Insights from Investor Brad Gerstner and Berkshire Hathaway’s Q3 Results
Investing Strategies and Insights: Brad Gerstner on the Mel Faber Show
In a not so recent episode of the Mel Faber Show, Brad Gerstner, founder and CEO of Altimeter Capital, shared his perspectives on the fundamentals of investing, his views on disruptive tech, and why long-term conviction is essential for successful portfolio management. I apologize for not recapping the conversation 4 weeks ago when Gerstner appeared on the podcast, but I believe he is one of the better investors of our time and becoming one of the most famous value investors before our eyes. Here are some of the key takeaways from the episode that I believe are timeless.
1. The Importance of Deep Understanding in Investing
According to Gerstner, the goal in both private and public markets is to develop a deeper understanding of a business than the mass public of investors, as this is where the real investment opportunities lie. He emphasizes that owning a long-term compounder at an attractive price is crucial, particularly in volatile markets. When you truly understand a company's value, you won’t feel compelled to sell during temporary dips. For instance, during market fluctuations, a stock may drop by 3% in one day, but if it’s a long-term winner, Gerstner argues there’s no reason to react impulsively.
2. Opportunities from Market Volatility
Gerstner reflected on the unique buying opportunities that 2022 presented. The largest tech companies were effectively on sale, with many down by 50% or more as the pandemic led to an extreme interest rate hiking cycle. He recalls how companies like Meta went through cycles of hype and doom, with headlines in 2022 suggesting that the company was “dead.” Since then, Meta’s stock has rebounded sharply, almost 5x.
These gains in tech stocks from their 2022 lows are tremendous and typically happen over decades, not just 18 months. Investors who had conviction through the noise of 2022 and early 2023 were able to capitalize on these unprecedented price movements. For Gerstner, these moments remind us of the need for patience and conviction in times of market fear.
3. Navigating the AI Supercycle
Gerstner sees the start of a Supercycle in artificial intelligence as one of the most transformative disruptions in recent years. The big question, he suggests, is identifying which companies will benefit most from the AI revolution. Companies like Nvidia have already emerged as early winners, thanks to their critical role in AI infrastructure. But as the cycle progresses, not every player will thrive. For instance, companies like SMCI may have been overhyped, demonstrating how quickly markets can swing during tech cycles.
This Supercycle is about more than AI’s impact on compute power; it’s about how AI could redefine entire industries. Gerstner has been following AI developments for over a decade, seeing it as a shift from the traditional “10 blue links” of search results to a world where users receive personalized, augmented responses from tools like ChatGPT. In Gerstner’s view, large language models (LLMs) could still be misunderstood by the general public, and their long-term impact should be massive.
4. Investing Lessons from Warren Buffett
Gerstner brings up Warren Buffett as a case study for blending quantitative and qualitative analysis. Buffett is often seen as a disciple of the quantitative school, using discounted cash flow (DCF) models. However, Gerstner points out that Buffett’s most successful investments have come from a qualitative understanding.
For instance, Buffett’s long-standing commitment to companies like Geico and Apple wasn’t based solely on numbers but on conviction in their competitive advantages and durable business models. For Buffett, these companies are long-term compounders, where shareholders benefit through dividends or share buybacks, rather than risky reinvestments. This aligns with Gerstner’s advice to focus on long-term growth rather than chasing every shiny new technology trend.
5. Staying Grounded in Portfolio Management
Gerstner emphasizes the importance of staying grounded and avoiding the “Silicon Valley bubble.” While themes like AI are undoubtedly exciting, he advises investors to maintain a diversified portfolio and balance conviction with caution. This means not blindly investing in every new AI company but instead being selective and patient.
While the U.S. leads in tech breakthroughs, Gerstner acknowledges that China is also aggressively investing in AI, which may create both competitive and collaborative dynamics globally. Additionally, Gerstner highlights other long-term themes such as nuclear energy and space exploration, both of which could benefit from AI’s rapid advancements.
6. Thinking in Terms of Long Horizons
One of the biggest mistakes Gerstner sees investors make is focusing on short-term horizons, which he argues are nearly impossible to predict accurately. Instead, he advocates looking out five years or more into the future to identify high-conviction opportunities. This requires a different mindset, where the goal is not to predict every quarterly earnings but to assess a company’s long-term growth potential.
He underscores the value of studying a business, having conviction, and being patient, especially in disruptive fields like AI. As he points out, the growth rate of cloud providers such as AWS, Azure, and Google is accelerating as more companies adopt AI for training models, suggesting the start of a new wave of growth driven by AI’s application in the cloud.
Conclusion: Investing for the Long Haul
Gerstner’s discussion on the Mel Faber Show offers a compelling perspective on long-term investing, and I suggest anyone interested watch the entire interview (link below). His approach emphasizes the importance of understanding business fundamentals, maintaining conviction in high-quality companies, and positioning oneself to benefit from secular trends like AI. For investors seeking alpha, this means combining patience with selective exposure to disruptive technologies.
As you explore your own strategy, consider Gerstner’s reminder: investing is about finding those rare compounders that you can hold with confidence—even during turbulent times. With this long-term mindset, opportunities for outsized returns become much clearer.
Berkshire Hathaway Q3 2024 Results: Insights and Strategic Reflections
While Berkshire’s performance underscores its resilience across various sectors, recent decisions from Warren Buffett and his team also reflect a disciplined approach to managing positions and accumulating cash.
Below I explore Berkshire’s latest financial performance, strategic moves, and how investors can interpret the company's cash-building activities—especially amid a prolonged bull market.
1. The Cash Question: What Does Buffett Know That We Don’t?
Recently, Berkshire has sold off portions of its large Apple holdings and other stocks, raising significant cash. This has led to questions from investors and financial commentators alike: “What does Buffett know that we don’t?” While tempting to speculate, it’s worth keeping in mind a few key points:
Strategic Profits and Cash Building: Berkshire is an institutional investor unafraid to take profits, especially when certain positions become disproportionately large. This is a proactive approach, ensuring that Berkshire remains flexible for new opportunities or market shifts.
Cash for Comfort: With over $305 billion in cash and equivalents, Berkshire’s cash reserves allow it to weather downturns, support acquisitions, and provide shareholder returns through buybacks. The accumulation is less about market timing and more about maintaining a margin of safety in any market conditions.
Wait for the 13-F: For those curious about Berkshire's latest moves, the quarterly 13-F filing—due in just two weeks—will provide further insights. However, investors should avoid overanalyzing every quarterly change; Berkshire’s strength is its broad portfolio, giving it insight into economic sectors beyond specific stock trades.
As Buffett often emphasizes, he’s not trying to predict the future or “time the market.” If the market corrects, it would be coincidence—not foresight—that finds Berkshire with ample cash reserves.
2. Financial Foundation and Shareholder Value Growth
Berkshire’s shareholders’ equity rose to $629.1 billion as of September 30, 2024, marking a $67.8 billion increase since December 2023. This substantial growth was fueled by net earnings of $69.3 billion, which included $36.4 billion in after-tax investment gains. These gains underscore Berkshire’s ability to generate significant returns, even amid market volatility.
The conglomerate’s strong cash position provides a solid foundation for continued investment, opportunistic buybacks, and future growth. Berkshire’s stock repurchase program, which saw $2.9 billion in shares repurchased in the first nine months of 2024, reinforces its dedication to shareholder value. Interestingly, no shares were repurchased in Q3, likely reflecting Buffett’s current view of the stock's valuation.
3. Diverse Business Performance Reflecting Market Conditions
Berkshire’s portfolio is a valuable economic barometer, spanning insurance, retail, manufacturing, and more. Here are key highlights from each sector in Q3:
Insurance (GEICO): GEICO saw improved pre-tax underwriting profits, driven by higher premiums and lower claim frequencies. Although catastrophe losses from Hurricane Helene affected results, GEICO’s improved loss ratio of 71.4% illustrates operational resilience.
Manufacturing, Service, and Retailing:
Clayton Homes: Revenue rose by 8.7%, with strong new home sales. However, pre-tax earnings were impacted by increased insurance claims and higher interest expenses.
Consumer Products: Brands like Forest River and Jazwares experienced moderate growth, with apparel and footwear (e.g., Fruit of the Loom) contributing a 41% earnings increase year-to-date.
Service Segment: While NetJets and FlightSafety grew revenue, rising operational costs and supply chain challenges impacted pre-tax earnings, particularly for TTI (electronics).
Retailing: Revenue declined across segments, with Berkshire Hathaway Automotive seeing a 1.4% drop in vehicle sales revenue due to pricing pressures. Home furnishings and other retail brands also experienced decreased sales volumes.
McLane Company: McLane’s wholesale distribution revenue fell, especially in the restaurant sector. Despite this, McLane’s pre-tax earnings increased by 25%, reflecting improved gross margins and reduced operating expenses.
Berkshire’s diverse portfolio not only provides insights into the broader economy but also reinforces its stability, balancing performance fluctuations across sectors.
4. Strategic Acquisitions and Capital Deployment
In 2024, Berkshire made key acquisitions and investments to strengthen its portfolio and expand in high-potential sectors:
Pilot Travel Centers: Berkshire acquired the remaining 20% of Pilot in January, making it a fully owned subsidiary.
Berkshire Hathaway Energy (BHE): BHE repurchased shares and retired debt from noncontrolling shareholders, enhancing Berkshire’s control over its energy assets.
Berkshire’s consolidated debt of $124.5 billion (primarily from BHE, BNSF, and BHFC) remains manageable, with recent debt issuances reflecting favorable terms. The company also invested $13.6 billion in capital expenditures across BNSF and BHE, reinforcing its commitment to infrastructure and operational growth.
Conclusion: Berkshire’s Long-Term Value and Macro Insights
Berkshire Hathaway has always been like a safe blanket for those of us invested in volatile growth sectors, weathering storms and offering stability. Years ago, when I started investing heavily, I followed a simple rule: for every share of QQQ I bought, I also bought some Berkshire. To me, Berkshire is almost a better proxy for value than the Dow30. The Dow Jones just doesn’t make fundamental sense as an index—it’s price-weighted, and the companies are picked by a committee. Recently, they even added Nvidia, which further dilutes it as a measure of value, financials, or industrials (in my opinion). Berkshire, by contrast, holds up as a real measure of stable, diversified value. Each Berkshire 10-K or quarterly report offers great insight into the broader macro economy. With businesses spanning financials, industrials, insurance, energy, utilities, transportation, and retail. There’s nothing in this earnings report though that raises any alarms for me. Berkshire, regardless of any quarterly earnings report remains a long term hold in our portfolio.
Full Disclosure: Long $BRK.B (2.71% of Portfolio Holding), Gain +127%
Disclaimer: This blog is not financial advice. The content here reflects my personal views and is shared for informational purposes only. Always conduct your own research or consult with a certified financial professional before making any investment decisions.
For those interested in diving into Berkshire Hathaway's detailed Q3 2024 earnings report, you can find it here: Berkshire Hathaway Q3 2024 Report