Value After Hours S06 E10: Christopher Bloomstran on Buffett, $BRK Berkshire, Munger, $SPY & China

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Tobias Carlisle is the founder of The Acquirer’s Multiple®, and Acquirers Funds®.
He is best known as the author of the #1 new release in Amazon’s Business and Finance The Acquirer’s Multiple: How the Billionaire Contrarians of Deep Value Beat the Market, the Amazon best-sellers Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014) (https://amzn.to/2VwvAGF), Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012) (https://amzn.to/2SDDxrN), and Concentrated Investing: Strategies of the World’s Greatest Concentrated Value Investors (2016) (https://amzn.to/2SEEjVn). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law.

Prior to founding the forerunner to Acquirers Funds in 2010, Tobias was an analyst at an activist hedge fund, general counsel of a company listed on the Australian Stock Exchange, and a corporate advisory lawyer. As a lawyer specializing in mergers and acquisitions he has advised on transactions across a variety of industries in the United States, the United Kingdom, China, Australia, Singapore, Bermuda, Papua New Guinea, New Zealand, and Guam.

He is a graduate of the University of Queensland in Australia with degrees in Law (2001) and Business (Management) (1999).

This meeting is being live streamed this is value after hours I’m Tobias carile joined as always by my co-host Jake Taylor very special guest today the inestimable Christopher bloomstrand how are you sir I’m doing okay um you always crack me up at the outset I’m good how are you

Fellows I’m doing well I went at Indian Wells saw the tennis was right two of my favorite two of my favorite Left Coast guys there yeah right good how was Indian Welles did you have a good time with that Toby kind of on my bucket list it’s so

Good it’s a great it’s a great uh sort of festival and you can just walk between the courts so I went and saw the Aussie Alex the manure he won and then we saw some of the girls cuz my daughter’s a tennis player and then went

And uh saw saw C and few other guys was great was excellent nice that that professional tennis up close is just crazy they’re so good was your daughter inspired yeah she loves it yeah she’s she’s pumped right up nice you to go well Chris so you’re back and you’ve

Surfaced from writing the the annual letter and you’re still alive that’s good news yeah I made it I got to the Finish Line I I don’t know how many more years I can do it at the Cadence I do ha the this one was particularly rough

And I got myself behind as I mentioned kind of pre-show the uh I’ve kind of stuck to this walking program I had the hip replaced in December which was turned out to be a really good time to do it but I’ve been out walking at least a couple hours a

Day listening to you guys on podcasts and earnings calls in fact I’m listening to way more podcast because you know you got to kill time and be productive at the same time and so um the hip recovery given that I lost about 60 pounds was really easy with the exception of

Sitting at length and you know if you write 150 Page Letter you sit at length and I write all night so I got myself behind because I was killing two to two and a half three hours every day kind of had to ditch the walking in the last

Week I was with the roost The Roosters were the roosters welcomed at the end of the night for me the sun I took a picture outside the sun was up pretty much last seven days in a row but just to get over the Finish Line yeah I got

It done it was great then decamped immediately to uh South Florida turns out I’ve got a lot of clients and friends that for whatever reason don’t retire to South Dakota but they go to South Dakota so I spent a hung out with your man Brewster and saw his new digs

And his old digs his grandmother’s digs and had a couple good meals it was great that’s good I’ve always made the I think I’ve teased you before Chris that uh you know we can basically do away with the CFA program as long as you just take a test on

Understanding Chris’s letter and what’s in it and uh you know that and I I figured I’m I might be getting up over the 50% Mark at this point so I feel like I don’t know if that puts me at like CFA level. five at this point or

What but uh oh that’s nonsense that’s nonsense I think we should start with uh and the thing that I noted when I when I shut back my response to Chris from his letter 25 years in business that’s amazing congrats yeah 25 as simper it’s a big milestone I was talking to Jim

Grant last week he’s at four he just had his 40th anniversary so back in the days of fractional trading we’re 58 so we’re 62 and a half percent of Grants but yeah 25 is a big deal and it it flies it goes fast um and 33 years doing this thing

Professionally or 34 maybe now um it’s a blur but I think about when we first bought Berkshire and how old I thought Warren and Charlie were at the time but that was that was February of 2000 and they’ve had a pretty good run Charlie almost almost to 100 pretty remarkable

It is pretty funny to listen to the old AG GMS from back then and and even like mid90s people are asking about succession what’s going to happen when you guys get hit by a bus or get too old I mean it was it was 30 years worth of

It I hope I’m I hope I’m around to celebrate seer’s 70th uh anniversary I’m not sure going to get much more than that and um you know we’ll see maybe losing 60 pounds will help in that effort I’m drinking my kambucha now which I never even heard of my daughter laughs at

Me you know I figure 55 years of God you think about all the ribe eyes and the T-Bones and the filets and the cheeseburgers ands and then layer on bourbon and beer back in the college days and a little Bordeaux and burgundy there’s something like nine billion living probiotics whatever that

Means in this I mean how do you put how do you fit 9 billion of these things in this little 16 or something 473 milliliter bottle but they they must be doing something you know it can’t be bad so and I don’t Envision my stacks of ribe eyes and filets stopping anytime

Soon so we need to do something for the gut they’re good for you Chris um this Market was pretty loopy through 2021 feels pretty loopy again to me now is it given that you actually have been doing this professionally through the full period what do you think are we

At 99 levels of loopiness now are we still sort of we’re 2021 Ty levels of loopiness where are we how do you feel about the market right now what inning is it set oh it’s late it’s late and there we’re in Extra Innings um I

Thought 21 the end of 2021 was a secular Peak and I’ve got a section in the letter on it um know you look at what stocks had done in the decade leading up to that 16.6% a year profit margins were at all-time high 13.3 you were 229 I think as a multiple

On earnings and so I mean you’re capitalizing a record profit margin at a historically very high multiple it doesn’t leave a lot of margin for a and then things blew up in 22 and you had the big recovery last year and essentially the S&P was up 1.7

The the mag 7 now that you’ve added Nvidia and Tesla to the mix they were up something like 2.7 for the two years so I think you’re and here up this year S&P is up whatever it is eight or nine and the mag seven up 15 or 16 you’re back to

Those 21 levels and um you know I think you know whether you call 21 a secular Peak or this moment a secular Peak getting much more out of the market um we can get into this but you know the the factors that make up how you generate returns are

Pretty much stacked against the aggregate investor and so I think things are pretty frothy and a lot of parallels this Nvidia my God Thursday had something like a 270 billion dollar swing in market cap intraday my God the whole market cap of the company was less

Than that in October of 2022 I mean a year and a half ago back in the old days what back in the old days yeah but In fairness I’ve never seen a large company mature and they’ve been public for a long time what’s going to be two consecutive years earn more than their

Prior years’s revenues think about that yeah it’s wild now I don’t think a 55% margin is sustainable and you happen to have a shortage right now of what they sell to their handful of big customers uh but the big customers are going to um not going to allow a 55 margin they’re

Going to manufacture some of their own stuff you’ve got some competition and so you’ll have misses and at 2.4 trillion the thing was kind of ridiculous I thought it was ridiculous at 1.2 trillion and I think in in retrospect when you look at this thing 10 years out

Whatever you’ll have Miss Miss misss somewhere between here and there and the thing will be more rational but it’s it’s as frothy as anything in the late 90s now great business growing but Microsoft was ridiculously expensive in the end of 99 and as I wrote in my

January 2000 letter you I said sh shareholders will lose money for 15 years and indeed they did um because you couldn’t do 620 billion market cap on 20 billion in sales albeit at a 37 or 38% margin I mean it was that far ahead of itself and at 2.4 trillion on 60 billion

In revenues what’s going to wind up being 110 this year if they do a 55 margin whatever they make 30 billion net I mean kind of using today’s level of revenues and profits it’s way way way ahead of itself and um I think even beyond the mag seven the the market is

So bifurcated at the top end of maybe 40 or 50 or 60 companies even Costco which we still own in some of our older accounts which we’ve owned since 2004 we paid $29 for it um you it’s going to earn that in a couple three years

Um but it traded at a 350 billion cap on 250 billion in revenues and a 2.7 margin it was trading at 50 times earnings a week and a half ago and lo and behold with the four uh letters in the in the ticker kind of back in the old days I

Mean really back in the old days your threel tickers were all New York Stock Exchange companies your four were NASDAQ Costco has always been an ndaq company and it’s in the NASDAQ 100 so I don’t think anybody in the right mind would buy Costco at 50 times earnings

Um the company doesn’t buy shares back with the exception of maybe diluting a little bit of what they do give away to shareholders but 50 times is ridiculous I me it’s a great business and they’ll continue to open stores at the Cadence of 20 or 25 a year but you can’t pay 50

Times for a business that’s going to grow way less for the next 20 years and it’s grown for the last 20 and so it’s not just it’s not just the seven but there are still I don’t even know if it’s the seven this year it’s it’s only it’s only Nvidia

Meta I think the others are Apple I don’t think it’s even half of the seven I think it’s only two or three of the seven at this point are doing all couple three of them are down Apple’s down Tesla’s down right Nvidia is just driving the bus here of have we just

Switched Nvidia for Netflix for NVIDIA we just the end just got switched out and nobody nobody said anything well they did yeah they it was a letter swap right so Chris if you had like let’s let’s play the kind of red team you know in this case the Angels argument um

Because you know I think you’re you’re pretty convincing in your letter about the different levers that can be pulled to create returns you know sales growth margin expansion or contraction share count dividend multiple uh and you know when you look at where all those are they’re kind of

All bumped up against the most optimistic versions of themselves in the kind of historically but let’s let’s take the Angels version and like where might we be surprised to the upside on one of those five all of a sudden maybe makes the returns for the next 10 years

Not quite as as as dire as we might otherwise believe interesting so as you guys know I I I put these five factors together the first four multiplicative dollar change in sales uh change in the share count um change in the margin change in the multiple and

Then the last being dividend yield being additive I’ve got a handful of scenarios looking out 10 years kind of playing with different different iterations so without doing it off the top of my head I pulled this out um so I’ve got I’ve essentially got four cases and the most bullish of cases would

Assume that you wind up back at what I think again were 2021 secular Peaks and so your profit margin which is declined for the S&P 500 by 190 basis points over the last two years you’d run it back up from 114 to 133 you take the multiple back up to

Where it was we kind of compressed it down to the low 22s from 229 so I mean frankly with S&P being up 8% this year you’re back to that level already um and if you get there you get a little bit of expansion in in you get

Maybe one and a half points per year out of expansion in the in the in the margin and then you get whatever sales do on a per share basis in the dividend yield which is given high prices the dividend yield is near record lows today in that scenario you make about 7

And a half% a year from the beginning of this year and you just Juiced a point of that in this last two and a half months right um to to to grow to and and you tell me I mean of those five factors were you g to get more out of that um

Most likely would come from a profit margin north of 133 I mean you know who would have thought back I think Warren Buffett was wrong in his 99 Fortune article when he talked about the mean reversion and the bracketed range of profit margins completely missed these

These um well he missed a lot I mean you wouldn’t have known that we’d get to zero interest rate policy for a bunch the last 20 years and so all this corporate debt which is mammoth in size but was bearing very low interest cost that very low interest burden added

About three points to the profit margin but straight down but you get these mag sevens I mean you know the the group group of the seven stocks has a margin of 20% it was 22% and you know Microsoft is 36 nid is going to be 55 uh the group

Gets pulled down by Amazon and you kind of tell me how their business shakes out between AWS and uh their retail businesses their onep business is going to have lower margins than Costco’s 2.7 the the third party is going to probably have a little bit higher margin level

But you know they’re a five margin and I think they can be a depending on what they do with their Cloud business but there’s 20 it’s double the so if that group continues to gobble up the world you can make a case for a profit margin north of

13.3 um but in the last 10 12 years the margin for that group was 22 and it’s back down to 20 and so I don’t think there’s I don’t I’m I’m a skeptic on getting much more than a mid single digit return and then I play with the number of scenarios that

Takes uh holds margins and multiples constant well then you’re only going to get sales growth per share and the dividend yield and the sales growth per share comes from Dollar sales growth and any change in the share count um and then you run more bare scenarios

And uh you tell me what inflation does and that that’s really going to dictate kind of the return series I think at least the components of the return Series so if we’ve let the inflation Genie out of the bottle you’re going to run sales hotter than they’ve run over

The last two decades and in the last three years sales have run at about 11% a year for the S&P for the last two years they’ve run at about 9% but those are they were inflationary periods and that’s how you got the profit margin down by 190 basis points right it wasn’t

Volume yeah so sales growth per share was about three and a half percent 3.4% for each of the last two decades it was a different mix in the first iter in the first decade of the last two decades Iran sales closer to six in dollars but

You had a growing share count and then in Reverse you you had a shrinking share count but much lower three and a half you know kind of three and a half percent dollar growth per sales so if you run sales at that level you can play around with holding margins multiples

Con but if you run hotter if you run more sales and I’ve got several scenarios where you run sales at nominal sales at six% a year you’re not going to keep margins where they are today if inflation runs hotter you’re going to profit margins for a whole bunch of companies

That can’t pass through costs and so you get right you get shrinking margins you’re going to also get shrinking multiples so you take the multiple back to its historic 15% and then you run an extreme of taking it back to 10% then you’re looking at low single- digigit

Returns to maybe as little as negative -3% a year reality is probably somewhere in between all these and so you S&P wise you do three or four% the mag 7 the is I what I used to call the Fab Five before you included the other two they they were they were

12 13 14 times 10 12 years ago Apple traded net of cash for less than 10 Microsoft traded for less than 10 and those two were the big the big dogs of that group well they went from you know low to mid teens you know even even a

Even a single digit for a couple of them to where they are today they’re you know as a group um trading at they were 32 to earnings at the end of the year they’re back to 38 times earnings which is where they were in 2021 and um you’re really

Only going to get sales growth and nominal dividends meta is going to start playing a dividend but sales growth is half of what it was 10 12 years ago um they’re they’re they’re just bigger businesses and they can’t grow as fast their sales in fact didn’t grow much

Faster than the S&P 500 sales for the last couple years interestingly and I just think you start trading you pricing these things at at mid 30s to earnings there’s a way more than go wrong that can go right if you think otherwise the math is just a math and plug in whatever

Assumptions you want to plug in that’s why you know that’s why I put it in the letter I think if you’re a cioo for university endowment or a big pension fund or you’re a 401k investor trying to figure out how to allocate your 401k and you and and you think passive is the

Solution tell me the math is pretty easy it’s pretty straightforward I think it’s I think it’s understandable to you know those beyond your cfas yeah and throwing a bunch of seems like what used to be cap light businesses the cap X for those guys is really ballooned a lot too with with AI

One thing I’ve tried to wrap my mind around also is the is there’s some kind of double counting almost that’s happening where nvidia’s revenue is Facebook’s capex and there’s kind of this circularity to to everything there where okay they’re adding it and they get a 55% margin on

It which gives a big earnings number and then the Facebook’s you know taking that capex and chopping it up into pieces and spreading it out over I don’t know whatever the useful life of a server is 10 years or something um so we’re like they look a little bit more profitable

As well today uh relative to the actual cash going out the door it feels like there’s something kind of weird going on there and these are really big numbers yeah the yeah well the numbers are too fat for Facebook and certainly for Microsoft’s Azure AWS within Amazon

Um to let your chip supplier keep those margins you’re going to at some level do it yourself you’re going to balloon your R&D you’ll figure it out whether AMD winds up being a competitor to the current iteration of Chip who knows but it’ll it’ll come you just you’re not

Going to do 55% as a chip designer From Here to Eternity there there have been very few businesses that that would run at a 50% margin Visa Mastercard would be a couple of them but you know capitalism being what it is you’re just in a period where there’s a shortage and there’s a

Huge demand for processing um and I’m not sure much of it’s new you’re just processing way more data way more quickly um but you look at the depreciable lives of the software and the hardware that goes into the data centers and equipment I mean they’ve doubled the appreciable

Lives of this stuff maybe that’s right maybe it’s wrong but yeah you know I I I I don’t think this is much different than the classical semiconductor cycle and you just happen to be in The Sweet Spot and there’s a retail craze now um good friend of mine just lost a portion

Of a client’s asset a doctor who wanted to put his entire million and a half dollar Ira so a fraction of his net worth but put the whole thing into video just a few days ago um friend wouldn’t do it for him and said well you’re gonna

Have to just aat it out and you do it somewhere else because I’m not going to do this for you or to you oh man wow so that that’s that that’s 1999 early 2000 Behavior I mean anybody you go to any cocktail party talk to anybody and everybody was loaded

Into the tech and they did not want to hear how silly a lot of it was and really good businesses some of those businesses were really good businesses Sun Microsystems Oracle Microsoft but they were priced Beyond Perfection and you know some of these things are priced Beyond Perfection today and competition

Will come it’ll come from within it’ll come among to your point you know they’re they’re selling to the other big tech companies and nobody’s going to keep a 55% margin you know albe it Outsourcing nvidia’s capex and heavy lifting to Taiwan semites so given maybe not the most

Bullish you know kind of call it General S&P 500 for the next 10 years your portfolio at simper right now I think seems like you’re very excited about it and just the metrics on how does that compare like and maybe this speaks to some of the bifurcation that’s happening in the market right

Now so we so if you run that two years everything was flat and the S&P and the the mag sevs and all that were up just a little bit we managed to make money in 2021 we were up about a percent we were

Up 22 we were up like 10 22 22 sorry we we were up you know 10ish last year we’re up something like eight or nine this year but you know for that two years we were up you know call it 10 um so we were ahead of all that and as

Recently as well year end uh and even you know before the world decided that J Powell was going to ease um the FED funds rate three or four or five times this year and kind of implicitly they’d stop shrinking the balance sheet below some number call it 7

Trillion that you put a candle you put you lit you lit the the torch underneath the market and bloed everything up I mean we were down for the year in mid October and wound up up quite a bit um for the year uh but and so you know

Things were really cheap but at year end we were a little over 10 to earnings with a 10 per earnings yield um with multiples to book in sales and cash flow at you know a third to a half of the snps so we have twice as much

Earnings yield and I think the the I think where where I think we have a very long-term Advantage is if you look at our businesses we don’t employ debt generally in the capital structure we’re very debt averse and so our businesses are largely unlevered which means they

Earn about as much on Capital as they earn on equity and so our companies earn about 60 16 on Equity about 15 on Capital well the S&P earns 20 on Equity you and when you had Brewster on a couple weeks ago you guys were talking

About um a little bit of this um book values are are very understated relative to replacement costs and that has a lot to do with the amount of Sherry purchases that take place at premiums to book company like Starbucks doesn’t have any Equity because they bought back so

Much of the stock and we own it so we have no Book value in that one um but you couldn’t rep you couldn’t rebuild uh Starbucks today without a lot of capital and a lot of money and so uh and then you’ve got some historical assets as

Well but still so if you’ve got Book value uh for the S&P at a little over a thousand um on a per share basis that gets you to you know n trillion let’s call it market cap of a little over 40 trillion uh sales are more like 18850 or

1900 so almost twice book um the point being a 20 Roe is not right but it is what it is but there’s so much leverage sitting next to the equity that does exist they’re almost like amounts that the return on capital for the S&P is 12

And ours is 15 yeah where if you own the S&P 500 for the last 20 years you get about a third of your profits distributed to you as dividends and the all of the balance more than all of the balance because it got augmented with debt has gone to Sherry purchases

And you’ve only Shrunk the share count by 710 of 1% for the last each year for the last 20 years but they’re giving away almost three% to themselves on the front end so it’s not anti-dilutive if you go back 25 years 25 years and we’ve done this experiment of share

Repurchases consuming two-thirds of profits the share count for the S&P 500 is unchanged two-thirds of all the money earned by all shareholders in aggregate went to repurchasing shares and there’s no change in the share count where’ all the money go where’ all the money go now part of it gets

Recapitalized when the banks blow up in every financial crisis right and so you you get a ballooning share count oddly in the last two quarters the share count is up despite repurchases at still very high levels although below the Cadence of a year ago and so we largely own

Businesses that you know we get way less in dividends and Burkshire excuse this because they don’t pay a dividend but you know we only get about 177% of our aggregate profits coming to us as dividend so the balance which is the preponderance you we own businesses part

Of our mission is to find companies that actually have places to reinvest money at the Returns on equity and capital some some of our companies like an Oland don’t but largely they do and so you know the Seer portfolio is not being reinvested just in Sher repurchases to offset delution giving money to

Executives we own companies where you have more of a founder mentality where you know these folks really are trying to find places to reinvest in their businesses or bolt-on Acquisitions that make sense and they are done at at e economically logical level and I think that’s what drives our return over

Time that that’s what’s Driven our return over the last 25 years it’s the preponderance of our profits actually being reinvested in companies that do invest at those returns and not at 20 times earnings with two-thirds of your profit which is a 5% earnings yield I that

That’s how your S&P for the last 25 years which was expensive during the tech bubble but the S&P is done 7% a year that’s it you make 5x your money you make an ibbitson 10 and a half percent you make twice that and you’re sitting here today at those similar valuations and corporate

Behavior that’s doing exactly what it’s done for the last 25 years and that’s burning up a whole bunch of corporate profit I’m going to guess that and maybe it has to almost be this way because of the pro cyclicality of of share BuyBacks and pushing prices up but I’m going to

Guess like on a dollar weighted basis what do you think that over the last 25 years the the the purchase price on a PE basis has been of these BuyBacks well I mean it’s your multiple of the of the market and you haven’t been far off of 20 extra earnings we’ve

Been very few times in the last nobody was buying back when it was cheap that’s that’s my point um 2008 like there wasn’t people were issuing Equity BuyBacks no share the share count went way up in 089 I mean that was again that was the financials

And the bank and so when things get really cheap even early in the pandemic everybody suspends their Sherry purchases because you worry about needing the capital in case things get really bad when you’re in a financial crisis like a 809 beyond the banks repurchase is slow which tells me

There’s something perhaps going on in the economy today and it’s not just all of a sudden a rationality by your CFOs and your CEOs something has slowed the Sher repurchase Cadence in the last half year uh and I think it’s business conditions that were probably weaker for

A lot of businesses and a lot of Industries and it’s all the inflation as well I mean if you’re having to give money to labor which has suffered for the last two or three decades uh if you can’t pass through price and you’re eating it on margin well that’s less

Operating income can that that that can go to share rep purchases if you’re a Dollar General that we own you know they they’ve got some blocking and tackling issues which made the stock really cheap which we took it up from 2% of capital A year ago to 10 bought our last block

When we took it from 4% to 10% at 113 a share it’s 160 today but they they cut their Sher purchase I mean the stock was trading at a re massive discount but you know they they put some debt on the books to buy shares back when the thing

Traded at 22 times earnings and you’d rather have them buying it today so Apple you know Apple when it was cheap I part of the beauty of why Apple was so good is they started paying a little dividend quarter of their profits but then they really ramped up their Sherry

Purchases and only in the last three or four years did the stock go from a low teens multiple to earnings well they haven’t slowed the Sherry purchase but because you’re trading it 30 times you’re retiring a far smaller proportion of the company so there’s no price it doesn’t seem like there’s a price

Sensitivity with a company like apple and I’d put most companies in that camp where there’s no price sensitivity they’re simply trying to offset dilution by making themselves all fatter and happier that’s that’s one thing that Jake and I have talked about offline possibly that Buffett Praises Apple for

A lot of those BuyBacks that seem to me that they happen at prices that are you know as you say they’re just price insensitive where he’s anything but do you do you have any what he just rather that they spend it on Apple stock than go and buy something silly G or something

Yeah well I mean there’s not a lot you can do with I mean Apple doesn’t have a lot of capital needs so what do you g to do with the money I’d rather do what I’d rather have a company do what a cost code does I mean the stock has rarely been cheap

They know how much money they need to open 25 stores a year they’ve never changed the Cadence and so so they started paying a dividend in 2004 and then they’ve paid a series of special dividends that are if you add them up the four or five special dividence it

Exceeds our cost basis in the stock they give it back instead of overspending that’s probably for having Charlie on the board for all those years I think there’s a rationality to when it makes sense to retire a share and when it does not make sense to retire a share um and

Warren’s not going to blast uh Apple on their Capital allocation in a public setting but you can also not not not uh had him on the back for it in the letter no I agree and and I think he really does think just by you’re proportionally increasing your ownership and I think

That’s his point but it only makes sense if you’re doing it when the stock is cheap um I I think they’ve proven here in the last couple three years that that they’re not they’re not doing it the way Burkshire has done it you know when they

Retired a whole bunch of stock in the 60s and 70s they issued it like it was going out of style in the 90s when this when birkshire traded it three to book um yeah they’ve been buying it back for the last six years but they’re very I mean

It’s the model of how this should be done they’re very price sensitive and he doesn’t preach I mean he he he he talks about the need for it being price sensitive and companies shouldn’t have a need for Capital otherwise I’m bewildered you then then you publicly

Tolerate it and endorse it in a public setting with an apple who knows Um let’s just change gears a little bit Charlie Monger as everybody knows passed away at the end of last year have any didn’t tell me did you miss that yes it wasn’t wasn’t well nured in the media but do you do you have any Reflections on manga and uh what do you

Think the impact would be on birsh well he like you guys he became a hero to so many of us in the investing World um I think um I think Warren’s tribute in this year’s letter his um couple things jumped out of me called Charlie the architect of the firm and Warren was

The general contractor and explained why that was the case and I think that was the case he also even though they were what seven years apart um called him a older brother figure and even a father figure at some level it brought a lot of wisdom and I think my

Take is you know he really was the DNA of Berkshire and a lot of the culture and the things that are so important at the board level the Sher rep purchases at Costco for example or the paying special dividends instead of simply just trying to shrink the share count

Massively I think I think what he gave to Burkshire will persist for a long time I also thought the choice of black I don’t think I didn’t see anybody note this but you know generally the Burkshire report has a different color to it each year and black was only

Fitting in the year you lose Charlie um they used black two years ago in the 2021 annual report so you would you would not you would not have had a repeat had it not been for the loss of Charlie and Warren would have said you know we’re going with black this year

But he didn’t say anything about it but that was I thought that was a very small unnoticed touch as well I think um you know I tried to I tried to pay tribute what little I could in this year’s letter by interspersing a bunch of Charlie and some of his quotes

In the lead off to each section and then instead of book recommendations and music I for those that aren’t as familiar with Charlie and you one of the great things he said was you can be a lot wiser by learning from the imminent dead well he’s now our imminent dead

Right and so yeah yeah he’s he’s made he made a whole series of book recommendations over the years and I think anybody that that uh is not familiar can go to the CNBC archive and just listen to all these old burcher meetings back to 19 1994 and get Peter Kaufman’s poor

Charlie’s Almanac and read his series of speeches that he’s given at Stanford and USC’s business school and all the various places there’s just there’s an awful lot of common sense and wisdom and humor to the guy he’ll be greatly missed he he was the reason you’d go to the

Burkshire meeting so many years um you know the the Rapport between Warren and Charlie was just a thing of beauty so you know we’ll miss him badly and you guys you we’ll all miss him badly and Burkshire will miss him but his spirit will be with Burkshire for a awfully

Long time I think and that that’s that’s the greatest tribute Buffett used to describe him as the Abominable no man because he used to say no to so much given that he bought things like Alibaba how do you sort of square the you know he seems to be willing to buy things

That and B and so on he seems to be willing to buy things that Buffett does not and yet he’s the Abominable no man to to Buffett do you how do you sort of square those two he he’s human um you know he believes believed in the China’s

Growth miracle and was it was so correct for so many years he was a big fan of Lee Quan Yu and China kind of modeled their rise to capitalism on what Singapore and some of the other Asian tigers had done kind of a command control economy um uh leelu’s obviously

A good friend he had money invested with him um I wouldn’t I couldn’t have invested in Alibaba I mean or any we just don’t do that we don’t we’re not going to invest in a Communist Regime um and yeah human I you know you if you

Look at even his and I put it in this year’s letter and when Warren did the super investors of Graham and doddsville in the appendix to the it’s now in the appendix to the intelligent investor but gave a speech at Columbia um commemorating the 50th anniversary of the book um at Columbia um

You know he put Charlie’s track record in with seven or eight other managers that were great but but you can see you know Charlie swung for the fences a lot more than one would it was wild to see like I I’ve looked at it before but it

Really stood out to me this last time that like 7374 he wiped out all the way back to like 67 like seven years worth of progress were gone in like a year and a half basically the S&P was down in those two years years 50% kind of 24 26

Whatever it was he was down over 30 in each of those two years and that scarred him you know if you go back read the biographies and you listen to some of the comments he made I think he I think he concluded wow maybe I shouldn’t be swinging for the

Fences the same way uh really pained him um to lose money for shareholders I mean and the and the management fees which weren’t clawed back um that bare Market did a lot of damage and he recovered the next year but then he hung it up yeah he

Doubled he doubled or whatever in 1975 had a big return and then hung it up and then a couple years later officially joined Burkshire as Vice chairman but had done some investing with him side by side and diversified retailing which then bought Blue Chip Stamps and you know they collaborated on on several

Deals and were very good friends and we’re talking a lot U it’s interesting for 20 years though they were not under a single really like you know unifying umbrella yet that they’d still been working together but not actually like as officially like Berkshire chairman Vice chairman I just think he’s human

And I think he was wrong on China but you’re you’re pretty bearish on China what do you think about China I know you just you just mentioned Alibaba but generally just don’t invest in Communist Regime it’s not the it’s not the vi or whatever they call it that

Structure where you I don’t know the r it’s a Alibaba if you own Alibaba you don’t own equity in a business you own you own a certificate in the Cayman Islands and Communists at a point tend to just take all the money away and you’ll never get it out I’m I’m fairly

Confident that most of these Western businesses are stuck in China and at a point who knows whether it’s when China actually does um weight across and and and try to take over and and Taiwan who knows what the endgame is I’ve got a section in the

Letter on China I always try to talk touch on two or three themes Beyond birkshire and Beyond the simper portfolio and I’ve got a section on China I am very bearish um you’ve got a you’ve got a you’ve got a country that in the last 40 years but really in the

Last 20 years grew to the second largest economy in the world8 trillion dollar they brought half their population off the Farms into the cities there was a growth Miracle component they never did it with a profit motive the Shanghai exchange is negative for the last couple decades the businesses don’t earn a

Return on Capital but that’s that’s not been the mission the mission from a party standpoint was we’re going to grow and we’re going to bring people off the farms and they did that well through a series of um and really the one child policy was disaster but anytime a nation

Industrializes you the you know families stop having as many kids because you don’t need you don’t need a lot of bodies on the farm Free Labor so you go from seven to five to four kids well you know China’s now got a birth rate of 1.2

And you need 2.1 to sustain a population the other thing that happens though when as the birth rate declines when a nation industrializes is the current population lives longer access to medicine and healthier living City living is is not as hard on the body as living in farms

And so you get this big expansion of the older P portion of population so China so topheavy now with 1.4 billion people that there’s no way to reverse that gruesome one child policy which you’ve now got so far fewer women because families would abort the girls um

Because you wanted the Sun as the heir there’s no way to undo Decades of a failed policy and so the Chinese population is going to shrink by half over some period of the next 30 Years to 70 years and you look at what they’ve done to grow and The Leverage

That they’ve used in the last two decades you know we have a huge debt problem in the west and in all of industrial World we’re 350% credit Market debt to GDP in the United States and the same holds for Europe China’s way above that they’re an 18 trillion

Economy with something like 55 or 60 trillion in debt you’ve got evergrand that’s blown up and Country Garden evergrand had over $300 billion in liabilities and they liquidated a couple weeks ago and there’s nothing there’s nothing um every property developer is done you’ve got something like 13 billion of hidden off-balance sheet debt

That exists at the at the Province and the municipality level that is not counted in the official Chinese debt numbers well all of that money got lent to property Developers and then in turn the wealthy Chinese who got rich as the early age of industrialization they’ve invested in

That stuff and so you know there’s no Capital left and you you combine these huge overbuilding of infrastructure with a population that’s now been shrinking since 2021 and as I said is going to get cut in half is a really bad way to grow your GDP per capita by cutting your

Population in half but that’s essentially what’s going to wind up happening happing over the next few decades overlay that demographic problem with no need to build more buildings and they’re going to compl what’s what’s really odd is they will finish all the projects under construction even though every single

Property developer in the country is bankrupt they’ll finish that stuff and then they’ll blow it up but you’re not going to put more people into the cities in fact people in the cities are probably going back to the Farms as the population shrinks there’s no more opportunity so the largest importer of

Every base commodity in the world Toby iron ore from Australia and Brazil it’ll still come in and it’s coming in now but less and less of it will get used domestically right now they’re dumping everything on the world Olan in the case of the CTIC uh and and chlorine world

You know they’re dumping epoxy resin on the world at prices that make no sense whe at whatever point the West sanctions that but there’s no economic use to it they’re losing China has among the highest electricity costs in the world and it makes no sense to it but that

That that will all come in reverse and that’ll bear on global growth which is already slower for the last two decades because we’ve put too much debt into the system so I’m very bearish on China no I would never invest in a place where you don’t have rule of law uh I think

Starbucks at some level with their 7,000 stores out of a 38 or 39,000 base you know China’s a big component of the growth curve for Starbucks their company owned store stores like they are in Japan not in Korea and it’s you know they intend to open a lot of stores you

Know if if if China really gets sideways with the west and again Taiwan will have a lot to do with it uh but International Trade will have a lot to do with it their debt problems will have a lot to do with it um there’s there’s a not insignificant chance that Starbucks is

Just a single example loses their assets in China and they’re commandeered by the state that that enters our think and um observing this for a number of years I had a prediction I had a series of predictions in my 2000 letter and then the followup my 2014 level letter said

China’s GDP would not pass that of the US and in in 15 years now they won’t do it in the next 70 years because you’re not going to do it with a population that gets cut in half we have we have net growth in population in the US and a

Lot of embedded advantages to how we’re situated with Agriculture and friendly neighbor to our north and south and two big oceans on the left and right side of the country most powerful military in the world water ways all of it I mean China’s is not going to pass the US in

Terms of GDP despite they’re having 1.4 billion are 340 billion it’s not going to happen they’ve already done it the the miracle has kind of run its course and that’ll reverberate in a lot of places and if you’re an investor a PM or an analyst you better be thinking about

How the roll over in China and demographics take forever I mean this is not a quarterly or a yearly thing it’s going to happen over a long period of time but there will be second and third and fourth order effects that are going to bear on how capital is treated

Globally and I think it’s a very I think I think China is as big of a risk as the debt bubble that we all sit underneath um in the industrial world and you better pay attention to it at least that’s my take scary it requires a little kombucha yeah

It does I’m interested to get how you feel about we’ve got about 13 minutes left how you feel about Burk Shear where it is now and how it’s doing and this is a this is a question from JT how that sort of what it says about the economy how

It’ll do brickshire is the keyhole into the US economy what if anything you you’ve seen what are you seeing from that they are pretty good proxy for the US economy for sure it’s it’s largely a domestic business there are there are components of the of the of the

Conglomerate that have been pretty weak rail car loadings have been really weak for the last for the last several years they they turned a little bit in the fourth quarter um for all of the class one the six class one rails uh Berkshire included but they’re you know the BNSF

Is earning about two billion below what I would call normalized earning power it’s been pretty weak um Warren had the letter volumes mostly is that what volumes are down yeah it’s volumes and it’s not just coal I mean in the last two years it’s last year especially it’s

Everything except for new cars I mean and some of this is now a rollover in trade I’ve got in my secular Peaks and troughs graph I I included total dollar exports total dollar Imports and net trade as percent of GDP we’ve rolled that over and again this is China now

Slowing in the last three or four years I think global trade is going to come in a little bit and you know to the extent we’re an exporter and an importer a lot of that Western Rail that Union pacifics and bnsf’s roll through the ports in the

West coast and volumes there come down Coal’s clearly in Decline and you’ve had a little bit of a Resurgence certainly in Europe you had a big Resurgence but as we retire Coal Fired capacity and replace it with Renewables you know Cole’s going to remain weak and that that impacts Burlington um uh the

Utility were okay Warren talked about um the regulatory environment and I’m sure he’s pissed um you know they Pacific Corp had the fires in 2020 in Oregon and Northern California um I think they paid a little over five billion for Pacific Corp in 06 or 07 uh they’ve set aside three billion

Pre-tax so far to cover losses net of about 500 million in reinsurance and you’ve got the regulatory body the Pu saying maybe you ought to be burying all of your all of your power Network well that’s fine if you’re going to make us bury it but you better give us a regulated return

Utilities always come with the risk of stranded costs go back to when we closed a lot of nuclear capacity in the 80s and you have these nuclear decommissioning trusts yeah you exist as a monopoly you would never build a Coal Fired plant or a nuclear plant or a wind farm or a

Solar farm unless you were going to get a return on it and so The Regulators have to be fair with the utilities you look at what happened with scan and their stranded nuclear cost just a few years ago I mean total disaster we had big cost overruns and the regulator said

That’s on you that’s not on the rate base well you got to get a return and what we’ve done rightly or wrongly by racing toward carbon neutral 2050 rightly or wrongly the cost of it is not exclusively falling on the individual consumer of electricity it’s not on the

Data center it’s not on the the household user of power the Bitcoin minor the Bitcoin miner it’s on a lot of it’s on the tax Bas a lot of it’s on the federal taxpayer um you know berkshire’s got like a $1.9 billion tax credit last year their net their tax tax rate was

Incredibly negative so the taxpayer is burying the cost and Beyond pacificorp when you close half of your nuclear capacity burkers closed something like 16 or 18 of their Co fired plants and you’re putting in wind and solar you gota if you built a 60-year life coal plant you better be allowed

The entire return on it either through a higher rate base on your current Renewables but if they say sorry that’s on you nobody in the right mind is going to build the next you’re not even going to maintain your grid you’ll just walk away from it

Um Pacific Corps debt is trading at 97 cents on the dollar it’s essentially 6% yield at par you haven’t stressed it but if the regulatory climate in one of their markets became so bad that they were going to kill the the the profit motive of a private Monopoly you walk away from

And here are the keys will bankrupt the equity piece and then all the debt they put in it which is kind of split 5050 with the equity side you just give it back to the regulator and say you guys run it we’re not going to build the next

Plant for you we’re not going to maintain it if you’re not going to let us make money on it here you go it’s yours we’re trending toward a more populist regime um from a regulatory standpoint not just with utilities but kind of across the board the way our political

Winds are blowing and if we’re going populist some of your regulated businesses may not be as good of businesses I don’t think that’s where we’re headed I think the message was kind of a warning shot to Regulators look this is insane and the conspiracy theorist in me will say if you look at

Where all those fires started there were a whole bit whole big series of fires don’t discount the fact that arson might have had something to do with it because it sure looked to me when you look at the the interstate and the highway map that most of those fires

Started at Trail heads just off the interstates you do have climate Cooks running around that will do anything to kill traditional power and if it means setting a whole bunch of uh forest and homes on fire to achieve their end they might do that and so you know

Berkshire’s going to take a three billion dollar hit on five billion in in equity Capital that is not insignificant and so then you get re insurance and the insurance World Geico is back to healthy they’re still trailing Progressive but you know you had a period where you lost a whole

Bunch of money coming out of the pandemic you made a whole bunch of money you had to give money back to policy holders then you had all the inflation it got really expensive to fix cars and and then you had to go get rate in places like California New York New

Jersey gave you rate late but the the the Auto industry is very healthy again because they got enough price now we don’t like it because you’re paying a lot more for your auto insurance um but I it but you and and and you know to the extent you’ve got weakness and

You’ve got retail weakness in places and you’ve got the BNSF weak the offset to that is you’ve got this1 167 billion do cash portfolio yeah that today is earning 5.3% you’re in 9 billion in interest that would have been earning nothing two years ago and you know that

That that makes palatable you know weakness in various places um you know you’re one recession away Mount Berkshire as you called it yeah it was I think I dreamt that up at five o’clock in the morning yeah it was a in a in a haze well Berkshire gets

Criticized for having all this cash laying around and they shouldn’t if you look at since they they did the Gen Redal when Burkshire traded at three to book and they bought Insurance business to essentially diversify the stock portfolio um you know they’ve run the cash relative to Total firm assets at an

Average of about 12% well if you’re 100 67 billion on a trillion 70 or a trillion 80 billion you’re a little higher higher nothing that major you’re kind of in the range of where the cash has existed for the last quarter century and it’s just Berk has over a trillion

Dollars in assets it’s the largest company in the world by tangible assets but and that doesn’t even count really the uh I mean what bu Buffett said that what’s BNF carried it like 30 billion a book value and it’s probably he thought it was like 500 billion in

Replacement that’s probably right um you know these these rails were built 100 years ago and you’ve got assets that are fully depreciated that yeah part part of them has to get maintained but part of these are just carried it I think it would cost 500 B I think that’s probably right it would

Cost 500 billion to replace the asset nobody’s going to do it because the assets are already in place I think they paid 35 billion for it and most of the profits since they boted have been Upstream to the parent and they had an opportunity to really improve the

Network by yeah double in inter modal and adding track in various corridors and blowing out all the tunnels and improving the bridges to accommodate the double stacking but that’s all run its course and so you know the railroad’s a good a good business the risk to the downside from a regulatory

Standpoint um and as trade comes in you know it’ll be okay it’ll earn 12 or 13 on on current carrying Equity value the equity of the firm is actually up to 50 billion so it’s grown since the Cs since the purchase and there’s still Goodwill that sits there um in fact the railroad

And the utility have both like 50 billion dollar in equity Capital today I think the utility business unless the regulator unless the regulator screw it up is still going to absorb a whole bunch of growth cap X over time because we are going to do more Renewables and

If we’re going to do them and the taxpayer is going to subsid subsidize them it’s a really good use of capital Chris we’ve got a only a couple of minutes left but what do you expect to see this year at the annual meeting uh I’ll be disappointed if we

Don’t have a cardboard cut out of Charlie um uh you you’ll have a celebration of Charlie um um it’s going to be emotional for Warren for sure I think you’ll probably have um Greg and AIT probably at the de for the duration of the meeting now where in the last couple

Years they’ve had them in the morning session and it was just Warren and Charlie in the afternoon my guess is you’ll have those three uh Fielding questions throughout the day um I I I just hope you know Warren 93 you know he’s he’s kind of living beyond the he’s kind of living beyond

The expiration date as well um the culture of birkshire will maintain and persist for a long time um the meeting is so fun because you guys we catch up with all of our friends there’s it’s a little it’s more of a celebration than just simply the six and

A half hours of listening to Warren and Charlie answer questions you can go to the CNBC archive and I encourage anybody that doesn’t do it to go go do that and listen to those old meetings there’s so much wisdom that has come out of these cumulative meetings over time um I I

Hope to see you guys 10 years and 20 years and 30 years in Omaha because it’s it’s a special thing there’s no annual meeting obviously anything like it and you know berkshire’s got a community of kind of cultists that um were uh developed because of Charlie’s care and touch and Warren’s care and

Touch and hopefully it lasts a long time so you know you know it’ll be a uh a tribute year for the meeting and also a celebration of Charlie’s life do you think record attendance this year I don’t know I I I think the attendance has fallen off in the last

Little been live streaming the meeting on yeah um whatever Yahoo or whoever does it um and and and it’s gon to shrink over time which frankly it’s too many people in Omaha the fact that I’m paying for four nights and I bring clients that and friends

That come in on Friday and go home on Sunday well you got to pay for four nights at the Embassy Suites that’s a little stupid yeah they really got you over the barrel that’s it’s their entire Year’s profit over those four days well that in the College World Series yeah so

They they they get you where they can he tried to fix that problem in fact he had me talked to Steve Jordan at the Omaha World Herald a few years ago I’d brought up the the the the price and the minimum nights and he called all the hotel

Managers into his office and said knock it off I’ll move the meeting to Texas if if you don’t treat the shareholders a little more fairly and you know that you know then you went to a two night requirement versus a four they never really lowered prices doubled the price

But um but you know they were back at it within a couple years and so he said look I don’t want to be the bad cop in my town he says why don’t you tell the paper what’s going on and then Steve can go run around and talked to all the different hotels

And nothing came of it so I was I was the bad guy in the paper for a minute and I went Incognito when I checked into the hotel that year I bet um we’re coming up on time thanks so much for spending the time with us and congrats

Again on uh 25 years that’s an extraordinary achievement that’s the true measure of success in this business I always think yeah well it’s a blur it’s you know it seems like we started the thing yesterday but I again I hope we’re doing this thing for a long a much longer period

Than another 25 but thanks Jens well thanks thanks for coming on again uh folks we’ll be back here same that time soon B Channel next week uh don’t know who the guest is yet we’ll be figuring that out over the course of the week but thanks again Christopher Bloom Strat

Simpa Augustus we’ll see everybody next week