Tom (3:25)

Yeah. How do you, how do you feel about it? I mean, I'm sure there's going to be a very special feeling this year. Without Buffett, I imagine that he would be sitting there with the board of directors, but he won't be up on stage. I think that is confirmed. How is the meeting going to be different? Other than the obvious fact, I guess.

Chris Brumstrand (3:41)

Well, they've said it's going to be shorter. I like the fact that Greg and Ajit are going to field questions about the operating companies and the insurance businesses, and then he's going to include Adam and Katie on stage as well to get a little more color from the subsidiaries. And so where Warren and Charlie would spend, well, six hours plus fielding questions, some with very little business relevance, they were able to talk about a lot, about teaching and life and wisdom. And I expect this to be a heck of a lot more business focused, which will be great. It's going to be shorter. But hearing from these folks that are running the subsidiaries about what's going on, what concerns them, is going to be great.

Tom (4:25)

Wonderful. And, Chris, let's jump right into it, because I wanted to talk about your annual letter. And I feel a bit torn about telling you this, Chris, because I know I'm supposed to read the letter from A to C, and I actually do do that. But first, like every good crime novel, I have to figure out who the killer is. I have to look at the intrinsic value update first. So I would go in this case straight to page 148 and see what's the value, what is Chris's assessment of the intrinsic value? And of course, you provide different methods. But let me just start by asking, how much has the intrinsic value of Berkshire Hathaway changed from 2024 to 2025. And what have been the major drivers behind that?

Chris Brumstrand (5:09)

Well, as you know, you've read the letter for a long time and we've talked now for years, I've got four essential methods that reconcile to each other that help put Berkshire's intrinsic value on a framework. I do a sum of the parts, I do a gap adjusted financials, and those are somewhat related. The gap adjusted financials are a great teaching tool because there's so many different moving parts inside Berkshire that requires adjustments to GAAP earnings to kind of get to what I call economic earnings. It's just a useful section from a teaching standpoint. And then you've got a very simple price to book. In recent years I've used 175% of book value, stated Berkshire's book value before, non controlling interest, and then the old classic two prong method. Because for years, if you go back 25 years, 20 years, Warren would give you on a per share basis, marketable securities. They would give you the operating earnings and you could apply whatever multiple you wanted to each and you could back out whatever you wanted. And so he, he took those out and he put them back in and he changed his methodologies. And I went back and forth with it, but I still do that. And so that, that'd be similar to a price to book. And I find over different periods of time some of my measures are more meaningful and more relevant than others. Tom, you tend to get distortions. So for example the railroad and even the energy business, but the railroad in particular are under earning, I think relative to what they should earn on a normalized basis. Well, I don't make an adjustment for the under earnings in the railroad, which is still under by a billion. Now it's been improving in the last couple of years dramatically, but they've still got a ways to go. And Greg addressed that in the letter this year. But then on underwriting, where Berkshire is still over earning what I think they would earn on a normal basis where we all strip out earnings from the stock portfolio, both realized gains and unrealized gains and losses, I also strip out underwriting whether it's aberrantly higher, aberrantly low, and assume that Berkshire is going to underwrite over time at a 5% pre tax. And so, well, they're still over earning, albeit less this year than the prior year. I don't make that adjustment. So at the moment, on an earning power basis, Berkshire looks like it's earning less than I think it probably would on a normalized basis. And Then for the year you had the stock portfolio require some work to figure out what the return was. I come up with 13.7%. You've gotta take the 13F holdings, the non 13F holdings like the Japanese trading companies. And I put those together and the portfolio was up 13.7 on a total return basis. And that drives, in addition to retention of earnings and what Berkshire earns on an operating basis, that drives the capital of the business, the book value and the assets of the business. So book value grew 10 and a half percent. And so I come up with, when you just do a simple average of my four methods, a progression of 9.3% year over year, which gets you to a little over 1.2 trillion. Almost one and a quarter trillion by market cap would be intrinsic value. And on a per share basis that went from the B shares a year ago were 522. I've got them at 570 per share now. And the A shares are up to 855,003,96. So at the current price this morning, the stock's trading at about 85 cents on the dollar, a fair value. We had a chance to buy it a couple times. So Berkshire stopped buying shares back in 2024. Tom Greg announced a couple weeks ago after the stock declined post the earnings release, that he had initiated cherry purchases again in consult with Warren, and made sense in that the valuation relative to intrinsic value, at least per my calculation, was back down to where it was in 2024 when they stopped buying shares back though, I mean, Greg made the announcement, the stock rose. We can go down a rabbit hole for a minute if you want. But even beyond my GAAP adjusted earnings, simply taking operating earnings, which Berkshire does make, has a supplemental Release to the 10Ks and the 10Qs and they'll strip out from GAAP earnings the earnings from the stock portfolio and they'll break out earnings by subsidiary. So the railroad, the energy operation, the MSR Group and the insurance operations. And the world took that operating earnings release this year and said, oh my God, quarterly earnings were down 30% and year over year they were down by almost 7%. Well, they really weren't on an economic basis. And so there were three or four really key things that the media misses and most commentators miss on it. And so where operating earnings were $44.5 billion for the year, that was down by almost $3 billion year over year. So a number of things transpired. So one thing you've got to do is adjust for currency movements. So in the Footnote to that operating earnings release. They tell you about any gains or losses on the currency translation of Berkshire's denominated in foreign currencies. So they've got a bunch of money, 15 ish billion borrowed in yen, and they've got a smaller amount of euro borrowings, and they've got even a smaller amount of pound sterling borrowings. Well, all of the Japanese debt that they borrowed at 1.2% went to finance the purchase of the five Japanese trading companies in intervals over the last few years, and they own about 10% of each of those. When you own a foreign asset that trades publicly, the Japanese trading companies trade in Tokyo. If the dollar declines against the yen on a translation basis, that helps on a reported basis the value of your holdings and vice versa, if the dollar rises, that harms the value of those holdings. Well, for the 2024 and 2025, 2024, you had a $600 million change loss on currency, and then you had a $1.1 billion gain. And the next year, the Delta there was $1.7 billion. I strip that out, and I think you should strip it out because the currency movement is getting translated into the stocks. But Berkshire ignores the changes in the value of the stocks from reporting their earnings, reporting their operating earnings. Well, likewise, they have to mark to market the value of the debt. So if the dollar declines against the yen, it helps the stocks, but it identically offsets the face value of the debt. Now, in a realistic basis, if Berkshire chose to just refinance or repay all that debt at the moment, and the dollar had harmed its position against the end, they would have a loss. But you have an identical offset movement in the end. So you need to strip those two out. Well, then you get into each subsidiary. Well, if you look at the main key moving drivers, the railroad was up. Its earnings were up almost 9% for the year. The energy business was up almost 7% for the year, Tom. And the manufacturing service retail group's earnings were up four and a half percent. Well, those three key drivers of value are half of Berkshire's value and half of its economic earning power. They were all up, not down for the quarter, they were not down for the year. And so within each of those moving parts in underwriting. So Berkshire's been selling Apple and a handful of other stocks. So its common stock portfolio is lower. So its dividends earned are lower. Now, its cash investments are way higher. But the Fed started cutting interest rates in 2024, and so Berkshire is earning less on its T bills. And so its earnings are down from those two and those naturally are driving operating earnings down. But on an underwriting basis, GEICO went through a period in the pandemic where they it was just awful. You made a whole bunch of money in the pandemic and then coming out of it everybody was driving again. And so for a time they had to give money back. All of the auto insurance companies had to refund money in various iterations. GEICO did their give back program where they give you a 15% on the rollover six month policy. Well then you had a period of inflation. You had inflation in used car prices, you had supply chain disruptions, you couldn't get parts. Inflation was running 9, 10%. So all of a sudden the auto industry and GEICO went from minting money for a short period of time in the pandemic to los a bunch of money or breaking even at best. And so one by one the state insurance commissions gave the auto insurance companies price increases sufficient to where the industry went from suffering to minting, minting money. So Geico in 2024 underwrote at almost an 80% combined, which is incredible because they normally write at 4. I think for the year 2024 they were underwriting at 82% which is essentially an 18% pre tax profit margin. Well in 2025 they still underwrote at an 85% combined. So there was some deterioration, but that's still a 15% pre tax margin where again they would normally they in progressive try to underwrite at 4. And the industry breaks even over time. So the industry is still really profitable. Well, when you get into the footnote and you know what's happening in auto, they had price increases. Nobody's getting price increases now because the industry is making a ton of money. For a period of time when they couldn't get profits enough realistic price on an auto policy in California, they stopped writing business and to do so they stopped advertising in markets where they didn't want to write. And so their policies in force cascaded down. Well here in this hard market last year they put their foot on the gas, which they should be. When they're as profitable as they are at the moment, you want as much business as you can get. So their underwriting expenses went up by 270 basis points. They spent over $1 billion more in 25 and 24 on auto. And so they increased their policies in force by 5%. They didn't get price, that was all volume. And so to me the thing is still really profitable. But Then in reinsurance, if you know how the insurance game works, your actuaries establish loss reserves which will evolve over the life of policy and auto. It's very quick tail business. In the first year, 2/3 of your losses develop because you wreck your car and the insurance company pays to get it fixed right away. So 65% is paid in year one, another 20% is paid by year two. And then the last three years are longer term resolutions of things like lawsuits and medical claims, but it's all paid out in five years. If you have a workman's comp policy, that thing might pay out over 30 years. So you establish a loss reserve and then Berkshire's got their loss triangles in the footnotes. And every year they will assess the degree to which losses are developing in line with either favorably or unfavorably against what the actuaries had originally estimated and what they re estimate each year. Well, Berkshire being Berkshire is always conservative. And you don't find many periods where they've, where they've not been conservative in the reserving. So they tend to have positive reserve development. In 2024 they had $1.7 billion in positive reserve development, meaning they were too conservative by a factor of $1.7 billion. For all of its prior year's underwriting in 2025 it was still positive, but by only $1.1 billion. So it was $600 million less. Well, I would make that adjustment for those differences. And then Berkshire being Berkshire and its manufacturing service, retail group, they were, every year they occasionally take these small charges against goodwill for asset impairment because they've got a gazillion businesses inside Marmon. They've taken some write downs on one of the trucking businesses, extra lease. So in 2025 there were $1.4 billion of write offs, right? Right. Downs of goodwill. The prior year there were, it was 1.5 billion net, 400 million the prior year. So there was 1.1 billion more additional write downs in 2025 versus 24. Those are non operating. Those are simply a reflection of businesses that we bought don't have the earning power anymore relative to what we paid for them. Most companies will exclude those from earnings. Berkshire just throws them into operating earnings. So where for the year it looked like operating earnings declined by almost $3 billion. No, they were actually up by 1.1 billion. But the world reacted, nobody in the media got it right. And the stock just started getting, just beat up. So Greg comes in with an acknowledgment to where he and in consultation With Warren thinks fair value is started buying the stock back. I wish they hadn't filed and told the world they were buying it because I doubt they're going to get that much bought because the stock jumped back up. Now the reality is, and Greg acknowledged it, we're in a tough market. There's too much capital in reinsurance. There's too much capital in a lot of the property lines, even in auto holding on to market share is going to be tough because if the industry is really profitable, your competitors are going to lower prices. So Berkshire is now classically running off insurance business. They're not renewing policies and they've got a history of not writing business when it's unfavorable. I've got a letter. I put the letter from or the table from Berkshire's 2004 I think it was annual letter the history of whatever they called it. Portrait of a disciplined underwriter. And so for 13 years in a row they ran insurance premiums down from $232 million to $50 million because insurance prices were not adequate. Berkshire does that. Nobody else does it that way. And they're in the process now of shrinking insurance premiums both in reinsurance and in some of the property lines within the surplus and the primary group so long winded about earnings and my GAAP adjusted but even on the operating earnings you've got to make some translations to operating earnings to actually figure out what's going on or where economic profitability is. And so if you put it all together, Berkshire, Berkshire did grow their earnings operating earnings last year by over a billion dollars. I think the price to book and the two prong are probably a little more reflective of value today because there's an under earning in a couple of subsidiaries that's that are pretty key like the railroad which I think Berkshire has this chance to to resolve some of that but it doesn't get accounted for in some of my numbers. So some are more conservative than others. But I think, you know, 9.3% growth in intrinsic value is kind of in line with what I would expect annually on average for the next 10 or 15 years. And that would be between 10 and 12% which is what it's been for the last quarter century. The days of compounding at 28% a year are gone. But I think if you look at the moving parts of Berkshire, the key moving parts they can grow the earning power of the business by 10 to 12% and kind of depending on what they do with share repurchases, you got to look at all on a per share basis anyway, that's probably more than you wanted, but I think intrinsic was up a little. And so here we are talking in mid March. This will, this will be out closer to the meeting. But if you linearly grow earning power and intrinsic value by 10%, you know, maybe instead of 570 on the B shares, they're worth 580 or 585. Shouldn't do it with precision, but the stock is trading at a reasonable discount to fair value to where maybe a little bit cheaper. Berkshire buys a bunch back and we've got a bunch of clients that don't own it or don't own enough. And I was buying it in August on the B shares at 460, was buying it a couple of weeks ago for 84. 80 is kind of the new 60 when you're six months on. And I like the stock down and not up because we've always got cash and cash flows to put to work and we like buying stocks cheap. And I think Greg's going to wind up doing the same thing.

Tom (21:39)

Well, let's talk a bit about Greg, Chris. And first, as you say, your letter, and I'm probably going to say this 10 times throughout this recording, it's absolutely outstanding. And I would encourage everyone to go through all of your methodologies in terms of how to value Berkshire. I think that. I'm not saying that everyone has to do it every year, but I think you need to do it at least once or twice and understand the strengths and weaknesses of each. I think it gives you a very good picture of the bigger drivers. No, actually, you should do it every single year with all of them. I should actually say that. But, Chris, you gave me a handoff to talk a bit more about Greg. Like you, I speak with people in the value investing community all the time and it's been quite anticipated. The first letter here from Greg, what could we expect? And I have to say I feel like people have been all over the place, at least in my echo chamber here. Some have been very positive and others have been honestly, borderline indifferent, to put it nicely. And I think I speak for many listeners of the show, Chris, whenever I say that I don't respect anyone's take on anything Berkshire related as well as yours. So, not that you are going to be the tiebreaker here, but I can't help but put you on the spot and ask you, what should we think about Greg Abel's letter this year?

Chris Brumstrand (22:52)

I thought it was good first time writing. He's not Going to be as funny ever as Warren. But I think he. I think he hit on all of the things he needed to touch on. He paid a nice brief early tribute to Warren as he should have done. Really demonstrated that he's a Berkshire guy. I mean, he gets the culture, he gets the integrity, he gets the value system of the place. I like the fact that he took the letter that he wrote to Berkshire's almost 400,000 employees and he broke that up into a handful of sections and elaborated on each of those talking points. Demonstrates that he gets it, that he gets the conservatism of Berkshire. Talked about specifically some of the businesses were earning cash flow from operations basis, which I like to see Berkshire earn 44 and a half billion. Talked about pilots improvements and that it was throwing off over a billion, maybe a billion for cash from operations. Talked a little bit about the oxychem deal. That was his deal. The Bell Laboratories, the pest control business they bought addressed share repurchases. So I think he's the right guy for capital allocation. Demonstrated that he gets it. Got into the nuances of some of the subsidiaries far deeper than Warren has done in, especially in recent years. But even perhaps entirely talked about insurance and some of the things that I talked about a few minutes ago with Berkshire still writing it at 87% combined, I mean, that's more profitable than they should be. And he didn't. He's not going to say it like that, but he said, hey, we're still writing in an 87% combined. Talked about Geico, talked about some of the headwinds that they're going to face, which we just talked about. There's going to have pricing pressure from some of the competitors. No insurance commissioner is going to give you price increases when the industry is too profitable. So either profitability gets eroded for loss inflation or from too much competition. And it's probably the nature of property casualty insurance, especially auto, probably the latter. I mean, you're going to see a lot of pricing pressure and price competition from Geico's competitors. Talked about repos, talked about Adam Johnson. Katie's going to be at the meeting. His move to have Adam, who runs NutJets, oversee 32 or 30. I think it's 32 of the operating subsidiaries. So this is what Greg's done. Greg has been running Berkshire effectively as its CEO since 2018 when he became vice chairman. And he's gotten his arms around all those businesses. He knows what he could handle. Warren has said the guy just lives, breathes. All he does is Berkshire Balances still coaches, hockey. So he's got a balance in his life, but he's gotten his arms around this business and he's leaning on Adam, who he has a lot of confidence in, to be essentially the CEO, just overseeing 32 of the businesses because Greg can't handle the direct reports from all those companies. Warren's approach was, I'm not going to oversee anything. I mean, I buy you, I'll let you run your thing. If you call me for help, I'll pat you on the back, say good luck, you'll solve it. You're a smart guy. Greg's been much more involved. He's proven that he's much more involved now. He's got Adam helping with that. And so I thought it was a good letter. I don't know what else the world would have expected him to get into. He spent however many pages. It was 16 or 17 pages. And he talked about culture and he talked about the big moving parts and summarized the key subsidiaries and what was going on with those businesses. I thought it was fine. I thought it was good.

Tom (26:23)

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Tom (30:08)

All right, back to the show. Wonderful. It's not easy to follow someone like Buffett. You know, it's almost like, what do you want? Whenever you win the super bowl, you want to win another. You know, it's difficult to make everyone happy in this world.

Chris Brumstrand (30:23)

Well, he said he's got. I mean, you can't fill the shoes. The expectation bar is really high. And he seems humble enough that he gets it, that he knows he's not going to be the next Warren. He'll have a shorter leash with all of the Berkshire watchers, both in the media and otherwise. And he's seemingly perfectly fine with that. I mean, he gets what his role is. And I thought he conveyed it pretty adequately and nicely in this year's letter, his first of what I hope are many. Yep.

Tom (30:52)

I wanted to speak to you about a specific paragraph in his letter. This is page 16 for anyone who is so inclined to print it out. So I'm just going to quote it here. CHRIS At Berkshire, equity investments are fundamental to our capital allocation activities. Responsibility ultimately resides with me as CEO, Ted Wesler manages about 6% of our investments, including a portion of the portfolio formerly overseen by Tip Coombs. Ted's impact extends beyond these investments as he continues to play a broader role in accessing significant opportunities, providing valuable input on our businesses and supporting Berkshire in various other ways. End quote. CHRIS Whenever I read that, I put that in my magic mug here and I made an exclamation point and then I said, ask Chris that question. I was really curious to hear what your take was.

Chris Brumstrand (31:41)

There's a few interesting notes about that. I mean, a Warren and Charlie hired Ted and Todd. Todd left to join JP Morgan. He'd been running Geico wearing different hats. He was part of the triumvirate with JP Morgan and Goldman to try to fix health care. And they threw up their hand, said, this is unfixable. I'm not sure that there was a role at Berkshire that matched what Todd thought his role might be. And so he moved on, which was fine. I think Ted probably picked up. Ted's a good investor. I think he picked up Todd's portfolio. My guess is a bunch of that portfolio has probably been sold, which we'll see, I would guess in the in the next 13F filing. But I like the structure. And when he said that ted is running 6% of the investments, he didn't specify whether that was of the Stockport, the $300 billion stock portfolio or the $700 billion combined assets, which are now over $120 billion at the holding company or if it was just the 580 or whatever that are in the insurance operation. So whether he's running 6% of 700 billion or 6% of 300 billion, don't know. It's north of 18 billion. I like how Greg's role and even Ted's role have evolved in that capital allocation needs to be done by Greg. It needs to be done by Warren's replacement. Because when you get into the teeth of a financial crisis or a recession, you're weighing opportunity cost. And so of the 370/billion dollars in cash there's probably a hundred billion dollars round number that's dedicated to the insurance operation that either needs to be held as cash or fixed income. Berkshire doesn't have a lot of fixed income securities. They have mostly T bills. So Berkshire has call it 270 billion plus another 40 billion a year that are generated by the operating companies to put to work. I think instead of judging his letter, judging what Berkshire does at the next opportunity and he said we need to be opportunistic. Warren acknowledged that in 0809 he screwed up and he didn't do enough. So he got the 5 billion and the $3 billion into the GE and the Goldman preferreds, got some of the Dow preferreds, the warrants later did some of the bank of America. But on the stock port he didn't do a lot in the stock portfolio. And Berkshire had has had cash reserves that have averaged about 14% of firm assets since 1998. He could have swung a lot harder and it acknowledged that he should have swung a lot harder. We're all going to judge Greg. I'm going to judge Greg by how hard he leans into opportunity when it comes and it's only going to come in a crisis or a recession. You may get a chance to buy the one off business, but you're going to do some of it in the stock portfolio. You're going to do some of it buying whole businesses. And as he is, Greg in the letter elaborated on Ted's role. I mean Ted's running a sizable amount of capital, but I'm, I'm certain that they're talking regularly the next big opportunity to buy an entire business or to get a big chunk of money at cost. They got 36. Warren got 36 billion invested in Apple at cost. Head's role may be running a farm system. I think my guess would be when Greg does an oxychem deal, one of the folks inside Berkshire he's going to lean on for an opinion is going to be Ted. So Ted's role is beyond just running his little corner of the stock portfolio, but he's looking at deals. If they're looking at buying companies, Greg's going to have more than his own set of eyes on these deals. He'll have folks on the board that are. Have expertise in various industries that he'll rely on. So. So Greg will. Greg's got a Rolodex. He's got his network of managers within the business. And so as he approaches capital allocation, it's not just Greg sitting in an office in Des Moines making decisions. He's got the Berkshire empire at his disposal. And Ted's going to wind up being an indispensable part of that. I mean, that's how, if I was running it, that's how I would do it. I think that's how it's evolved. And so I like that commentary because it confirms what I think is probably the right way to tackle the capital allocation levers, which is Greg's role. And it's hugely important that he, that he gets it. Then he's got the willingness to swing hard when it makes sense to swing hard. And just because the media tells you, oh, my God, this cash pile is out of control, they're too conservative now. They're going to do it on Berkshire's terms. And I hope he's the right guy for the job because we're going to get those opportunities. And as you know, it's not easy when you're staring down the barrel of a financial crisis. It's not that easy to pull the trigger. In retrospect, it's always really easy because you can pinpoint how ridiculously low prices were and how great the opportunity was. I think he'll do it, but I'm not going to judge Greg until after the fact. And that may be this year, it may be five years from now, maybe 10 years from now. I hope it's not 10 years. And I don't think it'll be 10 years, because I've got that little section in my letter about the opportunity cost of holding cash. And you, you will never recover if you're sitting on cash earning 3% for too long. If you compound stocks linearly at 10%, this, this is what my table shows. You take $100, it becomes $110 a year. One, it becomes $121 year. Two, it becomes $259 at year 10. I mean, pretty soon at five or six years. And stocks don't compound linearly, nor does Berkshire. But you get to the point where you've got to have a 30 or 40 or 50% drawdown to have justified owning the cash. And so at the next big opportunity, he's got to put $300 billion on the order of $300 billion to work. If sufficient opportunity exists. And if you get through a cycle like that in a period and they find they can't do it, that they don't have the opportunities to buy whole companies, there are plenty of places in the stock market to put that capital to work. I mean, there are among the largest cap companies in the world in the United States. There are some really good businesses that they could buy 10% of, 15% of, and that are liquid enough to do it pretty easily. But you got to do it at the right price. And so I'll judge him harshly, the shareholder community should judge him harshly if he doesn't swing hard at the next big chance.

Tom (38:13)

It will be interesting to see when that happens. Chris, I was speaking with your mutual friend Tobias Carlyle here the other day, who actually, not that it's super important for the listeners, he was actually the one who introduced us back in the day and we talked about Berkshire's valuation. For the record, I came up with a very lazy method and $547 per bizia. I should probably send Toby a message and say, don't listen to me. You should probably just read Chris's letter. I'm sure he already is doing that. And us. He's not listening to me anyways. Chris, we talked about Greg Abel's compensation. That was actually where I wanted to take it. And we talked about how his new conversation as the CEO was of 25 million in a way, was an obscene amount of money. In a way. It wasn't compared to what's the angle? Are you comparing to what others in that position would make? Are you comparing it to the $100,000 that Buffet were making before Then there is the dynamic with how many shares do we have? And there are so many other things to this. And so I wanted to ask you, Chris, what are your thoughts on the compensation package for Greg Abel and which compensation model would you have preferred?

Chris Brumstrand (39:23)

To me, it's the right way to do it. When Greg and Ajit got promoted, moved up, kicked up to vice chair of operations and insurance, they had matching salaries and I don't remember where they started, but they were 17 million and they're $18 million. And a couple of years ago they were 20 or 20, I guess 21. Greg, now that he CEOs 25 million, I don't think there's no better way to do it. Compensation is a hard thing. He's already rich and he's in his early 60s. I mean, he's at the age where the typical CEO who knows that he or she's going to be in that chair for four years and they're going to get an obscene amount of stock options and restrict shares. They're highly motivated to get the stock up. And then you've got these goofy compensation schemes and different performance hurdles, some of which are better aligned with shareholders than others. Greg's already rich. He was paid out for his modest 1% ownership position in Berkshire Hathaway Energy three years ago, four years ago, whatever it was, for $870 million, so call it 600 million net attacks. He turned around. And prior to that I was a little, I wouldn't say concerned, and I don't know how much liquidity he had. And he had that big bhe position that was illiquid, privately owned on paper, but I think he owned 5A shares and just a couple B shares. And so I own more than Greg. And Greg was running around as vice chairman for a bunch of years and you thought, gosh, you really want to see the CEO or the CEO to be own more of the stock. But when he was paid for his bhe position, he turned around pretty quickly and has cumulatively bought, I don't know, 100 plus million, $110 million at cost of Berkshire, which on a market value basis is pushing 180 or 190 million dollars. And presumably he's got other equity market investments. I don't think he's going to be a guy that has 30 homes and owns islands. I mean, he's going to live within his means like Warren has. And so I don't think there's a performance hurdle that would be suitable other than the fact that Warren trusted him in a role that we hope he's in for a long time. The shareholders trust him. He's got a responsibility to Berkshire and I think he's taken that on very positively. And so if I were in his shoes, I wouldn't want to disappoint Warren, I wouldn't want to disappoint the board, I wouldn't want to disappoint the shareholders. I wouldn't want to disappoint myself. So I'm going to exert every ounce of energy that, that I have. This is me speaking for Greg. I mean, I'm, I'm gonna do everything I can to make sure that, that Berkshire and I are successful over what hopefully is a 20 year run. And he said, I'm not going to get as long of a run as Warren to is 1965, Warren was 35 and I'm 62 or 63. But hopefully I get a couple decades doing this thing. And because he gets the culture and he's not going to put the business in harm's way, there's no return on equity hurdle. There's no hurdle that would wind up being short term in nature that I think would be an improvement over being paid a sum of money, a good sum of money. It's not outrageous. It's way less than a lot of CEOs make. It's not a trillion dollar pay package. And then to turn around and say, yeah, I'm going to buy the stock with all my money is essentially Warren for years and years and years and Charlie making $100,000. I don't need the money. I'm already rich. I'm motivated by the responsibility of running Berkshire Hathaway. So I think in Berkshire's case, and it's rare, but they've never given a stock option away to anybody. They've never given a restricted share away. The board is extremely, I mean, silly how little they're paid per board meeting. A few hundred dollars per board meeting. You make a little bit more if you're on the audit committee. But the board all owns big positions in the stock and everybody's bought them and paid for them out of pocket. Ajit owns far more than Greg, but he's been around Berkshire since 1986. Every share he bought was paid for out of pocket. And so there's an alignment when you reach into your own pocket and chunk down very real capital, your livelihood is driven by how Berkshire does. And, you know, you could argue that Ajit's compensation should be tied to how the insurance operation does, and Greg should have been compensated by how the operating companies do. But no, I mean, they're, they're in it for the entirety of Berkshire. And there's a benefit to having all of these businesses under the Berkshire umbrella. And so Ajit is approaching his role no differently than Greg. And that's A, maintain the culture, B, never put the business in harm's way, and let's just grow the economic earning power of the business as best we can without subjecting the business to undue risk. And so I like the comp structure.

Tom (44:24)

You know, I, I like the comp structure too, Chris. And I think that there are a lot of people who might be thinking, shouldn't it be tied to this KPI or that KPI, and I'm going to use a metaphor here, that's probably not going to work well, but we did start our conversation before we hit record, talking a bit about the Stones and music. And aside from the Stones, I've been listening to a lot of the Beatles throughout my entire life and probably read too many books about the lyrics. And there's still this interview that Paul McCartney is doing where he's being asked about the meaning of this and that. And he would very often come back to, you know, don't overthink it. In this case it just rhymed. And so of course there are then a lot of other meetings with a lot of other songs. But I don't know if I can necessarily use this metaphor here to talk about the compstructure because I think for a company like Berkshire Hathaway, there is a lot to be said about the optimal construct, but it really comes down to the integrity of the person. And I've seen a lot of obscene compensational structures and we're going to talk more about that later. Chris. But at the end of the day, it really comes down what I've seen. It comes down to integrity. I've seen some terrible structures that sometimes led to good results, not because of the structure, but because the person who managed that company was just really, really good person. And I think there's only so much you can do with incentives. And this is not going to be very helpful, I think. And this is my own. I'm not a psychologist by any means, but I think a lot of it comes down to good parenting. That's my own conclusion sometimes. Why is this person behaving so well? He probably had good parents. It's definitely not because of this thing here in his conversation. No, he's just honorable guy and that's why he's managing that company well.

Chris Brumstrand (46:11)

There's a lot to integrity and morality and either you've got it or you don't. And there's no pay package, there's no compensation structure that's going to alter behavior in how you wired. I think it's unfortunate the way most compensation systems are structured with a modest salary performance bonus that may or may not have hurdles. And then you've got longer term and shorter term hurdles on your performance shares, your restricted shares. There's just too much short termism that comes with the way most comm structures are structured. And it's the ones that align properly. Things like return on capital where you tend to get better behavior. But you're right, it boils down to the people.

Tom (46:57)

So speaking of which, Chad Munger famously said show me the incentive and show the outcome. And of course there are a lot of caveats to that. But I was looking at your portfolio here the other day Chris, at least with what is publicly available. And I was curious, whenever you look across your portfolio, what do you think is the most shareholder aligned compensation structure and what concerns you the most? And then if I can add another question to that, how much misalignment with shareholders do you tolerate if the underlying business is exceptionally good?

Chris Brumstrand (47:28)

So none of these are perfect, you just don't find a comp source. Oh, that's the gold standard. I found the Ark of the Covenant. So what I found over my 35 years managing money and reading proxy statements is you just have to get used to tasting a little bit of your vomit and if it's too much vomit then you need to move on. And that's generally when you found somebody that doesn't have the integrity or what have you. It's funny, you know, I love AI for its search capability and so recently I, I took, I said run the Semper 13F Gemini. I said run Semper's 13F portfolio and summarize the top 20 holdings by through their proxy statements on how to each company's compensation systems work. And I wanted to see how accurate it was and I'll be good. I mean it was absolutely accurate. I mean it pulled out my top 20 holdings, US holdings, the ones that we disclose in order and summarize the, the bonus hurdles, the short term hurdles, the performance hurdles and it nailed the ones that I think get it right. I mean Cummins, I've, I've talked about Cummins many, many times and how they've got a return on on capital hurdle, Motivate, motivation. Dollar General has a three year rolling return on invested capital. Then they throw in their bonus which uses ebitda, which is a terrible way to do it. Olin does an adjusted cash flow and a return on invested capital. They don't have an opportunity set to reinvest in the business. So you want to measure the business by its operating cash flow in a cyclical business over time. The ones that I really struggle with are the ones that are adjusted EBITDA heavy or where you're motivated by sales growth with no tie to profitability. So Starbucks is in the middle of turning around. They've got a new CEO that I like couldn't stand the prior one and I forget the name of the acronym for their program but they're measuring return, measuring comp based on back to Starbucks based on same store sales growth and operating income. Well there's no tie to the, to the capital earned at Each of the stores, deckers, which we made a big position, they've been a huge growth story. And they're compensated based on revenue growth and pre tax income. It's suitable for what they do. They don't have an EBITDA structure. They run net cash on the balance sheet. They've never resorted to leverage. So you wouldn't run an ebitda, but ebitda, which is above all the lines. If you're motivated by EBITDA and revenue growth, I mean you can put a whole bunch of business on the books and not have any of it make any money. Because if you've got a lot of interest expense and you're a capital intensive business and you've got big maintenance capex, you may throw off a lot of EBITDA cash flow, but you may not make any return on capital. And so those structures wind up being pretty poor. And more often than not you see it in the way companies make acquisitions and how they deal with their own company shares. And so you've got to be careful with comp and make sure you're not too disaligned, but you almost always taste a little bit of your vomit with everything you own.

Tom (50:41)

I love the way you said that. And I'm sure after testing out Gemini you went straight out and bought more Alphabet stock. No, it's just a bad joke. You know, Chris, I wanted to tie two of my favorite annual letters together here. Of course, your letter and then Buffett's and specifically I'm talking about the 1999. And I really like that in such good company because you're actually one of the people here who would set me straight if I don't quote the right letter, even if it's back in the 90s. But back then Warren talked about profit margin mean reverting and he was, I guess you could say he was ultimately wrong, but historically correct. And in your recent letter you point out that. And I've got a quote here from the letter. The S&P 500 now trades for 26 times current earnings against the second highest profit margin in the history of the stock market. That's against all stock markets anywhere in the world ever. High prices mixed with high margins are typically a recipe for mediocre returns or worse, end quote. And so first of all, very eloquently written, but I wanted to ask you. Some would say that we entered a new normal. And I know it's always painful whenever you say new normal, but some would say that we have entered a new normal. Technology has allowed profit margins to fundamentally be higher due to just new business models. Now what would you say to them?

Chris Brumstrand (52:02)

Well, I think that's right. Profit margins are durably higher than they were when we were more of a manufacturing based economy. Warren's 1999 article in Fortune was a amalgamation of a series of speeches that he gave, one honoring Ben Graham I think at Columbia. But essentially he was, essentially he was saying we're at a secular peak without saying we're at a secular peak. And margins and multiples were high. And he, he noted correctly, but ultimately wrongly that margins were range bound. And I think he used a range of 4% to 6 and a half percent. And in 99 the profit margin on the S&P 500 got up to 7 and a half or 7.6% wherever it wind up getting. So that was above the historical norm. Now at a moment they hit 8.9% in 1929. But from the point of that secular peak, he was right. And a high multiple to earnings, mid-20s multiple to earnings contracted when margins came back down to 5.8%. So he was correct where he was wrong and what he didn't see was margins by 2021 growing to 13.3% and then falling in 2022. Tom. But recovering back to 12.8% most recently now of that increase from mid sevens or mid sixes, wherever you would have put the prior range, double it to current levels. 3% of the increase has come from lower and lower interest rates. Even though rates ran up in the last few years, we still have an extraordinarily high amount of debt on the corporate balance sheet. But the interest rates are so much lower than they were for several decades that the interest burden, the interest expense has been lower. And that contributed 3 points to profit margin. The tax code at the corporate level for a lot of years was 35%. It changed a handful of years ago to 21%. That added 1% to the after tax margin which I thought would get competed away right away. It did not. But then what you wouldn't have known in 99 and maybe you would have for the Microsofts of the world, the cap light. But Microsoft in 99 was doing a 37 or 38% margin on 20 billion of sales. So they were making seven and a half billion dollars and it didn't take any capital to run that business. And then along came Google and along came the others. And so the profit margins of those businesses, with the exception of the retail side of Amazon, but the AWS side of Amazon. Tom, you've got a handful of very, very profitable businesses from a margin standpoint. And so margins double. Now, I do think there's still a mean reverting aspect of margins, but I've seen, I've seen papers and commentary say that because margins are higher, multiple should be higher. Well, I don't think that's right at all. I mean, if you could argue that returns on capital are durably higher, then I think the multiple on a higher return on capital business should be higher. But if you look at the return on equity and nuances to how it gets overstated in the current environment, based on sherry purchases above book value, based on write offs and write downs over time, based on the number of the amount of historical assets that are carried at historical cost in what's been an inflationary period for the last few years, book values are understated, meaning returns on equity are overstated. So I don't think you've had a durably wide meaning across the whole stock market, across the whole S&P 500 increase in returns on equity. You sure have had it in a handful of tech businesses and other companies. And I'd say two things, and I've got my five factor work that we've had in the ladder for two or three years, four years maybe, where I take the five variables that make up return, dollar sales growth, change in the share count, the multiple and the margin, which all four of those are multiplicative factors. And then whatever your dividend yield winds up being to argue that the high current margins coupled with very high multiples, you can bake in scenarios for each of the five variables. And it's really hard to get to more than a 5% return. And depending on where margins and multiples head from here, you can get to a loss for a decade, which is what happened after the 1999 peak. Two interesting things. One, when Warren talked at length many times about the tailwind that he enjoyed from growth in real GDP per capita. The United States was the economic engine of the world. That was the case. And real GDP per capita, and I've got a table in the letter that breaks this out by deciles, grew at over 2%, 2.5% for decade, decade, decade. It wasn't the same rate of growth every decade, but when debt levels reached 200, total credit market debt reached 250% of GDP in 2000. Now 300, almost 350%. And in even more recent years, post the financial crisis, the government piece of total credit market debt is now over 100% of GDP at a point more and more leverage is deleterious to economic growth. It's law of diminishing returns. And so indeed for the last 25 years real GDP per capita is growing 1% a little bit less than half its rate of growth. And this is adjusting for population growth and for inflation. And I would say if the long term PE, which was always 15 in the last quarter century, if you take it now over 100 years, it's probably 16 or 17 would be the long run average. PE growth is a big component to what you should pay for an asset. Faster growing asset warrants a higher pe. Lower growing asset, lower pe. If aggregate growth on a real population adjusted growth in the economy, maybe the long run average is not 17 or 16 or even 15, maybe it's supposed to be 13. And then you take these cap light businesses that have been just unbelievably successful. The Mag 7 were 8% of the S&P 50014 or 15 years ago. There are 37% of the of the stock market and they're trading at 30 plus times earnings. They also have very high profit margins in on average in the low 20s. Well, my roundtable to Lipomania in the fall, I made the joke. These things are rapidly turning into EBITDA stories, which is incredible because they were net cash on the balance sheet, free cash generating machines that didn't take any capital. And here you are all of a sudden in this AI arms race and all of a sudden increasing proportion of cash flow from operations is going to capex. These companies have gone from net cash in some cases to a little bit of net debt. You don't have enough cash flow from operations to support cherry purchases, to support all of the things the companies spend money on if they're going to dedicate this vast amount of money to CapEx. And so when you put CapEx on the balance sheet, regardless of the number of years over which you amortize it for depreciation, you're putting depreciation expense, which largely is maintenance on the balance sheet. And now you're putting interest on the balance sheet which is interest expense. And so all of a sudden you've got depreciation charges which are going to grow very rapidly. They will trail the growth in capex. So to me the profit margins of what had been capellite businesses are not only at risk, but they're far more likely than not to contract over the next period of years. How quickly they contract I don't know, but they're going to come down. I don't see that there's enough revenue possibility in the relative to the AI money being spent, the capex on AI being spent for chips and data centers and what have you to support current margins. And when you overlay high margins with high multiples, which is what you have at an extreme with those handful of tech businesses which were properly rewarded for their economic success and they were properly rewarded with high multiples, I think you're at an inflection point. And you could say it's an inflection point for the S&P 500, but it's probably an inflection point for the most richly valued of this large corner of the S&P 500. So long answer to your question, but Warren was wrong. And I don't think the margin goes back to a range of 4.5% to 6%. You take margins down from today's 12.8% to 10 and you're going to crucify a 26 multiple to earnings. So multiples come in when margins come in. Wall street investors in general don't like compressing profit margins and they punish the stocks with lower multiples, lower and lower multiples when margins come in. And I think there's a heck of a lot of risk margins for reasons related to the capex, but also reasons related to how the economy is structured and competitive forces. So to me there's a mean reverting, but it's at a higher level. It's at a durably higher level. But I think Warren then was right about the mean reversion and he would likely, if you put him on the spot, say the same thing today.

Tom (61:23)

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Tom (64:58)

All right, back to the show. Well, Chris, we should continue talking about multiples, but perhaps it's more multiples on revenue more than multiples on profits. You have this wonderful section here in your letter about you contrast the era of AI canals, railroads, autos, electric fiber, telecom. It was very thoughtful. And what I would really like to zoom in on is this section here you have about valuing OpenAI. So that goes back to my initial point about speaking about multiples. And you break down each funding round and then you ask what can go wrong. So let me, tongue in cheek, admittedly, Chris, ask you what can go wrong?

Chris Brumstrand (65:39)

Well, broadly, I touched on it in my comments just recently. The CapEx numbers, even just out of the big hyperscalers, were just shy of $400 billion last year on $400 billion of capex. If you're writing off the asset over 10 years, which is too long, there's a debate over whether it should be three or four years or five or six years. It's not about the debate. It's you're putting depreciation on the income statement depreciation expense. And it's a real expense. It's a real charge. If your depreciation schedule linearly on a straight line basis is 10 years on 400 billion of capex, that's $40 billion of depreciation expense. As far as I can tell, aggregate revenues supported on this incremental capex are about $30 billion. And now we're going to spend projections of perhaps three or more trillion dollars cumulatively over a five or six year period of time on $3 trillion. To make a 15% return on the capital that's spent, you need $450 billion in profit. The four big hyperscalers all have cash flow from operations at just over $100 billion. And I'm talking incremental profitability required from revenues that are now $30 billion. So who knows who winds up winning if there can be a winner? I equated AI to past capital cycles. Capital cycles involve big capital expenditures in the past, largely funded by debt. The current iteration oddly being funded by these companies that have enormous free cash and cash from operations, which is changing rapidly because those numbers are starting to exceed cash flow from operations. And then you've got peripheral players like OpenAI, and they're all vying to create these models that train first and then infer. But the dollars being spent are incredible. So if you go back over the history of OpenAI, I thought it'd be fun to go through the various of their 16 or 17 funding rounds. And Microsoft came in early with a couple funding rounds at $11 billion. The valuation at those moments was something like 28 or 29 billion. And so to me, if you. I don't. I'm not a venture capitalist, so I would be a terrible venture capitalist because I don't have vision. But if I'm going to put $11 billion in a business, I want to own $11 billion of the capital or the assets. And there may be a lot of growth to come. And I get that. And so I'm kind of tongue in cheek about that. But Microsoft was pretty rational. But then they had these successive funding rounds and I think cumulatively, OpenAI's raised something like $73 billion. By year end, they're doing $100 billion funding round at what they hoped was an 830 billion valuation. I think they just did it at 750. But Nvidia came in with capital. Masa came in, SoftBank came in with capital. And so here's an entity, Sam A's OpenAI, that's raised, call it 73. They've already burned through 50. They're burning through it fast. And the valuation rounds just went higher and higher. So two years ago, not even two years ago, a year and a half ago, they did one. This is after Microsoft, Microsoft stopped putting money into it and they negotiated it well because they own the IP. So if OpenAI fails, Microsoft owns OpenAI ChatGPTs AI. So you had a funding round in October of 24. They raised 6.6 billion at $157 billion valuation. 157 is a lot greater than 6.6. But 6.6 would be for a fraction of the business. Then they did one a few months later. 40 billion they raised at a 300 billion valuation. Then they did one just this past October at a $500 billion valuation. But the same $6.6 billion that they collected in the earlier one. Insiders were cashing out. So they did a $500 billion valuation, and the insider sold $6.6 billion worth of the private company stock. Now they're running out of cash and they're raising another $100 billion. So you and I could build car plants. We can build models if somebody's willing to give us a whole bunch of money. But you ask what could go wrong? Well, the entities that have more resources and that are embedded in more architecture. So Google has essentially committed outspending everybody and they've all committed to outspending each other. And Most of the CEOs of these companies have said yeah, we could be making a big mistake, but we can't afford not to do this. But Google's got their already their ad supported platform Meta, which has their Llama free is massively ad supported. Anthropic is just my understanding is and there's even an article in this morning's journal, they're just killing OpenAI with the success in corporations with their Claude models. And so OpenAI's share of AI search has dropped from mid-80s to mid-60s and it's falling fast. You've got regulatory risk, we're going to find out on fair use. The Europeans are very aggressive on this front. And then you've got a lawsuit from Elon. When Sam A flipped from we're going to do this thing as a not for profit, which is what he and Elon agreed to at the outset. Elon put I think $38 million into this thing, Sam a flip over a couple different degrees to now a fully for profit. They're planning on going public and Elon suing him. And it's not going to be a lawsuit with an M in front of the aliens. It's not going to be a millions lawsuit, it's going to be a billions lawsuit. So there's OpenAI specific and the guy, Sam went to high school, same school as my daughter, 3/4 of a mile from where I'm sitting right now. I don't cheer against people, but when the guy sits there on a stage a couple days ago and says intelligence, we're going to sell it like a utility, like water or electricity, my skin crawls a little bit. And so I don't think they will raise enough money to have the resources to be the one that wins this thing. Maybe they do, maybe they don't. I don't need to play in the game. But I think it's a tough hurdle. But it's a proxy for. It's going to be a tough hurdle for the aggregate of all of these guys in this arms race because the numbers are just frankly staggering. And I don't see how you've got enough revenue and then profit opportunity to make the whole thing generate a return on capital.

Tom (72:05)

Yeah, I'll just casually mention that for those of you who are watching the video, Chris is shirt is saying Tulipomania and the name of his company is Semper Augustus. I'm not hinting at anything. I'm just casually mentioning that. Chris, I can't help myself. I should probably preface this by saying that one of the favorite parts of your letters, whenever you talk about share repurchases, and here we're not talking about Berkshire, we're talking about the general stock market. And I have to say this year's letter did not disappoint. So you point out that Once reported for 2025, the S&P 500 combined share repurchase is like to exceed a trillion dollars. That's a T. I just want to say for the record, and so someone tuning in might be thinking, wow, that a trillion dollars has been returned to shareholders. That must be amazing. And over a quarter of a century, companies spend more than half of their profit. You're buying back shares. I think you made it out to 2.7% of market cap annual on average. But then you also look at the aggregate share count. It has not botched, really so impressive, but perhaps not the right way of being impressive. Can you, Chris, think of anything regulatory that could change in favor of shareholders? Or do you think that you're. You're basically at its core fighting and losing battle whenever it comes to basic human nature? Whenever you're looking at this creature that's being created with Jerry purchases, I think

Chris Brumstrand (73:26)

you're fighting a losing battle. And you've had various congresspeople, senators, representatives talk about banning share repurchases. Well, there's nothing evil about a share repurchase. And done intelligently the way Berkshire has done it over time. The way we like to see our companies do it is there's an acknowledgment that the stock is trading at a discount to fair value and we don't have a better use for the capital. So buy your share price and when it's cheap. If we've got opportunities to make good and great returns on equity or capital doing something else, then we should do that first and don't do it with leverage and excessively put the company at risk just for the sake of shrinking the share count. The trillion's interesting because if you do, I don't know where earnings wound up officially once all the companies reported for the fourth quarter, but I think estimates when I put my letter together were 263 and change per share for the S and P, which is, I don't know, two and a quarter trillion dollars. So a trillion, which is a big number. And it's the first time that number will be a trillion is 40, whatever, 44 or 45% of net income should probably rather look at the repurchases as a percentage of cash flow from operations. But on average, cash from operations is roughly going to match net income. It's materially different for some businesses, but on average, they tend to be pretty close. And so a third or 40% of profits on average for the last 40 years have gone to share repurchases or of cash from operations. It's staggering to think that over the last quarter. So if you go back to the late 90s, if you go back to the 90s, the share count for the S and P grew dramatically. It grew by something like 40%. Microsoft share count was just growing exponentially because they were giving 6 or 7% of the shares per year to their employees, not just the top executives, but everybody was getting shares and they were getting stock options. And it was wonderful as the stock went up because you got an option at 30 bucks a share. Now it was 60 bucks in shares you doubled against your cost. And Silicon Valley hadn't figured out offsetting dilution with share repurchases. And then you had the big market crash and the tech bubble imploded. The S and P dropped 50%. The Nasdaq dropped 80%. There were people that had exercised stock options, Tom, where the stocks had then declined so much that they had a tax liability that exceeded the value of what their shares were worth. And so they shifted from stock options to a larger preponderance of restricted shares, which are less dilutive because you're not giving away as as many shares. There's no option component to it. With a restricted stock, whether it's got a performance quotient to it or not, is basically the value of the stock at the moment. You give it away and you earn it over some vesting period with or without some performance hurdle. So you had a period of 15 or 20 years where the issuance of stock to employees, largely executives, largely the top executives, was about 2% of outstanding shares per year. And then for a bunch of years they were buying back on average, they being the S P 500 aggregate of companies, were buying back 2.7%. So there was a period of time where they shrunk the share count by seven, 10 of 1% per year. Then you get periods like the financial crisis where the banks blow up and they have to recapitalize and the share count balloons up. So what you get is a buy high, sell low mentality because most companies aren't price sensitive to their share repurchases. They're simply trying to offset the dilution that's coming from giving huge dollar amounts of money. I mean, compensation packages that are way higher than Greg's $25 million. And so we've gotten to the point now where there's more need for capital. So since June 2020, the share count's actually risen by 3.3%, which is staggering to me that you can spend a trillion dollars and the share count still goes up. And now for 25 years, there's no change to the share count. In fact, for 25 years, it's grown by 1.8%. But you're essentially. If 30 to 40% of what every company makes goes to retire shares, you have not shrunk the share count. Who got rich? The executives. And you could say in the case of the shareholder, those repurchases supported the stocks. And that's why we're trading at 26 times earnings today. And that's probably the case, but those were dollars that didn't go into reinvestment and property plant and equipment or acquisitions. That was money that was spent simply levitating a stock to make executives rich, driving up the stock price to higher and higher levels. And at 26 times earnings, even if you take the MAG7 out 22 times earnings for the S&P493, the share repurchases have been largely folly because they're not executed the way they should be executed. I don't know what fixes that, because if you get the job as CEO when you're 60 and they give you a bunch of stock on the barrel head because that's what your competitors get and that's what the compensation consultant says you should get. I'm going to get rich by driving the stock price up for four years. And I may be aggressive with my accounting. I may set performance hurdles back to the aligning shareholders that are not aligned. And I don't know how you fix that. I don't think there's any regulatory scheme that can fix it. More likely than not, the action of the stock market and a deep recession, a really deep recession may serve to fix it. But I guarantee you that the proxy voting companies, when they weigh in on governance, don't look at it the right way. They don't look at it this way. Those folks are not aligned with shareholders best interests. They're aligned with ESG and DEI and all kinds of crazy stuff. Berkshire should be a proxy on how to do it. But it can't be. And I go back to Greg's compensation and him saying I would buy the stock back. He was fortunate to be in a position to be rich when he became CEO and he got rich because he owned 1% of BHE. The next CEO is not going to come to the party with a net worth of 6 or 7 or $800 million at the moment he or she becomes CEO. And so the compensation of that person needs to be sufficiently high relative to the 1.2 or 3 trillion of assets. And it'll be a larger number depending on how many shares Berkshire buys back over time. But you want the comp to be high enough so the CEO might need a $25 million salary. I mean, as crazy it sounds to somebody needs $25 million, that's a reasonable amount of comp to run a business the size of Berkshire Hathaway. We could talk all day about share repurchases and executive compensation. It's so badly done in so many places that when you find it done reasonably well, it's pretty glorious.

Tom (80:16)

Yeah, I like the way you think about it, Chris. It's almost like saying what is the Buffet says about leverage? That if you're smart, you don't need leverage and if you're not smart, you definitely should not use leverage. And it's sort of like the same thing about if you're not already a financial independent and you probably are not the right person to run Berkshire in the first place, but you should also be compensated really well because you have a lot of responsibilities. But it's sort of like this chicken and egg kind of thing. So thank you for your perspective on that.

Chris Brumstrand (80:46)

I'll add to that share repurchase thing, even though a trillion is a big number, kind of back to the AI and the CapEx spending. Those numbers are so big, 650 to $750 billion for the current year, they're going to consume more than all of the cash flow from operations for Microsoft, Meta, Google, Amazon, that there's less capacity, Tom, to keep buying the stocks back. And so you've seen share repurchases among some of those 20 largest businesses start to decline. And that also back to the argument about PEs and multiples and what the right numbers are. Even though a trillion's a big number, it's shrinking. I've got a chart in the letter that shows repurchases as a percentage market cap going down and down and down. Well, that's partly a function of the prices, the valuations. The PE is going up and up and up. But if fewer dollars are committed to the share repurchase, one of those big supports for stock prices goes away because now the dollars are going into the ground in data centers or into space, which go off on another tangent. So they may not be the supportive salve that the market has had. And so for that, if we keep giving executives 2 or 3% of the companies per year, you may see the dilution factor go up and up and up. It's been pretty modest in the last five years, but that could very well increase. And a rising share count is deleterious to the investor's return. It's one of your five, it's one of your four multiplicative factors.

Tom (82:16)

Chris, I wanted to end this interview here on a bit more of a philosophical note perhaps because I really like how you started your letter by talking a bit about Guys choice not to manage outside capital. And given his health situation and of course what has unfolded is not defeat by any means. It really shows courage and integrity and putting family and clients first whenever, especially whenever it's incredibly difficult. And I should say you're shifting away from Guy and talking about this in general terms, it really makes one think about how none of us are immune to negative health events and sometimes cognitive decline can be gradual and hard for us to see. And so as investors we often talk about the downside protection in businesses that we invest in. But I'm curious to hear how you think about that for Cimbra Augustus and beyond planning for something catastrophic happening like being hit by a bus, metaphorically, what kind of structures and safeguards have you put in place to ensure that if your judgment were to deteriorate slowly, perhaps in a way that's very difficult to self detect, that you ensure that your clients are fully protected and you would continue to operate with this discipline. And I feel a bit torn about asking a question because I kind of feel like it comes across as very rude and that's not at all my intention with the question, but I was curious to hear if you thought about it.

Chris Brumstrand (83:46)

Well, for those that don't know what you're talking about, Guy Spear, mutual friend of ours, is deep in the Berkshire world as an acolyte. He runs a really nice business called Aquamarine. He's got a very good long term track record. He's struggling with, well, he's struggling with a pretty bad form of brain cancer and he had his family join him at one of my dinners in Omaha last year. And he was in recovery and we fought full remission and thought he was in good shape. And it came back late last year and, you know, praying that he gets through it. He's got a wonderful family. But he made the very, very difficult decision to focus on his health and his family and close his firm and return the capital to his investors. And that's just a brutal thing because I'm sure, like Warren and Charlie, like me. I mean, I hope I'm 57 years old and my plan is to go out either in a pine box or like Charlie did 34 days shy of his 100th birthday, or just struggle enough with my vision where I'm having a hard time reading 10Ks at age 95 to pass the baton. So we'll never sell the firm. I hope at 57, I get at least another three, three decades to do what I'm doing. I love what I do. I've never felt like I've worked doing this thing. I've got a responsibility to our clients. If I were to get hit by the proverbial bus, institutions are just going to move capital. We've got an obligation to people that have been with us for a long time that entrust us with capital that if I were to not get hit by a bus and to have cognitive decline, and I worry about it because I played football at a high level and had a number of concussions. So you sit there on a Saturday or Sunday morning and go drawing a blank on remembering somebody's name. Hopefully that's not the football. Maybe it's that I'm getting older, or maybe it's the fact that I had too much red wine last night on the weekend. Some combination of the three. But I think so business wise, if something were to happen suddenly, Chad knows the portfolio like the back of his hand. We've got young investment people working with us that are evolving and growing. We have a plan in place to essentially, respectively, with a good friend of mine, merge our operations in the event that that I or he running his firm would depart suddenly. So he's somebody that, that I'd be very comfortable having my family's capital with and my clients capital with. So we've got that in place as well. But I think to your point about a slow cognitive decline, we talk about tulipomania. This is my roundtable where I've got 30, 32, really my best friends, colleagues, contemporary's peers in the investment world that I've gotten over the years. We get together for four days in St. Louis and go through 12 or 13 companies and have a Lot of great discussions and eat well and drink well. Between my family and my colleagues and even my clients, many of whom are as much friends now as they are clients. I've got enough people in my universe that would, I believe would be candid and say, Chris, you know, you're starting to slow down. You need to do some, you need to think about not being having your finger on the trigger of capital. I'm confident that there's are enough people that think enough of me, that know me well enough and that I trust and mutually there's a mutual trust that I would do the same for them and I think they would do the same for me. So without expressly being able to say that with certitude, I've got friends who say, Chris, you're an idiot, you need to stop. You've got, you know, early dementia and you need to focus on family. And I think we're set on that front. I hope it doesn't come to that. I mean I really, I really do think the pine box. Although, you know, I may not get 100 years because as Charlie or Warren said a couple years ago after Charlie had passed, he noted that a. Having neither of them been athletes, that they're but that the non athletes bodies tend to live longer and you're sitting going, oh my God, I played college football. Well, I just scratches a few years from my life. But then he said obviously the women tend to out live men and noted that in his later years he was convincing Charlie to get a sex change operation. You know, I could, I could contemplate something like that to add a few years to the, to the Runway. Kidding aside, I think between suddenly how you go bankrupt, Bill will gradually at first and then suddenly. Well, that's either how you go out and either physically go out suddenly or you mentally go out gradually. And I think we've got a pretty good formal and informal structures in place to accommodate either or any combination of the two.

Tom (88:26)

I'm very happy to hear that, Chris, and of course you thought about it, so thank you for your very eloquent response. Chris, before I let you go and give you a handoff to where people can find the letters, the homepage, is there anything that we haven't covered that we should cover here in our conversation?

Chris Brumstrand (88:44)

No, I mean, I think this is great. I'd encourage everybody, I'll tell the story. So we didn't get, we didn't cover it. We didn't get to it. But I, A couple of years ago I started off my letter with My story of, I don't know, 10 years ago, I was trading a bunch of messages with Warren and about something different, but I noted that I just calculated that Berkshire could decline by 99.3% in share price and still have outperformed the S&P 500. And in his correspondence back with the other stuff, he noted Ben Graham would be proud, but let's not test the math. So there I was a couple weeks later at Charlie's meeting in Westco in Pasadena. I said, hey, I came up with this number and ran it by him. And he said, Chris, that's just simple compound interest. That's not impressive. And so you just slink away and go back to your seat. He just crushed me. So in going through last year, and then I updated this year with, with better numbers, I was able to, we were able to calculate market returns, S&P 500 returns from all of the big secular peaks and troughs over the last 100 years. So 29 peak, 32 trough, 37, 42, 66 peak, so on and so forth. And it's pretty amazing, the differentials of putting capital to work near a secular peak. Not even at, but, but if you do it at a secular peak or at a secular low, the difference in compounding series. And so I ran, so I ran the numbers over time and it's amazing how much disparate, how widely disparate the, the returns get from the famous Ibbotson. Ten and a half percent. And I realized something. So you've read the letter and maybe you didn't read this part, but there's a section I think from pages 994 to 104 that everybody should read because it's, it's my tribute to Warren and I talk about the track record and there's several things in it. His performance record versus the S and P at the moment he announced his retirement. And first weekend in May, there was no trailing 1, 2, 3, 4, 5, 6, 7, 8, 9, 10 year return. Berkshire outperformed in every yearly interval. Looking backward as of that date, which seemed pretty incredible, but on a 99% return. So what would be the single best day in the history of the stock market, the US Stock market, to put money to work, what single day would it be?

Tom (91:04)

I'll ask you, was it just right after the Great Depression? And you were like, people think it's this date, but it's the other date. Is that the segment you talked about?

Chris Brumstrand (91:13)

That is okay, yeah, June 1st. So S&P 500, June 1st, 1932. The S&P had fallen 86.2 or 86.4% from its peak in 1929. The Dow Jones, which is what you talk about, had fallen 89 point percent. And kind of more famously, I think it was July 8, 1932 that the Dow traded at its low. But the S P's low was on June 1, 1932, at $4.40. On the day of the Dow, it was 441. So it was a penny cheaper a month earlier, five weeks earlier in any of that from that day. So. So if you could put money to work on that day, would you for a third of a century, and you would have made 15% per year and change by having bought the low for the next third of a century through September 30, 1964. So compounding at that rate for that long, you turn each hundred dollars into just about $10,000. So hundred bagger in a third of a century.

Tom (92:24)

Wow.

Chris Brumstrand (92:25)

Would you be willing to lose 99% of your money on that date? And you know where I'm going with this? September 30, 1964, and put your money in one company stock for the next 61 years? Well, yes, you would have. Because on that 99% decline from the measurement period, the beginning of the fiscal year when Warren got control of Mercer, Berkshire compounded 19.7% and grew each hundred dollars to $6.1 million. The S&P could have fallen 99% from 10,000 to $100 and still grow. So during that period where Berkshire grew to 6.1 million at 19.7% by growing at 10%, the S&P grew from $100 to 45,000. So 45,000 against 6.1 million. And that's how you can fall 99.26% or whatever it is, but you could do it twice because if you do the whole record from the single best moment in history of the stock market to buy the s and P500, June 1, 1932, you compounded it 12 point whatever. I think it was 12.1%. Maybe it was 12.5%, but you grew a hundred dollars to 4.4 million. Berkshire grew $100 to 6.1 million in 33 fewer years. So Berkshire Hathaway on Warren's watch, outperformed the s and P500 over nearly a century, buying the market at the absolute low. And I think, and I said in the letter, and we'll see if Warren will agree, because I he'll, he's going to Read that part at least whether Charlie would have been impressed with that because even though it's just pure compound interest and pure algebra, seeing the start to tail S p compounding at twelve and change from a hundred dollars to four and a half million, knowing that Berkshire grew to 6.1 million for each hundred is pretty impressive. And, and that's the legacy of the track record. And then I've got more of a testament to what he did for teaching and integrity and the way businesses should be run. So there's a 10 page section of the letter that I hope even if you don't like getting into the accounting nuances of conglomerates, there's a, there's about a 10 page testament to Warren that's partly track record and partly human record. That is pretty fun reading. At least it was fun writing for me.

Tom (94:58)

Yeah. And I should probably also say, Chris, because I heard you and I think you also mentioned this here on the podcast, the people who read your letter, there is a self selection of those people and I very often talk with my team about it. When they were like, can we really talk about this? Isn't this too niche? I was like, you probably can because there's a self selection and the people who are not interested, they're just going to drop off and then you're really going to be with kindred spirits. So to me, whenever people are telling me that they're reading your letter, Chris, I just know they're awesome people. It's that simple.

Chris Brumstrand (95:29)

Well, I think there's a quirkiness to people that are listening to your regular podcasts or reading my letters. There's an intellectual curiosity about the investing world that people self select into listening to you or reading me or listening to us talk once a year.

Tom (95:44)

That's probably true. Yeah, that's probably true. I can't help but sneak in one quick question here before that you go, would Warren read your letter and send you a note each year? Or what's kind of the relationship? How does it work?

Chris Brumstrand (95:58)

Well, one of the biggest honors and surprises that I had was, geez, might have been 2002. I've got the letter hanging in my office, but I've. I received a letter from Warren letting me know that a friend of his and our letters have only been on our website in public since 2000. The 2015 letter. So we would send our letters just to our clients and to my 30 or 40 quirky friends. Right. Somehow my letter made its way to him and he wrote that somebody friend of mine sent me friend of Mine. Well, I'm talking war now. Friend of mine being Warren, sent me a copy of your January 1, 1999 letter, which I thoroughly enjoyed. And if you'd have any of your prior letters, please send them my way and any future letters, I'd love to read anything you write. And so he, he's been reading my letters and you know, we have some back and forth and over the years, but so I, I mean, I write the thing at a level where I know Warren's going to read it. I also know my clients are going to read it, some of whom are more sophisticated than others. I also know students are going to read it and learn from it. So I try to write to a myriad audience that have different levels of sophistication, but I always put reasonable amount of effort into it, knowing that he is looking at it every year.

Tom (97:13)

What a motivation to have. I also can't help but talk about this labor of love that it really is, that it seems to me like there is this ethos in the value investing community. Probably comes all the way from Benjamin Graham, where even though you don't have to, you're supposed to help the next generation. It's part of the honor code, for lack of better words. And I'm really happy that you're helping the value investing as much as you are, Chris. So thank you for your service to the value investing community. If I can, if. I don't know if I'm in a position where I can thank you on behalf of the value investing community. But I truly believe that you're doing a massive service to all of us, so thank you for that.

Chris Brumstrand (97:50)

Well, you're nice to say that and I appreciate that. It means more than you'll know. As I said in my tribute to Warren, he didn't have to teach. I mean, the archive of the Berkshire letters. The older letters were Warren teaching about executive compensation and disciplined underwriting and nuances on accounting. And he didn't have to do that. He could have just written a quick three page letter about the subsidiary and dotted the I's and crossed the T's. But he taught and then he entertained students and he would speak on campuses. In later years, he would have large groups of students come visit. And so I'm fortunate and blessed that I don't know, 7, 8, 9, 10 times. There's no consistency to it, but I find myself being asked to speak on college campuses. I've been at Notre Dame every year for the last several years. I've spoken at Columbia a bunch of times In New York, I've spoken of my, in my son's investment principles Warren Buffett class, which, which my friend Harvey Eisen put up the money for and tried to get Warren to fly down to attend my talk and have dinner the night before. This was just last year. Not because Warren did it and not because he had to teach. But, you know, he, his mentor, Ben Graham was such an important figure for him. Warren and Charlie have been such important for us as Berkshire acolytes that what little that I've learned over time, I take immense joy in being able to share. And when young investors or students, I find they're reading the letter, it's pretty gratifying. And I'll never be as great of a teacher as Warren, but what little I know, I'm. I'm happy to share. And I do it with more verbosity, for sure. I've been trying to get even, told Warren I've been trying to shrink the letter. I told him a few years ago I was going to shrink it by 2.6 pages a year so that when I was his age, which was then 91, we'd have matching linked letters. And he wrote back and said, you're going to have to recalibrate because when you read my letter a few days after you release yours, you're going to see it's the shortest one that I've ever written and I've done nothing. I tried to cut 35 pages of my, some of the parts intrinsic value commentary out. And a couple of friends said, chris, it's your letter. Just do it. People that think the letter is too wrong anyway, they're going to think it's too long, Whether you write 50 pages or 180, whatever it was this year.

Tom (100:07)

So, you know, it's funny you should mention because I do remember you mentioned that in the past you wanted to make it shorter. Then it was like 182 pages. And then we still have some appendix completely unintended.

Chris Brumstrand (100:22)

I'm going to commit to you now, Stig, this will be the secular peak of the Semper Letter.

Tom (100:28)

Okay, well said, Chris. I won't take up more of your time. Thank you. I just want to say it's been absolutely amazing, as it always is this time of year. We get to talk about your letter. Berkshire, the stock market, the price is absolutely right. Whenever it comes to a wonderful, wonderful letter. It's completely free. Where can people find it?

Chris Brumstrand (100:47)

Well, you get what you pay for. They're all on the website semperaugustus.com. we've got the archive of the letters and a bunch of the podcasts that I've done in recent years, various interviews, some of the stuff with Kate Welling. But as soon as you drop this, we'll, we'll have it posted and we'll keep it up. So we've got the archive of the letters and then a separate tab for interviews and podcasts. And I'm still on Twitter, though less in fact, during the letter writing process this year, my Twitter account got hacked, my ex account got hacked, some cryptocurrency group. I got a notice, I was working on the letter and I got a notice thing. So somebody's logged in from an unfamiliar device, change your password and by the time I saw that 30 minutes later my password had been changed, I couldn't get into the account. And in short order there was a Solana based outfit that was sending out messages using my user profile and it was, it was a process to try to get the service people at X to fix the problem, which they finally did. But it took a couple of weeks and way more man hours and energy on Semper's end to try to recover that than we wanted. So I'm there, but I don't post as much on the side. I usually when something material happens at Berkshire, I talk about it and I still have fun, but I only look at my Twitter account, my ex account once every week or two now.

Tom (102:08)

Okay. Wow, that must be a scary experience. And I also just want to say for the record, if anyone named Chris Broomster and they're trying to sell me Solana coins, I don't think it's you. You take that as a compliment.

Chris Brumstrand (102:22)

Rest assured, it's not.

Tom (102:24)

All right, thank you so much for your time, Chris.

Chris Brumstrand (102:27)

Thanks Tig. This was great. Always fun talking to you.

Stig Brodersen (102:30)

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