We Study Billionaires - The Investor’s Podcast Network - TIP 061 : Billionaire Charlie Munger with Tren Griffin (Business Podcast)

Starting point is 00:00:00 We study billionaires, and this is episode 61 of The Investors Podcast. Broadcasting from Bel Air, Maryland. This is the Investors Podcast. They'll read the books and summarize the lessons. They'll test the waters and tell you when it's cold. They'll give you actionable investing strategies. Your host, Preston Pish, and Sting Broderson. Hey, how's everybody doing out there?

Starting point is 00:00:30 This is Preston Pish, and I'm, I'm your host for the investors podcast. And as usual, I'm accompanied by my co-host, Stig Broderson, out in Denmark. On today's show, we have a really fantastic guest that's going to be talking to us about Warren Buffett's billionaire vice chairman, Charlie Munger. And for many value investors, Charlie Munger is one of the most intriguing personalities because he's truly Warren Buffett's right-hand man, and he's just full of generous amounts of humor. One of the leading experts on Charlie Munger is our guest today, and that his, his

Starting point is 00:01:01 His name is Tren Griffin, and Tren is the founder of the awesome value investing website called 25IQ. Trent is also an executive at Microsoft, but on his time off and his free time, he loves blogging and talking about everything value investors treasure, and that's information about people like Warren Buffett and Charlie Munger. So Tren just recently wrote a book, and the book is titled Charlie Munger, the complete investor. I've read this book. Stig, I know you've read this book. I thoroughly enjoyed it, Tren. It was a really great read. And I think our audience is going to love this because there's not many books about Charlie that are

Starting point is 00:01:39 out there. There's a couple, but there's not really a lot. You can tell in your book. You did a lot of comprehensive research. You pulled some amazing quotes. I know you went back and you read a lot of the books that Charlie loves because I caught some of the hints of those in your book, and I know you referenced them at different points. So we know you did a lot of research and it was really quite a fun read and we're really excited to be talking to you about this today and asking you some questions about the book. So great to have you on the show and thank you for joining us. Great to be here. All right, Trent. So I got the first question. We recently finished reading your book about Charlie Munger and it was a lot of fun. And when a person goes to the Berkshire Hathaway

Starting point is 00:02:18 shareholders meeting for the first time, I think one of the most obvious things that surprise a lot of people is the intellect of Charlie Munger. I had heard of Charlie, but I know whenever I went to that first meeting and I heard him start. Some of his responses are so quick-witted and so brilliant and so concise. I think that's the other thing is he's so concise and poignant in some of his responses. What is the reason you chose to write a book about Charlie, though? I know I was intrigued after I saw that, but why did you write this book about Charlie? And what was the one thing that you admire most about his personality? Well, the reason I decided to write a book about Charlie was, first of all, it was a tribute to Charlie because he's helped me with some major life decisions.

Starting point is 00:02:58 And the other reason is sort of, I think he has so much to teach. When I was troubled during the internet bubble, I was searching for sort of a rock to grab onto and say, what's going on here? This doesn't seem real. And he was a rock for me in terms of the way he thought. But the thing that bothered me was there really wasn't much out there other than this sort of scrapbook of material that I'd collected over the years. of things he said here and there. And I felt like there was a need to synthesize it a bit and create a framework so you could understand his ideas. But the key thing with Charlie is he has a rational approach to life, a curious approach to

Starting point is 00:03:41 life, and then also he's completely unrestrained in saying the truth. So, Tren, the thing I like about Charlie, and you're bringing it up right here, is it's almost like he says the stuff that you know Warren Buffett would never say. It's almost like it's Warren Buffett's alternate ego coming out at times where you know him and Buffett have almost the exact same opinion about everything. They've pretty much meshed at this point. But Charlie's the one that actually comes out and says it. Would you agree with that? Yeah.

Starting point is 00:04:11 He's completely unrestrained about the truth. You know, what he said earlier this year about Valiant, very few people are willing to go out and say what he's, said. It's simplified, I think, by the rise of comedians in political discourse today. Comedians are out there telling the truth, and people are hungry for the truth. And in an investing environment, mongers out there saying things out loud that most people would only think about it in their heads, like, oh, I can't possibly say that. And it's so refreshing, and I think people are hungry for that, not only in business, but in politics. Authentic people are interesting and funny.

Starting point is 00:04:53 Yeah, I definitely think that Charlie doesn't have the same urge to be liked as Warren Buffett. So I definitely agree with your presence. Sometimes you might be looking at Warren Buffett when he's applying to a question and thinking, yeah, he probably thinks that this is really some bad stuff happening. Where Charlie, he's like, I'm just telling the truth. I don't care what you think about me. And I think that's really what people like about Charlie. One of the things that Charlie has said, they say, well, Charlie should serve as a role model for people.

Starting point is 00:05:22 And Charlie says, no. He says, I'm too cantankerous and I'm too basically in your face. And he says, I don't think I'm a good career model for anybody. He also said that he doesn't particularly admire the fact that he's made so much money as an investor because he's not the person out there creating things. And so he'd rather people actually go out there and be doers, but learn from him. because what Charlie teaches about investing is applicable to life generally. I really enjoy watching Warren's face and just whenever Charlie comes out and says something,

Starting point is 00:05:57 you can tell Warren just gets total bliss out of listening to what's going to come out of Charlie's mouth next. And it's just, it's kind of this amazing, if you've never seen the exchange between these two, look it up on YouTube. If you can't go out to the shareholders meeting or whatever, go on YouTube, look this up because some of their interactions are just, downright hilarious in the way that they correspond with their audience. It's pretty awesome. So, Tren, I think you said this before, but I'm also the opinion that the main reason for Chalamonga's financial success is his really 110% rational approach to everything. So he has multiple times warned people about the psychology of human misjudgment in stock investing,

Starting point is 00:06:39 and especially the misperception of risk. And I know from your book that you also have a personal story where you really, as you said before, had a rock in Charlie Munger. Do you tell that story? Well, as the kids were growing up, my kids, I was always trying to tell them that basically when you make a decision, don't just focus on probability, focus on magnitude. In other words, it's magnitude of correctness that matters, both in a loss situation or a gain situation. I was in bed one night and my biceps started to get hot and I said that, That's not normal. It's happening on both sides. And so I jumped in the car, probably not a great move. And I'm driving to the hospital. And I said to myself, wow, the pain's going away. Maybe I'll just go home. I got a busy week next week. But I was starting to rationalize not going to the hospital. But basically at that moment, Charlie popped into my head. And I basically said, look, what we have is a situation here where we have a potentially massive magnitude of loss. I could die. Even if the probability was only minuscule, I got to. go to the hospital. Went to the hospital. They did the test. And I'd had a tiny amount of heart damage.

Starting point is 00:07:51 Well, the good news is it's only tiny. The bad news is it wasn't zero. And so I had the test. Turns out I was in a dangerous situation, wouldn't let him leave the hospital and I had a triple bypass. But the key point to my kids, think about magnitude. Don't just try and rationalize, well, there's such a small chance I'll drive into a tree. There's such a small chance I'll have a heart attack. And so you need to think about that way. And then on the upside, side, reverse of that. Magnitude of correctness, what you want is the situation with optionality that's positive. You want a low investment.

Starting point is 00:08:24 You can only lose 100% of your money when I do venture, but I potentially need a, you know, 100x, a 50x to make the whole thing makes sense. So magnitude really matters. But thinking probabilistically is a Charlie must do. Love that response. That is awesome. One of the things that I'm often asking myself is where are my blind spots and how can I improve on them? When I look at Charlie and Warren, it appears they often ignore this macroeconomic piece of investing.

Starting point is 00:08:58 And I'll be honest with you, for years, I was the exact same way because that's how these two gentlemen were. And I literally modeled every investing decision I made off of Warren Buffett and subsequently Charlie Munger. But in the last few years, really the last year, I've really started to pay a lot of attention to macroeconomics just because of the situation we're currently experiencing with these federal banks printing through the nose. I know there's a really good Charlie Munger quote that I'm going to mess this up, but it went something like, you know, you got every central bank in the world printing at ungodly levels and they can't get any type of inflation. In fact, it's deflation. You ask me what's going to happen. I have no idea what's going to happen. I just find it all going to end really badly.

Starting point is 00:09:46 That's kind of the gist of what the Charlie Munger quote was, but I'm sure I messed up a little bit of it. I have been paying a lot of attention to macroeconomics, and I know that Warren and Charlie really kind of don't. They really stick to their macro piece. They're looking at individual companies and they're doing their discount cash flow models. They're finding great management. all that stuff that we typically talk about on the show and any other value investor talks about. But is this maybe their blind spot trend? And I'm just curious whether you agree with that or is this going to be maybe one of their fatal mistakes because they've been ignoring it for 50 years and the economy just allowed it because of where we're at in this larger debt cycle?

Starting point is 00:10:27 I don't think so. I think the key insight that they and people like Harmon and Howard Marks have is the best way to be prepared. for the macro environment is to focus on the micro. In other words, if you're going through and doing a bottoms up analysis on all your companies, on all your opportunities, you're basically able to tell the state of the macro economy by whether you're able to buy these companies at an attractive price. And the natural cycle is, as the economy gets overheated, you can't find any bargains. And so what happens is if you focus on the micro and bottom of,

Starting point is 00:11:06 up, the macro takes care of itself. Now, it may be in a situation where there's a crazy bubble going on. You still get a bargain and you're able to buy a dollar for 70 cents. But the important thing is you, as a trend, you're likely to start accumulating cash when things get silly. And so the way to think about it is being positioned in a macro sense is the residual of being a disciplined buyer. And so naturally your cash levels creep up when bargains start to disappear. And that happens to be times when there's a macro bubble or something like that. So it's a residual. So, Trent, one of the things that, you know, when we look at today's market, and I know we're

Starting point is 00:11:51 getting off the beaten path here with where we were going to ask some of these questions, but I want to cease this opportunity because you're here. You're such a smart guy on this stuff. And I want to hear your opinion. Whenever I look at the current market conditions and I see how the Fed, is buying back bonds. They're creating this enormous supply and demand out of balance in the bond market because of all this quantitative easing. It's not just in the U.S.

Starting point is 00:12:14 It's worldwide. I mean, look at Japan. They're even saying that they're going to be buying up ETFs at this point. That's not a free and open market. And that's where I'm really starting to get concern is they are manipulating it. And we're not just talking some billions of dollars here. We're talking trillions upon trillions of dollars at a magnitude that's, unpressed and something that we've never seen in the last hundred years, the bond

Starting point is 00:12:38 markets being completely manipulated. I would agree and go a little bit further. And I would say, we've never seen this before. The Charlie quote you referred to, he actually says, we've never, ever seen this before. And so Charlie has this concept of a too hard pile. And in the two hard pile, you take certain questions in life and say, I don't know. And you don't go there. With macro, he doesn't know and he doesn't think anybody knows. And so stay away from it. Don't expose yourself to macro risk. Great response. Yeah, just before going to the next question, I love that you say the two hard pile trend. I often feel that when you talk about macroeconomics. Sometimes the person has some great insight. It's just like, I don't know, it's too hard.

Starting point is 00:13:23 Everything I'm talking about needs to be in the too hard pile. Yeah, and just for people out there that might not know. So on Warren Buffett's desk, I'm assuming Charlie has. one similar on his desk as well. He has a bin and it's labeled the two hard pile. And this is kind of a joke and a really kind of a fun conversation. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord. And every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June, First through the third, 2026, the Oslo Freedom Forum is entering its 18th year, bringing together activists, technologists, journalists, investors, and builders from all over the world, many of them operating on the front lines of history. This is where you hear firsthand stories from people using Bitcoin to survive currency collapse, using AI to expose human rights abuses, and building technology under censorship and authoritarian pressures. These aren't abstract ideas. These are

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Starting point is 00:17:47 All right. Back to the show. So the next question I have for your trend, that is that, it's hard to say Charlie Munger without saying Lollapalooza. Wow, that's the first time I said that here on the podcast. But this is the concept he used to describe everything from the rise and fall of the internet and to the effectiveness of Tupperware parties. Would you please explain the concept of Lollapalooza and why it's relevant for me to know as a stock investor?

Starting point is 00:18:17 So Charlie has a view of the world, which is consistent with work that's being done, Santa Fe Institute and other places that thinks of the world is a complex adaptive system. The economy and companies are not a machine. They're more biological, they're more organic. And you get situations where the whole is more than the sum of the parts. And in a lullapalooza, what you have is a situation where you have many inputs, and they sum up to more than what they truly are. When you have a complex adaptive system, from going back to the previous question, you get results that you just can't predict you just can't expect.

Starting point is 00:18:53 This is the butterfly wings and a flap in Brazil impacts the weather in Seattle where I live. And so the important thing to understand is situations like Tupperware parties, the way like somebody like the Moonies are programmed. There are a whole range of things where there are a confluence of things that go together. There's lots of feedback and there's what George Soros calls reflexivity, the result that just emerges out of no place. Crazy things happen that are completely unpredictable. And so once you accept that, it should make you humble about your ability to make predictions.

Starting point is 00:19:31 Yeah, so for instance, if we talk about Tupperware parties in particular, you have concept of reciprocity and liking and social proof. And then you have all of these factors mixed in together, and suddenly you find yourself paying double prize for a piece of plastic. That's right. People might be sitting out there and thinking, okay, these guys are talking about Tupperware at the investors podcast. But this Lollapalusa effect, that's also something that you've seen in the stock market. So if we revert to the thing about the dot-com bubble, how are all these factors combined creating this Lillapal effect when you saw the dot-com bubble?

Starting point is 00:20:08 So in a Tupperware party, you've got, for example, as you said, social proof operating. In the internet bubble, you had social proof operating. In the internet bubble, the biggest driver was fear of missing out. People were just deathly afraid of their brother-in-law having all this money and they didn't. And so there was this sort of cascade. And in a Tupper Party, people are afraid of what people think. You've got a whole soup of behavioral economics, heuristics, which are driving you to buy these pots and pans. But the internet bubble really illustrates better than anything in business ever, really.

Starting point is 00:20:44 the power of feedback. Then the other thing, you know, on March, I think it was 10th, 2000, it just stopped. And you can't predict the timing. But the feedback, the social factors, all of the human factors are similar between the Top War Party that Buffett and Munger have talked about and a stock market bubble or, you know, a range of phenomenon. So I got a comment that I want to piggyback on this. Whenever I'm looking at how high can the market cap really go. That's a question that a lot of people ask themselves. If they look right now and they're looking at the Schiller P.E., call it a 25, 26, or whatever it is today. And when you look at the Schiller PE back in 2000, it was as high as, what was it? Stig 35 to 37 or something, which was

Starting point is 00:21:31 really high, yeah. Which was significantly more than where it's at today. Just kind of showing you how far this psychological piece can really take things when you go back to the reflexivity, George Soros type stuff where it can work in the positive direction or it can work in the negative direction. Whenever I go back and I look at that 1990s time frame that drove those prices to such epic levels, I really like to attribute that enormous growth in valuations and multiples to the fact that we saw such a quantum leap in the way business was going to be viewed in the coming decades with online business and how you could now reach a world market. That was truly a quantum leap in business and we hadn't seen that in centuries. And I really think that that led to one of

Starting point is 00:22:20 the reasons why you saw the multiples get so far out of control. And like you said, they ultimately burst there in 2000. And I don't see that today. So whenever people were saying like how much higher can these multiples go, I really think that if you were going to throw something out that it's synonymous with where we were at in 2000. I would call that person crazy. But again, like you said, Trent, this is not something that is predictable. You don't know when that house of cards is ultimately going to fall. But I definitely think that 35 is we're not seeing the quantum leap in business like we saw back in that time frame. I think values right now are on the high side of fair. And it's substantially different than 2000. I lived in 2000. I lived in 2000.

Starting point is 00:23:05 2000 was literally nuts. I took a week off and did nothing but read and think just because things were so unhinged. And I was searching for what I should do with my own portfolio. And I read and I read and I thought and I read. And what I eventually decided was I'm going to sell half. This is before it popped. And it was really based on not math, but regret. It was enough so everybody in my family was going to be taken care of.

Starting point is 00:23:32 I was not going to be a burdened anybody in my retirement. it was basically taking enough. So the rest that I left in the game was house money. And it was based on humility, which is I didn't know. And I think even today, I don't know. And for people making decisions, I think what you should do is really think about things in a two-part analysis, which is try and be rational, first and foremost. And secondly, try and look for bias.

Starting point is 00:23:59 Are you concerned with things that are basically not rational? And for me, the game is completely different. Once you have enough money, put aside, you can take care of the people you love. Because there's nothing worse than that. And then playing the game with house money, like if you look at Buffett and the billionaires you focus on in this series, these people are playing with house money. and you can take risks, you can do things that someone who's got the rent money on the line can't take. And so one of the things you can have as an approach to life, and this is where Munger comes in, his idol is Benjamin Franklin. And Benjamin Franklin, probably the most amazing American ever, who's the first American, but he made a lot of money as a printer. And that financial security allowed him to be a statesman, the first postmaster, a diplomat. And Charlie

Starting point is 00:24:49 knew early on that that he wanted that freedom. So money for Charlie is really about being your own person and being independent. I don't know if I read this in your book or where I think this quote comes from, but I think there's a Charlie Munger quote that says something like that first hundred thousand is a real bitch. Is that exactly? It's exactly what he said. And what he's saying is, you know, when you're struggling, when you're just trying to put together a little bankroll, it's hard because you've got to pay rent. You don't have compounding working on your behalf. But once you do, then you can start relying on the magic of compounding.

Starting point is 00:25:26 You can start taking risks that you couldn't otherwise. Yeah. I love this episode, guys. I never said, bitch and Lollapalooza within the same 30 minutes time frame. Okay, I have the next question here, Trent. Channelmonger and Warren Buffett have recently, and recently that a few years ago, have bought into railroads, energy, and utilities. And in the beginning, that was very surprising to a lot of investors because they had very

Starting point is 00:25:54 high capital expenditures. Investors really thought that Warren Buffett was still buying, or Chalemonger was still buying Seas Candy, as you also talked about before. Now, Chalemonger explained the purchase as a method to employ large amount of capital still at above average return, though it's not really the same superior returns as you have seen. Bern Berksie Heatherweight do in the past. But one of the less discussed topics in the media is the types of mode that you have for these companies.

Starting point is 00:26:24 And one of the things that I found really interesting is to talk about the supply side advantages of these businesses. Tren, could you explain the concept of supply side advantages and also how Warren Buffett and Chianelmonger have used that in their investment philosophy recently? So the key thing about railroads is actually they got the idea of Bill Gates was in railroad stock first. But, you know, Munger and Buffett have this problem that the three of us don't have, which is they have to put billions of dollars to work, huge amounts of money. And a lot of that cash is generated in places like Dairy Queen and C's where they can't put it to work in their

Starting point is 00:27:05 own business. What they're doing is they're looking for opportunities to invest in, internally within the company that have a strong capital return, but also take advantage of the fact that it's very tax efficient to move money from C's and Dairy Queen into the railroad. So they basically get a tax deferral. So between the tax deferral and the returns they can get, they go out and do the CAPX required to double-decker railroad, they get a very high return and they've got a loan, essentially a loan from the tax deferral. And the key thing about economies of scale, according to Munger is it's really hard to replicate. In other words, creating another transcontinental railroad is fundamentally impossible.

Starting point is 00:27:49 Yeah, and to follow up about the things we talked about, macroeconomics and the two hard pile, so one of the things I've been talking about is that you can't outsource the railroad. I mean, it is where it is. You can't put that in India because Americans need goods transport in America. There are more and more Americans. So they will transport more and more goods. There's a higher, higher demand for goods. So this is really a micro play, but at the same time really bending on America.

Starting point is 00:28:16 And I really think this is very classical Warren Buffett and Chalmonga play because, as you said, I think you paid $26 billion for Burlington Northern back then. It's really hard to find good deals now for Warren Buffett and Chalmong because they have so much money. One of the things that they both said is that size works against performance. In other words, if you're managing $100 million, there's a lot of little companies you can buy, there's investments you can get into and get out of. But once you're trying to put billions of dollars to work, you really have to think in terms of a precision cast parts, whereas they have to buy a giant company and they have to buy all of it.

Starting point is 00:28:54 And that means they've admitted the returns may not be what they were in the past. And what's really amazing, trend, when you're talking about that specific piece of it, where they're saying that it's harder for them to get the returns that they were. able to get at a different point in time. And you look at how interest rates have changed. Say you go back 20 years back into the 1980s when interest rates were going bananas, you know, in double digits. That puts a whole different price dynamic across asset classes. And now that rates are getting polarized to zero, literally to zero. And in Europe, we can even say negative rates. How can you continue to get those yields because everything's

Starting point is 00:29:36 being priced off of those risk-free, if you want to call it that, investments. You're making an important point. And the way Munger and Buffett react to this is to say, we don't have a cost of capital. We have an opportunity cost of capital. And our opportunity cost is our next best alternative. And so when they look at interest rates today, they're not trying to compute their cost of capital as they would in a business school. They're just saying, what's our next best alternative? And so what they have to do is basically think, I still need to think long term, what should my hurdle be? And when Charlie's been asked this question, he said, our traditional hurdle has been around 10 or 12%. And the question is, how much do you drop it? And the

Starting point is 00:30:22 answer is you just really have to think. If your next best opportunity is 1% or 2%, do you take it or you just sit on the cash? And that's the $64,000 question rate. What do you do? How much cash do you keep on the sidelines? You see what Klarman's doing. You see what Marks is doing. You see what Buffett's doing. And you realize that they're sort of in the middle. It really reminds me of something that Jim Ricketts have said about Warren Buffett and Shellmonger.

Starting point is 00:30:50 Because as you might know, Jim Burkis is really bare on, I would like to say everything. But he is really not an optimist about the economy and the macro situation right now. So he's saying, well, what are they doing at Berksa Halleway? They really don't have that many great alternatives. well, they are buying into commodities. They are buying into utilities. So the way I look at it is really more in terms of circle of competence. We've both been interviewed and they said if they were young today, they'd both go into technology.

Starting point is 00:31:19 But the point is they don't understand technology in terms of a pureplay. All other companies use technology. They understand technology, but they're not going to make pureplay bet. It's a circle of competence issue for them. Google and Apple and Microsoft and Facebook can all be value stocks in my view. Charlie said all investing is value investing. If you can buy it at a bargain and if you understand the stock, you can apply the same principles to technology investing.

Starting point is 00:31:49 It's harder. It's more nonlinear. It requires a different circle of competence. And the key thing about commodities and brands and chewing gum and bricks and things like that is they understand them. And risk comes from not knowing what you're doing. Yeah, I love that. Let's take a quick break and hear from today's sponsors. No, it's not your imagination.

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Starting point is 00:35:19 Fund's Perspectus at fundrise.com slash income. This is a paid advertisement. All right. Back to the show. Trent, you wrote this book about Charlie, and I know you probably uncovered so many different stories about him. Could you tell our audience, and it could be from your book or not from your book, but could you tell our audience one of your favorite stories that you learned about Charlie Munger that you really just couldn't let go in this podcast? You just got to tell the world. Well, the best Charlie Munger story is really about an acquisition. And there was a deal and a company retained some investment bankers. They were going to get a two and a half million dollar commission no

Starting point is 00:35:57 matter what happened. And the best bankers were going to get paid no matter what. And what happened was after the fact, Buffett learned that the business was for sale and he bought it. He and Charlie did their own work and they did the analysis and they bought the company and the investment bankers were completely useless, but they were going to still get their fee. When the deal was close to completed, they all got together probably for the closing or whatever. And there was a card game going on. The investment banker walks up and said, oh, Charlie, he said, you know, we preferred a book for this deal. You know, we did all this research.

Starting point is 00:36:29 We'd like to give it to you. And he sort of reached out with this book, you know, to hand it to Charlie. And Charlie sort of looked up from his cards and said to the investment banker, I pay $2.5 million not to read that book. And the reason why this story is funny is, is because for me, it's hysterical, but it's meaningful for me because what Charlie is saying is you need to do your own work. That if you ask your barber whether you need a haircut, you're going to get what's in that book. And so as an investor, there's no excuse for not doing your own work. And if you're

Starting point is 00:37:05 not willing to do your own work, you should be buying a diversified portfolio of low fee index funds. You're a no something investor or you're a no nothing investor. You'd rather play golf, play golf, and buy index funds. You're willing to do the work and work hard and you can be rational and you have a better than average IQ and you're humble. Maybe you can do what an active investor can do. It's a hard road. But for me, and obviously for the two of you, this is fun. This is what I like to do on weekends and nights. This is really fun for me. Most people, you know, it's like watching paint dry. You're exactly right about that. I know whenever I talk about this kind of stuff around my wife or, you know, just friends and family.

Starting point is 00:37:49 They absolutely look at me like I'm a goblin because this stuff is so dry and so boring. I'll turn on Bloomberg on the news or watch whatever financial news on TV. And for me, it's like watching an action movie, watching them talk about interest rates. And I think for people that aren't dialed in and find that to be amusing and fun, they are really going to struggle to be successful because I know how hard it is. is for me, and I feel like I know a little bit, but for a person who's just going out there and buying stocks and thinking that they're going to be able to beat the market without really kind of any understanding at all, man, they got another thing coming, but love the story.

Starting point is 00:38:28 That was great. So, Trent, the final question for me from this episode is really simple. If you can recommend one book to our audience aside from your own, what would it be? So that's a really hard question. And I think it somewhat depends on who the person is. For the experienced investor, I think it's a tie. I think margin of safety by Seth Clarmine and the most important thing by Howard Marks, those are really solid books.

Starting point is 00:39:00 If you're a beginner and you're just getting started, I would recommend an older book, but a great book, Warren Buffett Way by Hagstrom. You know, it's a book that is a perennial bestseller. It's approachable. It's understandable. Hagerum really wrote a great book that can sort of lead you by the nose into it, but not overwhelm you. That's a long answer to a short question.

Starting point is 00:39:22 Okay, so this question this week comes from Ashraf, Hawaii, and here's the question that he has. Hey, Preston and Sting. My name is Oshruff, and I just wanted to thank you guys for having such an awesome podcast and website. I think they're really key for new investors like myself. so I wanted to thank you. I also just finished reading Benjamin Graham's intelligent investor, and my question relates to margin of safety. I took a look at a couple of Warren Buffett's current holdings,

Starting point is 00:39:46 one of them being Walmart, and saw that the price to book ratio was around 2.7. And I realized that this is higher than the 1.5 that's recommended for a margin of safety, but then maybe he purchased this a long time ago. So I looked at IBM, which is a more recent purchase, and saw the price of book ratio was 10. And while the period issue was also 10, I thought that the margin of safety was not there in this case.

Starting point is 00:40:07 My question to you guys is, how do you think Warren Buffett justifies purchasing IBM shares with a price-to-book ratio that's so high? Thanks, guys. The key up the good work. All right. So we love this question because this one's a fun one, and it gets to really kind of the root of value investing. And what else this gets at is how you take the Graham approach where you were talking about

Starting point is 00:40:30 having a lot of tangible assets to basically protect your margin of safety and how that approach has really evolved to where Warren Buffett is now and how he basically pivoted and transitioned away from that margin of safety of having tangible assets and going more towards earnings power. And that really kind of justify earnings power combined with having a long-term competitive advantage really being your margin of safety. And so that's really why Buffett is looking at this IBM pick as being a good pick. I owned IBM about a, year ago. I don't own IBM anymore. I was lucky to sell that well before it got into the price point that it's at right now. I think it's around $140 a share. I was lucky to get out

Starting point is 00:41:18 way above that, fortunately. But Tren, I'm throwing this over to Tren because I really want to hear his opinion. Really kind of talk about the book value piece of this and that transition point because you're really an expert on this because that transition occurred from Charlie Munger. So Tren's the perfect guy to have on the show to answer this. once you move to a quality-based approach, it's not just math anymore. You're looking for a bargain that has pricing power and earnings power that isn't appreciated. So I think in this case, Buffett has talked to the chief information officers of his portfolio companies. What he's found is a lot of people who use IBM.

Starting point is 00:41:54 I think the mistake that's been made is that that's not a representative sample of users of information technology. Insurance companies and railroads and people like that are still, using mainframes. They still have programs that are legacy that are based on things like Colville. And I think when he talks to them, he's getting an unrepresentative picture of what's happening. I think the cloud and the move to the cloud is on an exponential curve. And when you're on an exponential curve, you really can't see it. And so for me, IBM is going to experience from the cloud competition that's going to eat at its core markets in a way that people really haven't appreciated. So I'm short IBM as a company because I'm along the cloud. There's so much power

Starting point is 00:42:40 in moving to an architecture where you have much higher utilization in the data centers, where you have these shared APIs, where there are all these web services. And I think the good news about Buffett's portfolio is this relatively stable and these are conservative companies, but they're going to be the last ones to move to the cloud. And when they do, it's going to be apparent. And so I think IBM is a mistake. If you look at how the assets are composed at the balance sheet of IBM, you'll also see that they have a lot of intangible assets. Correct me if I'm wrong, trend. But I think IBM is the company in the world, at least in the U.S. that has the most patents. It has the most patents in terms of the amount of patents that it files. But the key

Starting point is 00:43:24 thing that people have realized about their balance sheet is they can't borrow anymore to buyback shares without going and losing their investment grade rating. So they basically had to throw the brakes on buybacks. And when that happens, then you basically have to operate yourself into an appreciating share price. I think that's sort of the financial side of it. I think the more important thing is the cloud. So I just want to talk to people why I ended up making the decision to sell.

Starting point is 00:43:52 And it really came down to a couple different things, really. The first one is, is I think that they have poor management. And I think that when you look at how IBM needs to grow, it needs to be grown by creating assets. That's what they're good at. Well, at least that's what they were good at in the past. They need to create more asset. That's why I transitioned away from IBM is because I didn't really feel like they were doing what has made them great and got them to the position where they are at today. These share buybacks from an accounting standpoint will make the book value of the company and the equity of the company look a little bit weird.

Starting point is 00:44:28 whenever they do these buybacks, they're listed onto the equity line of the balance sheet, and it's listed as a negative, which then makes your equity look lower than what it is. But if you wanted to go look at what that would be, assuming that they kept all those shares listed on their books in their treasury account is what it's referred to as. The shares listed as treasury and it wouldn't be actually removed from the open market. You could see what that number would be. And that's really some hardcore accounting jargon that I'm sure a lot of people, their eyes glazed over as we talked about that. That was watching the paint ride. Yeah, exactly. Trent and Stig were wide-eyed, though, let me tell you. But I really think that IBM is really having some fundamental issues. I think that they're having issues with retaining talent. I think a lot of the talent that was over there at IBM is leaving for Silicon Valley, chasing this idea of creating assets instead of buying assets and instead of buying your

Starting point is 00:45:22 own shares back, which they've been doing forever. I really think that Warren had made a very very very. very bad pick. I find it ironic. And just so everyone knows, this is a very different opinion than what I had a year ago, but it's, it has definitely morphed. I think that it's very ironic that Warren says that you have to stay in your area of competence. And he's always said that he doesn't understand technology companies and this and that. And this could potentially end up being one of his worst picks. And I find it really ironic that he basically told himself in advance that this isn't something that I would want to get involved in.

Starting point is 00:45:57 And I think that I personally think he got involved because of the numbers up front. But then four years later, as they're still exercising the same growth strategy, which was buying back our own equity. Yeah. And Warren Buffett was actually asked specifically about IBM and CNBC back in September. And he was saying, well, I don't know how things look in 10 days and 10 months, which is a very classical Warren Buffett answer. But he says that he knew that IBM would be better off in 10 years.

Starting point is 00:46:25 And he might be right. I don't know, but I think what I'm lacking from Warren Buffett because I've been looking into IBM as well when it got really cheap and I thought, now was the time to buy. But I couldn't find any really great arguments from Warren Buffett. He had two. The first one he said was stickiness,

Starting point is 00:46:43 that it's very hard to change whenever you use an IBM. That might be very well true. Trent probably knows a lot more about that than me. And the second thing he said was great management. And when I'm looking at, not only at the train, track records, but also what they're doing. Even a year ago when I was looking at the first time because I remember President and I discussing it back then, I was not impressed by the management, not only because they were

Starting point is 00:47:05 issuing a ton of shares to the own employees and then buying it back in the market, but because that whenever they had a guidance, they seemed to not meet their own guidance and says, really came with a bad excuse, to be honest. So here's the thing I don't understand. And this is probably because I'm not real tech savvy, but, you know, they got this thing. called Watson. Probably one of the best search engines out there on the planet. Why not go toe to toe with Google?

Starting point is 00:47:33 I mean, how much money does Google make in advertising by just running their search algorithm? Why are they going after this big data trying to put somebody on the hook and then they overpay and overextend themselves like the health industry? I just think that model is so broke. All right. I've learned that typically when I have the opposite opinion of Warren Buffett, I'm usually wrong. So we'll see what happens. So fantastic question. We're going to go ahead and send a free sign copy of our book, the Warren Buffett accounting book, off to Mr. Hawari for his question. And we

Starting point is 00:48:07 really appreciate our audience submitting questions. If you want to ask a question and get it played on our show, go to Asktheinvestors.com. You can record your question there. And if we play it, you get a free sign book in the mail. So we really appreciate Trent. Trent, thank you so much for coming on the show. This was really a fun conversation. And you can tell Stig and I are big Warren Buffett fans. You're obviously a huge Warren Buffett fan and Charlie Munger fan. So this was really a lot of fun to talk to somebody that has the same interest as us. It's great to be here.

Starting point is 00:48:37 So, Trent, I want you to tell our audience, if they want to know more about you or they want to grab a copy of your book, where can they learn more about you and just give them a handoff to all your information? Because your 25 IQ website is phenomenal post. But go ahead and I give them the handoff, Trent. I have like over 140 posts on 25 IQ. It's easy to remember. I usually put one up every weekend. I've done it about 100 weekends in a row. And then you can follow me on Twitter.

Starting point is 00:49:05 I'm at Tren Griffin, and I'm sort of relatively active there. Of course, the Charlie Munger book, Complete Charlie Munger, is available on it's your usual Amazon, Barnes & Noble sorts of places. Trent, I just want to throw it out there. The first time that I virtually met you was on Twitter. I was reading different, you know, I subscribed the different value investing type people.

Starting point is 00:49:30 And I started reading these posts from this Tren Griffin. I was like, man, these are some really good articles. And I sent a message via Twitter to Tren probably, I don't know, trend probably doesn't even remember this, but probably six to nine months ago. And I said, we have a podcast. I really want you to come on. And he said, I'll come on in about six months. And so we followed back up with him.

Starting point is 00:49:51 and sure enough, he accepted the invitation to come on the show. So we're so thrilled to have you on, Trent, and really appreciate everything that you're doing out there. That's great. It's been fun to talk to you. I wish more people were interested in this stuff. You do a service because I do think we have a bit of a crisis around investor education. And so you do do a service.

Starting point is 00:50:12 And I appreciate that. Well, thanks, Trent. Thanks. Very nice for you to say so, Trent. All right, guys. So that completes our episode this week. We really appreciate everyone joining us. It's always so much fun to bring guests on the show and just interact.

Starting point is 00:50:26 And if you guys got any questions, go to ask the investors and send them off to Stig and I, and we'll get that on the show or we'll try to get back with you. So thanks for joining us and we'll see you guys next week. Thanks for listening to The Investors Podcast. To listen to more shows or access to the tools discussed on the show, be sure to visit www.com. Submit your questions or request a guest appearance to the Investors Podcast by going to www.

Starting point is 00:50:53 Asktheinvestors.com. If your question is answered during the show, you will receive a free autographed copy of the Warren Buffett Accounting Book. This podcast is for entertainment purposes only. This material is copyrighted by the TIP Network and must have written approval before a commercial application.

We Study Billionaires - The Investor’s Podcast Network - TIP 061 : Billionaire Charlie Munger with Tren Griffin (Business Podcast)

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