We Study Billionaires - The Investor’s Podcast Network - RWH032: The Vigilant Investor w/ Chris Bloomstran

Episode Date: September 17, 2023

In this episode, William Green chats with Chris Bloomstran, President & Chief Investment Officer of Semper Augustus. This conversation is so rich that it’s been divided into two episodes. Here, in Part 1, Chris explains how to achieve long-term success by seeking a “dual margin of safety” that comes from owning high-quality businesses at attractive prices. He also warns about the perennial dangers of irrational exuberance, which he now sees in hot stocks like Tesla & Nvidia. IN THIS EPISODE YOU’LL LEARN: 00:00 - Intro 04:45 - What Chris Bloomstran learned from his brilliant mentor, Robert Smith. 08:17 - How Chris & Robert skillfully sidestepped the dotcom bubble & crash. 10:00 - What lessons Chris drew from an early investment that fell to zero. 35:17 - Why Chris named his investment firm after a crazily overvalued tulip. 44:53 - What Sir John Templeton saw as the best antidote to financial insanity.  55:38 - How to succeed in stocks by seeking a “dual margin of safety.” 56:51 - How his definition of a quality business has evolved. 1:07:01 - Why he’s skeptical about Cathie Wood’s ARK portfolio. 1:09:02 - Why hot tech stocks like Nvidia are likely to disappoint for many years. 1:11:32 - Why he’s wary of hype & “puffery” about Tesla’s glorious future. 1:17:49 - Why he’s trimmed great but pricey holdings like Costco & Nike. Disclaimer: Slight discrepancies in the timestamps may occur due to podcast platform differences. BOOKS AND RESOURCES Join the exclusive TIP Mastermind Community to engage in meaningful stock investing discussions with Stig, Clay, and the other community members. Chris Bloomstran’s firm Semper Augustus Investments Group “Extraordinary Popular Delusions & The Madness of Crowds” by Charles Mackay “The Rise & Fall of American Growth” by Robert Gordon William Green’s book, “Richer, Wiser, Happier” – read the reviews of this book Listen to Stig Brodersen’s April 2023 interview with Chris Bloomstran, or watch the video. Follow Chris Bloomstran on X (AKA Twitter) Follow William Green on X (AKA Twitter) SPONSORS Support our free podcast by supporting our sponsors: River Toyota Range Rover Sun Life SimpleMining The Bitcoin Way Onramp Briggs & Riley Public Shopify Meyka Fundrise AT&T iFlex Stretch Studios Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Learn more about your ad choices. Visit megaphone.fm/adchoices Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm

You're listening to TIP. Hi there. I'm really excited about today's episode of the podcast. I guest is Chris Bloomstrand, who's a superb investor. He's the president and chief investment officer of a firm in St. Louis called Semper Augustus. And this conversation is really so rich and so packed with practical lessons about investing and business and life that I didn't want to cut it short. So for the second time in the history of the podcast, I've turned to. this interview into two episodes. In part one, which you're about to hear, Chris shares what he's learned over the last three decades about how to navigate the madness of financial markets

so that you can survive and thrive through thick and thin. So we talk about how Chris and his mentor, a brilliant but unknown investor who had previously survived the crash of 1929, managed to sidestep the dot-com bubble that burst back in 2001. We talk about how to protect yourself from these crazy outbreaks of irrational exuberance, which go back at least as far as 17th century Holland, where investors were prepared to pay almost anything to own the rarest tulips. And it's not a coincidence, as you'll hear, that Chris actually named his investment firm after the most coveted of all tulips, which was called the Semper Augustus. And that's really an ironic reminder that investors can be dangerously irrational. Some of the lessons in this conversation are timeless and

foundational, but Chris also warns very specifically about the perils of betting now on hot tech stocks like Tesla and Nvidia. Why is he so wary of them? Well, it's an age-old story really about excessive expectations, lots of hype about their supposedly limitlessly rosy future, and also a failure to remember the most fundamental principle of investing, which is that valuations matter, that you can never afford to ignore the price you pay for any stock, regardless of how attractive the business might be. If you want to outperform over the long term as a stock picker, I think Chris is an excellent person to study because he shows what it takes to win this game of beating the market and truly just how hard it is. As I think you'll hear in this conversation,

He's ferociously intelligent, but he also has a lot of other qualities. He's got a calm temperament. He has this intense drive. He's got a very independent mind. He also has a relentless passion for analyzing businesses and solving the investment puzzle, which really is not just about wanting to get rich, but about just being fascinated intellectually by companies and business models. Equally important, he's a profoundly skeptical investor. He doesn't really take anything on trust. He questions everything and he doesn't let down his guard. The word that came to mind to me when I was thinking of him earlier today was vigilant.

And when I think about all of these qualities that you need to be a successful long-term stock picker, it helps me realize that I would much prefer to hire Chris or someone like him to manage my money rather than actually compete with him. And I think that self-awareness is important because one of the great lessons I learned while writing my book, Richer Wiser Happier, is that it's smart to stick with games that we're actually equipped to win. In any case, I hope you enjoy our conversation,

and I also hope that after listening to this episode, you'll then listen to Part 2, where Chris talks in depth about what he's learned from Warren Buffett and Berkshire Hathaway, which he studied as deeply as any investor I know. Thanks so much for joining us. You're listening to The Richer, Wiser, Happier Podcast, where your host, William Green,

interviews the world's greatest investors and explores how to win in markets and life. Hi, folks, I'm absolutely delighted to welcome today's guest, Christopher Blundstrann. Chris, it's lovely to see you. Thank you so much for joining us. Bill, it's great to be here. I mean, as much as I loved your book, I've, in the last few weeks, knowing I was coming on your podcast, I've been listening to

probably through a third of them. And they're just phenomenal conversations about not only investing, but life and kind of true to the spirit of the book. So it's a real privilege to be with you today. Thanks. Thank you. It's a real delight to have you on. One of the reasons why I wanted to get you on, actually, is that Guy Spear said to me months

ago, you need to get this guy on. He said, Chris is brilliant. And he has a really interesting mind and he's really unusual. And so I had read your letters over the years. I think I'd read your letter for the last three years, which is an amazing thing, as we'll talk about. I mean, it's a huge thing. But it's lovely to meet you finally in person, at least virtually remotely. And I wanted to start really by chatting with you in some depth about an extraordinary but largely unknown character who played really a transformative role in your life. This is a man called Robert Brooking Smith. And in your 2021, letter to your clients, you wrote, if the world knows Benjamin Graham as the father of value investing, I hold Robert Brookings Smith as its godfather. I contend he is the only investor to have nailed 1929, 1932, and 2000 spectacularly well. And he's also just a really fascinating character personally as well. So can you tell us who Mr. Smith was and how he came to be client number one

at your investment fund, Sample Augustus. And then let's get to what you learn from him. Wow, sure. So had I not included that section in the letter, which really was, it dawned on me, I should do it with an interview I'd done with Jim Grant. And we touched on kind of our first client and who he was. And I told a little bit of his story. Jim called me after he published it and said he thought it was his favorite interview.

Well, he called me right before he published. said, you know, the one thing you didn't do was mention his name. And I said, well, you know, A, he was very private, but, you know, we're very guarded with our clients. And I said, I really just not in a position to tell you who he was other than he was Semper's first client and that bit of background. And so I, so his piece turned out so well, I thought, gosh, I mean, his story really deserved to be told. He was a remarkable man. So I called his daughter and told her what I was thinking about, what I was working on for the letter. And she loved the idea and encouraged me to do it.

And so I set out to tell a little bit of his story as an investor and a human being through what I view is the main secular peaks and troughs over the past century and kind of linked it with what Warren Buffett had likewise done at various peaks and troughs. And so I set out to succinctly try to tell the story of this great guy that was born in 1903 to a fairly wealthy family here in St. Louis, they had a brokerage business that was started in the 1800s that still exists by name today, never got acquired. In any event, he went off to Princeton and to study and was in the choir, but he rode crew. He was on the football team and came back from school and joined the brokerage business in his mid-20s, early 20s, I guess. By 1925 or so, his father had passed away, and he had moved up the ranks a little bit as a

youngster. But in early 1928, he would have been about 25 years old. And he believed there was a bubble in the stock market and in the economy. And so he took all of his families, you know, substantial at the time capital out of the market and invested in bills and gilts and some railroad bonds and any clients that would follow the heat of a young broker, likewise did the same. And if you know your stock market history, you'll know that the stock market peaked in the fall of 1929. And so if you go back in time and look at kind of when he sold the portfolio down, the Dow Jones would have been about 200. Well, it didn't peak until hitting 381, I believe it was some year and three quarters later, which would have been brutal. I mean, it would have been like

getting out of the stock market in 1997 or 1998, thinking there was a bubble and just watching things continue to skyrocket higher, especially for the outside clients. And so obviously vindicated in the end and the Dow plunge 89 percent, we wound up in a depression. And he waited until the bitter end. And he waited until 1932 to put the capital back to work and reasoned at the time that you could buy businesses like General Electric for less than the cash in the business and kind of a genuine net of working capital. So where Ben Graham was writing security analysis, having lost an awful lot of money in the 1930s, Bob Smith was picking up just gems of assets and would have been hard to do because, you know,

most investors and most people in the stock market had lost so much that, you know, even if, even if you had the wherewithal to not panic and sell on the way down, you needed to live if you need to live off your portfolio. And you had, there are a couple of great books out, but they were, you know, the doctor class and the lawyer class professionals had clients, but the clients didn't have any money. So nobody was getting paid. And so you had to liquidate your stock portfolio. Well, if you had capital and weighed back in at, you know, very incredible discounts, that's

what he did. And then. Yeah, I think you said that he bought GE at the equivalent of 12 cents per share in 1932. Yeah, by the time I got involved in the late 90s, the dividend was multiples of the cost basis, even the quarterly dividend was multiples of the cost basis, which is kind of incredible. But that's what happens with what had been a good business over a lot of years. And GE wound up ultimately not being a great business when we figured that out. But that's an astounding thing if you think about it, even the fact that he not only did this

extraordinary thing that you mentioned in 1928, where he saw that there was trouble coming. Then he gets back in in 1932, but then equally astounding is that he holds something like GE for the best part of 60 years. And I think you've said, maybe it was in that 2021 letter, which was terrific. You talked about how he picked up various other great stocks along the way. I mean, he bought, I think, Merck and Dow Chemical and AT&T in maybe the 30s, and then later things like Walmart and Microsoft and Sun Microsystems. Can you talk about how he was able to hold these things for so long, because it's not just, it's not just the timing, it's the extraordinary patience of the man. It's remarkable. Well, he was a little like

Warren Buffett in the regard that I don't think he favored sending money to Washington, D.C., so, you know, to the extent you had capital against taxes, he was averse to that and adopted what he called for years and years, investment philosophy of benign neglect, which essentially it's a little like the coffee can approach where some of your winners really wind up dominating the portfolio. I mean, by the end, by 1998, when I got involved, GE was half the business. But I also think over the course of his life, he observed some things. You know, you had kind of a somewhat of another secular peak in 37, but that was the point where Germany was on the rise.

He was actually in Germany doing some work and had a lot of friends in Washington. The family was very well connected. and he had some very early intelligence. He and a friend of his Ned Potsl who wound up being an attorney in St. Louis, who wound up running the OSS, which was the intelligence arm of the military during the war. But, you know, Mr. Smith had some, he had a fair amount of intelligence that Germany was mobilizing and, you know, he didn't trust the communication. So he got on a ship, came back to the states, met with the Pentagon and let the, or the

war department, I guess the Pentagon at the time and let the folks know what was happening. And then by the time the war actually broke out and Japanese invaded Pearl Harbor, he called his friends in the war department. He was in his late 30s now at this point, or mid-30s, late 30s. And he couldn't bear to not be in the fight. And they said, you know, Bob, we're not going to put you in the fight. You're too old. I mean, he says, no, I've got to be in the fight. And so they put him in charge of a training vessel on Lake Michigan with still the Navy's big training facility.

And ultimately, I guess he called him back and said, you know, this is not really the fight. This is not what I signed up for. So he wound up, ultimately second in command on a light carrier, the white planes, and found himself deep in it and was in the battle of the Philippines. When I met him for the first time and throughout his time when he was in the office, he had pictures in his office of the battle of Lytte Gulf, which was the major battle, the turning point of the battle where we decimated the Japanese fleet and cut off their oil lines and supplies. and reverse fleet couldn't get back for munitions by not having the stranglehold of the Philippines. And he was in it. And he was part of the battle. And he would tell me these stories.

And he told me at a point in life, he said, Chris, you know, when you get to my age, it's a bittersweet, sad thing. He says, I'm so fortunate and blessed for the relationship with you. We'd got to be very good friends in his last four or five years. But he said, my friends are all dead. And so he'd confide in me a lot of things. And he said, you know, he would have nightmares throughout his lifetime. about that battle in particular.

It was the first time the Japanese had used a kamikaze strategy. And he told me the stories about the jihad of the kamikaze's dive bombing his ship. You know, one exploded just a few feet from the ship, damaged the whole of the ship. They wound up having to take the ship back to San Diego after the battle. But another adjacent carrier was destroyed by kamikazis. It may have been a, it may have been a destroyer. But, you know, he had pictures of the boat sinking and, you know, the sailors in the water, just a harrowing thing.

And so, you know, I think scarred by that. So here he is at war and the stock market by 1942 was really, had just been decimated again from the 1937 recovery high. You were back to, I think, 90 on the Dow. You got down to 41 and 1932, but back up to almost 200 than. So here he is. And surely at some level, you know, you're in the Pacific Theater, but you're paying attention to the stock portfolio because you come from a family of money and you're in the

money business. And so I think at the point, even Warren has talked about this. It's, you know, if things looked as grim in 1942 and America wound up being what it was and you could survive that on slot, you just let things go. And so I think, you know, he probably came to this philosophy of not selling things because he obviously sold things in 1928 and then wound up not selling things. But he came back and wound up leading the effort to start shrinking the Reconstruction Finance Corporation. Businesses had been, you know, couldn't get loans and couldn't get insurance contracts. The RFC had to run off. He told stories about having, they were selling off the military planes and ships, some for scrapping. But they had to shrink

that enterprise. And he led that effort. Then eventually got into the banking world and would join mercantile trust here in town, ran the investment operation, eventually became vice chairman of the bank. And so didn't go back into the brokerage business, but ran substantial institutional trust pools of capital. And by 1998, we were introduced by mutual acquaintance, who a gentleman had heard me give a speech and told Bob, you need to meet Chris and Chris, you need to meet Bob. And so we got together, he and his nephew and talked for a couple months. And he told me at a point he'd love to have me take over the family portfolio. And I said, well, I'd be delighted to. They weren't a client of the bank of the bank I worked for.

I was running money for a bank trust company at the time and ran a mutual fund and was working with trust accounts and some public pension systems, ultimately running the St. Louis operation for what was a Kansas City-based bank. And so, you know, we met in his office in Kansas City area in St. Louis. rather. And so he said, you know, but you can do it on one condition. You can't be working for a bank because even though I ran a bank and it was vice chairman of bank, I hate banks. He says they don't manage money the way I think it ought to be managed. And my concentrated positions, I'm loaths on it, it bothers me to know when to be signing letters of indemnification for my concentrated positions. I've managed the portfolio. I'm comfortable with these positions. And so, you know, after a month or month and a half of talking, we long, Simpter and he asked me to come set up shop in his family office in St. Louis. And so over the course of his last years, he made it to almost 100 years old. This was late 98 when we got together and his gym put it in his interview.

We joined forces, which I love the term. He'd come to the office every day and didn't tell about his last years. I had to go see him at the house, but we'd carve out an hour, hour and a half every day. He wanted to spend time with me and I really enjoyed spending time with him. And his friends like Ned Putzel, who ran the OSS, was on the foundation board that we had. And in terms of the portfolio, I believe there was a bubble. He believed there was a bubble, which was the impetus for our getting together. And so worked up a plan to start throwing assets into a foundation, his foundation,

and set up some credit accounts, which charitable remainder trust accounts that would feed he and Nancy his life income during their lifetimes, which would eventually wind up in the foundation, which then would give and make grants via, you know, his family overseeing the grantmaking process. But the beauty of doing what we did in the late 90s is you had a bubble in blue chip stocks in 98, you know, Coke within the Berkshire portfolio. Mr. Smith had some Coke. I was trading at 50 plus times earnings. The GE position was over half the capital.

And at that point, more than two-thirds of the business was finance. Jack Welch had run it for a bunch of years. There's a great book out by Bill Cohen on the history of GE, which is I think a must read for anybody. But I thought GE was really a house of cards at that point. The leverage was off the charts. The off balance sheet debt was crazy. And they ran the business on a,

you've got to make the quarterly number approach. And Jack spent a lot of time with the sell site on Wall Street. And I said, you can't have these reinsurance businesses, these insurance operations inside of holding, company and run them on a short-term basis, you're going to wind up with problems. And so he said, I'm back to benign neglect. He says, I get it. He said, gee, was so valuable for the family that why don't we sell 90% of it. And so, you know, I was able to sell 90%. And that was before the one for eight stock split between 50 and 60 bucks a share, the stock's still down 75% are thereabouts, 80% from

where we sold it. And the interesting pivot at that point was in concurrence that there was a bubble and his belief that it looked an awful lot like 1929, had discussions about whether it made sense to just sit in cash. And the market, as you know, William was so bifurcated that you wound up with a tech bubble by early 2000. Well, anything value related under the surface was being given away. If you were a small cap value fund manager, you were getting redemptions in the last couple of years daily because people wanted to chase the NASDAQ bubble.

and NASDAQ was up something like 84% in 1999. And, you know, the world just had lost confidence in real businesses. And so mid-caps, small-caps, real businesses just got crushed. We were able to build a portfolio of real businesses trading for six, seven, eight, nine, ten, 12-time earnings. And so pivoted into a very undervalued corner of the market, which wound up, wouldn't have expected it. But when the S&P 500 did fall almost 50%, then the Aztec fell 80%. And we wound up making 30, 35% during that 2000 to 2002 bear market. And so I think you said that the stocks that you bought him are up over 10 times since then.

So you were saying that the delta is actually 50x because the stuff like GE would have been so killed. Is that right? Well, against the GE position. Yeah, you think GE's down was down 80% and we were up over 10x. And so the performance record doesn't give you that delta, but you take a million dollars to $200,000, or you take a million dollars to $10 million or more than $10 million today. Yeah, the delta is a 50.

And it was very fortunate, it was very fortunate that we got together. And it was a highlight of my life because in addition to being a great investor, he was one of the most kind human beings that I'd ever met. we developed such a great friendship. He was brutally honest. I had episode, well, I grew up in a household with a kid with an individual that I really couldn't tolerate. My mother remarried when I was seven.

She left my father. And I grew up seeing a lot of lack of ethics and lack of morals and zero kindness and zero treatment of human beings. well. I mean, the way women were treated was abhorred. And so Mr. Smith was anything but that. He was the exact opposite. And he was just a great human being. He was philanthropic. He was modest. For his whole life, he'd given a lot of his money away charitably. And then ultimately started doing it through the foundation. But it was always anonymous. And certainly the big beneficiaries in St. Louis of his benevolence knew who he was. And they'd come visit the house.

house. And it was fun for me to get to know the directors of museums and the garden and the zoo and things like that. But he was just, he just, he was very modest. And which is why I thought it was so important to tell his story. And so I wound up when I, we published the letter, I sent it down to his daughter. And she had just lost her husband. And I didn't hear back for her for two or three or three weeks. And I thought, oh, hell, this has gone badly. I don't think she liked what I wrote because she would have gotten back to me sooner. And she called me three, four weeks after I'd sent it to her and said, yeah,

Chris, this was the most wonderful thing. I did, I got very emotional. I cried. I stirred up so many memories of dad. And,

um, you know, anybody that knew I loved him and to be a friend of his and, and to be a mentee of his really, and to be able to spend the, the regret I have is I didn't, we didn't do video recordings like we're doing now of all of our conversations.

I mean, there were so much. We should, there, there should be a movie. There, there should be a book. Let's take a quick break and hear from today's sponsors.

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Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right. Back to the show. There's a beautiful thing in your letter where you talk about what a giant of a man he was. And you say shunning the spotlight in the extreme, a model of living not within but under one's means, humble, brilliant, hilarious and charitable, kind to a fault.

And you talk about how he would give money to charity, but it would always be anonymous. and you talk about how he was playing tennis to the very end, albeit doubles in the end. But was this... He said he couldn't quite cover the court the way he used to, and so he had to resort to the doubles game. Yeah. Yeah. And then you say, also, please take from the story the importance of saving thrift and living well within one's means.

And so it seems like there are a lot of lessons from him as an investor, but also personally in terms of his courage, his sense of service during the war, his modesty. humility, lack of display and ostentatiousness and arrogance and stuff. Is that fair to say? If I had to pick a man, I tried to pick a human being to model one's behavior and life after he'd be it. And I know my little segment of my letter didn't do justice to the giant of man that he was, but I hope it was a nice tribute.

And it really felt great. And it meant a lot to be to be to be able to tell the story. story, at least in brief, the way I was able to do it in the letter. And I'm really thankful to his daughter for blessing the project, because I was, you know, so, always so impressed with how private he was and how modest he was despite the wealth. I mean, he didn't flaunt it. And, you know, he was, he was such a curious guy. I mean, even after retirement from chairing the bank, he had all these great projects going on and he was a voracious reader. He probably, he, he, He would have been a lot like Charlie Munger in that regard.

He was incredibly well read. But he had these venture projects going on all the time. He had a smart card technology business. And at the very end, he thought we were going to trend toward needing to have digitization of health records. And he had a medical card that had a smart chip embedded in it where you'd be able to store your medical record. So he was working with Washington University here in town about some things that have, you know, come to pass and in other corners. But he was curious to the end.

He was always trying to figure out what was going to happen next. And I think, you know, for somebody that would have loved seeing how the next 100 years would have evolved, it would have been, it would have been Bob Smith. He was truly was a giant of a man. Yeah. And it's interesting. He, I read a couple of obituaries of him the other day. And there isn't much out there.

I mean, there's something, I think, in a Princeton alumni publication and a local publication from the place where he lived. where he lived. And he died at 99 in 2002. And here we are 121 years after he was born, 120 years after he was born and we're still chatting about him. It's an amazing thing, right? It shows that when you meet someone who really is remarkable, it leaves this kind of enduring mark. So I'm glad to have a chance to talk about him. I wanted to get a sense of of what you think he saw in you, because in some ways, you were a kind of unlikely person for him to pick up in that way and to entrust with his family's fortune after all of those years, because you must have been about 30, right? And you'd studied finance at the University of Colorado

in Boulder, and you'd worked at this bank trust company, and you'd manage money for a few years there, and you managed a balanced mutual funder. So you were clearly smart and driven and talented. But I'm wondering if there was other stuff, like if the fact that your father was Marine and he had served in the Navy or if it was the fact that he played football at Princeton, you played football very seriously at the University of Colorado, where there was something that he saw in you that just resonated really deeply with him? I don't know. We immediately hit it off on the day we met, I was in my office and received a call early

afternoon from his nephew, who said, look, I'm sitting here. I'm with my uncle. He said, my name's Bob Smith, and I'm with my uncle, Bob Smith. And a friend of ours said we should get together and could we get together. And I reached for my calendar to set a date. And I said, sure, I'd love for me. He says, no, I actually mean, like right now today. He's, oh, I wound up driving out.

And we sat around for, oh, the afternoon and wound up going to dinner that night. And so probably spent nine or ten hours talking in. You know, he had the, I mean, he loved the stock market and he loved businesses. And I hadn't seen the portfolio, but, you know, he would, He'd be bringing up all of the companies that he owned. And I suppose it might have been just my ability to talk about just about everything he owned in depth with just the work that I'd done just for the few years that I'd been an investor. I was 29 years old. We started the firm.

We started December just slightly before my 30th birthday. But as I say, we spent over a month, month and a half talking pretty regularly and strategizing a bit and just getting into the only as a human being. and yeah, I'm not sure we got into much of my life story at the time, but from a personality standpoint and from a temperament standpoint, I think we hit it off. I loved his story about what he had done in 1928. I loved how he'd go about finding other businesses, the notion of minimizing the tax burden all resonated with me and, you know, what I had learned to that point. And at that point, I was in the Berkshire world when, you know, when I finally, too late discovered Berkshire Hathaway, but I didn't follow Berkshire until 1996 when they

issued the B shares and found the stock too expensive. I was stunned at the front page of the offering document when they did the B shares. They wrote the chairman of the vice. He's not, neither the vice chairman nor the chairman find the shares sufficiently, you know, reasonably valued or undervalued to, we are, we wouldn't recommend if we purchased our families and thought, Well, who in the world does this? And was getting my mind around Berkshire. And at that point, had read probably all the chairman's letters back to 1977. And so that resonated with me.

And I'd already developed my own thoughts on executive compensation and stock options and the way accounting was abused. And that was very much a Warren Buffett thing. And that was very much a Bob Smith thing. So I think it was just our interest in businesses. And I find myself today, my whole frame group. are folks that just love to sit around and talk about stocks. And if we're not talking about stocks, we'd kind of get bored.

And he and I love to talk about the markets and stocks. And it was later as we were working together that the friendship really evolved. And I got to really understand who he was as a man and anybody that's off to war and is in battle and sees death and experiences friends dying. We usually don't talk about it. And he had said he rarely in his lifetime had talked about the war. But for whatever reason, he was very, very candid and very open about that chapter in his past. And I'd love war history, World War II history, revolutionary war history. So I was fascinated with that.

But it was just his it was his temperance. It was it was his even keel approach. You know, he wasn't concerned that he was missing out on the tech bubble. He said, I've seen this picture show before. and it's getting in battalion. There was just a lot of commonality to the way we thought and looked at the world, probably beyond the stock market and the economy. But so it was a good fit.

From a personality standpoint, it was good. But I think had we been in the same generation and known each other, I think we would have been best friends. So you started the Central Augustus Investment Group. It was sort of late 1998, early 1999, you got launched. So really, this is about when I was starting very, seriously as a financial journalist. And so I remember living through this stuff and writing for magazines like Forbes and Fortune and money. And there was always this kind of credulousness in

some of these magazines where they'd be writing about these crap companies that, you know, someone had just made $5 million off their tiny investment. And it was very, it was very intoxicating and sort of head spinning. And at the same time, I was kind of a born contrarian outsider. And so I never owned any tech. And I looked at it like, it was. This is just moronic. And I ended up investing with Marty Whitman at the time. And so for me, it all sort of seemed nuts, but it was very intoxicating. And I was struck by the name that you chose for your firm,

because it was a sort of ironic nod to the fact that this was clearly a bubble. There was a parallel not only with 1929, but also with the 17th century. Can you talk about why you call the firm Semper Augustus, what the historic connotations of this beautiful name actually are? Well, it really was a contrarian bias, and I don't know if that's innate, if it's born, if it's learned, if it develops based on your life history. But I found myself very contrarian, very skeptical from the get-go. I'm the first stock I bought shortly went bankrupt.

And that makes you fairly jaundiced right out of the gate. And so I've always been fairly skeptical or everything I've read. But I love finance financial history. Even in college, I was reading everything I could trying to figure out the investing game and eventually got to Kendall Burger, manias panics and crashes. And the extraordinary popular delusions of madness of crowd and all the Austrian school. and during what was the first real mania in tulip bulbs in Holland in the 1630s, the Semper Augustus was the most inflated of the bulbs,

and there are great stories about that episode and there are debates as to whether it really was a bubble. But there was a bubble in real estate and there was a bubble in the economy, and there was a bubble in trade. And the extension of that was probably this group of collectors that like tulips and The Dutch have always liked flowers. In any event, the Simper Augustus was the most highly valued of all the tulip bulbs at the peak in 1637. In today's dollars, I don't know what would have gone for three or four million dollars. They say you could have bought a flat on the river and Amsterdam for the price of one bulb.

And interestingly, the bulb itself was genetically flawed. It couldn't reproduce, which was what produced, if you know, the picture of the flower. the red and white really streaking in the bulb. But yeah, I thought, and part of the reason we got together, Mr. Smith and I, was this sense that there was a bubble. And the bubble was, again, first in blue chips. The bubble was not the tech bubble yet. The tech bubble developed. But those big blue chips, the GEs and the Cokes, rolled over in 1998 about the time we were starting the firm. So we couldn't have sold the portfolio. We couldn't have done that at any better time. And then in that last period is when all the small caps really got cheap and the midcaps really got cheap

and some Japanese companies really got cheap. And Berkshire itself really got cheap after they bought in January, Berkshire got cut in half and it was only after the stock dropped by half that from three times book, we paid 1.05 times booked for it. But the tech bubble by the end of 98 was raging and believing it was a bubble and what a fool to start a business in the middle of a bubble. so the use of the Semperor, which I always kind of thought I'd start a firm at a point and harbored that name. I thought, oh, my God, somebody's going to beat me too, and I wish I was praying every day that nobody would beat me to the name Semper Augustus.

I actually dug out extraordinary popular delusions in the madness of crowds, which is the book where I think you first read about the tulipomania bubble back in the 1630s. And there's this beautiful passage in it where it's talking about how crazily overvalued the Semper Augustus was and how it says so anxious were the speculators to obtain them. The one person offered the fee simple of 12 acres of building ground for this particular tulip, the Harlem tulip, and then another guy bought one for a new carriage, two gray horses and a complete set of harness.

Then there's an amazing story that's worth telling just because it's so ridiculous, which I'm sure is untrue, but I think it's too good to fact check. some guy basically comes, I think, to deliver something to this. Labor, a laborer. Yeah, it's a sailor. It says the sailor, simple soul. And he sees what he thinks is an onion. And he takes it with him and he's sitting on a bunch of ropes and is eating the onion

and doesn't realize that actually he's eating this unbelievably precious Semper Augustus Tulip. And so he ends up getting arrested for felony against this merchant. But then there's this really beautiful passage that I, I just wanted to refer to because it all bursts and it's so reminiscent. There's a count from 1637 of what's happened in March 2000 when that bubble burst or with the nifty 50 or with more recently when tech stock started to blow up or certain cryptocurrencies blew up.

And it talks about how suddenly the confidence starts to go out of this thing and people start to default and people are suddenly left with these valueless things. that nobody will take. And it says, the cry of distress resounded everywhere. And each man accused his neighbor. The few who had contrived to enrich themselves hid their wealth from the knowledge of their fellow citizens and invested in the English or other funds. Many who, for a brief season, had emerged from the humbler walks of life were cast back into their original obscurity. Substantial merchants were reduced almost to beggary, and many a representative of a noble line saw the fortunes of his house ruined beyond redemption. And so there's something just

so wonderfully resonant about it, right? Like this is just sort of a part of human nature, and it just kind of repeats itself again and again. And it's done it for certainly the last four centuries and obviously much further back than that. I thought we'd never see what transpired in late 99, early 2000 again. The Janus of the world captured. sharing half of all of the flows into the mutual fund complex and owning the same 20 stocks that all traded it. What we wound up being Kathy Wood, you know, circa 2021 type valuations, the excesses in accounting, the excesses in compensation. And, you know, here we are. We did the same thing. We've done the same thing in the last cycle. And this last period here in the last year,

year and a half feels an awful lot like what happened in the late 90s and even throughout 2000. You had the big break in March of 2000, but you had a recovery. There's always a recovery bouts. It was 1929. The market fell from 381 to 41, but it recovered a 190 and change by 1937. Then, of course, it sell off again, but that was World War II. But you had a recovery in 2000 from March. You had a big sell-off.

And I don't think the S&P 500 hit its eventual high until September of that year, despite a big sell-off in the interim period. And so, you know, you had the big sell-off last year in the national. Azdaq over 30% than Azdaq 100. S&P was down 18 and change on a total return basis. And here you are. These entities are all closing in on their 2021 closing prices. You've had this recovery rally and valuations in some of the real businesses

were starting to get reasonable. I think a lot of the stuff that was so speculative is still somewhat washed out. All this, but you've got recoveries and businesses that really shouldn't exist that are up 100, 200, 300, 400 percent this year. And, you know, they're not near back to where they were. So the generals, the big five or seven companies, have recovered. But that same thing happened when Microsoft first broke and Sun Microsystems first broke. And Oracle first broke during 2000.

They all had a big recovery back to September. And then it just ground down over the next two years, 2001 and 2002. So it was three years of pain. But nobody believed it. You didn't believe the first sell-off. And I think there's this. this ebullience today, there's this bullishness that's returned among the tech crowd in particular that believes that, you know, we're backing off to the races.

And as Bob Smith said of the 1920s, you know, I've seen this show before and history repeats and we're repeating it again. And that's the extraordinary powerful ablutions mass crowds is Charles McKay. And it's a wonderful read. My first read of it and I read it many times turns out to be the abridged version. Turns out there's a giant version, which I've now bought three copies of, which I haven't read yet. But it's going to be like reading War and Peace or the Bible. It's a pretty weighty tone.

Yeah, it's really fun. You don't know entirely whether it's factually accurate, but as Tom Gannon might say, it's directionally correct. And it's elegantly done. And one of the things that's very interesting actually is that I think I write about this briefly in my book, that Sir John Templeton loved the book so much that he republished it through his Templeton Foundation back in the 1980s, and he wrote a forward. And so I was saying in my book that his forward basically offered a rational antidote to financial insanity. And so what Templeton said in his forward is he said the best way for an investor to avoid popular delusions is to focus not on outlook,

but on value. And so he talked about the importance of grounding yourself in very specific, specific valuation measures and in a critical analysis of a company's fundamental value. And that very much meshes with what you've done through your career. I mean, you're almost a maniac in your annual letter to clients where you tear apart the financial statements of Berkshire in unbelievable detail. And you're going into the footnotes and the like and really explaining what the economic value of these businesses is. Can you talk about that the importance of, in a way, this whole other system of investing, right? On the one side, we have the casino where it's full of these

charlatans. Like you've talked about charlatan promotion, right? Whether it's the SPACs or crypto trading or meme stocks and the like, all these things where people are somewhat unscrupulously making hundreds of millions of dollars from heavily promoting their SPACs or, um, luring you into massively overpriced funds and the like. And in a sense, your early life was a kind of introduction to the casino element of it, right? I mean, back when you were a college, the stock that you lost money on, where you lost, I think, something like $7,000 was something where you'd read about it in Hurt on the street in the Wall Street Journal and kind of rolled the dice and then realized,

oh, God, I knew nothing about this. So in a way, I see your career as a kind of renunciation of the casino element. of investing and a shift towards what Templeton is talking about, which is, no, ground yourself, anchor yourself in fundamental valuation. And that's what's going to keep you safe. And this strikes me as such an important thing to explore for our listeners, because this is how they're going to protect themselves from charlatans and unscrupulous promoters and bubbles. Sorry, it's a long-winded question, but the stage is yours. Well, I, no, I think in retro, prospect, probably the best thing that could have happened to me was having, I was reading everything.

I mean, I'd follow in love with investing when I'd move from the engineering school to the business school at Colorado. There were no investing courses. We didn't have a student run fund. This was not a Columbia MBA program. This was academic finance via the booth school efficient market hypothesis. Finance was taught in a corporate setting. So if you were running DCFs, it was.

on a project basis and not on how to value a business. But I was reading everything in the library and the business school library. I was found myself at the tattered covered bookstore downtown Denver, buying and reading all of the investing books that I could find. I was doing a lot of technical analysis, candlestick charting. I'd gravitated toward Bill O'Neill's Kanslim method, which was, it's still a thing.

It's an acronym. It's essentially a momentum-based. strategy of when earnings are breaking out and the stock price is breaking out, that's when you put your money to work. And so that, that's all I knew when I thought I knew enough, but I'd read this heard on the street column on this Norwegian very large crude carrier company. And well, why not? This makes total sense to me. And so I convinced this retail broker walked into the office with all of my money, my $7,000, which was some leftover scholarship money and everything I'd save from my summer jobs in college and in high school and plunked it all down. The broker even bought a little bit.

And he said, you know, prudently, you should probably diversify if this is all of your money. I said, this is such a sure thing. But I had no idea what I was doing. I had never read a balance sheet or an income statement. Hadn't been exposed to financial statement analysis in the least. And so, you know, when you lose all your money, you realize, good Lord, I either need to get a way different hobby or I've to figure out what the heck happened. And so I had to write a letter over to Norway to get the financial statements. And as I learned by reading them, and I'm not sure I had no expertise, but I realized this thing was so levered, the structure of the business, which was a liquidating structure, they had these four ships. They were old. They were going to run them around for

a while and then scrap them and sell to scrap for a profit and everybody was going to make a bunch of money. But there was so much leverage, they were such bad assets. I learned two things. I learned this was a bad business. It was a bad capital structure. And I also learned, you know, price. You have to pay a reasonable price. I hadn't been a, had it been a reasonable business but overpaid, you could have lost a whole bunch of your money. And so I've just very quickly, you know, as I learned, realized the only way to protect yourself is with, is with the business quality and the price you pay for that business quality.

And so I became really a price zealot. And when I found myself in a professional setting in the trust company in the old United Missouri Bank, it was a value shop and it was a bank. So, you know, hundreds of stocks in a portfolio and the chairman of the bank who was not an investor mandated 25% cash reserves. But there was, there was fundamental analysis going on. There were, you know, analysis of PEs and price to books and price to sales and price to cash flows and dividend yields.

I'm not sure there was that much going on in terms of a genuine, you know, an understanding of what makes a great business and the differentiation between a great business and a cyclical business, which can be a great business at the right price, but a terrible business at the wrong price. I came to that all over the years, but I got grounded very quickly and then the business itself trying to figure out how it works, whether it's a good one, and then ultimately the price you pay for it. And the lesson that so many people learned in 99 and 2000 that they learned a couple of years ago is, even if you've got a great business, at the wrong price is fashionable to say.

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All right. Back to the show. I was struck by two things that you said I spent a ridiculous amount of time of the last few days reading through old writings of yours and listening to lots of interviews and transcripts of your interviews. And I was very struck by a couple of things that I think are really worth our listeners internalizing because they're so important and so fundamental. and one is that you said price is the paramount driver of what we do. And the other is that something

you alluded to a moment ago that I think it's worth pausing and dwelling on, which is that you have a dual margin of safety and the dual margin of safety is A, the price you pay and be the business quality. And I don't really see a lot of people talking about both of those things in terms of margin of safety, that it's not just the price you pay, but also the quality of the business. Can you talk about that a little? Because it seems to me a very important insight. And I remember you saying to Jim Grant, we're very disciplined on business quality and management quality. So, and likewise later, you talked with Peter Kaufman at Glen Eyre, and he talked to you about his checklist of six agencies that you have to have to satisfy in order really to have a high

quality business. So this whole issue of quality is really critical, it seems. well, it's it's paramount to everything. A lot of it can only be learned over time through repetition, through making mistakes. But it's very easy to start with the balance sheet and simply discern leverage levels. And within footnotes try to find off balance sheet liabilities, you know, places where a culture is not run for the benefit of the owner, the shareholder, but it's run for management. And so you spend your time in the process. these statements there, figuring out what really drives managers and how they're compensated. You're trying to find the classic value investor moat, the thing that makes a business durable.

You wind up loving oligopolis, you know, places that are impenetrable. But at the same time, at least in my world, in our world, you've got to have the flexibility to, I think, more broadly defined business quality. Again, we own a fair number of cyclical businesses. today, but we've identified places where you've got some changing economics, where you've gone from hypercompetition to more of an oligopoly structure. In the case of a commodity chemical business, Olin here in St. Louis, which we've made an awful lot of money on.

Half the investing world hadn't heard of it, and it's been public company for a century. They've been a dividend aristocrat since the 1930s, but it's a business that is in the chloroccoli world. They take salt and a slurry of salt, electrify it, and make chlorine and caustic soda on either side of the bulkule. They've got vinals and an epoxy business through it. And I saw this industry consolidate when Dow merged with DuPont. You saw Olin pick up a bunch of assets for antitrust reasons, which at this point, then five, six years ago, made it all on the low-cost player in this chlorocaly world, vertically integrated as well by picking up the vinyl's business and the epoxy business. And what I realized was, you're going to go through

a period of a decade where nobody's going to build any supply. And if we have population growth and industrial production growth, Olin being the low-cost producer in the world, China's not going to be a position to export product onto the market. They don't have low-cost feedstock, natural gas, the way an Olin would with its plants on the Gulf Coast, with natural gas feedstock sitting right next to the plant. In any event, that scarcity that was developing became a margin of safety. And I was able to look through what was a fairly encumbered balance sheet with the debt they had to take on. You got to the pandemic and the business, the stock got really cheap. We were buying it in the mid to high teens. The stock got down to $10 a share on 165 million shares.

Market cap got down to $1.6 billion. Our basis in it was about $2 billion. And on a, normalized cash flow basis. The business went in a kind of a mid-cycle level do $2.5 billion in cash flow. So we paid less than one times cash flow for it. But in the pandemic, things, the end markets for so many of their product in the epoxy world, the auto industry slowed and closed plants, Boeing and Airbus closed. So the paints and coating businesses slowed, end use for vials, vinyl siding, housing market, housing construction slowed a bit.

And so, you know, the most optimal thing to do with capital would have been by the stock back when it was that cheap, but they had too much debt on the balance sheet. Well, as the economy and the business recovered, they've paid down the debt for over $4 billion to $2.7 billion. But knowing that you had this coming supply demand imbalance allowed you to look through what was probably a more levered balance sheet than we ever would have done. to where it's now a pristine balance sheet on a mid-cycle basis. Debt's now one-time's cash flow.

The stock is up five-exam where we bought it. And here's a business where, again, if you're not going to add capacity at all, and in fact, they've taken out a lot of their lowest margin capacity, which has made the business even better than it was when I first started analyzing it, they're buying the stock back. They've gone in the last year and a half, two years from 165 million shares out to 127 million. And the stock at $7 billion cap up from our cost of $2 billion is still trading it kind of a mid-single digit to what I'd call free cash. And so here's a place where you want this management team buying the stock back at as low the prices they can get it.

And so you have a margin of say 20 years ago, 10 years ago even, I wouldn't have defined margin of safety in that setting. But you really understand how this thing was going to evolve. that as long as we were confident you'd make it through the pandemic, we were comfortable making it a big size position. And so it's not just these lists of 50 companies that get put together with all the great businesses that we all know are great businesses, the visas, the master cards, the Costco's. At least in my world, you've got to be able to look beyond the refiners,

which I was able to buy for almost free in 2000, when the energy component of the S&P got down to one and a half percent from what had been double digits just a few years prior. European majors were shedding assets, institutions, endowments, sovereign wealth funds, were shedding their energy investments, and the whole thing aligned to where we were building, developing real shortages of capacity in various corners of the world. We have too little refining capacity. We've cut the number of refiners in this country in half, starting five years ago.

we started shrinking actual refining capacity. And so a business that was so cyclical that never would have been attractive to us became very attractive because you started to say, okay, well, business quality can be defined through something like a developing scarcity that's going to give you a lot of protection in the coming, what would be cycle when you start to remove a bit of the cycle out of the cycle. And so it's my definition of business quality is evolved over time. We're still looking for the best businesses, the ones that, that if you take our overall portfolio and put it together as though it's a company, you know, we essentially run no net debt on the collective balance sheet. You know, we've got about 10% net debt on the balance sheet versus more than 50% for the S&P 500.

A lot of our companies have net cash. They don't have debt on the balance sheet. The intangibles of, you know, how ethical and how moral and how honest your management teams are, how aggressive or not aggressive they are where they're accounting. that becomes a huge component of margin of safety when you're defining business quality. And when you put it all together, really the last thing that you'd want to focus on is price, but then you only want to buy these assets and these great businesses or these cyclical assets or these one-off special situations at a price that allows you to be okay if you're wrong on your thesis.

And if the business doesn't exhibit the same quality or if the scarcities you think that are coming in a cyclical world don't develop as you think they're developing. And so price becomes really important. And it gets lost on the investing herd at secular peaks. It's completely lost on the tech crowd today. This big recovery in the big five and the big seven or eight companies has seen the what I call the Fab Five shrink from what was. almost 25% of the S&P 500 at the end of 21, they got crushed down 36 or 37% in 2022. They're almost back to their highs. I mean, Microsoft is back to an all-time high.

Apple is back to an all-time high. And they're back to almost 25%. You throw in NVIDIA and Tesla in addition to the Big Five, and they're 30% of the index, and they're back to trading collectively at more than 30 times earnings. And these are bigger businesses today than they were 10 years ago, 12 years ago. They're not going to slow. But price matters. I mean, you may have seen the letter that I wrote that I think was interesting to Jim Grant that I put out in January 2000.

So we had just started the firm. And we were in this bubble. And I was so uncomfortable with what had developed in this tech world, the market cap of the NASDAQ. And I looked at this number. I used to track. I had a spiral binder. And then I had multiple sparrow binders. I'd go to the Barron's Business Week section, which used to be really thick.

It used to be thicker than what is now the entire. of Barron's. And they've removed a lot of that data. I know, just by pencil, just tracking, you know, hundreds of data points per week. You know, you took note of the fact that the market cap of the NASDAQ, which was published in Barron's, I had to infer that, actually, they were giving you the market cap of the New York Stock Exchange. But the market cap of the NASDAQ, when you look through to Microsoft's percentage, you can back into how big the NASDAQ was. This is how I did it. The market cap of the NASDAQ was going to pass the market cap of the New York Stock Exchange in March 2000, even though 80% of the profits were on the side of the New York Stock Exchange

businesses. And so I penned this fun letter at the end of 1999 on January 1, 2000, we published it with a series of predictions. It was the millennium and people were worried about clocks on computers and the meltdown of the world that was coming. But I'd put out 12 or 13 predictions for the next 15 years thinking, well, you're going to get held a task for being wrong for 15 years if you make a 15-year prediction, but I said, the first prediction was Microsoft shareholders will lose money for the next 15 years from today's price. And it had nothing to do with Microsoft being a bad business. It was a wonderful business. It still is a wonderful business. It was simply the price on 20 billion in sales and a 38% profit margin. So $7.5 billion in net income,

the market cap was $620 billion. It's 31 times sales and 80 times earnings. on a business that's not going to grow as fast as it had from its IPO 15 or 14 years prior, you went through an extrapolation of, well, what if the market cap were to grow at the same rate? Well, you'd be in the quadrillions of dollars. And what if sales would keep growing at 45 percent? And the business would essentially at a point consume the entire economy. And so I was right. And 15 years later, you had a negative total return.

Even to today, start to finish, you've made a single digit return. on Microsoft, which is now back to the perch of number two largest company. It's back to 37 times earnings. Its profit margin is recovered back to where it was in 2000. But paying that price, you know, lent at best a mediocre return and for 15 years it delivered a loss. And so- So, Chris, applying that kind of lens to the current crop of fab companies, you know, the Microsofts, the Googles, the apples, the Amazon's and the like, if you were to make a similar prediction, over the next 10 years, 15 years of places to avoid being, places where if you're really anchored in valuation in the way that you've had to be your entire career, what do you avoid?

What would you advise our listeners to say, yeah, this might be an amazing company. It might be a great business and it could continue to rise. But the odds are against you. Be very careful here. What would be a list of companies that trip off the, you? tip of your tongue that our listeners ought to be careful of. Well, I'd be very careful of the businesses that some of your software companies and a lot of what's in the ARC portfolios where you don't have profits and you may not have

profits where almost everything has to go right, yet you're paying ridiculous multiples to sales. I'd be always be careful of paying big multiples to sales for profitless businesses. But a Navidia reminds me today so much of Microsoft low 23 years ago. You know, here you are with a transformational AI on a business that has been a very good business with their graphics chips. But on what's trailing 25 billion in sales that's clearly going to grow very quickly over the next few years, you had a market cap that hit $1.2 trillion. Now, we've got a short position on this thing.

But you go through the same math. on trailing 25 billion in revenues, if you grow those revenues at 20% a year, let's say, you wind up in a decade at 400 billion in revenues, and then you take today's 20% profit margin and you could look at it growing to 30%, look at it growing to 40%. And in any of those scenarios, if you grow the top line at 20, which is very difficult to do for any business for a sustained period of time, and grow the margins to a very healthy level, far above what a semiconductor business is normally going to earn. But if you allow them a 30 or 40 percent margin and then you apply a 30 or a 40 multiple to earnings, only then can

you make a 10 plus percent return. I mean, you have to grow the margin to 40 percent, double it from where it is today. Now, they're a Wall Street analysts. Then in the next five years, think the profit margin is going to get to 50 percent and that the business is going to grow by 40 percent a year. Maybe it does. But when you start talking about 10 and 15 year periods of time, and you start talking about paying a trillion two for a business that's doing 25 billion in sales on a 20% profit margin, even if you get this immediate surge in top line growth and an immediate surge in profitability, you have to presume a lack of competition. I mean, AMD, there are other players in the chip world. There's so much that can go wrong, but only in the case where everything

goes right when you extrapolate everything out. Can you get to a mid to high single? did your return. So I would say Navidia, you pay Navidia at today's price. I'd say the same thing that I did about Microsoft. Today's investor in Navidia will lose money over the next 15 years. And what about things like Tesla or any of the other big names? So there are things that just seem kind of strikingly obvious if you're anchored in intrinsic value and the like rather than in momentum and hype and the like. I'm not saying this about Tesla in particular. I'm just wondering if there are the big names that leap out at you like that. No, so I've got a very short, I only shortened one account and I'm not a good short seller.

I should never do it. But we've actually made money on our Tesla short. We have very small Tesla short. We've got a very small Nvidia short. It's just, we just recently put on. Tesla, what's approaching a trillion dollar market cap again, and they're now at $100 billion revenue run rate, everything has to go right. And it bothers me to no end.

And Evanelli, Elon was out this morning singing the praises of Arc's analysts, I mean, one of whom is a CFA. And when they, they being Ark, put out their first research report on Tesla a couple of years ago, you had these wild assumptions about Robotaxi and wild assumptions about the number of EVs that Tesla would sell on their market share. And even things like, you know, they assumed within a five-year period Tesla was going to sell its own auto insurance and they'd be writing as much business. as Geico and Progressive.

The numbers two and three in the field are only slide behind State Farm, having done this now for 90 years each. In their latest report, ARC presumes in five years time, four and a half years time now, that in their base case, Tesla is going to grow to a $7 trillion market cap, which is about the same market cap that the Fab Big Five sported just a month and a half ago. In their bull case, you get to $9 trillion. Elon said today, he's going to, he thinks his business becomes a $9 trillion business.

And he supports the Robotaxy concept. I don't get it. I mean, if you're going to be in the, I mean, so you're an auto manufacturer and you're grounded by conventional manufacturer margins and capital needs when you're building cars. If they're really going to grow to ARC's base case in five years time, 10 million vehicles, you're going to need a hell of a lot more capacity than you have today. That requires capital. The beautiful thing that Elon did was talked the stock price up so much that they had several

funding rounds. They went into these at the market transactions when the cap got up to close to a trillion dollars. And they got Goldman and others to sell $5 billion here, $5 billion there at what was then 200, 300 times earnings, you know, 20 times sales. It was almost free capital. And it provided the money to build out in Germany and to build out Texas. But the full self-driving, you know, Tesla says you're going to be in production this year.

there's no way. I mean, you're so far from getting regulatory approval from this stuff being safe. And then you think about the economics. So if Tesla is the car manufacturer and we're going to sell cars at these wonderful margins that nobody in the auto industry has ever been able to do, but we're going to have software. And so our consumer is going to pay a way higher price than sticker because every upgrade, our car is going to get better and better. So it's not a $30,000, a $1,000 car, but it's going to be a $50,000.

dollar a car, but it'll be a better car four years from now than it is today because of the software. Not sure I buy that. And I really don't buy the concept of Tesla, the full self-driving Tesla, buying cars from Tesla, the manufacturing side making wonderful margins. Now, this car side, which is the akin to running a yellow cab business or what's now an Uber, well, Uber killed the yellow cab medallions in New York City. The Uber business doesn't make any money. And the drivers, if you look through to your actual overhead of insurance, and depreciation and fuel costs and the opportunity cost of your driving an Uber versus going out and having another job, the Uber driver doesn't make any money.

But all of a sudden, now we're going to go to full self-driving because it's going to be safer and everybody's going to adopt this and nobody's going to drive their own car. We're going to have wonderful margins on the FSD side as well that supports what's now a $9 trillion market cap. That's the number of these folks at Arc. Now, Elon's talking about the total market cap of the S&P 500 is $38 trillion today. But we're going to grow to nine. You mean, you're going to be bigger than the 30% market cap today,

Tesla included that the big seven stocks make up of the S&P. And we're going to get there in ARC's prediction, four and a half years. And Tesla says you ought not listen to anybody but ARC because their analysis is really good. Well, that's dangerous. And that's puffery. And, you know, you start to measure the integrity of management and the promises that are made. And I'd steer it as far away from a megalomaniac at the helm of the business. And that's just not, that's just not, it's not setting the expectation bar with any level of

reality, but it now starts to border on height. And when the retail investor is the one that gets harmed by the puffery, that gets my dander up a little bit. It's some of the behavior that we've seen in the SPAC world with some of these charlatans that have really just been in business of enriching themselves and abusing the retail investor. Look, if you're running a hedge fund and you want to drink the Kool-Aid and play the game, fine, so be it.

But, you know, it's the retail buyer of stock that is the one that really bears the brunt of the pain. I mean, the institution's plenty of them got wrapped up. And there were a lot of really great investors that drank the tech Kool-Lade in 99 that blew themselves up. And, you know, they were down the full 80% with the NASDA. and price was not a thing with them. It was all about, well, business quality.

One of this latest iteration, everybody's going to be the next Amazon because you should get a whole pass for making money for an indefinite period of time because this technology is going to be so wonderful. I mean, everybody ought to go read Robert Gordon's book on the economic history of the United States. I forget the title of the book. I've recommended it in my letter. It's a really long book.

He's a Princeton professor. This is the one that took you two years to read. Yeah, I mean, forever. But it's a wonderful history. It essentially goes back to the great technologies post the Industrial Revolution. And they were so transformative. All this AI and SaaS software and even the Internet is more incremental to real GDP growth per capita than some of those transformative changes were. And you've got to put it all in perspective.

I wanted to ask you a related thing. This whole issue of these great compounders, these great businesses that truly are high quality businesses, right? And you've owned a bunch of them over the years, whether it was starting with something like Ross Stores around 2000 or then Costco around 2004, Starbucks, Nike, these really truly, truly great long-term, outstanding businesses. And there seems there seems to be a kind of tension in your own investment career over how long to keep them and what to do when you're truly anchored in this notion of intrinsic value, what to do when a great business starts to get really pricey. And you've told the story a lot of the early mistake that you made in Ross stores where you bought it in 2000 for about 10 times earnings and then sold it in 2002 after making 150%.

and then watched it go up 25-fold. And so this is something you've wrestled with a lot. And I'm just wondering how you deal with it, because it's kind of become almost an orthodoxy. There are certain businesses that are great enough that you shouldn't sell. And yet, over the years, I've seen you cut back things like Costco and Nike, almost like you can't bear to hold them because they just get too expensive. How do you wrestle with this kind of eternal dilemma?

No, it's, I can't bear to, I can't bear to hold them at least in size. That's well put when they get that expensive. But what I've learned is don't eliminate a company you want to own forever from your portfolio in its entirety, because it becomes that much more difficult to bring it back into the portfolio. We only bring in one, two, three new names a year. And to bring something new in, you know, I've generally got to have something that's going out on the other end.

It's not a perfect, I'm going to sell something entirely and bring something in. It's just you find so many new things that you want to bring in because you've got to, because you like what you own. But price doesn't matter. Now, having trimmed the Costco position back and we still own a bunch of it in taxable accounts, I'm not going to sell my $19 cost basis, Costco, where we've made $19 in special dividends, another $20 in regular dividends on the stock at $5.50. You know, if you've got a taxable, if you have a taxable investor where you're probably going

to get, unless we change the tax code, a basis step up at death, I can't afford to pay the tax. I mean, I'm a buyer of the stock on a 25 or a 30% decline from current prices. But I mean, Costco's traded as high as 50 times earnings. It's trading it over 40 times today. I can't buy Costco, but I can sure eliminate it out of a non-taxable account. Nike, which had gotten to be a, we've made a lot of money in Nike. It's a one-half of 1% position, and I'm chomping at the bit to bring it back in. Lou Simpson turns out, who ran Geico's portfolio, of course, had adopted this theory at a point in life.

I've recently learned that he never wanted to get rid of his great businesses. So I've got a handful of companies in the portfolio that I'm... And it's also part of our process, William. My turnover has average 20, let's call it, 15% a year over the last quarter century. If I'm bringing in one... I brought in one new company all of last year, maybe a third of our turnover is, the elimination of a company from a portfolio. And the cyclicals are going to all have to go at some point. Olin's going to have to go at some point. I can't own a business that's not going to grow

at all for 30 years. But I can trade that out of it in the interim, but eventually it's got to go. Most of my activity is trimming the most expensive portions of the portfolio and buying the things that are the cheapest. You can see what I've done with a dollar general over all the years. We bought it back in 16 or 17 at, I don't know, high 60s, maybe 70 bucks a share was trading in the midteens. The world thought Amazon was going to come along and the internet was going to come along and kill all retailers. Well, Dollar General has a whale of a moat around it, given their rural footprint,

given the economics of the median household that is their customer. I don't think that at that price point and what they sell, you can be displaced by the internet. And so we found a moat in a business that went begging. They'd been taken private in 2007 and came back out with a bunch of debt in 2009 and that debt had to get worked down. But it was a wonderful business. And all through it was a wonderful business. And so we bought a bunch of it and made a bunch of money. And they were a clear beneficiary when the pandemic hit. I think at its low in March, the stock was down 12 or 13 percent. And then it wound up being up a whole bunch for the year. So, you know, where I tend to now stay once I'm fully invested on a portfolio, I tend to not raise

I like to be fully invested. When I'm buying Valero, and I'm buying what was Holly Frontier, now H.F. Sinclair, and I've got to raise money. I'll go to a dollar general that was then trading at about a full valuation and take it from a 4% position

to a 1% position to free up 3% of the capital I needed to buy the refiners. And so here you are fast forward. Well, you've got some operational issues today with Dollar General. The tax repeats are not what they are. Another customer at that business is essentially half of U.S. household median income. The business tends to do absolute worst right before a recession and a recession. The use of SNAP, which is the food stamp program, escalates.

And so Dollar General winds up being a better business when the economy is at its worst. well, the economy was at its worst in the pandemic. And so, you know, Dollar General wound up doing way more revenues per store and way more profit per store than they had done. And so some of that's now on the backside of that working off. The states are one by one pulling back out of the surplus snap benefits that the federal government through the state's ways. And so that's all going away. And so you've got some, you've got some things going on. But the stock is now kind of back to where it was when I was selling it a couple of years ago.

the business is bigger. They've added 1,000 stores per year, so you're pushing 20,000 stores today. But I'm making, I just made Dollar General a very big position here in the last month, month and a half, because it's now among the cheapest companies in the portfolio versus what was one of the most fully valued companies in the portfolio two years ago. But under the hood, you don't necessarily see it if you simply look at a list of Simper Augustus Hollings, but it's the value that's added by trimming the deer and buying the cheap at the margin that I think delivers an enormous amount of value over time. And that's very much credited on price. I mean, this has nothing to do with.

And I believe the issues that Dollar General is grappling with now operationally and on the regulatory front and on a little bit of changing distribution as they've changed the footprint of the stores and they're making their base store model 1,000 square foot bigger, 1,100 square foot, than the typical 7,400. I think this manager team is so good. Their board is so good. Mike Culbert, the chairman, I've got to know. He's phenomenal.

These are very good retailers. They'll fix the current issues. And again, some of these issues are simply the flip side of the business being pulled forward, being too good for a year and a half period of time. Now you're kind of back to where you were in 2019 on a margin basis. It'll fix itself. But opportunity costs, I would throw, if we're talking about business quality, price, that all meshes to where when you're a portfolio manager and moving money around and

you're trying to put money to work, it all boils down to opportunity cost. And it's not so much any hard and fast multiple to earnings or to cash flow or to book or whatever. But it's dollar generals, one of the best names right now front and center in front of me and their corners of the portfolio that have got a little more fully valued. So when I'm buying DG, I'm trimming other things in the portfolio. I think it's how you wind up keeping the overall portfolio in a reasonable valuation at most of time. All right, folks. Thanks a lot for listening to the first half of my conversation with Chris Bloomstrand.

As I mentioned at the start, there's much more to come. So I ended up dividing this conversation into two episodes. If you liked part one as much as I did, I hope you'll also listen to part two, which is titled Lessons from Buffett and Berkshire. Chris is one of the world's leading experts on Berkshire Hathaway, and he's extremely thoughtful in that conversation about the many unconventional things that the company does right, including treating its shareholders honorably and fairly as true partners.

We also talk in that episode about what Chris thinks of Buffett's enormous investment in Apple, how Chris manages his time, and how he overcame a painfully difficult childhood to become a highly successful investor. I'm deeply biased, of course, but I really don't want you to miss that second part of the conversation because it's just so full of valuable insights about investing on life. And Chris is very candid and open and thoughtful. In the meantime, as always, please feel free to follow me on Twitter at William Green 72. And do let me know how you're enjoying the podcast. It's really always a great pleasure to hear from you.

Until next time, take good care of yourself. and stay well. Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by the Investors Podcast Network. Every Wednesday, we teach you about Bitcoin, and every Saturday we study billionaires and the financial markets. To access our show notes, transcripts, or courses, go to The Investorspodcast.com.

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