Gabelli Funds May 3, 2021 One Corporate Center Rye, NY 10580-1422 (914) 921-5398 www.gabelli.com

Berkshire Hathaway: The Unique Conglomerate

Source: Marketwatch.

Reflections from the 2021 Annual (Digital) Meeting

(BRK.A - $412,500 - NYSE) (BRK.B - $274.95 - " )

Macrae Sykes Gabelli Funds 2021 (914) 921-5398 [email protected]

-Please Refer To Important Disclosures On The Last Page of This Report-

May 3, 2021 Gabelli Funds One Corporate Center Rye, NY 10580-1422 (914) 921-5398 www.gabelli.com

Berkshire Hathaway Inc. (BRK’A - $412,500 - NYSE) The Unique Conglomerate - NR Year B/V Per “A” P/B 2023P $416,600 1.0x Dividend: None Current Return: Nil 2022P 368,400 1.1 Common Shares “A”: 0.6 billion (a) 2021E 325,100 1.3 “ “ “B”: 1.3 “ (b) 2020A 287,000 1.4 52-Week Range “A” Shares: $417,905 - $250,926 (a) One Class “A” Share can be converted into 1,500 “B” Shares. Class “A” Shares have 10,000 votes per share. (b) Warren Buffett owns 248,734 of “A” Shares and 10,188 “B” Shares.

COMPANY OVERVIEW Berkshire Hathaway Inc., based in Omaha, NE is a holding company for a diverse group of operating subsidiaries including insurance, freight rail transportation, utilities and energy, finance, services and retailing. The subsidiaries operate in an autonomous fashion, while investment and capital allocation decisions are managed by Warren Buffett (90) in consultation with Vice Chairman, Charlie Munger (97). As of December 31, 2020, since 1965, the firm had an annual compounded gain of 20.0%.

On May 1st, Berkshire Hathaway hosted its annual meeting. Like the previous year at the start of the pandemic, the event was held virtually. Warren Buffett and Charlie Munger were based in Los Angeles, California, while Vice- Chairman, Greg Abel and Ajit Jain remoted in from other locations. Becky Quick from CNBC offered questions from the virtual audience that lasted from 1:30PM to 5:00PM EDT. Despite the second year of different physical structure, the event provided a plethora of feedback and enhanced participation from the younger managers. Warren concluded the meeting with hope for a return to the normal program in 2022 in Omaha.

Takeaways:

 It was confirmed that Greg Abel, Vice Chairman of Non-Insurance Operations would be Warren’s CEO successor and that Ajit Jain, would be a potential back-up to Greg.  The appearances and interaction with Greg Abel and Ajit Jain were welcome additions to this year’s meeting. The two senior managers contributed commentary about the firm’s utility, rail and insurance businesses. It is unlikely that investment managers, Ted Weschler and Todd Combs, will join the stage any time soon. Warren stated that both are doing absolutely terrific, but don’t want the public to speak to them about stocks. For competitive reasons, the intellectual capital understanding is better to be contained in-house.  Last year the market declined significantly, but quickly rebounded due to strong monetary and fiscal action by the US government. Jay Powell engineered a remarkable stop gap for liquidity in the American System. He moved “with such speed and precision.” Instead of a repeat of the ’08 crisis, when there was a run on the money markets, the Fed stepped in. “It was the most dramatic change in US history.” Unfortunately, for the capital allocators, there was not enough opportunity to put more cash to work. Charlie stated, “It is crazy to think that anyone could time the market in just one spot and spend all the money. A crazy standard to be held to.”  Warren and Charlie repurchased $25 billion shares last year ($6.6 billion in 1Q21) and chose to invest in Berkshire rather than pursuing expanding the securities book given the value they see in the shares. In general, repurchases at the right price make a lot of sense as a way of distributing cash to a small amount of shareholders that want out. On the contrary, “if you are purchasing stock to bullet your shares higher, it is immoral.”  The question of paying a dividend seems to be a perennial favorite and was addressed the same way. Berkshire shareholders a few years ago had the chance to start a normalized payment, but voted against it. These shareholders are attracted to the Berkshire business(es) for specific reasons and not obviously for the potential of dividends, which makes the Omaha conglomerate somewhat different. For some companies, dividend payouts may make sense. It is unlikely to happen with Berkshire.  There was turnover in the securities investments, with notable selling in the airlines positions as previously highlighted. Corporate and international travel still remains subdued from the effects of the pandemic, but will eventually recover. The faith in that predicament is backed up by a 19% position in American Express.

In aggregate, the firm was a net seller of 1% of the investment portfolio. Additionally, the management team chose to reduce exposure overall in financials selling JPM, GS and some others, while still adding to BAC. They reiterated their long-term appreciation for CEO Brian Moynihan and for the conservative lender.  The firm reduced the share count of the AAPL position, but saw an increase in the effective ownership due to repurchases at the consumer giant. At present, Berkshire Hathaway’s ownership equates to 5.3%. Warren continues to admire the firm and leadership execution of CEO, Tim Cook. “They have a product that everyone loves. Satisfaction levels are 99%. It is an extraordinary business.” Charlie: “Apple is one of the leading American companies. I don’t think Apple is doing a lot of harm. They are huge and that is good for us.”  The insurance business will be affected by the Pandemic in several ways. Industry losses could total $100 billion according to Ajit Jain. Berkshire will have losses and currently has reserved $1.6 billion against them, which is not insignificant, but much better than the other major players. Pricing pandemic risk will need to become more sophisticated and the language better in contracts going forward. There have been some unfavorable court cases in the UK that have hurt some insurers, but better legal outcome trends in the US. “One of the biggest human tragedies in history, but we will manage.”  In reviewing GEICO, there was admiration for auto insurer and competitor, Progressive that has been performing very well. “They have had the best operations of matching rate to risk.” Although GEICO continues to take share, it has not grown as fast as PGR, nor with comparable margins. Todd Combs is now leading GEICO and believes the firm can do better. WB: “I predict Progressive and GEICO will be the top two in the space in 5-years (currently around 13% market share each).”  Although considered one of the foremost authorities on tax advantaged investing and understanding, Warren declined to comment on specifics related to potential changes in American policy being driven by the Biden administration. However, if corporate tax rates change, it would not “affect how Berkshire runs its business.”  Threats of inflation. Both senior managers admitted that the present economic policies are working for the American economy, but there still could be consequences related to the significant spending. They highlighted the differentiated alarm forecasts from economist Larry Summers, about the dangers of inflation and the increased debt levels. Greg Abel separately commented that he sees inflation picking up in consumer prices and raw materials. “Steel costs are going up every day. It just keeps going. It will not stop. Quite a bit more inflation going on than one would have anticipated six months ago.”  The healthcare JV with Amazon and JP Morgan was disbanded this year. Berkshire learned a lot about the industry and took away some more specific benefits to Berkshire like finding ways to centralize the cost of healthcare for its many operating companies. “We accomplished a lesser objective. We got our monies worth.”  Robinhood Securities will be coming public soon and Warren looks forward to reading the S-1, which is the initial regulatory filing on how the company makes money. One item of interest is the relatively high amount (12-13%) of options trading by these retail customers, which he believes are gambling on the price of the stock movement in the next seven days or so. “You can’t build society around that. I hope we don’t have more of them.” CM: “That is really waving the red flag at the bull. It is deeply wrong. We don’t want to make money fooling people.”  Berkshire Hathaway Energy has been a leader in ESG disclosures. Since 2007, the firm has provided and enhanced feedback about efforts to work in a cleaner energy society. In accordance with the Paris Accord, the firm is actively reducing operated coal units and expected to close 16 plants by 2030 after a previous 16 from 2006 to 2020. All coal plants will be closed by 2049 as the firm fully transitions away.  In response to the recent energy crisis in Texas which is estimated to have cost $80 to $130 billion, Berkshire has proposed an additional level of investment for the state. As part of the proposed deal to be completed by November 2023, the firm would offer a $4 billion performance clause on the guaranteed timing. The return on investment for Berkshire is estimated to be 9.3%.  Berkshire continues to believe in decentralized management structure. It has benefitted the firm over the years. However, the cultural set-up and efficiency are based on a strong trust and unique set of people. “You couldn’t run our way without the proper people. If we had managers that just cared about making a lot of money it wouldn’t work.”

Exhibit 1 Popular Berkshire Brands

Source: Geiconow.com. Source: AmericanExpress Source: Coca Cola Co

PERFORMANCE Berkshire Hathaway continues to be among the largest public capitalizations in the United States. Since taking over Berkshire Hathaway in 1965, Mr. Buffett has generated an overall gain of 2,810,526% vs. the 23,454% change in the S&P 500 (including dividends). We would note that Berkshire’s performance is after-tax, while the S&P 500 return is pre-tax.

Table 1 Berkshire Hathaway Performance 1965-2020

Annual Percentage Change Annual Percentage Change in Per-Share in S&P 500 in Per-Share in S&P 500 Market Value of with Dividends Relative Market Value of with Dividends Relative Year Berkshire Included Results Year Berkshire Included Results 1965 49.5% 10.0% 39.5% 1993 38.9 10.1 28.8 1966 (3.4) (11.7) 8.3 1994 25.0 1.3 23.7 1967 13.3 30.9 (17.6) 1995 57.4 37.6 19.8 1968 77.8 11.0 66.8 1996 6.2 23.0 (16.8) 1969 19.4 (8.4) 27.8 1997 34.9 33.4 1.5 1970 (4.6) 3.9 (8.5) 1998 52.2 28.6 23.6 1971 80.5 14.6 65.9 1999 (19.9) 21.0 (40.9) 1972 8.1 18.9 (10.8) 2000 26.6 (9.1) 35.7 1973 (2.5) (14.8) 12.3 2001 6.5 (11.9) 18.4 1974 (48.7) (26.4) (22.3) 2002 (3.8) (22.1) 18.3 1975 2.5 37.2 (34.7) 2003 15.8 28.7 (12.9) 1976 129.3 23.6 105.7 2004 4.3 10.9 (6.6) 1977 46.8 (7.4) 54.2 2005 0.8 4.9 (4.1) 1978 14.5 6.4 8.1 2006 24.1 15.8 8.3 1979 102.5 18.2 84.3 2007 28.7 5.5 23.2 1980 32.8 32.3 0.5 2008 (31.8) (37.0) 5.2 1981 31.8 (5.0) 36.8 2009 2.7 26.5 (23.8) 1982 38.4 21.4 17.0 2010 21.4 15.1 6.3 1983 69.0 22.4 46.6 2011 (4.7) 2.1 (6.8) 1984 (2.7) 6.1 (8.8) 2012 16.8 16.0 0.8 1985 93.7 31.6 62.1 2013 32.7 32.4 0.3 1986 14.2 18.6 (4.4) 2014 27.0 13.7 13.3 1987 4.6 5.1 (0.5) 2015 (12.5) 1.4 (13.9) 1988 59.3 16.6 42.7 2016 23.4 12.0 11.4 1989 84.6 31.7 52.9 2017 21.9 21.8 0.1 1990 (23.1) (3.1) (20.0) 2018 2.8 (4.4) 7.2 1991 35.6 30.5 5.1 2019 11.0 31.5 (20.5) 1992 29.8 7.6 22.2 2020 2.4 18.4 (16.0)

CAGR 1965-2020 20.0% 10.2% Overall Gain - 1964-2020 2810526% 23545%

Source: Company reports. Note: Data are for calendar years with these exceptions: 1965 and 1966, year ended 9/30; 1967, 15 months ended 12/31.

OPERATING COMPANY CONTRIBUTION During the meeting, Mr. Buffett remained upbeat about the competitiveness of the firm’s operating businesses and suggested that the recovery was noticeable. Operating EBT in 1Q increased to $8.2 billion vs. $6.9 billion, YoY, and $6.8 billion in 4Q20. While GECIO and BSNF have had better business trends, some firms are still making adjustments however, including Precision Castparts, which supplies parts to the aerospace industry (revenues declined $900 million, YoY, and 1Q pre-tax contribution fell 33.5%). For the 1Q, manufacturing led pre-tax contribution at 30%, closely followed by insurance at 29% and then railroad at 20%.

Table 2 Berkshire Hathaway Operating Companies Earnings ($, millions) 1Q 2020 – 1Q 2021

EBT 2020 2021 % of Insurance Group 1Q 2Q 3Q 4Q 1Q Total Underwriting GEICO 984 2,060 276 108 1,023 12.5 % BH Reinsurance Group (489) (1,103) (441) (472) (263) (3.2) BH Primary Group (33) 96 (126) 173 206 2.5 Investment Income 1,647 1,613 1,220 1,469 1,412 17.2 Total Insurance Group $2,109 $2,666 $929 $1,278 $2,378 29.0 % BNSF 1,584 1,494 1,777 1,937 1,659 20.2 Berkshire Hathaway Energy 419 533 1,122 405 683 8.3 McLane Company 65 44 96 46 103 1.3 Manufacturing 2,111 1,399 2,255 2,245 2,436 29.7 Servicing and retailing 558 408 779 883 938 11.4 Total $6,846 $6,544 $6,958 $6,794 $8,197 100.0 % Source: Company data.

VALUATION AND REPURCHASE LEVELS In the past, Mr. Buffett often referred to Berkshire’s change in book value as a proxy for evaluating the progress against the S&P 500 Index. Since 2001, price-to-book (GAAP) value has fluctuated between 1.1x and 2.0x. At the end of March 2021, book value per Class A Share was $294,636 or about 1.4x.

For many years, Berkshire had a common share repurchase plan based on buying shares at prices no higher than a 20% premium to book value. On July 17, 2018, Berkshire’s Board of Directors changed the program. Now Warren Buffett and Charlie Munger are authorized to repurchase shares when they believe shares are trading at a discount to intrinsic value, “conservatively determined.” Since the change, the company has repurchased 27,518 Class A Shares for $8.9 billion and 138 million Class B Shares for $29 billion. (Table 3)

Exhibit 2 Berkshire Hathaway Class “A” Price-To-Book May 2001 – May 2021

. Source: Refinitiv.

Table 3 Berkshire Repurchase History (2018 – 1Q 2021)

Date Class A Price Total Class B Price Total 1Q21 Mar-21 1,113 $396,163 $440,929,319 4,545,124 $251.40 $1,142,644,174 Feb-21 1,959 362,748 710,623,900 5,341,489 237.06 1,266,253,382 Jan-21 1,534 348,489 534,581,589 10,661,127 231.68 2,469,969,903

4Q20 Dec-20 1,787 342,577 $612,185,617 12,605,335 225.73 $2,845,402,270 Nov-20 2,244 341,117 765,466,683 7,423,729 219.12 1,626,687,498 Oct-20 1,894 316,292 599,057,881 11,097,536 209.92 2,329,594,757

3Q20 Sep-20 3,670 325,251 1,193,672,198 11,387,889 215.80 $2,457,506,446 Aug-20 2,531 316,766 801,735,151 10,846,595 209.96 2,277,351,086 Jul-20 1,965 280,779 551,730,421 10,521,719 187.93 1,977,346,652

2Q20 Jun-20 1,282 268,816 344,621,574 7,514,590 178.59 1,342,030,628 May-20 540 262,968 142,002,542 18,828,006 174.58 3,286,993,287

Mar-20 1,001 301,086 301,386,696 319,814 214.18 68,497,763 1Q20 Feb-20 164 325,412 53,367,553 4,486,775 214.00 960,169,850 Jan-20 177 339,082 60,017,587 582,074 226.11 131,612,752

Dec-19 688 306,087 210,587,581 1,497,623 204.07 305,619,926 4Q19 Nov-19 1,326 328,975 436,220,731 3,657,884 218.62 799,686,600 Oct-19 674 333,298 224,642,892 953,070 221.67 211,267,027

Sep-19 149 310,231 46,224,459 375,771 206.50 77,596,712 3Q19 Aug-19 64 300,166 19,210,632 2,793,092 197.68 552,138,427

Jun-19 55 311,293 17,121,114 733,907 205.16 150,568,360 2Q19 May-19 1,032,233 198.90 205,311,144 Apr-19 226 305,872 69,127,108

Mar-19 965 304,175 293,529,020 5,924,418 200.63 1,188,615,983 1Q19 Feb-19 293 302,622 88,668,293 595,412 201.73 120,112,463 Dec-18 790 295,954 233,803,652 4Q18 Oct-18 202 310,763 62,774,084 589,955 205.09 120,993,871 3Q18 Aug-18 225 312,807 70,381,517 4,139,192 207.09 857,185,271

27,518 $322,831 $8,883,669,792 138,454,359 $207.80 $28,771,156,232

Current Class A Price $412,500 Class B Price $274.95

Source: Company data.

Macrae Sykes © Gabelli Funds 2021 (914) 921-5398 [email protected]

One Corporate Center Rye, NY 10580 Gabelli Funds Tel (914) 921-5000 Fax 914-921-5098 This whitepaper was prepared by Macrae Sykes. The examples cited herein are based on public information and we make no representations regarding their accuracy or usefulness as precedent. The Research Analyst’s views are subject to change at any time based on market and other conditions. The information in this report represent the opinions of the individual Research Analyst’s as of the date hereof and is not intended to be a forecast of future events, a guarantee of future results, or investments advice. The views expressed may differ from other Research Analyst or of the Firm as a whole.

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