The Digest #123

Buffett's Estate Plans, Freight Rail Disruptions, Austin's Evolution, Chick-fil-A, Interviews of Vitaliy Katsenelson, Guy Spier, and William Green

Buffett’s Estate Planning

Last week, the Wall Street Journal published Warren Buffett’s Estate Planning Sends Charities Scrambling, a long article about how Warren Buffett’s shares of Berkshire Hathaway will be distributed after his death. Mr. Buffett declined to comment on the article but said that there are “a significant number of inaccuracies” in the reporting.

As the article noted, the speculation involves what will happen to Mr. Buffett’s shares of Berkshire Hathaway that have not already been pledged to five foundations. As I recently documented in Buffett’s Philanthropic Record, Mr. Buffett has donated shares worth over $45 billion to the foundations since 2006.

The main question the Journal’s reporting raises is not whether Mr. Buffett will attempt to alter the pledges he made in 2006. The pledged shares that remain undistributed at the time of Mr. Buffett’s death will almost certainly still go to those foundations. The question involves the shares of Berkshire that will remain in Mr. Buffett’s estate and have not yet been pledged to any specific foundation.

Although the Gates Foundation has apparently assumed that it will receive the bulk of the un-pledged shares, the Journal reports that Mr. Buffett might instead choose to donate the shares to the Susan Thompson Buffett Foundation instead. The Buffett Foundation, named in honor of Mr. Buffett’s first wife who passed away in 2004, is a much smaller organization with less overhead which reportedly appeals to Mr. Buffett’s preference for frugality.

From my perspective as a longtime shareholder, I am more concerned about who will have voting control of the company in twenty years than I am about how Mr. Buffett will choose to distribute his shares. The causes that Mr. Buffett chooses to support with his money should not be a concern for Berkshire shareholders.

Berkshire Hathaway is unique for many reasons and the skin in the game of the company’s board of directors is critical for preserving the company’s culture. If Mr. Buffett decides to leave his un-pledged shares to the Buffett Foundation instead of the Gates Foundation, perhaps he should also consider donating the Class A shares directly rather than first converting them to Class B as he has done with prior gifts. Doing this would ensure that the Buffett Foundation will have significant voting power for several years while the shares are slowly liquidated to fund operations.

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Articles

U.S. Port Backups Are Extending Into Freight Rail Supply Chains by Paul Berger, June 24, 2022. A pile-up of containers in Chicago has impacted the number of containers freight railroads can move from Southern California ports. “Tom Williams, group vice president for consumer products at BNSF, said the railroad is limiting the number of containers it moves out of Southern California ports until it can be sure it has the capacity to handle them in Chicago. Mr. Williams said containers are sitting about 20% longer in freight-switching yards in Chicago compared with a year ago. BNSF is moving some containers to third-party yards to free up space, he said, but that uses up inland trucking capacity which is also in short supply. ‘This isn’t sustainable over time,’ he said.” (WSJ)

Conversation at Panmure House by Howard Marks, June 23, 2022. On May 24, Howard Marks was interviewed at a symposium on cognitive economics. “Economic man” is supposed to make all these decisions in a way that optimizes wealth.  But she often doesn’t, because she’s not always objective and rational.  She has moods.  And those moods interfere with this arriving at the right price.  So my definition of the efficient market hypothesis is that because of the concerted efforts of all the participants, the price at a given point in time is as close to right as those people can get.  And because it’s as close to right as most of them can get, it’s very hard to outperform the market by finding errors – what theory calls “inefficiencies” and I just think of as “mistakes.” (Oaktree Capital)

Chick-fil-A’s Packed Drive-Thrus During COVID Weren’t a Mirage by Danny Klein, April 13, 2022. This article reports on Chick-fil-A’s latest franchise disclosure document: “Those lines of cars you saw curving around Chick-fil-A drive-thrus throughout the pandemic? Turns out they were far more than social media fodder. According to the company’s annual FDD, of Chick-fil-A’s 1,836 U.S. freestanding restaurants outside of malls (those open and operated for at least a full calendar year, from a total of 2,023), average annual sales volumes clocked in at $8.142 million last year, with 849 of those, or 46 percent, producing figures at or above. One operator pushed $17.16 million.” (QSR) h/t Phil Ordway

What’s Up with Austin? by David Perell, June 24, 2022. I’ve never been to Austin but have been fascinated by its rising popularity for some time. This article seems like a balanced assessment of this rapidly changing city. “There’s a saying in town: “Keep Austin Weird,” which expresses some of the frustration with how the city is changing. It’s about the inflow of new money. You don’t have old-money tycoons in Austin like you do in Houston and Dallas, where most of the Texas oil billionaires live. Rather, their reluctance comes from wanting to preserve the culture and keep costs low.” (Perell.com)

Which is Safer: Rental Houses or Stock Investments? by Mr. Money Mustache, June 21, 2022. A good reminder that stocks are more than just price quotes moving around on a screen. I also like the observation that a stock portfolio will never call you on a Sunday night regarding a leaking water heater. “I think of houses and stocks as being two versions of the same thing. They are both real, concrete, productive assets rather than gambling instruments or numbers on a computer screen. If you understand this connection, you will become a better lifetime investor. Meanwhile, people who understand only one side or the other may become blind to what investing really means.” (Mr. Money Mustache)

Letter to Your Future Self by Sahil Bloom, June 22, 2022. “A few days before my 8th grade graduation in June 2005, our entire class was required to write a letter to ourselves that would be delivered upon graduation from high school four years later. In June 2009, I received the letter in the mail. It was a fun surprise considering I had completely forgotten about it! I opened the letter and recall being blown away.” (The Curiosity Chronicle)

The Survival Instinct of Money by Lawrence Yeo, June 22, 2022. This article is a good explanation of why the hedonic treadmill, or the ratcheting lifestyle trap, is so dangerous: “If you are attached to a certain lifestyle, the primary role of money is to ensure that you don’t lose it. This keeps you anchored to whatever identity you embody to ensure the regular influx of money, be it your current job or career. Even if you dislike it, you’ll feel like there’s no choice but to carry on because any change may threaten your ability to keep what you have. And it is this adherence to identity that can lead to an existential crisis when you begin to wonder if all this preservation was important in the first place.” (More to That)

Why I’m Biased Against Stock Options by Geoff Gannon, June 22, 2022. “I’m honestly less worried about huge cash bonuses sneaking up on a shareholder versus huge share issuance. Share issuance (whether through options or any other form) is easier to game in terms of timing and structuring in ways that can make the wealth transfer from owners to operators especially big. Looking at the last 10-15 years of a company’s history, I think I can account for large cash payments pretty well. But, if the company sometimes issues a lot of stock to insiders – that’s something I’d be more worried might happen in the future to a greater extent than I might predict on the day I buy the stock.” (Focused Compounding)

Why we trust fraudsters by Dan McCrum, June 16, 2022. The modern world cannot function without trust, a reality that can often be exploited by bad actors. “What such frauds exploit is the highly valuable character of trust in modern economies. We go through life assuming the businesses we encounter are real, confident that there are institutions and processes in place to check that food standards are met or accounts are prepared correctly. Horse meat smugglers, Enron and Wirecard all abused trust in complex systems as a whole. To doubt them was to doubt the entire structure, which is what makes their impact so insidious; frauds degrade faith in the whole system.” (FT)

Walking the World: Hanoi by Chris Arnade, June 24, 2022. I’ve been enjoying Chris Arnade’s travel essays (and photos) in recent months. His style of travel is to avoid the typical tourist experience and walk through cities as a local would experience it. “You cannot, certainly as a foreigner, pass along an alley of open homes, stores, and through the plazas of kids playing badminton, older women dancing, without being asked to join. To sit down, then given a drink (No no no way you’re paying. Absolutely not. That is clear), then offered the best cuts of what they are eating. Or even be asked to come inside their home and have a meal and do some shots of 8 year old rice wine.” (Walking the World)

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Podcasts

The Equation for a Meaningful Life w/Vitaliy Katsenelson, June 23, 2022. 1 hour, 37 minutes. This is an interview with the author of Soul in the Game: The Art of a Meaningful Life, which I reviewed last week and highly recommend. “Vitaliy holds a CFA and is the CEO of Individual Portfolio Management, better known as IMA. Vitaliy is also an author of a popular series of newsletters as well as multiple books, including his newest release Soul in the Game. It’s a beautiful book that goes beyond the learnings from investing and dives deeper into how to make a meaningful life.” (We Study Billionaires)

Guy Spier: Our brains didn’t evolve for a modern economy, June 23, 2022. 44 minutes. This is an interview with Guy Spier, a fund manager who published The Education of a Value Investor in 2014. I reviewed the book shortly after publication and recommend it. “In this podcast, famed value investor Guy Spier talks through how his investment process has developed over the past two and half decades and why he’s feeling more optimistic in the current market rout than he has in previous crises.” (Investors’ Chronicle)

William Green - The Man Behind the Books, June 23, 2022. 1 hour, 38 minutes. William Green is the author of Richer, Wiser, Happier: How the World's Greatest Investors Win in Markets and Life, a book that describes the investing approach of many well-known investors including Charlie Munger, Ed Thorp, and Tom Gayner. I briefly discussed the book in the May 7, 2021 newsletter. (The Business Brew)

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