Good evening,

Today, Sunday, August 30th, 2020, Warren Buffett turned 90 years old. He remains the Oracle of Omaha and I wish him a long and healthy life. Although, I’ve been in the same room as him a couple of times,  if you can call a 20,000 seat arena for the Berkshire Hathaway shareholders meeting a room, I’m a little selfish in my good wishes. As a shareholder of Berkshire Hathaway, I’m first and foremost interested in his professional capabilities. My wife and children would tell you that I’m a groupie and they wouldn’t be completely wrong. But first and foremost, as a capitalist and a portfolio manager, my wishes of health are self-serving. I’m not worried, Warren would probably say the same thing if the roles were reversed.     

A few weeks ago, RBC took Berkshire Hathaway off of their guided portfolio. I must admit that I smiled while listening to the conference call explaining the move. Something about Warren having lost his mojo (airline sales and Kraft Heinz) and all. They are being replaced with arguably good companies but companies who were all significantly up by the time my friends and colleagues at head office were recommending them. They seemed to have forgotten the following famous Buffett quote:

"The stock market is a device for transferring money from the impatient to the patient"

You see, a good business has characteristics that I’ve written about before. All the names added in replacement of Berkshire Hathaway have those characteristics. With that said, we must not forget another of his quotes: 

“Price is what you pay; value is what you get.”

You see, the sum of all parts in Berkshire Hathaway is always important to consider. Yes, Buffett often dwarfs the company by his legendary career but at the end of the day, Berkshire is still a company. Hence the importance of looking at the whole picture, Berkshire Hathaway is a few things.

First, an insurance company. It has numerous insurance subsidiaries, the best known is Geico. With the premium they get  (called a float in the insurance business), Buffett is able to invest in other companies. 

The most famous part of Berkshire Hathaway is the equity portfolio within. Some of the portfolio are the holdings in Coke, Amex, Apple, Kraft Heinz and Bank of America, just to name a few.

Then they have cash which has not been invested. At last count, on June 30th 2020, there was $147,000,000,000 in cash. That’s $147 billion with a B, in cash.

Lastly, there are the privately owned businesses, about 90 of them. Some are well known, such as Duracell, Fruit of the Loom and Dairy Queen. Others are much larger and tend to be very profitable, such as BNSF (one of the largest railway companies in North America) and Berkshire Hathaway Energy, the umbrella company to another ten companies involved in all aspects of energy production and distribution.

Therefore, Berkshire Hathaway is basically four parts: The insurance companies, the stock market portfolio, the cash and the collection of private businesses.

Seeing that the numbers available for Berkshires cash and stock holdings are from the June 30th quarterly disclosure, I will use that days market value to illustrate my point.

On that day, Berkshire Hathaway as a whole was worth $428 billion. We know that cash stood at $147 billion and that the shares of Apple were worth then $113 billion. Let’s take BNSF, the railway company. My friend Matt Barasch did a little analysis recently on that subject, his point was that Berkshire Hathaway bought BNSF on November 2nd, 2009 for $44 billion.  Assuming a return since then equal to the average performance of the Class 1 rails (in USD) over the past 11-years, BNSF would be worth $213 billion. I would simply note that BNSF is a little more than twice the size of CNR in terms of revenue. CNR is worth +/- $100 billion CAD, so a valuation of $213 billion, while generous, is not way off base. 

To recap, on June 30th  Berkshire Hathaway was worth $428 billion in total. Yet if you took only 3 parts of this large conglomerate (the cash at $147 billion, the Apple shares at $113 billion and the railway BNSF at $213 billion) you got $473 billion and all the other parts of Berkshire Hathaway for free (actually you were paid $45 billion to take them !). You can see why I liked Berkshire Hathaway back then.

What about today ?

Last Friday Berkshire Hathaway was worth $520 billion -  not the screaming bargain it was just 60 days ago. Keep in mind that during those sixty days, the cash went up. Cash goes up every quarter unless Buffett makes a large acquisition. He has to disclose those, so we can safely assume that cash has gone up. The Apple shares are now worth $125 billion assuming he hasn’t sold any and BNSF is still in business. 

With all of this, you know you can count me in as someone who still believes in Berkshire Hathaway. Yes, they will make some mistakes (see airlines stock purchases and  sales or Tesco, a leading food retailer in the U.K, which resulted in a loss of $444 million in 2014), but who doesn’t? The answer is fraud artists like Bernie Madoff. Berkshire Hathaway is now so large that moving the needle on its stock price is getting harder but name me one company that has the management talent of Berkshire Hathaway (he’s the most famous but the bench depth is there), the diversification of Berkshire Hathaway and the long term view of Berkshire Hathaway. Take your time. I’ll wait…

Long term outlook and patience is a virtue for Berkshire Hathaway. At last year’s shareholder meeting, Buffett circled back on an acquisition he made all the way back in 1972 when he bought See’s Candies for $25 million. Over the years, he’s poured back into this company +/- $40 million in capital for equipment. Since then, See’s Candies has contributed over $2 billion to Berkshire Hathaway. That’s an 8000% rate of return. This compounding effect of dividends and retained earnings from the various subsidiaries to Berkshire Hathaway, plus the float to be invested really is the secret ingredient for this great company.

PS for all you closet indexers out there: The present value of 1$ invested in the S&P in 1964 is $198. Not bad, since it’s almost 200 time your money. But the same 1$ invested in Berkshire Hathaway in 1964, when Warren Buffet took control of the company ? $27,373. No need to add anything else to this argumentation. 

Happy birthday Warren Buffett. May you live a long and healthy life.

From a happy shareholder,