Berkshire Hathaway Preamble to the Annual Meeting

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02 March 2021




Video commentary for March 1st 2021


Subtitle: stock markets start the month in positive territory, bond yield compression paused, metals prices pause, Chinese renminbi static, fragile emerging currencies weak,




Eoin Treacy’s view


Berkshire Hathaway Preamble to the Annual Meeting


Here is a section:


Berkshire’s investment in Apple vividly illustrates the power of repurchases. We began buying Apple stock late in 2016 and by early July 2018, owned slightly more than one billion Apple shares (split-adjusted). Saying that, I’m referencing the investment held in Berkshire’s general account and am excluding a very small and separately-managed holding of Apple shares that was subsequently sold.


When we finished our purchases in mid-2018, Berkshire’s general account owned 5.2% of Apple. Our cost for that stake was $36 billion. Since then, we have both enjoyed regular dividends, averaging about $775 million annually, and have also – in 2020 – pocketed an additional $11 billion by selling a small portion of our position. Despite that sale – voila! – Berkshire now owns 5.4% of Apple. That increase was costless to us, coming about because Apple has continuously repurchased its shares, thereby substantially shrinking the number it now has outstanding. 6 But that’s far from all of the good news.


Because we also repurchased Berkshire shares during the 21/2 years, you now indirectly own a full 10% more of Apple’s assets and future earnings than you did in July 2018. This agreeable dynamic continues. Berkshire has repurchased more shares since yearend and is likely to further reduce its share count in the future. Apple has publicly stated an intention to repurchase its shares as well. As these reductions occur, Berkshire shareholders will not only own a greater interest in our insurance group and in BNSF and BHE, but will also find their indirect ownership of Apple increasing as well. The math of repurchases grinds away slowly, but can be powerful over time. The process offers a simple way for investors to own an ever-expanding portion of exceptional businesses. And as a sultry Mae West assured us: “Too much of a good thing can be . . . wonderful.”




Eoin Treacy’s view


Buying back shares appears to be back on the menu for an increasingly large number of companies. For investors who seldom sell, like Berkshire, that’s good news provided the number of shares in issuance does in fact contract.


One of the most egregious abuses of share buyback programs is that additional shares are issued at a similar pace through executives exercising options. That effectively means buybacks amount to a massive transfer of wealth to company management.




Ignoring Energy Transition Realities


Thanks to a subscriber for this report from the team at Goehring & Rozencwajg which was released a couple of months ago. Here is a section:


Electric vehicles also involve energy intensive lithium-ion batteries. Few realize how much energy is embedded in an electric vehicle before it is ever plugged in. Over the life of a typical EV, nearly 40% of the total energy goes into manufacturing the battery. The IEA expects electric vehicles will represent nearly 15% of total transportation energy by 2040. We calculate this equates to approximately 850 mm EVs and nearly 65 terawatt hours of batteries. This is a staggering amount considering global lithium-ion manufacturing capacity is currently less than 0.4 terawatt hours per year. These batteries will require an incredible 2 billion tonnes of oil equivalent to build. We will shortly release a detailed podcast that goes into these figures in great depth.


Unfortunately, few people realize how energy intensive the “green transition” will be. As a result, much (if not all) of the carbon savings will be undone by generating the power in the first place. The IEA’s proposal assumes wind and solar make up nearly 50% of all electricity by 2040 and that some 850 mm electric vehicles will be on the road. These initiatives are expected to reduce CO2 by 55% or 18 bn tonnes per year. While this may sound impressive, simply moving away from coal towards much-cleaner natural gas would itself save nearly 14 bn tonnes of CO2 per year. When analyzed through this perspective, renewables would save an incremental 4 bn tonnes compared with the next cleanest option.




Eoin Treacy’s view


The views expressed in this report elaborates on many of the points made by other analysts. There is no getting around the fact that renewables are dependent on access to metals like copper, lithium, cobalt and nickel. That’s in addition to the significant additional quantities of rare earth metals required. These are all extractive industries. A lot of renewable infrastructure is also placed in very remote, ecologically pristine areas.




Housing Booms in Australia as Prices Surge Most in 17 Year


This article from Bloomberg may be of interest to subscribers. Here is a section:


We are seeing a significant increase in demand across all price points and all suburbs,” said real estate agent Ben Collier, who handled the Paddington sale. Usually “you see different markets moving at different speeds, whereas it seems to be somewhat more uniformed right now.”


In New Zealand, where home prices soared 13% in January from a year earlier, the problem is so acute the government will now require the central bank to consider the impact on housing prices when setting interest rates, a change the bank opposed. The Reserve Bank of New Zealand is also reimposing lending restrictions on property investors in an attempt to cool the market.


Fears that Australia’s housing market would be flooded by distressed sales as people were thrown out of work by the pandemic have faded as the economy recovers faster than expected, and people resume paying their mortgages after being offered six-month loan holidays last year.


Instead, a shortage of supply is helping fuel the price boom. The number of houses advertised for sale in the first three weeks of February was down 26% from a year earlier, CoreLogic said.


“Housing inventory is around record lows for this time of the year and buyer demand is well above average,” Lawless said. “These conditions favor sellers. Buyers are likely confronting a sense of FOMO, which limits their ability to negotiate.”




Eoin Treacy’s view


This is a familiar story from all over the world. There is low supply because many people are worried about moving during a pandemic. At the same time there is increased demand because other people feel they have more cash and need to move because of personal circumstances. The combination is leading to rising prices across the board. Record low interest rates are fuelled the advance.

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