Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / Berkshires Greg Abel Makes His First Big Deal as CEO
Transcript
- Lucas: So Greg Abel just made his first big move since taking over as Berkshire Hathaway's CEO, and it's interesting because it's not the kind of deal Warren Buffett would have done twenty years ago. Luna: Right — Buffett has been famously wary of big housing bets since the 2008 crash. What did Abel actually do? Lucas: Berkshire bought a roughly 12 percent stake in Taylor Morrison — a homebuilder that focuses on entry-level and move-up buyers — for about $1.2 billion. What's notable is the structure: it's a mix of common stock and convertible preferred shares with a 6 percent dividend yield. So Berkshire gets income while the housing market sorts itself out, and if Taylor Morrison's stock appreciates, they get upside. Luna: That preferred plus equity structure is classic Berkshire — downside protection with a coupon. But the sector choice is a departure. Buffett famously said in 2008 that 'a home is a terrible investment.' Lucas: He did. But the environment is completely different now. Back then, housing was overbuilt and overleveraged. Today we've got a structural shortage — especially in affordable starter homes. And the demographics are actually working in builders' favor: millennials are still forming households, and there's a backlog of demand because rates have kept people from moving. Luna: Yeah, and that's the tension — new home sales have been okay, but existing home inventory is still tight because people with 3 percent mortgages don't want to sell. So builders are the only game in town for many buyers. Lucas: Exactly. And Abel seems to be betting that the rate environment is about to get more favorable. The 10-year Treasury is at 4.45 percent right now — down from peaks over 5 percent earlier this cycle. If the yield curve continues to steepen, mortgage rates could ease, which would unlock a lot of pent-up demand. Luna: We've talked about the yield curve steepening before — how it's normally a recession warning. But this time it's more about term premium returning. So maybe Abel sees it as a tailwind for homebuilders rather than a red flag. Lucas: That's a key distinction. The traditional inverted curve meant the market expected rate cuts because the economy was weak. Today's steepening is happening because long-term rates are rising on fiscal concerns — deficits, inflation persistence. It's a different flavor. But for a homebuilder, lower short-term rates still mean lower construction financing costs. And if the Fed eventually cuts, mortgage demand picks up. Luna: And if our money conversations have helped you think about a decision like this differently — whether it's analyzing a deal or just understanding the yield curve — we hope you'll consider supporting the show. It's what keeps us ad-free and independent. Lucas: Yeah, listener support is really what allows us to do deep dives like this without worrying about advertisers. If you find value in these episodes, you can help out at buy me a coffee dot com slash fexingo. Luna: Alright, back to the deal. Abel's bet is also a signal about capital allocation philosophy. Berkshire has been sitting on a massive cash pile — over $150 billion at last count. Critics have said they should be more aggressive. Lucas: Right, and one critique of Buffett in his later years was that he let cash accumulate rather than making transformative acquisitions. But Abel seems to be taking a middle path — not buying the whole company, but taking a meaningful stake that gives Berkshire influence without the full risk of an acquisition. Luna: That's smart because Taylor Morrison isn't cheap — it trades at about 12 times forward earnings, which is a premium to some peers. But the preferred shares give Berkshire a 6 percent yield even if the stock goes nowhere. Lucas: And that dividend yield is actually higher than the 10-year Treasury. So Berkshire is getting paid to wait. If the housing market improves, they participate in the upside. If it doesn't, they collect their coupon. That's the kind of risk-reward Abel seems to favor. Luna: Let's talk about timing. Why now? The housing market has been in this weird stalemate for over a year. What changed? Lucas: I think the trigger is that the stalemate is starting to break. We're seeing more new listings come on the market as people finally accept that rates aren't going back to 3 percent. And builders like Taylor Morrison have been offering rate buydowns to move inventory. So volumes are picking up, just at lower margins. Luna: And Berkshire can afford to be patient with those margins. They're not a hedge fund that needs quarterly outperformance. Lucas: Exactly. Abel's first big deal shows he's willing to deviate from Buffett's playbook in terms of sector, but he's keeping the same valuation discipline. He's not overpaying for growth. He's buying a good business at a fair price with a built-in return floor. Luna: What does this mean for the broader housing market? If Berkshire is making a concentrated bet on homebuilders, does that signal that they see a floor under housing? Lucas: I think it does. But it's specifically a bet on the public homebuilders, not on housing prices broadly. Public builders have advantages over private ones: access to capital, ability to offer financing, scale in land acquisition. So Berkshire is betting that the public builders will gain market share as private builders struggle with higher rates. Luna: That's a theme we've seen in other industries too — public companies with strong balance sheets consolidating during periods of high rates. It's like a Darwinian winnowing process. Lucas: And Berkshire is essentially backing the winners. Taylor Morrison is one of the larger builders, but it's not the biggest — it's about the seventh-largest by revenue. So there's room to grow through acquisition. Abel might be betting that Taylor Morrison becomes a consolidator. Luna: That's an interesting angle. If rates stay high, small builders get squeezed. Taylor Morrison picks up cheap land from distressed sellers. And Berkshire provides the capital to do it. Lucas: Right. And the preferred structure gives Berkshire downside protection even if the consolidation takes longer than expected. This is a very Abel-like move — careful, structured, with multiple ways to win. Luna: So what's the takeaway for our listeners? If you're an investor, does this make you want to look at homebuilders? Lucas: I'd say it validates the thesis that public homebuilders are well-positioned in this environment. But you still need to be selective. Taylor Morrison's focus on entry-level buyers is smart because that demand is most resilient. Luxury builders might face more headwinds if the economy slows. And always look at the balance sheet — high debt levels are dangerous when rates are elevated. Luna: Also, Berkshire's stamp of approval doesn't guarantee outperformance. But it does tell you that one of the best capital allocators in history sees value there. Lucas: And that's the real lesson — Abel's first deal teaches us about his style. He's not trying to be Buffett. He's being Greg Abel. And that's actually reassuring for Berkshire's future. Luna: Yeah, succession was a huge overhang for years. If Abel continues making deals like this — disciplined, creative, sector-savvy — the stock might finally get some of that 'Buffett premium' back. Lucas: We'll see. For now, it's one deal. But it's a meaningful one. And it gives us a window into how Berkshire will operate in the post-Buffett era.