Motley Fool Hidden Gems Investing - Buffett Quotes Under the Microscope

Episode Date: August 30, 2023

We celebrate Uncle Warren’s 93rd Birthday with a closer look at some of his best known isms and a look at few investments he wouldn’t want any part of.  (00:12) Bill Mann and Dylan Lewis discuss: - Grayscale Bitcoin Trust’s path to a Bitcoin ETF and what it means for crypto adoption. - The largest automaker that you’ve never heard of – Vinfast – and why investors should stay away from its stock. - 3M’s $6B settlement, and how investors should be thinking about the legal issues plaguing the company.  (15:43) Ricky Mulvey and Anand Chokkavelu celebrate Warren Buffett’s birthday with a look at some of his most popular and misunderstood quotes. Companies discussed: GBTC, VFS, MMM, BRK.A, BRK.B, AAPL Host: Dylan Lewis Guests: Bill Mann, Ricky Mulvey, Anand Chokkavelu Engineers: Rick Engdahl, Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

ETFs and PFAS. We've got acronym alphabet soup. Motley Fool money starts now. I'm Dylan Lewis, and I'm joined in studio by Motley Fool senior analyst Bill Mann. Bill, thanks for joining me. Been a little while. It's been a little while. It's nice to be back in the groove of things. Yeah. We're going to be taking a break from the earnings beat with today's show. And I think when I teed up the topics for today's show, I said, Bill, we have three funky stories to talk

about. I think there's a lot of interesting stuff going on here. We have a multi-billion dollar settlement for 3M, an upstart that is suddenly one of the most valuable automakers in the world. But we're going to start with news of crypto and ETFs. Grayscale Bitcoin Trust has been trying to convert its fund to an ETF. The SEC has protested, despite approving Bitcoin ETFs for ProShares and some other ones. It seems like we're actually going to see a path forward for the Grayscale Bitcoin Trust becoming an ETF based on recent legal news this week, Bill? Yeah. So the SEC has blocked Grayscale from turning from an options and a futures-driven closed-end fund into an ETF. Whether you like crypto or not, and I will put my cards on the

table. I do not. But whether you do or not, the case itself isn't about any sort of any sort of evaluation of crypto itself. It's a trading vehicle. And to me, the SEC's position has always been somewhat bizarre because what they've been trying to do is, you know, they've they've got crypto and Bitcoin basically in this gray zone as to whether it's a commodity, as to whether it is a security. And it seems to me that Gary Gensler and the SEC just simply don't like crypto. And so I think that that has driven their set of decisions. And Grayscale is the first of them, but it's not the last of them. I mean, BlackRock has attempted to stand up a Bitcoin ETF. So it's not done yet. There are paths that the SEC could, they could come back and, you know,

attempt to have the case reheard. They can appeal. They can change what it is that their objections are to a Bitcoin ETF. But it seems that there is a path forward for this trading sardine to have a trading sardine on a major exchange. And so, you know, for the Bitcoin people out there, it adds a little bit of liquidity. But I think that's about it. Yeah, I was going to ask you. So we saw major currencies like Bitcoin, Ether, and we also saw Coinbase stock up on the news. Is this something that actually helps crypto adoption? Like, why is there an interest in making this an ETF versus the fund that it has been? I don't think it hurts crypto adoption. I mean, let's, you know, I don't see how this is a negative for them. So it is a, it's a reasonable thing to assume. I don't really see how it does help except for the fact that it gives a, it gives an avenue to more liquidity for people who do not

want to or are worried about storing their own Bitcoins. So this is the thing. An ETF is a much better vehicle than a closed-end fund with futures, with the exception of the fact that the people who run the ETF have to be really, really sure about their storage and their assay of the Bitcoins themselves. And as we've seen over the last couple of years, people have come up with remarkable ways of losing their crypto. So, it is on grayscale to protect the actual instruments themselves, as opposed to futures. But for an institutional group like that, I don't know that that's that big of a deal. Yeah, for the longest time, this grayscale Bitcoin trust was kind of the easy way into crypto for people that didn't want to necessarily...

Right. But it came with a cost. For a very long time, when we saw a surge in crypto interest, we saw that this fund was trading at a massive premium to the underlying assets. Now it's kind of the flip because I think we've seen the market switch a little bit. It's now at like a 30% discount. Do you expect an ETF would trade a little bit more closely to the asset value that the fund holds? Yeah, it should. I mean, so when you think about what an ETF is, an ETF actually gives you the right to go in and have them give, for the exchange of money, they will give you what's called a creation unit in return. So you can actually go to ETFs and get them to give you the underlying asset. So if there is a huge gap between the grayscale ETF and the actual price

of the underlying Bitcoin, people will come in and arbitrage that. You can't really do that with a closed-end fund, which is why you see those huge differences in net asset value, the premiums and the discounts to net asset value. So, there should be some more efficiency. And this, again, speaks to why, although I don't really see that this gets more people interested in Bitcoin, it does add an argument to the liquidity side of things that it does make it easier for people to do so. All right. Over to interesting story number two for the day, Bill. There's a new automaker in town, or at least on the market. Earlier in August, shares of Vietnamese automaker VinFast hit the market by way of SPAC. Bill, the company currently sports a market cap of over

$100 billion. It did less than a billion dollars in sales in 2022. Bill, what do you make of this? Got to buy. Buy, buy, buy, buy, buy. No, I love stories like this. Not ultimately because the people who are buying it, I think the stock is certainly being manipulated by somebody. So, the primary owner is a guy named Pham Nhat Vuong, who owns somewhere in the range of 99% of the company. So, there are very few shares that have made it onto the open market. This is a perfect situation where you could see a stock being easily manipulated when there are so few shares in the free float. Had a great IPO. This happened actually last year as well, a company from Hong Kong called AMTD, which people in Hong Kong will tell you,

they've still never heard of, went up to be about a $280 billion company. VinFast, at least, is a real company with real products. They sold 26,000 cars last year, which I submit is not many. It doesn't justify a $100 billion valuation, I'll say that much. Well, listen, what we always say about the market as investors is the market is efficient, but it is not fully efficient. So, situations like this just really show how the market does leave opportunities for people. This company, it's not shortable right now, at which point in time it does become shortable. I think you will see people piling in to get onto that side. The cost to do so is extreme, but this is an obviously overvalued company and one where I would say that

people stay very, very far away. I would even say that on the short side, even when you see a situation like this. It's just something that's fun to watch. And look, I have no comments about the company itself. It is a small startup that came public through a SPAC. I think, once again, the SEC really needs to take a close look in the mirror at how they have allowed so many SPACs to come public. And for something like this to happen, this is a market structure problem, and it was preventable. We've seen it in the past. I was going to say, I love the story, you know, the business itself aside, because it's a market mechanic story, right? It is a low float business. I think Barron said there were 16 or 17 million shares available for trading.

Right, which is nothing. In the grand scheme of things. But this is where we see this wild activity and this wild behavior. If you're looking for positives here, Bill, I'd say it's partially because we're seeing enthusiasm for EVs. This is a place where this company operates. It ticks all the boxes. There's the electric vehicle angle, and it is one of the few, if not the only, publicly traded in the U.S. Vietnamese company. And Vietnam is a country that I think that investors should be interested in. It's one of the logical places where manufacturing that has been in China will move to, and I think that that is an inexorable trend over the next decade. So there's a lot of reasons why you would be interested in VinFast, but I would say give it a little while and let things settle because this company might be worth a lot, but it's definitely not worth more than every automotive company except for Tesla and Toyota. All right. From an upstart manufacturer to one that I think is pretty much a household name at this point, 3M shares up 6% this week after reports it will be reaching a $6 billion settlement related to earplugs provided to the military.

Bill, this is the largest mass tort litigation in U.S. history affecting 250,000 plaintiffs. The stock is up on the news. Can you walk me through this one? Well, it just shows that the market hates uncertainty, right? Like whenever you get news and whenever you get bounds put around something, even if the news is bad, like that becomes a known as opposed to something that you guess at. So it's such an interesting case to me because these earplugs were manufactured from 2003 until the mid, you know, 2015, I believe. And 3M bought the company that made them in 2007. So it wasn't even 3M producing a product.

It was 3M buying a product. This ruling or this settlement – it's not a ruling. It's a settlement – comes with – you're not going to believe this, Dylan – no admission of liability. I think I've heard that story before. Yeah. Yeah. $6 billion in claims to the plaintiffs and it is $5 billion in cash and $1 billion in 3M stock. Which is kind of interesting.

I don't know that I've ever seen it done like that before. I definitely did a double take when I was looking at the press release. Yeah. Yeah. I don't know that I've ever seen that before. So, it's wild that the stock is up, but this has been an overhang over 3M for a really long time. And now they have boundaries around it and they know what the case is going to be. And by the way, they also aren't just coughing up $5 billion immediately.

It is over the next five years. So, this is not the only thing that is overhanging 3M stock, and it's not the only major settlement for this company. I've generally thought of them as one of the blue bloods of American manufacturing. They are. They're one of the vaunted names, but this has been kind of a rough year for them. They also are waiting on final settlement for a $10 billion agreement with U.S. towns and cities over the company's use of PFAS, which is short for per- and polyfluorocl... I can't even get through that. Polyfluorocl substances.

Easy for you to say. Yeah, these are better known as forever chemicals, Bill. And this has been something that people have been kind of wondering about as well. Do you feel like these two stories combined, there are starting to be some cracks in the armor for this business? That could be. I mean, so, again, I come back to 3M produces thousands of products, right? And we have seen over time – and you don't even have to be a cynic to have seen companies who have put forth profitability over public safety in some form or fashion. I mean I don't even want to start naming companies.

We'll get sued. But there are a legion of them. So it is definitely possible that 3M has cut some corners. I think it's really important with the hearing protection lawsuit to note that this was a product that they bought, right? This might go down on the list as one of the worst purchases in history for any company. I mean I guess there are some companies that bought – accidentally bought asbestos liabilities in the past. But 3M does have plenty of capability to handle that. I would be mindful of the next shoe to drop with 3M to see that if there are additional actual product liability issues for them to deal with.

In this country, as we know, we like suing people an awful lot. So I don't necessarily put product liability issues as being automatically the fault of the producer of the product. Over to something a little bit lighter as we wrap things up. Thank you. Gosh. Today, a special shout out to our good friend Warren Buffett. The Oracle turns 93 today. Bill, any well wishes or favorite quotes from Uncle Warren? So as people may know, I mean I think that there may be – and it's interesting to say for someone who's worth I think $70 billion. But I think that Warren Buffett has given more than he's gotten in terms of knowledge, in terms of building businesses, in terms of just returns on capital and how the businesses that Berkshire Hathaway owns have, for example, transformed the city of Omaha.

You know, like it is meaningful. So one of the most important people to have lived in the last century, and he has now lived for most of the last century. I think that the most important and maybe most misunderstood Warren Buffett quote is one where he said, if you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes. And he was one of the first. He studied under Benjamin Graham at Columbia University in business school. And he was – they were amongst the first people to really treat stocks as parts of businesses. And we hear this now and it doesn't seem – I mean it seems to be like bleedingly obvious. But for most of the period of time in which the US stock market has existed, it was something that was so highly speculative because the movement of the stocks and the underlying businesses were almost – had nothing to do with each other.

And so it's overstating it to thank Warren Buffett for this, but he definitely played a part in that change in philosophy. Yeah, I think we spend so much time in that philosophy, thinking of it as the foolish philosophy. And really, the foundation of that lives with Graham and with Buffett. Yeah, absolutely. And it is very easy for investors to wrap themselves in the blanket of Warren Buffett. But that is something that is at the core of what we do. And it is why The Motley Fool exists, is to get people to think about stocks as being pieces of businesses and not numbers that go up and down on a spreadsheet or on the internet. Well, Bill, like Warren, I think you give more than you get.

I appreciate you coming on today's show and giving some insights. Thanks, Bill. Coming up, the Buffett celebration continues. We've got a more in-depth look at some of Buffett's best-known quotes. Ricky Mulvey and Anand Chakvalu take a look at some Buffettisms that are often misunderstood. you know on it since the year 2000 warren buffett has pointed to age being a potential risk to berkshire hathaway in his annual shareholder letter we are a few years since then and warren buffett is turning 93 today so let us just first say happy birthday warren buffett happy birthday

warren i have no gifts for him we have nothing we can offer but maybe what we can try to do is take a look at some of the more misunderstood Warren Buffett financial wisdom that is often seen in clickbait articles and perhaps on Twitter. That's right. Our gift to you is more understanding. Our gift. I mean, what do you buy for a billionaire on his 93rd birthday? Someone who at one point, if you have a private jet, it's pretty hard to figure out gifts, I think. Yes. So with that, we know Warren Buffett likes to read. We've read a few of the shareholder letters. I think you've read a little bit more than me, so I'm going to lean on you for this. But what is the first Warren Buffett rule that is often misunderstood by

investors? Yeah, we'll start with rule number one, never lose money. Rule number two is never forget rule number one, right? That's the lesson. But here's the lesson what many people hear. most of you it's one honestly it's pretty correct they they but they fail to go to the next step into what it means they're just like yeah yeah don't buy stocks that go down yes that's bad and what i would also say to that is i took a look at when he said it i think it was originally in the mid 80s of where there's the first record i thought there was a chance that in the late 90s warren buffett watched fight club where the first rule is that you don't talk about fight club and the second rule is that you don't talk about Fight Club. And then he applied this to his

letters. But he, in fact, was first to this. But Buffett has also said, quote, we will occasionally make an unconventional move when we believe the odds favor it. Try to think kindly of us when we blow one, end quote. So there are times that he gets outside of his own framework. And we were talking about this before the recording. You can often kind of take whatever you want from Buffett to determine your own investing wisdom and preferences. Yeah, yeah. He is a very smart person, so it's not all, you know, you can't just button it down and perfectly do it.

But the real lesson he was going for here is, you know, for his style of investing, the floor matters more than the ceiling. And you have to be very, very disciplined for this. So here are some examples, right? Like, you know, the guy who doesn't buy tech stocks, like, right? Well, there is an exception, right? Apple is almost half of his portfolio at the point that we're talking right now. And that's partly because of price appreciation.

But he was comfortable making a big bet on Apple, even though it's, quote unquote, tech. And you know why? Because it's basically a consumer brand. And it was similar enough to Coca-Cola, one of his other huge bets in the past, versus a normal tech company that's going to get disrupted every few years. So one, that is actually consistent. But people also forget that this quote of never losing money, they also criticize the huge amount of cash that Berkshire Hathaway holds for a long period of time, just waiting and waiting for a

great deal to come along. And that's part of the never losing money, right? You know, and he gets hammered in bubble times for not doing more. Yeah. If you remember a few years ago, there was a group of folks that Buffett just doesn't understand cryptocurrency. And maybe the true sign of a bubble is when people are on LinkedIn explaining why Buffett is an idiot about investing. That's fantastic. I love it, LinkedIn. Because you got to be just good enough where your business associates think, yeah, yeah, that makes sense. Yeah. So Todd Combs did an interview. We did a Motley Fool Money episode about this in February. But basically, there's three rules that Berkshire looks for when they filter stocks. One is like a next 12-month price-to-earnings ratio of 15 or

less, a 90% confidence that the company will generate higher growth five years from now, and then they're looking for about a 7% compound annual growth revenue until then. It's one of those things where the rule is very simple. It is much harder to do that because it is odd and quite tough to think about what will happen five years from now and if you're 90% confident about it. Let's move to the next lesson or the quote, which is when Warren Buffett is most often asked about the key to success, he often says, focus. Yeah, and people hear, yeah, yeah, he focuses. But again, the magnitude of focus is misunderstood. At parties, I remember in one of his biographies. At social gatherings, at his own house, at parties, he'll just go off and start

reading shareholder letters, just like he does all the time. He started it around age 11. I think that's when he bought his first stock. Today, he's 93. 82 years. People also talk about putting in 10,000 hours. By my calculations, Buffett's put in well, well north of 100,000 hours. The focus he has on a daily basis and as consistently and early as he started doing it is just profound. I'd also add to that the letters he's reading, often they're for businesses that aren't exciting at all. It is going into the weeds about insulation, a lot of it about insurance, in some cases uh like these very boring companies with reliable returns that other people don't want to spend the time understanding and i'm offering that advice on and is someone who should probably

take it as well this is not a uh not a everybody else should do this thing you know there's that old that quote he has of like well how would you start and you'd say you know back when there wasn't an internet and it was like the moody's guides and stuff he said i would start with the a's you know like an encyclopedia type of thing and people think they don't realize he's not really joking. He's reading all these shareholder letters. He probably would start with the A's. But as we move to the third lesson, Anand, I think this one might be the most misunderstood. And it is, be greedy when others are fearful and fearful when others are greedy. Sounds pretty simple. And for a while, I was like, yep, makes sense to me. But why is this often misunderstood

by investors? Yeah, I mean, and we love it. It might be his most famous quote. It's hard to there's so many good ones. But it makes us all say, hey, the rest of the market doesn't see what I see and is unnecessarily scared. It's time to go all in. They're scared. I'm being greedy. But the actual lesson he was trying to impart is pretty much the opposite. It's don't try to time the market by jumping in and out. And by the way, it's darn hard to beat a boring old index fund. Here's the whole quote from his 2004 shareholder letter. It's a little long, but it's his birthday. So we're going to give him some time here.

Over the 35 years, again, this was the 2004 shareholder letter. Over the 35 years, American businesses delivered terrific results. It should therefore have been easy for investors to earn juicy returns. All they had to do was piggyback corporate America in a diversified, low expense way. an index fund that they never touched would have done the job. Instead, many investors have had experiences ranging from mediocre to disastrous. There have been three primary causes. First, high costs, usually because investors traded excessively or spent far too much on investment management. Second, portfolio decisions based on tips and fads rather than on thoughtful,

quantified evaluation of businesses. And third, a start and stop approach to the market marked by untimely entries after an advance has been long underway and exits after periods of stagnation or decline. Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful. There's a lot of preamble to it that is often left out. It's interesting because in some ways, the rules of that have very much changed. Right now, expenses and costs are significantly lower than when he wrote this letter in 2004, but human nature has a more difficult time changing in 2019 years.

I'll take a quick sidetrack. That does remind me of the Peter Lynch misquote, I would say, about don't cut your flowers and water your weeds when it's like, don't sell your winners and just add to your losers, where the actual quote is much longer and more thoughtful. Quote, some people automatically sell the winners, stocks that go up and hold onto their losers, stocks that go down, which is about as sensible as pulling out their flowers and watering the weeds. Others automatically sell their losers and hold onto their winners, which doesn't work out much better. Both strategies fail because they're tied to the current movement of the stock price as an indicator of the company's fundamental value, end quote. If you get anything from this segment,

please read the full paragraphs. But Anand, if you had to distill down Buffett's advice for his birthday, the gift you're offering to him and Munger and investors, how would you distill Buffett's investing advice? I'd put it into two buckets, right? One is for people who enjoy buying individual stocks and all the work that goes along with it. It's patiently buy quality companies when they become available at fair prices. Then you hold them. That's what he does. And then for people who don't enjoy buying individual stocks, buy broad market tracking index funds, hold them. That's what he does for his wife on his death. His words on, you know, in one of his writings is, my advice to the trustee could not be more simple,

put 10% of the cash in short-term government bonds and 90% in a very low cost S&P 500 index fund. I suggest vanguards. I believe the trust's long-term results from this policy will be superior to those attained by most investors, whether pension funds, institutions, or individuals who employ high fee managers. As we wrap up, I think Buffett's wisdom is often found in paragraphs,

and as we talked about the 1989 shareholder letter, I think one of the more underrated sections in there was about high growth rates and what investors can expect. It goes, quote, we face another obstacle. In a finite world, high growth rates must self-destruct. If the base from which the growth is taking place is tiny, this law might not operate for a time, but when the base balloons, the party ends. A high growth rate eventually forges its own anchor. Carl Sagan has entertainingly described this phenomenon, musing about the destiny of bacteria that reproduce by dividing into two every 15 minutes. Says Sagan, quote, that means four doublings an hour, 96 doublings a day. Although a bacterium weighs only a trillionth of a gram,

its descendants after a day of wild asexual abandon will collectively weigh as much as a mountain, in two days more than the sun, and before long, everything in the universe will be made of bacteria. Not to worry, says Sagan, some obstacle always impedes this kind of exponential growth. The bugs run out of food, or they poison each other, or they are shy about reproducing in public. Even on bad days, Charlie Munger and I do not think of Berkshire as a bacterium, nor to our unending sorrow have we found a way to double its net worth every 15 minutes. furthermore we are not the least bit shy about reproducing financially in public nevertheless sagan's observations apply end quote what a fantastic quote that was from 89 but i think

it still applies today and i know you have some final thoughts of your own about buffett's wisdom as we wrap up yeah so maybe it's uh talking about a criticism right it's you know why does buffett say the same quotes over and over and over and over again. But the reason is, you know, there are many ways to beat the market. But finding your winning system early and sticking to it is key. Remember, he was, you know, at age 11, he was starting and he pretty much formulated his plan pretty much since then. And he stuck to those those principles for the most part. So if you've got your plan, and so say someone asked you for 50 straight years, what two plus two equaled, Wouldn't your answer always be for? If you've got discipline and you've got a system,

then sometimes you might say the same things. But Anand, I always enjoy our different and varied conversations. Appreciate your time and your insight. Love it, Ricky. As always, people on the program may own stocks mentioned, and The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Dylan Lewis. Thanks for listening. We'll be back tomorrow. Thanks for watching!