Chris Bloomstran, Semper Augustus – Buffett, Berkshire, & Investing During The Energy Transition | #410

Episode Summary

Executive Summary: Chris Bloomstran argues that great investing requires constant pivoting, valuation discipline, and willingness to sell when businesses become overvalued. He critiques speculation, explains why current market returns are hard to repeat, and sees Berkshire Hathaway, energy, and select quality franchises as attractively positioned. He also emphasizes that risk is permanent capital loss—not volatility—and that process matters more than narratives.

Main Topics: Investment style, pivots, and lessons from career mistakes (Priority: 5/5): Bloomstran explains how his process evolved from traditional value investing to a more nuanced focus on intrinsic value, opportunity cost, and trimming positions. He highlights lessons from early mistakes like Ross Stores and a bankrupt shipping investment. Robert S. Brookings Smith and the importance of timely pivots (Priority: 5/5): He recounts the story of a client who exited stocks before the 1929 crash and re-entered near the bottom in 1932, using it as a historical example of courage, patience, and the power of acting against consensus. Berkshire Hathaway analysis and expected valuation (Priority: 5/5): A major portion of the discussion centers on Berkshire’s structure, valuation, buybacks, operational quality, and how Buffett’s capital allocation has evolved. Bloomstran views Berkshire as still cheap and well positioned for long-term compounding. Critique of speculative excess and misleading promotion (Priority: 4/5): He denounces SPACs, overly promotional venture-style letters, and inflated claims in public markets, arguing that retail investors are often being misled and that regulators should pay more attention. Decomposing market returns and why future equity returns may be lower (Priority: 5/5): Bloomstran breaks down S&P 500 returns into sales growth, share count changes, margins, multiples, and dividends. He concludes that today’s elevated margins and valuations make high future returns unlikely. Energy, capital cycles, and scarcity in fossil fuels and refining (Priority: 5/5): He makes a bullish case for energy, refiners, and commodity chemicals, arguing that ESG pressure and underinvestment are creating supply scarcity and attractive economics for disciplined operators. Portfolio construction, risk management, and international exposure (Priority: 4/5): He describes a concentrated long-only approach with some international holdings, minimal shorting, and a strong preference for rule-of-law jurisdictions. He avoids China and other fragile legal regimes.

Key Arguments: Great investors must be willing to pivot when secular conditions change; rigid loyalty to a position or style is a mistake. A good business is not always a good stock: valuation, margin of safety, and opportunity cost determine returns. Ross Stores was a classic cheap-but-growing business, but selling it too early was one of his biggest mistakes because he underestimated the durability of its moat and runway. Berkshire is still attractive because it has quality businesses, strong governance, disciplined buybacks, and optionality in energy and utilities. Current market returns have been boosted by multiple expansion, margin expansion, and buybacks; those tailwinds are unlikely to repeat at the same magnitude. The S&P 500’s long-run return math suggests lower forward returns unless margins or multiples expand further, which he views as unlikely. The energy complex is underinvested and supply constrained, making refiners, select chemicals, and integrated energy companies appealing. Retail investors are especially vulnerable to speculative promotion, so managers should speak out when marketing crosses the line into deception. Risk should be defined as permanent loss of capital, not short-term volatility. International investing is acceptable where legal systems are reliable; China is excluded because governance and property rights are not dependable.

Data Points: Robert S. Brookings Smith market exit: 1928 - Smith exited stocks before the 1929 peak, illustrating a rare successful major pivot. Dow level at Smith exit context: ~200 - Bloomstran notes the Dow was around 200 in early 1928 and later peaked near 384–387. Unemployment during the Depression: Almost 25% - Used to show how extreme conditions were when Smith re-entered stocks in 1932. GE sale price: $50–$60 per share - Bloomstran sold most of the Smith family’s GE holdings during the post-bubble era. Ross Stores entry valuation: 10x earnings - He bought Ross during the 1999–2000 valuation dislocation. Ross Stores subsequent appreciation: More than a 20-bagger - Bloomstran says Ross became one of the best-performing stocks after he sold it. Costco purchase price: $29 per share - He cites Costco as another long-term compounding example. Costco special dividends: $7, $10, $7 - Special dividends cumulatively matched his original cost basis. S&P 500 10-year return to 1999: 16.6% annually - He decomposes this as an unusually strong decade for U.S. equities. S&P 500 starting valuation in attribution example: 13–14x earnings - Used in the return decomposition for the decade ending 1999. S&P 500 ending valuation in attribution example: 23.6x earnings - Shows large multiple expansion contributing to returns. S&P 500 profit margin in attribution example: 13.4% - He says this is near the high end of historical profitability. S&P 500 dividend yield in the attribution example: 1.3% - Used in the return math for the recent decade. Big Five market weight increase: 8.5% to almost 25% - Apple, Microsoft, Google, Facebook, and Amazon materially increased index concentration. Big Five cumulative return: 29.8% - Bloomstran attributes much of the index’s gains to the mega-cap leaders. Apple sales growth: ~3x to nearly $400B - He notes Apple’s revenue roughly quadrupled over the period. Amazon sales growth: 10x to about $500B - Illustrates durable top-line growth but valuation risk. Berkshire estimated fair value: A little over $900B - His sum-of-the-parts valuation for Berkshire. Berkshire implied per-share value: ~$600,000 A shares / ~$400 B shares - Converted from the $900B fair value estimate. Berkshire buybacks: ~$60B over 2.5–3 years - He cites aggressive repurchases as part of Berkshire’s capital allocation. Energy and utility capex ratio: $2 of capex for every $1 of depreciation - Describes Berkshire’s utility investment intensity. Portfolio valuation: ~12x earnings - He says his portfolio trades at roughly half the market multiple. International exposure: ~20% - About one-fifth of the portfolio is in internationally headquartered companies. SPAC historical post-IPO performance: Minus 70% - He references historical research suggesting SPAC structures destroy value. Dissatisfaction threshold for active managers: Less than 3 years - He cites a poll showing many investors would sell after too short a period. Olin EBITDA: Over $2.6B - Supports his bullish view on commodity chemicals and capital-cycle scarcity. Olin market cap context: ~$2B at low teens basis - He says he bought Olin when it was dramatically out of favor. Refinery count in the U.S.: ~127 - Used to illustrate long-term refining capacity rationalization. Refinery count in the U.S. historically: ~250 - Shows the decline in domestic refining capacity over decades.

Pivotal Quotes: "Risk to me is not volatility, risk is permanent loss of capital, and you don't want to have portions of your capital permanently impaired." — Chris Bloomstran: His core definition of risk and portfolio management philosophy. "A good business doesn't equate to a good stock." — Chris Bloomstran: Explains why valuation and timing matter as much as business quality. "The last two years saw a proliferation of speculative excess and charlatan promotion." — Chris Bloomstran: His criticism of market hype, especially around SPACs and promotional investing.

Implications: Listeners should expect lower equity returns than the last decade, greater dispersion between price and value, and more importance on discipline. The episode favors patient capital, skepticism toward hype, and selective ownership of quality businesses in underappreciated sectors like energy and Berkshire.