Gongol.com Archives: August 2021
August 11, 2021
If you were a conglomerate, would you eat yourself?
In character as a sort of deranged Harry Caray, Will Ferrell once posed the enduring question, "If you were a hot dog, and you were starving, would you eat yourself?" As the nonsensical ranting of a impersonated sportscaster, it's a question nobody needs to answer. But as a financial matter, it's very real indeed. ■ Six months into the year 2021, Berkshire Hathaway has brought in $13.7 billion in operating earnings -- actual profits resulting from business, not counting the ups and downs of the investments the company owns. This is a meaningful figure, since Berkshire Hathaway is by any measure one of the largest companies in America. Its profitability is up nicely over the comparable period in 2020, and that bodes well as a signal for how the American economy is doing as a whole. ■ In those same six months, Berkshire Hathaway has repurchased $12.6 billion worth of its own shares. While both are very large numbers, there isn't much of a relative gap between $13.7 billion and $12.6 billion. In effect, Berkshire Hathaway is eating itself at roughly the pace that it is making new profits. ■ What makes this news is that Berkshire Hathaway is the lovingly-curated investment vehicle of Warren Buffett. Buffett has spent most of his adult life carefully curating the company into the incomparable conglomerate it has become. He is the most recognizable face of both value investing and the strategy of buy-and-hold, famously as protective of the company's stock as of his own personal shareholdings. At the company's 2011 shareholder meeting, Buffett proclaimed, "We hate issuing shares. It's selling off a slice of every good business we already own." ■ That makes the inverse behavior significant, too: Berkshire isn't just choosing not to issue shares -- it's actively purchasing them. In so doing, it is effectively consolidating the slice of every good business it already owns. And this, too, is a practice about which Buffett has been notoriously cautious. At the 2013 shareholder meeting, Buffett laid his cards right on the table: "The calculus is that you take care of the business with your money first, then if you can buy additional businesses in a way that adds value to the per-share value of the business, then you do that, and then if you can buy the shares of your own business at less than the intrinsic value, it's like spending $0.90 to get $1.00." ■ Thus, with Berkshire Hathaway spending almost all of its income to repurchase shares, it says something about two matters at once. Specific to the share price of the company itself, it says that management (most prominently, Buffett himself) thinks that they're "spending 90 cents to get $1", well in excess of what is required to "take care of the business" with the money coming in. ■ But, more broadly, it signals that they are unable to find additional businesses "in a way that adds value" on a per-share basis. It's not for want of dry powder: The company is sitting on a truly unbelievable $140 billion in cash and US Treasury bills. Even setting aside tens of billions of dollars as an emergency fund for its insurance businesses, Berkshire could comfortably buy out just about any business not in the list of the world's top 100. The $12.6 billion that have gone into share repurchases could have swallowed The Gap or Morningstar in full, with cash leftover to spare. ■ Berkshire Hathaway isn't a hot dog, but it's self-evidently starving for good deal opportunities in the market all around. Instead of making suboptimal deals, it's choosing to eat itself -- which in the long run ought to be the most attractive service it can perform for the shareholders who choose to stick around instead of selling out. But the starvation it's feeling for deals on the outside ought to be a warning to anyone deploying their own money. If a team with Berkshire's cash pile and Buffett's brains can't find better things to do with their money than to circle back to itself, it's hard to believe the stage is set for the rest of us to get rich quick.
