Paul Morigi
According to the latest company filing, Warren Buffett's Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B), is selling down exposure to public listed equities. During the period from January to the end of March, the U.S. conglomerate sold about $13.3 billion worth of equities, while adding only $2.9 billion to existing exposure, netting more than $10 billion of sales. Buffett allocated approximately $4.4 billion to share repurchases, while the company's cash holding jumped to $130.6 billion, the highest level since late 2021, when the equities market started to go down aggressively.
During the Berkshire annual shareholder meeting in 2023, Buffett explained that he expects the 'majority of holdings will likely report lower earnings this year, than last year', arguing that the economic backdrop is pressured by a 'very different climate than 6 months ago'. As an example for why his assessment is negative, he shared the observation that 'we are starting to have sales where we did not need to have sales before'.
Berkshire Reports A Strong Q1 2023
Interestingly, Buffett's commentary about the economy is somewhat conflicting with the earnings results of the Berkshire conglomerate, where operating earnings for Q1 2023 increased 13% YoY versus the respective period in 2022, despite the unfavorable economic backdrop. During the period from January to the end of March, the Berkshire conglomerate accumulated $8.07 billion of operating earnings, aided by a recovering insurance business.
Geico, after posting six consecutive quarters of losses, achieved a remarkable turnaround by generating $703 million in earnings. This positive outcome is attributed to higher average premiums earned, paired with lower advertising expenses and claim frequencies. With that frame of reference, Buffett commented that he expects the insurance sector to perform solidly, due to a relative low correlation with economic business activity.
Berkshire Hathaway's BNSF railroad and utility business, however, both reported an earnings decline versus Q1 2022. BNSF's operating income fell to $1.25 billion, from $1.37 billion previously, attributable in part to slowdown in imports at the West Coast ports; while the utility division's earnings dropped from $775 million to $416 million.
BRK.B Q1 filing
I would also like to point out Berkshire's enormous investment gain in Q1 2023, which totaled $27.4 billion, versus a loss of about $1.6 billion for the same period one year earlier. However, these gains are only 'paper gains' and might fluctuate strongly over time. Accordingly, Buffett advised to give these numbers any meaning:
The amount of investment gains (losses) in any given quarter is usually meaningless and delivers figures for net earnings per share that can be extremely misleading to investors who have little or no knowledge of accounting rules.
BRK.B Q1 filing
Juicy Yield in Treasuries
One major reason why Buffett is somewhat shifting away from equities is anchored on the juicy yield that treasuries offer. Especially in a stressed macro environment, it might not necessarily be prudent to risk capital for a 10% equity yield, when low risk treasuries yield close to 5%.
In that context, Buffett commented that Berkshire's ~$125 billion cash pile invested in short-dated fixed income securities is delivering attractive returns as compared to 1-2 years ago. In fact, Buffett estimated that Berkshire's investment income from 'cash and cash equivalents, including marketable securities' is poised to top $5 billion this year.
Other Takeaways From The Shareholder Meeting
Apple
Buffett continues to like Apple (AAPL), even at a ~30 P/E. The Oracle of Omaha said that Apple is different than any business Berkshire owns, adding that Apple is also 'the best' business. In that context, Buffett argued that if made to choose, consumers would give up their 2nd car before their iPhone, which costs less than one-tenth of a car.
Apple is in a position with consumers, where they're paying maybe $1,500 bucks, or whatever it may be, for a phone... and the same people pay $35,000 for having a second car, and when they have to give up a second car or give up their iPhone, they'd give up their second car...
...I mean, it's an extraordinary product. We don't have anything like that that we own 100% of, but we're very, very, very happy to have 5.6%, or whatever it may be, and we're delighted every 10th of a percent that goes up.
Taiwan Semiconductor
Buffett surprised markets when he bought a sizable position in TSMC (TSM) in late 2022, only to sell 86% of the shares a few months later. Now, while Buffett continues to like TSMC's value proposition, the geographical presence of the company simply doesn't fit his investment portfolio/ circle of comfort.
Taiwan Semiconductor is one of the best-managed companies and important companies in the world... I [just]don't like its location and reevaluated that,... [but] there's no one in the chip industry that's in their league, at least in my view...
...Marvelous people and marvelous competitive position, but I'd rather find it in the United States
Banking Crisis
Of course, Buffett also received questions regarding the most recent bank stress: Munger and Buffett criticized the executives responsible for the collapsed banks, emphasizing the importance of holding them accountable for the mistakes that were clearly visible. The duo also highlighted the flawed incentives within banking regulations and expressed dissatisfaction with the ineffective communication between regulators, politicians, and the press.
It was doing it in plain sight and the world ignored it 'til it blew up
Buffett emphasized the criticality of the government's decision to safeguard all of SVB's deposits, commenting that the consequences would have been disastrous for the U.S. if such a guarantee had not been made.
Occidental Petroleum
Buffett said that he/ Berkshire has no plans to make an offer for complete control of Occidental Petroleum (OXY), dampening speculation that Berkshire was aiming for a takeover. However, Berkshire did not rule out the possibility of purchasing additional OXY stock, praising CEO Vicki Hollub.
There's speculation about us buying control, we're not going to buy control... we wouldn't know what to do with it.
...but we love the shares we have... [and] we may or may not own more in the future but we certainly have warrants on what we got on the original deal on a very substantial amount of stock around $59 a share, and warrants last a long time, and I'm glad we have them.
Final Words
Buffett sees an 'incredible period' for the U.S. economy coming to an end, and accordingly, he is tactically reducing some exposure to equities. However, Buffett also argued that 'nothing is ever sure', and he advised against paying attention to forecasts about how the macro backdrop develops or markets move, including his, the Oracle of Omaha's.
For reference, Berkshire Hathaway stock is slightly underperforming YTD, with shares being up only 4.51%, as compared to a gain of approximately 8% for the S&P 500 (SP500).
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