Who Will Run Berkshire After Buffett?
Who Will Run Berkshire After Buffett?
PLUS: Group Chat Rules, 5 Banks in Disguise, Chipotle's Memo.
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Today, we have a round-up of good reads, listens and watches from the past month including:
Berkshire After Buffett
Group Chats Run the World
5 Banks in Disguise
George Miller’s Incredible Career Change
Chipotle’s Hysterical Memo
Yondr: A $300m Biz to Lock Up Smartphones
…and them fire memes (including Google Waze)
Warren Buffett’s Successors
Berkshire Hathaway held its annual general meeting (AGM) in early May.
This was the first one since the passing of Warren Buffett’s long-time partner Charlie Munger. The event was a celebration of Munger and also a closer look at who will ultimately succeed the 94-year old Buffett to lead the ~$900B conglomerate.
In the lead-up to the AGM, the Financial Times wrote an interesting series of articles on Berkshire Hathaway’s succession plan titled “Berkshire After Buffet":
Greg Abel will be Berkshire’s next CEO. The 61-year old was born in Alberta and grew up in a working class family (I was also born in Alberta but — conversely — am the least-qualified human being in the world to run Berkshire).
Abel had an accounting background before working at MidAmerican Energy, which was acquired by Berkshire Hathaway in 1999. Nine years later, Abel was running Berkshire Hathaway Energy and he now heads dozens of the company's non-insurance industrial business lines (e.g. Precision Castparts, Lubrizol) and the massive rail transportation arm (Burlington North Santa Fe aka BNSF).
FT says that it was “his ability to wring out improvements in a company’s operating performance — as well as finding deal targets — that helped persuade Buffett he was the best pick.” As the future CEO, FT says that Abel faces some major challenges including: 1) unlike Buffett, his investment decisions will face heavy scrutiny from the board and shareholders (which could slow Berkshire's capital allocation speed); and 2) a large portion of Berkshire’s $130B+ in energy assets are public utilities that are navigating climate change risk (and ESG concerns over coal use).Ajit Jain will fully run Berkshire’s insurance arm. Born in India, the former McKinsey executive joined Berkshire in 1986 with no background in insurance but is now widely considered the 2nd most important person at the company after Buffett. Berkshire’s insurance arm (e.g. GEICO, General RE, Berkshire Hathaway Insurance) has famously provided the fuel for the rest of the empire via “float”, the insurance premiums that customers pay upfront. If the insurances policies are properly underwritten and the funds are invested profitably, Berkshire is effectively paid to hold the float (even after paying out claims).
Berkshire’s float has grown from $39m in 1970 to $169B in 2023. That giant balance sheet allows Berkshire to be an insurance lender of last resort. Jain has worked closely with Buffett on the insurance operation for decades and the “division has been profitable for 18 of the past 20 years”. In 2010, Buffett wrote, “If Charlie, I and Ajit are ever in a sinking boat — and you can only save one of us — swim to Ajit." Moving forward, a major concern is that Jain is already 72 and it is not clear who would succeed him.
Finally, FT’s analysis on Berkshire’s future stock-pickers — Todd Combs (53) and Ted Weschler (61) — included some interesting figures on their performance under Buffett:
Combs and Weschler now manage $27B of Berkshire’s $354B portfolio (~8% of the portfolio with Buffet managing the rest)
Over the past decade, the duo posted a +113% total return (underperforming Buffett at +165% and the S&P 500 at +211%)
The annualized gain for the duo over the span was ~8% vs. Buffett at +10% and S&P 500 at +12%
Combs and Weschler sold out of 48 stocks with an average holding period of 2 years and 10 months (this was a shorter holding period than Buffett, who held for an average of 4 years and 3 months on 63 stocks)
Either Combs or (most likely) Weschler initiated an Apple investment in 2016 (they put in $1.6B and have 3x’d the trade)
Buffett followed the Apple pick and the returns have been stupid good: a total $40B investment is now worth $175B (even after liquidating $16B)
A winning Weschler bet was in dialysis maker DaVita (Berkshire now owns 41% of the $12B company)
Combs made strong plays on Visa and Mastercard (similar to Buffett’s bet on Amex decades prior)
The pair have taken Ls on Charter Communications, Liberty Media and Paramount Global
My three takeaways from FT’s breakdown: 1) it is very very hard to outperform the S&P 500; 2) it’s hard to move the needle when investing deca-billions (obvi); and 3) one great call (in this case: Apple) is often all you need.
Even though Buffett announced at the AGM that he had trimmed 10%+ of the Apple position, it’s still a $100B+ win and accounts for ~1/5th of Berkshire’s entire value (I previously wrote a history of Buffett’s Apple trade, which is probably the best tech pick ever in terms of an absolute dollar gain).
Neither Combs or Weschler ever had to clear a trade with Buffett. The Oracle says of their tenure, “Both Todd and Ted have been invaluable to Berkshire, and our shareholders have profited significantly from their activities.”
Their future calls will help Berkshire manage its massive insurance float and continuously grow the cash pile, which is sitting at $180B+ (while Combs and Weschler have underperformed the S&P 500, a lot of their money management aims are to outperform corporate papers and government bonds).
My favourite part of their run is how they joined Berkshire. Each had successful money management careers prior to Berkshire but ended up working for Buffett in completely opposite ways. Combs joined in 2010 (his in was a cold call with Charlie Munger). Weschler joined in 2012 (and met Buffett by paying a total of $5.3m on two charity lunches). Those are the two literal endpoints of the spectrum of how to get a job: cold outreach (very free) or pay millions (very not free).
Group Chats Run the World
Sriram Krishnan has an insightful piece on the rise of group chats and why “most of the interesting conversations in tech now happen in private group chats”. A few catalysts in recent years include: 1) the culture wars of the early 2020s meant people shared less in public; and 2) COVID pushed more communities online.
The piece then outlines seven ways to create interesting group chats — what he calls “forever dinner parties” — including:
Be a gardener, not a carpenter: Every chat needs “a strong and fair central leader who sets the tone and enforces the rules.”
Dinner party alchemy: “A good group chat needs a mix of personalities. Some archetypes: 1) the very online person who is familiar with participating in chat at all times; 2) The celebrity who everyone is surprised to see in a chat; 3) The deeply thoughtful people who don’t speak up often but when they do, have real depth to their opinions; 4) The cheerful bon vivants who keep the group light/funny/fresh.”
The N-1 group: Every group chat has the exact same group minus one person. This speaks to the importance of vibes. A single user can change the chat dynamics and the other users may just want their own space.
On the last point: I know for a fact that there are group chats I am in where everyone else is in another group and mercilessly roasting me. It has taken me years, but I've learned to live with this painful knowledge...mostly because I also roast other people in N-1 group chats.
5 Banks In Disguise
In the (highly recommended) finance newsletter Net Interest, Marc Rubinstein writes about 5 companies that have huge financial businesses hidden inside of them (aka “non-bank banks”).
Starbucks — which has ~$2B in customer funds on its app — is one of these companies (Rubinstein was nice enough to flag a piece I wrote a few weeks ago on the coffee chain). Carnival Cruises is another. Many cruise operations receive customer deposits months — and sometimes years — before the voyage. They can't recognize the deposits as revenue until the trip is completed, but can use the funds for operations.
“As at the end of February, Carnival had $7.0 billion of customer deposits on its balance sheet, enough to finance a sixth of its property and equipment (principally, its ships). It’s fairly seasonal — cash collections are typically higher in the spring months — but it has grown over time. Operating ships is a capital intensive business, but if customers can shoulder some of the burden, sailing can be a lot smoother.”
I've definitely entered the phase of my life where I'm looking into cruise ship vacations for the sake of simplicity, but I hesitate slightly on doing one of these trips every time I think of Speed 2.
The full article is worth a read with details on other “non-bank banks” including Naked Wines, Delta Airlines and Travel + Leisure Co.
George Miller’s Incredible Career Change
Furiosa: A Mad Max Saga was released last week and performed really badly.
The 5th film in the Mad Max franchise made $32m in the US during Memorial Day weekend against a projection of $80m. It barely beat out The Garfield Movie (!!!) which pulled in $31m.
It's a bummer for 79-year-old director George Miller, but he has a lot of wins under his belt and one of the best director origin stories ever.
Before making the original Mad Max (1979), Miller worked as an emergency room doctor in Sydney. To finance the film’s budget of $400k, the then 34-year-old Miller continued to take on emergency calls. His co-writer Byron Kennedy often drove the vehicle to accident sites while Miller treated patients (many of the crashes and injuries he witnessed were incorporated into the film).
Mad Max launched Mel Gibson’s career and went on to make $100m worldwide, making it the most profitable film ever with an ROI of 250x on the budget (The Blair Witch Project and then Paranormal Activity would later top this ROI figure).
Miller made two more Mad Max films in the 1980s: The Road Warrior (1981) and Mad MAx Beyond Thunderdome (1985). He waited four decades to make another Mad Max, during which time he dabbled with other genres including animation (Happy Feet) and comedy drama (Babe).
Mad Max: Fury Road came out in 2015. It did OK at the box office, grossing $380m on a $180m budget but it won 6 Academy Awards (Furiosa cost ~$170m and looks unlikely to win any Academy Awards). One of the Fury Road Oscars was for Miller's wife, Margaret Sixel, whom he asked to edit the film even though she had never worked on an action movie before. She crushed it. Anyway, here is a 28-minute “making of” video for Fury Road and a solid blurb from Sixel’s Wikipedia:
In 2012, Sixel began editing Mad Max: Fury Road under the direction of George Miller. When asked why he chose his wife to edit his film, Miller observed that she had never cut an action movie before, and that if it were to be edited by "the usual kind of guys, it would look like every other action movie we see."
Because the majority of the film revolves around an intense road battle, featuring dozens of vehicular stunts and hundreds of individual extras, the location team would shoot with upwards of 20 cameras on any given set up. As a result, the editorial team on location processed between 10 and 20 hours of footage on a daily basis, which had to be flown back to Sydney, Australia, where Sixel and her editorial team would work on shaping the footage in conjunction with production. By the time principal photography had wrapped, Sixel was given over 470 hours of footage to edit, which took three months to merely view in its entirety.
What a legendary collaboration and the world got to see the "flame-throwing guitar guy" because of them (fun fact: the stage actor who played this short role was given an audition brief saying that the character should be a combination of “Keith Richards and a Scarecrow”).
Chipotle’s Hysterical Memo
Over the past few weeks, Chipotle has been getting roasted on social media for reducing portion sizes in your favourite carnitas bowl and chicken burritos.
As part of the roasting, a Chipotle “hack” began trending on TikTok showing customers they could maximize the amount of food they received by filming their orders with their smartphones. Why? Because Chipotle management apparently sent a memo to store managers to be generous with ingredients if the order was being filmed, in order to avoid getting roasted. It’s a tale as old as time.
I have no idea if this memo is a real thing but I have seen videos of people recording their Chipotle orders and the portions look healthy AF.
Out of curiosity, I pulled Chipotle’s financials from the past 5 years and the business is firing on all cylinders. Sales have nearly doubled fom $5.5B to $9.9B while the operating income margin has also doubled from 8% to 16%.
As a percentage of sales, the primary costs — including “Food, Beverage & Packaging”, “Labor” and “Occupancy” — are all down. There are many ways to improve food costs but I am choosing to believe that the main reason is that Chipotle corporate is making store managers count every bean and grain of rice...unless there is a smartphone camera around. My (lapsed) CFA designation is impressed by the fiscal management but my stomach is annoyed.
Either way, the entire story was perfect fodder for dumb memes.
Yondr: A $300m Biz to Lock Up Smartphones
Yondr makes pouches that can lock up smartphones, specifically the camera. You probably saw them at the last comedy show or live concert you attended.
Launched in 2014, it sold 25,000 units in the first year and became really popular due to Dave Chapelle, who didn’t want the audience to record his comedy sets.
The Wall Street Journal wrote about the company and I fell out of my chair when I saw the lifetime sales: estimated to hit 10m units — at ~$30 a pop — by end of 2024. I just asked Alexa to confirm my math on this and $30 multiplied by 10m is indeed $300m.
It’s a literally a fabric pouch with a magnetic locking mechanism. That’s it.
The #1 customer for Yondr is schools, which use the product to lock up smartphones so students can do literally anything other than be on the smartphones. Schools made up 40% of sales in 2023 and are projected to be 70% of sales by end 2024. Speaking as someone addicted to his iPhone, this is clearly a positive development.
Here is some free advice for Yondr. Call up the procurement manager at Chipotle and have them require every customer to put their phone in a Yondr before ordering a carnitas bowl. The cost savings on ingredients will be immense. You're welcome.
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Song of the summer?
I don't watch the Netflix show Bridgerton (seriously, I don't). But my wife does, so I always hear the show's music in the background. In a recent episode, an orchestral version of Pitbull and Ne-Yo's "Give Me Everything" was featured. That song came out in 2011 when I was DEEEEEP in my Saigon nightclubbing days and I was shocked hearing the instrumental.
Turns out Bridgerton has popularized the orchestral treatment of pop songs in recent years. Other Bridgerton riffs include Taylor Swifts “Wildest Dreams”, Beyonce’s “Halo”, Rhianna's "Diamonds" and Miley Cyrus’ “Wrecking Ball”. These are all cool but the truth is we just need more Pitbull riffs.
Check out this amazing clip of violinist Jonathan Hill going HAM on the Pitbull track. Is this actually the song of the summer? Probably not. That would be Kendrick Lamar's "Not Like Us". But I traffic in hyperbole and have listened to the 2-minute song over 100x in the past week (so, there's that).
Bridgerton’s music supervisor Justin Kamps told Netflix about selecting Pitbull’s instrumental cover for the scene:
“I think everyone was a little bit shocked that they were so in love with this Pitbull song cover for this sequence, of all things. But the song is amazing, and it has this great build to it, and that’s what the scene really needed. It needed this anticipation and then an explosion into the main chorus of the song as we see what’s happening on-screen.”
And Pitbull — aka Mr. Worldwide aka the guy who did the song “Timber” — shared some thoughts on the super horny steamy Netflix scene (and the official Netflix Bridgerton account replied to Pitbull):
…finally, enjoy them fuego X posts:
