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00:00 Josh
Good to see you, Swartz. Let’s have a bull bear debate here on Berkshire. Mel, and just full disclosure, you are a shareholder. Uh we’ll start with the bull case though because you say here, Mel, this is interesting. You say Berkshire has a an all-weather quality is how you put it. What what do you mean by that, Mel? Explain that.
00:20 Mel
Well, thanks for having having me on, Josh. Uh yeah, I think I think if you look at the uh at Berkshire Hathaway, it’s primarily an insurance business, but really it’s large enough that it’s a conglomerate. It’s involved in many different places. So there’s kind of a a cyclicality and a countercyclicality within that portfolio. So you could almost even think of it as a an alternative to a a lower risk alternative to opening owning the broader market. And uh and you’re going to find some of the businesses like the insurance are are countercyclical. Uh but then other other parts like the railroad are going to be more sensitive to the economy.
00:54 Josh
How would you characterize valuation here, Mel?
00:58 Mel
So, uh, in a in a year of pretty high valuations for US large cap stocks, I think Berkshire is still pretty reasonably valued. Um if you look at the estimates for next year, it looks a little closer to the overall market on a price- to- earnings ratio. Uh they prefer book value. I think that’s fair because there’s so many different businesses here. On book value, it’s around about 1.5 times. That’s historically a little bit higher than it been before. Uh also uh shareholders who pay attention know that the Warren Buffett advocates repurchasing stock at 1.2. So this is a little bit above his level, uh but uh when you look at some of the other uh companies that make up the market, it’s it’s certainly reasonable, uh if a little bit higher than than than it has been in the recent past.
01:34 Josh
And Mel, post Buffett, how does the bench look at Berkshire? Would you say that falls into the the bullish column?
01:42 Mel
Uh cautiously bullish. We’ve had a couple of changes in that bench recently. That was a little surprising, I think to to to investors at Todd Comb’s departure in particular. Been there a couple of decades. You you would have thought that this was the exact moment that he was waiting for, but there’s been a change there and and and that’s fine. The bench is still deep. uh Greg and and Ajit, these are very very seasoned folk. Uh it’s reasonable to think that a lot of the uh the values that have brought the company to this point will continue to be uh to be in place. We wouldn’t expect major changes. Uh I wouldn’t be holding out for a dividend or I wouldn’t be expecting uh major swings and and aggressive allocations of capital, but um, you know, there’s there’s there’s a there’s a definitely a culture in place that uh I think uh the the bench will probably continue to to keep in there.
02:22 Josh
So we’ve walked through the bull case. Let’s talk about the bear case, Mel. Let’s outlie that one. One concern you have, the risk of losing the Buffett premium. Explain that.
02:35 Mel
Yeah, there there’s no question. There’s no investor out there. There’s no CEO or investor spoken about as much uh quoted as often. and there’s so many books out there. I mean there’s an iconic investor. And we lost Charlie not that long ago, Charlie Munger. Um uh Warren Buffett is stepping down. And so there’s the and anyone who’s been to the annual event um in in Omaha will will testify. It feels different. It’s not a regular comp company meeting. So, is there some premium there? You could argue that some of that’s been coming out over the course of the year. It’s performed by two-thirds of the overall market performance this year. Uh some of that is related to some of the underlying business trends, which we can get into in a second. But um there’s definitely a a a caution out there that some of the core investors are investors in Buffett rather than in the actual fundamentals of the company itself.
03:22 Josh
Uh you also say here, Mel, Berkshire’s sheer size makes outsized returns extremely difficult. Fair enough. If that’s true, Mel, what do you think returns are likely to look like then in in the quarters, years ahead?
03:32 Mel
Well, I think instead of home runs, we’re talking about singles and doubles and I think we should be okay with that. This is a large cap company, sitting on a pile of cash and discipline is is really important here. So uh where where it comes whether it’s the investment book or it’s actually uh acquiring companies at right. Uh they’ve always been happy to sit on cash and that cash pile has grown and so it’s really hard to move the needle when you get to this size. Like the the the the very dynamics that got them to this point. It’s going to be hard to to replicate that in the future just because of the size. So I think that the discipline and the continued focus on discipline, again, what do they say waiting for that fat pitch. We’re waiting for half decent pitches is is okay. But um as long as as that discipline remains in place, I think um uh more reasonable or more market like returns going forward, more broad market returns going forward seem reasonable.
04:22 Josh
You mentioned that cash hoard, Mel. What as a shareholder would you like to see them do with that?
04:28 Mel
Um well I think a lot I I think a dividend would be welcome because it would broaden the number of investors who can own it. It would also mean there’s an awful lot of funds that uh would automatically uh there’d be a lot of buying automatically into a lot of income funds where there’s a rule there that you have to pay a dividend, no matter how small. Apple discovered the benefit of that many, many years ago. So some kind of dividend uh makes sense. I just wouldn’t uh I was wouldn’t be holding our breath on that one. Ultimately, I think um waiting for uh a better entry point to to add to stock, uh to you know, repurchasing shares. That’s also very valuable for shareholders. That does um that that does there there’s tremendous return for shareholders by by being patient, disciplined, but then at the right time, aggressive in repurchasing stock. So we’re comfortable with that approach.
05:22 Josh
Uh you you’ve laid it out very well, Mel. I’m curious, who is the who is the investor, Mel, who should be putting new money to work in Berkshire as you imagine it?
05:32 Mel
Yeah, so, uh as you as you mentioned earlier, uh our clients are shareholders, I’m a shareholder personally. Uh this is for the long-term investor and particularly investors who find themselves kind of heavily weighted towards uh the the high valuations, the the market leadership, anything to do with technology or or AI, and you’re getting a lot of diversification here in this name. Now, we we like to think we can diversify for clients with different names, but there’s a lot of diversification here. There’s a little bit more of a value bent to this name than some of the other large companies in the market. So, uh while near-term, uh you may have some uncertainty here and there. Uh long-term investors have have been uh have been rewarded up to up to now and even if it’s a little bit more modest going forward compared to the past, uh we believe long-term investors will be rewarded for holding this name.
06:23 Josh
Mel, you broke it all down very clearly and simply. Thank you, sir.
06:28 Mel
Thank you.