We Study Billionaires - The Investor’s Podcast Network - TIP548: Berkshire Hathaway Masterclass 2023 w/ Chris Bloomstran

Episode Date: April 30, 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.  IN THIS EPISODE YOU’LL LEARN: 00:00 - Intro 10:21 - The intrinsic value of Berkshire Hathaway and what the P/B of Berkshire Hathaway tells us & what it doesn’t tell us.  16:34 - How to think about depreciation and maintenance CAPEX 19:02 - Why the insurance business is worth approximately as much as the energy and railroad businesses combined 35:17 - How to think about Berkshire Hathaway’s bigger equity positions 1:13:49 - Where you can use Berkshire Hathaway to park cash?  Disclaimer: Slight discrepancies in the timestamps may occur due to podcast platform differences. BOOKS AND RESOURCES Join the exclusive TIP Mastermind Community to engage in meaningful stock investing discussions with Stig, Clay, and the other community members. Listen to Stig’s masterclass with Chris Bloomstran on valuing Berkshire Hathaway or watch the video.  Tune in to Stig’s masterclass with Chris Bloomstran on equity valuations or watch the video. Chris Bloomstran’s website. Read Chris Bloomstran’s letters to his clients.  Buffett resource on CNBC. NEW TO THE SHOW? Check out our We Study Billionaires Starter Packs. Browse through all our episodes (complete with transcripts) here. Try our tool for picking stock winners and managing our portfolios: TIP Finance Tool. Enjoy exclusive perks from our favorite Apps and Services. Stay up-to-date on financial markets and investing strategies through our daily newsletter, We Study Markets. Learn how to better start, manage, and grow your business with the best business podcasts.  SPONSORS Support our free podcast by supporting our sponsors: River Toyota Range Rover Briggs & Riley American Express The Bitcoin Way Public Onramp USPS SimpleMining Sound Advisory Shopify AT&T BAM Capital Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Learn more about your ad choices. Visit megaphone.fm/adchoices Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm

You're listening to TIP. On today's episode, I invited the legendary investor Chris Broomstrand. His company, Simper Augustus, has an outstanding track record compounding annually at 11.5% since his fund's exception in 1999. This is compared to only 6.9% for the S&P 500. Aside from Buffalo Munger, in my book, only Chris Brunstrand understands Berksa Heather way better. The company is the largest equity position for both Chris and me, and I hope you'll

enjoy this master class in valuing Berksa Heatherway as much as I did. You are listening to The Investors 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. Welcome to the Amherstaffestr's podcast. I'm your host, Dick Browerson, and as I said there, in the introduction, I'm here with Chris Broomstren. Chris, how are you today? I'm great. I'm great. It's good to be doing this again this year with you. I'm going to be in Omaha with you. Chris, we're recording this April 18th,

and this episode will be published on April 29 or the weekend before the Berkshire weekend, if, well, at least that's what we would call it, 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? Yeah, we bought the stock for the first time in February 2000,

after it had been cut in half, close the January deal. and when nobody wanted to own a real business, they were infatuated with the internet and all things tech and Bershure was out of fashion, so we traded it about 105% of what was a fairly conservatively stated book values. So yeah. We had a chance to talk a bit here before we hit record. And we talked about like the good old days for the lay of the class, a better word. And, you know, I read somewhere that Buffett used to like shake the hands of everyone who came in from abroad, like back.

back in the day, and you actually had a story from, was it your first meeting that you had this story from? Yeah, so we buy the stock. I'd follow the company since they issued the B shares in 96, and it finally got cheap enough to buy in any event, headed to Omaha hand with my business partner, Chad. And, you know, you did dinner a night before and ran here to some folks that we knew.

And it was a small gathering. I mean, you know, the MBA, the 20-something crowd, really having gravitated to Berkshire at that point. it probably had 11 or 12,000 at the meeting that year. So it had caught on that it was nowhere near the culprit. 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 saw it get there early enough if you wanted to get a good seat. So you'd queue up early. And you know, you had the line. It was I think they had one door that went into the old arena in downtown Omaha had not moved over to the new convention center yet. And so you've got this line. line and all these festivities outside. 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 long horn 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. All these blue hairs, 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 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 on the hour. I'd never see me anything like it in my lights. And it was at that moment I realized, good Lord, we've actually joined a cult. What an amazing, amazing story, Chris. And I can't help but ask. When are you going to be in line this year? Have you have decided yet? I don't know. I've been lucky to have some younger friends that are more scry that have done the early morning.

You know, we tend to get there pretty early. You know, 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 late room in the aisle. And I've had folks that have saved those seeds 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. Wonderful. Yeah. We'll be in line early. And it is sort of like if you haven't, if you haven't been, you know, 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 think, you know, you're sort of like, you sort of like have to experience it.

It's like, yeah, you know, to use Warren's words like the woodstock of capitalism, right? Some people came out. You know, they want the good seat. And I'm almost embarrassed to say, I was telling Chris here just before we started the recording that I just, I can't do the 430 anymore. Like, I used to do that. And now I'm just like, no, I can because I'm pawing through the entire day with my schedule there. And, you know, I die out there around like 8 p.m.

If I start my day at 430. So kudos to you, Chris, for starting early. That's, you can upgrade the wine selection for some of the younger folks in your circle. you know, ply them with good food and beverage and maybe talk about me getting up and running ahead. That sounds like a good investment, Chris. I'll keep that in mind. So, Chris, I wanted to jump into the outline here of today's conversation. And I want to start out by saying that, you know, they say it's easier to fall in love than to stay in love. But I don't think that's true for Berkshire. And like you and so many of our listeners, you know, I've read multiple books about

about Buffett and Munger and Berksa Heatherway. And we make this annual pre-legrements to Omaha that we just talked about just now. And, you know, a part of me feels that I might be susceptible to the liking bias. And this is something that Munger talked about in his famous speech, The Psychology of Humans misdustment. I don't know if that's something that you considered also, Chris, because I know you read a lot of information coming on from Berkshire, but how do we as investors stay objective to the new information?

and comes out from the company and whenever we read their SEC filings and so on. You know, 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. 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 when he met with Gorbachev. Trust but verified. He actually borrowed the phrase from a Russian proverb. In any event, 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. You know, 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 the quarterly 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 and then all the successive insurers that they acquired.

Geico and Genree, now Allegheny's collection of three insurance companies, all the little primary businesses, they're specially 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. 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 of 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 restrain them the insurance book.

And for the conservatism, surplus capital has grown. So I think it really is, it really is a place where trust is verified. Mr. Buffett wrote about it in the annual meeting this year. He said we've got these billion, you know, a lot of billionaires and centi millionaires who've owned the stock for years. And he said, none of them go as far as to read the MD&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, you know, they're getting to the end, which is a shame for all of us. But you'll have to watch the business analysts. You know, I spend a lot of time. I've spent a lot of time over the years. trusting but 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. And then if that was a cultural thing, 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.

Reg's been involved now for a few years there. He's gotten his arms around all those subsidiaries. But you know, when Warren's gone, you've got to watch Greg, they've got to watch whoever replaces gray. 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 if you see the culture shift to one of more of a shorter term orientation, particularly

when you're running an insurance operation, you know, I think you'll have plenty of red flags and their dance that the culture might be shifting. But at this point, you can't kill it. They're massively overcapitalized of 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 MSR businesses,

but they're very diversified, very disparate. They're unlevered, which is a margin of safety on a net basis. The MSR doesn't carry net debt with the exception of carrying some debt with the leasing operations, which is offset by assets. It really has the variable four knocks. And the trust is deserved and the culture will persist for a long time. And so I think it's about as worthy of parking money and putting into the top drawer and never having to worry about it as most businesses that you can find globally. That's beautiful.

It's sad. And I wanted to continue talking a bit about love if we can and stay in that theme. You know, 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 talk. tolerate how much we're in love with accounting. And I wanted to share that love with the listener and offer a perspective on the book value of Berkshire that is often used as a short-court evaluation. And there's nothing wrong with that. But investors should be aware of what the price the book tells us and also what it doesn't tell us. And you have this highlight in your wonderful letter that I should give a huge shout-out to. Everyone can find it for free on your website.

If you go to page 76, you talk about Brexit's equity portfolio, which has declined 16% in 2022. And this highlights the potential flaws of using price to book as a Yassi 4 valuation, especially coupled 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? That's always been the case in accounting when a public company owns shares of a company as an investment. Any unrealized capital gains are offset with a deferred tax liability. So as the portfolio rose, recently we changed the marginal tax rate to 21% from 35% of the United States.

And so now you only capture 79% of the upside in terms of any gains that are accreted to book value. and then conversely there's an offset when a portfolio declines. And so you have that nuance. But think about it. In 2022, you had a $350 billion portfolio going into the year, declines by 15 or so percent. Bulk value is declining by that 15 percent offset by the tax shield of the tax rate. Stock price was up about 4 percent last year.

So price rises. The bulk value of virtue drops. And so you've got a higher price to be. book at the end of the year. But with any investment, do you want a lower price or higher price? And so to my mind, you know, 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 worse book value? And so the cheaper the stock portfolio gets, the more attractive it is, which equates to simply higher prospective returns. And so that portfolio drops from 19 and change times earnings going into

to 2022 to under 14 times last year. And the decline in the overall stock market allowed Berkshire to spend a whole bunch of money. I mean, they spent a net $50 billion buying more shares. So the portfolio ended the year of just under $310 billion down from $350, but they spent $50 billion. So you had a big loss and book value decline, but it was a more wholesome book. I mean, I had a offset in the portfolio the prior year. I think, you know, 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 is worth. And there have been times in the past where the Berkshire portfolio has been really, really inexpensive. There have been times for 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, you know, 1965 to 1998,

where the stock had compounded at mid-20s. And the stock portfolio itself had compounded at a faster rate, where compounded at a high rate, augmented by the leverage that you had from insurance, the stock portfolio with larger than book value, Bursher 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, and it really tilted towards insurance. And in 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 mixed-dated losses and you've been too aggressive, surplus capital built. You had a whole bunch of years. You had 25 years, let's say, where the stock portfolio itself is a percentage of insurance reserves and invested assets was larger than shareholders' equity. And so that grew to where the stock portfolio was trading very expensively. Coca-Cola was trading almost 50 times earnings, and it was 35% of the stock courtfully in 1998.

Berkshire had a high-class problem of the stock court-fellate having done so well, but also Berkshire shares itself having done so well that it treated it three times buck. Well, that was a bad book value. 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 remedying some of that with their purchase of January, and I won't get into the nuances there, but they spent the stock at almost three times book as currency entirely in a deal

to pay $22 billion for January when the stock had said. was only worth $11 billion and wound up. Ultimately, Genri bringing 45% of the assets to that combined merger, where the shareholder of January only got 18% of the combined business. And so, Rochabbar big bond portfolio essentially diversified without paying capital gains taxes and selling Coca-Cola,

diversified 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 bullsaintiffed that the book value was not as wholesome. It was not a cheap book value. It was an expensive book value, and the price that Cheryl was repaying at that moment

was an expensive price. Similarly, I think over the course of 2022, Berkshire's book value became more valuable, even though the book value itself for share declined. So you've got to think true what are the underlying assets worth, essentially, is kind of what I'm saying. In your letter, you mentioned that maintenance capics

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 Brooks A Heatherway, in particular, that maintenance CAPEX roughly match the depreciation expense? I think that's part of it. And then the other part would be perhaps you could use the example of BDSF

to provide an example of growth and maintenance CAPEX. 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. An asset, a 40-year asset has to be replaced if you have a house, you're going to have to replace the rough 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.

And so depreciation is an easy expense. There were, for a long time, forever, you would write off depreciation. And the analysts had to add back to depreciation charge. Much like today, a goodly portion of other intangibles are written down. And some portion really do decay. Some portion don't decay. And it's the job of the analysts to figure out what the real economic make decay is. 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 depreciation number sits there in the, it sits there in the financials. You're going to read about it in the footnotes, your depreciation schedules, but very few companies tell you what maintenance cap-ex is. And there are places where maintenance cap-x can be a lower number than the depreciation charge. We own Olin, for example, and I think maintenance cap-x, there's probably $220 million. Decreciation is probably $600 million, where they're not going to add any capacity. There's zero growth CAPX.

These have been incredibly well-maintained assets, and there's a little bit of hidden earning power there for the analysts that can figure that out. In Berkshire's case, I think that appreciation charge across all of its subsidiaries has done a pretty fair proxy for maintenance CAPX. And then 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, 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 1 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, and so Berkshire figured out in the case of BNSFs, that even though he's 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 call maintenance cap X or the depreciation charge. And in railroads, actually, maintenance cap X is typically a slightly higher number than depreciation. Simply, I think because some of the assets are so old, replacing the cost of those assets is a higher number.

You've got, you know, 60-year-old assets that have to be replaced and appreciation schedules may not have been corrected with those assets. They've been fully appreciated for a long time, but in Berkscher's case, they realized with intermodal, the double stacking of containers that end their footprint in the west. If you were to expand corridors into the big port city, so going into L.A., 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 were a lot of what I would look at as growthy capacity improvement. that would allow more straightforward 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. Now, a lot of that's run its course.

And so in the early years, if you take BNSFs, since Berkshire's owned in 2010, they've spent almost $50 billion in cap-ex, depreciation charges are 25. So they've kind of spent at two to one. but if you look at the current cadence of spending of cabdex spending relative production, you're really running closer to 130 or 140%. So a lot of that capacity improvement in the system has run its course.

And in 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 dividended up to the parent company, and they simply They financed the cash flow with debt and cash on hand. And that was sufficient to finance the CAPEX that was needed. In the utility operation, when they bought MetAmerican in 2006, they've spent way more than $2 in CAPEX cumulatively for every dollar of depreciation.

Cumulatively, you've spent over $80 billion depreciation charges are less than 40. For the majority of this period of time that they've, you know, they now own three utilities. 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, zero dollars of profits earned by the utilities and by the pipelines,

the various distribution assets, zero dollars 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 found a place to put an enormous amount of money to work. I mean, last year, CAPX at BHE ran over $7 billion. The depreciation charge was about $3.5 or $4 billion, spending an enormous sum of money building out capacity.

They're closing coal-fired capacity, but building wind-fired capacity, and getting a regulatory chart on those numbers. And so there's a place where, you know, Berkshire can spend three or four billion dollars. Let's call it $4 billion of the earnings that benefit itself. Berkshire doesn't own all of the energy operation. They own 92% of it. And then as you look under the hood at B&G itself, they've got a number of joint ventures. They bought some Dominion assets that Berkshire doesn't fully control 100% of.

The LNG export terminal, they don't own 100% of. There are a number of joint venture subsidiaries inside of BH that aren't fully owned. So the aggregate of that business really earns $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 half equity capital in the capital structure.

So those brochures are going to retain $4 or $5 billion. They're going to augment that $4 or $5 billion. with a like amount of debt. And that's now financing all of that growth cap-ex. And so you've got a utility operation. You saw value at $87 billion a year ago. And when Greg's piece got bought out, and he owned 1% of the company. 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 energy operation is going to be worth more than the railroad in two or three years because here's a home for an enormous amount of capital

spending that really is growth cap X. 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 cap X versus maintenance cap X. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days. in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the

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All right. Back to the show. Could you paint some color around? Whenever you're talking about regulated returns, is that different projects that the government sort of like puts out there for different companies to bid on? Or is it specifically, do they call Berkshow? 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 it work and practice? Well, in electric utilities, they're largely monopolies, granted permission to operate by the various state regulatory commissions, overseeing nationally by FERC. But when nobody would stand by, 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. Because 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 economic return. And there have been a lot of cases where regulators change their mind. You look at somebody like Scana,

there have been stranded nuclear plants where you spend a whole bunch of money. then you wound up not turning on the plan 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. And so the regulators understand, you know, kind of how much an equity return is going to be allowed. And now 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 allowed equity. And those numbers nationally are closed. sort of 8 to 9 to 10% today in Berkshire's world across their entire spectrum of energy assets. Some are non-regulated, some are regulated, some are sort of pseudo-regulated. 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. You know, regulators will crack down if they think you're overcharging, if they think you're underspending.

Kind of to that point about debt and equity, they don't like to see you underspent because you still run these are. of the monopolies, they're publicly treated. They're in many case, they're publicly treated. They're for profit. They're sending a whole bunch of dividends to their shareholders. And you've got an obligation if you're the board of 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 that 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. And these assets have to be maintained.

plants have to be, you know, they have to turn around. They've got to be repaired. And so it's been, and you've seen myriad cases over the years of companies understanding on maintenance and a light's no different than being a homeowner. You know, how much should you spend per year to maintain your house? Well, if you buy an old home and nobody who's maintained it, you know, 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 is only 40% debt, The conventional wisdom is you're kind of underspending on maintenance cap X. And if you're running kind of 60% debt, they think you've kind of gone wild and you've lost your mind on leverage and you're overbuilding and you're trying to overbuild kind of your rate base. The happy medium is, you know, a well-run utility has terrific relations with their regulators. I mean, Berkshire's case, where there's three big utilities, Mid-American Pacific Corp and Nevada Power, you've actually got a fourth there with Pacific Corp. 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 ten on regulated equity. You throw in the rest of the distribution assets and that pulls the returns up a little bit north of 2%.

But it's a very noble return. Monopolistic businesses, 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 in a very noble fashion, you've got a very good use of Berkshire's capital, at least that portion of profit that's earned by that energy business that is retained. It's going to grow the rate base and it's going to grow the shareholders' equity of that business by about 10% a year, which will be the second largest piece of Berkshire, larger than in the railroad era than two or three years. It'd be years before they passed the insurance operation in scope. I mean, that's

insurance operations worth way more than, right worth probably. It's probably worth, well, the insurance operations worth probably twice as much as the energy business and the railroad combined, I would say. And what's stopping that from, from growing? Is that because it has to grow internally? Is that just the size of the market? Is it because of the regulation that they're not, our number or doubling down 50% whatnot on that unit. I mean, they're only going to go build in projects they have the capital for. I mean, they've got an insatiable appetite. You'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 for sure, as the capability, if you do a lot of things that, others couldn't do. 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 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 in Texas, not so much a single monopoly, but more competition, certainly

in the industrial market. And you had the freeze and you had the real issues through by, I guess it was three years ago. Perks your 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. You've got to work with regulators. You've got to demonstrate, you've got the skill set to be able to do what they're doing. And I think if they could 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. And some of these energy assets are perceived to be dirty. I mean, pipelines are a dirty asset in the ESG world. And so I think for that, they have the opportunity to buy the assets from Dominion a couple of years ago.

I think you'll see Berkshire make more acquisitions on that front as the political landscape steers us more toward renewables. Going back to Berkshire's equity portfolio that we already talked a bit about here before, in 2022, we solely PE go from 19.1 to 13.6. and that would equate to a 7.3 earnings yield that could produce, you know, high, single-digit, low double-git returns if you include multiple expansion, ongoing growth and earnings power. In your last letter for 2021, you estimated 50 billion in overvaluation of the stock portfolio, lastly attributed to Apple. Now, Apple Inc produced at 26.4% loss in 2022, wiping up that discount, is. Now, you also mentioned that 73% of the equity portfolio is Apple, Bank of America, Chevron,

Coca-Cola, American Express. 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 also comment on a few of the stocks, 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 spot. So I don't know, Chris, if I could ask you to share some perspective on some of the individual stocks that Buffett owns or Berksa owns and what we should look out for as investors.

Well, to your point, the concentration has always been in a handful of companies. It was Coca-Cola in 1998. And, you know, from the point, Warren bought toke right after the stock market crash in 87. over a period of a couple three years. They got $1.3 billion in it. They grew up a $13 billion full today. That position at brochures hasn't done much. It's grown kind of mid-single digit.

But you've had to grow from a 50 multiple earnings down to a 25 multiple earnings. So over the last decade or two and a half decades, the multiple has been done and a half. Offsite by still, you know, decent unit growth. And they've got enormous pricing power. You had the inflation last year. Coke's got the ability to pass through their syrup.

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. There are a lot of manufacturers. That's gotten massively squeezed last year. You could grow your sales, but you took massive hits in margin. Kind of like Coke was in 98, 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% in a year for the prior decade. They were treating collectively at 35 times earnings. Apple, which Berkshire bought and spent $30 billion of dollars, I think their basis in what's left. He trimmed Mr. Buffett trim some share. a couple of years ago, but they've still got a $31, $30,000, $30,000 basis. Well, a year ago, at the end of $21, at north of 30 times earnings, that position in Berkshire was over $160 billion, and I thought that piece alone was overvalued.

And I think if you think about Apple being a great consumer company, they've got to reinvent their product line, but it's very sticky. You know, I'm out in the Apple architecture. I'm not going to not have an Apple's own. I'm not going to have an iPad. I'm not going to have the Mac notebook. Everything is integrated on the desktop, everywhere I am, office, office at the house, the notebook.

I'm not leading that. I'm not leading that architecture. But that makes it sticky. But you're going to be $400 billion in sales and almost a 25% profit margin. So Apple's almost doing $100 billion in profit. And the stock's recovered. It was up, I think, 31% for the first quarter and is still up 27 or 28% as we speak.

That's 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 don't exist in the 13-F where we've tried to reconcile that. But I'd say the stock portfolio was up about 11%. All of that gain was Apple. Apple's back to a $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 growing for the last 15 years because they're doing $400 billion on the top line. So I would presume perhaps you hold margins kind of constant where they are. You're going to get a mid to high. They're probably high single digit growth in dollar sales.

You're going to get maybe 10% out of it when you account for all the sherry 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 the last decade, the thought was cheap. 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. So this $150 billion is multiple expansion. But it's also an enormous amount of growth. So you've still got more growth out of Apple than you're going to get out of most companies. But the growth rate can't be as fast. And so if you wind up growing dollar sales at 5 or 6%, when 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. And so you drop it from 25 to 15, you're 40% down on the multiple offset 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%.

So you're going to be $340 billion. I think Warren said in the, I read the transfer up 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 he probably going to be about $345 billion, will be in stock portfolios, 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 and maybe another $4 billion in 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. If you add them up, either they're not as big as the Apple position. And again, Apple is the 800-pound gorilla. Those others are all $25 to $30 billion,

dollar 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 seven percent out of it. But it's conservative six or seven. I mean, the diversity of its brand portfolio in global reaching distribution, you still have international growth. 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 American Express. I could not tell you how to value a big money center bank. 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 investment banking and kind of non-fee revenue, which offsets

some of the volatility of the bank side. But I've always thought he just buy banks after a banking crisis when they're all treating it half a book and the good ones have been recapitalized. Berkshub probably regrets they trim down the bank portfolio by saying, 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. Well, they're all learning about duration and convexity risks today. Bank America will 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 the said goes from zero to 500 basis coins on the short end of the curve, banks are levered at 10 to 1. That's how fractional reserve 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 buck on portfolios. And that's you can really get into trouble. So I think we're in the early innings of banks, but the stock's down the bunch.

I mean, probably down 40% from its peak. And so having sold off all of Wells Fargo, which he purchased her own for years, but they massively got rid of Goldman. They sold off some even trim down U.S. bank, which they still own, but PNC is gone,

M&T is gone, all those banks. They had that bank concentration in the portfolio was fairly high and going into this problem. I think they saw what was timing in the banking world. I wouldn't want on banks. broadly, and so they trimmed it down. So they still sit with the Bank of America, which is now

trading it 10 to earnings. 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 just a heck of a business. And, you know, at 15 to earnings, probably fairly valued. You know, that collection of five is really, if you want to monitor the stock portfolio, that all you need to know, but I don't think you're going to get any wonderful returns

out of the stocks going forward. You know, probably at best match BS&P 500, maybe a little more, maybe a little less, but tell me what Apple is going to do if Apple's still trading it 25 or 30 times earnings a decade from now, you'll have a pretty good experience. If Apple trades it 15 times earnings, you know, the overall S&P 500 is expensive and probably more expensive than the Berkshire portfolio would be. Going into this year, the Berkshire portfolio is probably cheap, and that was Apple having traded down to 20 times earnings. But long answer, it's Apple, Apple, Apple, but it's almost half with the end-stock portfolio. I think the listeners should also know that some of the numbers that we refer to here that's end of 2020.

But we're also sitting here in April and, you know, there have been some changes. And so you sort of like have to have to separate the two. Like where are we with the numbers? And perhaps on that note, we could talk a bit about valuation. You always outline four different values techniques in your letters. And the simple average of your four village techniques and the estimate here year end 2022 has a valuation equivalent to a B share intrinsic value of 421 up from 401 the year before. 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 on page 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. The media focus on Berkshire's loss when it's report earnings for the year will probably be the loss. Bill mentioned will be on Berksha's 18.1% gain in earnings power. Durable profitable growth coupled with superb capital allocation drives intrinsic value. Now, for those of our listeners who have not yet had a chance to reach a wonderful letter, could you please elaborate a bit more on that paragraph? A lot of moving parts here. I have, I jump 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 parts basis. I also look at the company on a gap-adjusted earnings basis. And in terms of what I would define is economic earning power, this is kind of a normalized taking out the volatility of stock portfolio, taking out the volatility of underwriting, looking at the tax benefit of using accelerated depreciation in the railroad and in the energy operation, normalizing pension map, which is a charge

against earnings. In any event, Berkshire in my and 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. The 92-year-old that sits there in Ola Hawn is still at the top of his game. Widely criticized for maybe overstaying his welcome. He's got cooks that 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 themselves out of direct recording role. Great. Now, it has all the direct records, and he's overseeing all of the not-insurance business as Zahid 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.

It's simple, but I took simply Berkshire's cash flow from operations, simply from the cash flow statement. And I think about that number, and I back off for our conversation about maintenance, cap X versus depreciation. I back off the depreciation charge, which simply says you've got operating cash. You have to spend so much money effectively financing your depreciation. That's your main in the cap X. So last year, you had $40 or so billion in operating cash flow.

You got about $9.5 billion in depreciations. You were left with about $30 billion. Over the last five years, you've gone from $28 or $29 billion up to $30 billion. So in five years, cumulatively, Berkshire has Aster, covering depreciation had about $150 billion in operating cash flow, which is now running at a rate of about $30 billion per year. That's after depreciation. That's really the allocable 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 between the railroad, the energy, 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 cap acts. And then if you look at what else purchase is done with capital over the last five years, well, they began a sheer repurchase program, and now have cumulently bought back about $65 billion worth of the stock. A lot of that was done in 2000, 2021.

The stock was very cheap. They didn't have much use to do anything else with capital. I say the ability to spend CAP-X, the ability to do some things was muted by the pandemic. And so they bought the stock back. They bought it back in Eurist. Over this last five years, they bought back about 11% of the company. Last year, the cadence of Sherry Purchase is slow. They only bought back about $7.8 or $7.9 billion.

What they do with the money is we've talked about, they spent $50 billion net buying the stock. So the last five years, they've spent $7.8. about per year operating cash flow and cut a net spent cash down, which happened last year in a big way. They went from almost $150 billion in cash down to $128. What did they spend 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 their earnings. And so they spent $75 billion last year against $30 billion in operating. cash flow astro depreciation expense. It was their biggest year on the CAP-X front in a long, long time, certainly way bigger than anything they've done individually in the last five years. So what did 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, I get pushed back on this, but for sure has this big cash pile that's averaged about 12% of assets. To me, it's not that

big relative to $950 billion. What's going to be pushing a trillion dollars in assets? And if Ferscher rose this year, they're going to, for the first time, I have a trillion dollars in assets on the balance sheet. There's a portion of cash that's kind of permanently held. 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 thereabouts. But for any cash above, what? I think would be permanent cash, I assume Berkshire is going to put that money to work. 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, and I'd back off. 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 billion of investable cash. So north of $4 billion I would look at as opportunity cost return on cash. 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 and they spent 11.5 billion dollars on Allegheny that on a $50 billion net purchase in stocks at a 10% earnings yield, that adds $5 billion in earning power to Berkshire's ledger. The purchase of Allegheny, I mean, was an absolute steal. We owned Allegheny. Weston Hicks, who retired his CEO a year and a quarter ago was 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. It's all business. They had a myriad interests in the past, but Berkshire, but Western really turned it into an insurance powerhouse with their three insurance operations, 23 and the two specialty, businesses, RSUI and Cap Specialty.

Berkshire paid $11.5 million to this business. 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 is going to have a lot more of that capital eventually invested in stocks because they can because of the surplus capital. Well, the delta there on earning 4% on bonds or 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. Alligati capital will be similar to Markell Ventures, similar to what Berkshrews done for all these years. Well, when they bought it at the year in 21, those businesses with $1.3 billion in capital earned 12 on equity. And in the prior years later, in single digits. What we have to know is Weston had a couple of 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. Well, my understanding is last year, that group probably has a billion four in capital now, and they earned 30 percent. had free tax ROE, call it a 24 or 25% after tax ROE. I had that grid tarried at a $3 billion valuation, probably $5 billion today, which means they bought the insurance operation for $6.5 billion.

And the insurance operation is a better business. You don't have to lay off risk in the retrocessional market back into the reinsurance world via Berkshire's ballot sheet. What they write, they will retain. There's just a lot of nuances. since pricing is firmed in reinsurance of the $5 billion in premium that comes with Trans3 is more profitable than it had it appeared for the prior two or three years, and Berkshire stole Allegheny, and that picks up a couple billion dollars in earning car

that they paid $11.5 billion 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 $100 billion is earning $5 billion. So I, there's, I almost have no opportunity cost benefit for the cash because interest rates are so much higher. The delta between my 7% of soon return on the 5 is lower. And the portion of cash that's investable is down because they spent so much money last year. Let's take a quick break and hear from today's sponsors. No, it's not your imagination.

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at fundrise.com slash income. This is a paid advertisement. All right. Back to the show. Thank you for sharing that, Chris. It's so interesting to hear you go through that deal with Allegheny. And when I was announced, I was thinking to myself, I wonder where Chris feels right now like being invested in both companies. And I came up with, he's probably not too happy. Well, we lost. I had, I had Allegheny carried it. My intrinsic Alleghen was over a thousand bucks a share. And they went out at $8.42. The $8 below $150 reflected the banking fee paid the gold, which was a fun story. But it will make more money inside of Berkshire.

Alleganie's assets are more valuable to Berkshire than they were to Allegheny. But even had Allegheny persisted, we would have made more money out of Allegheny, and now it's a rounding error inside of Berkshire. But it's, you know, materially accretive to the insurance operation. It's just a very good thing. So keep your eyes on Markell, which Berkshire has been buying as well, because they could slip that. I'm not sure they necessarily want all of Markelly,

but Markel inside of Berkshire would be more valuable than Markel as Markel. Yeah, yeah, that makes a lot of. a lot of sense. And it is interesting that you would mention Markell with, well, just with the story and everything that's happened. And whenever you saw that 13F filing, you're like, huh, okay, it just seemed like such a logic step in so many ways. But hey, who knows? There are probably going to be a lot of speculation about that for the Markele branch and probably also before. But Chris, I wanted to talk more about your evaluation techniques. Like I mentioned, you have four different that you elaborate on in all your letters. And you're always, you all of your letters.

also do it more in-depth in some of your previous letters, I should also mention. And they all comes with strength and weaknesses. We already discussed some of the shortcomings with the simple price to gap book value. And also, some methods are more conservative than others, depending on the time. And you have this two-prong approach that understates values today. And in contrast, you also mention that you will hang your hat on a recent equal weighting of some of the parts basis and gap-adjusted financials, which suggests intrinsic value, per seattle. And in contrast, share grew by 10.7% in 2022. Perhaps you could elaborate a bit on why, why are some of the value aid techniques more relevant than others depending on the circumstances?

Well, we talked about price and buck. Even in there, we talked about the nuance of how the stock portfolio works. To the extent any company is buying back their shares in norative book value, you're going to shrink equity and you're going to shrink book value per share. American Expresses book value has been written down so much because they have been. bought back 40% of the shares. Apple's book value is diminished because they bought back so much. So those returns on equity in those businesses are massively overstated relative to what replacement cost of capital would be. We on Starbucks, Starbucks has no book value. It's probably they 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, I mean, Berkshire officiados, those that have read the chairman's letter for years, To 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, we basically have two elements of value. We have our operating earnings from everything not insurance related. And so that would be all the subsidiary, seized candy, so on and so forth. And what were those businesses earning on a per share basis? 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 proponents. 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. But you would simply capitalize the operating, the pre-tax operating earnings at some number. And we'd always capitalized him at about 13.5x. When the tax so changed with TCGA in 2017, here's a valuation nuance that some on Wall Street didn't get because they live in the world of Eden. and above the line, if you live in the world above the interest in the depreciation and the tax line, I'm more interested in what flows to the bottom line for 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 to a pre-tax earnings number to simply represent the delta on the tax. And so we changed the multiple to both your 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 the, you'd include underwriting and at the outset, Berkshire included underwriting profits. 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 said just ignore the underwriting, just assume the underwrite break even. And then they put it back in. 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 in any given year, we back out whatever the underwriting result was and put in a 5% pre-tax underwriting. 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 $4 billion this year in premium volume, up by $80 billion in premium volume at 5%. That's $4 billion pre-tax. It's $3.2 or $3 billion on an after-tax basis. That's a normalization technique. So, you know, I've left to hand. That's what I'm doing, both at the subsidiary level

and in my gap-adjusted financials across the spectrum is. when I make adjustments for any Berkshire shareholder that follows the business, we'll know to look at the look-through earnings. Because when you own the stock portfolio, two years ago, at the end of 2021, when the stock portfolio was trading at 19 times earnings, you had total earnings of about $17.5 billion on the stock portfolio. A little over $5 billion of that was dividends. You had about $12 or $13 billion of that was the retained earnings.

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're trying to free out the earning power of the enterprise, you have to include the earning power of the stock market holdings. You have over $300 billion in stock market holdings. Well, given the purchases last year in the Stockportfolio 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 that 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 you retained earnings are now almost $18 billion. Well, that $18 billion is every bit as economical to brochure as the $4.5 billion and it's earned by the energy business. But you just don't see it because it's retained by Apple and Bank America and American Express, but it's very much a component of the earnings number. And of my 53.9, you know, $23 billion or $17 or $18 billion of that is the retained earnings. 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 earnings, you were only had an earnings yield of a little over 5%. when the stock portfolio dropped going into this year, as you mentioned, earnings yield of over seven, a little over seven percent. 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 billion, rounded up to $10 billion pre-tax that will in Newer for the benefit of the Berkshire.

shareholder if the stock portfolio does better than the earnings yield. If you look at the history of Berkshire stock portfolio, it tends to outreform the earnings yield by three or four percent a year over time. Again, I'm stripping out short term, which now throw through the P&L, and he gains the 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. 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. There are 90, you can read about this in my level, 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 100% of an asset this year, but it has a 40 year life, 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 in cash terms here today. That's worth a billion and a half dollars to purchase. So each of the gap adjusted accounting numbers are actually done at the subsidiary level. So what 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 nuanced

to each of those subsidiaries, which means you should get to the same earning number at the end of the day, and that's how I get to $53.9 billion presently for both, but you can do it through simply an analysis of the railroad. You can pull BNSF's Q's 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.

And then in the energy operation, BHE and each of its subsidiaries, file and so B.G files a consolidated Q&K every year. You can get 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 Dominionate assets. So what's going on with CoFoint. It's all there and the financials and it's there in the footnotes of each of these subs. And so, diving those two businesses is pretty easy because you've got a ton of data and a ton of granular. And then 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. And so you can figure out where profitability comes from. I mean, it's pretty easy to feel back some of that and now figure out where the equity is, 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 more collaboration. 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 a sum of the parts basis that gets reconciled through my headline gap adjusted financials. But the gap adjusted financials, anybody could do that. I mean, you could take quarterly earnings. You could take bursures and 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 could also look at the press release, which shows you what operating earnings are, 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, and I would discount the, because the stock portfolio has been so volatile. I think the book value, and I think the two-prong approach are less useful to say. But the other two, my gap adjusted and my sum of the parts really is going to get you to what I think fair value is.

And there are reasons why I think in both those cases, they're more conservatively stated than understated. 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 do it ends and we've got cash flows and clients make deposit and I've got to save money. I'd rather buy my shares of anything I'm buying cheap rather than expensive.

And God bless, persistent conglomerate discount or whatever you call it, because I'm getting $53.9 billion of earning power for about $700 billion today. 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 know, you have to do a bit of reading yourself and perhaps also pull out of calculator. If you really want to understand it, 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 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 were

like really into the whole Berkshire, there's this discussion and I hear it year and year again about using Berksa stock to part cash. That's sort of like the headline of the discussion. And I think what I wanted to sort of like 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 Berksa stock. We just talked about how it was three times book value and how crazy evaluation that was, and that probably wasn't a good time to park your cast there. But I guess what I find 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. 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 individual investor. And I've included the four categories of four arguments that are most often here for this argument about parking your cash in Berkshire. The first one is Berkshire is a different stock because it's less volatile.

The second is that shareholders of 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 allocated in the world, not that I disagree with that. And he's not shy about putting serious money behind buying back shares when the opportunity costs the right. And then the last and argument here is that the stock is more thinly traded than other major stocks and it doesn't require high volume before any mispricing is corrected.

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 in Berksia stock? And do you think that the question's premise should be challenged in the first place? I would challenge that premise. When I think about my Berkshire position, we try to make it 20% of client capital. It's grown in some client accounts to be a larger percentage. When you look at my 13 Siling, 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 the clients have laying around has utility for cash. 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. 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 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 MSR group is very diversified. The insurance operation writes seven or eight cents on the dollar of capital in the reinsurance business. Reinsurance probably has $230 or $240 billion of statutory surplus. and it writes, it's going to write $25 billion this year in premium, including the slide from Treon's Re. So you can own a big stock portfolio there. So, if Berkshire earns 10 or 11 or 12 on what I look at as kind of an estimate of what would be replaced with cost of assets or even on stated book value, 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 a long-duration asset that has price risk. I mean, when we bought our Berkshire in early 2000, it had dropped by shaft from where it was. It went from expensive, almost three to book to 105% of book when I bought it. But that's a 50% drawdown. In 1974, Bercher was down, I think,

2.5% in 1973. In 1974, the stock was down 48 or 49% in a single year. It matched the decline of the Dow and the S&P 500. Mercher was down 30%. When the S&P was down 30%, in March of 2020, the pandemic, there was no place to hide in the financial crisis.

Drop the last, but you had almost a 50%. percent drawdown in Berkshire from 2007 to the lows of the late 08, 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 rotten. 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.

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 Nunn Insurance Operations. It has been buying shares in Berkshire Hathaway here recently through the Abel Family's Trust. So the man that many expect to be the new CEO of non-insurance operations here now, and he just looked up the share price just before we hit record, $114 million worth of A shares, and BCHS. Prior to September last year, he owned very few, 5 ETSS and 2,400 BCS, and he received some critique from some people in the Berksia ecosystem community, whatever we want to call it. Able received $870 million before taxes for instaking Berksia-Hathaway Energy

in 2022. We briefly talked about it here earlier in a conversation, and he has a compensation packets of 19 million-ish in base 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 with me, because I'm going to quote something long here afterwards, but there's this thing from the recent proxy statement I wanted to sort of run by you and then ask you at the end of it, how that looks related to Great Abel. But to quote from the proxy statement, in particular, of the governance 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 shares relative to the resources of at least three years. 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 directors, end quote. So with all of that being said there, I know this is a very, very long question. But Chris, how do you look at Greg Abel and being true to what it says in the recent proxy statement? I'm a big fan of what Greg has done, not only of late, but when he took over Mid-American from Sokol. And he was there previously for a long time. He came out of accounting.

He's a really good manager. You know, for the couple, three years that he was vice chairman in charge of all the operations, and he left the Mid-American Post. he left the Birchherathaway energy post. Yeah, I was always curious about his liquidity to your point. You know, now making $19 million each Ajit and Greg are paid identically. They don't get shares. There are no stock options. There are no RSUs. Berkshire management reaches into their own pocket and buys their shares. It's unique. You don't see that at any other company outside of founders. There were a few years there where I own more shares of Berkshire than Greg until this recent purchase. So maybe I should have been CEO. That would be a disaster. But I gladly would have swapped my

Berkshire position for Griggs position and B.H.G. of course, because, of course, we've discussed $870 million is real money. Now, he's bought, you're right, it's position now, is 114 or 115 million. Aegee owns nearly twice that shares that he's been accumulating over the years. And of late, Ah, she's been giving his monetary charity, similar to what Warren is doing, similar to what Charlie has done over time. Charlie's kind of lived on a chunk of his Berkshire shares and spent more personally even war and spent personally on himself, but everybody at Berkshire, all the top managed by me. They owned the stock and they've never been given the stock. Relatively great is not worse. I would guess that he'll buy more over time. I don't know what his,

even, you know, he's got a big tax liability. He would have written a very, very, very, 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. So, you know, we don't yet know. the degree 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. Maybe there's plenty to go around, and so that'll all get sorted out. But, you know, I wouldn't be surprised if Greg's position in Berkshire ultimately perhaps kind of doubles relative to current valuation and matches where Ajit is, and that would be a couple hundred million dollars, but $100 million.

Who does? I mean, who does that? You know, 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 the table of insider buying versus insider selling, we talk about that 2% dilution, management don't tend to own their shares. 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 dumps the rest of it because they don't want that concentration. In Berkshire's case, you join the business. Berkshire Board. Every, just about every member of Berkshire's board owns a lot of the stock. There are a couple that don't

on this much, but I'm not sure their personal resources are as deep and some of the other board members. But Wally just went on the board. Chris Davis won out of the board. I mean, these guys have big, big, big, big, brochure holdings. And for that, you know what their director's fees are? $3,000 a year. There's no D&O insurance. If you're the lead, if you're Steve Eckler,

if you're the lead, independent director, or you chair some of the big committees, you make $7,000 of cash compensation and you're not given any stock options. You're not given any RSEs. 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 days are compensated, but they've been there for so long. You know, 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 it, that you've reached into your pocket to pay for. Do you imagine the culture of Berkshire changing when Warren and Charlie are gone? The director's turn and Cal first comes in and now you're doing checkbox on ESG. And you've separated the role of chairman and CEO, which will happen in your directors 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.

All of a sudden, Berkshire is giving away 2% of its shares per year. $14 billion. Now, you give a stock option away at today's prices, doubles in value over the next six or seven years. You buy it at 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.

Let's say they're buying back like the S&P 500 broadly does. 3%. So you're spending $300 of $700 billion at today's valuation. $21 billion is simply going to offset the dilution of what you just gain for the insiders. Do you imagine the uproar of the Berkshire community? Well, that's exactly what happens to the S&P 500. And it doesn't happen. So Greg's, Greg is his incentive that his motivations are perfectly aligned with Berkshire.

And you will not sign another vice chairman, CEO, let's call him, in the world, who has reached into his pocket in today's dollars and paid $100 billion for their shares. If you're Elon at Tesla, you were given 20% of the company. You were not a founder. You were given 20% of the company in two option grants of roughly 10% each. So Elon were going to be the richest guy in the world and didn't pay a dime for that 20% position of the company other than the very little 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. Berkshire doesn't do it. The governance of Berkshire is 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 package. They're not going to ask Greg and Adjid to go

knocked their pay from $19 million down to $100,000, but Warren and Charlie have been that for so long for the history of my owning the company. I've never seen their pay package changed from $100,000 per year. I mean, the employee pay the governance calculation is a joke because the average employee at Berkshire makes more than the chairman and the vice chairman, the vice chairman in this case being Charlie.

So I'm really happy with, Greg, having liquidity. And again, we don't know what his personal P&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. And I should also quickly mention about Buffett. I want to say he returned $50,000 of the $100,000 compensation that he received.

I think you're right whenever you talk about the governance is, let's just say it's been done quite well. Yeah, they've covered the, they've covered. some of the travel. The NFJETs membership now if it's covered, but from a salary standpoint, relative to a almost trillion dollar asset enterprise and over what's going to be $500 billion in shareholder equity. For the CEO and chairman, to be making $100K is pretty remarkable. Greg and I should be making $19 million and that's it. It's pretty remarkable, given the size of the franchise. Again, if you diverted their pay package to stock options, it would be way more

than $19 million a year, ultimately. Great point, Chris. Before I let you go, Chris, and thank you for everything that you provided the audience with here today. I think we all learned a lot, but I also think that the audience will learn a bit more about you and Semper Augustus. I know I said it probably five times already, but you write these wonderful, wonderful letters. And the price is just right for a cheap skate like me. It's free. You can just go into the Semper Augustus website. But I wanted to hand it over to you, Chris. Where can the audience learn more about you and Simper Augustus?

Well, the website, simperagustus.com, we've got a link to an archive of a bunch of our old client letters. All of the letters from 2015 on have 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. and this pod, when it drops, we'll put it on. So you've got the client letters tab and you've got the podcast tab. I'm also on Twitter. We'll see what happens there.

I mean, we'll see if Twitter is even a thing by the time. I think our letters are a pretty good resource. I definitely agree. Again, for the million of 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. Chris, thank you.

Thank you so much for your time. Yeah, I look forward to seeing you in Omaha soon. Two weeks, we'll raise a glass. It'll be good to see it. Wonderful. That's a deal. All right. Thanks, Steve.

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