In their latest episode of the VALUE: After Hours Podcast, Alex Morris, Jake Taylor, and Tobias Carlisle discuss:
- $HD And The Economy
- Is BNSF A Proxy For The U.S Economy?
- Dairy Queen – The Company That Keeps Giving To Berkshire
- Warren Buffett’s Masterful Use Of Debt
- Berkshire’s Next YOLO Trade
- Housing Slowdown
- BH Energy Effective Tax Rate (-52%)
- The Stock Market Accelerometer
- $RH Typos Driving Search Traffic
- How High Can Google Go?
- Warren Buffett’s Investment in Coca-Cola
- Airbnb’s ‘Anti-Search’ Strategy Pays Off
- Buffett On Buybacks And Inflation
- GEICO’s Significant Underwriting Losses
- Foie Gras – No Joke!
You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:
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Full Transcript
Tobias: And we are live. It’s Value: After Hours. I’m Tobias Carlisle, joined as always by Jake Taylor and our recurring special guest, Alex Morris, the– [crosstalk]
Jake: I don’t think it’s special anymore if you come back–
Alex: [laughs]
Tobias: Not so special guest.
Alex: It wasn’t special the first time joining. [laughs]
Jake: Yeah.
Alex: Thanks for having the guest.
Tobias: Welcome, Alex.
Jake: Welcome back.
Alex: Thank you.
Tobias: I watch a lot of this housing crash porn on YouTube, and there’s this one particular guy that I like, and he always starts every single thing off, he says, “Big moves in the US housing market.” So, I’m going to start that, big moves in the stock market. Big news.
Jake: Smash that subscribe button.
Tobias: [laughs] Nothing really. No really big moves. Modest moves. But some interesting stuff going on. Berkshire ruined everybody’s weekend by Buffett putting out the shortest letter he’s written a long time, I would say.
Jake: Yeah. Was he padding it with podcast notes about Charlie–?
[laughter]Alex: Yeah. Bought himself two pages with that little ploy.
Jake: Yeah. [laughs]
Jake: By the way, what was he talking about there? Was that just the Daily Journal and he called it a podcast or was there something I missed?
Alex: I think someone said he did something with Patrick Collison. Is that his name?
Jake: Oh, did that come out yet? I knew that [crosstalk] it’s been recorded, but okay.
Alex: Yeah. I think that’s what it’s from. That’s what someone said, at least.
Jake: All right, I’ll go look for that later. That’s good to know.
Tobias: Yeah. I had a few people ask me, but I didn’t know. Someone said the Pinker Podcast, but I don’t know what that was. Let me give some shoutouts, because there’s some good spots here. Kingston, Jamaica, Saskatchewan. I hope I’m saying that right. Cardiff, Wales. Amsterdam, what’s up? Sas-cat-chew-on. Thank you spelling it out for me.
Jake: This is like a geography quiz.
Tobias: Beaverton, Oregon. Prince George, BC. Hamburg, Germany. All right. Canadia. Very funny. Carlsbad, Norberg, Sweden, what’s up? Eldorado Hills. Is that El Do Hills?
Jake: Whoa.
Tobias: California, Dubai. What’s up, Samson?
Jake: That’s my backyard. EDH repping, I like it.
Tobias: Ah, Brisney Land, up early. Good job. Mexico, Nice. Altamonte Springs, Florida. That’s a good spread. Vermillion. That’s a good name. South Dakota.
Alex: Were any of the bullet points in Buffett letter about Charlie’s mention of crypto shit or did that not get called out?
Jake: Yeah.
Tobias: I didn’t see that one.
Alex: Yeah.
Jake: I didn’t either.
Alex: He said it enough times at DJCO. I’m surprised you missed it. [laughs]
Tobias: Yeah, that was funny.
Alex: It was interesting.
Tobias: What’s the point of having billions of dollars and being 99 years old if you can’t give people your pure, unvarnished opinion on everything?
Jake: Yeah.
Alex: [laughs]
Jake: Well, maybe Buffett, he sub-tweeted a little bit there with, “Don’t bail away in a sinking boat if you can swim to one that is seaworthy.”
Alex: [laughs]
Tobias: Yeah. Energy is devoted to changing ships. He said that before, right? Energy is devoted to changing boats.
Jake: I’m being glib. I’m sorry, crypto bros.
Tobias: You’re being glib. I know that everybody wants an update on the value spread.
Jake: Yeah, where are we?
Tobias: I saw that the data came in for January or Alpha Architect put the data up a little bit late. It looks like January closed a little bit. So, if you had a nice run in January, it might have been value getting a little bit cheap. Value spread closing, which was nice.
Jake: Did you feel that, Toby? I don’t know.
Tobias: I did. I can tell you what happened in February. It’s gone the other direction.
Jake: Okay, good to know. [laughs] Back to wide open, full spreads again?
Tobias: I want two closing months in a row so I can feel it when I read the fact that it’s closed, but I already knew it. I’m sure it’s blowing out again.
Jake: Imagine a whole quarter worth. Could you–? [crosstalk]
Tobias: I don’t know. I think the longest run that I’ve seen was October to February. So, that was October 10th to February 2nd. Not to be too specific, but that was a nice little run.
Jake: That was when you were just drunk on power. [laughs]
Tobias: This feels pretty good. I said to my wife, “I feel pretty good. We must be having some good performance out there. Value spread must be closing. I can sense it.”
Jake: Of course, it’s strong.
—
$HD And The Economy
Tobias: Finger on the pulse. So, Alex, you’ve been doing some work on HD. What do you–? [crosstalk]
Jake: Home Depot for the laymen.
Tobias: Home Depot. Sorry.
Jake: [laughs]
Tobias: For the laymen. What’s the view on Home Depot for the economy, the market? What are we looking at here?
Jake: Yeah.
Alex: Yeah, I think the best way to sum up the story is, as were talking about before we hopped on, if you go back to, call pre-pandemic, it’s a business with no unit growth or effectively no unit growth.
Tobias: So, no new stores is what that means.
Alex: No new stores. It’s a crazy story. It’s a really interesting story. From early 1990s to mid-2000s, stores went from 200 to 2,000 basically, or 2,200. Completely put the brakes on in 2007, 2008, and people were skittish, as you might expect. 10 times earnings, something like that. It’s been an absolute monster over the last 15 years. Even before the pandemic, they really focused on running the core business well, and it shows in some of their comparative results with Lowe’s and other players.
Jake: Operating leverage is so amazing to see play out, right? When you drive revenue through the same four walls at such a better clip, it just so much hits the bottom line. It’s amazing.
Alex: Yeah.
Tobias: Do they have some research or some– There must be some reason for they’ve just decided, whatever it is, 2,200 stores, is that what you said? Is that saturation? They’ve decided that’s close enough to everybody to, they don’t need any more stores?
Alex: Yeah. So, in the 2007, 2008 period, as they looked at where they were at, they actually had, I think, numbers, half a billion dollars of stores in the pipeline. I think this is before things got really, really bad, but I think they had half a billion of stores in the pipeline. They essentially just took a write-off on and said, “We’re not going to build these.” The days of us just– Some of it was international in terms of where they were looking to grow, at least in the early 2000s. But I think they just realized, “Let’s focus on what’s happening inside the four walls,” then obviously, the e-com and distribution stuff around all of that, and it’s proven to work quite well in terms of unit economics.
But yeah, so call it a mid-single digit grower and then you’re just living up the pandemic. You have everything that’s happened subsequently. Past three years, revenue growth, CAGR has been, I think, 13%. So, obviously, well above the trend. You have this interesting dynamic, where the primary driver hasn’t been transactions. It’s actually only grown low single digits from Q4 ’19 to Q4 ’22. The driver has been ticket. It’s tough to parse out exactly the percentage contribution from these buckets. But it’s pretty clear from how they report the numbers and what they’ve said previously that early on a big driver was what you would call real organic ticket growth from mix shift to more pro customer spend more than anything else, which is driving up the number of dollars in a basket, and really speaks to remodeling and home investments and the like in 2020, 2021, 2022. As you’ve gotten to the later part of that period, it’s been a lot more of cogs inflation and the like.
Now where they’re at today, you’re seeing where customers were a little bit more willing to eat some of those price increases and still not impact volumes as much as that price was hitting them. It’s now leveled out with one another and they’re pretty clearly saying, “Hey, customers are becoming a lot more sensitive than they were previously.” I think they wrapped up the macro data pretty well with a comment where they said, “Home prices–” From pre pandemic to June 22, I want to say, they said home prices increased by 45% and subsequently in the past X number of months, they’ve declined by roughly 3% cumulatively on whatever data they’re looking at. So, I think it just speaks to the nature of what has happened. Then, there’s also obviously with rates and everything else, I saw in a recent Wall Street Journal article, NAR said, “Home affordability is at its lowest level since 1985.”
So, I think there’s just a big question about what the trend looks like for this business in 2023, 2024, and beyond. Their guiding to comp is basically flat, which is worse than what they’ve been reporting, but certainly, it doesn’t strike me as being particularly pessimistic. I was listening to the F&D call before we hopped on, Floor & Décor, and one of the analysts asked during the Q&A, which I liked a lot. “How long is this going to last and how severe is it going to be?’ [laughs] That was a good question. Unfortunately, they didn’t have the answer either.
Tobias: Oh, I was waiting for the answer.
Jake: Yeah.
Alex: [laughs] Yeah, they didn’t have the answer. Unfortunately, they didn’t have the answer either, but it was a good try. [laughs]
Jake: Alex, do you have a sense of what drives–? Okay, I’m trying to imagine turnover of houses, I would think that people come in, they want to make it their own, they spend money at Home Depot. Or, is it, “My house price went up. I have home equity now. I take money out and I do stuff to it.” What drives more, do you think? Turnover or home equity HELOCS, basically?
Alex: Yeah, I think it’s both. I think it also depends probably, as you look at specific categories– I’ve seen something recently, for example, “Hey, when the economy does a little more poorly or when home prices come in a little bit, it doesn’t necessarily lead to all that work just going away, but it might be that kitchen or bathroom is now going to be-
Jake: Good enough for another couple years.
Alex: -a great job and– [crosstalk] Yeah, it might be a smaller project in the house that is not going to stretch you too much on the amount of work, or hiring someone, or the budget, et cetera, et cetera. So, I think it partly depends on who you’re talking about in this space. It’s funny. If you look back in 2006, 2007, 2008, 2009, I think that’s right, HD comps were down every year during that period. Cumulative comp’s down more than 20%. The mix between the two was essentially split between ticket and transactions. So, obviously, that period was very unique. I don’t know if this is going to be anything like that, but– [crosstalk]
Tobias: Toby says it will be worse.
Alex: Yeah. Well, if it is, then that’s a problem for– [crosstalk]
Tobias: I don’t know.
Jake: [laughs]
—
Housing Slowdown
Alex: I was talking with Bill about this. I was talking about even prices coming back 10% after a massive run. Does even that impact the way that people will think about it, given just indexing their mind to what it’s worth at some crazy high, potentially? I would argue it probably does, at least on the margin, but we’ll see.
Tobias: Yeah, the data that I’ve seen says– I thought May ’22 was the peak in the– but it could have been June or May, same difference. I’ve looked at Zillow’s home price data and I’ve looked at the Alfred or whoever produces– There’s a luxury home, there’s a few different series that they produce, I think comes out of the Edgar– I’m just forgetting where it comes from. The peak was May or June after running up unusually quickly at the very tail end of what had been a pretty good run already. Then, it’s come back off, I think it was like 4.4% not seasonally adjusted, but this is also a softer time of the year. So, seasonally adjusted, it ends up being like 2%, which I think rhymes with– I think he said 3%. They saw back– [crosstalk]
Alex: Yeah, they– [crosstalk]
Tobias: They’re just saying somewhere in the middle of those two numbers.
Alex: Yeah.
Tobias: The stuff that I see is people just going back and looking– because it’s so slow, typically, the housing market takes years and years to bottom, like five years or six years, it seems, looking at the last two in particular. And so, the last one was 2006, 2007, 2008. The bottom actually wasn’t until 2012, although there were two. There was a bottom in 2010 and there was another bottom in 2012. It got up off the mat a little bit and then it fell back down. The true bottom was 2012, but it was comparable to the 2010 bottom. The reason that people say it’s different this time, they said lending standards were stricter, but they’ve also gummed up– It’s been harder to evict people from their homes, harder to go through the foreclosure process. So, that’s part of the reason why inventory is so low. But as that eases, I think that there’s going to be a lot of inventory coming on the market through foreclosure and that will probably coincide with–
Michael Cantor has that H-O-P-E, HOPE. Housing is the first thing to go, and unemployment is the last. And so, the statistic that I source today is that unemployment is ticking up faster than it was after Lehman. It’s only just started. It’s still a pretty low level. So, it looks like it’s rocking up.
To me, it just looks like that if we’ve got a problem with house prices, house unaffordability, the simplest way to resolve that is lower house prices. I don’t think it’s particularly controversial at all. It’s just sticky and it takes a long time for it to work through. And so, over the next two or three or four or five years, I think you see it, but I think it’s well and truly underway now. I don’t know. What do you guys think?
Alex: Yeah, I just can’t work into it any other way. If prices go up 45 and cost of borrow goes up significantly and you’re all in, cost goes up, whatever, 60%, 70%. I just don’t see how the math works for someone who hasn’t already bought. Home Depot and these other guys like to say, “Hey, 90% of homeowners now either own their house outright or have a long-term fixed rate mortgage that’s sub–” I think, 5%. But again, you can’t move them.
Tobias: Yeah.
Alex: [laughs] I don’t know, it seems very tough on both sides of the coin to me. I was talking to Bill the other day about this about companies talking about shipping costs and supply chain, etc., etc. As Buffett likes to say, “You can’t always point to one thing and macro stuff, because there’s always “and then what happens after that” question.” Well, in this case it looks like it’s partly getting resolved and the fact that demand is potentially coming in quite significantly, at least in certain categories, and that is now at least partially starting to fix the problem. At least, if you listen to someone like Floor & Decor, they’re talking about passing price in the other direction now back to consumers, as their cost to serve is starting to come in.
Jake: Hmm.
Tobias: JT, what’s your topic today? What do you got on deck? We got to get through the Buffet letter and a few other things?
Jake: Yeah, it’s all just Berkshire related. After so much stuff came out this last weekend, I feel like it’d be very on brand for us to dig into the Berkshire.
Tobias: Let’s get in that. We got an Aussie tuning from Moscow, Russia. That’s cool.
Jake: Hopefully, has his freedom still.
[laughter]Jake: Well, where do you want to start? Do you want to start with the Buffett letter?
Tobias: Yeah, let’s do that.
—
Warren Buffett’s Investment in Coca-Cola
Jake: All right. Well, for me, I think on the shorter end, like we said already, maybe a little skimpy on details although a couple of interesting things I saw. Boy, spent $1.3 billion on Coca Cola. By the way, buying from 1987 to 1994, accumulating over and over and over for years on end, that in and of itself is an amazing thing. But currently, dividends of $700 million in 2022 from that. He’s on a 54% yield to cost right now, which is just staggering. The value of the investment now is around $25 billion. So, just price alone, he’s on an 11% CAGR for 28 years. That doesn’t even count the dividend. So, what an unbelievable investment.
American Express looks kind of similar, like $1.3 billion accumulated over a reasonable amount of time finishing in 1995. Now, $300 million a year that he’s getting, which is a 23% dividend yield on his original cost and also similar 11% price CAGR for 27 years for American Express. What an amazing– just two home runs, right?
Alex: I wrote about this somewhat recently. I think the whole Coca Cola thing is so fascinating with the– So, one, as you said, starts accumulating late 1980s, finishes the buying in 1994. If you go back and look at the price, what he paid in, whatever years those were, 1987, 1988, 1989, the price he paid in 1994 was three times higher, and he was still willing– We all know.
Jake: How hard is that to do, intellectually?
Alex: I don’t know. I’ve never done it before.
[laughter]Tobias: Yeah.
Jake: So, I guess very hard. But yeah, then completely stopped. Hasn’t bought or sold a share since 1994. You think about, obviously, the crazy run-up in the price throughout the late 1990s, a lot of management problems.
Jake: Yeah, 50 times earnings by 1998. And then, he pulls the Gen Re switcheroo to lower the exposure to it effectively. What a bold move that was.
Alex: Yeah. Even fast forwarding today, I guess he didn’t disclose it now in terms of the value relative to the equity book. Obviously, you can back into it, but it’s 5%, 6%, 7% of the book. Just a fascinating story, in my mind, in terms of willingness to actually be an investor/holder of the business, not tinkering along the way on a position that was greater than 30% of the equity book through much of that period. But then also, the cash flow dynamics of Berkshire and how that influences the whole thought process around these things, which obviously may differ from how an individual thinks about it. It’s all very interesting.
—
GEICO’s Significant Underwriting Losses
Jake: Yeah. Maybe it might be good to get into some of the 10-K and talk about GEICO and what you’ve been seeing there, Alex?
Alex: Yeah, the simplest way to frame it, I think is, if you go back five years– I wrote down some numbers so I have them. Five years ago, 2017, GEICO had $16.3 million auto [unintelligible 00:19:17] policies in force. Fast forward 2010 to 2022, $17.2 million. So, call it $900,000 net. Progressive, end of 2017, $11.7 million. 2022, $17.9 million, $6.2 million net. So, $6.2 million versus $900,000. Obviously, it’s just volume. You have, obviously, the cost of running the business. Last five years, GEICO underwriting expenses, 14% of earned premiums, Progressive 21%, slightly different model. But when you look at loss and adjustment expense ratio, GEICO has been at 82% of earned premiums, Progressive has been at 72%. 2022 was also a big divergence here in terms of where they’re both at.
I think you go back and listen to– I’m far from an expert on this stuff and trying to learn more. You go back and listen to what they were saying about Telematics and UBI, when it started getting discussed in that 2012, 2013, 2014, 2015 period, and it was kind of–
Jake: Yeah, they blew it off.
Alex: Buffett specifically said in 2013, “I invite you to come back and compare the results in two to three years.” It didn’t take two to three years, but a decade later, the results are in and it’s not looking too hot. They’ve changed their tune, but I think some have rightly picked up on the fact that it’s not something you can turn on overnight, I don’t think. There may be more to this story than just Telematics and UBI, but I think it’s pretty– They’ve said it such, that they just missed it.
I’ve wondered too about this, and I’m curious to hear you guys’ thoughts. Do you think Buffett being out there and talking about decisions at a subsidiary or own company of Berkshire is–? He can’t totally avoid it. I get it. Do you think it impacts their willingness to think about doing something like this more seriously back in 2013, 2014, 2015?
Jake: That’s a good question. I don’t know. I think he’s close enough with some of these that he talks about where he’s in on the conversations. And so, I would imagine that wasn’t just his opinion. That’s what they talked about in the right path.
Alex: Like the party line? Everybody is on the same page.
Jake: Yeah. Right. Yeah, this last year, you could call it a disaster for GEICO. It was $1.9 billion loss, 10:5 combined ratio, mostly due to used car price inflation, and property, and physical damage claim inflation. Premiums written were up 2%, but that came from 11% price increase, basically, premium price increase minus 8.9% in policies enforced. So, I was wondering, are they pulling back the reins a little bit? Because they’ve decreased underwriting expense 16% and most of that is ad spend, right? So, GEICO’s ad spend is being backed off, which says maybe he doesn’t like the pricing in general right now relative to the costs, which might be a little bit of a tell of what he thinks about inflation potentially. I don’t know, I might be reading into that too much. But if he doesn’t think he’s getting enough premium to make up for the risk that they’re taking, even on short term, because auto insurance is a very short-tailed insurance. It turns over 6 to 12 months, you get a new pricing chance.
I don’t know, maybe that’s saying that it’s not as hard enough of a pricing market for them to want to really be plowing into it with ad spend. I don’t know. What do you guys make of that?
Tobias: The Telematics is the plug into the car that tells you–
Jake: Yeah, it’s like an accelerometer basically that theoretically correlates with some risk. If you’re driving erratically, it’ll show up on the Telematics.
Tobias: Do you think it influences your behavior if you have that little thing in the car? You see that, you’re like, “Ooh, better drive a little bit more carefully”?
Jake: I bet it does.
Tobias: That alone is worth having.
Alex: Well, here is an interesting update on this point. So, I was reading the Progressive letter today. There are just reported results this morning. They introduced Snapshot in 2010, which is their little Telematics offering. GEICO released their version of this in 2019. What they said in the 2022 letter that I thought was interesting is, to your point, “This was previously an offering where you had it for one policy period,” I guess, six months. And at that point, the rate was set based on that. They could adjust higher or lower over time. They changed the implementation of it. What they’re doing now in 2022 and 2023 is it’s a continuous use, and you’ll get adjustment to your policy rate at each renewal.
Jake: Mm-hmm.
Alex: What they showed in their deck from this quarter, which is interesting, for the people that they– I think they baselined it on renewal rate for the business or retention rate for the business. For people who were getting a significant discount or a moderate discount, the retention rate was 300, 500, 700 bips above the core business. For people who they came back to and said, “Hey, we’re going to add incrementally to your cost,” they had a minus 16% relative to the baseline. But that just means the person is leaving as they give them the appropriate rate and then they’re going somewhere else. [laughs]
Jake: Or they’re not keeping [crosstalk] crazy a driver you are.
Alex: Yeah. “We’re going to charge you the appropriate rate and now you’re leaving–” You look at GEICO and loss and LAE in 2022 was 92% of earned premiums. That Progressive personal lines, it was 78% or 79%. They’re certainly better on underwriting expenses, but they have a loss and LAE problem relative to their clearest competitor in direct.
Tobias: When did Buffett pick up GEICO, the first chunk?
Alex: Oh, gosh. Well, what he bought in the 1970s, did he keep that through or did he sell that portion? I think he kept that and that grew into the 50% and then they bought the other 50 in 1995.
Jake: That would be what I would say as well, but that would be a low confidence.
Tobias: I just wonder if that type of insurance, it’s hard to make money through highly inflationary periods.
Alex: Yeah. The other thing that Progressive talked about in their letter, which speaks to what you were saying, JT, is they took pricing in 2022– In 2021, sorry. I think they said high single digits. It sounds like they saw some impact in terms of customer ads early in the year, and they ultimately took pricing again in 2022 of, I think, 9%. What they indicated is that the rest of the industry was late to take pricing and they saw volumes improving at the close of 2022. It sounds like they feel, and their numbers would be supportive of this view, that they’re a little bit more in touch with what they need to be doing on the underwriting side than some of their peers.
Jake: Hmm.
Tobias: They had a few good years too through when nobody was driving during COVID, right?
Alex: Yeah.
Jake: I mean, combined ratios were way down with that. But then they gave some of it back and make the customer feel better that the fact that they paid so much premium and didn’t drive at all.
Tobias: Yeah.
Alex: [laughs]
Tobias: What else you got, JT?
—
Is BNSF A Proxy For The U.S Economy?
Jake: Let’s switch gears to the railroad. So, revenue coming in at $25 billion last year, which is up 12%. Sounds good. Operating costs up 21% and their fuel costs were up 65%, [Tobias laughs] which that’s not so good, but they have surcharges they can put on there. They still ended up with a 34% operating margin, which is amazing. But here’s the thing. A revenue per average car, plus 19%. Car volumes down almost 6%. So, this is that same story of Home Depot that Alex was just telling is that, price increases, but we’re getting volume decreases. And boy, one, does that say that are we in a recession already? Kind of Using BNSF as a proxy for the US economy, like things moving around, maybe not the worst pulse that you could take.
To me, also, prices up 19% and volumes down 6%. That’s what stagflation looks like, I think. So, I’d be curious to see how this continues. I think we may find that maybe we’re already in worse shape than the other economic data that’s slower to report than necessarily this keyhole into the US economy, which a railroad might represent.
Tobias: Yeah, that’s not a cheery thought, but I think it lines up with just about everything else that I see anyway. I’m somewhat pessimistic about the economy in general, and housing everything at the moment. It all makes me a little bit nervous, honestly. I’m surprised it hasn’t shown up in real estate or housing prices yet. I can’t really square those two. I guess we’re down 6% or 7% over the last 12 months. It’s not much.
Alex: Yeah, I haven’t looked closely at BNSF. I think that’s the point you’re just making, Toby, I think a company like Target to me is interesting because it’s obviously pretty easy to understand. You look at pre-pandemic to now, and it’s like the Home Depot store sales are up very significantly. The difference there is, well, one, their mix of business. They’re much less of a grocery store food retailer in the same way that Walmart is, for example. They’re really grocer more than anything else. Target plays a lot more in these discretionary kind of general merchandise categories. It’s funny. They are not seeing– at least so far from the ones I’ve seen, you’re not really seeing the hit to them in terms of the revenue side of the business. It’s not coming in very significantly, again, at least so far. But in terms of the profitability, they are–
They’re talking about taking three years to get back to mid-single-digit EBIT margins they reported pre pandemic, where they peaked out at eight and a half percent two years ago. They were guiding to either 6% or 8% in 2022, and they came in at 3.5%. So, it’s a business, obviously where if you get caught offsides on cost/revenue assumptions, you can see real pressure on profitability in the short term on top of potentially significant excess inventory that you’re holding.
So, it just strikes me as one where it’s oddly persistent in terms of the challenges that they’re facing and I don’t know what the read through from that is. But it just strikes me as odd that it’s not really settled even though they knew what their problem was six plus months ago now. It just seems odd. I would say the HD guide and the FMD guide also seem odd to me, and I don’t totally understand.
Jake: Well, that dynamic you just described, it describes the entire S&P 500 right now. All margins seem to be coming in. They peaked at 13.3%, I think, in 2021, which was like off the charts, like 2x the long run average, on their way south right now. If you think of PE, where are we now, like 19 or something, if that E is on its way down, which it just seems like all the micromeasurements show that the E is on the way down, that P needs to adjust as well to get to a reasonable evaluation. So, I don’t know. Not to be too bearish, but there’s some concerning elements right now.
Tobias: The difficulty is when you’re analyzing– To take the macro into the micro and you’re analyzing individual stocks, you look at all of these things that have been overearning for a little while. It’s hard to tell if something’s overearning or if it’s just growing very quickly. It’s very, very hard to tell the difference between the two. And so, I look at these things that look cheap on the last five years of comps. That’s just a nightmare to figure out through the last five years, like what is the average earning power, what’s the real earning power through the last five years? Five years now includes 2018, 2019, 2020, 2021, I guess a little bit of 2023. It’s tough. That makes me want to pay a lower price, honestly.
Alex: [laughs]
Jake: One would think that you would want to be conservative with that margin of safety of what you’d be willing to pay with such erratic predictability, huh?
Tobias: Yeah, it is erratic. It’s very volatile. It’s artificially volatile, but it’s also just figuring out what the true earning power is. It’s just hard to figure it out through that. I don’t know. I think it’s an interesting 10 months on deck, 8 months on deck. I think we’re drawing pretty close to the precipice one way or the other. We find out one way or the other pretty quickly here.
Alex: I think an interesting flip side to some of these generally more established profitable just figuring out what P&L looks like in the short term is some of the unprofitable column– product market fit companies that don’t know if they have a business yet, might be a fair way to describe some of them.
Jake: [laughs]
—
Airbnb’s ‘Anti-Search’ Strategy Pays Off
Alex: Thinking about, in some cases, what they’re communicating, in other cases, what they’re communicating, and actually starting to deliver against and what that means for the changes and what their businesses may potentially look like in a handful of years. Airbnb is a very notable example where they’ve had significant tailwinds there in terms of the shift in travel to some extent, especially early on in COVID, and they’ve also benefited from higher room night rates. So, that’s certainly impacted their income statement in a significant way.
But one example there is, they spent a lot of money on performance advertising in the pre-pandemic days. When the pandemic happened and they turned off their spend, not to get too hyperbolic, but they realized that a lot of their spend was just waste of money. And so, what they’ve done from 2019 to 2022 is they took sales and marketing from 35% of sales to 20% of sales, and they’re at record volume. So, it’s just interesting to think companies that will potentially test some of the assumptions that the market maybe didn’t force them to test themselves on previously, and now you’re going to see what happens in some of these cases, and it might be quite bad. [laughs]
—
$RH Typos Driving Search Traffic
Tobias: It reminds me a little bit of that Restoration Hardware tweet that was doing the rounds about their ad spend on Google where they said– they went and looked at the 1300 words that they were using on Google and they found that the 22 that accounted for the most like 90% of the clicks or 80% of the clicks was like misspellings of Restoration Hardware.
Alex: [laughs]
Tobias: So, they switched off all the others, including the Restoration Hardware misspellings. I tested it as soon as I read that, I just mangled Restoration Hardware. It still comes up. It’s like the top link. The only difference is there’s no shaded box over the top with Restoration Hardware. I shouldn’t see anybody else trying to steal that space either. So, I guess that’s the risk that you have when you’re in a highly competitive market that you get– and I’ve done that before, not knowing, typed in the name of the retailer or whatever, and then clicked the link above, not realizing that it wasn’t to them, it was to a competitor. So, that’s a real risk.
Jake: Have they [crosstalk] don’t know which half of the ad spend is being wasted.
Tobias: Yeah. Classic.
—
How High Can Google Go?
Alex: [laughs] This is very anecdotal, but I typed in Google Flights yesterday and the top ad result said Google Flights on it and then /Priceline. It was a link to Priceline. I was like, “Oh, wow, that’s pretty sneaky.”
Tobias: I think that’s what I did. I saw the word that I was looking for in there and not thinking. Just clicked it and then realized I was in the wrong place.
Alex: But I guess, Google is fine with it. So, that works. [laughs]
Tobias: Yeah. If enough people kind of get that lesson, I wonder what happens to Google. I wonder if they see a little bit of softness through this period too. They have been insulated from the cyclicality of advertising for the most part, just because they’ve been growing so fast and stealing from other channels.
Jake: Offline. Yeah.
Tobias: Probably going to see this time. They probably reach that saturation point where the cyclicality turns up.
Alex: I thought they would stop growing at insane rates. I think it was 2013 or 2014, the first time I looked and they ticked off 20% quarterly growth, like a clock every quarter since then.
Jake: This is done. The cat’s out of the bag.
Tobias: Can’t get any bigger
Jake: [unintelligible [00:35:55]
Alex: They didn’t do it for two quarters, and then the quarter after that, they grew 70% or something.
Tobias: Oh, what a beast.
Alex: Yeah. The day I buy it, they’ll stop.
Jake: Then, it’ll roll over and it’s done. Yeah.
Tobias: Naturally.
Alex: Yeah.
Tobias: That’s the only way it’ll get cheap enough.
Alex: [laughs]
—
BH Energy Effective Tax Rate (-52%)
Jake: So, I could give you some more numbers here.
Tobias: Yeah.
Jake: BH Energy, which is, God, what an amazing business this is. The ability to just eat capital, almost infinite capital that they want to feed into it and produce a 10-ish percent regulatory return. Care to take a guess as to what the effective tax rate of BH Energy is? Remember, there’s a lot of credits.
Tobias: Because there’s so much depreciation.
Alex: Negative 25.
Jake: There’s accelerated depreciation and you have all the tax credits for the wind and solar.
Tobias: Yeah, that’s tough. It’s pure speculation. I’ll say 10%.
Alex: Negative 25.
Jake: Negative 52%.
Tobias: What?
Alex: Oof.
Jake: [laughs] So, net income is like 150% of [laughs] EBIT, basically.
Tobias: All the housing bros that they just decided they could become energy infrastructure bros.
—
The Stock Market Accelerometer
Jake: Oh, my gosh. Amazing. MSR, actually, so this is Manufacturing Services Retail, and then they also put their financial products in there now as well. It’s kind of the basket catch-all for everything. That’s not railroad insurance or BH Energy. That actually had a pretty good year in 2022. It had been sucking wind a little bit relative to the other components of Berkshire. But this last year, there was some bounce back. A lot of that is attributed to precision cast parts, which was a big component of that. They had a plus 16% revenue growth, which is good news for them. Clayton continues to be an absolute homerun for Berkshire. 21% revenue growth last year, unit sales plus 6%, the rest of it in price. But fourth quarter for Clayton, unit sales were down 4%. So, already seeing slowdowns there.
That same story, they said is playing out at Forest River, which is the RVs stuff, apparel, which is a bunch of Hanes, Brooks, all those things, Dexter shoes.
Tobias: [unintelligible [00:38:14]
Jake: Yeah. And then, Duracell as well, that they own. All those are expecting slowdowns, are already feeling it in unit volumes. They said that they’re actively right sizing those businesses already. So, they’re telegraphing that there’s a lot of places that they’re taking in the horns a little bit, it feels like. So, yeah, it’s interesting.
Tobias: Is it surprising at all? We’ve had some overearning years here for a while. I don’t think that it’s necessarily just cooling off a little bit back to whatever the underlying population growth, or GDP growth, whatever the underlying trend is in there. Is that surprising? Wouldn’t you just expect that we’ve front-end loaded a whole lot of stuff over the last few years and now we just go back to trend, which might mean falling for a little bit? It’s funny that the market seems that– The stock market is like this accelerometer on that stuff. If it goes up a little bit faster than it expects, the stock market goes crazy up, and then you slow down just a little bit, it goes crazy down on the other side although we haven’t seen it go down on the other side for a little since 2020.
Jake: Yeah. It does feel like it’s the derivative of velocity, right?
—
Tobias: Yeah. What else do you get, JT?
Jake: Let’s see. Just think about $470 billion worth of equity in the company now. Almost $948 billion of total assets on the books.
Alex: Wow.
Jake: Just amazing. Just the size of that is staggering.
Alex: How big was Apple? Do you have it in front of you?
Jake: What is Apple, like $115 or something? I think I might be a little wrong on that, but it’s down from where it was obviously about 25%. $37 billion cash flow from operations. That’s not too shabby. Just the way the compounding works out after all these years, we’re in that phase where every single, double now just leads to just insane amounts of money. Only spent $8 billion on buybacks after being more like 25% to 27$ the two years before that. Price to book right now is at 1.4-ish for– But you could make the argument that price to book is increasingly irrelevant for Berkshire, just because of the way the operating businesses are working. And also, book value is shrinking as you do buybacks.
I would say that the number that price to book should be evaluated should be going probably a little bit higher. Probably, actually, earning power was greatly increased this last year. You actually had some decrease from the marking down Apple as a big chunk, that reduced book value by quite a bit. They actually decreased their cash by a surprising amount. There’s not quite as much cash on the books. You had the $11 billion purchase of Allegheny, which was part of it. Another $15 billion of Capex, which they’re always spending more than depreciation. But in general, they’re structured right now, I look at their balance sheet and I look at for what’s Buffett’s asset allocation look like, and it’s 25%-ish cash and short term investments, 5%-ish percentage bonds, which is probably mostly related to insurance operations, and then about 70% equity. So, that gives you a rough sense of how Buffett’s looking at the world.
—
Warren Buffett’s Masterful Use Of Debt
Now, their use of debt is masterful. That’s something that I think that’s really missed when you look at the capital allocation of Berkshire. Right now, I think the average is around the 3%, and it’s all long dated, fixed. Some of it, the Japanese stuff, the yen is zero forever. Free money, basically.
Tobias: Who took the other side of that trade?
Jake: I don’t know. Some banks.
Tobias: Japanese insurers.
Jake: He executed it when the yen was especially weak. His dollars translated into– He just knows how to play this game so well. It’s just amazing to watch a master at work. But they’ve got, let’s say, what is it, $76 billion at the railroad in debt, $46– at railroad and energy. That’s actually regulatory required. The commissions that they operate under want them to have debt to lower the cost of capital that they are then paying on for when they figure out how much to pay like a return on equity for them. So, they want them to have some debt because it lowers the cost of capital for these companies.
But then, the insurance side of things in corporate level, they’ve got $46 billion. And then, something else you don’t really talk about much is the deferred tax liability is $77 billion. So, you could think about that as an interest-free, no expiration, non-callable loan from the US government of $77 billion that they’re running with. So, Buffett continues to be a master. There’s nobody better doing it. I just marvel at the artistry of it.
Alex: I like the float comment, 2011, 2012, “Hey, probably won’t grow from here. Could fall 2%, 3% a year,” or whatever it was. It’s [crosstalk] [laughs]
Jake: Or not. Yeah. Well, it doesn’t hurt. They added another– How much did they get? Maybe $20 billion, I think, in float from the Allegheny transaction. So, there’s some of that inorganic, but it still counts. Still float.
Alex: Yeah.
Jake: And now imagine taking those bonds and converting– because they can probably free up a fair amount of capital now, because Berkshire is so overcapitalized that now Allegheny doesn’t have to have as much tied up in 3% bonds or something. And now, they could make that into equities more. So, imagine what that float’s worth all of a sudden.
—
Tobias: I like the little section that he had. We discussed a little bit earlier, the secret source, where he was talking about buying Coca Cola, $1.3 billion cost, and then this year, $700 odd million dollars in dividends. But then, he had this nice line. “Assume for a moment, I’d made a similarly sized investment mistake in the 1990s, one that flatlined and sickly retained its $1.3 billion value in 2022, like a high grade 30-year bond. That disappointing investment would now represent an insignificant 0.3% of Berkshire’s net worth and would be delivering to us an unchanged $80 million or so of annual income.” Still, it wouldn’t be a bad outcome, but you just don’t get those extreme outcomes that he’s managed to get. I think he’s said he’s only made one good decision every five years, but it looks like that’s enough.
Jake: Yeah, I feel like that’s a little bit of a– [crosstalk]
Tobias: He’s selling himself short.
Jake: Yeah.
Tobias: The point stands. He gets one of these absolute blockbuster hits every five years and that’s enough. If he’d just done See’s and then just plowed everything back into SPY or something like that, he’d still be Warren Buffett. He’d still be well known.
Jake: Yeah.
Alex: Yeah, I was looking at GEICO. Even with the problems it’s had, you look back over the past 25 years since they retained control and just on underwriting– I think I want to say they paid $2.3 billion for the other 50% that they didn’t already own in the first 50. They paid some nominal amount of money.
Jake: Yeah, 50% or so. [laughs]
Alex: Yeah, they paid for their purchases, in theory, but they paid a nominal amount for that stake. Past 25 years, the pretax underwriting gain’s been $20 billion. It’s still an ongoing business, obviously. Hopefully, one day to be profitable again.
Jake: Yeah. Right. I saw that Berkshire earned more interest on their $110 billion of whatever you want to call, cash there than they paid interest expense for their $116 billion of debt that they’re using to help have a bigger balance sheet.
Tobias: [laughs]
Jake: What a legend.
Alex: [laughs]
Buffett On Buybacks And Inflation
Tobias: He had this comment on inflation, which I can’t find right now. Do you remember what he said about inflation? He had a little shot on buybacks and a little shot on inflation.
Jake: He’s against it.
Tobias: [laughs] He’s not in favor. [unintelligible [00:46:55]
Jake: Well, let’s see. He said that Berkshire offers some modest protection for runaway inflation.
Tobias: That was all he said.
Jake: But this attribute is far from perfect, and huge and entrenched fiscal deficits have consequences.
Tobias: Yeah. He said that he and Charlie didn’t know the consequences of those giant fiscal deficits.
Jake: Yeah.
Tobias: Yeah, sorry, I just can’t find it. I just thought it was interesting. He teased that. He said, what was it, $25 trillion in tax revenue and $43.9 trillion in spending. So, he doesn’t know what the consequences of that differential are, but there will be some at some point.
Jake: Yeah, $11.6 trillion cumulative deficit over the last 10 years. I was surprised, actually. I guess, I knew this, but I just had forgotten. But the government receipt intake, they’re 48% from individual income tax, social security is 34%, and only 8.5% for corporate income tax. I don’t know if that’s long run sustainable to me. I know it was higher before. Obviously, we had the Trump tax cut in 2017 or whatever it was that brought it down from 35% to 21%. But if I’m sort of game theorying this out as far as what will society allow for corporations to earn without taxing them before you get the pitchforks out, I think there’s a real risk there that corporate taxes go higher from where they are today, and therefore, you should also be paying a lower multiple if you think that’s going to be pinching it at some point.
Corporations have won, especially the last five years since that cut. But we’re doing a lot of money printing and without taxing the corporations, I don’t know. There’s all kinds of arguments about it, like trickling down. There’s a lot of “and then what” to be answered, as you said, Alex.
Tobias: Does it get captured in the dividend payment? You pay tax at the corporate level, then you pay a dividend, and it gets paid again in the hands of the person who receives it. How’s that–? [crosstalk]
Jake: How much of the earnings of a corporation? What’s the dividend payout of earnings right now?
Tobias: That’s 1.7%, I think.
Jake: Well, that’s the yield. That’s not how much they’re earning.
Tobias: [crosstalk] portion is paid out. Yeah.
Jake: Yeah, the dividend payout as a percentage of earnings is– [crosstalk]
Tobias: I think it’s not quite half. It’s like 40%– [crosstalk]
Alex: Yeah. If it’s 1.7 on a 5% yield, it’d be, what, mid 30s payout ratio, something like that? You said 20 times before around there.
Jake: Yeah. So, there’s a lot of retained earnings that aren’t counted in that, that aren’t being taxed.
Alex: They are now with the buybacks. [laughs]
Tobias: Yeah. So, that was where I was going.
Jake: Yeah.
Tobias: So, we got the thin edge of the wedge last year with 1%, and now we’re going to, what, 4%? Eventually, I guess it just equalizes with dividends.
Jake: Buffett had a good line on that about it. [laughs]
Tobias: Yeah.
Jake: Well, let’s just do the direct quote. “When you’re told that all repurchases are harmful to shareholders or to the country or particularly beneficial to CEOs, you’re listening to either an economic illiterate or a silver tongue demagogue. Characters that are not mutually exclusive.”[laughs]
Tobias: Yeah, it’s a good line.
Alex: Yeah.
Jake: Yeah, it’s a good line.
—
Tobias: Jon Bartel’s got a question. “Any guesses on the 12 investments that moved the needle for BRK that WB referenced in the letter??? AAPL, Sees, AMEX, Cap Cities, ???, ???, ???, ???”
Jake: I don’t know. I think Mohnish did a post on that on Twitter, if you want to go look at his version.
Alex: National Indemnity would count if we’re talking wholly owned businesses.
Tobias: Berkshire. Berkshire itself.
Alex: Yeah, I don’t know. I’d have to think about that.
Tobias: General Re has got to be on there for just the dilution that it created for saving. When you trade three times book value for your equity for something– By the way, that equity value, highly bloated because of paying huge multiples on the underlying equities inside of it. So, you had very expensive stocks pushing up a book value, and then the price to the book value was also at three times, and then he was able to wash that out in a transaction tax free with the acquisition of General Re. That was massive. I think Chris Bloomstran says that Berkshire would be worth half as much today if that hadn’t happened.
Tobias: Wow. I didn’t understand that until you described it that Bloomstran had explained it to you as a good insight.
Jake: Yeah.
—
Berkshire’s Next YOLO Trade
Alex: Now, we just got to find the next thing. Next thing, Warren.
Jake: What’s next?
Alex: Time to acquire Paramount.
Tobias: Well, they’ve still been buying Paramount, haven’t they?
Alex: I think so. How big is the stake? The company is not that large.
Tobias: What do you think–? I saw OXY’s upped its buyback again, and it’s paying increased its dividend as well. So, it’s doing that well there. What do they do things like–? They’ve taken TSMC, spat that back out again. Any thoughts on that?
Jake: I don’t know. I think that’s the lieutenants who are going to be a little bit more active in their management of things.
Alex: Yeah, I noticed that on Ally, which I own. They owned 2 million shares, whatever it was, 200 million shares, whatever the number is and they sold 5% of it. I was just thinking, “I wonder what leads to that decision.” It’s a situation where you probably believe one thing or the other on a name. You’d probably either want to keep owning it or be out, is how I think you’d probably think about it. It just struck me as odd that the decision was to sell 5%. But they’re smart guys. So, I’m sure there’s some thought process behind it, but it was confusing for me.
Tobias: Just rebalancing, I guess. Don’t like the risk reward at that level and take it down a little bit. I don’t know, maybe you plan to sell it out as it goes up.
Jake: Yeah.
Alex: Maybe Charlie found something good and they’re getting ready to lever the entire organization for one big trade.
Tobias: YOLO.
Jake: Yeah, they have a Charles Schwab account with margin in it that they’re going to take. [laughs]
Tobias: Buffet gets his YOLO trade at 98 or 99.
Alex: Yeah.
Tobias: Lever up the account at 2X– [crosstalk]
Jake: I’ve got one more little tidbit for all the real junkies for Berkshire, which I hadn’t seen before.
Tobias: [laughs]
—
Dairy Queen – The Company That Keeps Giving To Berkshire
Jake: One of my friends ferreted this out who just finds the most random ass stuff. But he found international Dairy Queen’s operating results from last year. I’ve never seen this before. It was in some random ass trade magazine. So, financials– this is actually for 2021, but I’m sure it looks similar for 2022. As you know, DQ does a franchising model where they charge only 4% of revenue, which is actually very low in the franchising world. But on book value of $106 million, their revenue was $224 million and operating income of $112 million. So, it’s operating margins of 50%. Cash flow from operations is $113 million. So, it’s almost direct– if it’s operating income falls to cash flow, capex of $2 million, so almost nothing. Dividends back to Berkshire of $110 million.
Alex: Nice.
Jake: So, basically, this thing is just printing money and sending it to Omaha every single year. ROEs are through the roof over 100% plus every year. But this is just basically a royalty stream of cash that just flows from all the Dairy Queen’s that goes right to Omaha. Just an amazing buy.
Alex: How in the world did he find that? [laughs]
Tobias: Is it an Omaha thing? I don’t think– [crosstalk]
Jake: Was Dairy Queen an Omaha thing?
Tobias: Yeah.
Jake: No, I don’t think so.
Tobias: I don’t see many of them here.
Jake: They’re out here.
Tobias: Yeah?
Jake: In California, if you mean here.
Tobias: Yeah.
Jake: Yeah.
Tobias: Sort of. I just don’t see them. I don’t know.
Jake: Yeah.
Tobias: I’m on the protein. [laughs]
Alex: No Blizzards.
Jake: Oh, man, they’re so good though.
Alex: They are. Not too good for you, I don’t think.
—
Foie Gras – No Joke!
Tobias: The biggest sugar here I get is when I’m sitting with you at Omaha at the meeting, eating at the See’s for breakfast.
Jake: Yeah. And our friend, Lonnie, is force feeding you sugar like you were a duck that was going to be turned into foie gras.
Tobias: Foie gras. Yeah.
Jake: [laughs]
Tobias: We get in trouble for making a foie gras joke on this. You never get into trouble occasionally. Not just from– somebody who was upset. Somebody was upset, we made a joke about foie gras. If you’re listening this far into the podcast, I apologize for the foie gras joke. If somehow you just found it by searching the internet, then go away. [crosstalk]
Alex: You mentioned it now, are we going to get demonetized? Because I was hoping to get paid. I was hoping to get paid for this appearance. [laughs]
Tobias: You get your 30 cents.
Alex: Awesome. I’m excited.
Tobias: Well, can we talk about lab leaks now? Is that okay?
Alex: Oh, there you go.
Jake: Now, that it’s been talking about demonetizing.
Jake: [laughs]
Tobias: What was it? Sorry.
Jake: Oh, the COVID lab leak now being–
Tobias: Oh, the lab leak. Yeah.
Jake: Now, it’s an okay thing to hypothesize. Whereas before, if you even mentioned it, it was canceled.
Tobias: Yeah. You weren’t allowed to say that. You also weren’t allowed to suggest that the Ukraine was– You couldn’t victim blame the Ukraine. I got an early note about that very early in the war.
Jake: What does that mean?
Tobias: I don’t know. I’ve never heard that expression in relation to a country before.
Jake: [laughs] They were asking for it or something? Is that the [crosstalk] applying?
Tobias: Yeah. But it was just a funny term. It was just a funny phrase. I just never heard that in relation to a country before. Yeah, [crosstalk] before it.
Jake: Shouldn’t have worn that outfit out, you were asking for trouble?
Tobias: Yeah, on the border. Yeah.
Alex: My shot at the 30 cents is going away very quickly.
[laughter]Jake: I’m surprised we made it this far before we got canceled, honestly.
Alex: What do you think about it? If we have time real quick, what do you think about, for example, GEICO, something like that never being–? I know he discussed in the past, but especially on something where he could angle it more to what he said and what he thought as opposed to calling out potentially [unintelligible 00:58:07], do you surprise ever that he doesn’t really do that anymore? I know it’s late in the game. He’s done his time, but still.
Tobias: What you mean calling it out?
Alex: Just discussing, even simple as, “I was wrong on this and here’s what’s happening,” just to give people an understanding of what even is going on to some extent.”
Jake: I bet he’ll talk about it this year. I bet it’ll come up because it’s a fairly loud datapoint. Those were kind of awful results. So, I wouldn’t be surprised if it comes up and that he’s pretty forthcoming with it and says that it was a mistake.
Tobias: That’s a tough business.
Jake: Well, they’ve been pretty quick to admit mistakes in the past. So, it wouldn’t surprise me. But I do think that you’re right that there’s certainly no real– His upside to downside on calling out big problems even, is relatively skewed to it’s just not worth it at this stage for him. He’s on a victory lap. He should just be positive all the way out and finish strong. There’s no reason to go out on a cranky note necessarily. So, I think the days of him really calling bullshit on stuff has passed a little bit.
Tobias: Uh, he took a shit on the buybacks.
Jake: Yeah. That is the exception-
Tobias: On the deficit.
Jake: -that proves the rule in my mind that [Alex chuckles] how rare it is anymore that he calls bullshit on stuff.
Tobias: Buyback– [crosstalk] So, that’s the thing.
Alex: I guess on Berkshire company specific stuff that’s probably always been– it’s more of a meeting discussion than really– The letter was only for praise to the extent that it ever touched on that stuff, generally speaking. So, I guess that’s fair.
Tobias: He’s a big believer in that– [crosstalk]
Jake: Praise in public.
Tobias: Yeah. Well, put praise by name and criticize by category.
Jake: Yeah.
Alex: Yeah. I was hoping he could criticize himself since he was the one who said some of these things. [laughs]
Tobias: Yeah, [crosstalk]
Alex: Yeah.
Tobias: At the last meeting, when Munger was criticizing someone, he said, “Hey, we don’t criticize by name.” He means it even talking to his 98-year-old partner. He’s like, “Hey, careful. Careful”
Alex: I still love you, Warren. I’m not criticizing you, if you’re still listening after those Ukraine comments.
Tobias: He switched off at foie gras.
Jake: That got him. Yeah.
Tobias: All right, thanks, Alex. Great episode today. Thanks, JT, as always.
Alex: Thank you.
Jake: Thanks, Alex.
Alex: Thank you.
Tobias: We’ll be back next week, same bat channel soon, same bat time. See you, everybody.
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