This meeting is being live streamed. This is Value After Hours on Tobias Carlisle. I'll join as always by my co-host Jake Taylor. Very special guest today, the inestimable Christopher Bloomstran. How are you, sir? I'm doing okay. You always crack me up at the outset. How are you fellows? I'm doing well. I went out to Indian Well, saw the tennis. It was great. To my favorite fan. To my favorite left-close guys. There you are. That's good. How was Indian
Well? Did you have a good time with that? Tobias, that's the best. It's kind of on my bucket list. It's so good. It's a great festival and you can just walk between the courts. I went and saw the Aussie Alex de Mino, he won. Then we saw some of the girls because my daughter's a tennis player and then went and saw Sinner and a few other guys. It was excellent. That professional tennis up close is just crazy. They're so good.
For sure, daughter inspired. Yeah, she loves it. Yeah, she's pumped right up. Nice. Well, Chris, so you're back and you've surfaced from writing the annual letter and you're still alive. That's good news. Yeah, I made it. I got to the finish line. I don't know how many more years I can do it at the cadence I do. This one was particularly
rough and I got myself behind as I mentioned, kind of pre-show. I've kind of stuck to this walking program at the hip-ray place in December, which turned out to be a really good time to do it. I've been out walking at least a couple hours a day listening to you guys on podcasting, hurting's calls. In fact, I'm listening to way more podcasts because you got to kill time and be productive at the same time. The hip recovery, given that
I lost about 60 pounds, was really easy with the exception of sitting at length. If you write 150 page letter, you'd sit at length and I write all night. So I got myself behind because I was killing two to two and a half, three hours every day. I kind of had to ditch the walking in the last week. The roosters were, the roosters welcomed at the end of the night for me. The sun, I took a picture outside. The sun was pretty much the last seven days
in the road, but just to get over the finish line. Yeah, I got it done. It was great. And decamped immediately to South Florida. Turns out I've got a lot of clients and friends that for whatever reason don't reach higher to South Dakota. But the South Dakota. So I spent a hang out with your man Brewster and saw his new digs and his old digs and his grandmother's digs and got a couple good meals. It was great.
That's good. I've always made the, I think I've teased you before, Chris, that we can basically do away with the CFA program as long as you just take a test on understanding Chris's letter and what's in it. And you know, that, and I figured I might be getting up over the 50% market this point. So I feel like I don't know if that puts me at like CFA level point five at this point or what, but. All that nonsense. That's nonsense.
I think we should start with and the thing that I noted when I, when I shut back my car, I was supposed to Chris from his letter, 25 years in business. That's amazing. Congrats. Yeah. 25 as December. It's big milestone. I was talking to Jim Grant last week. He's at four. He just had his 40th anniversary. So back in the days of fractional trading or five ace or work 62 and a half percent of grants. But yeah, 25 is a big deal in it. It
flies. It goes fast. And 33 years doing this thing professionally or 34 maybe now. It's blur. But I think about when we first bought Berkshire and how old I thought Warren and Charlie were at the time. That was early to those February of 2000. And they've had a pretty good run. Charlie almost almost to 100 pretty remarkable. It is pretty funny to listen to the old age gyms from back then. And even like mid 90s people are asking about
six session. What's going to happen when you guys get hit by a bus or get too old? I mean, it was 30 years worth of it. I hope I'm around to celebrate Semper 70th anniversary. I'm not sure going to get much more than that. And you know, we'll see maybe losing 60 pounds will help in that effort. I'm drinking my Ken Bucha now, which I've never even heard of. My daughter laughs at me. You know, I figure 55 years
of. God, do you think about all the rib eyes and the t-bones and the flays and the cheese burgers and what it pops and then layer on bourbon and beer back in the college days and a little bordeaux and burgundy. There's something like 9 billion living probiotics, whatever that means in this. I mean, how do you put 9 billion of these things in this little 16 or something 473 milliliter bottle? But they must be doing something. They can't be
bad. And I don't envision my stacks of rib eyes and flays stopping anytime soon. So we need to do something for the gut. No, they could play Chris. This market was pretty loopy through 2021. Feels pretty loopy again to me now. Is it given that you actually have been doing this professionally through the full period? What do you think? Are we at 99 levels of loopiness? And I always still sort of, we're 2021. So levels of loopiness, where
are we? How do you feel about the market right now? What ending is it? No, it's late. It's late and there were an extra endings. I thought 21, the end of 2021 was a secular peak. And I've got a section in the letter on it. You look at what stocks had done in the decade leading up to that 16.6% a year. Profit margins were at all time high 13.3. You were 22, 9, I think, is a multiple on earnings. And so I mean, you're
capitalizing a record profit margin at a historically very high multiple. It doesn't leave a lot of margin for air. And then things blew up in 22. And you had the big recovery last year. And essentially, I think the S&P was up 1.7. The mag 7 now that you've added in a video and Tesla to the mix, they were up something like 2.7 for the two years. So I think you're in here up this year, S&P's up, whatever it is, 8 or 9 and the mag 7 up 15 or 16, you're
back to those 21 levels. And I think whether you call 21 a secular peak or this moment a secular peak, getting much more out of the market, we can get into this. But the factors that make up how you generate returns are pretty much stacked against the aggregate investor. And so I think things are pretty frothy. And a lot of parallels, this is a video, my god, Thursday had something like a $270 billion swing in market cap, intraday. My god, the
whole market cap of the company was less than that in October of 2022. I mean, a year to have to go back in the old days. But in fairness, I've never seen a large company mature them. They've been public for a long time. What's going to be two consecutive years earn more than their prior years revenues? Think about that. Now, I don't think a 55% margin is sustainable. And you happen to have a shortage right now of what they sell to their handful
of big customers. But the big customers are going to not going to allow a 55th margin. They're going to manufacture some of their own stuff. You've got some competition. And so you'll have misses. And at 2.4 trillion, the thing was kind of ridiculous. I thought it was ridiculous at 1.2 trillion. And I think in retrospect, when you look at this thing, 10 years out, whatever, you'll have miss, miss, miss somewhere between here and there.
And the thing will be more rational. But it's as frothy as anything in the late 90s. Now, great business growing. But Microsoft was ridiculously expensive in the 99. And as I wrote in my January 2000 letter, I said, shareholders will lose money for 15 years. And indeed, they did. These couldn't do 620 billion market cap on 20 billion in sales, albeit at a 37
or 38% margin. I mean, it was that far out of itself. And at 2.4 trillion on 60 billion in revenues, what's going to want to be 110 this year, if they do a 55th margin, whatever they make, 30 billion net. I mean, kind of using today's level of revenues and profits,
it's way, way, way ahead of itself. And I think even beyond the Mag 7, the market is so bifurcated at the top end of maybe 40 or 50 or 60 companies, even Costco, which we still own in some of our older accounts, which we've owned since 2004, we paid $29 for it. And it's going to earn that in a couple of three years. But it traded at a 350 billion cap on 250 billion in revenues on a 2.7 margin. It was trading at 50 times earnings a week
and a half ago. And low and behold, with the four letters in the ticker, kind of back in the old days, I mean, really back in the old days, your three letter tickers were all New York Stock Exchange companies, your four were NASDAQ, Costco's always been an NASDAQ company. And it's in the NASDAQ 100. So I don't mean anybody in the right mind would buy Costco at 50 times earnings. The company doesn't buy shares back with the exception
of maybe deluding a little bit of what they do give away to shareholders. But 50 times is ridiculous. I mean, it's a great business. And they'll continue to open stores at the cadence of 20 or 25 years. But you can't pay 50 times for a business that's going to grow away less for the next 20 years. And it's grown for the last 20. And so it's not just it's not just the seven. But there are still I don't even know if it's the seven this year.
It's only it's only Nvidia meta. I think the others are Apple that I don't think it's even half of the seven. I think it's only two or three at the seven at this point. I'm doing all a couple of three. I'm or down apples down Tesla is down. Right. And Nvidia is just driving the bus here. Well, we just switched in video for Netflix for Nvidia. We just the end just got switched out. Nobody. Nobody said anything. Well, they
did. Yeah, they did. The letters. Well, right. So Chris, if you had like let's let's play the kind of red team, you know, in this case, the angels argument, because you know, I think you're you're pretty convincing in your letter about the different levers that can be pulled to create returns, you know, sales growth, margin expansion or contraction,
share count, dividend, multiple. And you know, when you look at where all those are, they're kind of all bumped up against the most optimistic versions of themselves in the kind of historically. But let's let's take the angels version and like where might we be surprised to the upside on one of those five that all of a sudden maybe makes the returns for the next 10 years, not quite as as as dire as we might otherwise believe.
Interesting. So as you guys know, I put these five factors together. The first four multiplicative dollar change in sales, change in the share count, change in the margin, change in the multiple. And then the last being dividend yield being additive. I've got a handful of scenarios looking out 10 years kind of playing with different different iterations. So without doing it off the top of my head, I pulled this out. So I've got,
obviously essentially got four cases. And the most bullish of cases would assume that you lined up back at what I think again, were 2021 secular peaks. And so your profit margin, which is declined for the S&P 500 by 190 basis points over the last two years, you'd run it back up from 11 for to 13, 3. You'd take the multiple backup to where it was. We kind of compressed it down to the low 22s from 22, 9. So I mean, frankly with S&P
being up, E% this year, you're back to that level already. And if you get there, you get a little bit of expansion and you get maybe one and a half points per year out of expansion in the in the margin. And then you get whatever sales do on a per share basis and the dividend yield, which is given high prices the dividend yield is near record lows today. In that scenario, you make about seven and a half percent a year from the beginning of this year. And you
just juiced a point of that in this last two and a half months, right? To grow to and you tell me, I mean, of those five factors, were you going to get more out of that? Most likely would come from a profit margin north of 13, 3. I mean, you know, who would have thought back, I think Warren Buffett was wrong. And his 99 fortune article when he talked about the mean reversion and the bracketed range of profit margins completely missed these
these. Well, he missed a lot. I mean, you wouldn't have known that we'd get to zero interest rate policy for a bunch of the last 20 years. And so all this corporate debt, which is mammoth and size, but was bearing very low interest cost. That very low interest burden added about three points to the profit margin, but tax straight down. But you get these mag sevens. I mean, you know, the group of the seven stocks has a margin of 20%. It was
22%. And you know, Microsoft is 36. Naviti is going to be 55. The group gets pulled down by Amazon. And you kind of tell me how their business shakes out between AWS and their retail businesses. Their 1P business is going to have lower margins than cost codes 2.7. The third party is going to probably have a little bit higher margin level. But, you know, there are five margin. And I think they can be a 10 depending on what they do
with their cloud business. But there's 20. It's double the, so if that group continues to gobble up the world, you can make a case for a profit margin north of 13.3. But in the last 10, 12 years, the margin for that group was 22. And it's back down to 20. And so, I don't think there's, I don't, I'm, I'm a skeptic on getting much more than a mid single digit return. And then I play with the number of scenarios that takes, holds margins and multiples
constant. Well, then you're only going to get sales growth per share and the dividend yield. And the sales growth per share comes from dollar sales growth and any change in the share count. And then you run more bear scenarios. And you tell me what inflation does. And that's really going to dictate kind of the return series, I think, at least the components of the return series. So if we've let the inflation genie out of the bottle, you're going to run sales hotter
than they've run over the last two decades. And then the last three years, sales of run at about 11% a year for the S&P. For the last two years, they've run at about 9%. But those are, they were inflationary periods. And that's how you got the profit margin down by 190 basis points, right? It wasn't volume. Yeah. So sales growth per share was about 3.5%. 3.4% for each of the last two decades. It was a different mix in the first iterate in the first decade of the last two decades.
You ran sales closer to six in dollars, but you had a growing share count. And in reverse, you, you had a shrinking share count, but much lower, three and a half, you know, kind of three and a half percent dollar growth per sales. So if you run sales at that level, you can play around with holding margin, multiple costs. But if you run hotter, if you run more sales, and I've got several scenarios where you run sales at nominal sales at six percent a year,
you're not going to keep margins where they are today. If inflation runs hotter, you're going to cripple profit margins for a whole bunch of companies that can't pass through costs. And so you get, you get shrinking margins, you're going to also get shrinking multiples. So you take the multiple back to its historic 15% and then you run an extreme of taking it back to 10%. Then you're looking at low single digit returns to maybe as little as negative 3% a year.
Reality is probably somewhere in between all these. And so you know, the S&P-wise, you do three or four percent. The Mag 7, the O- is what I used to call the Fab 5 before you included the other two. Hey, they, they were, they were 12, 13, 14 times 10, 12 years ago. Apple traded net of cash for less than 10. Microsoft traded for less than 10. And those two were the big, the big dogs of that group. Well, they went from, you know, low to mid teens, you know, even even a single digit for
a couple of them to where they are today. They're, you know, as a group, um, trading it, they were 32 to earnings at the end of the year. They're back to 38 times earnings, which is where they were in 2021. And um, you're really only going to get sales growth and nominal dividends. Met is going to start playing a dividend. But sales growth is half of what it was 10, 12 years ago.
They're, they're, they're just bigger businesses and they can't grow as fast. Their sales in fact didn't grow much faster than the S&P 500 sales for the last couple of years. Interestingly, and I just think you start trading, you're pricing these things at mid 30s to earnings. There's a way more than go wrong. They can go right. If you think otherwise, the math is just a math and plug in whatever assumptions you want to plug in. That's why, you know, that's why I put it
in the letter. I think if you're the CIO for university endowment or a big pension fund, or you're a 401k investor trying to figure out how I'll allocate you 401k. And you, and, and you think passive is the solution. Tell me the math is pretty easy. It's pretty straightforward. I think it's, I think it's understandable to, you know, those beyond your CFA's. Yeah. And throwing a bunch of seems like what used to be cap light businesses, the CapEx for those guys is really
ballooned a lot too with, with AI. One thing I've tried to wrap my mind around also is the, is there's some kind of double counting almost that's happening where, in videos revenue is Facebook's CapEx. And there's kind of this circularity to everything there where, okay, they're adding it and they get a 55% margin on it, which gives a big earnings number.
And then the Facebook's, you know, taking that CapEx and chopping it up into pieces and spreading it out over, I don't know, whatever the useful life of a server is, 10 years or something. So we're like, they look a little bit more profitable as well today, relative to the actual cash going out the door. It feels like there's something kind of weird going on there. And these
are really big numbers. Yeah, the, you know, the, well, the numbers are too fat for a Facebook. And certainly for Microsoft's Azure, AWS within Amazon, to let your chip supplier keep those margins. You're going to, at some level do it yourself, you're going to balloon your R&D, you'll figure it out, whether AMD winds up being a competitor to the current iteration of chip who knows, but it'll come. You just, you're not going to do 55% as a chip designer from here to a turn. There's only,
there've been very few businesses that would run at a 50% margin. Visa, MasterCard would be a couple of them, but, you know, capitalism being what it is, you're just in a period where there's a shortage and there's a huge demand for processing. And I'm not sure much of it's new, you're just processing way more data, way more quickly. But you look at the depreciable lives of the software and the hardware that goes into the data centers and equipment. I mean, they've doubled the
depreciable lives of this stuff. Maybe that's right, maybe it's wrong, but, yeah, you know, I, I, I don't think this is much different than the classical semi conductor cycle. And he's happened to be in the sweet spot. And there's a retail craze now. Good friend of mine just lost a portion of a client's asset, a doctor who wanted to put his entire million and a half dollar IRA. So
a fraction of his net worth, but put the whole thing into video just a few days ago. Friend wouldn't do it for him and said, well, you're gonna have to just eight cat it out and he can do it somewhere else because I'm not going to do this for you or to you. Wow, so that's that's that's that's 1999 early 2000 behavior. Yeah, yeah, any, but you go to any cocktail party, talk to anybody. And everybody was loaded into the tech and they did not want to hear how silly a lot of it was.
And really good businesses, some of those businesses were really good businesses, son, micro systems, oracle, Microsoft. They were priced beyond perfection. And and some of these things are priced beyond perfection today. And competition will come, it'll come from within, it'll come among to your point. You know, they're selling to the other big tech companies and nobody's going to keep a 55% margin. You know, I'll be at outsourcing
Navidias, CapEx and heavy lifting to Taiwan semis. So given maybe not the most bullish, you know, kind of call it general S&P 500 for the next 10 years, your portfolio at simple right now, I think seems like you're very excited about it. And just the metrics on how does that compare like and maybe this speaks to some of the bifurcation that's happening in the market right now. So we so if you run that two years, you know, everything was
flattened of S&P and the the mag sevens and all that were up just a little bit. We managed to make money in 2021. We were up about a percent. We were up 22, 22, 22, sorry. We were up, you know, 10ish last year, we're up something like eight or nine this year. But you know, for that
two years, we were up, you know, call it 10. So we were ahead of all that. And as recently as, well, year end and even, you know, before the world decided that Jay Powell was going to ease the Fed funds rate three or four or five times this year and kind of implicitly, they'd stop shrinking the balance sheet below some number call it seven trillion that you put a candle, you put, you know, you lit the torch underneath the market and ballooned everything up. I mean, we were down for
the year in mid-October and wound up up quite a bit for the year. And so, you know, things were really cheap. But at year end, we were a little over 10 to earnings with a 10 percent earnings yield with multiples to book and sales and cash flow at, you know, a third to a half of the S&Ps. So we have twice as much earnings yield. And I think that the, I think where, where I think we have a very long-term advantage is if you look at our businesses, we don't employ debt generally in the capital
structure. We're very debt-averse. And so our businesses are largely unlevered, which means they earn about as much on capital as they earn on equity. And so our companies earn about 16 on equity, about 15 on capital. Well, the S&P earns 20 on equity. But you and when you had Brewster on a couple of weeks ago, you guys were talking about a little bit of this book values are very understated relative to replacement costs. And that has a lot to do with the amount of sherry purchases that
take place at premiums to book. Company like Starbucks doesn't have any equity because they bought back so much at the stock. We own it. So we have no book value in that one. But you couldn't re-play, you couldn't re-build Starbucks today without a lot of capital and a lot of money. And so, and then you've got some historical assets as well. But still, so if you've got book value for the S&P at a little over a thousand on a per share basis, that gets you to, you know,
nine trillion, let's call it, market capital, a little over 40 trillion. Sales are more like 1850 or 1900, so almost twice book. But the point being a 20 ROE is not right, but it is what it is. But there's so much leverage sitting next to the equity that does exist. They're almost like
amounts that the return on capital for the S&P is 12 and ours is 15. Yeah. Where if you own the S&P 500 for the last 20 years, you get about a third of your profits distributed to you as dividends and the all of the balance, more than all of the balance because you got augmented with debt has gone to sharey purchases. And you've only shrunk the share count by seven tenths of one percent. The last each year for the last 20 years, but they're giving away almost three percent to themselves
on the front end. So it's not anti-dollotive. If you go back 25 years, 25 years, and we've done this experiment of sharey purchases consuming two thirds of profits, the share count for the S&P 500 is unchanged. Two thirds of all the money earned by all shareholders and aggregate went to repurchasing shares, and there's no change in the share count. Where are all the money go? Where are all the money go? Now part of it gets recapitalized when the banks blow up in every
financial crisis. Right. And so you get a ballooning share count oddly in the last two quarters. The share count is up despite repurchases at still very high levels, although below the cadence of a year ago. And so we largely own businesses that we get way less in dividends and Berkshire skews this because they don't pay a dividend. But we only get about 17% of our aggregate profits
coming to us as dividends. So the balance, which is the preponderance, we own businesses. Part of our mission is to find companies that actually have places to reinvest money at the returns on equity and capital. Some of our companies, like an oland don't, but largely they do. And so, you know, the Semper portfolio is not being reinvested just in sharey purchases to offset
delusion, giving money to executives. We own companies where you have more of a founder mentality where these folks really are trying to find places to reinvest in their businesses, or bolt on acquisitions that make sense and they are done at economically logical level. And I think that's what drives our return over time. That's what's driven our return over the last 25 years.
It's the preponderance of our profits actually being reinvested in companies that do invest in those returns and not at 20 times earnings with two-thirds of your profits, which is a 5% earnings yield. I mean, that's how your S&P for the last 25 years, which was expensive during the tech bubble, but the S&P's done 7% a year. That's it. You make 5x your money. You make
an Ibbison 10 and a half percent. You make twice that. And you're sitting here today of those similar evaluations and corporate behavior that's doing exactly what it's done for the last 25 years. And that's burning up a whole bunch of corporate profit. I'm going to guess that, and maybe it has to almost be this way because of the prosick locality of share buybacks and
pushing prices up. But I'm going to guess on a dollar-a-weighted basis, what do you think that over the last 25 years, the purchase price on a PE basis has been of these buybacks? Well, I mean, it's your multiple of the market. And you haven't been far off of 20 extra earnings. We've been very few times in the last- Nobody was buying back when it was cheap. That's my point. 2008, like, there wasn't people or- No, no, no.
Doing buybacks. No, the share account went way up in 08 or 9. I mean, again, that was the financials in the bank. So when things get really cheap, even early in the pandemic, everybody suspends their share purchases because you worry about needing the capital in case things get really bad when you're in a financial crisis like 08 or 9. Beyond the banks, repurchases slow, which tells me there's something perhaps going on in the economy today. And it's not just
all of a sudden a rationality by your CFOs and your CEOs. Something has slowed the share repurchase cadence in the last half year. And I think it's business conditions that were probably weaker for a lot of businesses and a lot of industries. And it's all the inflation as well. I mean, if you're having to give money to labor, which has suffered for the last two or three decades, if you can't pass through price and you're eating it on margin, well, that's less operating income
that can go to share repurchases. If you're a dollar general that we own, they've got some blocking and tackling issues, which made the stock really cheap, which we took it up from 2% of capital a year ago to 10, bought our last block when we took it from 4% to 10% at 113 to share. It's 160 today. But they cut their share repurchase. I mean, the stock was trading at a massive discount. But they put some debt on the books to buy shares back when the thing traded at 22
times earnings and you'd rather have them buying it today. So, Apple, when it was cheap, they part of the beauty of why Apple was so good is they started paying a little dividend quarter of their profits. But then they really ramped up their share repurchases. And only in the last three or four years did the stock go from a low teens multiple to earnings. Well, they haven't slowed the share repurchase. But because you're trading at 30 times, you're retiring a far smaller
proportion of the company. So, there's no price. It doesn't seem like there's a price sensitivity with a company like Apple. I'd put most companies in that camp where there's no price sensitivity. They're simply trying to offset delusion by making themselves all fatter and happier. That's one thing that Jake and I have talked about offline possibly. But Buffett praises Apple for a lot of those buybacks that seemed to me that they happen at prices
that are, you know, as you say, they're just price and sensitive where he's anything. But do you have any what he just rather that they spend it on Apple stock than go and buy something silly? Like go and buy GM or something. Yeah. Well, I mean, there's not a lot you can do with, I mean, the Apple doesn't have a lot of capital needs. So, what are you going to do with the money? I'd rather do what I'd rather have a company do what a Costco does. I mean, the stock has rarely been
cheap. They know how much money they need to open 25 stores a year. They've never changed the cadence. And so they started paying a dividend in 2004. And then they've paid a series of special dividends that are, if you add them up, the four or five special dividends, it exceeds our cost basis of the stock. They give it back instead of over spending. That's probably for having Charlie on the board for all those years. I think there's a rationality to when it makes sense to
retire a share and when it does not make sense to retire a share. It warrants not going to blast Apple on their capital allocation in a public setting. But you can also not not, not to add them on the back floor in the letter. No, I agree. And I think you really does think just I should, you're proportionally increasing your ownership. And I think that's his point. But
it only makes sense if you're doing it when the stock is cheap. I think they've proven here in the last couple three years that they're not doing it the way Berkshire has done it. When they retired a whole bunch of stock in the 60s and 70s, they issued it like it was going out of style in the 90s when Berkshire traded at three to book. They've been buying it back for the last six years. But they're very, I mean, it's the model
of how this should be done. They're very price-insitive. And he doesn't preach, I mean, he talks about the need for it being price-insitive and companies shouldn't have a need for capital otherwise. I'm bewildered, you know, then you publicly tolerate it and endorse it in a public setting with an apple. Who knows? Let's just change gears a little bit. Charlie Munger is everybody knows passed away at the end of last year. What did he tell me? Did you miss that?
It wasn't well-muted in the media. But do you have any reflections on Munger and what you think the impact will be on Berkshire? Well, he'd like you guys. He became a hero to so many of us in the investing world. I think Warren's tribute in this year's letter is a couple of things jumped out of me. Charlie, the architect of the firm and Warren was the general contractor
and explained why that was the case. And I think that was the case. You also, even though they were what seven years apart, called him a older brother figure and even a father figure at some level. It brought a lot of wisdom and I think my take is that he really was the DNA of Berkshire and a lot of the culture and the things that are so important at the board level. The Sherry purchases at Costco, for example, or the paying special dividends instead of simply just trying to shrink the
Sherry count massively. I think what he gave to Berkshire will persist for a long time. I also thought the choice of black. I didn't see anybody note this, but generally the Berkshire and a report has a different color to it each year. Black was only fitting in the year you lose Charlie. They used black two years ago in the 2021 annual report. You would not have had a repeat hit it not been for the loss of Charlie. Warren would have said, we're going with black this year.
But he didn't say anything about it, but I thought that was a very small unnoticed touch as well. I tried to pay tribute to what little I could in this year's letter by Interspersing a bunch of Charlieisms and some of his quotes in the lead-off to each section. Instead of book recommendations and music, for those that aren't as familiar with Charlie. One of the great things he said was you can be a lot wiser by learning from the imminent dead.
Well, he's now our imminent dead. He made a whole series of book recommendations over the years. I think anybody that is not familiar can go to the CNBC archive and just listen to all these old Berkshire meetings back to 1994 and get Peter Kaufman's poor Charlie's Almanac and read his series of speeches that he's given at Stanford, USC's Business School and all the various places. There's just there's an awful lot of common sense and wisdom and humor to the guy. He'll be
greatly missed. He was the reason you'd go to the Berkshire meeting so many years. The rapport between Warren and Charlie was just a thing of beauty. So, you know, we'll miss him badly and you guys will all miss him badly and Berkshire will miss him, but his spirit will be with Berkshire for an awfully long time. I think that's the greatest tribute. Buffett used to describe him as the abominable no man because he used to say no to so much.
Given that he bought things like Ali Barba, how do you sort of square the, you know, he seems to be willing to buy things that and be a ID and so on. He seems to be willing to buy things that Buffett does not and yet he's the abominable no man to Buffett. How do you sort of square those? He's human. He believes believed in the China's growth miracle and was so correct for
so many years. He was a big fan of Lee Kuan Yu and China kind of modeled their rise to capitalism on what Singapore and some of the other Asian tigers had done kind of a command control economy. Lee lose obviously a good friend. He had money invested with him. I couldn't have invested in Ali Barba. I mean, or any, we just don't do that. We don't, we're not going to invest
in a communist regime. And yeah, human, I, you know, if you look at even his and I put it in this year's letter and when Warren did the super investors of Graham and Doddsville and the appendix to the, it's now in the appendix to the intelligent investor, but you have a speech at Columbia commemorating the 50th anniversary of the book at Columbia. You know, he put Charlie's track record in with seven or eight other managers that were great, but you can see, you know, Charlie swung
for the fences a lot more than Warren would. It was wild to see like I've looked at it before, but it really stood out to me this last time. But like 73 74, he wiped out all the way back to like 67, like seven years worth of progress were gone in like a year and a half basically. The S&P was down in those two years 50% kind of 24, 26, whatever it was. He was down over 30
in each of those two years. And that's scarred him. You know, if you go back, read the biographies and you listen to some of the comments he made, I think he, I think he concluded, wow, maybe I shouldn't be swinging for the fences the same way. Really pained him to lose money for shareholders. I mean, and the management fees, which weren't clawed back, then with that bear market did a lot of damage. And he recovered the next year, but then he hung it up. Yeah, he doubled, he doubled
or whatever in 1975 had a big return and then hung it up. It meant a couple years later, officially joined Berkshire as vice chairman, but had done some investing with him side by side in diversified retailing, which then bought blue chip stamps. And they collaborated on several
deals and were very good friends and were talking a lot. It's interesting for 20 years though, they were not under a single really like, you know, unifying umbrella yet that they'd still been working together, but not actually like as officially like Berkshire chairman, vice chairman. I just think he's human and I think he was wrong on China, but you're pretty bearish on China. What do you think about China? I know you just, you just mentioned
Alibaba, but generally just don't invest in communist regime. It's not the VIE or whatever they call that structure we, I don't know what the right to. That's a VIE. It's the end of the way, Alibaba. If you own Alibaba, you don't own equity in a business. You own a certificate in the Cayman Islands. And communist at a point tend to just take all the money away. And you'll never
get it out. I'm fairly confident that most of these Western businesses are stuck in China and at a point who knows whether it's when China actually does weight across and try to take over and tie a wand. Who knows what the end game is? I've got a section in the letter on China. I always try to talk, touch on two or three themes beyond Berkshire and beyond the separate parts of Leo.
And I've got a section on China. I am very bearish. You've got a country in the last 40 years, but really in the last 20 years grew to the second largest economy of the world, 18 trillion dollars. They brought half their population off the farms into the cities. There was a growth miracle component. They never did it with a profit motive. The Shanghai exchange is negative for the last couple decades. The businesses don't earn a return on capital, but that's not been the mission.
The mission from a party standpoint was we're going to grow and we're going to bring people off the farms and they did that. Well, through a series of, and really the one child policy was disaster, but anytime a nation industrializes, the family stopped having as many kids because you don't need a lot of bodies on the farm, free labor. So you go from seven to five to four kids. Well, you know, China's now got a birth rate of 1.2 and you need 2.1 to sustain a population.
The other thing that happens though when, as the birth rate declines when a nation industrializes is the current population lives longer, access to medicine and healthier living. City living is, is not as hard on the body as living in farms. And so you get this big expansion of the older portion of population. So China's so top heavy now with 1.4 billion people that there's no way to reverse that gruesome one child policy, which you've now got so far fewer women because families
would abort the girls. Because you wanted the sun as the air. There's no way to undo decades of a failed policy. And so the Chinese population is going to shrink by half over some period of the next 30 years to 70 years. And you look at what they've done to grow and the leverage that they've used in the last two decades. You know, we have a huge debt problem in the Western and all of industrial world. We're 350% credit market debt to GDP in the United States and the same holds for
Europe. China's way above that. You know, there are an 18 trillion economy with something like 55 or 60 trillion in debt. You've got ever grand that's blown up in the country garden. Evergrande had over $300 billion in liabilities and they liquidated a couple weeks ago and there's nothing. There's nothing. Every property developer's done. So you've got something like 13 billion of hidden off-balance sheet debt that exists at the province and the municipality level that is not counted in the
official Chinese debt numbers. All of that money got lent to property developers. And then in turn, the wealthy Chinese who got rich as the early age of industrialization, they've invested in that stuff. And so, you know, there's no capital left and you you you combine these huge overbuilding of infrastructure with a population that's now been shrinking since 2021. And as I said, it's going to get cut in half. It's a really bad way to grow your GDP per capita by cutting your
population in half. But that's essentially what's going to wind up happening over the next few decades. Overlay that demographic problem with no need to build more buildings. And they're going to complete what's what's really odd is they will finish all the projects under construction, even though every single property developer in the country is bankrupt. They'll finish that stuff and then they'll blow it up. But you're not going to put more people into the cities. In fact,
people in the cities are probably going back to the farms as the population shrinks. There's no more opportunity. So the largest importer of every base commodity in the world, Toby, the iron ore from Australia and Brazil, it'll still come in and it's coming in now, but less and less of it will get used domestically right now. They're dumping everything on the world, Olin, in the case of the cost and chlorine world. They're dumping epoxy resin on the world at prices that make no sense,
whatever point the West sanctions that. But there's no economic use to it. They're losing China has among the highest electricity costs in the world. It makes no sense to do it, but that will all come in reverse. And that'll bear on global growth, which is already slower for the last two decades because we've put too much debt into the system. So I'm very bearish on China. No, I would never invest in a place where you don't have rule of law. I think Starbucks at some level with their
7,000 stores out of a 38 or 39,000 base. China's a big component of the growth curve for Starbucks. They're company-owned stores like they are in Japan, not in Korea. And they intend to open a lot of stores. If China really gets sideways with the West, and again, Taiwan will have a lot to do with it. But international trade will have a lot to do with it. Their debt problems will have a lot to do with it. There's a not insignificant chance that Starbucks is just a single example loses their
assets in China and they're commandeered by the state. That enters our thinking and observing this for a number of years. I had a series of predictions in my 2000 letter and then the follow-up in my 2014 level letter. So China's GDP would not pass that of the US in 15 years. Now they won't do it in the next 70 years because you're not going to do it with a population that gets cut in half.
We have net growth in population of the US and a lot of embedded advantages to how we're situated with agriculture and friendly neighbors to our north and south and two big oceans on the left. Right side of the country, the most powerful military in the world. That's a big of a waterways. All of it. I mean, China is not going to pass the US in terms of GDP. Despite they're having 1.4 billion or 340 billion, it's not going to happen. They've already done it.
The miracle is kind of run its course. That'll reverberate in a lot of places. If you're an investor, a PM, or an analyst, you better be thinking about how the role over in China and demographics take forever. I mean, this is not a core role here, I yearly think. It's going to happen over a long period of time, but there will be second and third and fourth order effects that
are going to bear on how capital is treated globally. I think China is as big of a risk as the debt bubble that we all sit underneath in the industrial world and better pay attention to it. At least that's my take. Scary. It requires a little kombucha. Yeah, it does. I'm interested to get how you feel about it. We've got about 13 minutes left. How you feel about Berkshire, where it is now and how it's doing.
And this is a question from JT, how that sort of what it says about the economy, how it will do. For sure is the keyhole into the US economy? Anything you've seen, what are you seeing from that? They are pretty good proxy for the US economy for sure. It's largely a domestic business. There are components of the conglomerate that have been pretty weak. Railcar loading has been really weak for the last several years. They turned a little bit in the fourth quarter for all of
the Class 1, the 6th Class 1 rails. Berkshire included, but the BNSF is earning about 2 billion below when I would call a normalized earning power. It's been pretty weak. Or it had the letter. It's volume, mostly. Is that what volumes are down? That's volumes and it's not just coal. I mean, in the last two years, it's last year, especially, it's everything except for new cars. I mean, and some of this is now a roll over in trade. I've got
in my secular peaks and troughs graph. I included total dollar exports, total dollar imports, and net trades percent of GDP. We've rolled that over. Again, this is China now slowing in the last three or four years. I think global trade is going to come in a little bit. To the extent we're an exporter and an importer, a lot of that Western rail that Union Pacific and BNSF roll through the ports, the West Coast and volumes there can mount. Coals clearly in decline. You've
had a little bit of a resurgence. Certainly in Europe, you got a big resurgence. But as we retire, coal fired capacity and replace it with renewables, coal is going to remain weak in that impact Burlington. The utilities were okay. Warren talked about the regulatory environment. I'm sure he's pissed. They pacificorp had the fires in 2020 in Oregon and Northern California. I think they paid a little over five billion for Pacificorp in six or seven. They've set aside three billion
pre-tax so far to cover losses net of about 500 million in reinsurance. You've got the regulatory body, the PUC, saying maybe you want to be burying all of your power network. That's fine. If you're going to make us bury it, but you better give us a regulated return. Utilities always come with a risk of stranded costs. Go back to when we closed a lot of nuclear capacity in the 80s.
Have these nuclear decommissioning trusts. You exist as a monopoly. You would never build a coal fired plant or a nuclear plant or a wind farm or a solar farm unless you were going to get a return on it. The regulators have to be fair with the utilities. You look at what happened with Scana and their stranded nuclear costs just a few years ago. We total disaster. We had big cost overruns and the regulators said, that's on you. That's not on the rate base. Well,
you got to get a return. What we've done rightly or wrongly by racing toward carbon neutral 2050, rightly or wrongly, the cost of it is not exclusively following on the individual consumer of electricity. It's not on the data center. It's not on the household user of power. The Bitcoin miner. It's on a lot of it's on the tax pay. A lot of it's on the federal taxpayer. Berkshire's got a $1.9 billion tax credit last year. Their tax rate was
incredibly negative. The taxpayer is bearing the cost. Beyond Pacificoor, when you close half of your nuclear capacity, Berkshire's closed something like 16 or 18 of their coal-fired plants. You're putting in wind and solar. If you built a 60-year-life coal plant, you better be allowed the entire return on it, either through a higher rate base on your current renewables. If they say, sorry, that's on you, nobody in the right mind is going to build the next.
You're not even going to maintain your grid. You'll just walk away from it. Pacificoorbs debt is trading at $0.97 on the dollar. It's essentially 6% yield at par. You haven't stressed it. But if the regulatory climate and one of their markets became so bad, that they were going to kill the profit motive of a private monopoly, walk away from it. Here are the keys. We'll bank it up the equity piece. Then all the debt they put
on it, which is split 50-50 with the equity side. You just give it back to the regulator and say, you guys run it. We're not going to build the next plant for you. We're not going to maintain it. If you're not going to let us make money on it, here you go. It's yours. We're trending toward a more populist regime from a regulatory standpoint, not just with utilities, but across the board, where our political winds are blowing. If we're going populist, some of your regulated businesses
may not be as good a business. I don't think that's where we're headed. I think the message was a warning shot to regulators. Look, this is insane. The conspiracy theorists, and you will say, if you look at where all those fires started, there are a whole big series of fires. Don't discount the fact that Arson might have had something to do with it, because it sure looked to me when you look at the interstate and the highway map that most of those fires started
at trailheads just off the interstates. You do have climate coups running around that will do anything to kill traditional power. If it means setting a whole bunch of forests and homes on fire to achieve their end, they might do that. Berkshire is going to take a $3 billion hit on $5 billion in equity capital, but that is not insignificant. When you get re-insurance and the insurance world, Geico is back to healthy. They're still trailing progressive, but
you had a period where you lost a whole bunch of money coming out of the pandemic. You made a whole bunch of money. You had to give money back to policyholders, then you had all the inflation. It got really expensive to fix cars. Then you had to go get rate in places like California, New York, New Jersey, gave you rate late, but the auto industry is very healthy again because they got enough price. Now, we don't like it because you're paying a lot more for your auto insurance.
To the extent that you've got weakness and you've got retail weakness in places and you've got the BNSF week, the offset to that is you've got this $167 billion cash portfolio that today is earning 5.3% of your $9 billion in interest that would have been earning nothing two years ago. That makes palatable weakness in various places. You're one recession away. That's about Mount Berkshire, as you called it. Yeah. I think I dreamt that up at 5 o'clock in the morning. Yeah, it was in a haze.
Well, Berkshire gets criticized for having all this cash laying around. They shouldn't. If you look at, since they did the gen-redeal when Berkshire traded at 3-2-buck and they bought insurance business to essentially diversify the stock portfolio, they've run the cash relative to total firm assets at an average of about 12%. Well, if you're $167 billion on a trillion in 70 or a trillion in 80 billion, you're a little higher. That'll be higher. Nothing that major.
You're kind of in the range of where the cash is existed for the last quarter century. It's just Berkshire has over a trillion dollars in assets. It's largest company in the world by tangible assets. That doesn't mean we can't really. What Buffett said that what's being asked carried it like 30 billion of book value and it's probably, he thought it was like 500 billion in replacement? That's probably right.
These rails were built 100 years ago and you've got assets that are fully depreciated that yeah. Part of them has to get maintained but part of these are just carried it. I think it would cost 500 billion. I think it's probably right. It would cost 500 billion to replace
the asset. Nobody's going to do it because the assets are already in place. I think they paid 35 billion for it and most of the profits since they've bought it have been upstream to the parent and they had an opportunity to really improve the network by a double intermodal and adding track
in various corridors and blowing out all the tunnels and improving the bridges to accommodate the double stacking but that's all run its course and so the railroads are good, a good business, the risk to the downside from a regulatory standpoint and as trade comes in, it'll be okay. It'll earn 12 or 13 on current carrying equity value. The equity of the firm is actually up to 50 billion so it's grown since the purchase and there's still good will that sits
there. In fact, the railroad and the utility have both like 50 billion dollars in equity capital today. I think the utility business unless the regulator screw it up is still going to absorb a whole bunch of growth cap acts over time because we are going to do more renewables and if we're going to do them and the taxpayers going to subsidize them, it's a really good use of capital. Chris, we've got a couple of minutes left but what do you expect to see this year at the annual
meeting? I'll be disappointed if we don't have a cardboard cut out of Charlie. You'll have a celebration of Charlie. It's going to be emotional for Warren for sure. I think you'll probably have Greg and Ajit probably at the day us for the duration of the meeting now. We're in the last couple of years. They've had him in the morning session and it was just Warren and Charlie in the afternoon. My guess is you'll have those three fielding questions throughout the day.
I just hope Warren at 93, he's kind of living beyond the expiration date as well. The culture of Berkshire will maintain and persist for a long time. The meeting is so fun because you guys go, we catch up with all of our friends. It's more of a celebration than just simply the six and a half hours of listening to Warren and Charlie answer questions. You can go to the CNBC archive and encourage anybody to do it to go do that and listen to those old meetings. There's so much wisdom
that has come out of these cumulative meetings over time. I hope to see you guys 10 years and 20 years and 30 years in Omaha because it's a special thing. There's no annual meeting obviously. Anything like it. Berkshire's got a community of cultists that were developed because of Charlie's care and touch and Warren's care and touch and hopefully it lasts a long time. It'll be a tribute year for the meeting and also a celebration of Charlie's life. Do you think record attendance this year?
I don't know. I think the attendance has fallen off in the last couple of days. It has a little bit of life streaming the meeting on whatever Yahoo or whoever does it. It's going to shrink over time, which frankly it's too many people in Omaha. The fact that I'm paying for four nights. I bring clients that in friends that come in on Friday and go home on Sunday. We got to pay for four nights at the Embassy Suites. That's a little stupid. Yeah, they really got you over the barrel.
That's their entire year's profit over those four days. Well, that in the college world series. Yeah, so they get you where they can. He tried to fix that problem. In fact, he had me talk to Steve Jordan at the Omaha World Heritage World a few years ago. I'd brought up the price and the minimum nights. He called all the hotel managers into his office and said, knock it off. I'll move the meeting to Texas if you don't treat the shareholders a little more fairly. Then went to a two-night
requirement versus a four. They never really lowered prices. Double the price. Yeah, but you know, they were back at it within a couple of years. He said, look, I don't want to be the bad cop in my town. He says, why don't you tell the paper what's going on and then Steve can go run around and talk to all the different hotels. Nothing came of it. I was the bad guy in the paper for a minute. I went in Cognito when I checked into the hotel that year. I bet.
Chris, we're coming up on time. Thanks so much for spending the time. This is in Congrats again on 25 years. That's an extraordinary achievement. That's the true measure of success in this business. I always think. Well, it's a blur. It seems like we started the thing yesterday, but again, I hope we're doing this thing for a much longer period than another 25. But thanks, James. Well, thanks for coming on again. Folks will be back here same that time, same that channel
next week. Don't know who the guest is yet. We'll be figuring that out of the course of the course. Thanks again, Christopher Bloomstrand, Samper Augustus. We'll see everybody next week.