[01:13:40] Chris Bloomstran: I’m a big fan of what Greg has done, not only of late, but when he took over Mid-American from SoCal and he was there previously for a long time. He came out of accounting. He’s a really good manager, for the couple three years that he was vice chairman in charge of all the operations and he left the Mid-American Post, or he left the Berkshire Hathaway Energy post.

[01:14:01] Chris Bloomstran: Yeah, I was always curious about his liquidity. To your point, now making 19 million each Ajit and Greg are paid identically. They don’t get shares. There are no stock options. There are no RSU’s. Berkshire management reaches into their own pocket, advised to shares it’s need. You see that at any other company outside of sounders but there are a few years there where I own more shares of Berkshire than Greg until this recent purchase.

[01:14:23] Chris Bloomstran: So maybe I should have been CEO, which would be a disaster but I gladly would’ve swapped my Berkshire position for Greg’s position and BHG of course, because of course, we’ve discussed 870 million is real money now. He’s bought, you’re right, it’s positioned now, it’s 114 or 115 million. Ajit owns nearly twice that shares that he’s been accumulating over the years and of late ad’s, been giving his money to charity.

[01:14:49] Chris Bloomstran: Similar to what Warren’s doing, similar to what Charlie has done over time. Charlie’s kind of lived on a chunk of his Berkshire shares and spend more personally than Warren spent personally on himself. But everybody at Berkshire, all Todd manage, by the way, they own him the stock, and they’ve never been given the stock relatively Greg’s net worth.

[01:15:07] Chris Bloomstran: I would guess that he’ll buy more over time. I don’t know what his, even, he is got a big tax liability. He would’ve written a very big check today. Presumably. I don’t know what he’s doing in terms of charitable giving. If he’s going to run, if he’s going to have his own foundation.

[01:15:24] Chris Bloomstran: So, we don’t yet know that agree of Berkshire on what’s going to wind up being the taxable side of his ledger. You don’t know what his thinking is in terms of leaving money to his family over time. I mean, there’s plenty to go around and so that’ll all gets sorted out. But I wouldn’t be surprised if Greg’s position in Shire ultimately perhaps kind of doubles relative to current valuation and matches where Ajit is.

[01:15:47] Chris Bloomstran: And that would be a couple hundred million dollars, but a hundred million dollars. Who does, I mean, who does that? I get excited when insiders buy 10,000 shares of $30 stock. Most insiders are net sellers. I mean, they’re massive net sellers. If you look at, if you look at the table of insider buying birds, insider selling, we talk about that 2% Dilution managements don’t tend to own their shares.

[01:16:09] Chris Bloomstran: I mean, they’ve got, in terms of their compensation packages, you’ve got to own two or three years worth of your salary as shares. And a lot of them just dump the rest of it because they don’t want that concentration. In Berkshire’s case, you joined the Berkshire board. I mean, every, just about, every member of Berkshire’s board owns a lot of the stock.

[01:16:30] Chris Bloomstran: There are a couple that don’t own as much, but I’m not sure their personal resources are as deep as some of the other board members. But Wally just went on the board. Chris Davis went on the board. I mean, these guys have big Berkshire Holders and for that, you know what? Their directors’ fees are 3000 bucks a year.

[01:16:44] Chris Bloomstran: That’s it. There’s no d and o insurance. If you’re the lead, if you’re Sue Decker, if you’re the lead independent director or you chair some of the big committees, you make $7,000 cash compensation and you’re not given any stock options. You’re not given any RSU’s. And so at a 19 million salary, and I’m sure that’s been well thought out, and there are performance hurdles that go into how these guys are compensated, but they’ve been there for so long that I’m not sure that they need short-term incentives. The incentive is having a meaningful portion of Berkshire owned outright that you’ve delved in, that you’ve reached into your pocket to pay for. Do you imagine the culture of Berkshire changing when Warren and Charlie are gone.

[01:17:26] Chris Bloomstran: The director’s turn and CalPERS comes in and now you’re doing checkbox on E S G, and you’ve now separated the role of chairman and CEO, which will happen under your director’s change. And all of a sudden, the culture changes. And now we’re about quarterly earnings. We’re meeting with Wall Street, and now we introduce, because Berkshire’s never had a stock option plan, but we ought to do it broadly and widely.

[01:17:47] Chris Bloomstran: All of a sudden, Berkshire’s giving away 2% of its shares per year, 14 billion. Now you give a stock option away to today’s prices, doubles in value over the next six or seven years. You are buying it, today’s price you sell it at the double, but now Berkshire’s got to go out and offset the dilution, so they’ve got to buy back.

[01:18:06] Chris Bloomstran: Let’s say they’re buying back like. The S and P 500 broadly does 3%. So you’re spending 3% of 700 billion at today’s valuation. 21 billion is simply going to offset the dilution of what you just gave for the insiders. Can you imagine the uproar of the Berkshire community? Well, that’s exactly what happens to the S and P 500 and it doesn’t happen.

[01:18:28] Chris Bloomstran: So Greg’s… His incentive that his motivations are perfectly aligned with Berkshire and you will not find another vice chairman, CEO, let’s call them in the world, who has reached into his pocket in today’s dollars and paid a hundred million dollars for their shares. If you’re Elon at Tesla, you were given 20% of the company.

[01:18:51] Chris Bloomstran: You were not a founder. You were given 20% of the company in two. Option grants of roughly 10% each. So Elon really be the richest guy in the world and didn’t pay a dime for that 20% position of the company other than the very low stock price. So the stock did well. So there’s, there is upside Tesla. The stock had done very well from when those stocks were granted, but that was a giveaway.

[01:19:13] Chris Bloomstran: Berkshire doesn’t do it. The governance of Berkshire’s different than none other these folks that sit on the board and that run the company, they’ve never benefited themselves. Look at Charlie and Warren’s comp package. I mean, they’re not going to ask Craig and Ajit to go knock their pay from 19 million down to a hundred thousand dollars, but Warren and Charlie have been there for so long for the history of my owning the company.

[01:19:33] Chris Bloomstran: I’ve never seen their pay package changed from a hundred thousand dollars per year. I mean, the employee pays the governance calculation as a joke because the average employee at Berkshire makes more than the chairman and the vice chairman and the vice chairman of this case being Charlie.

[01:19:47] Chris Bloomstran: So I’m really happy with. Greg having liquidity, and again, we don’t know what his personal P and L and his ballot sheet and his charitable desires are, but that is a big time commitment in Berkshire and I’d be surprised if he doesn’t make ongoing big time commitments in Berkshire.

[01:20:02] Stig Brodersen: And I should also quickly mention about Buffett. I want to say he returned 50,000 of his of the hundred thousand dollars compensation that she received. I think you’re right. Whenever you talk about the governance is, let’s just, let’s just say it’s been done quite well.

[01:20:15] Chris Bloomstran: Yeah. They’ve covered some of the travel, the NEF Jets membership, now it’s covered, but from a salary standpoint, relative to almost trillion dollar asset enterprise and over what’s going to be 500 billion in shareholder equity for the CEO and chairman be making a hundred k is pretty remarkable or Greg and I each be making 19 million and it is pretty remarkable given the size of the franchise. Again, if you diverted their pay package to stock options, it would mean way more than 19 million a year ultimately.

[01:20:48] Stig Brodersen: Great point. Chris, before I let you go, Chris and thank you for everything that you provided the audience with here today.

[01:20:54] Stig Brodersen: I think we all learned a lot, but I also think that the audience will learn a bit more about you and Semper Augustus and I know I said it probably five times already but you write these wonderful letters and the prize is just right for a cheapskate like me, it’s free.

[01:21:06] Stig Brodersen: You can just go into the Semper Augustus website but I wanted to hand it over to you, Chris. Where can the audience a little more about you and Semper Augustus?

[01:21:15] Chris Bloomstran: Well, the website, semperaugustus.com, we’ve got a link to an archive of a bunch of our old client letters. All of the letters from 2015 on. I’ve had somewhat of an ongoing analysis of Berkshire, in addition to everything else that I try to write about each year. We’ve also got a link to all of our… a number of recent podcasts and interviews, conferences, which I’ve spoken this pod. When it drops Stig, we’ll put it on. So you’ve got the client letters tab and you’ve got the podcast tab.

[01:21:45] Chris Bloomstran: I’m also on Twitter. We’ll see what happens there. I mean, we’ll see if Twitter’s even a thing by the time. I think our letters are a pretty good resource.

[01:21:54] Stig Brodersen: I definitely agree. Again, for the millionth time make sure to read Chris’s letters and make sure not to just read the last one but go back in the library and check out the others.

[01:22:04] Stig Brodersen: Chris, thank you. Thank you so much for your time and yeah, I look forward to seeing you in Omaha soon.

[01:22:09] Chris Bloomstran: In two weeks, we’ll raise a glass. It’ll be good to see you.

[01:22:12] Stig Brodersen: Wonderful. That’s a deal.

[01:22:13] Chris Bloomstran: All right. Thanks Stig.

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