Is the U.S. Government the New Warren Buffett?

Should you invest alongside hedge funds, Berkshire Hathaway—or Washington DC?

KEY TAKEAWAYS

• Intel receives $9B government investment, making U.S. a 10% shareholder

• 13D and 13F filings show how big players move markets

• Buffett’s 13F filings create the “Berkshire bump”

• Intel lost market leadership to Samsung, AMD, and NVIDIA

• Government’s investment is strategic, not activist

MY HOT TAKES

• 13F chasing isn’t a sound strategy, but signals matter

• Intel’s issues are more strategic than financial, and it’s not clear that money can fix them

• Government investing in stocks raises red flags

• Intel’s foundries give it a unique geopolitical role

• Markets often mistake association for actual greatness

• You can quote me: “Greatness by association works on Instagram. It’s a terrible investment strategy.”

Greatness by association. In case you haven’t noticed, I am on the road this week. If you get my missives in email form directly from me, you might have noticed that I sent out my morning comments in the middle of the night (Wall Street Time). I am actually on holiday with my family celebrating my daughter’s 30th birthday. We are staying at a beautiful place known for its frequent hosting of famous folks who rub elbows with us normies on the regular. Now, I am a normie of the highest degree, and I can assure you that I am not here to run into any high-profile folks, but I can tell you that there are some folks who are here for the hopes of spotting some famous person or another, and, of course for the ‘Gram pics. If you are ever going to post a pic of yourself on Instagram, this would be the place. It is absolutely beautiful. The beauty and topnotch service is why we chose this place–it had nothing to do with its internet fame, though that probably has something to do with the premium we paid to stay here.

Do you know who your fellow shareholders are? Well, under the Securities and Exchange Act of 1934, specifically under Section 13(d), any entity or person owning 5% or more of a public company must register their ownership by filing a Schedule 13(d). If someone has more than a 5% stake in a public company, it probably means that they are quite serious about their interest in a company’s future. So, in essence, it is good to know who or what has intentions about your investments, and even more importantly, what their intentions are.

Not all intentions are pure and altruistic, grant you. Way back in the day, a 13(d) filing by certain companies may have been the hint that your investment was the object of a hostile takeover. That could be good or bad. Good, in that the acquiring entity may end up paying an ownership premium. Stocks would typically experience price gains to reflect that potential. The question then became, what to do once the stock traded up on the filing. Would you take the gift and cash out or ride it out?

Your first instinct may have been to take the profit and invest in another stock with similar potential upside. But it is not that simple. What if the acquiring entity could make your investment more valuable by injecting some sort of synergistic know-how? That, by the way, is how most acquisitions are justified–on paper at least. There is a great deal of academic literature on how these so-called “synergies” never come to fruition. So, what I am saying is that if you’ve read the literature–and I have–you would most likely sell and take the gift.

There is another kind of interesting public filing called a 13f through which companies that have $100 million or more of investments must file their holdings on a quarterly basis. This typically applies to hedge funds. There are a great deal of investment strategies that track hedge fund investments through 13f filings and try to mimic their strategies. The theory behind those strategies is that hedge funds, with their “superior” research skills, have identified a company that has great potential for growth. After all, the sole purpose of a hedge fund’s investment is capital gains. By the way some companies–fewer these days–disclose large short positions in companies indicating their expectation of a company’s decline.

Have you heard of this strategy? Have you ever read a 13f filing? No? Don’t worry, you're not alone. I am sure you have heard about Berkshire Hathaway’s filings and witnessed the invested stock’s meteoric rise in the wake of the disclosure. The theory there is as simple as it gets. If Warren Buffet, legendary value investor–one gets “oracle” status–deems that a company has unrealized value potential, then there is a good chance he is correct and that value potential will be realized at some point in the future. Buffet is mostly a passive investor, though he does occasionally invest enough to warrant a 13(d) filing. You have probably heard of Buffet’s “fantastic” track record, and I suppose, that alone, is a good enough thesis for many “regular” investors to jump in and follow the Oracle of Omaha. In fact, enough people do so that stocks get a Berkshire bump after investments show up in 13f disclosures, even though the 13f may be a snapshot of what the company owned 45 days prior. It is not a sound investment strategy, but having Buffet as a partner might at least help you sleep better at night.

So, you can see that there are potential benefits from investing alongside “big guys,” even if their intentions may be nefarious (hostile takeover). What if you found out that the US Government bought stock in a company you owned? Is that a good thing or a bad thing? Of course, I am referring to the recent news that the Government is making a $9 billion investment in Intel, which would make it a roughly 10% owner of the struggling semiconductor company. Intel, the company, is an American treasure which still enjoys significant dominance in the desktop PC processors chip market. It is also a leader in the server processor market, though it has lost a lot of market share to its rival Applied Micro Devices, AMD. Intel was the world’s largest semiconductor company until being toppled by Samsung in 2017. Intel did come back for a year or two prior to the pandemic, but Samsung ultimately regained its lead, but NVIDIA ultimately closed the book on Intel’s 25 years of market dominance with the emergence of AI. To be clear, AI didn’t kill Intel. Intel missed some very important strategic market shifts, which its competitors, like AMD embraced. 

Still Intel does have certain assets that many of its competitors don’t have. Namely, its foundries. As a manufacturer, Intel is a direct competitor of TSMC. The “T” in TSMC stands for Taiwan, as in the country that sits in the shadow of China, literally. TSMC manufactures some 65% of the world’s outsourced semiconductors. Because of its contentious political relationship with China, some might argue that it is in a strategically tenuous position. With an increased push to bring manufacturing back to the US, Intel is thought to be an ideal candidate to do so. Its existing manufacturing capacity combined with its vast know-how of chip manufacturing would, in theory, put it in the best position to compete with TSMC. Enter the US Government.

The Government is not an activist investor looking to whip things into shape by injecting savvy management. 🤣 Neither is the Government known for its great track record of selecting undervalued public investments. No. The US Government is hoping to give Intel a leg up in the foundry race, providing fabless semiconductor companies a strategic alternative to TSMC. Those fabless companies include NVIDIA, Apple, Broadcom, AMD, and Qualcom! So, yeah, it means a great deal. 

Let’s not get into all the bad reasons for capitalist governments intervening in public markets. There is a huge list of reasons why it’s bad, but that is not the topic for today’s note. Today’s note is all about is it a good thing or a bad thing to know that the Government is investing in stock that you might own. Well, let’s boil it down to just this. If you believe that lack of capital is the reason why Intel is now trading some -62% of where it was in 2020, then the $9 billion injection is a windfall. If you believe that Intel’s management will be able to use that capital infusion to unlock enough value to return the company to the top slot, and that the top spot means enough profit to get the stock to double, then it is a good thing.

Would you believe that, literally, on my first day here, I bumped into a mega superstar–literally. She looked at me as if she knew me and I looked at her trying to place her face. It seemed like the staredown lasted 10 minutes, though it was probably only 10 seconds. I eventually figured out who it was. I giggled about it with my family for at least 20 minutes after. She was shorter than I expected. That bit of information was certainly not enough of a reason for me to pay a superhigh premium for staying here. No, I am happy to pay that premium, because even without the gaggle of superstar guests I have seen in the past few days, there is true value here. The service is topnotch, and the views…

YESTERDAY’S MARKETS

Stocks gained yesterday in the vacuum of no-info ahead of today’s big earnings release: NVIDIA, which has everyone on the edge of their seats. Rightly so, its success or failure will determine where the markets end the year. Markets are also on edge over the very public tension between the President and Fed Governor Lisa Cook which appears as if it will end up in court.

NEXT UP

• No major economic releases today, but Richmond Fed President Barkin will speak today.

• Important earnings today: JM Smucker, Kohl’s, Williams-Sonoma, Abercrombie & Fitch, Snowflake, HP Inc, Crowdstrike, NVIDIA, Veeva Systems, Five Below, and NetApp.

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