This is the Value Investor podcast with Tracy Rinek, All Things Value All the Time. Welcome back, Value Investors. Did any of you tune into the 2022 Berkshire Hathaway Annual Meeting in Omaha? It was alive for the first time in three years.
Both Warren Buffett and Charlie Munger were there in person and answered questions for over five hours, although they did take a break for lunch. So they're not immortal after all. They didn't keep going and going in their 90s. They did take breaks and I even saw Munger crack open a can of Coke there in the second half of the session to keep going.
And then Buffett continued on with the actual annual meeting after the question. So it wasn't all day event. It started at 8.45 in the morning, central time, and it was broadcast live on CNBC.com. They had excellent coverage, I have to say.
If you didn't tune in, you missed it. It was all day. We're all just sitting there watching two guys sitting at the table for the most part. But in between when they did have the breaks, Becky Quick and Mike Santoli had coverage live and they had a lot of good, interesting interviews, some with the CEOs of the various subsidiaries at Berkshire Hathaway, obviously.
And then they had Bill Murray, who was also in the house, who is a Berkshire Hathaway shareholder. So it was a fun day and it was nice to see everybody back live after the pandemic, zoom meetings that they've had in the past, plus also giving the ages of Buffett, Munger, it's unclear how much longer both of them will be there live. But were there any bombshells? We're always kind of waiting to see what happens at these meetings.
But really, I would say there wasn't actually. It's mostly what we heard before, a lot of the same similar stories that we've heard before. I actually also thought that the questions were kind of disappointing, given the current market conditions. I was waiting for a question from somebody to ask whether or not they're interested in buying some more shares of Amazon on this big pullback.
Remember they bought some of Amazon a couple of years ago before the pandemic. I want to say it was like 2019, early 2019. And Buffett took a lot of heat because it wasn't exactly a value stock on a PE basis back then. And Buffett said it was lieutenants who bought it and that they reassured him that there was value there.
Well, what are they telling him now? That there's even more value? Are they buying more? We don't know yet.
They have their 13F filings. We're not going to get it for a couple of weeks still. But at the annual meeting, Buffett did reveal some of the trades that they did do in the first quarter. So we already knew that Berkshire bought another $7 billion in Occidental Petroleum in the quarter.
They now own 14%. That's ticker OXY. And Occidental remember, they had those warrants because they loaned them money when they bought Anadarko Petroleum a couple of years ago. There was a bidding war on it between Occidental.
And I believe it was Chevron actually at the time. And in order to win it, they had to offer more. And Occidental needed some money. And Warren Buffett was pleased to give it to them at a premium.
So they have those warrants. And now they bought additional shares and they own this big chunk of Occidental. Remember, Occidental is a producer. It's not big oil.
They don't have refining, but they do have the chemical side. So that distinguishes them a bit from some of their other just regular exploration and production peers because they have that nice, big chemical side. So they own Occidental now, but he also revealed that they added to their Chevron position. Now the Chevron position is also kind of odd because if you'll recall that we talked about on this podcast in the past, Berkshire Hathaway bought Chevron in 2020 on the huge energy sell off, but then they sold the shares almost immediately.
And that was weird. That's how we knew it was, again, one of the lieutenants doing that because Buffett doesn't buy in one quarter and sell in the next unless there's a pandemic or some kind of event that changes the story with that stock and that company. So we saw that with the airlines when he immediately got all of them when the pandemic hit. So that's not the case with Chevron because they bought after the big declines in energy and when crude prices went negative, they bought in after that.
So there was no reason to sell it after you just bought it. It was paying the big dividend then, but they did. So that was the lieutenants doing it, but they bought back in later in the year in 2021. That's also odd.
We've discussed this in the past. And now we've heard here in 2022 that they've added a huge additional position, maybe about 25 billion or so or 21 billion, I guess it would have been because the position is now worth about 26 billion dollars and it's now the fourth largest position in the portfolio. So you might be asking, well, Tracy, what are the other big positions? We all know that Apple is the largest position ticker, a APL that is 46% of the portfolio still.
Although that might have gone down a bit, but we were told at the meeting that they did add a bit to that position actually on this pullback. We don't know yet how much. So it might even be bigger now that I think about it, but Apple's the biggest dominating position. Second has been for a while now Bank of America, ticker, BAC.
That's about 13%. And then number three was American Express, about 7%. And now we know that Chevron is stuck in there. So Chevron must be around seven as well because Coke, ticker KO was around seven and we're told by Berkshire that it's now the fourth largest.
So that's interesting that suddenly he goes all in onto energy and that he chose Chevron and not one of the other big producers, but they do own the accidental in a big position now as well. But they've always been limited to buying big caps. If he wants to spend 25 billion, unless he buys the producer outright, he has to stay with these much bigger mega caps. So how many are there?
I said I know it's pretty big cap. Chevron is one of the megas, Exxon, obviously, could have gone for like a BP. Also could have done maybe one of the big producers like a Pioneer Natural Resources or EOG, both of those have quite big market caps, not as big as big oil. But really Berkshire Hathaway has been limited because of its size of buying only these large caps for many, many years.
And this is another example of them being limited to that. And I'm not saying any of these large caps are bad investments on the energy side right here, but big oil is less likely to move as much because of its size, its different business segments, its profitability will be different than the smaller cap nimble energy players that are just pure play producers as crude and natural gas prices rise. So that's also true in his banks. I mean, he's in Bank of America.
That's one of his largest positions. Also in USB still, that's just 2% of the portfolio, US bank core. And they first bought that in first quarter of 2006. It's paying a dividend of 3.8%.
So that's pretty juicy because Chevron right now is only paying a dividend yielding 3.6 after paying 5% in last year and even higher in 2020 on the pandemic. So yeah, like it's, you got to keep these things in mind when you're watching the Berkshire changes and Berkshire portfolio because it's so massive, they are somewhat limited to buying only these big caps. Although Buffett did tell us he bought into three German companies as well in the quarter. We don't know what they are yet.
He wouldn't tell us. So we have to wait for that filing and we're going to find out. Maybe some of those are smaller. We don't know.
So they had about $147 billion heading into that first quarter and they spent about $51 billion on stocks and the share repurchases of Berkshire shares. That was about $3.2 billion. So they still have $106 billion, but that was a big spending spree. Buffett also said that he bought more Activision Blizzard.
ATVI is the ticker. This scenario. So one of the lieutenants bought Activision Blizzard. It was a small position, I think, like a billion dollars or something, but they bought before Microsoft announced that they were buying them.
So suddenly Microsoft announced that they're buying them. The shares spike up. But the shares in the first quarter were selling for less than Microsoft's offer price. And in finance, this is what's known as an arbitrage.
And that's when people like Buffett, who just has an extra cash on hand, can go in by the shares at a cheaper price than the offer price. So if the offer price is $100 and they're trading at $90, you see that there's that $10 difference. So if the deal does actually go through that shareholder who bought it 90 will get $100. So it's an easy trade and an easy way to make $10 a share.
That's why it's called the arbitrage. And a lot of companies specialize in just doing this arbitrage trade. Now if the deal doesn't go through, that's where the risk is because then the share price may fall back below the $90 that you bought at, for instance, and then you may be in the red. So Buffett's kind of going back to his old days, his younger years doing an arbitrage here.
Why not? He's got extra cash. So they now have 9.5% of the company. That's a big bet.
And we'll see what happens. There are a lot of people who don't believe that this acquisition will go through, maybe even for antitrust reasons that the government may block it. But we'll see going forward what happens with this trade. So those were basically most of the moves and things he said he did in the quarter, where they stand on their cash.
Again, most of his advice was kind of things we've heard in the past. Someone did ask about inflation. And he said basically the one way to fight inflation is to bet on yourself. I don't know if that's real helpful to most of us.
I'm not sure that's what we're all thinking. He would say at that. And we've heard a lot of the other stories, but one of them that he also mentioned again, that we have heard in the past that I talked about on the podcast, but it's been a while since I talked about it. And I know that there's many new listeners here who may be completely new to value investing.
So it's time to bring it back. And that is that he also mentioned the book that changed his life. And we all know what that book is. The Intelligent Investor by Benjamin Graham.
You can still buy it. It's in the fourth edition, I believe now. That edition was out in 2005. The original edition, I don't remember when the late 30s, early 40s, something in there, I think Benjamin Graham has been dead since the 1970s, but Warren Buffett first picked up the book.
He's mentioned this and it's mentioned in the letter that is the preface to the book. He first picked up when he was 19 years old. And he's talked about how it's again changed his life. So that was the first edition of it.
And he said it turned his investing world upside down. And this is what he said at the annual meeting again as well. He had been trying to trade stocks. So he first bought stocks when he was 11.
And all during his teenage years, he was interested in investing and was doing the trading kind of thing, thinking this was the way you did it. Using charts, playing the momentum, the double tops and all of that stuff. But then he got a copy of The Intelligent Investor and it completely opened up his mind and blew his mind basically. And he has many times specifically mentioned chapters 8 and 20.
And he mentioned it again at the annual meeting. Now the book is, it includes the updates that are provided by Jason Zwig in the New Editions where it gives examples from more modern day scenarios. That book is nearly 600 pages. It's very thick and kind of dry, so to speak.
So I do recommend if you're going to read it, just kind of take it chapter by chapter and maybe even take breaks in between. But Buffett is giving us some ideas of exact chapters to just dive into. If you don't want to read the entire book or listen to some of my podcasts that have tried to summarize some of the chapters. And so he says chapter 8 and chapter 20.
So chapter 8 is called The Investor and Market Fluctuations. That's kind of fitting for today, right? I need something. I need some advice on market fluctuations.
So I just did a quick scan of this chapter again to remind myself what was in it. And it talks about using market swings to profit, but then says that there's two ways people do that. They do it with timing and that is anticipating the actions in the stock market, right? Market timing.
We all try to do it. We can't help ourselves. We all try to say S&P 500 is at 4,200 and it'll be at 4,800 by the end of the year or 3,800 by the end of the year. And these are all timing things and anticipating the actions, either up or down of the stock market.
But he also talks about pricing. And this is a different concept, but people often mix them together. Pricing is when you buy stocks when they are quoted below their fair value and then you sell them when they get above their fair value. Well, that seems easy, right?
So future courses in the stock market doesn't matter. It actually doesn't even matter the future course of that particular stock because you're buying it below fair value for whatever reason. Maybe it has sold off or maybe the market's just ignoring it and it hasn't sold off or fundamentals have changed so dramatically, the stock may be rallying, but it's still trading under fair value. That would be rare, but it probably happens occasionally, especially in these commodity based stocks where you might see a surge in the underlying commodity price, suddenly earning surge and the stock has not kept up with the changes in that market.
So a couple examples of that are the recent ones are the Anderson's. So the ticker is A-N-D-E. They are an agriculture, agribusiness company. They have trading.
They have renewables, which is their ethanol and they are distributor of nutrients, which is the fertilizers. So they don't mind the fertilizers like Mosaic does. They contract with Mosaic to distribute it to the farmers because the farmers aren't going to go directly to the big minor companies. They're going to go to these middle man distributors, just like what happens in the chemical sector.
We all, you know, companies, manufacturing companies that need chemicals don't normally go, hey, let's go call Exxon and order our two barrels of whatever it is, acetone. No, they contact the middle man who had bought the acetone from Exxon and then resells it to the smaller company there. So the Anderson's is that's what they do and they had a big earnings miss in the first quarter because their trade group, which trades the corn, the soybeans, the grains, got caught up in the Ukraine war price spikes on the commodities and they had to unload a hedging position for between eight and $10 million in the quarter. It really brought down the trading revenues as results, but the company said they bought in at the lower basis now for quarters going forward.
So they got in at a different price now and that will actually help the revenue in the coming next couple of quarters. So all is not lost, but the street didn't care because the earnings miss was massive. It was like 30 or 40 cents. So the shares were down 35% in trading the next day.
And so now analysts on the conference call were asking the Anderson's management whether or not they were going to buy shares with their share repurchase program, which they do have, but they can initiate it at any time. And now they said with the sell off, the shares were not trading at one time the book value, whereas normally their competitors right now are trading at two times book value given the market conditions and agriculture. So basically what they're saying is the stock is on sale, like an actual pricing sale below fair value type of sale. So that is when you should be buying this type of shares.
And so the timing isn't really relevant. You're not really asking, hey, is it going to bounce here? Is it going to go lower? You know, that's the timing aspect to trying to determine what the stock market and this particular stock is going to do in the future.
But we know from the pricing side that right now is actually a good time to buy. So we don't even have to be concerned about the timing aspect because pricing is directing us. Another example of that is KB home ticker, KBH. So they're one of the largest home builders and all of the home builders shares are down.
So KB home is down 25% year to date. And on their conference call here in the recent quarter analysts were also asking them if they were going to do a share buyback soon on those shares because those two were trading below book value. And so it didn't really matter that they're sliding necessarily again. That's the timing part, but the actual pricing part is already flashing a buy sign there.
Contrast that with a company like Shopify ticker SHOP. Those shares are down 67% year to date. They haven't yet reported earnings when I'm recording this on May 4th, but they're about two. So we're going to hear from them.
But a lot of people thinking this is a buy, it's down 67%, but that is a timing thing you're doing. You're doing timing, not pricing because on a pricing level is Shopify below fair book value. I'm not thinking it is quite yet because that's based on the earnings and they're not quite there. So that's the difference.
And that's the difference between a value investor and a growth investor as well that the Ben Graham value investor is looking at the pricing. And though we all get sucked into the timing side, all of us, even value investors do, but you have to force yourself to consider the pricing side. Okay, Chapter 20, however, is the margin of safety chapter. And it's called margin of safety as the central concept of investment.
And you might actually say Berkshire Hathaway has a margin of safety itself because it had $147 billion in cash. I like to say cash is a margin of safety for any investor to have. I just like the term margin of safety, don't you? And the cash gives you that, but that's not really what the concept is about.
So Ben Graham says that the margin of safety lies in the expected earnings power being considerably above the going rate for bonds. So negative margin of safety often arises as bonds rise. And in the book, one of the updates happened in 1965 and then Graham didn't die until mid 1970s. So he did give a speech in 1972 talking about the rising bond yields in that decade with the oil shock and inflation and that there was negative margin of safety on just about every stack back then, even those with low PEs.
So PE does matter because the earnings power is determined by the PE. It's like an inverse of the PE. And in the book, it talks about how there was a PE on the overall market at 11. So that gave earnings power of 9% because it's one divided by the 11.
And if you strip out the dividend and then you look at the bond rate, it was not super profitable, even at 11 times. And this is why stocks got dirt, dirt cheap in the 1970s as inflation rose because the earnings power actually did decline as well. And even with a PE of seven or a PE of five, many companies were still in the negative margin of safety because those bond yields were 10, 15, you know, the bond yields were rising as those interest rates rose. And so you couldn't compete.
There was no margin of safety and the signal in this chapter and this analysis by Graham, the signal was don't buy stocks. Not even just don't buy the growth stocks, don't buy any stocks. And that's how you ended up with many investors buying CDs and just putting their money in a five or 10 year, 15% CD, right? No stock could keep up with that.
So there was no point in being in them. That's how we got the business week cover that's called for the death of equities that the stock market was basically over. But that period, the late 1970s was basically the golden age as Buffett would describe it for him as a value investor, also for Peter Lynch, who was starting to invest right then. I mean, they were buying great qualities, companies at two or three times earnings because nobody really wanted them because why would you?
You're making more money in the bank. We all had savings accounts. We were all putting our money in there or we went out and bought gold. We bought the gold bars.
We bought gold coins. We were doing all that. We were not buying stocks even with five percent dividend yields or whatever they were paying. So keep that in mind as we are now in another situation with the rising bonds here in the 2020 decade.
So we might be consulting this book more than we know on the margin of safety chapter. So Graham also does go on to talk about if you get the stocks that sell off enough where you do get the PE of two. And so even if the margin of safety is still negative, the risk is still fairly low for those quality stocks. He talks about how it's fairly low in a rising rate environment once it sells off like that.
But if you have a, well, that's for the low quality stocks. So imagine the risk is even less for the high quality stocks. So you can actually find some deals on those low quality stocks, but they have to go much lower, which is my concern about this market right here is that with those rising rates, that many of the lower quality stocks are not cheap enough yet, sadly to say, to lure in stock investors with those rates rising. So Graham always does talk about how price matters.
And in the update to that chapter, Jason's wig talks about gives an example from the dot com boom. So JDS Uniface, that was a big dot com favorite stock. It traded as high as $153.42 on March 7th, 2000. So just before the NASDAQ peaked, JDS Uniface peaked too.
At the end of 2002 at the dot com bust, it traded at $2.47. So if you had bought at that top, and even if you had dollar cost averaged or held on all the way down to 247, he said that it would take a 10% return a year. Let's say JDS Uniface started going up after 2002 at 10% a year. It would take 43 years just to break even again on your investment if you had bought at the top.
So price does matter, where you buy it does matter. That's what gives value investors the advantage. And another example of the current era in Vite ticker NVTA, I know many have owned it. I've been watching it for a long time because some people on Twitter told me it would not go below $10, but it has actually trading just under $6 now.
And it's down over the last year, it's down 82.3%. So it's high was $59.74 or thereabouts, almost $60 was it's high. And right now again, it's trading at $584. That's a huge, obviously devastation for those shareholders.
But what is your margin of safety now that it is actually plunged all the way down? There is no real margin of safety on in Vite because it has negative earnings. So Graham would not like buying this low quality stock even on the sell off because there is no real way to value it as it has those negative earnings. So that's not going to work.
But let's say it did have some earnings. Shopify has some earnings and it's very low. So you still would probably have that strong negative margin of safety, again, depending on how cheap it goes down and what the earnings outlook really looks like. But this kind of parameters really makes you think twice about the sell off in stocks that it's happening right now, how you're responding to it, and how you look around at deals on the stock market.
Is it really a deal? Is in Vite a deal here? It's round tripped during the pandemic from lows up to those highs all the way back down. But without the earnings, I don't know how much of a deal that stock even is here.
And then on some of these others, we have them trading below book value on their recent sell offs. They have the earnings. They actually do have a margin of safety, but again, depends on what happens with those bond yields. That's also why people are still on the sidelines with the home builders.
Even the insiders at the home builders are not really diving in here even with the sell off in their stock and some of them trading below book value because as those bond yields rise, they too may not be all of a deal as they're cracked up to be, especially if earnings start to slow into 2023 as those higher mortgage rates start to impact the buying and the sales of the new homes and the closings. If we start to get more cancellations and the gross margins start to take a hit and it hits the earnings, then that's when things will get a little more rocky with that particular industry. So these are all things that are very helpful. That's why we love the intelligent investor.
Now you can see why Buffett brings it up all the time and about how it did change his life as a 19 year old. So more than 70 years ago, this changed his life and it's still out there. I'm still waiting for them to do another updated version. It's a big undertaking, which is why I think they haven't done it yet, but it's been over 15 years now since the last update.
So I would not be surprised, especially now that value stocks are coming back into favor again with these rising rates. Buffett is back in Vogue. He's still with us. He could do another intro letter to the book and intelligent investor could be on people's nightstands again here in the next couple of years in this decade.
So let me recap all the stocks I talked about. There were quite a few in this episode. So Buffett bought more Chevron. It's now a huge position in his portfolio ticker CVX.
He also bought more Occidental and now owns a big chunk of that company, OXY. He added to Activision Blizzard to play the arbitrage trade. Wow, Warren, he's getting spunky in his older age here doing the arbitrage. ATVI is the ticker.
The Anderson's is the agribusiness that sold off on its earnings, but now is trading at one time book value, which is cheap on a historical basis. A and D E is the ticker. I own it in the value investor portfolio here at Zacks. I don't own it in my own personal portfolio.
Then we had KB home ticker KBH also trading actually below book value for that one in Vite, huge sell off on in Vite, but it may still have a negative margin of safety. It may not be a deal here. NVTA is a ticker. Similarly with Shopify that too, seen a big sell off.
We're still getting earnings coming up, but it also might still be a negative margin of safety on Shopify. Be sure to subscribe to get all of our podcasts. I know many of you are listening to the old episodes. We have dozens of episodes.
I don't even know what episode number this is, but it's close to 300 now. By maybe the end of the year, we're going to be getting at that 300 episode mark. Oh my gosh. There's a lot of content you can go check in on and listen in on.
Much of it is still helpful here. There are intelligent investor podcasts. I'm a couple of years ago. You do have to scroll back a bit to see those, but this only confirms that maybe I need to do more updates on those again for all you new listeners who don't even know what I'm talking about when I mentioned the intelligent investor, but I'm sure you're looking it up on Amazon to see the book or buy it on Kindle.
Do they have an audio version? If they did, that would probably be helpful too, but I do consult it often. It's sitting here on my table even when I'm not doing podcasts on it. You might benefit from actually having the book version and not doing the audio, just FYI.
I'm old fashioned. I'm not going to revisit these chapters and especially if up it's talking about them in something like the annual meeting or some other kind of interview, I will like to refresh what is in there because it is just so good and it keeps you on the track of value investing. So you're not buying something that looks like a deal when it really isn't. So be sure to get all of our podcasts on Apple Podcasts.
We're on Spotify. You can get us on SoundCloud with the market edge podcast there. You have to search under Zach's market edge there on SoundCloud. You get two shows for one over there.
We're also on Amazon Music. You're over there checking out the book. You can check out the podcast on Amazon Music. We're on plenty of other podcast platforms, but be sure to get us somewhere.
And I'll see you again next week with some more value stacks. This material is being provided for informational purposes only and nothing herein constitutes investment, legal accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this podcast without seeking the services of competent and professional legal tags or accounting counsel. Publication and distribution of this podcast is not intended to create and the information contained herein is not constitute an attorney-client relationship.
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