Table of Contents

• Berkshire Now Owns 34% of Occidental Petroleum

• Damodoran’s Annual Massive Data Dump

• Howard Marks: Low Rates Are Corrupting Investing

• Duolingo Embraces AI, Fires 10% of Contractors

• SEC Approves Spot Bitcoin ETFs

Guru Watch | Value Stock Ideas

Berkshire Now Owns 34% of Occidental Petroleum

According to an SEC filing, Berkshire Hathaway has increased its stake in Occidental Petroleum to 34%. Last month, Berkshire Hathaway purchased over 15 million shares of Occidental at a cost of approximately $900 million.

The purchases coincided with Occidental's acquisition of CrownRock, expanding its footprint in the Permian Basin. Occidental asserts that its drilling operations in the Permian Basin remain profitable even if oil prices fall below $40 per barrel.

Futures have oil priced above $70 through October. That could change rapidly due to geopolitical risks, but Buffett likely sees it as a margin of safety for the investment.

Buffet's move suggests his belief in rising oil prices over time. Oil has stayed over $40 per barrel since November 2020, when prices rebounded after coming out of the pandemic.

Some speculate that Berkshire Hathaway may eventually acquire the entire company, although Buffett has claimed no interest in taking a controlling stake.

The stock is down 48% from its all-time high last seen in 2011 when oil was over $100 per barrel.

It trades at 7.2x cash flow, a free cash flow yield of 13.8%. It's easy to see why Buffett loves this company at current prices.

Macro & Markets

Damodoran’s Annual Massive Data Dump

NYU Professor of Finance, a.k.a. “The Dean of Valuation,” Aswath Damodoran, unveiled his updated annual industry data list for 2024.

• Have you ever felt like geeking out on a massive finance data set?

• Want to know typical margins, returns, and capital requirements for a sector you’re researching?

• Want to deep dive into hundreds of other factors for every industry worldwide?

Watch the video for an overview of how he compiles all the data.

Then, spend 10 minutes playing with the specific data sets.

It will be eye-opening, and give you more of a “gut feel” for what a great industry looks like on a “numbers” level.

Here are some gems:

• Detailed data on margins for every industry.

• Return on equity for every industry.

• Fundamental EPS growth (ROE x retention ratio) for every industry

• Historical and future expected revenue and income CAGRs for every industry.

Enjoy.

Principles of Investing

Howard Marks: Low Rates Are Corrupting Investing

Billionaire investor Howard Marks released a recent memo titled “Easy Money.”

Warren Buffett has said of Marks’s memos: "When I see memos from Howard Marks in my mail, they're the first thing I open and read. I always learn something."

Marks argued in the memo that low interest rates have corrupted investing and that the US has not had a free market in money since the 1990s. He says ultra-low rates encourage bad investments and discourage economic activity.

He believes that the natural interest rate, which reflects supply and demand for money without central bank intervention, is the optimal way to determine capital allocation. However, central bank activism has prevented the natural rate from influencing the market.

The memo is worth the read but is long, so here’s a detailed bullet-point summary for you, with the biggest implications in bold.

• 🏢 Until recently, low Interest rate effects created an "easy money" environment.

• 🤝 This stimulated the economy and lowered costs for businesses.

• 💰 Reduced perceived opportunity costs, encouraged spending.

• 📈 Lifted asset prices, influenced investments.

• 🤔 Encouraged risk-taking, potentially unwise investments.

• 💵 Enabled financing deals easily and cheaply.

• 🔀 Increased use of leverage, raising fragility.

• 🍅 Food analogy: Ketchup makes food more palatable, just as leverage can make risky investments seem attractive.

• 💰 Low interest rates and leverage: Low rates can lead to excessive leverage in investments, potentially causing problems when rates rise.

• 🏢 Impact on companies: Companies with heavy debt loads struggle when interest rates increase.

• 💡 The "six-foot-tall man" adage: Heavy leverage can make companies fragile in challenging times. A six-foot tall man can drown walking across a stream that’s 5 feet deep on average, getting caught at the deepest point.

• 💼 Signa: A large private property company in Europe recently started bankruptcy proceedings after getting over-exposed when interest rates were near zero.

• 💲 Borrowing short at low rates: This strategy can lead to mismatches and difficulties in tougher times.

• 📉 Cycles and interest rates: Interest rates can and will change, leading to unexpected challenges for projects planned during low-rate environments.

• 📊 Wealth inequality: Low rates can benefit borrowers but penalize savers, exacerbating wealth inequality.

• 🔄 Cyclical behavior: Market cycles tend to rhyme, with periods of excess leading to corrections.

• 🎶 When the "music stops": People often take on more risk in easy money environments, even if it leads to problems later, but it’s too late.

• 📜 Lessons from history: People tend to forget financial disasters and repeat the same mistakes during easy money periods.

• 💭 Charlie Munger's wisdom: "Easy money corrupts, and really easy money corrupts absolutely."

• 💱 Current interest rates in context: Rates today at 5.25-5.50% are not considered high compared to historical averages.

• 📈 Outlook for Rates: The future of interest rates is uncertain, as it depends on various factors and the decisions of the Federal Reserve.

• 🌐 Globalization Impact: Globalization has been a disinflationary force, but it might decline, leading to potentially higher inflation and interest rates.

• 📊 Neutral Rate: The neutral rate is estimated at 2.5%, which could become a target for the Fed to maintain a balanced monetary policy.

• 💼 Fed's Role: Marks says The Fed should let market forces determine interest rates rather than actively controlling them. Zero percent rates from 2009-2021 were a mistake.

• 📈 Inflation Control: To control inflation, the Fed should keep the fed funds rate positive in real terms, above the inflation rate.

• 🌍 Economic Conditions: The Fed needs room to lower rates in case of a recession, which is challenging if rates are already near zero.

• 📉 Consequences of Easy Money: Easy money policies can lead to risk-taking, leverage, asset bubbles, and economic imbalances.

• 🤝 Natural Interest Rates: Natural interest rates reflect supply and demand for money, promoting efficient capital allocation.

• 🏦 Free Market in Money: he suggests returning to a free market approach to interest rates, with central banks intervening only when necessary.

• 📉 Expected Rate Reduction: The Fed is expected to reduce rates from the current levels in 2024, though market consensus varies.

• 📊 Consensus Thinking: The consensus on economic conditions and rate expectations can be prone to change and surprises.

• 📅 Expect a shift from declining interest rates to a new environment with higher rates.

• 📈 Investment Implications: Different investment allocation strategies will be needed in the higher interest rate environment. The same easy money strategies of the past decade won’t work anymore.

• ❓ Conclusion: It all depends on whether Marks is right that we won't return to easy money conditions soon, greatly impacting future investment strategies. He could, of course, be wrong.

If he’s right, the reigning in of easy money excesses will mean value stocks should outperform.

Future earnings will be discounted at higher rates, dropping current equity values, especially of unprofitable growth firms.

Industry Watch

Duolingo Embraces AI, Fires 10% of Contractors

AI is taking jobs. Expect to see this story much more in the next 1-3 years.

37% of companies have already replaced some workers in 2023, and 44% of companies expect more layoffs due to AI in 2024.

Duolingo, the language-learning app, is laying off around 10% of its contractors as it increases its use of generative artificial intelligence (AI) to create content.

The company spokesperson stated that the layoffs were due to the fact that they no longer require as many people to do the work that the contractors were previously responsible for, which can partly be attributed to the use of AI.

Duolingo's decision to incorporate more AI into its operations reflects a larger trend of companies replacing certain tasks typically performed by humans with AI technology. The use of AI tools can streamline processes and potentially increase efficiency.

While proponents argue that AI will replace mundane tasks and allow humans to focus on more complex and creative work, critics worry about the potential displacement of human workers.

Companies likely won’t have a choice. They will be forced to adopt AI to stay competitive. Margins may expand in the short run, but will likely return to the median and normalize after all surviving companies have the same AI advantages.

Duolingo (DUOL) trades at 87x cash flow.

Macro & Markets | Industry Watch

SEC Approves Spot Bitcoin ETFs

Warren Buffett called Bitcoin “rat poison squared.” But it looks like it’s here to stay.

The US Securities and Exchange Commission (SEC) has approved the creation of exchange-traded funds (ETFs), offering investors a cheaper method of investing in spot Bitcoin.

After a decade of rejections, 11 applications from asset management companies like BlackRock and Fidelity have been given the go-ahead.

Investors can now pay lower fees to access holdings in bitcoin ETFs than they would by purchasing bitcoin directly through a cryptocurrency platform such as Binance, Coinbase, or Kraken.

Spot ETFs enable individuals to gain direct exposure to the digital assets market without the need for a cryptocurrency wallet and cold storage.

Coinbase (COIN) was up almost 5% after hours. It trades at 8.8x cash flow.

But keep in mind their revenue, cash flow, and stock price are highly correlated to the price of Bitcoin, which has been on a tear and is prone to 80% drawdowns.

Thank you for reading today—happy investing!