How to build your own mini Berkshire Hathaway part two!

Lessons from Omaha and Warren Buffett after the recent shareholders meeting...

Last week the Woodstock for capitalist took place again.

Below are some personal interpretations and takeaways after the event.

This will be finalized with some conclusions for our very own mini Berkshire version.

Let’s go!

The biggest shock from this weekend was that Warren had sold a substantial part of his Apple investment. 

Berkshire Hathaway had already sold about one percent of the Apple holding in the last quarter of 2023.

In the first quarter of 2024 13% more of the Apple shareholding was let go.

Warren Buffett had already hardly mentioned Apple in his annual shareholder letter in February of this year.

Perhaps that was because he was busy selling the stock.

In this years’ shareholder meeting the tone was much more about the awareness of mortality and that Mr Buffett is no spring chicken anymore.

Of course it was also the first one without the late Charly Munger so this is not very surprising.

Charly ran the investment portfolio for the Daily Journal Corp.

He had advised to leave the investments unchanged when he would be gone.

That is not how things played out though.

The first chance management had they trimmed the two top holdings.

Perhaps this was not surprising because the investment portfolio was and is very concentrated and Charly had used about 30% leverage on top of that.

Warren and Charly have high convictions and are more comfortable running concentrated investment portfolios and still sleep well at night compared to other people.

Now what happened at the Daily Journal is unlikely to have escaped Buffett’s attention.

He knows he cannot rule over his grave.

Warren gave a tax reason as being behind his reduction of the Apple holding.

I’m sure that is one of the reason, but it is unlikely to be the main argument.

Mr Buffett in public likes to stick to;

“If you don’t have something nice to say then say nothing”.

We will never know for sure, but me thinks that there is more behind this Apple stock reduction...

Rather than leaving it up to his successors he addressed Berkshire’s stock market portfolio concentration himself.

Apple even after the selling is still something like four times bigger than the second largest position the Bank of America Corp (BAC).

Warren left himself plenty of wiggle room on the future of the Apple position.

I expect the selling of Apple shares at Berkshire Hathaway to continue between now and year end.

The balance of the Apple position must be pure profit by now.

Well played.

The second surprise of the weekend was that Greg Abel was firmly left in charge as successor also for capital allocation decisions and investments in public equities.

It makes sense since if you are in charge everything is on you.

That opens the door for more investments in S&P 500 companies and just replicating the S&P 500 index rather than having Todd and Ted playing around with the entire $356 billion Berkshire stock portfolio.

After all according to the recent FT article the stock investing performance of Berkshire including Apple over the last 10 years underperformed the S&P 500 index.

On top of that Todd Combs has been the CEO of Geico since January 2020.

Ajit Jain stated that Geico hasn’t done a good job matching rates with risk.

Geico is still playing catch-up.

Progressive has done a better job of that recently.

Only at the end of 2025 is Geico expected to have data analytics on par with the competitors.

In the meantime Geico is profitable but sacrificing market share.

Some are not convinced that Todd Combs is in the right seat at Geico...

Also Greg and Ajit were on stage with Warren.

Todd and Ted were not.

It sounds like Greg Abel and Ajit Jain are firmly in charge when Warren is gone one day.

Thirdly rail still isn’t doing great.

This is another business unit that may need a turnaround with an outside management hire.

Energy bounced back.

Insurance is still doing great.

Shareholder friendly share repurchases continued.

Fourthly Mr Buffett is still trying to brainwash us on his cash pile.

Most commentators will report that Berkshire’s cash pile is close to $200 billion by now.

Yes the T-bill and chill strategy is working just fine at the moment.

Maverick has written more extensively on the joys of that currently.

https://open.substack.com/pub/maverickequityresearch/p/my-name-is-bond-yield-bond-the-return-f4e?r=21hvgy&utm_campaign=post&utm_medium=web

The received interest rate is now higher than the inflation rate.

For other companies though cash is always compared to debt as a SeekingAlpha commentator pointed out after the annual shareholder letter.

Obviously Berkshire Hathaway has debt.

Warren loves cheap funding.

It doesn’t matter if it is free insurance float.

Or long term debt below inflation rates.

Or upfront cash from writing long-term puts on the S&P 500 in the 2000’s.

At the end of the day Berkshire Hathaway is a leveraged company.

Warren Buffett basically does a magic trick.

Leverage or debt?

Nothing to see here.

As Lyn Alden pointed out in a good SeekingAlpha article many famous investors advice you to avoid leverage but are perfectly happy to use leverage for themselves.

Most Investments Are Bad. Here's Why, And What To Do About It | Seeking Alpha

“Berkshire Hathaway is a big leveraged insurance company that borrows a lot of money at low rates and deploys that capital into companies who are also leveraged at low rates.

There are multiple layers of low interest rate borrowings built on top of one another, and that capital is redeployed into scarcer business equity and property.

That spread creates tremendous wealth relative to those who are long currencies and bonds.

Buffett makes sure to focus on low-volatility long-term compounding stocks”.

“Within the current financial system, those who do not use leverage generally lose.

Those who leverage too much or too unskilfully and “go over” also lose.

But those who leverage moderately and skilfully have been the winners”.

That brings us to some conclusions regarding my previous article on your own mini Berkshire Hathaway.

https://open.substack.com/pub/hollandparkcapitallondon/p/how-to-build-your-own-mini-berkshire?r=21hvgy&utm_campaign=post&utm_medium=web

Ninth lesson;

9.       Don’t try to create your own insurance business because negative surprises in insurance can mean the end of your company.

Yeah the above still applies.

I have been avoiding single stock exposure since the financial crises in banks and insurance companies.

As they say “investors always fight the last war” applies here as well.

Still one can get insurance exposure to a basket of insurance stocks.

They are unlikely to all go to zero at the same time unless they load up on the same risks again like in 2008 and 2009.

An investment in an insurance stock can only go down 100%.

The upside is more than that though.

So I have been adding some insurance stocks lately.

These have been selected because they look like Berkshire, compete successfully with Geico, compete successfully with Berkshire, have fans on Substack or were admired by Nick Sleep.

None of the insurance companies have been dead money over the last five years.

The past is no guarantee of future performance but at least there is potential for 100% plus returns in my subjective opinion.

Insurance companies that have been added are Progressive Corp (PGR), Allstate Corp (ALL), Travelers Companies Inc (TRV), Kinsale Capital Group Inc (KNSL), Brown & Brown Inc (BRO), American Insurance Group Inc (AIG), Erie Indemnity Co (ERIE) and W R Berkley Corp (WRB).

Future purchases are planned in Chubb Ltd (CB), Marsh & McLennan Companies Inc (MMC), Aon Plc (AON), Arthur J Gallagher & Co (AJG), Markel Group Inc (MKL) and Fairfax Financial Holdings Ltd (FFH in Canada).

With inflation coming down globally, claims-inflation should calm down in the insurance space.

The above adds some of the upside and leverage of the US insurance space without having to start your own insurance company.

Outsource what you can.

This is much easier than inventing the wheel for everything yourself.

Thanks for reading and may the force be with you!

This blog is not advice on what you should do with your money and was written for information and entertainment purposes only.

When you invest in the stock markets it is possible to lose money.

Please do your own research.

If in any doubt what is best in your individual situation, please hire a licensed financial advisor.

Good luck on your investment journey.

Holland Park Capital London hopes you enjoyed the information in the blog. Holland Park Capital London Ltd is not receiving any compensation from anyone to write this blog. Holland Park Capital London is long most of the stocks in the S&P 500 index and is also long the S&P 500 index ETF. Holland Park Capital London has no business relationship with any company whose stock is mentioned in this blog. Holland Park Capital London expressed its own opinions. This is not advice. Make your own decisions please.  Please go and see an authorized financial advisor before making any investment decisions. What works for Holland Park Capital London may well not work for you and your personal situation is unknown to Holland Park Capital London. Stocks go up as well as down and you may get back less than you invest. Any information in this blog should be considered general information and not relied on as a formal investment recommendation. This blog is for information purposes only and helps Holland Park Capital London expand on the book “Beat the Stock Market Casino” (available on Amazon) and brings extra discipline in the investment process. Holland Park Capital London is not liable for any mistakes in this blog. This blog cannot be a substitute for comprehensive investment analysis. Any analysis presented in this blog is illustrative in nature, limited in scope, based on an incomplete set of information and has limitations to its accuracy. The information upon which this blog is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore the accuracy cannot be guaranteed. Any opinions are as of the date of publication and are subject to change without notice.