Inside the Berkshire Hathaway Annual Meeting with Adam Mead

[00:00:00] Welcome to Excess Returns where we focus on what works over the long term in the markets.

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[00:00:07] long-term investor. Justin Carbonneau and Jack Forehand are principals at the

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[00:00:19] Hey guys, this is Justin. In this episode of Excess Returns, Jack and I sit down with Adam Mead,

[00:00:23] founder of Mead Capital Management and author of the Complete Financial History of Berkshire

[00:00:27] Adam recently attended the Berkshire Hathaway annual meeting and there was one notable figure

[00:00:30] missing. And that was Charlie Munker. We talked with Adam about Munker's contributions to Berkshire,

[00:00:35] why Adam would choose Munker over Buffett if he had a chance to do lunch with one of them.

[00:00:39] Adam's belief that Berkshire will likely pay a dividend at some point over the next 5-10 years,

[00:00:44] its energy business, life at Berkshire after Buffett and much more.

[00:00:47] Adam is a wealth of knowledge when it comes to all things Buffett and Berkshire.

[00:00:50] As always, thank you for listening. Please enjoy this discussion with Adam Mead.

[00:00:54] Hi Adam, how are you? Thank you for coming back.

[00:00:58] Great to be here. Thanks for inviting me back on.

[00:01:00] It's been a couple of years since we've had you on Excess Returns but I think when Jack and I

[00:01:05] think about Buffett and Berkshire Hathaway there's really a handful of guys that we would

[00:01:11] consider to be experts on the topic. A lot of people out there look at Buffett and a lot

[00:01:16] of people have studied Buffett but I think in terms of the depth and thoroughness that

[00:01:21] you've looked at Berkshire Hathaway and its history and actually attended the meeting,

[00:01:27] you were at the last one. I think you're one of in my opinion at least in my network,

[00:01:33] one of the more knowledgeable people on the company and on its history.

[00:01:40] We wanted to have you back on today to talk about two different things. It's the meeting

[00:01:49] and what's going on at Berkshire but I also don't ever want to lose the lessons that we can learn

[00:01:57] from Buffett and Munger and all the great things and the consistent message, if you will,

[00:02:04] that Buffett has been speaking about investing for over 65 years now.

[00:02:11] I wanted to start with the meeting since that was just recently. You were out there,

[00:02:20] I saw that you were networking and you brought the great people. I think we're still interested

[00:02:23] in the book and on the book is fantastic. I had it right here. It's a massive undertaking that

[00:02:28] Adam did but I wanted to ask you how because Munger wasn't at the meeting this year,

[00:02:34] he passed away. How in your view do you think it was different without Charlie?

[00:02:42] Yeah, it was different for sure. I've been going out since 2012 every single year

[00:02:51] with the exception of the COVID years where no one was there but

[00:02:56] you know and I think the meeting would have been different if he had just died

[00:03:00] or he died November. It's still fresh but we've had enough time that

[00:03:09] weren't even joked after the movie. Geez, don't applaud too much for Charlie.

[00:03:17] There was enough time had gone by where we could still joke and Charlie would probably

[00:03:22] first say don't shed any tears. I almost lived to a hundred here

[00:03:29] but it definitely was different without Charlie. You felt that absence and

[00:03:37] but it was nice at the same time to really take some time, celebrate his life

[00:03:45] and really just kind of introspect on why we love the man, why we continue to go out to Berkshire,

[00:03:53] why we continue to follow the company. It was just one of those opportunities to really pause

[00:03:58] and laugh. I was really happy that they were able to get the permission of all these folks.

[00:04:06] I hope you guys have your listeners have watched not only the meeting but the pre-meeting movie

[00:04:13] so one of the benefits of being out there person is you get this pre-meeting movie which is

[00:04:20] generally an hour long of all kinds of new commercials and different skits and they get

[00:04:25] these celebrities to do these skits. I just think it's so wonderful that have the greater

[00:04:32] world see their, if it weren't for Charlie but certainly Charlie too, just their personality

[00:04:38] and they not all about this. They had fun and they had this skit with the Breaking Bad guys

[00:04:46] instead of drugs that was peanut brittle and it just really humanizes

[00:04:54] both of them and I think just celebrating Charlie and again hopefully the world could see

[00:05:00] the human elements that he really brought to the table much deeper than business

[00:05:05] and so when you lose that kind of present and had him for so long and he was so sharp

[00:05:12] right up until the end it felt kind of sudden but reflecting on his life I think we were really

[00:05:18] lucky to have him for as long as we did. I really thought the first page of Buffett's

[00:05:26] letter this year which was titled Charlie Munger the architect of Berkshire Hathaway was

[00:05:33] and it was just a one pager but you know when you when you read that and kind of frame it that way

[00:05:41] you know it really does sort of stand out as you know Charlie being the architect.

[00:05:47] Buffett might have been the builder but Charlie was the guy above architect type of you know

[00:05:54] with the design if you will. What in your mind what are the biggest lessons that you either

[00:06:07] have learned or were have taken from Munger? You know people it's sometimes this question

[00:06:15] comes up you know okay if you could only have lunch with Warren or Charlie you know who would

[00:06:20] you pick? I would pick Charlie. I very much gravitate just sort of naturally towards a

[00:06:32] worldly view just interested in so many different subjects and for me Charlie's

[00:06:40] worldly wisdom this multidisciplinary approach of looking at things really resonated with me

[00:06:48] certainly everything Buffett is about I mean he's my hero too but and Buffett has even said

[00:06:55] he's much more narrow focused but Charlie just had this broad range of of interest and intellect and

[00:07:03] so for me it's finding sort of that kindred spirit and just the depth that goes along with that

[00:07:14] you know and then you could always you know you listen to or read you know some of the

[00:07:21] talks he gave at Westco when that was going on or the Daily Journal meeting you know he would

[00:07:28] always find a way I mean first of all the people that you know his his quote unquote groupies

[00:07:35] which we are affectionately called and he called us would give him questions that were very broad

[00:07:40] but he'd always find a way to really relate those kind of things to investing really kind of bring

[00:07:47] it into a fun way I mean you know thinking about investments markets like an ecosystem have you

[00:07:55] know different niches and you have different say species or companies you know that occupy

[00:08:01] different economics spaces and just that way of crossing bounds and being very

[00:08:10] unabashed about it he would he would cross academic boundaries with ease and I think he was

[00:08:19] he was much better for it and Berkshire was much better for it.

[00:08:23] To your point about to Justin's point about the letter before like one of the cool things

[00:08:27] about both of them is you know we live we're in a business where egos are so huge like everybody

[00:08:31] and they both always would give credit to each other like if it had been Buffett who went first

[00:08:35] and Charlie was writing the letter the letter would have been about you know how the credit goes

[00:08:39] to Buffett I think that's really cool that both of them always did that with each other.

[00:08:44] Yeah you know my book was for sale at the bookworm the last two years and this year it wasn't

[00:08:50] and that's because Warren the only book that was for sale at the meeting was the new edition of

[00:08:58] poor Charlie's Almanac and it really you know you have that one pager at the beginning and just

[00:09:04] you know just really I think I think Warren really wanted to pay tribute to his partner and

[00:09:12] and I think it was dessert you know those those two guys are just so just intellectually

[00:09:23] they're just powerhouse and to see them defer to one each other one another you know it really

[00:09:30] just shows you how much respect they had for the other and sort of highlights

[00:09:35] just how good the other person was so without a doubt Berkshire Hathaway would be completely

[00:09:42] different if 10 years ago or 20 years ago either of them had left first so it's just

[00:09:54] his influence was certainly deserved I think you know Warren will get his credit and Charlie I

[00:10:02] think will will age well over five I mean those of us who are more close to the Berkshire and

[00:10:08] into the investing world really appreciate him but I I really think Charlie's influence will be

[00:10:15] will grow over time Warren Warren has his you know his fate sealed in the pantheon of

[00:10:21] of investing grace but uh but Charlie's a little bit more nuanced and I hope that and I believe that

[00:10:26] his influence will uh will be recognized more over time do you think that there's anything

[00:10:32] this might be a little bit of a seem like weird question but I mean is is there any area with

[00:10:38] in Berkshire that would be impacted by this or is the company does it have enough leadership and

[00:10:46] have the most decentralized decision making that it's sort of we might not see it of course

[00:10:54] boss it might not have that sounding board that he had or that deeply thoughtful guy

[00:11:00] but he kind of does have that so I'm just wondering do you think there's anything we might

[00:11:03] that might be impacted by it and not being there yeah I I think his presence this influence

[00:11:15] was a positive and would have been positive for as long as they live but again I think he

[00:11:23] would be the first to say and Warren would put me the first to say if the success of Berkshire

[00:11:29] Hathaway relied on you know one man living to 93 or 94 and the other man living to 100 you know

[00:11:36] they've done something wrong so so back 10 years either of them could have died certainly Berkshire

[00:11:44] would not be to where it was exactly today but they've had this transition plan in place

[00:11:53] for a long time so their last job really and I think that job is done we're in extra innings now

[00:12:03] with Warren I think he said that but they've set the Berkshire culture up put these

[00:12:09] momentum in place to continue after they're gone and so I think their their last job really to

[00:12:16] make sure that Berkshire could continue because if if it was even a significant degree ended on

[00:12:24] either of them being around I think it would be a much much weaker organization and so I think once

[00:12:32] you know certainly Charlie I think your right jacket it would it would be different if

[00:12:37] Warren left first. Charlie being throughout the number two man I think it's less direct but

[00:12:46] I think when the day comes that Warren is no longer there it will really become apparent

[00:12:52] depth of management depth of expertise that exists at Berkshire and it's not just the

[00:13:00] management bubble it's also at the board level too I mean there's some phenomenal board member

[00:13:05] at Berkshire too so the momentum that the company has in place today will absolutely continue

[00:13:10] forward however long Warren at that the helm. Yeah we've had Chris Davis on the podcast and he's

[00:13:17] like one of the most thoughtful people he can come up with and I'm sure the rest of the board

[00:13:21] is very similar to that. Well and what's interesting with you know Chris is that he pitched

[00:13:25] Munger on buying that family business and Munger turned him down but yet they developed like

[00:13:30] this long-term friendship and he almost became Munger became like almost a segment or to Davis

[00:13:36] which is which is really cool. Yeah you see that depth in the board that for how long Davis

[00:13:45] owned Berkshire shares or Merrill Whitmer or Ken Chenald, Rand American Express I mean these

[00:13:52] are these are people that have one way or another been really deeply connected to Berkshire

[00:13:56] Hathaway and that's not even counting Howard or Suzie but it's two children that are on the board so

[00:14:06] you know there's a lot of depth there that I think is you know Warren and Charlie but

[00:14:12] Warren's got the spotlight and spotlight on top of the company but there's there's

[00:14:17] there's a significant depth at Berkshire Hathaway. There is this cool thing you know Charlie would

[00:14:22] always do in the meeting or he would do a lot you know Warren would turn to him

[00:14:25] and ask something and Charlie would always say I have nothing to add you know and that's a really

[00:14:30] cool thing because obviously in our business you know people always you know you go and see in

[00:14:33] BC or whatever like you come up with if you don't have anything to add you come up with

[00:14:36] something to add even if it doesn't make any sense so I think that was a really cool thing

[00:14:40] about him and then I think there was a story where that played out a little bit at the new

[00:14:43] meeting with Greg sitting next to Warren so can you talk about what that is? Well there was

[00:14:48] there was two related to that the first one when when Warren just kind of reflexively

[00:14:56] you know looked look to his like I said be his left and that you know Charlie and and you know

[00:15:03] and then it was kind of you know he said he even had to check himself a couple of times but still

[00:15:09] did it so just sort of reflexively looking to Charlie to his left and

[00:15:15] you know Greg who was now on his left you know clapped and kind of took it well

[00:15:24] and everybody kind of applauded but just kind of showed just showed just that depth of

[00:15:32] you know he was just he was always his right hand man always there and

[00:15:38] just how hard it is to for him to remember that he's just he's on the stage and you

[00:15:43] know Charlie I'm sure when you do it for that many years and you be looking at the same person

[00:15:48] for that many years and saying that I'm sure it's hard to it's hard to look at face someone else's

[00:15:51] name yeah it was it was uh it was it was kind of a special moment and then um and a little bit

[00:15:59] later I think it might have been the afternoon Greg uh Warren had answered some question and then

[00:16:06] passed it off to Greg and Greg genuinely did have anything to say and he watched his clip

[00:16:11] I mean I just love it it just endeared me more to Greg he kind of kind of just squirmed in a seat

[00:16:16] a little bit and then he started to say you know I've got nothing to add he kind of kind of apologized

[00:16:21] he had said that you know I have nothing to add of course everybody everybody applauded so I

[00:16:27] just thought it was a nice uh a nice little moment you know Greg in his way showing extreme

[00:16:35] deference uh to Charlie and the shareholders you know kind of accepting Greg is has um

[00:16:42] you know really that that new right hand man because I think Greg Warren has really um to rely on

[00:16:48] Greg much more and certainly much more publicly I mean they went to to pan together and uh I I

[00:16:54] think with Charlie gone that relationship will be highlighted uh to a greater extent and and to

[00:17:02] the extent that Warren you know really places 100% of his faith trust in Greg is apparent because

[00:17:10] there was a number of times where you know whether it was the home services settlement or the pilot

[00:17:16] uh the pilot settlement that whole kind of debacle you know he just handed it off to Greg and

[00:17:22] Greg has met the challenge so I think that trust that uh that Warren places in him is

[00:17:28] certainly well-deserved and well-founded and to your point the way the shareholders reacted showed

[00:17:33] how much they respect Greg too um you know it's it's very clear that the Berkshire you know shareholders

[00:17:38] have a ton of respect for him yeah and to your point earlier about you know having that stage

[00:17:43] having that soapbox you could easily see someone at another company you know angling for sort of

[00:17:51] the spotlight or something tapping into you know the mongerisms and just going right out

[00:17:57] of life nothing to add but Greg I think it just kind of happened and he was very differential and

[00:18:04] and um I think that showed I want to ask you what about about the thing that was probably the most

[00:18:10] in the news after the meeting which was the whole thing with apple um but he had sold you know

[00:18:15] some he's still out of a ton of apple but he sold some significant a significant number of shares

[00:18:19] like what was your take on that and what did he talk about in terms of the reasons he's doing it

[00:18:24] so I the reasons he gave any kind of he squirts he's sort of uh squirms a little bit and

[00:18:33] you know uh weasels way out of out of the direct question but um you know he said that you know we

[00:18:41] won't be it won't be a bad thing if you know we've sold a little bit you know basically taxes go up

[00:18:46] but uh you know if you kind of read between the lines I think it was primarily a valuation thing

[00:18:54] you know apple trading at you know almost 30 times earnings and uh that that I think gets to be a little

[00:19:01] bit uncomfortable and and more it has even said no generation ago when coca cola with value that some

[00:19:07] crazy multiple that he made a mistake not selling coke at the time that would have been around

[00:19:13] you know 2000 around there so um you know that's probably in its mind but probably just

[00:19:19] valuation and then I think you know that coupled with sort of these again we kind of read between

[00:19:30] the line we wouldn't directly say it but markets are expensive um you know I think he even said

[00:19:37] you know it it's it's not it'd be nice to have a little bit more cash around he talked about 2008-2009

[00:19:44] and having the willingness to do something and maybe they could have done could have done something

[00:19:50] bigger so I don't want to read too much into it to say that hey you know he's building up this

[00:19:55] war chest because you know excuse me another another big crash is coming I think it's just a matter

[00:20:03] of a couple of these little factors really coming together over valuation really not much

[00:20:13] happening for general market things looking expensive geopolitical

[00:20:20] tensions that are high and rising and I think he mentioned at one point you know other markets are

[00:20:28] are even more interconnected these days and that could lead to potential for more more disruption so

[00:20:35] uh I I'd say you know kind of characterize it 50% valuation 50% sort of preparing for the future

[00:20:43] but I have no particular insight into that. At Adam do you know if

[00:20:50] he's ever held such a large individual stock position as a percentage of Berkshire's overall

[00:20:58] portfolio like right now even with the sale I mean Apple's 40% of his public stock portfolio

[00:21:06] and I'm wondering like back in the day early days thinking like 80s did his portfolio ever get that

[00:21:13] concentrated in any other name that you can think of or the one the one time which is sort of

[00:21:22] almost an exception but Geico when they when they when Berkshire was first buying Geico

[00:21:29] they bought half of it as um as a common stock investment before buying the other half of it

[00:21:36] 1996 that don't quote me on this um probably upwards of like 70% of the portfolio it was a

[00:21:45] it was a very significant piece but but there you know he was almost looking at it like a take

[00:21:51] takeover candidate probably and they ultimately did take take the whole thing private but

[00:21:58] it's if it's not the largest it's one of the largest apple it's it's huge the other thing there too

[00:22:08] you know I guess I'm not surprised that he sold some of it but the other dynamic too is

[00:22:16] they have such a large embedded game in Apple that to sell say okay say say it's 100%

[00:22:27] it's overvalued at 30 times earning well if you're if you're Berkshire and you have a cost basis

[00:22:34] that's what 30 billion you have 150 billion dollar gain on this thing you know you're gonna have

[00:22:40] to pay a significant amount of tax so the calculus for Berkshire really how much can we realize

[00:22:48] after tax and then what can we do with the money so there's a big tax debt sort of the

[00:22:53] effective PE ratio if you will for Berkshire owning Apple lower than the market just by virtue of their

[00:23:02] gain it's always been interesting to me how comfortable he is like being concentrated so

[00:23:09] you know one of the reasons of the reasons you listed one of the reasons you did not list is

[00:23:13] well this has become such a huge portion of our portfolio that we've got to get rid of some

[00:23:16] you know if you talk to any traditional money manager that would be the reason probably

[00:23:19] if I've got a stock that's 40% of my portfolio they would say you know prudent you know

[00:23:23] management just dictates that I sell some of the position but it's interesting like Buffett is

[00:23:27] always comfortable with that he's comfortable with having when he's got conviction he's comfortable

[00:23:30] you know exceptionally large positions yeah and again sort of if you take a step back Jack and

[00:23:38] look at you know Buffett at Berkshire really looked at their common stock investment as

[00:23:45] piece of a business so you know Apple

[00:23:51] their 6% of Apple or whatever it was you know they look at that as a proportional business so

[00:24:00] Apple's a bit more than two and a half trillion a three trillion in the market

[00:24:05] you know they have a little piece of Apple so they look at it like a business so if you look at

[00:24:12] you look at Apple in Paris and to say Berkshire's market cap or intrinsic value

[00:24:24] call it 900 billion Apple's not as big you know they they it's one of one of that Berkshire's

[00:24:32] biggest businesses but you know they have a lot of other business too so it's not just that

[00:24:36] just that stock portfolio which is about 350 billion it's really all of the businesses that

[00:24:42] Berkshire owns they just happen to own 100% of them BNSF Berkshire the way energy

[00:24:51] so I think in the proper context it's not as large but it is a very large position

[00:24:56] that's that's without without question you and mentioned taxes which just got me thinking

[00:25:03] if you don't mind just commenting on why Buffett says you should look at operating

[00:25:10] earnings not gap reported earnings and the importance of that sort of seeing through

[00:25:16] with that with the gap earnings including the I guess unrealized gains and losses right yeah it's

[00:25:21] one of these things where I guess from the outside you know you hear Buffett say okay don't

[00:25:27] don't look at adjusted earnings and and all of that but yeah okay we're telling you to look at

[00:25:33] something different so so so Berkshire's and actually I had a conversation with a friend about this

[00:25:40] Berkshire's definition of operating earnings are after tax after interest so when when you know

[00:25:50] I think we're used to hearing operating earnings as EBIT earnings before in taxes

[00:25:54] Berkshire's definition and after tax after interest so just just to kind of be be clear on that

[00:26:02] but they exclude any any changes in the investment portfolio though I think it was 2018

[00:26:10] that the rule changed where the added low unrealized and realized gains in the investment portfolio

[00:26:17] through the income statement and so it just caused a huge swing in the bottom line and it really has

[00:26:24] caused the net income gap reported earnings to be meaningless because you can cherry pick and

[00:26:33] say well geez you know in a big stock market up year earnings look huge and then in a year where

[00:26:41] stocks are down you know they're earning terrible but kind of ignore that noise you come to something

[00:26:48] that's much more stable much more realistic to the underlying earnings power of the businesses

[00:26:54] rather than sort of this noise of the accounts so I've put into the equation

[00:26:59] you mentioned Berkshire energy and one of your takeaways and you have a great blog post

[00:27:03] on your blog that I recommend everybody read about your takeaways from the meeting but

[00:27:06] one of your takeaways was they were very very optimistic about energy it seemed like um

[00:27:11] it seemed like Greg Abel was talking about just how much demand is going to go up on the

[00:27:14] energy side um like I think he had talked about I think you'd mentioned like Iowa and Nevada

[00:27:18] as two places that uh energy usage is going to go like up exponentially over you know by 2030

[00:27:24] or something like that I'm just wondering can you talk a little bit about what they said

[00:27:27] about energy and also how is Berkshire positioned right now with respect to energy

[00:27:32] yeah so so Berkshire Hathaway first got into the energy business in 1999 I think they

[00:27:38] the deal closed and then 2000 they bought the Iowa company uh mid-american energy it was called

[00:27:46] mid-american up until I think 2014 when they changed the name the Berkshire Hathaway Energy

[00:27:52] but that has grown from Iowa utility they bought a company Bada NV Energy they purchased

[00:28:05] Altalink which is an entity up in Canada they own some assets in the UK

[00:28:13] they also bought some Dominion energy assets this cold point terminal and on the east coast

[00:28:21] so it has really grown to be this this huge huge entity and they've never paid a dividend that's the

[00:28:28] thing with most utilities I kind of joke about this most utilities are sort of running the cash cow

[00:28:35] you know the uh they pay out most of their their earning the dividend well you know I like

[00:28:42] to say if Berkshire Hathaway energy had a motto it would be milk me later because

[00:28:47] it says never take a dividend from the energy business up to Berkshire Hathaway

[00:28:55] they just reinvested it basically layered on taking those earnings borrowed an equal amount of

[00:29:01] debt so the energy business is huge uh so it's what's really interesting now

[00:29:10] is kind of characterized it as you know balancing on the edge or two-edged sword because

[00:29:17] Warren talked about his letter what we're seeing now is this huge amount of litigation

[00:29:23] where had some wildfires out west and there's there's lawsuits uh totally billions of dollars

[00:29:32] against in this case one of uh one of Berkshire subsidiary Pacific Corp and

[00:29:38] so that's a bit it's a big negative the potential big negative where I think Warren characterized it as

[00:29:46] you know we're okay with some variability in returns but we don't want to invest money good money after

[00:29:53] bad we can't have that be you know a binary good return or zero they won't they won't invest if

[00:29:59] they think it's zero so the the risk in the energy business is that the political establishment the

[00:30:09] regulatory establishment essentially bankrupts or takes uses the utilities to pay for um you know

[00:30:23] some some of these wildfire damage really puts a damper on future investment to such a degree

[00:30:30] that you know it doesn't make economic sense to invest in those utilities or in those assets Berkshire

[00:30:38] Berkshire is insulated to a a slight degree because they have such diversity of assets so

[00:30:45] Pacific Corp which is kind of in the the crosshairs at the moment there's only about 19 or 20%

[00:30:51] of Berkshire Hathaway energy's uh earnings so it's a it's a significant portion but it's not

[00:30:59] it's not a game it's not like Berkshire Hathaway energy's going to go bankrupt tomorrow

[00:31:03] you have all these risks on the one hand but on the other side there is a truly huge amount of

[00:31:11] potential upside here and needed investment so Greg talked about mid-american the Iowa utility

[00:31:19] doubling its potential demands in the 2030s uh nv energy which is Nevada and

[00:31:26] uh talked about that tripling let me trip that look for an industry that has really remained

[00:31:33] quite flat for a very long time they have that kind of increase in demand is really just unprecedented

[00:31:39] though the opportunity there and really the societal need to have these energy investments happen

[00:31:47] uh is there and so I where I kind of fall is I think it will happen in a way that's ultimately

[00:31:56] constructive those there's there's a bill in in Utah bill 224 uh it's basically I think Greg kind

[00:32:04] of touched on it being the bold standard where essentially they're gonna kind of do or look

[00:32:11] to do what they did in the insurance industry but there's a loss of 100 billion dollars in the

[00:32:15] insurance and effectively the government steps in and says you know we're going to backstop that

[00:32:19] but what what this bill in Utah will do with the dotted elsewhere will help essentially shield

[00:32:25] the utilities from major unwarranted lawsuit that prevent this uh this investment it will allow

[00:32:37] cost recovery of prevention some other other assets that they need to invest

[00:32:43] and it will set up a fund that states and uh municipality tap into if there is a wildfire so

[00:32:50] it's really just looking at the system and saying how can we structure this in such a way that it

[00:32:56] encourages investment needed investment much needed investment while uh protecting those who

[00:33:04] need need protecting it making sure that the system is is safe really uh but but the demand

[00:33:11] is huge and and Berkshire there's a great presentation uh Berkshire Hathaway Energy put out

[00:33:20] generally every year but you can see that they they have 42 billion dollars worth of

[00:33:26] backlog just in the next three years to invest this is just a truly huge amount that's just

[00:33:32] that's just one company so the the coming demand for these assets is truly huge and

[00:33:39] I think the industry is just kind of waking up to the reality you've heard Erquilon must talk about

[00:33:46] this we're needing two or three times the amount of capacity and people kind of laughed them off

[00:33:51] but it's really coming and I think you know and it's driven by AI it's driven by

[00:33:58] EVs and sort of this decarbonization so a lot of things are hitting at once and I think that

[00:34:05] that ultimately I think the opportunity there and the need for this will end up be a net positive but

[00:34:12] you can't rule out that there there's risk involved as well so so Adam just for our audience

[00:34:19] and feel free to kind of shake this out a little bit more it seems like the lawsuit stands around

[00:34:25] maybe the Pacific Corp not keeping its infrastructure up and like sparks and

[00:34:34] down trees can bring down wires and stuff and that effectively is what they're saying caused

[00:34:42] those wildfires is that the gist of it? Yeah I mean every utility is in a battle against

[00:34:50] mother nature and I think it's natural for when something like this happens to look at who can

[00:34:58] pay for it but you know first or half the way and this is Greg Abel who gets credit for it

[00:35:07] first out of the way energy really has an endless reputation in the market. Charlie talked about

[00:35:12] it a couple years ago I think at the Daily Journal meeting saying Greg runs the utility business

[00:35:19] like he were a regulator and that's quite unusual and when Pacific PG&E in California failed

[00:35:29] they want a Berkshire to come in and buy it because of Berkshire's reputation so

[00:35:34] you know without a doubt you know something probably could have done better but you know

[00:35:39] Berkshire Hathaway has a well-deserved reputation in the energy business and Greg even talked

[00:35:45] about this this the shift that they're going to have to do from always on to you know flip the

[00:35:51] switch basically if there's an issue so actually this two days ago FERC the Agile Energy Regulatory

[00:35:59] Commission just unleashed or unveiled sort of this new plan for transmission going forward

[00:36:08] and sort of this new set of rules and plans and going forward the utilities are going to have to

[00:36:17] best certainly invest more in prevention but there's all kinds of other things that that are

[00:36:21] available in terms of different technologies different sensors that they can put on the line

[00:36:28] shut things off quicker or I think as a society we're going to learn a lot from this but you

[00:36:36] know the demand and the thing with power and I did an analysis of the utility industry a couple

[00:36:42] of months ago it's really fascinating because you know just the power that that is coming into our

[00:36:49] monitors and our speakers who are having this conversation today was generated you know a

[00:36:55] fraction of a second ago it can't be stored so it has to happen immediately and utilities

[00:37:02] have to balance this demand on a second by second base I mean it's really quite remarkable the whole

[00:37:07] system actually works and there's this great book I'm kind of going off on a tangent here but it's

[00:37:14] called The Grid you want to read a little bit more think about five years old but our electrical

[00:37:21] grid is ancient and outdated and there's a there's a real need for investment upgrade in

[00:37:30] the utility space and Berkshire Hathaway I think uniquely positioned to contribute and to benefit

[00:37:38] from it they have the capital to do it they have the expertise and they have the reputation

[00:37:43] perfectly though wouldn't it be wouldn't it be funniest utilities turned into like the new

[00:37:47] growth stocks rather than like rather than tain a good end of your point they all take a

[00:37:53] clue from from Berkshire Energy and just start retaining their earnings and figuring out how

[00:37:59] to get growth going a lot of these I and again I've studied I studied the industry a little bit

[00:38:06] a lot of them issue shares and pay dividends so it's kind of this weird

[00:38:11] cash flow thing going on but the the upside you know kind of complicating all of this

[00:38:19] unregulated assets first regulated assets and you know there's

[00:38:22] it has sort of a natural cap certainly when you're in regulated markets you can have a regulator

[00:38:30] return you know probably capped at nine to eleven percent but you have the ability to invest huge

[00:38:37] amounts of money huge amounts of capital at known returns so I think the indirect play of AI

[00:38:46] you know that's already out of the bag but it's energy that's really the choke point

[00:38:53] I want to ask you a little bit about succession succession we talked about Greg a little bit

[00:38:56] but there's there's a bunch of other players and we have a jeet we have Ted and Todd a lot of

[00:39:00] people that are out in the media in terms of who might be playing significant roles in Berkshire

[00:39:05] in a post-buffet world can you talk a little bit about how that's all been figured out and

[00:39:09] what are the roles everybody's going to play post-buffet yeah well I think the way Berkshire

[00:39:15] has been designed is sort of has largely solved that problem you know this the philosophy of

[00:39:24] delegation just shy of abdication so giving the managers of the individual units extreme

[00:39:31] degree of autonomy to run their businesses it really doesn't require a big big amount of

[00:39:41] investment headquarters I mean headquarters something like 25 people so that said you know I

[00:39:51] think the structure under Greg and a jeet where they have their respective areas of

[00:39:58] non-insurance with Greg and an insurance with a jeet that seems to be working really well

[00:40:04] and you know if you look at Berkshire's results particular in some of the manufacturing business

[00:40:11] Greg's Greg's hand is just sort of subtle but guiding hand is apparent there where he's applied

[00:40:17] some more energy into those businesses and have gotten them to form a little bit better

[00:40:23] so I don't think much really needs to change or will change you know we saw

[00:40:30] Warren you know say he would like to have Greg he were voting let Greg have the ultimate

[00:40:37] responsibility but investment portfolio but that could also and some have taken that to suggest

[00:40:44] that Todd and Ted the two individuals that Berkshire hired about 15 years ago the handle

[00:40:51] investments that that was somehow a knock on Todd and Ted and I don't think it is I think

[00:40:57] it's just a matter of saying that the CEO of Berkshire will be Greg about something you

[00:41:03] know unfortunate happened the CEO really used to be that that ultimate risk first person

[00:41:10] that the person ultimately responsible but I think Todd and Ted will continue to invest

[00:41:17] tens of billions for Berkshire the way that they've done they're they're involved in looking

[00:41:23] at acquisitions and and and even chairing some of the subsidiaries over time so

[00:41:31] they're involved in a way that I don't think is fully appreciated but you know then you just

[00:41:37] kind of look look below you know Greg and a Jeep you know the insurance side with with with a Jeep

[00:41:45] Joe Brandon came back over when they bought Allegheny the guy that run the specialty group

[00:41:53] Peter Eastwood he's got a pretty good reputation on his background with the AIG if I remember

[00:41:58] correctly and then Greg has put a couple of energy managers in charge of of other operating but

[00:42:09] got it run seas candy guy by the Pat Egan he was at it's an American he might have been with

[00:42:18] MB energy before that so there there is a group of managers there's this group of talent that

[00:42:24] is below the surface that is really quite impressive and you know when you walk around

[00:42:32] the the exhibit hall and that's what's one of the coolest things about going out to Omaha's

[00:42:38] I've gotten to meet you know the CEO of BNSF farmer or you know got around Benjamin Moore

[00:42:45] Dan Calkins you can just talk to these people and they're they're super smart they're interested

[00:42:51] they know their business and it really gives you the assurance that you know things things are

[00:42:59] really going to be okay and this this culture this really deep culture that exists in Berkshire

[00:43:03] Hathaway is going to continue but it's it's it's not just words at the top I mean it really

[00:43:10] pervades the whole organization it's really quite impressive so I think once once that spotlight

[00:43:17] has shifted from Buffett really is on Greg I hope I hope some of these managers kind of

[00:43:24] get a little bit more light I think they're they're under a pre when I was uh when I was thinking

[00:43:30] about Ted and Todd and the newer guys I was thinking about the impact that Munger had on Buffett

[00:43:34] you know taking him from more of a deep value guy to buying quality companies and discounting

[00:43:38] and I'm wondering when you think about these new guys that have come in I mean is there

[00:43:40] a significant shift in Berkshire strategy like that do you think's coming or has come with them

[00:43:46] being involved in the picture um you know I but my first inclination Jack is to say

[00:43:54] no I don't think there's any kind of you know sort of meaningful shift that even needs to happen

[00:44:02] I mean the only kind of caveat with that would be Warren has said that Greg and Charlie said

[00:44:11] it before that Greg has searched ability better a certain thing than Warren is

[00:44:19] so to the extent that Greg kind of puts his mark on thing you know it might be a little bit more

[00:44:23] energy a little bit more attention to some of these businesses where Warren is kind of fine just

[00:44:29] you know buying them putting them on the shelf letting them operate but I don't think anything

[00:44:35] really big will happen post Buffett I don't think anything really needs to happen I think this

[00:44:41] architecture you know that the Charlie put in place that markets the Charlie credit for

[00:44:47] being the architect of Berkshire has to wait I mean they've really figured out how to run

[00:44:53] the place really well that being said I do think that the managers the managers given this autonomy

[00:45:01] at the local level really really is is the secret sauce because things don't have to be made

[00:45:10] these decisions don't have to be made at headquarters I mean I was talking to the new CEO of Pampered

[00:45:16] Chef of the Venus they're last name and probably what you're at but

[00:45:24] this woman is moving she's shifting the business into more of the digital age so she

[00:45:30] she helped the business when when COVID hit having some of these pampered chefs you know

[00:45:34] parties so virtually you know these managers are on the ground and that's that's the beauty

[00:45:40] of the Berkshire system at the beauty of having this autonomy is that they can adapt quickly

[00:45:47] they can make changes so I think the changes that need to be happened that needs to happen

[00:45:53] at local level will happen but I don't see any kind of big strategic shifts in any kind of

[00:45:59] philosophy and Greg even I think he took pains to highlight that nothing really big will change

[00:46:08] that they're still gonna look but they're they're buying 1% or 100% of a business they're gonna

[00:46:13] look at it like a business if they have any excess cash they're gonna they're gonna keep it the

[00:46:17] safest asset which is treasury so the fundamentals in those pillars of Berkshire Hathaway

[00:46:22] I think will remain standing and sound for a very long time if not forever but the

[00:46:30] sort of day to day year to year stuff you know will be handled that

[00:46:36] let's talk about just as we kind of get towards the end here just obviously the cash position

[00:46:42] at Berkshire is huge it continues to grow obviously with profits that are kicked off

[00:46:48] from the operating companies maybe the sale of apple that puts more cash in the coffers and so

[00:46:53] there's a question of you know what is Buffett going to do with that I think it's I I I tend to

[00:47:02] personally find it the opportunity cost question in my mind like when I think about how long they've

[00:47:09] had that cash position built up interesting but you know I think what the point of that is

[00:47:15] Adam you can talk to this is you know they want to be in there when the when the times get really

[00:47:20] tossed when the real opportunities emerge that they can kind of put that that cash to work and

[00:47:26] just as a side note I was I was just looking like I thought their investments in those Japanese

[00:47:31] trading houses were particularly interesting and they've had those for a couple years and those

[00:47:36] have actually been pretty good performers and I always kind of thought there'd be more

[00:47:41] he owns already I think anywhere from like maybe six to eight percent of those

[00:47:48] states in those in those companies I don't know if there's limits in Japan or what but

[00:47:52] I thought he might ratchet those up a little bit more but I don't know if on the top end

[00:47:56] he can own more than 10% or something like that so anyways just did he give any other

[00:48:00] sense of like the cat like the plan with the cash yeah I mentioned before kind of the

[00:48:09] in selling apples sort of these uncertainties that he he sees which I guess is you know almost

[00:48:15] always the case but with the Japanese company that think Berkshire has committed

[00:48:22] not going above 9.9% I don't think there's any a legal reason why they couldn't go higher

[00:48:29] you know they just want to probably do it on a friendly basis

[00:48:33] that the cash position is interesting you know if I'll start it if you look at Berkshire's history

[00:48:47] in every decade the largest acquisition has been no less than 15% of their equity capital

[00:48:55] so all the way through their history to make an acquisition at 15% of their equity capital

[00:49:03] today would require an investment you know purchase price of 90 billion dollars so just

[00:49:10] just that universe of companies just shrinks dramatically so you know at some point they're

[00:49:18] going to be just so big that you know they just can't really move the needle but I think it's

[00:49:24] important to look at Berkshire's cash in in relation to its you know in proportion so

[00:49:34] if you go back over Berkshire's history right right now at the end of 2023 their cash was at 15.5%

[00:49:44] of total assets at the end of Q1 it was at 17.5% percent so it's not it's not a it's a big

[00:49:55] position and I think everybody focuses on the numbers you know 189 billion dollars worth of cash

[00:50:00] it's a lot of cash I mean don't get me wrong but in relation to total assets it's not all that different

[00:50:07] from you know recent years and it's not it's not the highest it's ever been I think in 2004

[00:50:13] Berkshire's cash was somewhere around 23% of their total assets so Warren did talk about

[00:50:21] you know say he said he wouldn't be surprised if cash was 200 billion at the end of the second quarter

[00:50:27] so you know you'd be kind of pushing that 19 or 20% range but when you think about I guess your

[00:50:36] point Justin about opportunity cost and Warren sort of reflecting on how much they could have done

[00:50:42] in the past of that cash they have a stated value of 30 billion that they won't go below

[00:50:51] because of their insurance commitments I think that number is really effectively probably 50

[00:50:56] billion just by virtue of if you look at their their paid paid claims every year that's how

[00:51:02] much money is going out the door so but let's so call it 130 billion of dry powder that could go

[00:51:11] very quick I mean if they found that they put out what was it 14 15 billion dollars something like

[00:51:20] that in a matter of two weeks in 2008 so if we saw a situation where you know a bed or someone

[00:51:28] else didn't really step in in a big way they could they could make some of these commitments to lend

[00:51:34] to businesses they could make some significant direct investments they could buy whole companies

[00:51:41] and they could invest a ton in the stock market in pretty short order and they could repurchase

[00:51:45] their shares so I think that that cash to me I guess I'll just sort of end this by saying I

[00:51:51] don't think it's not as huge as the raw numbers would lead you to believe and and I'm

[00:51:57] comfortable where it is you know as an owner of Berkshire Hathaway I think the opportunities will

[00:52:04] ultimately materialize yeah and he kind of emphasized sort of a lot of that in the annual letter to

[00:52:13] kind of talking about you know this is they're going to be there when no one else is there

[00:52:18] and there will be another time in the future whether or not Buffett is with us we don't know

[00:52:22] but when there's calamity in the markets and the markets are turning to Berkshire

[00:52:28] because they're kind of the lender of last resort potentially so he kind of views it's almost like

[00:52:34] a more of a mission maybe of what he wants Berkshire to be able to do for this country and for capitalism

[00:52:44] if you will when those times are needed yeah and you know that this sort of counter argument is

[00:52:52] you know they're they're spitting off 35 billion cash a year in operating earning so you know that

[00:53:00] will be that will that cash board will be will be replenished pretty quickly so at some point

[00:53:07] you know they will need a relief valve we've been kind of lucky uh in that they've been able to

[00:53:13] repurchase shares and tire you know a pretty good amount of shares over the last five years

[00:53:19] uh if that's not available you know and I think probably

[00:53:24] probably within five years but but more certainly within 10 years they'll have to start you know at

[00:53:29] least some sort of regular dividend to kind of bleed off that cash because you know like I said

[00:53:34] the universe of companies that they could buy to really move the needle really just just

[00:53:39] shrinks dramatically once the sums get so big jack there is our youtube cover

[00:53:46] that uh right there get Berkshire Hathaway get get ready to pay a visit but whoa whoa

[00:53:56] just getting at him that's uh oh yeah we're all about the quick through right over here

[00:54:03] and then it'll be like the fibers eventually I mean it really will happen eventually and

[00:54:08] uh yes but happens when you retain all of your hurtings for you know 65 years right right

[00:54:18] as we wrap up here what would you say what was the what was the funnest event you attended

[00:54:22] during me beyond the actual meeting itself oh god weekends full of events what were what were

[00:54:27] the what was the highlight for you oh I I the whole weekend it's just phenomenal uh

[00:54:34] and I you know encourage anybody who had even a passing interest to come out it's just

[00:54:38] you meet so many interesting people and so many people are just so generous

[00:54:42] I guess one that that really stuck out was um Guy Spears value X BRK which he was generous enough

[00:54:51] to post on on youtube this year because of the demand and I mean he he had some

[00:54:57] some just incredible speakers uh lined up in that event I mean I got to meet uh Rosie Rios who was

[00:55:05] the former treasurer of the United States hurt her name is on the lower left of 1.8 trillion dollars

[00:55:11] worth of cash uh Ariel Singh who was this uh uh prodigy of um table tennis Robert Hagstrom

[00:55:23] gave a talk I mean just just some phenomenal speakers um that that was definitely a highlight

[00:55:30] but but the whole weekend it's just so much more than just you know the annual meeting day or just

[00:55:36] the meeting and you meet so many wonderful people and so many different side events and

[00:55:41] you know a company like Markel you know they hold a little meeting uh on Sunday and

[00:55:49] they provide a brunch and this is not like you know a couple of plastic wrap uh for an olivar

[00:55:57] they give you you know the wonderful sandwiches and eggs and

[00:56:01] coffee and I mean it's top notch and it's all free and it's just the generosity of spirit

[00:56:08] and and um learning it it's just that culture um unconvinced will will continue long after

[00:56:19] you know Buffett Buffett leads the hell I mean I think the meeting will the meeting will shrink

[00:56:24] for sure you have a lot of people that go out there um you know sort of one timers but I think

[00:56:29] to the extent that it shrinks it better in the sense that the people that are out there

[00:56:34] really want to be out there and um and are true owners and partners but the whole culture is just

[00:56:41] phenomenal so I'd love to see you guys out there next year we do have to be here I'm like disappointed

[00:56:48] I haven't done it but um listen Adam this has been great thank you very much for coming on kind of

[00:56:52] short notice here if people want to um learn more about you and what you do either on the

[00:56:58] newsletter side or the asset management side where can they go sure so uh let's say

[00:57:03] twitter uh frk underscore student is my my handle I think the ex um meat capital management

[00:57:12] beat cm.com and then I do write a newsletter uh partly partly free partly uh paid but on

[00:57:18] sub stack watchlist investing watchlistinvesting.com it's a lot of fun guys thanks Adam appreciate

[00:57:26] you this is Justin again thanks so much for tuning into this episode of excess returns

[00:57:31] you can follow jack on twitter at at practical quant and follow me on twitter at jjcarbono

[00:57:38] if you found this discussion interesting and valuable please subscribe in either itunes or on youtube

[00:57:43] or leave a review or a comment we appreciate it. Justin Carbone on jack forehand are principles

[00:57:48] at the lidia capital management the opinions expressed in this podcast do not necessarily

[00:57:51] reflect the opinions of the lidia capital no information on this podcast should be

[00:57:55] construed as investment advice securities discussed in the podcast may be holdings

[00:57:58] of clients of lidia capital