Author and investor Adam Mead on Berkshire Hathaway $BRK.A / $BRK.B, Warren Buffett, Abel | S08 E16
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Looks like we're live. This is Value After Hours. I'm Tobias Carlisle, joined as always by my co-host Jake Taylor. Special guest today, following along from the Berkshire meeting. Uh he's an expert on Berkshire Hathaway. Uh it's Adam Mead, author of The Complete Financial History of Berkshire Hathaway. It's an absolute doorstopper. How are you, Adam? Congrats. What a great What a great book. [laughter] Thanks. Thanks. Great to be here, guys. Thanks for having me on. Yeah, welcome back. Gents, I didn't make the meeting this weekend, so for someone like me who didn't go there, what were your impressions? First one without Warren as up on stage. What happened? Well, let me let me do a quick little plug of Adam's book first before that, just cuz I think this is important. Um I would I I got an MBA, and I would gladly trade that MBA away from and what I learned for the combination of taking Adam's book and you read that year, cuz it's broken up chronologically into years. You read that chapter of that year, and then you go listen to the AGM, and so you get Adam providing the play-by-play narrative of or sorry, the numbers that are happening in real time, and then you listen to Charlie and Warren doing the the color commentary of what's happening. And it's just You just keep going and you step through each year like that, and that's better than an MBA. You got Thank you. You're welcome. Well deserved. What What were your impressions, Adam? What What What did you think? You know, uh I I had high expectations going in, and that was because I expected it to be a business meeting. I expected Greg to really get down to the numbers, and I expected him to deliver it, and I mean, he met he met my high expectations. I I thought it was a great meeting. I mean, in terms of, you know, value per minute, I mean, it was probably the most informative meeting there was, and I thought it was a good balance of you know, we got to meet some new managers, get to hear from them, you know, Warren was there and had his part, including a you know, AI spoof of him asking the first question. Like, it was it still had the Berkshire fun, you know, they retired Warren and Charlie's numbers up in the rafters. Yeah, it was really cool. You know, and then it still, you know, there was a lot of talk about how the attendance was down as this this was so like such a big negative, but I mean, that that arena was was still pretty full, and I mean, I actually welcomed it. I mean, one one just being able to get around, go shopping without, you know, being in so many lines. And then, you know, just having, I guess, more more of a higher ratio of true owners to total participants, you know. Those are the people who really wanted to be there, and you know, those are the people I want to meet. So, I thought it was a great meeting. You're saying we you got rid of the wrong half of the audience. E- Exactly. I I I I mean, I don't know what you'd you'd say, Jake. I mean, I'd probably estimate on balance, you know, down by a third. Would you say that's that's probably right? Maybe a little bit more, but yeah, I think that's probably roughly right. But, what would you say in terms of, say, if you've been to the Berkshire meeting 5 or 10 years, you know, in a row, that cohort, you know, down single digits? I I mean, not I mean, I I saw all my friends. I mean, Toby, you weren't there, that was one big miss, but I mean, everybody else was saw that that my usual friends. Yeah, those who have built up enough kind of a network, the network effect is still there and still real. What was Buffett's question? Oh, that was that actually I I I was I was fooled for a second there. I I thought he actually had dressed up. It was this uh what do they call it? A deep fake. And it looked like him, you know, up there. I mean, obviously I knew it wasn't live, but I didn't know if they pre-recorded or something, but um you know, it was him like pretending to stand at the microphone and saying, you know, "Geez, I own this stock and you know, why should I continue to hold Berkshire Berkshire Hathaway stock? You know, what should I tell my friends?" Uh so it was it was fun. They It was It was kind of fun. And what's the answer? I think Greg Greg did a good job just kind of going through, you know, all the the Berkshire culture is the same, the advantages are the same, you know, the opportunities in front of us are are great and um Yeah, and it was Yeah, it was I thought it was good. He uh I was actually surprised I was a little marginally disappointed that we didn't get through even one complete round of shareholder questions. You know, they were they were quite Yeah, what was like maybe eight or nine, maybe? Yeah, yeah, it wasn't it wasn't many. Because the answers were so long? Um I don't know if it was that or if it was like there was a a more pre-prepared at the beginning than than previous years. Went through more of the Q1 results in a little bit more granularity than normal. Uh shorter duration periods for each one, too, than normal. So, it's I mean, it's not surprising, but um I agree with you, Adam, like the structuring of it I thought was quite clever. Like bringing uh Ajit [clears throat] out for some of it and hitting those questions and then like taking a break and throwing it to Becky interviewing Warren behind the you know, off stage or backstage and then come back out and now it's uh Katie Farmer and Adam Johnson up there and just the way that they they organized the flow of it I thought was actually really well done. Yeah, I I agree. I thought it was it was it was fun. It worked and um I I did think the the commercials or the you know the I think it was got Geico uh BNSF and the NetJets thing. It was everybody kind of started getting up like it was a break and I was like, "No, no, no, this is like this is like part >> I went I I went and bought a a sweatshirt while I was >> [laughter] >> during that segment. But um yeah, it was it was it was a it was a quick quick that way. Like there was just it was it was a lot of information. And what was the pitch like from uh new CEO? What was What was the pitch like? Yeah, what was his argument for Berkshire? What was his How did he look? How did he present? I mean I I thought he was as confident as he's ever been. You know, he he seemed very confident. There was a question of at I think towards the end about it was about succession or you know and or or who's who's his number two and he was very clear that he was in charge. I mean it was like there should be one leader, you know, I'm the guy. Um you know, I I thought he I thought he displayed I mean a a great grasp of Berkshire's businesses. You know, they played you know, they didn't have a movie but they played you know, that classic Warren testifying in front of Congress with Salomon Brothers scandal. You know, he called it Berkshire's anthem. So, you know, I I really felt like there was this great balance of I mean Greg don't forget I mean Greg's been with Berkshire since you know, 1999 technically. Um 2000. They bought MidAmerican. And so, you know, he he's got you know, quarter century under his belt as part of Berkshire but I mean I I they're they're also implement he's pushing things forward like with the technology, taking the tech front the tech guy from Geico, putting him in BHE, in BNSF, you know, this whole idea of operational um operational excellence. And you know, you kind of heard some of those same words repeated by Katie Farmer from BNSF. So, his message is getting out. And you know, he's he's not going to let anybody cruise like Warren did. He's he's going to call him out. Yeah. I thought Adam Johnson was pretty impressive, too. Who's Adam Johnson? He's the CEO of NetJets, but he also has I think 32 other CEOs subsidiary CD CEOs reporting to him. So, he's in charge of the like consumer service and retail segments. Which it's one of my favorite clips. I I I'm going to I think I posted it on on exit the link actually worked, but Greg basically said, you know, "Hey, you know, here's here's 32 other businesses 31 other businesses for you to to manage. And oh, by the way, you know, we're not giving you any resources, no other group from headquarters. Like figure it out." Um No, I mean I Greg I mean there was one question about, you know, will you break up Berkshire? And his answer was absolutely not. You know, he said we're a conglomerate, but we're an efficient conglomerate. And you know, that's stuff is so refreshing to hear. And it you know, what it motivates me. It's like, "Oh my gosh, this you know, Berkshire's doing all this stuff. You know, how much more can I do?" Right? I mean, just you can't help but walk away from that meeting energized. >> Yeah. I know. >> [laughter] >> There was another part I thought that was pretty clever. I don't know if this was on purpose or exactly probably was, but um you know, I think Warren called out um Tim Cook cuz he Tim Cook was there obviously and and highlighted that uh Tim had taken over for another legendary CEO and the stock had I don't know whatever 10x since then. Uh and so like I feel like Warren was kind of showing the pattern of like look you could things can still work out pretty well even if you turn it over to the new guy. Uh and you know and to bring that up in front of everybody I thought it was probably wasn't an accident. No no absolutely not. And then Oh. I was just going to say is he is is he like Tim Cook in the sense that he's going to be more focused on operational stuff than Warren was. Uh but maybe he'll lose some of the well you lose the acquisitions the visionary acquisitions for from Warren. What do you think? No I well I I think I I maybe not he's definitely more of an operator. I would say. But I think it's more of that the hands-on. We'll see when uh the world is desperate for cash again uh what Greg's appetite and uh execution looks like when it comes to M&A and the investment world. I mean he he he there's a history there so I I'm to my knowledge in 2000 8 I think it was Berkshire made a bid for Constellation Energy and got a billion-dollar breakup fee. That that uh to my knowledge was Greg. I mean he he's a deal maker he he'll I I think he's going to get it done. I mean I I could just imagine you know if we have another great recession or even just a sort of run-of-the-mill recession. I mean he could be buying back Berkshire stock you know hand over fist and making acquisitions and doing things in the stock market. I mean I think Warren said it best you know if you know businesses you know stocks and so I feel comfortable about that just Just because he hasn't, you know, been picking stocks doesn't mean he doesn't know business. I mean, gosh, you know, what what better I mean, literally, I mean, Warren handed over his entire 100 whatever it is now, 100 plus billion dollar net worth to Greg and said, you know, you're managing my money. I mean, what better testament than that? Yeah, you think Warren's going to pick a guy who doesn't know what a the right price for a business looks like? >> [laughter] >> Yeah. Come on. Yeah. I guess I thought the the dynamic [clears throat] between um Greg and Ajit was There was almost There was a couple of almost like Charlie Charlie Warren moments there, too, which were were pretty fun. Yeah, Ajit was kind of trying to lean into the Charlie a little bit, wasn't he? >> [laughter] >> Yeah. Yeah, good. There's some A few weeks ago, there was some uh s- Berkshire was buying back some stock, but uh I saw some commentary that it might have been done at a higher price than Buffett might have done it previously. Do you have any view on that? Yeah, I I think Greg is going to I think Greg is buying it back closer to intrinsic value. So, they bought back the the the 10-Q just came out. They bought back 235 million of shares at, you know, $486 a share. So, you know, that sort of roughly translates to you know, uh a trillion billion dollar uh little bit more than a trillion dollar valuation. So, um but a tiny amount. So, you know, it looks like they And that was just in March. So, it looks like, you know, if you look at the price, probably like the last 2 weeks of March, uh So, I think they're doing it, but, you know, just sort of right at the margin. I mean, I really don't see unless, you know, if the price goes down significantly, I would I would expect and and hope that they would buy back more, but you know, they're probably where Warren was probably comfortable getting up to like 90% of intrinsic value. Greg might be putting it closer to 95% which you know, his his calculus might be you know, hey, we've got 380 billion in cash on the books. You know, we can let some of it go out closer to intrinsic value, but you know, I trust him to make the right that right choice, but you know, I I I I peg Berkshire's value kind of around 475 to 510 a share. So, you know, kind of right right in that range. Adam, you got to handicap which one's going to be higher? The total number of shares. Is it going to be purchased in the open market or done off market in like big blocks of you know, some [snorts] of these families that own a bunch of Berkshire from for a long time? I mean, there's precedent for that. I mean, we we saw we saw we've seen that a couple times. Um Yeah, and some of those were pretty good size. Yeah. So, you know, even just kind of fast forward to um I had a I I kind of fun discussion with uh Greg Gardner uh who wrote a good book. Uh Buffett's early investments another great good good book. Um And he was saying you know, jeez you know, same thing like will will will Berkshire buy back Buffett's shares you know, kind of right away after he passes and I made the case I I think it's I think they're going to stay in the foundations and and kind of meter them out maybe over 10 years just just to keep that sort of lock on the voting power over Berkshire, but I wouldn't be surprised to see you know, I mean gosh, if if a 100 billion goes to his you know, the foundations kind of collectively and they have to spend down you know, 10 billion a year. I I can imagine Berkshire negotiating directly with the foundation to make those purchases if open market purchases are available. I mean, it would make sense. It would really make sense to do that. Who else is on the team? So, you said there was a second disc with Katie Farmer and somebody else. What was What was your impression of that those two? Yeah, Katie I mean, she's been running BNSF for about 5 years. I think I think I I met her maybe two or three years ago on the floor. I mean, impressive woman. I thought she Did you help her up when she What's that? I was just joking. >> I I I gave her some tips. Yeah. >> Hey, you know, get this operating margin back up and she's delivered. Uh no, she was she seemed confident. I mean, I thought she presented well. Um you know, I guess maybe I would have liked to see them get into some more than the nitty-gritty of kind of improving the railroad. I mean, they they touched on a little bit with you know, the technology and sort of the logistics and all that and What's the AI strategy? Well, I mean, I I and Greg Greg's answer I mean, I think to the the AI question was, you know, we need it needs to We're not doing it just to have it. It needs to have a defined outcome. I thought that was a really good response. So, I mean, the nice thing about the rail is I mean, Union Pacific's the leader. They're literally in their same market. So, you know, you've got similar geographies, climate, all that. So, it it's pretty clear that BNSF can get to call it a 40% operating margin, you know. Um and as Greg pointed out in his letter, I think 1% is 230 million of additional earnings. So, you know, if we can get back up to 40%, I mean, that's another billion dollars in earnings for Berkshire. Um Yeah, I'm not sure how to think about that actually because I remember Warren talking about um he had concerns about precision railroading and like kind of the customer experience from that. And I think that that would might describe where those extra four points of margin might come from. And so let's just imagine like in my mind, okay, yeah, it's an extra couple billion dollars maybe and that sounds nice, but if your customer is a little unhappy about it because you have more margin now like from a long-term perspective, is it really that big a difference between 35% operating margin and 40? I I'm not I'm not convinced that like that that is actually that it's all that important to be honest. Yeah, I mean I I don't know. You don't want to be wasteful, but you also like I don't know, to like do whatever it is you have to do if it involves cheating the customer at all or even the feeling of that. I'm not sure that's worth it. Well, I mean I I guess I would I would say if they can do it in such a way that they can communicate the value to the customer. Like I think I think if they're doing it just to be, you know, and Anheuser-Busch InBev squeezing their squeezing their suppliers, getting the last bit of margin out, you know, or Walmart and every you know, suppliers hate them. Okay, that's one thing. But I guess if they're trying to be more efficient, maybe that operating margin gets to 38 because they're passing on some of the savings to the customer. Like I think as as long as like the efficiency should always be strived for, but I mean I absolutely agree. I don't think they should do it just to the customer's detriment, but I mean maybe, you know, this AI or the tech or you know, whatever they're putting in, I mean if they can integrate to shippers you know, systems and they know the timing of when the truck's going to get to the intermodal stations. So, you know, just all this stuff. I mean I think they're going to find efficiencies there and um It's not going to be labor savings though, right? Like it's down to what how many people drive these giant trains now? Like two or something? Well, that's the STB. They want to do it with one and that was, you know, I think he mentioned that this weekend that they they can do it with fewer. But you know, the technology's there. I think that's going to be kind of the next big thing. You know, say over the next 10 years is convincing the STB to allow them to go down to maybe one person per train with the technology that's on the on the trains cuz STB's, you know, has basically said you have to have two. So you know, that's we're we're down to you know From like what? 5 500 to run a train, you know, 100 years ago to Now, whatever. Yeah, it's pretty incredible the the efficiencies that they've gotten. Adam, you want to tell us a little bit about the updates to the book? You've got a second edition of a complete financial history. I guess it's been a few years that passed since you wrote the last one. Is that Is that the update? Yeah, so the first book came out in 2021. It covered through 2019. Uh and so the book is laid out in decades that center on Warren taking over 1965. So 2024 ends cleanly uh Warren's sixth decade leading Berkshire Hathaway. Fortunately, uh so I've got a little bit of 2025 in the introduction, but fortunately, there was no like major acquisition or something in 2025 that I you know, kind of sneak into the book, but I mean, it was it was amazing seeing, you know, we we go year by year and we look at Berkshire. And even going back 5 years, I mean, Berkshire added uh more equity capital in the last 5 years than in the first 53 under Warren Buffett. And Thanks, Apple. >> Just that the compounding is enormous. And so, you know, when you look back, I mean, gosh, the the pandemic, I mean, for one, was was a major event. Um Allegheny acquisition, which again >> [clears throat] >> just Berkshire's size, like we think about Allegheny, oh, you know, jeez, a Berkshire peer, you know, gets some big insurance companies, big non-insurance companies. It was 2 and 1/2% of Berkshire's equity capital, but actually It's $10 billion acquisition, like you don't notice. >> it was a quarter of a quarter's worth of cash flow. Right? I mean, just the the size is just incredible. Um the Pilot >> like listening to, you know, in the even like 2010-ish time frame, and it was like, oh, a billion dollars of earnings this quarter. Wow, that sounds impressive. It was like 11 billion, you know, this last one. Like these numbers just keep getting they're preposterous. Yeah, it's enormous. Um Yeah, Pilot was the other big one. I mean, that was that was fun to write about. Cuz a lot came out about that, the whole Haslam sort of debacle. Yeah, what what happened there? Give us the thumbnail version of what happened there. Oh, gosh. So, Berkshire contracted to buy Pilot in three stages. The first was, I don't know, 38% in 2017, maybe. And then another 20, no, another 40% I think in 2023. And then the final bit in 2024. So, first part went out fine, great relationship, all right, everything's good. Um The second piece happened when oil prices were high, so fuel prices and margins were really high. Berkshire paid a pretty steep price for that. They got control of it, and when they made the final acquisition that that final controlling piece the Haslams didn't like that Berkshire was applying um it's called push down accounting basically revaluing the assets at acquisition cost so the depreciation was higher so earnings were lower so it affected their purchase price of that last remaining you know 20% that that they owned and so they sued Berkshire there was a counter suit um came out that the Haslams or it was alleged that the Haslams were you know basically bribing people inside to to make you know change around some numbers to make that stake valued more I mean here's just gross gross behavior and you know if you if you read Warren's last letter he he references the whatever 1863 comptroller you know saying not to make a deal with scoundrels like they were that was no accident that he he linked that there um that was that was just sort of a little call like hey but I mean so so but it was I mean it was fascinating to read about this because we got a look behind the curtains they alleged that the uh the purchase multiple you know was six times EBIT where it was supposed to be 10 so we got a little insight into you know how Berkshire values uh companies we also got a good look at it because in 2023 they had it under the energy segment and they moved it out of the energy segments we had a nice look at the balance sheet uh when that was moved um so just really a fascinating story in itself but a nice look look behind the curtains but um man what what a saga but I was able to talk to Adam Wright this weekend uh he says you know the the business is doing good. They're continuing to do the store rebranding and you know, um moving forward, you know, confidently. So, um so, that that was you know, that was that. Um Apple, you know, the big run-up in Apple price, sale of Apple, gosh, the you know, Japanese investments, funding them with 1% long-term borrowing. I mean, just what a What a What a carry trade. What a play. Um you know, the the wildfires at BHE, like just, you know, Greg having his shares bought out at $90 billion valuation. Couple years later, the Scott estate gets its uh stake taken out at a $50 billion valuation cuz of all the uncertainty. I mean, just uh I Charlie Munger died, Warren retired. Like, so much happened in in 5 years. It's just unbelievable. So, um in a in a relatively few uh few pages, we cover that. So, you know, Berkshire's history, I I think we we we pushed the limits of of Harriman House's printer. They said, "It It cannot be any longer. You'll Uh-uh. What are you going to do for the third version? Well, I don't know. We'll see. >> Two volumes. Yeah. Split it up or, you know, maybe do one after 10 years or something. Act two under Greg Abel. You know what I need, Adam, please, is uh I need that as an API that I can connect my my LLM of choice to. What's that? Connected to the book? Yeah, the materials in the book as a reference for the LLM. I'll uh I'll follow up after. I'll I'll Okay. I'll get you. Let's build that. Actually, I I came across that. So, I'll give a little plug uh to this guy uh Ninad uh that I met this this weekend. munger quips.us He he made this um He made this He's a software engineer and he made this uh bot whatever um uploaded all of Munger's writings but it's not it doesn't hallucinate it's only based on what what Munger wrote. He was very careful about what uh what it uh what it would do and I actually he he told me he goes before you reference it, you know, be careful cuz I have to like upload some some dollars to get the the uh the program to work. So, I might have just blown his whole uh token budget by mentioning it but >> [laughter] >> uh Yeah, anyway, sorry. Were there as many philosophical questions from the floor? Um Less so, I think. Yeah, there was I I would again I would I mean I don't know what what you'd say Jake. I mean I think the quality of the questions were pretty high. I would say that if there were they weren't answered philosophically. Yeah, Greg I think I heard some critique that Greg was a little long-winded and They must not have been at the last couple meetings with, you know, Warren only taking like three questions in the first half. >> [laughter] >> Yeah, no there was only one that high school student you know, bemoaning the Oh, yeah. carbon assets that BHE even though they have all the materials on the website that show that they're retiring them by 2049 and Also built the most uh wind of anybody uh but other than that, yeah, go ahead and rail against rail against Berkshire. [laughter] Yeah. Um JT, you want to you want to do uh veggies? Yeah, that'd be fun. All right, so when you're scrolling Instagram, how often do you think that you're seeing reality? Or perhaps are you seeing something that's very optimized and filtered? Better lighting, better angles, little smoothing here and there. The messy stuff gets cropped out of the frame. I'm going to make the argument today that EBITDA is the Instagram filter of finance. So quick credit for this segment, there's this old Moody's paper from 2000 by Pamela Stump called putting EBITDA in perspective, 10 critical failings of EBITDA as the principal determinant of cash flow. And if you want the more institutional version of this whole argument, you know, with all the receipts, go read that. 25 years old and basically every warning in it has aged quite well. So here's the short version of what's in that paper. EBITDA didn't start out as a villain. Earnings before interest, tax, depreciation, and amortization had a very specific job. Of course, as everybody knows, during the 1980s there was a leveraged buyout boom. Investors needed a quick way to answer one very simple question. Can this company service its debt in a very worst-case scenario? >> [clears throat] >> So they stripped out all of the non-cash charges. The logic was if things get really tight, you're really up against it, you're likely you likely have to defer any reinvestment into the business and that's just like the trade-off that you're making. Like you're that close to death's door. What earnings power still exists that you could pay your creditors with? Well, in that context, EBITDA works. It makes sense. But then something kind of subtle happened and and this is part of what Stump nailed in in 2000. We took a tool that was designed for distressed edge case analysis and turned it into a universal measure of business quality and and it shouldn't be a big surprise that that was kind of a dumb idea. So we can't really talk about EBITDA with without mentioning John Malone who coined the term while he was raising a ton of capital to build much of the modern cable industry. Cable is a very specific kind of business. Massive upfront CapEx, you wire entire regions, you lay all this infrastructure, you build the network. And once that's in place, the incremental cost of adding that next subscriber is actually quite small. And so cash flow becomes recurring at that point. And and Malone used EBITDA to isolate that earning power of the network from how it was originally financed and from a lot of the the accounting noise that would happen there. Um and so in depreciation being the biggest part of that, it can kind of separates economic reality from from accounting. Uh you know, GAAP doesn't always reflect that these networks can last for decades. So if you anchor to reporting earnings, you're really underestimating the actual cash generating ability of the business. And Malone's insight was specific to capital-heavy, long-lived asset businesses with low ongoing reinvestment. That logic didn't really travel very far from there though. Uh doesn't fit, you know, a trucking fleet or a retailer or really most businesses. EBITDA escaped kind of its original habitat and it went from a very context-specific tool to just part of the general lexicon that we all use. And it got stretched into places where depreciation does matter, where reinvestment is constant, where working capital does eat cash. And this filter was designed for one type of photo basically. You know, but then it was applied to everything. Portraits, landscape, night shots. You know, at some point it stops enhancing and it really starts to distort. So what is actually getting filtered out here? For most businesses, EBITDA isn't cash flow. It ignores working capital changes, it ignores CapEx, ignores timing, ignores when is debt due. Of course, Munger had a much more colorful way of of saying it. He called EBITDA earnings. Uh Buffett was also regularly ranting against EBITDA. He once said that does management think that the tooth fairy pays for CapEx? Uh so let's address [clears throat] the working capital part first. A company can show rising EBITDA while it's burning cash. Maybe they're selling more, but the customers are taking them longer to pay, so accounts receivable is swelling, inventory is building, uh you receivable >> [clears throat] >> and and then from an EBITDA perspective, though, it looks all great. Uh but from a cash perspective, you know, you're emptying the tank. Then CapEx, you know, EBITDA strips out depreciation, which has this pesky little non-cash charge feature to it. Um and depreciation as is often a proxy for something very real, the cost of staying in business. You know, if it's a trucking company, these trucks are wearing out and they need replacing, and that actually costs real cash. So, you if you you ignore that, EBITDA makes the business look wildly profitable, but it in a reality, a huge chunk of that profit just gets reinvested into the business to stay where you are. You're not even making any progress. This is just, you know, basic uh kind of Red Queen dynamics. So, now let's get even a little bit sillier here, adjusted EBITDA. To extend our little Instagram analogy, it works like sponsored content, uh you know, sitting inside your feed. It looks like the rest of the feed, uses the same fonts, the same format, same hashtags, whatever, but it's promoted. Someone paid to put it in there. And they're shaping the message that you're seeing. So, adjusted EBITDA is this very same trick. It looks like a continuation of the regular metric, but parts of it are just paid placement, synergies that that haven't materialized, non-recurring restructuring charges that for some reason just keep on recurring. Uh stock-based comp added back like it's free and doesn't cost anything. Pro forma run rate revenue from contracts that haven't even been signed yet. Uh you can really turn a mediocre business into something that looks incredible. And the numbers are all dressed up, but it's it's a promoted narrative. And S&P has actually done some work on this tracking how often these adjusted numbers actually show up later, and the answer is not very often. Uh you take a deal, you know, typical where management projects a hundred million of EBITDA based on synergies and all these adjustments, and the actual number comes in closer to 70 to 75 million. Um that's what S&P has found so far. So, why has EBITDA spread as a concept? Well, one, markets reward it. It's the same way Instagram rewards engagement. You know, simplicity of a narrative wins in a first order market. You know, eight times EBITDA, very clean, comparable, fits neatly on a table or in a slide. Or try on my nerdy alternative, you know, free cash flow is constrained by working capital dynamics, ongoing reinvestment needs, and timing mismatches in receivables. Boring, doesn't fit on a slide. Next, moving on. So nuance is superfluous in bull markets, so EBITDA spreads like that. Now, if you want a live live example of all this, we can look at private private credit. Grant's Interest Rate Observer ran a piece recently called The Turn of the Screw, and they looked at middle market loans, which were roughly carried at five times five turns of EBITDA. And that EBITDA is, of course, the adjusted version. And here's how that's going. Last month, Blackstone's flagship private credit fund had to fulfill 3.7 billion of redemption requests, which is like 8% of the net assets. 25 of their senior leaders had to chip in 150 million of their own money to help cover these outflows. And S&P followed 165 middle market borrowers who private equity sponsors stepped in to support them. Only 23% ever climbed out of that triple C rating basement. The other 77% stayed down in, you know, below junk and or defaulted. So the filter is kind of starting to come off a little bit on some of these things, and you know, the photo underneath looks quite different than than what's in the marketing deck. So just wrapping this all up, in easy markets, this EBITDA filter works. Liquidity is available, refinancing is possible, growth hides weak cash conversion, add backs get waved through because everyone just wants the deal to clear. But tighter markets change that lighting. They customers are maybe paid late, inventories balloon, CapEx is greater with more inflation, interest expense starts to rise, debt maturities loom. The company that looked healthy on adjusted EBITDA starts looking very different on actual cash flow, and that's when the filter comes off. So, people forgot that EBITDA was just one angle on a certain kind of business in a very certain kind of situation, and it was never meant to be stretched beyond that, but but that's what we've done. Good stuff, JT. That was big. What do you think, Adam? I agree. Um and and maybe to bring this back to Berkshire, although I I want to I want to keep I want to keep Berkshire as far away from, you know, all that negative as as I can, but you know, one one critique My my question I had for Greg this weekend, and I I didn't get a chance at the mic, but in his letter, he mentions net operating cash flow a bunch of times. And my question is, why why use that, right? You That's still It's after interest, but it's still before depreciation. So, I don't know why he's using that metric uh if if if not maybe for just, you know, what you you described, Jake, being, you know, sort of the ultimate, all right, if anything goes wrong, you know, we've got all this cash coming in if we defer CapEx, you know, we still have this cash, but I would have liked to have seen him talk a little bit more about EBIT, you know, let's let's get let's get after CapEx, uh especially like a business like BNSF, where you know, historical cost is so low, and and true maintenance CapEx is actually above depreciation. So, um I completely agree, but I didn't I didn't have that full full story. Um so, I'm going to have to go read that paper, and uh I thought it was great. I I I have a commercial lending background, too. So, you know, all all though that's sort of worst-case scenario, I mean, if you're a lender, that's fine, but as an equity holder, yeah, beware. Uh what do you think of EBIT? A question from the crowd. That's not from me. Same thing, right? Same same problem. Just chopping out the appreciation, amortization as an issue. I like EBIT because it's a top line. Just gives you a quick thumbnail sketch of what's happening. It's like operating income coming into the business. And then uh they can make decisions about the capital structure. And so you need to be answering those questions about the capital structure separately from EBIT EV. But I like it as a screen. Yeah, I think if you don't if you include interest, then you are you are making capital structure uh you're not putting apples to apples necessarily on capital structure. And then tax, kind of same thing. You're maybe different tax regimes or different uh states, whatever they're operating in can be different. So if you're going all the way down to net income. But the truth is if you tested EBIT and EBITDA virtually identical. They don't really make much difference whatsoever. Really? That's interesting. Almost identical. And it varies. It changes over time. How would you know that? Didn't you write a book about that? >> [laughter] >> Yeah, I understand I understand the criticisms of it and I think they're valid particularly if you're looking at a if you're doing a deep dive on a single name, makes no sense to be stopping at EBIT or EBITDA. But as a screening tool, it's excellent. Mhm. Um it's done better than any of the other price to a fundamental metric. >> I mean I I think EBIT gets closer to truth. I mean, you know, the issue with free cash flow is if you have a growing company and it's still going to have cash, right? So um I think if you're kind of looking at normalized profitability and um you know, enterprise value, I think it's closer to, you know, Buffett, you know, my study of Berkshire Hathaway. I mean, they they buy as if it was 100% equity finance. I think that's that's the way that's the way you got to look at it because, you know, the financing decision is independent of the operating assets of the business. Free cash flow is also a very good metric to screen on. The problem is it just tends to be a little bit more volatile. Sure. It's it's it's almost identical to EBIT and EBITDA. Which I think they all roughly get to there. Same kind of thing. Yeah, I I think I mean the the bigger the bigger sort of takeaway in my mind is know know your tool, right? I mean, if you're going to the toolbox, you know, and you need to, you know, fix something on your wall or whatever and you take out the sledgehammer, like that's right? Like get get the right tool from the toolbox. If if you don't understand how the tool was designed to work, you're you're going to you're not going to get the right answer. You're not going to you're not going to fix the problem. So, I think all of these things kind of put put together if you if you know them and everybody has their favorite, right? But, you know, if we look at a a business from an EBIT standpoint, free cash flow is lower. I mean, you and I, you know, okay, well, jeez, it might be growing or or what have you. You know, you can kind of triangulate, but if I think the big the big the big problem I see is is just getting stuck on one metric as sort of the the go-to. Yeah, what do you think about I mean, sometimes I I see a lot people arguing past each other a little like they kind of just conflate oh, it's 10 times, and they don't say what it really like is that EBIT? Is that EBITDA? Is that free cash flow? Is that And maybe you pick they cherry pick the one that looks the best at that time, right? Depending upon uh you know, whatever, like maybe it's they're they're not putting any CapEx back in and now free cash flow looks really good, but um you know, depreciation's still being recognized in earnings, so it doesn't look as good. Like it's just all these you can sort of like, under different scenarios of what's happening in the business, different metrics look better or worse. And so, when you are talking, you know, kind of pitching your book on, you know, talking to people or whatever, like, or writing it up, oh, it's it looks really good today on this one, but maybe you're kind of hiding the fact that it looks terrible on one of the other ones. I think there's a lot of that that happens. It could even be innocuous. I mean, Berkshire bought um Berkshire Hathaway Automotive, which was Van Tuyl Group. They paid a little north of 4 billion for it, which looked like a huge multiple, but they were they were paying a big price for the existing cash on the books. So, that So, part of the purchase price was just purely cash, you know, back into the owner's pocket. And And then the multi-appropriate multiple underneath it. So, it distorted that public view. So, again, just kind of getting getting beneath the surface and making sure they understand. Speaking of that, the cash versus market cap, did you I see this uh the eBay >> I know exactly where you're going. Yeah. Yeah. Jimmy >> [laughter] >> I think that I think that Andrew Ross Sorkin was trying to do him a favor and help him out a little bit cuz he said it's an $11 billion market cap, it's $9 billion in cash. So, you add those two together, you have $20 billion in in consideration. And And then he's like, "And the other half is in in stock." It's like, that's a lot of halves. Yeah. Yeah. I mean, I I I'll try to classify. That was painful. That was >> [laughter] >> I mean, all he had to say was, you know, GameStop stock is undervalued, therefore the half that we're giving is actually worth more. I mean, that that to me was the the takeaway, but he just was For some reason, I think that the way that they have proposed to do the transaction is that eBay is you know, eBay's bigger. eBay's the acquirer. And he inserts himself as CEO. And they end up with some 10% of eBay or something like that. And then they can pay out a little cash dividend using the cash that's inside GameStop. But for some reason he didn't want to characterize it like that. He just kept on saying go and read the filings as if everybody's going to go and pull those filings and look at them. Yeah, 50% cash, 50% stock. Just Just buy it, right? Just right? >> Smash that Smash that buy button. Smash the buy button. I mean, gosh, if we are not at the top of the market, I don't know. I Well, that's the If only there were signs. It's an interesting point because uh Berkshire hasn't trailed this much versus the S&P 500 other than on like fairly famous dates. There's not very many points where it has trailed as much as this, and it's all like 99, 2000, uh 19, 20, and then a few more dates recently. Probably right. Yeah, I mean, the 10 years ending 2024, again, that's sort of like last that last decade, uh Berkshire trailed by one 1.9%. I mean, you can see, you know, it was a 31% outperformance in the the '80s, down to 20, down to 10, but um I I Yeah, it's it's more the S&P I think getting over its skis than than anything. I mean, gosh, would you rather own the S&P at crazy valuation multiple >> 40 times cape plus, yeah. I'm of of high margins, not even I mean, you're talking high on high margins. Yeah. Right? Ton of debt versus, you know, Berkshire Hathaway with a net cash position holding two utilities that have a bunch of debt. I mean, that's that's a crazy dynamic. Um What did you make of the re Berkshire traded down yesterday. The I mean, a lot of the value complex traded down yesterday, so it's not It wasn't just Berkshire, but coming on the heels of the meeting could have been seen as a a bit of a vote of no confidence. Yeah, I didn't want to say that, but yes, that's what I was going to say. Okay. First of all, how dare you? I didn't want to characterize it that way. >> [laughter] >> I don't think like I'm, you know, I mean, it's one day, who cares one day? Yeah, 70 bips is not a vote of no confidence. >> And the first move's always the wrong move, so, you know, so they say. So the traders say, I've got no idea, it's just something they say. I mean, there's there's again, I think this Tokyo Insurance Tokyo Marine deal that they they just signed is, you know, the Look at what Greg's done in 100 days. I mean, gosh. Um I mean, this Tokyo Marine deal, they get 2 and 1/2% of this insurer, which GE called, you know, the the best of the best. Um they get a whole account quota share agreement with Tokyo Marine, which if you read the 10-Q, it says it will be a meaningful part of the volume. And if you kind of just did the rough math, they didn't disclose it, but, you know, if you did 2 and 1/2% of Tokyo Marine's volume, that's roughly 800 million to a billion in premiums. Um plus an agreement to do to do M&A in the future, so I I I mean, I always feel good after a Berkshire meeting, but I mean, genuinely, like Greg, I think, is is really kicking butt. I mean, I was talking to I won't mention the name of the subsidiary, but uh talking to the manager of one of the subsidiaries, and he said, you know, we we made an acquisition in the UK and Scotland recently. And um so they're, you know, it's not not big enough to really be disclosed or or highlighted, but you know, these things are happening. So, I'm I'm biased, of course, but I I like what I see. Peter question from the crowd. Thoughts on ABL never mentioning ROE or ROC and only focusing on earnings or value proposition. Hm. Has that been a metric that Buffett has tracked for Berkshire over time? Well, I mean, change in book value, which he has tracked, is effectively ROE. So, in in a roundabout way, he's been tracking ROE. Yeah, and I think, you know, it's like my my question about why he's focusing on operating cash flow. Greg Abel knows that depreciation is a real expense. I mean, he he understands that. He understands what they're trying to do. Um Yeah, I don't know. I mean, I I I think it would be I mean, I'd love, obviously, to have a better an hour with Greg or have have a bunch of questions with him. But, I mean, I think I think it's a a reasonable question, right? Like what what are you seeing for the potential of these businesses? But, I mean, I I think he's seeing again, another one of the managers I spoke to, their compensation is tied to basically volume and operating margin. So, it's like more more product through the the system at a good operating margin, which has the basis behind it of you know, a a capital investment. So, he he understands the the the dynamic. But, I think it would it would be great for him to to to focus on that. I I love that. >> My hunch is is that that uh the numbers he's talking about probably look smoother over time. Whereas ROE, if you go back like starting in 2017 with the accounting change when they started flowing through uh security change like price security changes uh in in the uh income statement. And now ROE just goes all over the place now depending on what the market's doing. So, >> Yeah. I'm guessing focusing a little bit more operationally make take some of that noise out relative to if you just showed ROE. And I'm I imagine that's probably like if you're thinking about wanting to be a good steward and you know, making an easier ride for your shareholders, perhaps you focus on numbers that are a little bit little less volatility to them that which might, you know, make them get spooked out. I don't know. That's just a just a hypothesis. I I mean I think it would it would be good if he if he actually did explicitly talk about it, but if if you read uh listen to I think he mentioned a little bit this weekend and then even some other interviews that he's given, he was talking about deploying capital and looking at the risk of that capital. And I mean even just the recent, you know, BHE divesting the utility in in Washington state. I mean I think he he understands the importance of it. You know, it's not just it's not just earnings, right? It has to be in relation to how much capital you're deploying. So um he understands it, but yeah, I mean I I'd be right there with with the questioner trying to love to see more discussion around it. What do you make of Todd Combs leaving? I think it's neutral. You know, I I hope I think if Ted leaves, I'll be I'll be a little bit worried, but um you know, I I think Ted Ted does a lot I think that people don't fully realize. I mean even Todd before he left, you know, he was vetting deals and Ted to my knowledge is still chair of Detlev Louis, the German motorcycle accessories retailer. So he's he he has some other roles, but you know, I I think it's I think it's good to have Greg have that investment sounding board, you know, he he still has Buffett to talk to, but you know, to have someone like Ted there um and I don't I don't think they need a big team. I mean I really think just Ted is is fine, but uh I mean, it's only magic. He's Yeah. They said he's got 20 billion, which is 2% of the assets. So, he's Maybe he does have time. Neither of them have outperformed over the period that they've held for, have they? Neither of them have got paid performance fees. We don't know. I mean, we we can only speculate based on the the 13F's, but I mean, that it's a safe bet that that's right. Why do you think that is? Just a tougher market for value guys. Yeah, I think it's probably as simple as that. Nvidia. I don't know. >> Yeah. Should've been buying Nvidia. Yeah, what what would you do if Nvidia showed up in Berkshire's 13F? That's the question. Well, Amazon showed up. Amazon showed up, yep. And then left, didn't it? Or I think with uh Yeah, it didn't stay for long. >> just I think >> Greg sold all of all of Todd's positions. Is that right, Adam? You know, I actually I was just writing up some some of my thoughts on the 10-Q. The the consumer uh Berkshire categorizes its investments into industrials, consumer, and financials. Um the consumer group is down about 2 and 1/2 billion, but the unrealized gains didn't really change. So, my first thought was it's Apple, but I think it I think it might be them cleaning out, you know, Domino's Pizza and um uh what was the other one that they had in there? I'll think of it in a minute, but I think it's probably the last of cleaning out Todd's portfolio, if I had to I had to guess. Um this is a this is a longish question, but I'll I'll throw it out there. Uh you know, AI is writing a lot more software. So, many companies are going to become software companies in some sense. Software eats the world, so uh when software does the non-material functions in the economy, and Berkshire's not so tech-friendly, does that put them at a disadvantage? Well, I'd kind of push back on the initial premise of like that'd be like saying uh well, every company is an electricity cuz they use electricity to keep the lights on while they're running the computer or whatever. I don't I'm not sure about that. I mean, I don't think it's I think if you have an inherent competitive advantage in some way, it's only going to enhance it. I mean, it's it's not AI is not going to instantly replace BNSF. I mean, it's just physical infrastructure. So, if you kind of go down the list of the Berkshire's businesses, you mentioned electricity. I mean, Berkshire has has a huge investment in BHGE. They move 15% of the natural gas in the United States every year. You know, you kind of just go down the list. All these consumer products, buildings products companies, you know, maybe a maybe a business like BusinessWire, the news service, you know, gets hurt by it. Um I think on balance it will probably help Berkshire, but there will definitely be some casualties. What's a consumer surplus? Yeah. Maybe. Uh just take >> on. Yeah. Does Ted have any say in the portfolio? No, that's another question. $20 billion worth of it. >> Yeah, $20 billion. >> You just answered that. Yeah. Sure. Um thoughts on whether Ackman's PS is going to become something people rotate into and out of Berkshire on the margin. Pershing Square's IPO, is that That's the question. Yeah. PS, yeah. Uh does that Are those overlapping Venn diagrams of shareholders and like-minded folks? I'm not sure. >> you get GameStop, eBay, and Pershing Square all together, then then you got it. Hey, there might be an opportunity to create a new, you know, a new ETF or a new mutual fund there. Just call it the I don't Baby Buffets. The Baby Buffets. So far anybody who's given the next Buffet or Baby Buffet moniker >> of death. It's been not a great It's Yeah. Watch out. Yeah. Oh god. Who hasn't been anointed who deserves it? Is there anybody public? You don't want to put that bad juju on anybody, do you? >> Yeah. >> [laughter] >> Well, I'll I'll I'll offer this sort of related question. Greg highlighted Mark Hamburg. I think Mark Hamburg is by far the most underappreciated person inside of Berkshire in terms of how how well he's known. I mean, he's been there 40 years. I mean, he's the guy that's pulling together all the financials and you know, making sense of all of the nuances and all of this. I mean, it's >> Tax and Yeah. Can you imagine? You know, that that name deserves to be in the, you know, He needs to go up in the rafters, too, with the horn of Charlie. Yep. Uh We miss Chamath. We miss Chamath. I miss Chamath in the portfolio as a Baby Buffet. Cuz I think he was outperforming for a while there, right? 2021, 22, something like that. I don't think you can get into that if you just self-appoint. Uh >> [laughter] >> You're a Buffet status. It has to Someone else has to say it for you. >> Yeah, you need to be nominated by by someone. Yeah. Can't self-nominate. Uh Well, when the value worm turns, when I'm going to put your name up for consideration. Somebody said it's been 8 years at the top, and that's how I feel, too. 8 years of spy at the top. Hardy, you little run for value. Would be good to have. I mean, if I told you that um the war in Ukraine would still be going, the Straits of Hormuz were closed, uh oh AI is the people are spending a ton of money on AI, but it's not clear whether there's going to be any return on that money. Um Yeah, where's the index? What else? Yeah, where's where's the index right now? You'd go like, uh yeah, all-time highs, for sure. >> 40 times, Kit. No doubt. Well, I mean, >> [clears throat] >> Buffett's Buffett's point in his interview, you know, mid mid day, if we knew what was going to be that that thing, you know, the next crisis, you know, it it wouldn't be it it it will come out of the blue. So. I think I like the Einhorn was I think it was Einhorn in his last letter was talking about how like, you know, everyone always talks about like the V-shaped recovery, you know, it's like this. But he's saying No, now it says they're all check marks is the real shape, because it's like, you know, down a little bit and then up more, and then the next one is down a little bit and then up more. It's just check mark recoveries. Yeah. The best comment on the on the Iran war I saw was that we're 9 weeks into a 4-week war that we won 8 weeks ago. >> [laughter] >> That's strong. And still still running. And energy's been super soft over the last few weeks, too. Hilarious. Even though oil's up, very funny. I think it makes sense. The complete financial history of Berkshire Hathaway it's an absolute magnum opus. It's a giant work. Congrats. Thank you. >> getting out the second edition. Yeah, I think it's If folks want to get in contact with you or follow along with what you're doing, what's the best way to do that? Well, I'm I'm on X BRK_Student and then I write a Substack watchlistinvesting.com. Awesome. Thanks, Adam. Any final words? Be well to each other. Be good to everybody. Be kind. Thanks. Thanks, Adam. Okay. Next week, same bat time, same bat channel. See you all then. Good grief, it's impossible to sign off now. Oh, no. That's going to It's going to take a >> [laughter] >> It's like we're frozen. Now I got to I need to get Sorry, Tim. I'm trying to hang up. >> [laughter]
Author and investor Adam Mead on Berkshire Hathaway $BRK.A / $BRK.B, Warren Buffett, Abel | S08 E16
Summary
Value: After Hours is a podcast about value investing, Fintwit, and all things finance and investment by investors Tobias Carlisle, …Transcript
Looks like we're live. This is Value After Hours. I'm Tobias Carlisle, joined as always by my co-host Jake Taylor. Special guest today, following along from the Berkshire meeting. Uh he's an expert on Berkshire Hathaway. Uh it's Adam Mead, author of The Complete Financial History of Berkshire Hathaway. It's an absolute doorstopper. How are you, Adam? Congrats. What a great What a great book. [laughter] Thanks. Thanks. Great to be here, guys. Thanks for having me on. Yeah, welcome back. Gents, I didn't make the meeting this weekend, so for someone like me who didn't go there, what were your impressions? First one without Warren as up on stage. What happened? Well, let me let me do a quick little plug of Adam's book first before that, just cuz I think this is important. Um I would I I got an MBA, and I would gladly trade that MBA away from and what I learned for the combination of taking Adam's book and you read that year, cuz it's broken up chronologically into years. You read that chapter of that year, and then you go listen to the AGM, and so you get Adam providing the play-by-play narrative of or sorry, the numbers that are happening in real time, and then you listen to Charlie and Warren doing the the color commentary of what's happening. And it's just You just keep going and you step through each year like that, and that's better than an MBA. You got Thank you. You're welcome. Well deserved. What What were your impressions, Adam? What What What did you think? You know, uh I I had high expectations going in, and that was because I expected it to be a business meeting. I expected Greg to really get down to the numbers, and I expected him to deliver it, and I mean, he met he met my high expectations. I I thought it was a great meeting. I mean, in terms of, you know, value per minute, I mean, it was probably the most informative meeting there was, and I thought it was a good balance of you know, we got to meet some new managers, get to hear from them, you know, Warren was there and had his part, including a you know, AI spoof of him asking the first question. Like, it was it still had the Berkshire fun, you know, they retired Warren and Charlie's numbers up in the rafters. Yeah, it was really cool. You know, and then it still, you know, there was a lot of talk about how the attendance was down as this this was so like such a big negative, but I mean, that that arena was was still pretty full, and I mean, I actually welcomed it. I mean, one one just being able to get around, go shopping without, you know, being in so many lines. And then, you know, just having, I guess, more more of a higher ratio of true owners to total participants, you know. Those are the people who really wanted to be there, and you know, those are the people I want to meet. So, I thought it was a great meeting. You're saying we you got rid of the wrong half of the audience. E- Exactly. I I I I mean, I don't know what you'd you'd say, Jake. I mean, I'd probably estimate on balance, you know, down by a third. Would you say that's that's probably right? Maybe a little bit more, but yeah, I think that's probably roughly right. But, what would you say in terms of, say, if you've been to the Berkshire meeting 5 or 10 years, you know, in a row, that cohort, you know, down single digits? I I mean, not I mean, I I saw all my friends. I mean, Toby, you weren't there, that was one big miss, but I mean, everybody else was saw that that my usual friends. Yeah, those who have built up enough kind of a network, the network effect is still there and still real. What was Buffett's question? Oh, that was that actually I I I was I was fooled for a second there. I I thought he actually had dressed up. It was this uh what do they call it? A deep fake. And it looked like him, you know, up there. I mean, obviously I knew it wasn't live, but I didn't know if they pre-recorded or something, but um you know, it was him like pretending to stand at the microphone and saying, you know, "Geez, I own this stock and you know, why should I continue to hold Berkshire Berkshire Hathaway stock? You know, what should I tell my friends?" Uh so it was it was fun. They It was It was kind of fun. And what's the answer? I think Greg Greg did a good job just kind of going through, you know, all the the Berkshire culture is the same, the advantages are the same, you know, the opportunities in front of us are are great and um Yeah, and it was Yeah, it was I thought it was good. He uh I was actually surprised I was a little marginally disappointed that we didn't get through even one complete round of shareholder questions. You know, they were they were quite Yeah, what was like maybe eight or nine, maybe? Yeah, yeah, it wasn't it wasn't many. Because the answers were so long? Um I don't know if it was that or if it was like there was a a more pre-prepared at the beginning than than previous years. Went through more of the Q1 results in a little bit more granularity than normal. Uh shorter duration periods for each one, too, than normal. So, it's I mean, it's not surprising, but um I agree with you, Adam, like the structuring of it I thought was quite clever. Like bringing uh Ajit [clears throat] out for some of it and hitting those questions and then like taking a break and throwing it to Becky interviewing Warren behind the you know, off stage or backstage and then come back out and now it's uh Katie Farmer and Adam Johnson up there and just the way that they they organized the flow of it I thought was actually really well done. Yeah, I I agree. I thought it was it was it was fun. It worked and um I I did think the the commercials or the you know the I think it was got Geico uh BNSF and the NetJets thing. It was everybody kind of started getting up like it was a break and I was like, "No, no, no, this is like this is like part >> I went I I went and bought a a sweatshirt while I was >> [laughter] >> during that segment. But um yeah, it was it was it was a it was a quick quick that way. Like there was just it was it was a lot of information. And what was the pitch like from uh new CEO? What was What was the pitch like? Yeah, what was his argument for Berkshire? What was his How did he look? How did he present? I mean I I thought he was as confident as he's ever been. You know, he he seemed very confident. There was a question of at I think towards the end about it was about succession or you know and or or who's who's his number two and he was very clear that he was in charge. I mean it was like there should be one leader, you know, I'm the guy. Um you know, I I thought he I thought he displayed I mean a a great grasp of Berkshire's businesses. You know, they played you know, they didn't have a movie but they played you know, that classic Warren testifying in front of Congress with Salomon Brothers scandal. You know, he called it Berkshire's anthem. So, you know, I I really felt like there was this great balance of I mean Greg don't forget I mean Greg's been with Berkshire since you know, 1999 technically. Um 2000. They bought MidAmerican. And so, you know, he he's got you know, quarter century under his belt as part of Berkshire but I mean I I they're they're also implement he's pushing things forward like with the technology, taking the tech front the tech guy from Geico, putting him in BHE, in BNSF, you know, this whole idea of operational um operational excellence. And you know, you kind of heard some of those same words repeated by Katie Farmer from BNSF. So, his message is getting out. And you know, he's he's not going to let anybody cruise like Warren did. He's he's going to call him out. Yeah. I thought Adam Johnson was pretty impressive, too. Who's Adam Johnson? He's the CEO of NetJets, but he also has I think 32 other CEOs subsidiary CD CEOs reporting to him. So, he's in charge of the like consumer service and retail segments. Which it's one of my favorite clips. I I I'm going to I think I posted it on on exit the link actually worked, but Greg basically said, you know, "Hey, you know, here's here's 32 other businesses 31 other businesses for you to to manage. And oh, by the way, you know, we're not giving you any resources, no other group from headquarters. Like figure it out." Um No, I mean I Greg I mean there was one question about, you know, will you break up Berkshire? And his answer was absolutely not. You know, he said we're a conglomerate, but we're an efficient conglomerate. And you know, that's stuff is so refreshing to hear. And it you know, what it motivates me. It's like, "Oh my gosh, this you know, Berkshire's doing all this stuff. You know, how much more can I do?" Right? I mean, just you can't help but walk away from that meeting energized. >> Yeah. I know. >> [laughter] >> There was another part I thought that was pretty clever. I don't know if this was on purpose or exactly probably was, but um you know, I think Warren called out um Tim Cook cuz he Tim Cook was there obviously and and highlighted that uh Tim had taken over for another legendary CEO and the stock had I don't know whatever 10x since then. Uh and so like I feel like Warren was kind of showing the pattern of like look you could things can still work out pretty well even if you turn it over to the new guy. Uh and you know and to bring that up in front of everybody I thought it was probably wasn't an accident. No no absolutely not. And then Oh. I was just going to say is he is is he like Tim Cook in the sense that he's going to be more focused on operational stuff than Warren was. Uh but maybe he'll lose some of the well you lose the acquisitions the visionary acquisitions for from Warren. What do you think? No I well I I think I I maybe not he's definitely more of an operator. I would say. But I think it's more of that the hands-on. We'll see when uh the world is desperate for cash again uh what Greg's appetite and uh execution looks like when it comes to M&A and the investment world. I mean he he he there's a history there so I I'm to my knowledge in 2000 8 I think it was Berkshire made a bid for Constellation Energy and got a billion-dollar breakup fee. That that uh to my knowledge was Greg. I mean he he's a deal maker he he'll I I think he's going to get it done. I mean I I could just imagine you know if we have another great recession or even just a sort of run-of-the-mill recession. I mean he could be buying back Berkshire stock you know hand over fist and making acquisitions and doing things in the stock market. I mean I think Warren said it best you know if you know businesses you know stocks and so I feel comfortable about that just Just because he hasn't, you know, been picking stocks doesn't mean he doesn't know business. I mean, gosh, you know, what what better I mean, literally, I mean, Warren handed over his entire 100 whatever it is now, 100 plus billion dollar net worth to Greg and said, you know, you're managing my money. I mean, what better testament than that? Yeah, you think Warren's going to pick a guy who doesn't know what a the right price for a business looks like? >> [laughter] >> Yeah. Come on. Yeah. I guess I thought the the dynamic [clears throat] between um Greg and Ajit was There was almost There was a couple of almost like Charlie Charlie Warren moments there, too, which were were pretty fun. Yeah, Ajit was kind of trying to lean into the Charlie a little bit, wasn't he? >> [laughter] >> Yeah. Yeah, good. There's some A few weeks ago, there was some uh s- Berkshire was buying back some stock, but uh I saw some commentary that it might have been done at a higher price than Buffett might have done it previously. Do you have any view on that? Yeah, I I think Greg is going to I think Greg is buying it back closer to intrinsic value. So, they bought back the the the 10-Q just came out. They bought back 235 million of shares at, you know, $486 a share. So, you know, that sort of roughly translates to you know, uh a trillion billion dollar uh little bit more than a trillion dollar valuation. So, um but a tiny amount. So, you know, it looks like they And that was just in March. So, it looks like, you know, if you look at the price, probably like the last 2 weeks of March, uh So, I think they're doing it, but, you know, just sort of right at the margin. I mean, I really don't see unless, you know, if the price goes down significantly, I would I would expect and and hope that they would buy back more, but you know, they're probably where Warren was probably comfortable getting up to like 90% of intrinsic value. Greg might be putting it closer to 95% which you know, his his calculus might be you know, hey, we've got 380 billion in cash on the books. You know, we can let some of it go out closer to intrinsic value, but you know, I trust him to make the right that right choice, but you know, I I I I peg Berkshire's value kind of around 475 to 510 a share. So, you know, kind of right right in that range. Adam, you got to handicap which one's going to be higher? The total number of shares. Is it going to be purchased in the open market or done off market in like big blocks of you know, some [snorts] of these families that own a bunch of Berkshire from for a long time? I mean, there's precedent for that. I mean, we we saw we saw we've seen that a couple times. Um Yeah, and some of those were pretty good size. Yeah. So, you know, even just kind of fast forward to um I had a I I kind of fun discussion with uh Greg Gardner uh who wrote a good book. Uh Buffett's early investments another great good good book. Um And he was saying you know, jeez you know, same thing like will will will Berkshire buy back Buffett's shares you know, kind of right away after he passes and I made the case I I think it's I think they're going to stay in the foundations and and kind of meter them out maybe over 10 years just just to keep that sort of lock on the voting power over Berkshire, but I wouldn't be surprised to see you know, I mean gosh, if if a 100 billion goes to his you know, the foundations kind of collectively and they have to spend down you know, 10 billion a year. I I can imagine Berkshire negotiating directly with the foundation to make those purchases if open market purchases are available. I mean, it would make sense. It would really make sense to do that. Who else is on the team? So, you said there was a second disc with Katie Farmer and somebody else. What was What was your impression of that those two? Yeah, Katie I mean, she's been running BNSF for about 5 years. I think I think I I met her maybe two or three years ago on the floor. I mean, impressive woman. I thought she Did you help her up when she What's that? I was just joking. >> I I I gave her some tips. Yeah. >> Hey, you know, get this operating margin back up and she's delivered. Uh no, she was she seemed confident. I mean, I thought she presented well. Um you know, I guess maybe I would have liked to see them get into some more than the nitty-gritty of kind of improving the railroad. I mean, they they touched on a little bit with you know, the technology and sort of the logistics and all that and What's the AI strategy? Well, I mean, I I and Greg Greg's answer I mean, I think to the the AI question was, you know, we need it needs to We're not doing it just to have it. It needs to have a defined outcome. I thought that was a really good response. So, I mean, the nice thing about the rail is I mean, Union Pacific's the leader. They're literally in their same market. So, you know, you've got similar geographies, climate, all that. So, it it's pretty clear that BNSF can get to call it a 40% operating margin, you know. Um and as Greg pointed out in his letter, I think 1% is 230 million of additional earnings. So, you know, if we can get back up to 40%, I mean, that's another billion dollars in earnings for Berkshire. Um Yeah, I'm not sure how to think about that actually because I remember Warren talking about um he had concerns about precision railroading and like kind of the customer experience from that. And I think that that would might describe where those extra four points of margin might come from. And so let's just imagine like in my mind, okay, yeah, it's an extra couple billion dollars maybe and that sounds nice, but if your customer is a little unhappy about it because you have more margin now like from a long-term perspective, is it really that big a difference between 35% operating margin and 40? I I'm not I'm not convinced that like that that is actually that it's all that important to be honest. Yeah, I mean I I don't know. You don't want to be wasteful, but you also like I don't know, to like do whatever it is you have to do if it involves cheating the customer at all or even the feeling of that. I'm not sure that's worth it. Well, I mean I I guess I would I would say if they can do it in such a way that they can communicate the value to the customer. Like I think I think if they're doing it just to be, you know, and Anheuser-Busch InBev squeezing their squeezing their suppliers, getting the last bit of margin out, you know, or Walmart and every you know, suppliers hate them. Okay, that's one thing. But I guess if they're trying to be more efficient, maybe that operating margin gets to 38 because they're passing on some of the savings to the customer. Like I think as as long as like the efficiency should always be strived for, but I mean I absolutely agree. I don't think they should do it just to the customer's detriment, but I mean maybe, you know, this AI or the tech or you know, whatever they're putting in, I mean if they can integrate to shippers you know, systems and they know the timing of when the truck's going to get to the intermodal stations. So, you know, just all this stuff. I mean I think they're going to find efficiencies there and um It's not going to be labor savings though, right? Like it's down to what how many people drive these giant trains now? Like two or something? Well, that's the STB. They want to do it with one and that was, you know, I think he mentioned that this weekend that they they can do it with fewer. But you know, the technology's there. I think that's going to be kind of the next big thing. You know, say over the next 10 years is convincing the STB to allow them to go down to maybe one person per train with the technology that's on the on the trains cuz STB's, you know, has basically said you have to have two. So you know, that's we're we're down to you know From like what? 5 500 to run a train, you know, 100 years ago to Now, whatever. Yeah, it's pretty incredible the the efficiencies that they've gotten. Adam, you want to tell us a little bit about the updates to the book? You've got a second edition of a complete financial history. I guess it's been a few years that passed since you wrote the last one. Is that Is that the update? Yeah, so the first book came out in 2021. It covered through 2019. Uh and so the book is laid out in decades that center on Warren taking over 1965. So 2024 ends cleanly uh Warren's sixth decade leading Berkshire Hathaway. Fortunately, uh so I've got a little bit of 2025 in the introduction, but fortunately, there was no like major acquisition or something in 2025 that I you know, kind of sneak into the book, but I mean, it was it was amazing seeing, you know, we we go year by year and we look at Berkshire. And even going back 5 years, I mean, Berkshire added uh more equity capital in the last 5 years than in the first 53 under Warren Buffett. And Thanks, Apple. >> Just that the compounding is enormous. And so, you know, when you look back, I mean, gosh, the the pandemic, I mean, for one, was was a major event. Um Allegheny acquisition, which again >> [clears throat] >> just Berkshire's size, like we think about Allegheny, oh, you know, jeez, a Berkshire peer, you know, gets some big insurance companies, big non-insurance companies. It was 2 and 1/2% of Berkshire's equity capital, but actually It's $10 billion acquisition, like you don't notice. >> it was a quarter of a quarter's worth of cash flow. Right? I mean, just the the size is just incredible. Um the Pilot >> like listening to, you know, in the even like 2010-ish time frame, and it was like, oh, a billion dollars of earnings this quarter. Wow, that sounds impressive. It was like 11 billion, you know, this last one. Like these numbers just keep getting they're preposterous. Yeah, it's enormous. Um Yeah, Pilot was the other big one. I mean, that was that was fun to write about. Cuz a lot came out about that, the whole Haslam sort of debacle. Yeah, what what happened there? Give us the thumbnail version of what happened there. Oh, gosh. So, Berkshire contracted to buy Pilot in three stages. The first was, I don't know, 38% in 2017, maybe. And then another 20, no, another 40% I think in 2023. And then the final bit in 2024. So, first part went out fine, great relationship, all right, everything's good. Um The second piece happened when oil prices were high, so fuel prices and margins were really high. Berkshire paid a pretty steep price for that. They got control of it, and when they made the final acquisition that that final controlling piece the Haslams didn't like that Berkshire was applying um it's called push down accounting basically revaluing the assets at acquisition cost so the depreciation was higher so earnings were lower so it affected their purchase price of that last remaining you know 20% that that they owned and so they sued Berkshire there was a counter suit um came out that the Haslams or it was alleged that the Haslams were you know basically bribing people inside to to make you know change around some numbers to make that stake valued more I mean here's just gross gross behavior and you know if you if you read Warren's last letter he he references the whatever 1863 comptroller you know saying not to make a deal with scoundrels like they were that was no accident that he he linked that there um that was that was just sort of a little call like hey but I mean so so but it was I mean it was fascinating to read about this because we got a look behind the curtains they alleged that the uh the purchase multiple you know was six times EBIT where it was supposed to be 10 so we got a little insight into you know how Berkshire values uh companies we also got a good look at it because in 2023 they had it under the energy segment and they moved it out of the energy segments we had a nice look at the balance sheet uh when that was moved um so just really a fascinating story in itself but a nice look look behind the curtains but um man what what a saga but I was able to talk to Adam Wright this weekend uh he says you know the the business is doing good. They're continuing to do the store rebranding and you know, um moving forward, you know, confidently. So, um so, that that was you know, that was that. Um Apple, you know, the big run-up in Apple price, sale of Apple, gosh, the you know, Japanese investments, funding them with 1% long-term borrowing. I mean, just what a What a What a carry trade. What a play. Um you know, the the wildfires at BHE, like just, you know, Greg having his shares bought out at $90 billion valuation. Couple years later, the Scott estate gets its uh stake taken out at a $50 billion valuation cuz of all the uncertainty. I mean, just uh I Charlie Munger died, Warren retired. Like, so much happened in in 5 years. It's just unbelievable. So, um in a in a relatively few uh few pages, we cover that. So, you know, Berkshire's history, I I think we we we pushed the limits of of Harriman House's printer. They said, "It It cannot be any longer. You'll Uh-uh. What are you going to do for the third version? Well, I don't know. We'll see. >> Two volumes. Yeah. Split it up or, you know, maybe do one after 10 years or something. Act two under Greg Abel. You know what I need, Adam, please, is uh I need that as an API that I can connect my my LLM of choice to. What's that? Connected to the book? Yeah, the materials in the book as a reference for the LLM. I'll uh I'll follow up after. I'll I'll Okay. I'll get you. Let's build that. Actually, I I came across that. So, I'll give a little plug uh to this guy uh Ninad uh that I met this this weekend. munger quips.us He he made this um He made this He's a software engineer and he made this uh bot whatever um uploaded all of Munger's writings but it's not it doesn't hallucinate it's only based on what what Munger wrote. He was very careful about what uh what it uh what it would do and I actually he he told me he goes before you reference it, you know, be careful cuz I have to like upload some some dollars to get the the uh the program to work. So, I might have just blown his whole uh token budget by mentioning it but >> [laughter] >> uh Yeah, anyway, sorry. Were there as many philosophical questions from the floor? Um Less so, I think. Yeah, there was I I would again I would I mean I don't know what what you'd say Jake. I mean I think the quality of the questions were pretty high. I would say that if there were they weren't answered philosophically. Yeah, Greg I think I heard some critique that Greg was a little long-winded and They must not have been at the last couple meetings with, you know, Warren only taking like three questions in the first half. >> [laughter] >> Yeah, no there was only one that high school student you know, bemoaning the Oh, yeah. carbon assets that BHE even though they have all the materials on the website that show that they're retiring them by 2049 and Also built the most uh wind of anybody uh but other than that, yeah, go ahead and rail against rail against Berkshire. [laughter] Yeah. Um JT, you want to you want to do uh veggies? Yeah, that'd be fun. All right, so when you're scrolling Instagram, how often do you think that you're seeing reality? Or perhaps are you seeing something that's very optimized and filtered? Better lighting, better angles, little smoothing here and there. The messy stuff gets cropped out of the frame. I'm going to make the argument today that EBITDA is the Instagram filter of finance. So quick credit for this segment, there's this old Moody's paper from 2000 by Pamela Stump called putting EBITDA in perspective, 10 critical failings of EBITDA as the principal determinant of cash flow. And if you want the more institutional version of this whole argument, you know, with all the receipts, go read that. 25 years old and basically every warning in it has aged quite well. So here's the short version of what's in that paper. EBITDA didn't start out as a villain. Earnings before interest, tax, depreciation, and amortization had a very specific job. Of course, as everybody knows, during the 1980s there was a leveraged buyout boom. Investors needed a quick way to answer one very simple question. Can this company service its debt in a very worst-case scenario? >> [clears throat] >> So they stripped out all of the non-cash charges. The logic was if things get really tight, you're really up against it, you're likely you likely have to defer any reinvestment into the business and that's just like the trade-off that you're making. Like you're that close to death's door. What earnings power still exists that you could pay your creditors with? Well, in that context, EBITDA works. It makes sense. But then something kind of subtle happened and and this is part of what Stump nailed in in 2000. We took a tool that was designed for distressed edge case analysis and turned it into a universal measure of business quality and and it shouldn't be a big surprise that that was kind of a dumb idea. So we can't really talk about EBITDA with without mentioning John Malone who coined the term while he was raising a ton of capital to build much of the modern cable industry. Cable is a very specific kind of business. Massive upfront CapEx, you wire entire regions, you lay all this infrastructure, you build the network. And once that's in place, the incremental cost of adding that next subscriber is actually quite small. And so cash flow becomes recurring at that point. And and Malone used EBITDA to isolate that earning power of the network from how it was originally financed and from a lot of the the accounting noise that would happen there. Um and so in depreciation being the biggest part of that, it can kind of separates economic reality from from accounting. Uh you know, GAAP doesn't always reflect that these networks can last for decades. So if you anchor to reporting earnings, you're really underestimating the actual cash generating ability of the business. And Malone's insight was specific to capital-heavy, long-lived asset businesses with low ongoing reinvestment. That logic didn't really travel very far from there though. Uh doesn't fit, you know, a trucking fleet or a retailer or really most businesses. EBITDA escaped kind of its original habitat and it went from a very context-specific tool to just part of the general lexicon that we all use. And it got stretched into places where depreciation does matter, where reinvestment is constant, where working capital does eat cash. And this filter was designed for one type of photo basically. You know, but then it was applied to everything. Portraits, landscape, night shots. You know, at some point it stops enhancing and it really starts to distort. So what is actually getting filtered out here? For most businesses, EBITDA isn't cash flow. It ignores working capital changes, it ignores CapEx, ignores timing, ignores when is debt due. Of course, Munger had a much more colorful way of of saying it. He called EBITDA earnings. Uh Buffett was also regularly ranting against EBITDA. He once said that does management think that the tooth fairy pays for CapEx? Uh so let's address [clears throat] the working capital part first. A company can show rising EBITDA while it's burning cash. Maybe they're selling more, but the customers are taking them longer to pay, so accounts receivable is swelling, inventory is building, uh you receivable >> [clears throat] >> and and then from an EBITDA perspective, though, it looks all great. Uh but from a cash perspective, you know, you're emptying the tank. Then CapEx, you know, EBITDA strips out depreciation, which has this pesky little non-cash charge feature to it. Um and depreciation as is often a proxy for something very real, the cost of staying in business. You know, if it's a trucking company, these trucks are wearing out and they need replacing, and that actually costs real cash. So, you if you you ignore that, EBITDA makes the business look wildly profitable, but it in a reality, a huge chunk of that profit just gets reinvested into the business to stay where you are. You're not even making any progress. This is just, you know, basic uh kind of Red Queen dynamics. So, now let's get even a little bit sillier here, adjusted EBITDA. To extend our little Instagram analogy, it works like sponsored content, uh you know, sitting inside your feed. It looks like the rest of the feed, uses the same fonts, the same format, same hashtags, whatever, but it's promoted. Someone paid to put it in there. And they're shaping the message that you're seeing. So, adjusted EBITDA is this very same trick. It looks like a continuation of the regular metric, but parts of it are just paid placement, synergies that that haven't materialized, non-recurring restructuring charges that for some reason just keep on recurring. Uh stock-based comp added back like it's free and doesn't cost anything. Pro forma run rate revenue from contracts that haven't even been signed yet. Uh you can really turn a mediocre business into something that looks incredible. And the numbers are all dressed up, but it's it's a promoted narrative. And S&P has actually done some work on this tracking how often these adjusted numbers actually show up later, and the answer is not very often. Uh you take a deal, you know, typical where management projects a hundred million of EBITDA based on synergies and all these adjustments, and the actual number comes in closer to 70 to 75 million. Um that's what S&P has found so far. So, why has EBITDA spread as a concept? Well, one, markets reward it. It's the same way Instagram rewards engagement. You know, simplicity of a narrative wins in a first order market. You know, eight times EBITDA, very clean, comparable, fits neatly on a table or in a slide. Or try on my nerdy alternative, you know, free cash flow is constrained by working capital dynamics, ongoing reinvestment needs, and timing mismatches in receivables. Boring, doesn't fit on a slide. Next, moving on. So nuance is superfluous in bull markets, so EBITDA spreads like that. Now, if you want a live live example of all this, we can look at private private credit. Grant's Interest Rate Observer ran a piece recently called The Turn of the Screw, and they looked at middle market loans, which were roughly carried at five times five turns of EBITDA. And that EBITDA is, of course, the adjusted version. And here's how that's going. Last month, Blackstone's flagship private credit fund had to fulfill 3.7 billion of redemption requests, which is like 8% of the net assets. 25 of their senior leaders had to chip in 150 million of their own money to help cover these outflows. And S&P followed 165 middle market borrowers who private equity sponsors stepped in to support them. Only 23% ever climbed out of that triple C rating basement. The other 77% stayed down in, you know, below junk and or defaulted. So the filter is kind of starting to come off a little bit on some of these things, and you know, the photo underneath looks quite different than than what's in the marketing deck. So just wrapping this all up, in easy markets, this EBITDA filter works. Liquidity is available, refinancing is possible, growth hides weak cash conversion, add backs get waved through because everyone just wants the deal to clear. But tighter markets change that lighting. They customers are maybe paid late, inventories balloon, CapEx is greater with more inflation, interest expense starts to rise, debt maturities loom. The company that looked healthy on adjusted EBITDA starts looking very different on actual cash flow, and that's when the filter comes off. So, people forgot that EBITDA was just one angle on a certain kind of business in a very certain kind of situation, and it was never meant to be stretched beyond that, but but that's what we've done. Good stuff, JT. That was big. What do you think, Adam? I agree. Um and and maybe to bring this back to Berkshire, although I I want to I want to keep I want to keep Berkshire as far away from, you know, all that negative as as I can, but you know, one one critique My my question I had for Greg this weekend, and I I didn't get a chance at the mic, but in his letter, he mentions net operating cash flow a bunch of times. And my question is, why why use that, right? You That's still It's after interest, but it's still before depreciation. So, I don't know why he's using that metric uh if if if not maybe for just, you know, what you you described, Jake, being, you know, sort of the ultimate, all right, if anything goes wrong, you know, we've got all this cash coming in if we defer CapEx, you know, we still have this cash, but I would have liked to have seen him talk a little bit more about EBIT, you know, let's let's get let's get after CapEx, uh especially like a business like BNSF, where you know, historical cost is so low, and and true maintenance CapEx is actually above depreciation. So, um I completely agree, but I didn't I didn't have that full full story. Um so, I'm going to have to go read that paper, and uh I thought it was great. I I I have a commercial lending background, too. So, you know, all all though that's sort of worst-case scenario, I mean, if you're a lender, that's fine, but as an equity holder, yeah, beware. Uh what do you think of EBIT? A question from the crowd. That's not from me. Same thing, right? Same same problem. Just chopping out the appreciation, amortization as an issue. I like EBIT because it's a top line. Just gives you a quick thumbnail sketch of what's happening. It's like operating income coming into the business. And then uh they can make decisions about the capital structure. And so you need to be answering those questions about the capital structure separately from EBIT EV. But I like it as a screen. Yeah, I think if you don't if you include interest, then you are you are making capital structure uh you're not putting apples to apples necessarily on capital structure. And then tax, kind of same thing. You're maybe different tax regimes or different uh states, whatever they're operating in can be different. So if you're going all the way down to net income. But the truth is if you tested EBIT and EBITDA virtually identical. They don't really make much difference whatsoever. Really? That's interesting. Almost identical. And it varies. It changes over time. How would you know that? Didn't you write a book about that? >> [laughter] >> Yeah, I understand I understand the criticisms of it and I think they're valid particularly if you're looking at a if you're doing a deep dive on a single name, makes no sense to be stopping at EBIT or EBITDA. But as a screening tool, it's excellent. Mhm. Um it's done better than any of the other price to a fundamental metric. >> I mean I I think EBIT gets closer to truth. I mean, you know, the issue with free cash flow is if you have a growing company and it's still going to have cash, right? So um I think if you're kind of looking at normalized profitability and um you know, enterprise value, I think it's closer to, you know, Buffett, you know, my study of Berkshire Hathaway. I mean, they they buy as if it was 100% equity finance. I think that's that's the way that's the way you got to look at it because, you know, the financing decision is independent of the operating assets of the business. Free cash flow is also a very good metric to screen on. The problem is it just tends to be a little bit more volatile. Sure. It's it's it's almost identical to EBIT and EBITDA. Which I think they all roughly get to there. Same kind of thing. Yeah, I I think I mean the the bigger the bigger sort of takeaway in my mind is know know your tool, right? I mean, if you're going to the toolbox, you know, and you need to, you know, fix something on your wall or whatever and you take out the sledgehammer, like that's right? Like get get the right tool from the toolbox. If if you don't understand how the tool was designed to work, you're you're going to you're not going to get the right answer. You're not going to you're not going to fix the problem. So, I think all of these things kind of put put together if you if you know them and everybody has their favorite, right? But, you know, if we look at a a business from an EBIT standpoint, free cash flow is lower. I mean, you and I, you know, okay, well, jeez, it might be growing or or what have you. You know, you can kind of triangulate, but if I think the big the big the big problem I see is is just getting stuck on one metric as sort of the the go-to. Yeah, what do you think about I mean, sometimes I I see a lot people arguing past each other a little like they kind of just conflate oh, it's 10 times, and they don't say what it really like is that EBIT? Is that EBITDA? Is that free cash flow? Is that And maybe you pick they cherry pick the one that looks the best at that time, right? Depending upon uh you know, whatever, like maybe it's they're they're not putting any CapEx back in and now free cash flow looks really good, but um you know, depreciation's still being recognized in earnings, so it doesn't look as good. Like it's just all these you can sort of like, under different scenarios of what's happening in the business, different metrics look better or worse. And so, when you are talking, you know, kind of pitching your book on, you know, talking to people or whatever, like, or writing it up, oh, it's it looks really good today on this one, but maybe you're kind of hiding the fact that it looks terrible on one of the other ones. I think there's a lot of that that happens. It could even be innocuous. I mean, Berkshire bought um Berkshire Hathaway Automotive, which was Van Tuyl Group. They paid a little north of 4 billion for it, which looked like a huge multiple, but they were they were paying a big price for the existing cash on the books. So, that So, part of the purchase price was just purely cash, you know, back into the owner's pocket. And And then the multi-appropriate multiple underneath it. So, it distorted that public view. So, again, just kind of getting getting beneath the surface and making sure they understand. Speaking of that, the cash versus market cap, did you I see this uh the eBay >> I know exactly where you're going. Yeah. Yeah. Jimmy >> [laughter] >> I think that I think that Andrew Ross Sorkin was trying to do him a favor and help him out a little bit cuz he said it's an $11 billion market cap, it's $9 billion in cash. So, you add those two together, you have $20 billion in in consideration. And And then he's like, "And the other half is in in stock." It's like, that's a lot of halves. Yeah. Yeah. I mean, I I I'll try to classify. That was painful. That was >> [laughter] >> I mean, all he had to say was, you know, GameStop stock is undervalued, therefore the half that we're giving is actually worth more. I mean, that that to me was the the takeaway, but he just was For some reason, I think that the way that they have proposed to do the transaction is that eBay is you know, eBay's bigger. eBay's the acquirer. And he inserts himself as CEO. And they end up with some 10% of eBay or something like that. And then they can pay out a little cash dividend using the cash that's inside GameStop. But for some reason he didn't want to characterize it like that. He just kept on saying go and read the filings as if everybody's going to go and pull those filings and look at them. Yeah, 50% cash, 50% stock. Just Just buy it, right? Just right? >> Smash that Smash that buy button. Smash the buy button. I mean, gosh, if we are not at the top of the market, I don't know. I Well, that's the If only there were signs. It's an interesting point because uh Berkshire hasn't trailed this much versus the S&P 500 other than on like fairly famous dates. There's not very many points where it has trailed as much as this, and it's all like 99, 2000, uh 19, 20, and then a few more dates recently. Probably right. Yeah, I mean, the 10 years ending 2024, again, that's sort of like last that last decade, uh Berkshire trailed by one 1.9%. I mean, you can see, you know, it was a 31% outperformance in the the '80s, down to 20, down to 10, but um I I Yeah, it's it's more the S&P I think getting over its skis than than anything. I mean, gosh, would you rather own the S&P at crazy valuation multiple >> 40 times cape plus, yeah. I'm of of high margins, not even I mean, you're talking high on high margins. Yeah. Right? Ton of debt versus, you know, Berkshire Hathaway with a net cash position holding two utilities that have a bunch of debt. I mean, that's that's a crazy dynamic. Um What did you make of the re Berkshire traded down yesterday. The I mean, a lot of the value complex traded down yesterday, so it's not It wasn't just Berkshire, but coming on the heels of the meeting could have been seen as a a bit of a vote of no confidence. Yeah, I didn't want to say that, but yes, that's what I was going to say. Okay. First of all, how dare you? I didn't want to characterize it that way. >> [laughter] >> I don't think like I'm, you know, I mean, it's one day, who cares one day? Yeah, 70 bips is not a vote of no confidence. >> And the first move's always the wrong move, so, you know, so they say. So the traders say, I've got no idea, it's just something they say. I mean, there's there's again, I think this Tokyo Insurance Tokyo Marine deal that they they just signed is, you know, the Look at what Greg's done in 100 days. I mean, gosh. Um I mean, this Tokyo Marine deal, they get 2 and 1/2% of this insurer, which GE called, you know, the the best of the best. Um they get a whole account quota share agreement with Tokyo Marine, which if you read the 10-Q, it says it will be a meaningful part of the volume. And if you kind of just did the rough math, they didn't disclose it, but, you know, if you did 2 and 1/2% of Tokyo Marine's volume, that's roughly 800 million to a billion in premiums. Um plus an agreement to do to do M&A in the future, so I I I mean, I always feel good after a Berkshire meeting, but I mean, genuinely, like Greg, I think, is is really kicking butt. I mean, I was talking to I won't mention the name of the subsidiary, but uh talking to the manager of one of the subsidiaries, and he said, you know, we we made an acquisition in the UK and Scotland recently. And um so they're, you know, it's not not big enough to really be disclosed or or highlighted, but you know, these things are happening. So, I'm I'm biased, of course, but I I like what I see. Peter question from the crowd. Thoughts on ABL never mentioning ROE or ROC and only focusing on earnings or value proposition. Hm. Has that been a metric that Buffett has tracked for Berkshire over time? Well, I mean, change in book value, which he has tracked, is effectively ROE. So, in in a roundabout way, he's been tracking ROE. Yeah, and I think, you know, it's like my my question about why he's focusing on operating cash flow. Greg Abel knows that depreciation is a real expense. I mean, he he understands that. He understands what they're trying to do. Um Yeah, I don't know. I mean, I I I think it would be I mean, I'd love, obviously, to have a better an hour with Greg or have have a bunch of questions with him. But, I mean, I think I think it's a a reasonable question, right? Like what what are you seeing for the potential of these businesses? But, I mean, I I think he's seeing again, another one of the managers I spoke to, their compensation is tied to basically volume and operating margin. So, it's like more more product through the the system at a good operating margin, which has the basis behind it of you know, a a capital investment. So, he he understands the the the dynamic. But, I think it would it would be great for him to to to focus on that. I I love that. >> My hunch is is that that uh the numbers he's talking about probably look smoother over time. Whereas ROE, if you go back like starting in 2017 with the accounting change when they started flowing through uh security change like price security changes uh in in the uh income statement. And now ROE just goes all over the place now depending on what the market's doing. So, >> Yeah. I'm guessing focusing a little bit more operationally make take some of that noise out relative to if you just showed ROE. And I'm I imagine that's probably like if you're thinking about wanting to be a good steward and you know, making an easier ride for your shareholders, perhaps you focus on numbers that are a little bit little less volatility to them that which might, you know, make them get spooked out. I don't know. That's just a just a hypothesis. I I mean I think it would it would be good if he if he actually did explicitly talk about it, but if if you read uh listen to I think he mentioned a little bit this weekend and then even some other interviews that he's given, he was talking about deploying capital and looking at the risk of that capital. And I mean even just the recent, you know, BHE divesting the utility in in Washington state. I mean I think he he understands the importance of it. You know, it's not just it's not just earnings, right? It has to be in relation to how much capital you're deploying. So um he understands it, but yeah, I mean I I'd be right there with with the questioner trying to love to see more discussion around it. What do you make of Todd Combs leaving? I think it's neutral. You know, I I hope I think if Ted leaves, I'll be I'll be a little bit worried, but um you know, I I think Ted Ted does a lot I think that people don't fully realize. I mean even Todd before he left, you know, he was vetting deals and Ted to my knowledge is still chair of Detlev Louis, the German motorcycle accessories retailer. So he's he he has some other roles, but you know, I I think it's I think it's good to have Greg have that investment sounding board, you know, he he still has Buffett to talk to, but you know, to have someone like Ted there um and I don't I don't think they need a big team. I mean I really think just Ted is is fine, but uh I mean, it's only magic. He's Yeah. They said he's got 20 billion, which is 2% of the assets. So, he's Maybe he does have time. Neither of them have outperformed over the period that they've held for, have they? Neither of them have got paid performance fees. We don't know. I mean, we we can only speculate based on the the 13F's, but I mean, that it's a safe bet that that's right. Why do you think that is? Just a tougher market for value guys. Yeah, I think it's probably as simple as that. Nvidia. I don't know. >> Yeah. Should've been buying Nvidia. Yeah, what what would you do if Nvidia showed up in Berkshire's 13F? That's the question. Well, Amazon showed up. Amazon showed up, yep. And then left, didn't it? Or I think with uh Yeah, it didn't stay for long. >> just I think >> Greg sold all of all of Todd's positions. Is that right, Adam? You know, I actually I was just writing up some some of my thoughts on the 10-Q. The the consumer uh Berkshire categorizes its investments into industrials, consumer, and financials. Um the consumer group is down about 2 and 1/2 billion, but the unrealized gains didn't really change. So, my first thought was it's Apple, but I think it I think it might be them cleaning out, you know, Domino's Pizza and um uh what was the other one that they had in there? I'll think of it in a minute, but I think it's probably the last of cleaning out Todd's portfolio, if I had to I had to guess. Um this is a this is a longish question, but I'll I'll throw it out there. Uh you know, AI is writing a lot more software. So, many companies are going to become software companies in some sense. Software eats the world, so uh when software does the non-material functions in the economy, and Berkshire's not so tech-friendly, does that put them at a disadvantage? Well, I'd kind of push back on the initial premise of like that'd be like saying uh well, every company is an electricity cuz they use electricity to keep the lights on while they're running the computer or whatever. I don't I'm not sure about that. I mean, I don't think it's I think if you have an inherent competitive advantage in some way, it's only going to enhance it. I mean, it's it's not AI is not going to instantly replace BNSF. I mean, it's just physical infrastructure. So, if you kind of go down the list of the Berkshire's businesses, you mentioned electricity. I mean, Berkshire has has a huge investment in BHGE. They move 15% of the natural gas in the United States every year. You know, you kind of just go down the list. All these consumer products, buildings products companies, you know, maybe a maybe a business like BusinessWire, the news service, you know, gets hurt by it. Um I think on balance it will probably help Berkshire, but there will definitely be some casualties. What's a consumer surplus? Yeah. Maybe. Uh just take >> on. Yeah. Does Ted have any say in the portfolio? No, that's another question. $20 billion worth of it. >> Yeah, $20 billion. >> You just answered that. Yeah. Sure. Um thoughts on whether Ackman's PS is going to become something people rotate into and out of Berkshire on the margin. Pershing Square's IPO, is that That's the question. Yeah. PS, yeah. Uh does that Are those overlapping Venn diagrams of shareholders and like-minded folks? I'm not sure. >> you get GameStop, eBay, and Pershing Square all together, then then you got it. Hey, there might be an opportunity to create a new, you know, a new ETF or a new mutual fund there. Just call it the I don't Baby Buffets. The Baby Buffets. So far anybody who's given the next Buffet or Baby Buffet moniker >> of death. It's been not a great It's Yeah. Watch out. Yeah. Oh god. Who hasn't been anointed who deserves it? Is there anybody public? You don't want to put that bad juju on anybody, do you? >> Yeah. >> [laughter] >> Well, I'll I'll I'll offer this sort of related question. Greg highlighted Mark Hamburg. I think Mark Hamburg is by far the most underappreciated person inside of Berkshire in terms of how how well he's known. I mean, he's been there 40 years. I mean, he's the guy that's pulling together all the financials and you know, making sense of all of the nuances and all of this. I mean, it's >> Tax and Yeah. Can you imagine? You know, that that name deserves to be in the, you know, He needs to go up in the rafters, too, with the horn of Charlie. Yep. Uh We miss Chamath. We miss Chamath. I miss Chamath in the portfolio as a Baby Buffet. Cuz I think he was outperforming for a while there, right? 2021, 22, something like that. I don't think you can get into that if you just self-appoint. Uh >> [laughter] >> You're a Buffet status. It has to Someone else has to say it for you. >> Yeah, you need to be nominated by by someone. Yeah. Can't self-nominate. Uh Well, when the value worm turns, when I'm going to put your name up for consideration. Somebody said it's been 8 years at the top, and that's how I feel, too. 8 years of spy at the top. Hardy, you little run for value. Would be good to have. I mean, if I told you that um the war in Ukraine would still be going, the Straits of Hormuz were closed, uh oh AI is the people are spending a ton of money on AI, but it's not clear whether there's going to be any return on that money. Um Yeah, where's the index? What else? Yeah, where's where's the index right now? You'd go like, uh yeah, all-time highs, for sure. >> 40 times, Kit. No doubt. Well, I mean, >> [clears throat] >> Buffett's Buffett's point in his interview, you know, mid mid day, if we knew what was going to be that that thing, you know, the next crisis, you know, it it wouldn't be it it it will come out of the blue. So. I think I like the Einhorn was I think it was Einhorn in his last letter was talking about how like, you know, everyone always talks about like the V-shaped recovery, you know, it's like this. But he's saying No, now it says they're all check marks is the real shape, because it's like, you know, down a little bit and then up more, and then the next one is down a little bit and then up more. It's just check mark recoveries. Yeah. The best comment on the on the Iran war I saw was that we're 9 weeks into a 4-week war that we won 8 weeks ago. >> [laughter] >> That's strong. And still still running. And energy's been super soft over the last few weeks, too. Hilarious. Even though oil's up, very funny. I think it makes sense. The complete financial history of Berkshire Hathaway it's an absolute magnum opus. It's a giant work. Congrats. Thank you. >> getting out the second edition. Yeah, I think it's If folks want to get in contact with you or follow along with what you're doing, what's the best way to do that? Well, I'm I'm on X BRK_Student and then I write a Substack watchlistinvesting.com. Awesome. Thanks, Adam. Any final words? Be well to each other. Be good to everybody. Be kind. Thanks. Thanks, Adam. Okay. Next week, same bat time, same bat channel. See you all then. Good grief, it's impossible to sign off now. Oh, no. That's going to It's going to take a >> [laughter] >> It's like we're frozen. Now I got to I need to get Sorry, Tim. I'm trying to hang up. >> [laughter]