According to an interview with Nikkei Asia in April 2023, Berkshire Hathaway swapped out almost the entirety (90%) of a $4.1 billion dollar investment in Taiwan Semiconductor, with the remaining shares sold some months later, for what was estimated to be a moderate loss, perhaps a break even. The proceeds were reported to have been divided up among 5 Japanese trading house conglomerates with similar structure and business models to that of Berkshire Hathaway; Itochu, Marubeni, Mitsubishi, Mitsui, Sumitomo.
“Berkshire Hathaway purchased $4.1 billion of TSMC stock in the third quarter of 2022, but sold nearly 90% of the position a few months later.”
“He told Nikkei that Taiwan Semiconductor is a well-managed company, but said that Berkshire Hathaway had better places to invest its money.”
The basis for the about-face of Berkshire Hathaway, according to the content of the article, was that “Warren Buffett says the unusually quick sale of Berkshire Hathaway’s TSMC stake was driven by geopolitical tensions”, that “rising geopolitical tensions between China and Taiwan were “a consideration” in its swift sale of the world’s largest chipmaker.”, “and those tensions — which have been building over the past year as more US political figures visit the island and meet with its leaders in a show of solidarity — just aren’t worth the headache for Buffett.”
Evaluating the relative returns earned on the pre and post investment differentials of Taiwan Semiconductor and the package of Japanese trading houses, make it self-evident that Berkshire DID NOT have better places to invest the money.
Substitute the word “better” with “different”, and in that case, selling out Taiwan Semiconductor could at least be explained. One estimate suggests that Berkshire subsequently posted a paper gain of roughly 43% on the Japanese securities, but missed out on the subsequent 83% increase in TSM.
Some portion of the gains, possibly the bulk, at the Japanese holding company purchases, may have little to do with fundamental business improvements; rather, they may be attributed to the notable pile-on effect of Berkshire Hathaway followers. They rely, sometimes exclusively, on Buffett trades to direct their own personal investment purchases. Not unlike front-running, when a well known investor reports on a purchase, others jump on board and continue to drive the prices higher, at least for a time. The far smaller market caps of the Japanese securities, as compared to Taiwan Semi-conductor, made them easier to move, based upon capital inflows.
All that taken into account, TSM outperformed the package roughly 2x, without so much as a single Buffett order to positively influence the share price. A trade led to opportunity cost, and opportunity lost.
The explanation of TSM being too great a a headache to endure, based on China-Taiwanese geopolitical concerns, simply did not hold water to me, not then and not now.
China has asserted, for more than 7 decades, that Taiwan is not a country, but is just a breakaway region, one intended to be absorbed, at a time of China’s choosing. Those pronouncements, the saber rattling and jingoistic moves, were evident long before Berkshire made its initial purchase and continue to this day.
Did Berkshire fail to conduct an appropriate amount of due diligence, at the outset regarding geopolitical concerns, which would represent a vital oversight to those entrusting the firm with their shareholder capital? I doubt that very much. More likely, the reality is that TSM just wasn’t of interest, despite producing a 38% trough net earning margin, an estimated five year almost doubling of revenues, similar growth in net profits, no meaningful competition and a business runway as far as the eye can see.
A fallback to comfort via familiarity represents its own bias.
What is apparently of greater interest to Berkshire are a package of low margin commodity and currency trading firms, bundled up as financial conglomerates. In terms of business focus, financial leverage (or lack therein), management and, most importantly, secular trend capture, there just isn’t the slightest comparison to be made between TSM, the world’s largest fabricator of semiconductors, to a number of smallish, regionally themed, commodity and investment trading houses. I assume Buffett chose to invest in a number of miniature, Asian, Berkshire Hathaway’s as they were quite similar to his business, therefore, were entirely comfortable to own. He was not comfortable with TSM, sold away global excellence and replaced it with what some consider to be, regional mediocrity.
This series of trades, in my humble view, illuminates, not one, but rather, two, issues not uncommon at businesses operated by those placed on pedestals from the investment media and the investing public at large.
The first issue, completely glossed over by acquiescent and pliable analysts, is that the notion of long-term investing, which most assume is the operating model when monitoring the public equity portfolio held within the Berkshire Hathaway conglomerate; that notion might be as much marketing lip-service as anything.
The second issue, to me, equally troubling, is that those who sit atop a number of notable firms, too often treat third party investor capital as through it were all their personal monies, when in fact, most of it is not.
At roughly the same time that Berkshire Hathaway embarked upon the extremely short-term trade and unwinding of Taiwan Semiconductor, Paramount Global was also added to the Berkshire account. The shares are now down, depending upon the timing and income derived from option and hedge income received (or lost) on the hedge positions at Berkshire, possibly as much as 2/3 from the purchase, at least on the initial position.
“At Berkshire’s annual meeting on Saturday, 93-year-old CEO Buffett told shareholders that he was directly responsible for the company’s Paramount share purchases in 2022, but that the company had now changed course.” “I was 100% responsible for the Paramount decision,” Buffett said. “It was 100% my decision, and we sold it all and we lost quite a bit of money, and that happens in this business, too.”.
The phrasing of that declaration speaks volumes, for those willing to parse the statement. Berkshire Hathaway’s esteemed head indicates a 100% responsibility for the decision to purchase Paramount, a streaming business with huge cash burn, one with few barriers to entry and a host of larger competitors. Taiwan Semiconductor, another sell decision, had it actually been held as a long term investment, rather than a quarterly trade, could very much fall into the category of a wealth building core holding, akin to a Microsoft or Apple.
The Chairman of Berkshire Hathaway acknowledges these failures to be his call, his alone, and one takes that as some sort of assertion that all of the capital losses experienced on the misadventure fall on Buffett personally, that his net worth and only his, are impacted. Yet, the conundrum facing Berkshire shareholders, is that Mr. Buffet only holds about 18% of the total capitalization of the conglomerate; the remaining 82% are held by others. So, no, the mistakes are not his, and his alone; an overwhelming percentage of any capital losses are borne by the majority shareholders.
Berkshire Hathaway proponents poo-poo any critique, on the basis that TSM represented just a $5 billion investment, certainly not enough to move the needle for the overall corporation one way or another.
Such rebuttal is dismissive of the single greatest benefit to be had with equity investing, the tax-deferred compounding of capital return. A $5 billion dollar equity purchase becomes a $9.1 billion holding with an 83% capital growth rate. Were that equity to then double again, $5 billion compounds to $18.2 billion. A further doubling of that capital ultimately moves a $5 billion equity holding to a $36.4 billion value.
What is of ultimate significance to one’s overall return is not necessarily the initial sum deployed to any single purchase; it is the choice of equity. Apple Inc., by way of example, was not immediately the single largest security held at Berkshire Hathaway; it grew to that stature over a great number of years via compounding, by leaving the position bloody well alone, rather than trading portions away in options strategies or upon a reliance on short term profit taking to bolster quarterly fiscal cash balances. One can never replicate that Apple return, when one lacks Apple-equivalent securities to do so.
For we, the great unwashed masses of retail investors on the planet; there is a value to be had in deeply pondering recent statements, and misadventures, in the public equity markets.
We maintain consistency in portfolio management when we actually practice what we preach. Professing a long term investment style represents a core statement of intent, rather just than a marketing slogan, one to be discarded on a whim.
The second lesson to be learned, is that operating margins and monopoly positions matter more to an investment thesis, than any supposed seal of approval, by any single investment guru. When we are in charge of 100% of our personal equity capital, then we do not have the luxury of engaging in multiple misadventures and expect to make it up with a shoulder shrug.
If excellence is sold from a portfolio, replaced only by mediocrity, what should one logically assume to be the outcome for an account?
It was once noted: “We are what we repeatedly do. Excellence, then, is not an act, but a habit“.
Individual investors have a single edge, and only one, when compared to legends. We do not reside in an echo-chamber of others who fawn upon our every utterance and fail to point out the painfully obvious flaws in our logic. We can, and must, be better; better in the selection process, better in our practice of discipline.
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