Motley Fool Hidden Gems Investing - The Quotable Mr. Buffett

Episode Date: August 16, 2022

Big Retail starts to report earnings and the news is good (so far). (0:21) Jason Moser discusses: - Walmart exceeded lowered expectations for the 2nd quarter - CEO Doug McMillon's comments on the new customers that drove results - Home Depot passing inflation costs onto customers (and not missing a beat) - How the expectations bar has been raised for Target and Lowe's (13:37) Warren Buffett's quotations hold meaning for investors, regardless of their portfolio size. Alison Southwick and Robert Brokamp and a host of Fool investors share their favorite Buffett quotes and why they're relevant. Stocks mentioned: WMT, HD, LOW, TGT, BRK.A, BRK.B Host: Chris Hill Guest: Jason Moser, Alison Southwick, Robert Brokamp, Buck Hartzell, Alyce Lomax, Scott Phillips, Anand Chokkavelu Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

When WestJet first took flight in 1996, the vibes were a bit different. People thought denim on denim was peak fashion, inline skates were everywhere, and two out of three women rocked the Rachel. While those things stayed in the 90s, one thing that hasn't is that fuzzy feeling you get when WestJet welcomes you on board. Here's to WestJetting since 96. Travel back in time with us and actually travel with us at westjet.com slash 30 years. Big retail starts to report, and Warren Buffett has a few words for investors.

Motley Fool Money starts now. I'm Chris Hill, joined by Motley Fool Senior Analyst Jason Moser. Thanks for being here. Hey, hey. Thanks for having me. Let's start with the biggest retailer out there, Walmart. Let's be clear, Walmart had lowered expectations heading into their second quarter results, but they beat the lowered expectations on both the top and bottom lines. And for anyone wondering about the size and scope of Walmart, they did just under $153 billion worth of sales in the quarter. Yeah. I mean, I know some people might like to call shenanigans and be like, well,

you know, they lowered expectations a month ago, and lo and behold, they come out and beat those lowered expectations. So, hey, listen, I think at this point in the game, you just got to take whatever you can get, right? It's good to see that the business is doing okay, regardless the expectations game. And honestly, that's why we tell folks not to get too hung up on that stuff, right? Just focus on making sure the company is doing what they say they're going to do, right. Focus on leadership doing what they say they're going to do. I think in this case, they are. Walmart is in a unique spot here, a little bit of a double-edged sword, so to speak, regarding inflation. That's really been the subject here of this earnings season.

One of the biggest subjects of earnings season is inflation. It's good for a company like Walmart to see more demand pushing that revenue growth, obviously. By the same token though, a company like this, profitability becomes a bit more pressured as they start to see more demand in the essentials like grocery, for example. That's a good thing. They're gaining share in grocery. That's a very resilient and necessary market opportunity. But this is also a business that already operates on razor-thin margins anyway. At the end of the day, this is like Costco to the extent that it's about volume in selling as much stuff as they can. We already know they're going to be operating on razor-thin margins. Seeing

a little bit of pressure there on profitability isn't or shouldn't be, at least, as great a concern for a business like this because that expectation is already there. We already know that. When you see a company like this, profits did tighten a little bit as we saw share rise in that grocery segment, for example. But honestly, that's a net win, I think, because you're really helping push that top line. You said, I mean, total revenue, $153 billion is up 9.1% in constant currency, translated into $1.77 for adjusted earnings per share. U.S. comp sales up 6.5%. Like I said, they continue to gain share in grocery, which I think that's something that should not be overlooked.

You mentioned the leadership. I'm not discounting the challenges that Walmart or Target or any major retailer has experienced with respect to inflation and inventory controls. But it did surprise me just a little bit given Doug McMillan's leadership at Walmart as CEO all these years that when they came out a month or so ago and lowered expectations, there was just a little bit more hand-wringing on Wall Street than I thought was warranted, as though a complete novice was in charge as opposed to McMillan. He came out this morning and talked about the customers at Walmart, how they're more priced focused, which is totally understandable, but also how Walmart got a lift from new customers and they got more frequent visits from households

with an annual income of $100,000 or more. Yeah. I'm glad you made that point because I agree with you. We did the show on this a month ago, I think, right when they came out with that pre-announcement there. It did feel at the time like that was a very short-sighted reaction to what is obviously a very important and well-established business that has the tools to deal with the current economic climate. To your point there, management today, CFO David Rainey, talking about the fact that three-quarters of the company's market share gains in food came from customers, as you mentioned, with an annual household income of $100,000 or more. We talk about ways for folks to deal with tougher economic times,

to deal with inflationary times. It requires us as consumers to think a little bit more about the purchases we're making. It requires us as consumers sometimes to just make trade-offs, to alter our behavior. It feels like in this case, Walmart is benefiting from some consumers deciding to alter their behavior, shop in different places and focus a little bit more on value, which is what they specialize in clearly. I think that's really what speaks to the share gains in grocery. Then you talk about inflation, you talk about inventory. I think that was a key theme of the call was inventory. U.S. inventory growth was 26% from a year ago. But they did note that much of that really relates to inflation, and they've canceled billions of

dollars in orders. They're trying to right-size those inventory levels. They're seeing the benefits of consumer behavior more on the essentials and the grocery side of things. They need to get through some of that apparel backlog and clean that inventory house up a little bit. But all things considered, it feels like a business that is handling a difficult situation very well. Shares of Walmart up 5% today, so are shares of Home Depot. Second quarter profits and revenue were both higher than expected, and this was not a beat by a penny situation either with Home Depot. Same-store sales, nearly a full percentage point higher than expected. This is about as good a quarter as

you could have wanted to see if you're a Home Depot shareholder. Yes. I am very happily a Home Depot shareholder and I foresee in the future owning more of these shares. It's a business that I'd like to hang on to for a long, long time to come because it feels like a broken record. Go back and maybe I was thinking about it as reading through this earnings report and then going through the call earlier today, it made me think of MasterCard and Visa back in the day, when you and I would have these conversations on a quarterly basis and just being like, God, these companies knocked it out of the park again. Hey, do you own shares? No. Do you own shares? No. Why don't we own these shares? Well, eventually you wake up to reality

and you fix the situation. I think with Home Depot, it is just another very good quarter for a company that really does hold the lion's share to this point of just a tremendous market opportunity, resilient space, and home improvement. Now, Lowe's is making great strides there, thanks to Marvin Ellison, but Home Depot is certainly still performing very well. You look at the sales numbers there, $43.8 billion for the quarter that was up 6.5% from a year ago, comp sales up 5.8%, and U.S. comps up 5.4%, that all translated to earnings per share growth of 11.5%. It's really hard to find something to complain about in this quarter. They reaffirmed guidance, which is really nice to see, particularly

as we're starting to see a little pressure maybe in the housing market. We're starting to see folks backing out of deals. The nice thing, though, is that you see people backing out of deals and you see people making decisions to not sell and rather stay in the home, normally the next step after that decision to go ahead and stay in the home is to undertake some sort of a project, undertake some sort of a home improvement project, and that's translating into strong pro-growth for Home Depot as well. Look at big-ticket comp transactions, those transactions that were over $1,000, that was up 11.6% for the quarter. Ultimately, much like Walmart, they are seeing inflation play a role in the business. The average ticket

increase was 9% for the quarter versus transactions, which fell 3.1%. That ticket increase, they said in the call, was driven mostly by inflation. No surprise there. But it's a company that's able to cope with that. While they saw a little bit of a tick down in gross margin, they are managing the expense line very well here. Operating margin actually grew in the face of gross margin coming down. Strong expense management and all things considered, I think shareholders such as myself should be very happy with the way the quarter shook out. I'm glad you mentioned the average ticket price because that caught my attention as well. The average ticket for the quarter is now $90. Am I correct in assuming that

when they talk about the average ticket, that's excluding the business, the pro category? That's just average folks like you and me going into Home Depot? Or does that include the professional side of the business? No. My understanding, that includes everything. Now, I would need to go double-check that. I would want to make sure to double-check that before I answer that with certainty, but my understanding is that the ticket is the ticket. But regardless, I think the point does remain that you see a very strong DIY do-it-yourself consumer as well as a very strong pro side of the business. They did note a little bit of seasonal weakness in the DIY, the do-it-yourself consumer. They don't seem very concerned with that at this

time. It's something where they can't necessarily attribute it to some of the growth that was pulled forward over the last couple of years versus perhaps some seasonality. Maybe that's something to keep an eye on going forward is just the state of the do-it-yourself consumer. But again, you've got a business that focuses on such a large market opportunity and tackles it from so many different directions. Then ultimately, it results in a company that does a very good job of returning value to shareholders. They paid $2 billion in dividends for the quarter, they spent $1.5 billion on share repurchases, and you've got a share count that's down 11.5% since 2018. Very well managed, tremendous market opportunity, obviously resulting in attractive gains for shareholders. I think

shares for Home Depot, if I'm not mistaken, are up better than 120% over the last five years alone you stretch that timeline out, it just seems to get more and more attractive. Another one of those businesses where I liked it, it rarely ever looks like it's on sale, and that is for a reason, because it's just such a high-quality and resilient business with tremendous focus. In less than 24 hours, we'll get quarterly results from Target and Lowe's. You look at what we just talked about with Walmart and Home Depot, and fairly or unfairly, It seems like the bar has been set for both Target and Lowe's. Yeah, it does feel like, and it also feels like, particularly given Target's last

report where it was obviously a little bit of hand-wringing there, it feels like an opportunity for them to maybe set some more positive expectations going forward. For me, with Lowe's, I think we'll see a lot of similarity in the consumer behavior between Lowe's and Home Depot. I think with Lowe's, a bigger part of the story recently has been that returning value to shareholders. They've just been spending so much more on share repurchases in particular as of late. I suspect that will continue. Again, Lowe's being a dividend aristocrat, obviously, that's a priority, I think, that sits at the top of management's mind as well. I made that reference to MasterCard and Visa earlier. It really does feel like,

in the case of Home Depot and Lowe's, maybe you don't really need to focus on picking a winner. Maybe it's okay to own both because they're very well-run businesses that are just capitalized on the very large markets. Jason Moser, thanks for being here. Thank you. Warren Buffett isn't just one of the best investors of all time. He's also probably the most quotable. Alison Southwick and Robert Brokamp and several other fools, share their favorite Buffett quotes, and why they're relevant to all investors. When times get crazy in the markets, as they sometimes do, look to the wisdom of your elders.

And I can think of one birthday boy turning 92 years young on August 30, who is chock full of elder wisdom for anyone looking to create long-term wealth, and that's Warren Buffett. Bro, I think most of our listeners know The Buff, as no one calls him, but maybe you could give us a brief bio. Well, sure. Why not? Warren Edward Buffett began his career as an investor at an early age, buying his first stock at age 11 and bought 40 acres of farmland for $1,200 at age 14. That's a lot of money for any kid to have, especially back then. How did he get it? Well, he raised the money by working basically various side hustles. He sold magazines door-to-door. He delivered newspapers. He used to buy used pinball machines

and put them in barbershops. And he also worked at his grandfather's grocery store, as did eventual Berkshire Hathaway vice chair Charlie Munger, though they actually didn't cross paths then. They didn't meet until Buffett was almost 30. So, Buffett graduated from the University of Nebraska at the ripe old age of 19 with a business degree. He then applied for Harvard Business School, but they rejected him. So, he instead enrolled at Columbia University to study under the legendary Benjamin Graham, who he eventually worked for until 1956 when Graham retired. Then Buffett began forming investment partnerships with some of his own money as well as getting stakes from other investors. In 1962, he combined all the partnerships into one and

began accumulating shares of a textile manufacturer that owed its name to the 1955 merger of Berkshire Fine Spinning Associates and Hathaway Manufacturing Company. He eventually bought enough shares to take control of the company, and then he promptly fired the president. However, the textile business suffered a slow death and Berkshire Hathaway closed its last mill in 1985. Actually, Buffett called it one of his worst investments. But the name and the stock lived on as Buffett essentially turned it into a holding company that accumulated stakes in companies like American Express, Washington Post, Coke, Geico, and the rest, as they say, is history. Berkshire Hathaway now owns more than 60 subsidiary companies and shares in more than 40 publicly traded companies.

Berkshire Hathaway is the sixth largest publicly traded company in America, and Buffett has a net worth of around $100 billion, most of which will go to charity after he passes away. And finally, despite joking about it for years that they were related, a 23andMe test confirmed that Warren Buffett and Jimmy Buffett are not related. They're still friends, and Jimmy Buffett told CNBC earlier this year that he has owned Berkshire stock for 25 years and never sold a share. But someone who is ever so distantly related to Warren Buffett is Barack Obama. They are seventh cousins, three times removed, according to Ancestry.com. Get out. Really? Yes. Their common ancestor is a guy who immigrated from France in the 17th century.

Crazy, huh? Science. All right. Well, I asked a few analysts here at The Motley Fool to share their favorite advice for investing in life from Warren Buffett, and here's what they had to say. Hi, this is Buck Hartzell. I'm an advisor here on some of the Motley Fool investment services. And I'm bringing you a quote today from Warren Buffett's 1990 shareholder letter. Yeah, we're going way back. And I love this quote. And here's how it goes. The most common cause of low prices is pessimism, sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment, not because we like pessimism, but because we like the prices it produces. It's optimism that's the enemy of the rational buyer.

None of this means, however, that a business or stock is an intelligent purchase simply because it's unpopular. A contrarian approach is just as foolish as the follow the crowd strategy. What's required is thinking rather than polling. Unfortunately, Bertrand Russell's observation about life in general applies with unusual force in the financial world. Quote, most men would rather die than think, and many do. So, what's that mean to us? Pessimism. In times of broad market sell-off, there's a lot of pessimism. And what I've been reminded of by this quote is the fact that the best prices come to us at the times where it's most difficult for us to make a stock purchase. And so, I would encourage all of you to follow Warren Buffett's advice,

be out there and looking, particularly at times when no one else wants to be an investor. When all of the headlines are negative, everything that you read in the newspaper and see on the TV is talking about, in this era, inflation, supply chain shortages, a war in Ukraine, all these bad things. What we have to do instead is look ahead three to five years and think about where the market, and most importantly, the stocks that we're analyzing are going to be. Those are the best times to be stock purchasers. And I would say, don't run away in times of pessimism. Embrace them and the opportunities that a broad-based market brings us. Long-time Fool and Buffett follower Anand Chakravallu here. My favorite Buffettism is,

we like things that you don't have to carry out to three decimal places. If you have to carry them out to three decimal places, they're not good ideas. When you're at a wedding and you think, maybe these two can make it, you're about to carry it out to three decimal places. not a good sign. With stocks, I know many of us, me included, have gotten into heaps of trouble convincing ourselves that a bad idea could work. Recognize any of these ifs? If it can pay down its massive debt balance. If consumers finally start loving its latest products. If the economy holds out for just a few more quarters. If they fund dividends versus dubious growth initiatives. If this also ran, can execute as well as the leader in the space.

If these cost cuts work. If this time it's different. These types of ifs are especially troubling when the upside is barely beating the market. This is why Buffett also says it's far better to buy a wonderful company at a fair price than a fair company at a wonderful price. And why so many fools believe that winners keep on winning. Newlyweds that are truly best friends sometimes don't make it. And a stock that seems really obvious after we've done our research sometimes loses us money.

But the odds are a heck of a lot better than relying on third decimal place thinking. Hi, I'm Alice Lomax, and I'm a senior analyst at The Motley Fool. My favorite Warren Buffett quote is, it's only when the tide goes out that you learn who's been swimming naked. There are a few different variations of that quote out there on the Internet, but the overall gist of it applies. And I think it's pretty timeless advice. It's kind of associated with the global financial crisis of 2008.

But given the bearishness we've been seeing and, you know, the macro conditions right now, I think we are getting that same kind of sense of figuring out which companies may not quite be properly attired, right? And when you look back on the last decade or so, we did have a recession and a bear market in 2020 related to the COVID pandemic. However, it was so fast that it was almost like blink and you miss it. And prior to that, we had very placid and very bullish times where, you know, everybody was feeling really good about things.

investors loved just about any kind of company or asset, often very risky assets. However, this quote is a reminder that regardless, there is going to be cyclicality. The tides are going to go in and out. And even though a rising tide lifts all boats, once the tide goes out, you're going to find out which ones are weaker, maybe took on too much risk and so forth. So bearing that quote in mind, the way that I like to look at companies to try to figure out which ones are properly attired is I look for profitability. I look for strong balance sheets. I love to see a lot of cash and very little debt. I look for strong brands.

I look for stakeholder-centric companies. I love ESG investing as a way to make sure a company has more proper attire and isn't naked. G'day fools, it's Scott Phillips here, the Motley Fool's Chief Investment Officer down in Australia. And is there a better investor to talk about than Warren Buffett? And are there more quotable quotes than those that come from the Oracle of Omaha himself? I very much doubt it. And so the one I wanted to talk to you about among so many I could have chosen, because there's so many great ones, is just this one. Quote, calling someone who trades actively in the market and investor is like calling someone who repeatedly engages in

one-night stands a romantic. And as always, Buffett at his pithy best, but it is such an important point. The investor, particularly the non-professional investor like you and me, has a couple of really, really key advantages. Firstly, we have the ability to use time. to put time on our side. We have the ability to use patience and we have the ability to look and think long-term. We are not required to report daily, weekly, monthly, even yearly, other than to ourselves. Yes, we should keep score, but over the right timeframe. And as Buffett says, to invest is to hold your shares, your stocks for the long-term. David Gardner would tell us and does repeatedly, that long-term investor should be and is a tautology. Investing can only

be long-term. And here's the other thing. What game do we want to play? Do you really want to trade against the professionals? Do you really want to trade against the computerization? Do you really want to trade against the arbitrageurs? I doubt it, because we'll unlikely be better than them. What can we be better at? We can be better at thinking about business. We can be better about setting realistic expectations and we can be better about using time frame and temperament to our advantage. I heartily, heartily endorse, not that he needs it, Warren Buffett's comments about being long-term in our approach to stock ownership and specifically making sure we are not falling into the trap of playing someone else's game. The long game is the only game

worth playing. Investing is long-term by definition. And as Buffett says, calling someone who trades actively in the market an investor is like calling someone who repeatedly engages in one-night stands a romantic. Now, I like to think I'm a romantic. I've been married now for more than a decade. I'm very much in love with my wife. And I think we should take the same approach, a same long-term approach to investing. And on that note, I will leave you to enjoy the rest of this podcast. Well, Bro, we've heard from a few analysts here at The Motley Fool about their favorite Warren Buffett advice, particularly for right now. But I imagine you also have your own favorite advice. I mean, after all, you've been to the annual shareholders meeting and you followed

him for a while. I got an email from once too. I emailed a question to Berkshire Hathaway and the secretary sent back his reply. I was totally surprised. But yes, I do have a favorite Warren Buffett quote, and here it is. The ultimate irony of the investment business is that there's no question that an obstetrician will deliver babies better than the husband or the wife, or if you take dentists as a whole, they will remove teeth or fill teeth better than if the patients try to do it themselves. But in the investing world, somebody who believes in American business and who will seek out the lowest cost way to participate in business and do it consistently, will achieve results that exceed those of investment professionals as a group.

It's the only industry I can think of where the professional's efforts subtract value from what the layman can do himself." That's the end of the quote. I love this because, first of all, it encapsulates the original ethos of The Motley Fool back when we were formed in 1999. The whole idea was, if you put in the time and the effort, especially with this then-new thing called the internet, you could pick investments and manage a portfolio on your own. You don't need to pay a financial advisor commissions or 1% to 2% a year to do it for you. Also, this quote is a nod to Buffett's appreciation for index funds. He thinks they are the right way to go for the vast majority of investors. As I've mentioned on previous episodes of the show, he's mentioned

that in his will, he's directed that the money that his wife inherits, 90% of it is going into an S&P 500 index fund, the other 10% essentially in cash. Because frankly, it's just very difficult to beat an index fund. Now, of course, over our 29 years here at The Motley Fool, many readers have told us they don't have the time and inclination to manage their portfolio, so it's fine to get the help of a financial pro. Just know that, as Buffett says, as a group, they are a net negative for their clients. So, if you're going to hire a financial advisor, make sure you get a good one. All right. So, that's my quote. Allison, perhaps you have one as well? I do. It just so happens I do. The one I'm going to go with that I think is particularly

pertinent for my thinking right now is successful investing takes time, discipline, and patience. No matter how great the talents or efforts, some things just take time. You can't produce a baby in one month by getting nine women pregnant. Why I think this one is particularly pertinent right now is that for more seasoned investors out there, they can perhaps accept the current volatility in the market because they've been there before during previous downturns. They've seen stocks that they love get cut in half, but they've also seen them bounce back in the past. However, there's a lot of new investors out there right now who don't understand that successful investing is a long game. According to a survey by CNBC, 26% of the general public

began investing in 2020. That's 60% of young investors, those 18 to 34, first started investing in 2020 or later. And it's been nothing but a wild and wooly ride in the market the last couple of years. And for investors who thought stocks only went up, I hope they don't lose faith because long-term investing in great companies that you believe in really is one of the most enriching and exciting ways to build wealth. So as Buffett says, it takes time, patience, and discipline to stay the course. And so, I hope that everyone who started investing in just the last couple of years can follow Buffett's advice and the path that he took himself and to stay the course for the long-term, because that's the best path that I know of

to generate long-term wealth. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.