Warren Buffet has again surprised markets with an unexpected play in what is becoming a year of shocks from the world’s most closely-followed investor.
2022 will end up being one of the busiest years for Buffett and Berkshire in terms of investment in listed shares – close to $US70 billion has been directed towards surprising areas.
More than $US34 billion in oil and gas ($US24 billion or so in Chevron and more than $US11 billion in Occidental); a $US4.1 billion stake in a major chipmaker, buying $US20 billion in cash at 50 cents in the dollar via the takeover of insurer Alleghany Corp, and – for a second time in three years – a top up in one of Buffett’s most astonishing deals, buying more shares in Japan’s five major trading houses.
Buybacks, which were popular in 2020 and 2021, have fallen sharply – by more than two thirds to just over $US6 billion in the first 9 months of the year.
And there have been some sales which surprised – stakes in key banks, such as Well Fargo and US Bancorp and, just this week, the fourth sale this year of a stake in Chinese electric vehicle and battery company BYD – an investment previously held for 14 years without any change.
Monday’s top-up in the holdings of the five major Japanese trading houses – Mitsubishi, Mitsui & Co, Itochu, Marubeni and Sumitomo came out of the blue and reminded analysts how Buffett structures deals and sets up massive profits.
Berkshire first took the 5% stakes in the Japanese giants in the middle of 2020. Now those stakes have been increased – to 6.59% from 5.04% in Mitsubishi Corp; to 6.62% from 5.03% in Mitsui &Co: to 6.21% from 5.02% in Itochu Corp; to 6.75% from 5.06% in Marubeni Corp and to 6.57% from 5.04% in Sumitomo Corp.
The increase is line with Berkshire’s declaration in 2020 that its financial investments in the Japanese trading homes were for the long term and the stakes might increase to 9.9%.
What is interesting about this play is the way Buffett and Berkshire has constructed it, using currency as well as sharemarket prices to generate a super profit – on paper.
Berkshire has used the strong US dollar (against the yen) to boost its stake, even though the share prices of the five companies has risen this year.
Shares of the five trading homes have actually increased by double digit amounts from the start of the year, easily beating the 3% drop in the Nikkei market average.
That has helped generate a massive paper profit for Berkshire, estimated at about $US4 billion on an initial outlay of around $US6.2 billion.
That profit has been won in a typically Buffett way
The shares of the five trading houses have risen by between 50% to 130% in yen terms since Berkshire revealed that it had purchased 5% stakes in each of them in late August 2020.
But in the same the yen has slumped against the US dollar by around 35% (with most of the fall coming this year).
The dollar now is worth about 141 yen, against 105 in August 2020 and 116 at the start of this year.
To protect its position, Berkshire hedged its yen exposure by issuing about $US6 billion in yen-denominated debt, thus giving it the full benefit of the price moves in yen.
At the time of the investment, Berkshire said the borrowings meant it had “only minor” currency exposure. The value of that debt has dropped by about $US1.6 billion in the past two years.
The result is that Berkshire now is showing a profit of about $US4 billion on the initial investment which now has a current total value of $US10.3 billion, including the hedge gains. That is a roughly 65% gain.
The five companies have been beneficiaries of the boom in commodity markets in the past two years given their extensive trading operations. Mitsubishi owns 50% of BMA in Queensland with BHP holding the other 50%. BMA is the largest premium coking coal exporter in the world. Mitsui has a stake in BHP’s WA iron ore operations.
They are also involved in trading and importing oil, metals, LNG and thermal coal. This shows Buffett’s smarts in realising that commodities were commodities on the verge of a boom thanks to the gradually evolving debate over climate change and renewables.
Berkshire Hathaway Energy is one of the most advanced of global energy utilities in moving down the renewables route with growing investments in wind, solar in the US and UK.
The move into the five trading giants was a gamble that paid off in February of this year by Putin’s invasion of Ukraine which set off a surge across the board, but especially in gold, coal, metals like nickel and copper, oil and gas.
At the time of the initial investments in 2020, the trading companies were out of favour, with several trading below book value and with single-digit price/earnings multiples. They offered then a nice margin of safety to Berkshire which Buffett has turned into one of his most profitable deals.
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And this week another sign of Buffett’s luck in his deals came with the world’s biggest computer chipmaker TSMC, in which Berkshire owns a $US4.1 billion stake.
TSMC confirmed that it will install its most advanced chip making technology in a huge plant it is building in the US state of Arizona.
The plant – which will cost more than twice what it would in China, has all the appearances of TSMC taking out ‘insurance’ in case China’s aggression against Taiwan turns into actual violence. TSMC has chip-making plants in Taiwan and in China.
SMC accounts for an estimated 90% of the world’s super-advanced computer chips, supplying tech giants including Apple and Qualcomm.
“Chips are very important products,” TSMC’s founder Morris Chang said Monday at a media briefing in Taipei. “It seems that people are only starting to realize this recently, and as a result, lots of people out there are envious of Taiwan’s chip manufacturing.”
Super-advanced semiconductor chips — like those produced by TSMC — are an indispensable part of modern-day life. They are also difficult to make because of the high cost of development and the level of knowledge required, meaning much of the production is concentrated in just a handful of suppliers.
Advances in chip manufacturing require etching ever-smaller transistors on to silicon wafers. Chang said its plant in Arizona will produce 3-nanometer chips, TSMC’s most advanced technology.
TSMC’s Nanjing plant in China makes 12 nanometre chips which are about two generations behind the technology to be installed in Arizona.
You can bet the new 3-nanometre chips won’t be made in China, not if TSMC wants to continue to operate in the US and supply American companies.
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Meanwhile Berkshire Hathaway has raised more eyebrows in the markets with another sale this month of a small parcel of shares in BYD, China’s biggest EV maker (and battery manufacturer).
Berkshire offered 3.23 million Hong Kong-listed BYD shares for $US80.67 million.
The sale reduced Berkshire Hathaway’s stake in BYD’s H-shares to 15.99% as at November 17, down from 16.28% after another sale earlier this month.
That’s four sales of BYD shares this year so far – the first since Berkshire bought 225 million BYD shares in 2008 at a then cost of $US230 million.
All up those sales have generated around $US1.3 billion for Berkshire – most of that profit. Berkshire only paid around $US1 a share when it first invested in BYD, and has now sold 49.4 million shares for around $US26 each.
What makes the sale interesting is that they have come as BYD has moved past Tesla to become the biggest maker of electric vehicles in the world – both plug-ins which was BYD’s first vehicle line (in addition to batteries) and now BEVS (Battery-powered Electric Vehicles, which is what Tesla makes).
The sales have all the appearance of Berkshire testing to see the appetite for BYD shares in the wider market as the carmaker accelerates into a global leading position.
It wouldn’t surprise if this leads sooner rather than later to Berkshire selling more BYD shares, perhaps even the entire holding.
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And finally, Berkshire Hathaway said on Wednesday that Buffett has donated more of his fortune to four family charities, but didn’t reveal if the billionaire had made a new donation to the Bill & Melinda Gates Foundation.
According to a regulatory filing, Buffett on Wednesday donated another 2.4 million of the conglomerate’s Class B shares, worth about $US759 million.
Buffett donated 1.5 million shares to the Susan Thompson Buffett Foundation. Named for his late first wife, the foundation funds college scholarships to students from Nebraska, while another 900,000 shares were split evenly among charities run by his children Howard, Susan and Peter: the Howard G. Buffett Foundation, the Sherwood Foundation and the Novo Foundation.
These took to more than $US46 billion the value of donations Buffett has made to charities since 2006.
More than three-quarters of this has gone to the Gates Foundation, still one of the world’s largest private charitable foundations despite last year’s divorce of its eponymous co-founders.
Following the latest donations, Buffett still owns 15.5% of Berkshire’s stock and controls 31.4% of its voting power.
Both percentages rise as the Omaha, Nebraska-based company repurchases its own shares from other investors.
Buffett is still worth $110.2 billion as Berkshire Hathaway shares continue to outperform the wider market in 2022.
Berkshire shares are up 5.8% year to date while the S&P 500 is off 15.5%.
