Berkshire Hathaway Hasn’t Done This in Over 3 Years

0:02Matt Frankel:Berkshire Hathaway just did something it hasn't done in three years. Motley Fool Hidden Gems Investing starts now.

0:13Matt Frankel:Welcome to Motley Fool Hidden Gems Investing. I'm your host today, Jon Quast. I'm joined by foolish contributors that are always joining me on Monday, Matt Frankel and Rachel Warren. On today's show, we're responding to a mailbag question. And to respond, we're going to pull back the curtain, so to speak, on some AI tooling that we're using in the Hidden Gems universe. But first, we wanted to talk about Berkshire Hathaway because it was busy in the second quarter here. So we do like to talk about Berkshire Hathaway around here. On the one hand, it's a trillion dollar company. And so kind of like Ron Burgundy, it's kind of a big deal.

0:50Matt Frankel:But on the other hand, I think many of us have learned and gleaned wisdom from investing greats like Warren Buffett and Charlie Munger over the years. So we're kind of endeared to the company for that reason. But speaking of Buffett, there is a new sheriff in town at Berkshire, and it is not Buffett. It is CEO Greg Abel. And really for the last three years, actually for more than three years, Berkshire Hathaway has been a net seller of stocks going back to the first quarter of 2022. And if you look at the S &P 500 returns since the start of 2022, the market is up 63%. So Berkshire are really missing out on a big bull market.

1:29Matt Frankel:And yet now all of a sudden it is no longer a net seller. Right, Matt?

1:35Jon Quast:Yeah. And first of all, I love how you sneak a Ron Burgundy dad joke right into the opener. I love that. But yeah, you're right. Berkshire was a net seller of stocks for 14 consecutive quarters. I'll save you the 2022 math. So the reversal is kind of a big deal. The company was a net buyer of about$20 billion in stocks. They bought about$24 billion. They sold$4 billion. So it works out to a$20 billion net addition to the portfolio. And that's in addition to buying back about$4.5 billion of its own stock and closing on the acquisition of home builder Taylor Morrison during the quarter, which cost them $8.5 billion by itself.

2:11Jon Quast:So of course,$10 billion of this was a previously announced private placement in Alphabet stock that added to its position, which I'm sure we'll talk about again sometime in this show. There were a lot of buys. It was a significant addition to the portfolio this quarter.

2:26Matt Frankel:Rachel, I couldn't help but think about this. The stock market does seem somewhat overvalued right now, at least by some metrics that you look at. It seems that way. And Warren Buffett has been known, he's made his mark as a value investor. And so even though the market has risen 63 % since it became a net seller, I think that investors could kind of wrap their head around the fact that maybe Warren Buffett thinks that it's overvalued and he doesn't want to participate. That kind of makes sense. But now here we have the market at an all-time high and now we are reverting to be a net buyer. So I guess I'm just wondering, do you think that new CEO Greg Abel, do you think that he actually does see value and is continuing that value investing mantra of Berkshire Hathaway, that ethos of the company?

3:13Matt Frankel:Or is it something different that maybe he's not quite as a stickler on price as perhaps his predecessor was. I think that's kind of the golden question right now. I mean, this is something Matt mentioned. For 14 consecutive quarters, Berkshire was aggressively hoarding cash, kind of signaling the broader market looked vastly overvalued. You know, breaking that streak to become a net buyer of nearly$20 billion in a single quarter, especially while the indices are sitting near all-time highs. I think it tells us that Able, through Berkshire, they're not just waiting, for a market crash. It also doesn't mean that the entire market is cheap.

3:47I think we are seeing a lot of overvaluation in a wide range of sectors right now. To me, the bigger takeaway is that under Abel's leadership, Berkshire is aggressively hunting for those high conviction pockets of value. You think about how they just boosted the Alphabet stake by about 83%, pouring$10 billion through private placement to fund Google's AI infrastructure recently. You're looking at a roughly$38 billion bet that vaults Alphabet into Berkshire's top three holdings alongside Apple and American Express. So I would argue that Abel, he isn't throwing out the value investing playbook, but I think he's modernizing it for the current era that we're in with a lot of focus on the dominant tech infrastructure that is fueling a lot of the current stock market and the broader global economy.

4:36And I know we'll talk about this a bit more in a second, but what makes this shift really interesting is how ABLE funded it by cleaning house, trimming some of those financial and retail stakes like Bank of America, Kroger, and then funneling that right back into a lot of these bets into the future of tech and AI. And I find that to be a really, really fascinating shift.

4:58Matt Frankel:Okay. So Berkshire was a net buyer, but Matt, it wasn't only buying stocks during the quarter. There were also some cells and some trims there. I want you to walk us through that. What was it doing here in the second quarter?

5:10Jon Quast:The headlines, and Rachel just mentioned one, Bank of America was the largest sell by dollar volume, but this is the fifth consecutive quarter they've trimmed that stake. So I'm not sure I'd call that a surprise by any stretch. It's still one of the top five holdings in the portfolio, still 9.3 % stake in the company. Trimmed a few other financials. Capital One was cut by more than half. Ally Financial was slightly trimmed. Ally generally seems like they trim it to keep the stake just under 10%. Over time, they buy back stock and the stake goes up. They reduced exposure to Nucor during the quarter.

5:40Jon Quast:For me, the biggest surprise out of the cells was trimming that stake in Kroger that Rachel mentioned. That was the one that really stood out to me. Right now, if I'm looking at what's going on geopolitically, if I'm looking at what's going on, just talking to friends about how they feel about the economy and where they're having to cut back, it seems like not a great time to be getting rid of a company that people have to go to no matter what. So it seems like a cautious play that I would expect, especially a company like Berkshire to hold on to an environment like this. But that's the one that really stood out to me as a surprise.

6:14Matt Frankel:Rachel, do you agree or disagree with what Matt just said? Because I think I kind of agree with what Matt said. You look at the market, it's at an all-time high. There's a lot of fast moving pieces of the market, especially with AI just constantly changing things. And we ask, is this company going to have a business model in two years, three years, right? So a lot of things change. And it just seems like in a portfolio, having a bellwether grocery store business in there, even if it's a small stake such as Kroger, but it makes a lot of sense. I can see the rationale for having that to trim that at a time like that.

6:46Matt Frankel:It does strike me as unusual. You know, it might seem counterintuitive, but I really think it reflects the broader strategic shift that we are seeing in Berkshire's capital allocation under Able. I think that what we're seeing right now as he appears very focused on consolidating the portfolio, pruning some of those more defensive positions to fund larger commitments in areas like digital infrastructure and housing, which do benefit from significant long-term tailwinds that can also go into the portfolio. So I think it also aligns with a lot of the broader streamlining of the portfolio we've seen in recent months, of course, as well following Todd Combs' departure.

7:23I think we're seeing Abel really concentrate Berkshire's resources into a smaller number of dominant holdings rather than maintaining fragmented retail stakes. And I think that at least so far, this seems to be kind of an early hallmark of his leadership style as it pertains to the portfolio.

7:38Matt Frankel:Okay, Matt, final part of this conversation. I think it's fair to say that Berkshire Hathaway's top brass has never fully embraced the idea of portfolio diversification. You know, within the Motley Fool world, we don't think that it would be crazy for investors to hold, 50 stocks as a really good diversification goal, we think that might be a really good starting point. Hey, I'm going to own 50 stocks in a portfolio. Berkshire doesn't really go that direction, does it?

8:06Jon Quast:Well, no. And there's that famous Warren Buffett quote that diversification is protection against not knowing what you're doing. I interpret that as Buffett's investment style is one that most people shouldn't try to copy. He can take risks with that amount of money that I couldn't take risks with my portfolio because I don't have$300 billion at my disposal. I don't have a longstanding financial industry relationships that allow me to get investments that other people couldn't. Buffett's most lucrative investment of the past, say, two decades is arguably his Bank of America stake that came from the financial crisis.

8:38Jon Quast:And it was a privately negotiated warrants and stock deal that you and I couldn't get. So when you see that that became one of his largest positions, take the diversification comment for what you will. But I would push back on the fact that Berkshire is not diversified because yes, the stock portfolio has 77 % of its value concentrated in just five positions. Berkshire also holds 60 privately held companies in many different industries, some of which are much larger than even those five stock holdings, maybe not the Apple holding. I could make the case that Geico's worth more than most of Berkshire stocks or Berkshire Hathaway Energy would be a top five holding.

9:13Jon Quast:You can make the case that Clayton Holmes is worth$25 billion. I've done the back of the napkin math on that one. So I push back that Berkshire's not diversified, but in its stock portfolio. It's definitely a concentrated group of holdings.

9:26Matt Frankel:Okay, Rachel, final word here on this conversation. I want you to speak to Greg Abel. What do you think about his first outing here as the CEO of the company? I think the real takeaway here is that the era of Berkshire acting as sort of this hands-off passive index of the American economy is drawing to a close. I think Abel is showing himself to be a far more active manager than many had anticipated. I think we're seeing that he's willing to aggressive reallocate capital away from some of these more traditional defensive bastions that Berkshire has been known for investing in into more high conviction tech, even cyclical infrastructure.

9:57And I think as investors, this also means that we can't just look at Berkshire through the lens of Buffett's mid-century value investing playbook. This is now Abel's firm. He is managing it for a digital-first resource-constrained global economy. I think maybe we're also seeing signs that Berkshire is a bit more willing to accept shorter-term market volatility in exchange for having core stakes in the broader infrastructure of the future. And maybe it's also a sign that Abel feels that one of the best ways to preserve Berkshire's wealth is not just sitting on a mountain of cash, which they still have, of course, a considerable cash stockpile to pull from, but also actively deploying into a lot of the pillars of tomorrow's growth, those growth pillars over the next decade and beyond.

10:39That's what this filing really showed me.

10:42Matt Frankel:Well, after the break, we're going to go into the mailbag. You're listening to Motley Fool Hidden Gems Investor.

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13:02Matt Frankel:Welcome back to Motley Fool Hidden Gems Investing. You know, we normally don't take questions from our mailbag here in the second segment, but we're mixing things up today. And the question that we got is a little bit long. So rather than read it, I'm going to summarize. But essentially, this listener says that they listen to our show every day and they love it. So first of all, thank you for that. Sometimes you wonder on this side of the microphone if there's anybody out there. But listening to this show, this listener found the company Rocket Lab, the space company, ticker symbol RKLB, found the stock from listening to our show when it was trading in the single digits.

13:40Matt Frankel:And of course, it's much higher than that now. And so the question was essentially, I found this stock listening to your show right before it skyrocketed, no pun intended, found it right before it skyrocketed. And the question is, what kind of screening can we do? So what kind of things do we screen for in a stock to find it right before it skyrockets. Find a momentum stock before it has momentum. And I just wanted to say here as the host, I want to reframe this because that sounds a little bit like looking for something at the right time and finding that momentum. And we're really not a big fan of stock screeners, many of us, because there's an intrinsic flaw.

14:23Matt Frankel:They are always looking backwards at what the company has done in measuring it against that. Whereas as long-term investors, we're thinking more about the future and not so much about momentum, but what are the things that are actually creating durable, long-term shareholder value over time and adding to those businesses. However, within the Motley Fool universe, within Hidden Gems in particular, we are increasingly turning to AI tooling to create scores for many things in investing to help us in our research process. And so I thought today it would be a good chance to talk to Matt and Rachel just kind of about the things that they like and some of the scoring that we're bringing to the table and how it relates to what we're talking about here with this listener question.

15:08Matt Frankel:So Matt, I think we're going to go to you here first. What do you look at in a stock to identify it early?

15:17Jon Quast:If there was an easy way to identify what stocks were going to 10x over the next two years, all three of us would have retired on a beach somewhere a while ago. There's no easy way. So I want to preface this by saying that and putting that in very, very honest context. But since the listener brought up Rocket Lab, let's use that as an example. So consider what Rocket Lab looked like when it was trading at, say,$8 versus where it is today. So even before the climb, it was already showing some of the things that I like to look for or screen for, if you want to use that term, to identify the next breakout candidates.

15:47Jon Quast:Not only growing revenue, but accelerating revenue growth. Even though Rocket Lab's revenue was small and still is relatively small for its market cap, it was accelerating. It's unit economics we're improving. That's definitely something to look at, especially in an unprofitable company. The unit economics will tell you how the path to profitability is going to start to emerge. A growing backlog of business. It operates in a very large market that's misunderstood by most investors. A lot of people really just don't understand the space economy just yet. They have a founder leader who has a lot of skin in the game.

16:19Jon Quast:It's one of the big principles we look for in Hidden Gems. I would suggest using things like this as kind of triggers for further research into a company, not just, as John mentioned, screeners are backward looking. So not things that should say, okay, buy the stock today. But on the topic of AI tooling, I'm going to use kind of a different direction. So some smart ways that I like to use AI to my advantage when looking at stocks, especially if I identify something that looks like Rocket Lab did back then. So I'll use AI to help me read and summarize earnings calls and especially 10Ks, which are annual reports.

16:50Jon Quast:I can't tell you even before AI, have I ever read a 10K from cover to cover? I don't know if you guys have, you have more time on your hands than me, if that's the case, because they're well over 100 pages long. You can find language like talking about accelerations that they're seeing in the business from management before they show up in the numbers. You can find kind of nuance within conference calls that most people might miss. Those are really good use cases for the AI tooling that we have. But just one key point I would say is to use AI to compress your research time. Like at reading a 10K in 30 seconds as opposed to three days.

17:24Jon Quast:Not to necessarily outsource your stock research, but to use it to give yourself that time advantage.

17:30Matt Frankel:Yeah, and I want to double down on what you just said there regarding that, and I'll turn it over to Rachel here. But Matt's talking about compressing the research time, but Rachel, why even research it all? If we have AI tooling, why not just let the AI invest for us? Can you speak to the human element of investing? I agree with Matt that this is an incredible research tool. I mean, the thing is, AI excels at processing historical data, identifying statistical patterns. That's really key when you're trying to research a business, its model, understand how it works behind the scenes to determine whether a company is the right fit for your portfolio.

18:04But AI lacks the capacity to evaluate a lot of the qualitative dynamics that are also a really, really important part of evaluating businesses and seeing whether that aligns with the goals you've set for your portfolio. You know, it can't gauge, for example, a CEO's integrity during a crisis or measure a lot of these other elements that AI can't really spit out. Now, investing ultimately involves your backing leadership that has to navigate unpredictable real world challenges. And so human judgment remains really essential, I think, to assess whether a leadership team possesses the adaptability to execute their vision when quantitative models break down.

18:41I think also outsourcing everything to AI can create a feedback loop, right? We're all relying on the exact same data signals. AI tools screen for the same metrics. They can crowd into the same trades. Sometimes it can inflate valuations and even manufacture artificial momentum. So I want to stress, AI is a fantastic research assistant. Matt mentioned how he uses it for summarizing earnings calls, 10Ks. I do the same. It's really, really helpful as well if you're trying to understand specific industries that you want to invest in. A lot of these very complex, heavily regulated spaces like healthcare, for example, you want to invest in that space.