Chit Chat Stocks - Buffett and Munger Unscripted: Lessons From Berkshire Hathaway With Alex Morris

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Starting point is 00:01:26 not formal advice or recommendation. Now please enjoy this episode. Welcome in. This is the Chit Chat Stocks podcast. My name is Brett Schaefer and joined as always by Ryan Henderson. But today we have a third guest on the show, a recurring guest, someone who's been coming on the show almost as long as anyone. We really appreciate Alex supporting the podcast as we got it up and running back in the day. He's come on plenty of times in the past to discuss various

Starting point is 00:02:02 companies. I think we've done ones on a lot of media stuff, as well as Airbnb. We had Spotify, actually Roku, which I thought was a fascinating one, even though it was a little bit different than some of the shows we've done in the past, where it wasn't as bullish or maybe like a bold thesis, but Alex runs the TSOH Investing Research Service on Substack. And a day before, actually a day after we are recording this, but a day before this episode is being released, he has a new book out and it is called Buffett and Munger Unscripted, Three Decades of Investment and Business Insights from the Berkshire Hathaway Shareholder Meetings. So Alex, that was a long lead in. Welcome to the show. First question, why did you publish this book? What inspired you to write it?

Starting point is 00:02:55 Yeah, thanks for having me, guys. I remember one of the other ones that you didn't mention that I came on for was Netflix. And I remember it was the day that we were getting ready to record and a well-known investor who I like a lot more. And I always liked him. I like him a lot more now that he tweeted something about the book. A very well-known investor had sold Netflix that morning I mean, we were going to that pod, like, oh, boy, this is going to be – the stock was obviously doing terribly, too, if we had that talk. So that was an interesting time. But, yeah, I always enjoy coming on. You know, I started working on the book a couple years ago.

Starting point is 00:03:28 I think when, you know, Berkshire announced in 2018 that they were releasing all the old annual meeting videos back to 1994, which up until that point had been, you know, you couldn't access them, basically. um and i think i didn't start writing at that point in time but i think when that happened it kind of clicked for me that there was an opportunity to do something very similar to the uh larry cunningham book essays of warren buffett lessons for corporate america which for me when i started investing in call it the you know mid to late 2000s um was really like a formative book for me in terms of learning about investing and learning about business so i i thought there was surely an opportunity to do something like that um but then i was gonna have to also do the work so it took some more time before that kernel kind of led to me to start

Starting point is 00:04:20 rolling um i eventually got it got it moving a bit and then at some point a couple years ago i reached out to berkshire to get approval they'd be okay with me doing this and i kind of laid out the idea and told warren that i was going to donate half of the proceeds to glide and hopefully that would be something that he was okay with and thankfully they got back to me and said that I can move ahead so at that point the ball was uh was really rolling and uh yeah it took took a couple years to get it done and um you know really figuring out how to organize it at first was a little haphazard but then eventually once I had a better understanding of how I was going to structure the book it was you know really just putting the time in um so yeah yeah it seems like

Starting point is 00:05:05 Well, that seems like I've been perusing the book and it's not something that, you know, is a narrative going from, you know, it's not a story. It's something that anyone who's interested, I think, in investing can pop through and say, oh, I'm interested in what Buffett and Munger talked about management or what they talk about proxy statements in relation to that, incentives, all the stuff that they've talked about a lot in the annual meetings. And there's not a thousand, but maybe over a hundred hours of recordings at this point from the annual meetings.

Starting point is 00:05:35 Let me ask the second question here before we get kind of into the insights and some of the teases from the book. Who do you think should buy this book? Who would benefit the most from reading it? Yeah, this answer is surely going to sound biased, but I really think anybody who's interested in business and investing is the perfect audience for this book. And again, I think it's very similar to the letters in the sense that when you're at an earlier stage in your career, you may read them and get certain insights that are fitting with where you're at in terms of your experience and knowledge. And as you become more experienced, I think there's other things that obviously will hit you differently, you know, years down the road

Starting point is 00:06:13 when you have a little bit more experience under your belt. I think, you know, a lot of the things like thinking about cost of capital in terms of how the managers at the subsidiaries get paid and how they deal with the incentives of that relationship, you know, thinking about stock options. There's a lot of things in here that for a brand new investor is going to be a little bit probably ahead of where they're at currently, and it's not going to be very valuable to them. But there's also a ton of other things in terms of the basic thinking around value investing and assessing managers and things like that. Stock splits, what are they and why do they make sense or not make sense? There's a huge range of topics that will be definitely relevant for

Starting point is 00:06:54 investing people but even just business people i think as well now with with warren and charlie there's a lot of public speeches essays the annual meetings all this to sift through and for me it would be probably an intimidating amount of information so i guess what was your process like for putting this together and how were you how did you compile everything i think when i there were some public sources that had um reasonably decent starting transcripts for some of the years which helped but but they weren't perfect and one of the weird things too is as you listen to them talk and try to take spoken word if it's just transcribed as they say it there's a lot of times they talk where warren will say the first couple words of a sentence and

Starting point is 00:07:51 then trail off and go with a different thought and so that would be i had to i had to go through all of it again i couldn't just read it i had to listen to it while editing that so i started doing that at first and then i got a couple years in and i was just purely going through and doing like the grammatical stuff and after a couple years and i was like well this is really stupid i'm gonna have to i'm gonna have to go through all of this again to then organize it by subject maybe i should be doing maybe i should be doing this up front and having some structure for what this book is going to be. Um, so I basically had to restart. I think we had only been a couple of years of the meetings. Um, so yeah, then I went from there and started compiling in that fashion.

Starting point is 00:08:30 So I had a, I had a big Excel document with basically every single question that was asked and I had a timestamp, which, which people will see in the book. Every, every question says the meeting and then the spot that it aligns with on, you know, the YouTube videos that are available it for the annual meetings. So I went through it in that fashion. Then I had to, as I started from the earliest meetings, let's say you're talking about something that they've talked about 20 times, the basics of value investing or something like that. I'd copy and paste into a larger document or a fresh document. Okay, this is value investing. Then as I go through, as I mentioned at different meetings, I would basically try to find what I thought was the, you know, the clearest

Starting point is 00:09:14 explanation of what something is or the one that made the most sense. Um, so that was obviously an exercise as well. It took some time. Um, but as it really got rolling in the, in the later years, then I, you know, I, I'd already listened to 20 meetings or whatever it was. I had a really good sense for how to do this. So it got, it got rolling a little bit faster towards the end, But the start was, yeah, the reason why it took me a couple of years to get this done. Yeah, I mean, this seems like a project where in the middle of it, you're like, why did I do this? But now, I mean, the book's great. It's something that I'm going to definitely go back to from time to time.

Starting point is 00:09:51 And especially if I'm focused on a certain topic and seeing what they've said. One, we're going to get to some, you know, the lessons from the book, some stuff you learn from Buffett and Munger, what investors can apply. But maybe one funny question. You mentioned the repetitiveness sometimes of their stories. What do you think is the story that either Buffett or Munger repeated the most? Like, is there one that they just brought up every single meeting? Because I know there's some they like to play the hits sometimes. Yeah, I mean, it's hard for me to think of one right now. I know what Warren always said at the one meeting, Charlie started talking about something.

Starting point is 00:10:25 He goes and he's getting ready to talk about something. And he goes, and now Charlie's going to tell you for 10 minutes about the virtues of Costco or something like that. Like he always came back to that example of like, this is a lot of merit to that argument, to be fair. But it was a frequently used example. He told the funny story the one time, I'm sure people have heard this before, but of them being on a plane that got hijacked. And the hijackers said, you get one more wish, basically. And Charlie, he said, what's your wish? And Charlie said, I want to tell you the virtues of Costco, blah, blah, blah.

Starting point is 00:10:56 and they said, okay, Warren, what's your wish? He's like, shoot me first or whatever. So I don't have to hear it again. So that was a common one. I mean, I think in the earlier years, there was a lot more of like, how do you invest basically? You know, how do you get the 50% annualized returns is a really common one that, you know,

Starting point is 00:11:14 the comments that he's made about being younger and being able to replicate those returns. But also the questions changed somewhat over time, especially as Berkshire obviously became more popular. And then they changed up the meeting structure where it wasn't just the audience questions all the time. They brought in, you know, Becky Quick and Andrew Ross Sorkin and Doug Cass a couple of years, I believe. So that also changed the nature of kind of the questions that were getting asked at the meeting a little bit. Going back through them, was there a period, was there a timeframe of meetings that you enjoyed the most?

Starting point is 00:11:50 i think the late the late 90s meetings were really interesting especially as it didn't get to like a fever pitch but there were definitely times where the the questions were more pointed in terms of like what the hell are you guys doing just completely disregarding where the world's going type of type of mindset um and it was really interesting to watch them them kind of navigate through that period. And even into the early 2000s as well, I think it was really interesting. And again, I think it gets to that time period

Starting point is 00:12:27 where what the meetings were, I think, started to shift a little bit more. I mean, you really see it now. Like when Warren, I can't remember if it was last year or the year before, basically did like a 30-minute or an hour introduction on, you know, like capitalism and the American economy and stuff like this. The structure of some of these things is a lot different

Starting point is 00:12:45 than how the meeting used to be. So I like some of the older meetings a bit more than some of the newer ones. I do as well. I remember all three of us, the one meeting that Ryan and I have been to, we were at the famous one where in the morning session, I think there was a total of three questions answered. I think the 90s meetings, there was more of a rapid fire pace. But let's get into some of the lessons from the book.

Starting point is 00:13:08 There's a couple of things and look, there's much more covered in the book. Go buy it. I should say we'll have a link. I forgot to mention this at the start. We'll have a link for the book in the show notes, the Amazon one, but you can find it at other places as well. The first lesson that I think we can talk about and one that they discuss time and time again are proper incentive structures. Maybe we can discuss first of what the problems they saw or still see in executive rooms and how that can lead companies down a bad path. Yeah, I mean, I think a lot of it is, you know, at least at like the CEO level and dealing with shareholders, you know, they talk about a lot of it in terms of obviously the amount of time that's spent communicating with investors.

Starting point is 00:13:59 And it's something that kind of after working on the book and obviously not having to come out and reading these things more, I mean, I think some people have said previously, it's kind of like going to church, like you already know all the stuff, but you kind of get it reinforced again. And it really does make you step back and think about things that companies do, like, you know, where they have an investor day and they say, OK, we're going to buy $3 billion of stock over the next four years. It doesn't really make a ton of sense to do that. I get why you're doing it. I understand why that becomes part of the incentive structure at a lot of public companies. But you just note how many things are kind of like that. And then you really have to wonder what's happening behind closed doors. And I think my favorite example, and it's discussed in the book, I actually put in the appendix, I put this article I wrote about national indemnity.

Starting point is 00:14:50 I think it's called The Right Way to Run an Insurance Company. And it's about the experience of national indemnity from the early 1980s to 2004, I believe. And during that period, I'm going to get the years wrong now, but I think it was 1982. In 1982, written premiums were like $60 million. Two years later, they're at $360 million. Then they went over a 15-year period where written premiums contracted by 85%. And then that's in 1999. So it's back down to $60 million or so now.

Starting point is 00:15:24 Five years later, written premiums were $600 million. So they went up 10x over the next five years. So significant volatility in the volume of production from that insurance business. And basically, when Warren walks through the example, I believe it was a 2004 meeting, which is in the book, talks about how, you know, most businesses, the people who are working on the floor, in this case, the underwriters, obviously have an incentive to produce some set of volume. Otherwise, it's like, what is the point of your job? And you'll be fired. And National Indemnity made it very clear to their employees that nobody would ever be let go because of a lack of volume. They just wanted people to write profitable insurance and intelligent insurance versus just writing volume for the sake of writing volume.

Starting point is 00:16:10 So when you look at the track record over the course of the 25-year period, it's very, very impressive. And by the way, the times when they were writing the most business were also the times when they had the best underwriting results. So averaged out the profits, you know, it basically works through that cycle in a way that actually made out well for national indemnity. But just a really interesting example, as Warren lays it out, of thinking about how you have to worry about incentives throughout a whole organization and how you really have to avoid things that send a message to employees that they should basically do something that's not, you know, for the long term benefit of the company. I think that happens a lot with public companies. I've talked about at TSOH Investment Research, I've written a lot about Nike. And I think that's part of, it's not the only thing that's happened, but it's a company that had certain public financial targets that I think they tried to hit. And as they were dealing with other pressures, it led them to make incremental decisions that were not helpful to the situation. So it's what you have to watch out for in running a business. Yeah, I mean, we talked about things that Munger, he's kind of the more repetitive one or was. The one that he said all the time, I'll never forget, is show me the incentive, I'll show you the outcome. Seems like that applies time and time again throughout executive suites. And you can see from what they've discussed in this book and just in general that it doesn't take that many small, what seemingly feel like small changes to not destroy. I mean, Nike is still a big business, still a good business, but really changed the trajectory of a company.

Starting point is 00:17:50 One follow up I have there, though, you'll hear Buffett talk about in these meetings, he'll mention, oh, when you talk to management. and for most individuals i think most listeners they're not talking to management but one thing he does talk about is reading a proxy statement and looking that and saying i don't need to talk to the management team i can look at the proxy statement and say yeah this is someone that i agree with or someone i would invest with or someone that's not is there anything specific that like a listener can take away from here of okay i'm looking at a proxy statement what's like a good incentive? What's a bad one? Or is it almost each time you're coming at it with a unique situation? Hopefully, that question makes sense. It feels a bit convoluted.

Starting point is 00:18:36 No, I don't think I have a blanket answer. In terms of how I approach it in my own investing, I just look for things that are logical and somewhat straightforward, which again, it gets to a lot of what we're talking about here. The example that people will see in the book in terms of how Berkshire compensates their managers at the subsidiaries. I mean, I don't know the exact wording, obviously, but they say it's not rocket science. We know what we're incentivizing for. We know some businesses are better than others, and we account for that to some extent in how we set our compensation practices. We know businesses that have seasonal needs or working capital needs, and we can account for that too. And then from there, we really want to

Starting point is 00:19:21 pay people based on the key levers of value creation, which for them, I think more often than not, has been the cost that they attach to capital for managers who want to either reinvest in their business in some non-standard or some material way, or if they want to go out and do an acquisition or whatever, bolt on to their business. I think that's the main way that they think about it. The proxies that I read for a lot of public companies seem, one, overly really complicated in terms of the number of variables that they're compensated on to a bit arbitrary when you can just pick some variable and go, okay, well, this one hits. So it pays a 200% of the bonus. And if the results for the company weren't even particularly good last year,

Starting point is 00:20:02 you still get paid at least reasonably well. Um, I think a lot of it is, it's just close to nonsense. Basically it's, it's, they're going to find a way to get the answer they want. And to the extent that it's more complex than less, it's, it's for the sake of getting them, giving them outs to the desired outcome versus it actually being rational and needed, in my opinion. Yeah, tragically, that's all too common. And we've seen that dozens and dozens, maybe hundreds of times looking at companies. And I haven't finished the book, but I've read a lot of the quotes from there. And especially with even analyzing businesses or analyzing management teams, it seems one big meta theme from all of their discussions is keep it simple.

Starting point is 00:20:47 One of the quotes they use, again, is that Einstein one of keep things simpler or as simple as possible, but no simpler. And it seems like proxy statements, management incentives, and even running your business. It seems like something they would say is the best way to optimize results over the long term. Yeah, absolutely. Okay, let's talk some other lessons that you pulled from these meetings. the second lesson that you mentioned was just the continual learning as an investor what were some of the things you drew revisiting all these meetings yeah i mean i think the most the most fascinating example and one that people probably know pretty well is is you know going

Starting point is 00:21:35 back to the discussions around tech companies even as early as you know call it the mid-1990s um you know fast forward to i have a quote from the 2012 meeting here in front of me i pulled up uh this is warren he says google and apple are extra are extraordinary companies obviously and they're both huge companies they make lots of money they're in fantastic return on capital they look very tough to dislodge where they have their strengths i would not be at all surprised to see them be worth a lot more money 10 years from now but i wouldn't want to buy either one of them. And it goes on from there. That's 2012. And they made somewhat, they kept getting asked about why the FAANG stocks overall during this time period. And they made somewhat similar

Starting point is 00:22:17 comments in 2013 or 2014. It's also in the book. And then fast forward a couple of years and Berkshire has a position in Apple that at the peak was worth $180 billion or something like that. So again, I think it's really fascinating. He probably, I think, warrants out of the time, He thinks about it a bit more in terms of a consumer product than the tech kind of component of what Apple is, which I think is a pretty fair statement. And what he said about owning the phone screen and the value of that real estate at the time, I think he probably was ahead of other people in terms of really understanding what that meant for the company and for the business. So, again, I think they've always shown a willingness to learn and be somewhat open-minded. Well, at the same time, I think they're rigid about kind of where they want to play or the things that they're willing to do kind of more generally. I think the example that sticks out to me as the most counter to that kind of point is, and this is inside of the business at Berkshire,

Starting point is 00:23:19 but what happened with Geico and Telematics is just an interesting period where they went through. I mean, it really was at least five years and close to a decade from when the conversation started at the meeting about telematics to when they basically said, hey, we've we've we've got this wrong. We should have been doing this basically. And I don't know how much of that was how much of that was a technology changing, you know, snapshot with progressive. That one point was a piece of hardware that you stuck into the car on your own. And who knows how expensive that was to do versus, you know, having a cell phone in your car today, something like that. So maybe those things changed in a significant way. But that was one example where it seemed like they were in a business, obviously, they talked about all the time. That's very valuable to Berkshire.

Starting point is 00:24:04 They were pretty slow to kind of catch up there, and they're still paying for it today. Yeah, part of their philosophy, from my read of it, is they want to never make an error of commission. So when they make a decision, they don't want it to be bad, but they're going to, given the rigidity that you talked about, they're going to make some errors of omission the google one being being one and also maybe that geico example as well for anyone watching the video i was looking at the actual book here trying to pull up a quote for our next lesson which is this is something i still have a hard time fully grasping what munger's trying to say sometimes he was a you know mysterious monk but he talks about avoiding difficult decisions for anyone that has the book it's on page 26

Starting point is 00:24:51 And he, you know, Wofford kind of tees him up and he talks about how not trying to be a hero and all these things and kind of when you're inverted and you maybe try to do hard things, he calls it dangerous. Can you describe that? Because I think some investors have, or anyone reading this or sorry, excuse me, listening to this can maybe have a hard time understanding this. What do you think they're trying to get at with the avoiding difficult decisions mantra? Yeah, I mean, I think it kind of gets to what I was trying to say a minute ago in terms of – I tweeted it today, so it's top of mind for me as well.

Starting point is 00:25:31 When Charlie talks about Warren's investment in PetroChina, I believe it was in 2003, and Warren basically says, you know, anybody – I just found it by reading the annual reports. Anybody could have found it. It didn't require anything special. And Charlie says, well, when you were buying it, I don't remember anybody else doing it. And he's like, you know, that's not common sense. It's what an old Omaha friend would call uncommon sense. And at the second part of the quote, he says something along the lines of, I think we've benefited from basically having huge loss of things that just are completely out of balance, what we do, and they don't take any of our time and they don't distract us at all. And then we have the things that we may do, and obviously they prefer to do them in size when they do go after those things. And that helps them to some extent to, you know, not just to figure out where you're going to play, but when you then look at those things to make the decision on what to kind of go after.

Starting point is 00:26:27 So I think about avoiding difficult decisions basically in that way of really quickly getting to the filter of, you know, Charlie obviously talked a ton about opportunity costs throughout his life. Getting to the point where you have the relatively short list of things that you're even confident enough to say you are willing to put to that opportunity cost test. A lot of things just simply don't even get that far. It's a great way. I mean, I feel like it's similar to how, you know, a lot of investors who particularly those with a longer term mindset, I'm thinking of a firm like Ockery comes to mind. I think they write about things and they may have explicitly said this. So I'm not misremembering that their investment universe is basically like 1% of the public traded companies that they've looked at.

Starting point is 00:27:13 Like that type of filtering just gets you to a different starting point from, okay, now how do we make a decision from here? And it comes down to, or back to, I feel like I'm just name dropping Munger quotes, but the one quote that I had trouble understanding at first, but I kind of think I understand it now is the avoiding where, or no, tell me where I'm going to die so I never go there. I always thought that when I first, when you first hear that, you're like, wait, what is he talking about? But I think he's talking about the same thing where it's avoiding decisions that you're trying to do hard things as a business and it's going to set you up for failure. Yeah. Yeah. All right. Now having, I guess, published, written, published, done all the research for years on end, what, I guess, if anything, have you learned about Buffett and Munger that you didn't know prior to writing this book?

Starting point is 00:28:07 yeah i mean it's very it's very it's very difficult to say at what point i learned what things about puffin and munger because i've been you know learning about them for uh close to two decades now right around two decades um i think the national denly example i said earlier is a really a really prominent one and that's it was warren wrote it up in the he wrote about it in the 2004 2005 shareholder letter so it's not like he hasn't talked about it before um i think what's true in the book and the meetings overall, which then obviously shines through in the book relative to something like the shareholder letters or Lawrence and Larry Cunningham's book, the way that they talk about things at the meeting is somewhat different than

Starting point is 00:28:48 the way they talk about things in the letters, because obviously it's, um, you know, less of a, it's unscripted to use the title of the book. So sometimes the things they say or the direction that the conversation goes in is slightly different. Um, in this case, I'm thinking of the fact that at the end of the conversation, um, And, you know, Warren basically notes it's the right way to run an insurance company. But the takeaway from everything they say is inapplicable everywhere. You couldn't run an auto OEM this way or a bunch of other businesses this way.

Starting point is 00:29:20 And, you know, you have to adjust your way of thinking for the different, you know, dynamics in any given business. Which, again, like a lot of this stuff is really simplistic and obvious and straightforward, but things that you don't necessarily pick up on unless you're actually thinking about them deeply. So the national indemnity example and kind of what it teaches is definitely a big one. This episode is brought to you by our friends at Yellow Brick Investing. Yellow Brick is an aggregator of the best stock pitches across the internet. By tracking thousands of blogs, newsletters, fund letters, podcasts, and more, they collect and summarize the best stock pitches and bring them to you in a single place.

Starting point is 00:30:02 If you are a regular listener to Chit Chat Stocks, you know that we use Yellow Brick every single week here on the podcast to discover new investments or maintain existing coverage on companies we already know. Try it for yourself. Simply go to joinyellowbrick.com slash chitchat and search a company or ticker you are interested in. You are bound to find a great report on just about any company. That's joinyellowbrick.com slash chitchat. All right. I'm going to skip around to, before we talk about your investing style at TSOH Research, I'm going to skip to this other question, which is about their philosophy, again, some stuff you've covered in the book. And we talked about it a bit beforehand, how it's kind of hard to find things,

Starting point is 00:30:43 just given how popular they are and how wise they were building up over the decades. But what do you think is something that a lot of investors or something you see people misunderstand when studying Buffett and Munger's philosophy and how people make mistakes trying to take what they say and applying it to their personal investing. Yeah, as you just said, it's hard for me to find examples. And again, what I think and how much of that's influenced by them is also where this gets difficult. I don't totally know how people perceive them.

Starting point is 00:31:19 I mean, I think a prominent one, which is maybe less true than it probably was at one point in time, is thinking of them as value investors in the sense of just paying low multiples. But they've explicitly said all along that that's not how they define value. It's obviously part of trying to ascertain what value is. I think it was most prominent to me after they hired Todd and Ted, the investment managers, and one of them bought Amazon. Someone at one of the meetings was like, what the heck are these guys doing? This is not value investing.

Starting point is 00:31:49 And Warren got up there and said, there's no difference between buying Amazon or buying some bank at a discount to book value or something. Both of them can be value investments. It just depends on all the factors that go in that decision. So that's that's that's probably one of the most notable ones. You know, I guess another one that could could be could answer here is what they did with silver and some other, you know, arbitrage type plays back in the 90s in that time period. And then eventually they think they basically just stopped doing that stuff outside of the Microsoft ATBI thing. But I think in a lot of ways, I was thinking about this before, I think Warren in a lot of ways is, he always talked about Ben Graham and how Ben Graham liked what he was doing. It worked for one, but also he liked the fact that it was really teachable. And I think there's part of Warren that likes the idea of, especially as he's gotten older, obviously, and Berkshire is at a very different place than where it used to be.

Starting point is 00:32:50 I think he, and they're less effective, obviously, or less meaningful now, right? He can't do a lot of those things like the silver purchase that he did back in the day and have it have a large impact. But I think he likes the idea of teaching kind of the long-term investing, the owning great businesses, partnering with good managers. He likes that style of teaching now, too. So I think that's part of it all as well. what are some of the things an individual or maybe even yourself can take away from this book and apply it to their own style is there anything that after having written this book i know it's hard because the kind of the learning evolution with buff and amongers is seemingly perpetual

Starting point is 00:33:34 like it just keeps going but is there anything you took away that you may be trying to apply more to your own investing style? Yeah, I think, again, it really depends on how you invest, obviously. But for someone like myself who runs, you know, pretty concentrated and also tends to own positions for a long period of time, it's really that comment that I said earlier about finding managers at businesses, obviously, like to find high quality businesses, but also managers that are operating in a way that's intelligent. A lot of these things are, the tests are not particularly difficult in terms of a sensible capital allocation strategy, or even the way they talk about things like that, right? And the reality is a lot of companies kind of fail that

Starting point is 00:34:18 test. And I don't think you can be so black or white in how you assess some of these things, or else the list of companies that do pass is going to get very short very quickly. But it should definitely be taken into consideration. And I think it's pretty darn meaningful in terms of talking about owning something for a long period of time, as as these small things kind of compound what you mentioned diversification and concentration there what do they say buffett and munger say about diversification because i think you see at least when especially when i like i'm pulling a quote for a motley fool article or something like that you know buffett that plays well in the headlines you can write that you know

Starting point is 00:34:56 get some good clicks but it seems like there's uh conflicting quotes and people maybe misinterpret them what do they say about diversification and again how can do you think other investors can learn from that yeah i think they basically say if you're someone who uh knows what they're doing which is uh not necessarily the easiest thing to know whether or not you know what you're doing sometimes it takes a little bit of uh investing for 5 10 20 years to figure out whether or not you know what you're doing right um but if you if you know what you're doing, then you should... They don't say these exact words, but you should be willing to place decent-sized bets when you find things that look attractive. So that would lead to a

Starting point is 00:35:38 smaller number of positions. And they say on the opposite end, if you are what they call, I believe, a know-nothing investor or someone who isn't going to be doing this stuff in a way where they really have reason to believe that they should have good results, then the answer should be to diversify. And I think they'd say an S&P 500 index fund, something like that. I think that's the general idea. Those are some of the quotes that get, I think, the most pushback when I've shared them are the ones along the line of where I think one of them, Charlie, Warren says to Charlie, you've had a position that you had, I think he says more than 100% of your net worth in at one point, right? And Charlie responds, sure. Like very flippant,

Starting point is 00:36:18 like yeah i've had that before i know people and people get worked up like that that's charlie munger doing it and if other people do it that'd be idiotic basically they're gonna blow themselves up which is a fair point um but also people need to be smart enough to recognize that that he's charlie munger and you know what he's doing you you need to be at that level to to operate that way which uh very very very few of us are so yeah and it seems like internal first you have to internalize the lesson that buffins buffett's lesson number one which is don't lose money and i don't think it's different than i mentioned the molly fool the the high risk growth stock approach where you have a lot of stuff out there and then you get a couple of netflix and amazons

Starting point is 00:37:04 or nvidia's in a venture capital style approach where buffett and munger there they seem to be they were looking for stuff that was they were almost guaranteed not to lose money i know guarantee is hard to say in investing, but there was upside, but then just a minimal amount of downside. Did they talk about that at all? Or do they, you know, like how different investment styles are, I guess, can apply to putting 100% of your portfolio into something because I guess I'd be afraid of especially today with the AI boom and unprofitable companies doing so well of someone saying, look, Buffett and Munger put 100% of their portfolio in American Express or whatever the company was. I'm going to do it with this quantum computing stock. Sorry for the quantum

Starting point is 00:37:54 computing stocks. But what do you think about that? Is that like the misinterpreting? Is that something that you would, I don't know, do they talk about that or am I reading it wrong? No, I think they more so have left it to someone to reasonably and intelligently interpret like what they're saying and to make i mean especially charlie um i mean it's it gets he he's repeated this multiple times over the years which means i'm now i'm gonna butcher how i repeat it back but i think he said the example of someone you know going to mozart and saying how you compose music and he basically says you know someone who was 20 or something however old they were 12 um how do you compose music and mozart says you're not old enough and the person

Starting point is 00:38:38 said well you were you were my age when you started doing he's like yeah but i wasn't running around asking somebody else how to do it like i was like so i think it's i think there's something that that idea of again and i i personally like it now that i'm at a you know certain stage of development as an investor the conversation isn't really dumbed down especially on some of these topics like concentration and position sizing it's discussed very honestly and it requires a certain level of understanding of like the things you're talking about uh in terms of thinking what the application of that kind of looks like um and i you know i think it's and again you can see it in berkshire's own actions right i mean apple was when berkshire was a huge company at this point

Starting point is 00:39:22 in time apple was a very significant percentage of the equity portfolio and a reasonably significant percentage of the overall asset base of the company um so they've had and coca-cola was a very similar situation and and especially in the late 90s it was up to you know i think it was at 35 or north 35% of the equity book. Those were big swings at a time when Berkshire was starting to become a pretty sizable company. So yeah. Okay. I do want to shift gears a little bit and talk about your research service. But before I will plug the book just one more time. If you are like me or any of us that are interested in everything Buffett and Munger have had to say over the years. There's a ton. But if you want a more organized summary and someone

Starting point is 00:40:15 who's done a lot of the work digging through it, this is a wonderful way to get that. So I highly recommend checking out the book. Just one more time on the name, Buffett and Munger, unscripted, in case you guys are looking for it. But I do want to talk about your research service. um so i guess maybe for anyone who has not heard you on this show before i know our recurring listeners probably have maybe give us like the thumbnails of tsoh um and some of the stocks you cover and kind of the the philosophy of of running it and how you show your portfolio as well sure um thanks for the plug for the book by the way i appreciate that um And I guess a short background, I worked in the finance industry as a buy-side equity analyst for roughly a decade before starting TSOH Investment Research in 2021.

Starting point is 00:41:09 I was also writing online throughout that period preceding the launch for about a decade as well. So that kind of brought the research skills that I acquired and the writing together to launch this service in 2021. And the premise of it is I post write-ups every Monday and every other Thursday. And it's a mix of kind of like initiation, you know, call it deep dive type write-ups. Like recently I've written up Ground Foreman and looked at Academy Sports and Dick's Sporting Goods. And then there's also updates like Nike, as I was discussing earlier, it's a company I just updated on recently. There's some investment philosophy discussions. There's some broader commentary, kind of similar to the National Endowment article that I referenced before.

Starting point is 00:41:56 So it's kind of a mix of different write-ups. And then there's also complete portfolio transparency, and I disclose every change I make in the portfolio before I make it. The day before at 5 p.m. Eastern time, I'll send an email saying, hey, here's my portfolio as of right now. Here's the changes I'm making, and here's the ending portfolio, and here's the reason why I'm doing it. Um, and that was kind of born out of coming out of the finance industry and, um, being, uh, not loving the fact that a lot of conversations were about like, oh, what are you, you know, what stock are we buying now? We're buying Microsoft for buying property and gamble, whatever it may be. But then there was never really much of the follow-on conversation of like, okay, well, it's a 30 basis point position in my portfolio, or it's a three percentage point position, or it's a 15 percentage point. The sizing of the position is incredibly important to that conversation.

Starting point is 00:42:50 And then talking about the changes to get there is obviously incredibly important as well. So I wanted to be able to talk about those things very transparently. And it's something I had learned from having written for the prior decade that, you know, forcing that level of transparency also forces a certain level of kind of continued evolution and learning. Because at least I know for me, I certainly don't have the answers to all of the questions that kind of underlie how to invest intelligently or what I think is intelligent. So that's kind of the underlying, you know, nature of TSOH investment research. And the companies that I own slash follow are, again, the names that is mentioned, a bunch of media companies, Netflix, Disney, those kind of names, a few kind of oddball type things, Ally Financial, Fever Tree, follow a decent number of retailers. So, yeah, I have the list on the website of the last six months of write-ups that give people a decent idea of the other names. All right, listeners, we've got a new sponsor here at Chit Chat Stocks, and their name is Blue Chippers Club.

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Starting point is 00:45:10 Full disclosures in the podcast description. Yeah, I was just reading the Brown-Forman one this morning. We love the service. And if you're sick of the analyst questions or reports about gross margins expanding 10 basis points next quarter and constant discussions about that on conference calls and in reports, and if you're paying too much for stuff you don't find value in, this is the service for you. And it is, again, focused on the fundamentals, focused on the long-term story, stuff that we talk about, our listeners talk about often. I'm trying to think of one final question. Maybe tease some companies you plan on covering or is on your list for future coverage at TSOH Investing Research and maybe why those interest you. I'm pulling up my, my running lists that I have as I'm, as I'm going to start saying some of the ones that come to mind. Um, yeah. So having just looked at, at, at, uh, Brown Foreman and, uh, you know,

Starting point is 00:46:15 having some interest in Fevertree as well. Um, I'm going to probably look at Diageo here pretty soon. Um, I looked at, I looked at FanDuel somewhat recently. Um, I'm not totally sure how I feel about the space, whether or not it's something I'm really interested in investing in or not, But to the extent that that is something that I might do, I'm going to look at DraftKings and probably at, I believe it's called Sport Radar. So those are a couple names there. There's a couple of names that I probably need to update on here pretty soon.

Starting point is 00:46:48 Vita Coco is a somewhat interesting one to me. Portillo is, which I know you guys follow. Peloton, Roshi Outlet. But so those are, those are some of the ones that I'm kind of continuing to keep an eye on that I've, that I've looked at previously. We, yeah, I was reading some of your Brown Foreman write-up this morning as well. You mentioned you're doing Diageo here. I guess any takeaways in looking at some of these spirits producers that you could share?

Starting point is 00:47:21 I saw the other day that like pretty much all three of the big ones that I could think up here, Pernod, Ricard, Brown, Formant, Diageo are all trading at record low or decade low multiples. What have been kind of your early takeaways from looking at these businesses? Yeah, I think it's one where the COVID pandemic headwind, tailwind, and how it's all shaking out isn't quite clear to me yet, which is, I didn't think at the time I'd be saying this in early 2025, but that's true in more industries than I thought it would be in, in terms of how the reported financials shake out. You know, in terms of how the companies are managed, I was surprised at the strength of

Starting point is 00:48:08 Jack Daniels, both domestically and abroad. But then also, as I dug in more, I saw how the company's kind of capital allocation and portfolio management strategy had worked its way through over the past, you know, call it 25 years or so. And just interesting to think about how to give a really dominant brand that can play globally what's the most intelligent kind of capital allocation and, you know, strategy to run from there. I think it partly depends on, you know, who the stakeholders are and how much of their wealth is invested in and how much of their, you know, their life is invested in it too, their name, their family, et cetera. So that's interesting to think about. I'm not totally sure on the I've seen some data that basically suggests that alcohol consumption is pretty similar to where it has been.

Starting point is 00:48:59 I've seen some other data that suggests younger people are are not drinking as much as their previous generation. So I need to do a bit more digging there to have to have confident thoughts. But what do you have? What have you guys thought about that? Or have you looked into it much? and i want i want to like these companies but i looked at diageo and we talked about the management stuff and the incentives things and i just felt like there was a lot of focus on you know compensation consultant stuff and things that just didn't really please me in that regard i was shocked that i i pulled up like on finchat i guess i

Starting point is 00:49:36 should shout at our sponsor. Go use our link, finchat.io slash chitchat. Get 15% off any paid plan. But I pulled up their revenue chart. I was shocked at how slow their revenue growth has been. Maybe I was overestimating it, but for a company that I believe was trading at a very premium earnings multiple, I don't know. Were you shocked at that? I guess I just thought the growth would be better. I just think the one thing to teach, and I don't know about Diageo specifically, but my sense is that all of them had a decent amount of M&A and divestitures too. So you just have to getting clean numbers from there is always a little bit difficult. I mean, even the thing where here's an organic sales growth for this year, but the go forward that includes that

Starting point is 00:50:25 acquired business in the organic numbers so so even just trying trying to get clarity on something like that is it just gets a little bit messier when companies have a lot of portfolio movement and again i don't know about the asha but but brown foreman has had enough of that over the past um again like 25 years well even more than that but that's the period i looked at most closely that it made it um that part a little bit challenging they do have some good volume data though that that kind of gave the indication at least for the core the core jack daniels family um that brand has had you know not not crazy growth but pretty consistent and solid you know call it something like five percent annualized volumes um over the past 20 30 years um which

Starting point is 00:51:12 again it's i mean that's pretty good for a brand that's very well established in the in the cash and the business are pretty attractive too. So it's a situation I think that could work pretty well if you have confidence that something like that will continue going forward. But yeah, I need to do a little more digging personally. Yeah, Diageo is similar with the spinning out stuff, buying a lot of things.

Starting point is 00:51:36 I don't know, Ryan, what are your thoughts? What are your thoughts? Yeah, I've seen some of the data. I've seen very mixed data on alcohol consumption overall. Like I've seen charts that show alcohol consumption in the States is just fine. It's kind of where it's been historically. And then I saw – well, I saw one chart that said like Gen Z spends way less on alcohol and it's like half of Gen Z is below the drinking age. So it didn't – and the chart kind of went viral and so it didn't really make a whole lot of sense.

Starting point is 00:52:04 But the other part is you even see some commentary from the management teams about like shifting towards premium alcohols, not as much spend on kind of the lower tier. I kind of had some worries when they acquired – what was his – I always forget the celebrity's name, his tequila. Ryan Cluny. Cluny, George Cluny. Had a tequila brand, Casamigos. And it worried me that that playbook for like big celebrity presences, like I know The Rock has made his own, Matthew McConaughey has made his own bourbon and all this stuff can kind of eat away at the edges of like Diageo's core brands and some of the other companies as well. But other than Casamigos, I'm yet to see any real proof of that. So I don't know.

Starting point is 00:52:58 It's kind of a mixed bag. But I would love to like them because it seems like they have some big advantages. But there's something just kind of holding me out, and I don't really know what it is. Yeah, I think that's – I mean, it's a lot of what I was thinking too on Jack Daniels and thinking about the – yeah, they're going through a similar path of some incremental brands. but also some kind of line extensions within the Jack Daniels family that move it further up the premium, super premium scale. And they also have flavors and some other things that have generated a significant amount of volume for the brand. And I think you've seen things like this before, I think, and probably vodka is the most notable, where there was like every flavor under the sun at one point, I think.

Starting point is 00:53:45 And I think from what I've heard, I think my understanding is that Tito's has probably been the most successful vodka brand in the last handful of years or whatever. And I'm sure others have done this too, some of them, but Tito's has kind of stayed true to their core identity, right? They weren't selling cotton candy flavored vodka as far as I know anywhere. So maybe there's something to be said. Also, you have to be very careful in terms of how much of that you do, particularly if you're trying to move up scale in terms of premium or super premium. Yeah. One final mention, you talked about Fevertree. I posted that chart about Brown Foreman and how the revenue growth wasn't as exciting as I thought it would be. Someone sent me a DM, I guess someone that we all know, and they said the best way to play this is

Starting point is 00:54:31 Fevertree. I guess maybe that could be the case. We don't have time to go full in depth on Fevertree, but what are they and what do you cover about them? What interests you about them at TSOH? Yeah, Fever Tree is basically, I guess you would say, like a premium tonics company. I kind of had some of the math on this in my first Fever Tree write-up. If you comp it to like a liter of Schweppes or whatever would be on the shelf at the grocery store of that tonic water, it's something like somewhere between five and ten times more expensive on a per ounce basis. Also, the product is significantly better. And if you're mixing tonic with a spirit that costs $50 for a 750-milliliter bottle or whatever it may be, then maybe you don't want to go cheap on the mixer.

Starting point is 00:55:22 So they've certainly established their position in their home market in the UK. They've also done a very good job, still early, but they've done a very good job at establishing their position in the US. Now, that said, the pandemic was a pretty difficult situation for them, particularly in terms of product production and product sourcing, basically, too. So they've gone through a period where the margin profile has been really significantly lower than what it used to be on both gross and operating margins. And, you know, part of the question now is how do they kind of get back to where they once were or anywhere close to where they once were? And then also what's kind of the, you know, the top line growth trajectory going forward as a market like the U.K.? You know, it's a sizable market for them and a good market for them, but it seems like it's kind of tapped out to some extent, particularly in terms of the G&T kind of play. So, you know, it's one where you have to have some thoughts on how big that market actually is, how strong is their competitive position.

Starting point is 00:56:27 And then you need to answer whether or not there's anything to really be paid for in terms of adult soft drinks or the non-carbonated mixers. So I think it's a really interesting company. I wrote about it here fairly recently, so people can go read about it if they're interested. Yeah, fascinating company. Ryan, any other questions before we close out here? No, I'll just give a pitch to the audience. I love reading TSOH investment research, and there are a ton of companies that we didn't even mention today that are in Alex's coverage universe. Some of the ones that are coming to mind for me, since I just took a road trip across the country, are some of the discount retailers, dollar stores, which you'll see throughout a lot of the-

Starting point is 00:57:12 You saw a lot of dollar generals in middle America, right? Yes, I certainly did. And every time I thought, you know what, I, what, what do they say? They, we go where they ain't that I, yeah, we went where they ain't. Yeah. I understand that now. But yeah, there, there's tons of great, great companies in the coverage universe. So I recommend at least checking it out and seeing if there's any companies, write-ups types of things that you like, if you're listening now.

Starting point is 00:57:43 All right, Alex, thank you for joining us. Anything else before we close out and hit the disclosure? That's it. Thank you for having me. And yeah, people check out the book if you're interested. I think you'll love it. If you're listening to this show, you're going to be someone who likes this book. I can.

Starting point is 00:57:57 Yeah, I was going to say the exact same thing. Yeah, exactly. Exactly. Yep. Thank you, Alex, for joining. Let's hit the disclosure. We are not financial advisors. Anything we say on this show is not formal advice or recommendation.

Starting point is 00:58:09 Ryan, I or any podcast guests may hold securities discussed in this podcast, may have held them in the past and may buy, sell, or hold them in the future. Thank you everyone once again for listening to this episode. Go download, buy the book, and check out the TSOH Investing Research Service. And we'll see you next time.

Chit Chat Stocks - Buffett and Munger Unscripted: Lessons From Berkshire Hathaway With Alex Morris

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