Berkshire Hathaway's third-quarter earnings; Charlie Munger interview; Why I do extreme sports; What is a deep relationship?

1) Warren Buffett's Berkshire Hathaway (BRK-B) reported third-quarter earnings on Saturday (earnings release and Form 10-Q here and here, respectively)...

GAAP net income declined sharply, but this was entirely due to mark-to-market losses in the investment portfolio, which are largely meaningless over short periods of time.

But there was plenty of good news from the operations of Berkshire's wholly owned businesses, as you can see in this table from the earnings release:

Operating earnings grew an extraordinary 40.6%, driven almost entirely by Berkshire's insurance operations.

Auto insurer GEICO's pretax underwriting earnings were $1.05 billion in the third quarter (versus a $759 million loss in the prior year's quarter) thanks to "higher average premiums per auto policy, lower claims frequencies, reductions in prior accident years' claims estimates and a reduction in advertising costs."

Berkshire also benefitted from fewer "super cat" events this year – in last year's third quarter, Hurricane Ian cost Berkshire $1.9 billion.

Lastly, investment income soared by 75% thanks to higher interest rates on Berkshire's record cash hoard of $157.2 billion.

These huge gains were partially offset by a small decrease in railroad BNSF Railway's earnings due to lower volumes and prices and a drop in Berkshire Hathaway Energy ("BHE") earnings due to a $1.3 billion increase in estimated pretax loss accruals by BHE subsidiary PacifiCorp for wildfires that took place in 2020 and 2022.

Turning to the cash flow statement, cash flows from operating activities came in at $13.7 billion during the quarter – up 17% from $11.7 billion in the same period last year.

Stock sales were $7.0 billion, offset by only $1.7 billion of purchases... meaning net stock sales were $5.3 billion – up from $3.7 billion of net stock purchases in last year's third quarter.

Lastly, let's look at share repurchases...

Buffett started buying back shares in 2018 and really ramped it up in 2020 and 2021. He then slowed buybacks to a trickle in early 2022 as Berkshire's share price hit an all-time high (and briefly reached my estimate of intrinsic value). But as the stock (and markets) pulled back, Buffett resumed buying in size in late 2022 and the first quarter of this year before pulling back during the past two quarters, as you can see in this chart:

Tomorrow, I'll share my updated estimate of Berkshire's intrinsic value... Stay tuned!

2) In yesterday's e-mail, I covered the highlights of the 66-minute interview the Acquired podcast did one of my heroes and mentors, Berkshire Vice Chairman Charlie Munger. Coincidentally, the Wall Street Journal also interviewed Munger recently and published these highlights: Charlie Munger Will Take Your Questions Now. Excerpt:

Q: If you were starting out today as an investor, are there any things you would do differently than you did back in the 1960s?

A: Conditions were quite different then, and there were a lot of what we used to call loaded laggards... There were two or three times as much in assets per-share value as there was in stock-market value per share. Ben Graham taught us all to buy that kind of stuff. It was underpriced, and hold it as long as it was underpriced, then sell it when the price got more normal and buy another undervalued asset. And you could do that for about four decades in the aftermath of the 1930s Great Depression. That's gone, all of that low-hanging fruit.

I think that the modern investor, to get ahead, almost has to get in a few stocks that are way above average... They try and have a few Apples or Googles or so on, just to keep up, because they know that a significant percentage of all the gains that come to all the common stockholders combined is going to come from a few of these super competitors...

Q: Is there anything you've learned recently from the books you've read?

A: I think I learn a little something from... everything I've read. I think that one of the reasons I was as economically successful as I was in life is because I read so damn much all my life, starting when I was about six years old. I don't know how to get smart without reading a lot.

Q: You've spoken about the importance of psychology in investing. Is there a cognitive bias that you think is particularly significant in the markets today?

A: There are lots of cognitive biases that are very significant. One is the constant tendency to overrate your own intelligence and skills in deciding what to do and what not to do.

3) As I hobble around, nursing my aching body after running 65 miles and doing 200-plus obstacles at the 24-hour World's Toughest Mudder this past weekend, you might be wondering why I do extreme sports like this.

There are several reasons...

I actively seek out new experiences, especially those that push me outside of my comfort zone. They test and broaden my mind and, even amid quite a bit of pain and suffering, bring a hard-to-describe richness and joy into my life.

At the end of each year, my outside-the-box adventures – along with quality time with family and friends – are always among the things I look back on most fondly.

I suspect it's also healthy for my brain to mix things up a bit. On a normal day, other than a few minutes in the shower or doing a workout class, I'm reading, watching, or listening to something every waking moment.

It's stimulating, but exhausting – like drinking from a fire hose. In contrast, for 24 consecutive hours this past weekend, I didn't once look at a screen and, for nearly the entire race, was alone, accompanied only by my thoughts. It was strangely peaceful and relaxing...

Accomplishing something difficult also builds my resilience, both mentally and physically.

Participating in events like this motivates me to stay in great shape – which is especially important as I get older (I turned 57 last week!). I want to lead a long, healthy life. A brutal race probably doesn't extend my life, but the months of training beforehand sure do.

Being super fit also makes me feel stronger and more confident – and I'm certainly not complaining about being on the World's Toughest Mudder podium at the awards brunch yesterday for finishing third in my age group:

Lastly, my adventures are an incredible bonding experience. Ask anyone who has served in combat which people they're closest to, and most of them will say the ones with whom they shared a foxhole.

We increasingly live in a "clicks and likes" world, where our relationships are a mile wide and an inch deep...

But research shows that happiness actually comes from the opposite: the number of deep relationships you have.

That leads to an obvious question: What is a deep relationship?

I've always thought that this was a good test: Would they hide you?

During the Holocaust, when the Nazis murdered more than 6 million Jews in Europe, some survived because their non-Jewish friends hid them – risking their own lives to do so. This is how Anne Frank and her family survived for more than two years in Amsterdam before they were betrayed.

How many people do you have in your life, outside of your immediate family, who would hide you?

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.