The Digest #131
IBerkshire Wins FERC approval to Buy 50% of $OXY, Hoenig on CBDCs, Safety of Nuclear Power, Sloan on Automobile Distribution
“The use of traveling is to regulate imagination by reality, and instead of thinking how things may be, to see them as they are.”
— Samuel Johnson as quoted in The Pioneers by David McCullough
Berkshire Approved to Buy up to 50% of Occidental
The Federal Energy Regulatory Commission has approved Berkshire Hathaway’s application to acquire up to half of Occidental Petroleum. In the decision dated August 19, the FERC approved Berkshire’s application which was submitted on July 11. Occidental’s stock jumped by nearly 10% on the news to close at $71.29.
Warren Buffett’s bet on Occidental Petroleum has attracted significant attention in recent months, particularly as Berkshire’s ownership interest in Occidental recently surpassed 20%. I first learned about the FERC decision this afternoon from a post by @josh_young_1 on Twitter (h/t to @firyami for sending the link to the tweet).
In the past, Warren Buffett has halted purchases of Occidental when the stock price slightly exceeds $60. With the stock now trading above $70, it will be interesting to see whether Mr. Buffett starts buying again or waits for a better price.
CNBC reports that some observers who know Berkshire well believe that Mr. Buffett intends to eventually make an offer for the entire company:
David Kass, a finance professor at the University of Maryland’s Robert H. Smith School of Business, said an acquisition down the road is likely.
“I think it is likely that Buffett will buy the whole thing eventually. The 50% limit may have been set to receive FERC approval for a non-controlling stake,” Kass said. “He clearly plans to purchase additional shares. So far his maximum purchase price has been $60.37 per share.”
Berkshire is required to file a Form 4 with the SEC in the event of any new transaction in Occidental shares. You can follow Berkshire’s Form 4 filings at this link.
Articles
Benefits, Costs, and Design Considerations of a Central Bank Digital Currency by Thomas Hoenig and Brian Knight, May 4, 2022. In January, the Federal Reserve released a white paper discussing potential plans to introduce a central bank digital currency (CBDC). Such a step would be a major change to the payments system and a threat to privacy. Thomas Hoenig served as President of the Federal Reserve Bank of Kansas City from 1991 to 2011 and is also the primary subject of Christopher Leonard’s book, The Lords of Easy Money, which I reviewed in January. In this response to the Fed’s white paper, Mr. Hoenig and Mr. Knight raise several objections to the introduction of a CBDC in the United States in the near future. (Mercatus Center)
Review of “My Years with General Motors” by Alfred P. Sloan, November 21, 2016. One of the key issues facing the automobile industry in its early decades was the question of how to distribute cars to customers and provide ongoing services for drivers. Alfred P. Sloan was one of the pioneers of the industry as the leader of General Motors from the 1920s through the 1950s. His concept of the franchised dealership network still dominates automobile distribution today. I read Sloan’s memoir several years ago, but my recollection of his perspective was still very useful during my recent work on the automobile industry. (The Rational Walk)
How Safe Are Nuclear Power Plants? by Daniel Ford, August 13, 2022. In the 1950s, a future of abundant nuclear energy that would be “too cheap to meter” seemed right over the horizon. However, a combination of complexity, expense, legal liability, and public reaction to perceived risks prevented nuclear power from reaching its potential. This article looks at the history of nuclear power along with real and perceived risks that have hindered development in recent decades. (The New Yorker)
Bill Gates and the Secret Push to Save Biden’s Climate Bill by Akshat Rathi and Jennifer A Dlouhy, August 16, 2022. “Gates started wooing Manchin and other senators who might prove pivotal for clean-energy policy in 2019 over a meal in Washington DC. “My dialogue with Joe has been going on for quite a while,” Gates said. “Almost everyone on the energy committee” — of which Manchin was then the senior-most Democrat — “came over and spent a few hours with me over dinner.” (Bloomberg)
Buffett: All Cars Will Be Electric in 20 Years, November 21, 2009. Thirteen years ago, Warren Buffett told a group of students that all cars will be electric in twenty years. Based on Charlie Munger’s recommendation, Berkshire had recently invested in BYD, a Chinese automaker with plans to enter the U.S. market in 2010 with its e6 electric car. Other than a small number of fleet sales, BYD has yet to enter the United States, but Berkshire’s investment has been a smashing success. The $232 million investment is now worth $7.9 billion. It seems very unlikely that all cars will be electric by 2029, but the electrification trend is clearly here to stay. (The Rational Walk)
The U.S. Education System by Ana Lorena Fabrega, August 12, 2022. This article points out that over half of American adults cannot read above the sixth grade level. This is a national disgrace and explains many of the problems we are facing today. The author sees the internet as a solution, noting that it is now possible for people who have been failed by the system to educate themselves. There is no doubt that the internet has the potential to spread knowledge, but it is going to have to be well structured for children to maintain focus and avoid endless distractions. (Fab Fridays)
Warren Buffett's $11 Billion Mistake by Kevin Carpenter, August 16, 2022. Berkshire Hathaway’s acquisition of Dexter Shoe in 1993 was a terrible mistake that was compounded by the fact that Warren Buffett agreed to pay for the acquisition using Berkshire stock. “What makes Warren Buffett such an incredible investor, though, is that he doesn’t allow missteps like Dexter Shoe to cloud his judgment. He quickly internalizes the lesson — don’t use Berkshire stock to make acquisitions unless you’re really sure of the company’s long-term prospects — and moves on.” (Kingswell)
For Happiness, Moral Character is More Important Than Intelligence or Money by Rob Henderson, August 14, 2022. People expect money to provide more than it is capable of: “Many people would prefer to be smarter than more ethical. This is because they’d say intelligence will lead to more money, more friends, more mates, and ultimately, more happiness. But these findings suggest people intuitively believe moral character, compared to intelligence, is more closely tied to happiness.” (Rob Henderson’s Newsletter)
The infamous 10000 hours assertion by Mark Dykeman, August 17, 2022. In Outliers: The Story of Success, Malcolm Gladwell presented an interesting heuristic to estimate the effort required to achieve mastery in a field. Ten thousand hours of dedicated practice could lead to mastery in many fields, such as playing a musical instrument or mastering computer programming. Of course, this is only a generalization, and one that does not hold up particularly well in many fields. This article explores some of the problems with the ten thousand hour rule of thumb. (How About This)
The Record Collector by Thomas J Bevan, August 13, 2022. I enjoyed this short story and many of the other eclectic compilations, essays and fiction that appear weekly in The STSC Omnibus newsletter. (The Commonplace)
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Podcasts
The Price of Time in a World Without Interest, August 15, 2022. 54 minutes. “For the last twenty years, Edward Chancellor has been arguably known best for his book, “Devil Take the Hindmost,” which is a fantastic history of the last 400 years of financial speculation. Yet, that streak may be soon coming to an end with the publication tomorrow of his latest book, “The Price of Time,” an absolutely brilliant philosophical exploration of interest and its essential role in valuing and directing the allocation of capital, labor, and resources in the economy over time.” (Hidden Forces)
David Perell—Write to Find Yourself, August 18, 2022. 1 hour, 22 minutes. Transcript. This is a very interesting conversion between Jim O'Shaughnessy and David Perell. If you are interested in writing online, you should definitely be reading David Perell’s website as well as following him on Twitter. (Infinite Loops)
Roblox: David Baszucki, August 15, 2022. 1 hour, 5 minutes. “In 2003, David Baszucki wanted to go viral. He had already sold a company that made educational software, and now he wanted to build something with mass appeal; with build-your-own avatars and myriad opportunities for users to compete and connect online. So in 2006, he and his co-founder Erik Cassel launched Roblox, a platform where you can play millions of different games, set in a wide array of virtual worlds.” (How I Built This)
Tweets of the Week
Don’t let money burn a hole in your pocket!
This advice works for consumers and companies alike. Paul Graham counsels young companies to be smart about spending the mountains of cash they raised when valuations were high. It seems obvious that money should be spent on hiring only if the incremental employees will propel the company forward, not simply to create the impression of rapid growth.
Saving and Investing are Two Sides of the Same Coin
10-K Diver has created another excellent thread explaining the interplay between saving and investing and highlights the fact that saving is much more in our control. The points he makes are similar to those I made a few years ago in Fifteen Years to Financial Independence.
This is Perfect Competition!
Free Digital Magazines
In the Weekly Digest, I usually try to list articles that are free to read. However, some content is behind metered paywalls that permit only a certain number of free views per month. The Wall Street Journal, The New York Times, The New Yorker, The Economist, and Bloomberg are all in this category.
I have recently found that my local library offers numerous digital magazines that can be checked out and read for free using Libby, an app available on iOS and Android. I recommend looking into free magazine subscriptions available at your local library.
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Thanks for the link and feature!
Berkshire will likely exercise warrants, strike around $59, before buying at $70.