Over the Independence Day holiday weekend came news that the Sage of Omaha had at last bestirred himself.

His Berkshire Hathaway said its energy unit — very capably managed by Greg Abel, who is also a vice chairman of Berkshire — has agreed to buy Dominion Energy Inc.’s natural gas transmission and storage network. The acquisition includes 7,700 miles of natural gas transmission lines and 900 billion cubic feet of gas storage.

The enterprise value of the transaction is $9.7 billion. However, $5.7 billion of that is the assumption of debt — meaning that it will only involve deploying $4 billion of Berkshire’s $137 billion (at March 31) cash hoard. That relative pittance is, of course, the glass-half-full reading of the situation. To Berkshire shareholders (of whom I am one), it means we will be earning several hundred million dollars a year in net income on capital that had hitherto been earning zilch. But I digress.

What is surely most interesting to Buffett watchers is that the Dominion acquisition represents a return to form: the opportunistic commitment of capital to an industry it knows well, at a time when that industry is sorely besieged. (One notes that Berkshire Hathaway Energy already accounted for fully 12% of the parent’s $24 billion of operating profit in 2019.)

Said return had been anxiously awaited. Indeed, the things Buffett did — and didn’t do — during the brief but savage panic of March and April raised predictable concerns that the old fellow might finally have lost his touch. (This refrain was most recently au courant when he steadfastly refused to chase the internet/tech mania circa 1999-2000.)

What he did, most notably, was to dump his entire airline stock portfolio pretty close to the recent bottom. Seems he had forgotten his own observation from several years ago — after his USAir debacle — mourning the failure at Kitty Hawk of some far-sighted capitalist to shoot down Orville Wright. What he did not do was buy anything — nor make any of his signature capital infusions at rich rates of return, such as the General Electric and Goldman Sachs transactions during the Global Financial Crisis of yesteryear. The Dominion acquisition — perhaps somewhere near the trough of a hydrocarbon energy cycle for the ages — hints that it may be premature to count Buffett (and Berkshire) out.

Which brings us to Professor Lawrence Cunningham’s most recent addition to his library of Buffett/Berkshire books — this one with his wife Stephanie Cuba. Published just this past January, it’s Margin of Trust: The Berkshire Business Model.

Professor Cunningham has, since 1997, functioned as Buffett’s Boswell. His breakthrough book of that year was The Essays of Warren Buffett: Lessons for Corporate America. Its uniqueness then and now is twofold: first, that it edited/rearranged all of Buffett’s classic shareholder letters thematically, so that — for example — you could read all the Sage’s thoughts on share repurchases, or the accounting of stock options, or the value of brands all in one of the book’s sections. The other element of this uniqueness is that Buffett himself helped him do this. The book has gone through several editions, and remains a must-read for advisors.

In Margin of Trust, Professor Cunningham and Ms. Cuba suggest that as a collection of operating businesses, Berkshire’s distinguishing feature is a culture in which autonomy and decentralization are core management principles. While detailing the strengths and notable successes of a trust-based approach, the authors are candid about its risks, and how Berkshire works to mitigate them. Their prose is lively, and their points well taken.

Published as it was a very few weeks before the coronavirus pandemic took hold, Margin of Trust may serve the thoughtful financial advisor as a sort of reset button, as it relates to Berkshire the enterprise and Buffett the manager.       

© 2020 Nick Murray. All rights reserved. Reprinted by permission.

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