Berkshire Q3 2023

[Luca]

2 minutes ago, Gregmal said:

Exhibit A for market stupidity 

 

Great earnings… nothing not to like

 

Some asshole in a sweatervest at Cuck Asset Management…”too rich, I’m selling today!”

 

 

"Cuck asset management" xD

[Jaygo]

17 hours ago, Spooky said:

Channelling Phil Fisher, my view on a wonderful company like Apple is that the right time to sell is never.

Never say never. We are addicted to the internet at our fingertips imo not the actual device. 
 

for now apple is great, obviously. I Just don’t like having my 340 brk.b’s so damn leveraged to it if it does go the way of all other phones before. 
 

 

[Cigarbutt]

20 hours ago, Munger_Disciple said:

...

It is crazy that regulated utilities (where all the capex needs to be approved by regulators) have to pay for wildfire costs.  

 

19 hours ago, Munger_Disciple said:

More on wildfire looses at PacifiCorp. from 10-Q (underlined emphasis mine):

...

It is reasonably possible PacifiCorp will incur significant additional Wildfire losses beyond the amounts currently accrued; however, we are currently unable to reasonably estimate the range of possible additional losses that could be incurred due to the number of properties and parties involved, including claimants in the class to the James case, the variation in those types of properties and lack of available details and the ultimate outcome of legal actions.

Ok, a follow-up here in order to:

-promote some kind of uneducated wishful thinking?

-see this noise as a potential building comparative advantage?

At the very least, it's likely reasonable to look at both sides of the story?

-----

The following is based also on a relatively involved assessment of what happened to PG&E. Short version, fire costs (and poor management) tipped PG&E into bankruptcy (phoenix entity coming out with residual pre-BK equity value), costs were mostly borne by PG&E owners (at least it seemed at the time) but now (over time) appear to be effectively passed to the end of the line ie customers.

PG&E is based in California and there was an added consideration for inverse condemnation but even in that legal climate, the point is that costs will eventually be paid by customers and utilities will eventually earn their 'fair' return on capital.

-----

i did not follow the PacifiCorp legal travails as closely but, during procedures, potential liability of 7B and even 11B was mentioned although eventually, if history is any guide, the final liability will likely be much lower. In this specific case (during appeals, we'll see), a jury found PacifiCorp guilty of recklessness/negligence. A common aspect of this verdict with a recent Colorado case, which came to a similar conclusion (and with the recent Maui fires it seems) was the failure of PacifiCorp to proceed with temporary shut downs of electricity distribution in key areas. How to deal with wildfire costs for utilities is work in progress and regulators are slowly taking notice (what works, what does not work). One of the developing ways to prevent wildfire costs is to optimize the use of temporary shut downs. In other words, 'we' will eventually get better at it and utilities should (eventually) be treated proportionally.

-----

In August of 2020, on this Board (what are you selling pages), there was a participant who suggested the possibility to short Eversource Energy (poor management?, poor handling of an unexpected natural event etc) and i had suggested that this may not have been a good idea, at the time. Share price went from 90 to 80 and went back up rapidly. However, with interest rates rising, wildfire costs and others, share price is down 30%, imo getting to levels where BRK could pull the trigger (versus general price levels for utilities).

-----

The point being that the issue of wildfire costs is significant but temporary and may offer an opportunity for BRK utilities to become leaders in developing working models with regulators. There are many ways to discount this but, in a reasonably working free market economy, the customer should eventually bear the price of those costs.

Apologies for the long post but people often wonder about the impact of size on BRK for future growth and profitability etc. Expansion into utilities is potentially massive and offers long periods of adequate return on capital. But there will be noise and one has to assume that the US will continue to work reasonably well when dealing with such issues (public good vs private interests).

[james22]

On 11/4/2023 at 3:14 PM, aws said:

Make sure when you are thinking about the operating earnings you are considering the huge impact of interest income on the cash pile, a factor that wasn't there at all a couple years ago. $150b+ at 5.25% is almost $2b a quarter in pretax operating income.

 

Yeah, but: inflation. 

 

Probably worse off after-tax.

[John Hjorth]

1 hour ago, Gregmal said:

Exhibit A for market stupidity 

 

Great earnings… nothing not to like

 

Some asshole in a sweatervest at Cuck Asset Management…”too rich, I’m selling today!”

 

 

 

Please mind and check bra straps and dentures!

[Munger_Disciple]

3 hours ago, Cigarbutt said:

 

Ok, a follow-up here in order to:

-promote some kind of uneducated wishful thinking?

-see this noise as a potential building comparative advantage?

At the very least, it's likely reasonable to look at both sides of the story?

-----

The following is based also on a relatively involved assessment of what happened to PG&E. Short version, fire costs (and poor management) tipped PG&E into bankruptcy (phoenix entity coming out with residual pre-BK equity value), costs were mostly borne by PG&E owners (at least it seemed at the time) but now (over time) appear to be effectively passed to the end of the line ie customers.

PG&E is based in California and there was an added consideration for inverse condemnation but even in that legal climate, the point is that costs will eventually be paid by customers and utilities will eventually earn their 'fair' return on capital.

-----

i did not follow the PacifiCorp legal travails as closely but, during procedures, potential liability of 7B and even 11B was mentioned although eventually, if history is any guide, the final liability will likely be much lower. In this specific case (during appeals, we'll see), a jury found PacifiCorp guilty of recklessness/negligence. A common aspect of this verdict with a recent Colorado case, which came to a similar conclusion (and with the recent Maui fires it seems) was the failure of PacifiCorp to proceed with temporary shut downs of electricity distribution in key areas. How to deal with wildfire costs for utilities is work in progress and regulators are slowly taking notice (what works, what does not work). One of the developing ways to prevent wildfire costs is to optimize the use of temporary shut downs. In other words, 'we' will eventually get better at it and utilities should (eventually) be treated proportionally.

-----

In August of 2020, on this Board (what are you selling pages), there was a participant who suggested the possibility to short Eversource Energy (poor management?, poor handling of an unexpected natural event etc) and i had suggested that this may not have been a good idea, at the time. Share price went from 90 to 80 and went back up rapidly. However, with interest rates rising, wildfire costs and others, share price is down 30%, imo getting to levels where BRK could pull the trigger (versus general price levels for utilities).

-----

The point being that the issue of wildfire costs is significant but temporary and may offer an opportunity for BRK utilities to become leaders in developing working models with regulators. There are many ways to discount this but, in a reasonably working free market economy, the customer should eventually bear the price of those costs.

Apologies for the long post but people often wonder about the impact of size on BRK for future growth and profitability etc. Expansion into utilities is potentially massive and offers long periods of adequate return on capital. But there will be noise and one has to assume that the US will continue to work reasonably well when dealing with such issues (public good vs private interests).

 

@Cigarbutt Thanks for your response. If I understand you correctly, wildfire risk is an evolving issue for regulators, and ultimately all the capex required to implement better shut-off systems will be borne by the public that receives the service. In the meantime, utilities that have not so hot balance sheets to handle current legal payments may go bankrupt so that creates an opportunity for a financially strong entity like BHE to pick up their equity for nothing. So it is painful in the short-term for BHE (a hit to current earnings) but a great opportunity to acquire other utilities long term. 

[aws]

4 hours ago, james22 said:

 

Yeah, but: inflation. 

 

Probably worse off after-tax.

 

The point was that the operating earnings are inflated by the cash interest income, so it should be discounted versus if they were growing profits in the businesses.

[Cigarbutt]

3 hours ago, Munger_Disciple said:

 

@Cigarbutt Thanks for your response. If I understand you correctly, wildfire risk is an evolving issue for regulators, and ultimately all the capex required to implement better shut-off systems will be borne by the public that receives the service. In the meantime, utilities that have not so hot balance sheets to handle current legal payments may go bankrupt so that creates an opportunity for a financially strong entity like BHE to pick up their equity for nothing. So it is painful in the short-term for BHE (a hit to current earnings) but a great opportunity to acquire other utilities long term. 

Yes.

And whatever temporarily depress valuations or cause the sector to be in temporary disfavor may represent an opportunity to grow in these capital intensive businesses.

Added link for reference, if needed:

https://www.law.georgetown.edu/environmental-law-review/blog/utility-liability-and-grid-modernization-a-path-to-reducing-wildfire-risk-and-protecting-consumers/

[james22]

8 hours ago, aws said:

 

The point was that the operating earnings are inflated by the cash interest income, so it should be discounted versus if they were growing profits in the businesses.

 

Sure.

[UK]

https://www.bloomberg.com/opinion/articles/2023-11-07/buffett-s-157-billion-cash-pile-isn-t-an-ominous-sign?embedded-checkout=true

 

Everything in the world is relative, including Warren Buffett’s cash position.

[CassiusKing1]

Apple is also sending Omaha almost a billion a year in dividends.  Not too shabby.

[ValueArb]

On 11/4/2023 at 10:07 AM, gfp said:

I agree with you guys except for this bit, “no other company can come close to offer an alternative.  Insane.  And nonsensical. ”

 

obviously there is a strong competitor in Android phones

 

10 years ago Apple made 70% of the profits in the smartphone space. Now, given the massive increase in Android's market share, Apple only makes about 70% of the profits in the smartphone space.

 

A year later Qualcomm just announced they wouldn't be rolling out an emergency Satellite communications feature to Android phones to match Apples iPhone service. What makes iPhones "better" are dozens of "little" things, from build quality, to performance, to service, to software, to security, to resale value. Apple is arguably better at all of them, and arguably in many cases the difference isn't that great.

 

In others, it's not universal. iPhone cameras are almost always ranked among the best in smartphones, but there are always a couple Android phones that are ranked as good or better. Google Pixel almost always has cameras on par with iPhones and very good build quality, but they also have worse security, service, app store and resale value. And they aren't much cheaper.

 

Outside of the third or developing world, most people can easily afford to spend $1/day on a smartphone. That's about what a $1000 phone costs if you own it for only three years. If you decide to spend only 50 cents a day on a $500 phone you will have a worse camera, a smaller screen, and if its Android, worse security and software. Not "worse" by any large margins, but enough that if your income is over a few hundred a day that  fifty cent upgrade to the better phone is a very small cost for a very nice upgrade.

 

Another way to look at it. I pay $200 a month for 4 lines of cell service + a watch, so about $45/month per phone. If my daughter loses her iPhone, I'm not going to think too hard about spending another $20/month for a couple years so she can get a new SE. If I lose my iPhone (like I did swimming in Cancun), I'm not going to think too hard about spending $45/month for a couple years to get a new iPhone 15 Pro. Most important part of my smartphone is the camera since it documents my family life, so I'm always going to pay up a little for the best available.

 

Anyways, this is a long meandering defense of Apple to say, it's not "fashion".  Apple has a durable competitive advantage with the iPhone, which is why Buffett and Ted bought it. I'm not saying they should own it forever, I'd never say that of anything and all tech companies eventually fade. But for now it not only has some key proprietary technology (Secure Enclave, Ax series of processors, iOS) that is pretty much unmatched in the Android world, but it also has a much better business model. You see this in how superior they are in new product development, they have an institutionalized patience that ensures they rarely release innovative new products before the technology is ready. And being able to earn high returns on those products by selling hardware, not ads to captive audiences. How they have the heft to throw money at key problems, such as when they cornered years of the production of aluminum milling machines during the switch to aluminum bodies, or currently subsidize a satellite emergency texting system. Finally, how they do a great job of capital allocation and tax efficiently return excess to shareholders.

 

Disclosure: I don't own any berkshire or apple stock, but I do own a lot of apple products and this rant was written on an Apple device.

[John Hjorth]

Please go to the Apple topic in the Investment Ideas forum for discussion of Apple as an investment - you incorrigible messheads

[DooDiligence]

Apple produces 500,000 iPhones a day.

 

I made a dozen burgers for a recent cookout, and can't imagine milling out 500k iPhone cases every day, let alone orchestrating all the other components into assembly, and channeling it all through to point(s) of sale. It's amazing that they consistently run it all on a razor thin 10-12 days inventory (I think that figure is correct).

 

edit: I'm surprised Nintendo hasn't popped up in Omaha. They possess similar Appleish features. Let's take up a collection and buy Warren a Switch. I'll contribute a dub.

Edited November 16, 2023 by DooDiligence

[Cigarbutt]

On 11/6/2023 at 2:25 PM, Munger_Disciple said:

...wildfire risk is an evolving issue for regulators, and ultimately all the capex required to implement better shut-off systems will be borne by the public that receives the service. In the meantime, utilities that have not so hot balance sheets to handle current legal payments may go bankrupt so that creates an opportunity for a financially strong entity like BHE to pick up their equity for nothing. So it is painful in the short-term for BHE (a hit to current earnings) but a great opportunity to acquire other utilities long term. 

Follow-up note, news released yesterday in relation to the infamous California electric utility that went through bankruptcy and now is able to essentially pass the costs to the consumer. 

https://www.reuters.com/markets/commodities/california-regulator-decide-pge-base-rate-hike-request-2023-11-16/

[gfp]

Sure - It is no surprise that utilities are permitted to pass the costs of mitigation to the customers.  What we don't know (and I doubt) is that utilities would be able to pass liability judgements on to the customers ultimately.  Mitigation is normal course of business.  Multi-billion dollar liability judgements are another matter altogether.

[Cigarbutt]

On 11/17/2023 at 8:07 AM, gfp said:

Sure - It is no surprise that utilities are permitted to pass the costs of mitigation to the customers.  What we don't know (and I doubt) is that utilities would be able to pass liability judgements on to the customers ultimately.  Mitigation is normal course of business.  Multi-billion dollar liability judgements are another matter altogether.

Apologies for stating the obvious.

i'll try to improve in the future.

-----

The future is now?

So, what should BHE do?

-leave Oregon?

-leave states with significant wildfire risks?

-lobby for tort reform at the national level?

From a certain (naive?) perspective, this sounds like an opportunity?

For the Oregon fire, the jury (more or less) had to decide what a reasonably competent and prudent utility should have done under the set of circumstances ie they had to define where PacifiCorp belonged in the spectrum from normally expected mitigation efforts to recklessness and negligence liability-type behaviors, a spectrum which is being defined/refined for wildfire risks.

BHE could use this opportunity? to become a leader in the category, perhaps emulating San Diego Gas & Electric and taking advantage of in-house insurance and reinsurance modelling capability to improve wildfire risk management.

SDG&E recognized by Chartwell for wildfire mitigation predictive modeling technology | Sempra

PowerPoint Presentation (oregon.gov)

It's now possible to use advanced analytical tools to act, with real-time observations, in order to take validated decisions for public safety power shutoffs with almost surgical precision.

-----

The future is not the past but PacifiCorp has many 'tools' to deal with past wildfire costs.

First, the non-economic and punitive damages ratio to economic costs (from what i've seen) is at about 20x, a ratio which should not exceed 9x in the worst of cases (Supreme Court reference) and which is likely to be eventually much lower given where i think they should be in the normal-expectations-to-negligent spectrum.

Second, they should ask (already done recently) for a cap in relation to future wildfire losses. In Oregon, about 70% of 'damages' go directly and indirectly to the State so a 'negotiated' solution may be in sight.

Others?

-----

Personal note

The US situation for tort losses compared to Canada is highly unusual, especially given the amount of shared values. This AM, i was reading some legal stuff that came out lately. One case was about an ex-husband (lawyer and law professor) who used his knowledge and status to (legally) harass the ex-wife using a despicable approach (a personal approach similar to what was done during the short-term relationship it seems). Despite the nature of the actions from the ex-husband and the decision to accept the notion of judicial violence in the conclusion, the amount of punitive damages resulted in a ratio of about 1.25x to economic losses..

This difference between our two great countries is difficult to reconcile but i am prudent in condemning the US since the cancellation of Mr. Buffett's involvement in a multi-billion LNG project in my jurisdiction (CDN) was cancelled in 2020 and the exit may have been related to some difference in the underlying nature of our legal/regulatory framework linked to the secret sauce (and the difficulty to understand the combination of ingredients).