We Study Billionaires - The Investor’s Podcast Network - TIP 087 : Attending the Berkshire Hathaway Shareholder's Meeting (Business Podcast)

Starting point is 00:00:00 We study billionaires, and this is episode 87 of The Investors Podcast. Broadcasting from Bel Air Maryland. This is the Investors Podcast. They'll take complex things and make them seem insanely simple. They make your boring drive-to-work feel exhilarating. They give you actionable investing strategies. Your host, Preston Pish, and Stig Broderson. Hey, how's everybody?

Starting point is 00:00:31 you doing out there. This is Preston Pish and I'm your host for The Investors Podcast. And as usual, I'm accompanied by my co-host, Stig Broderson out in Denmark. And I played a different intro that time because when we were out at the Omaha shareholders meeting for Berkshire Hathaway, I got talking with some of the folks that listened to the show and they were kind of laughing at the intro and just talking about how they enjoyed the personality that we had that recorded that. And I said, we actually have like five other recordings, but I just never really use any of the other ones and I can. And so that was why I kind of mixed things up this morning when we started the show just to kind of show people. There's some other recordings that we did as well.

Starting point is 00:01:08 But anyway, so as you probably have guessed, this episode is all about our attendance at the Berkshire Hathaway Shareholders Meeting. So this is going to be a fun conversation for Stig and I because this year we had just a blast. I mean, it's kind of hard to even describe. The community was just so much fun. I mean, we have some fun. people in this community. And it's kind of hard because, you know, Stig and I just kind of sit and look at each other through Skype, record the show. And that's pretty much it. Then when we're done recording it, we just kind of upload the files, you know, into the internet. And it's gone forever. And we never really think about it ever again. So it was so much fun for us to go and meet some of

Starting point is 00:01:50 the people from the community that have been listening to the show and kind of hearing their comments. And there's some wild ones out there. I'll tell you, we have some wild folks in our crowd because Saturday night we did a pub crawl and we'll talk about that a little bit more and man, did we have fun? So what I'm going to do is, Stig, did you have any opening comments or anything you wanted to highlight from the meeting that just stood out in your mind and you have to get it off your chest before we start, you know, going sequential through the weekend here. Well, my highlight is basically just how much fun it was. And Preston, you have to factor in that But for me living in Denmark, it's like 24, 25 hours door to door to go to the event. And it might

Starting point is 00:02:32 seem like a big investment to go there, but I definitely think was worth it. And I really feel like I met some great people and I made some great friends over there. So I can't wait to get back next year. We had so much fun with our community. It was a blast. Hey, so let's talk about the weekend here in order. So Friday night, we fly out to Omaha. I got in kind of late. I got in about an hour before our first event started, which we went out to a barbecue restaurant, and I don't know how many people showed up. We probably had 50 or 60 people there the first night if I had the guests off the top of my head. And we just had a great time, just interacting with everyone. The community got to know everyone. One of the things that we did that I think was really beneficial is the

Starting point is 00:03:16 people that signed up on the list, we shot out an email and said, hey, if you're coming, send us a picture and just kind of a brief bio about yourself. And then what we did is we did is we turned it into like this digital flash card deck. If you've ever used Quizlet, maybe our younger crowd would kind of know what Quizlet is, but it's kind of like a digital flashcard deck for your smartphone. So people could see a picture. And then if you tap on the picture, then it'll flip over and it'll say the person's name and kind of their bio. So we did this. We sent this out to everyone that was attending the Omaha meeting so that you could learn everyone's name, their face, kind of what they've done in the past before you got there. So we walk into the room and,

Starting point is 00:03:54 And everyone knew everyone's name. We're all chatting because they had used the flashcards. We sent it out probably about 30 days in advance so people had time to learn it. So it was great. Everyone knew who they wanted to talk to if there were similar business interests or whatever. And it really turned into this great networking opportunity for people to kind of really get to know each other. So we did that Friday night. We really had a good time.

Starting point is 00:04:16 We said that, you know, the next night was going to be the pub crawl. So they needed to bring their A game and be ready. And they did. We'll get into that just a second. So when you go to Omaha, the thing that's a little bit difficult is if you want a good seat, you have to get there really early because, I mean, it's a madhouse. There's how many people, 30, 40,000 people Stig? Yeah. Yeah. It's, it's, there's a lot of people that come out for this thing. So they have it at what's called the CenturyLink conference. It's kind of like a, it's a big sports, indoor sports arena that houses, you know, 30. to 40,000 people. And it's jam packed. There's like no seats. So to get in there and get a seat, it's first come, first serve. And something that they added this year is they had security measures that before you go in, you had to get scanned. And before they'd opened the doors and everyone just

Starting point is 00:05:10 kind of ran in and you got stompled if you were slow. Preston, I don't know if those scanners worked because it seems like everyone that went through them, like everything was just beeping. And people just kept going because they wanted the good seats. So no, you're right. And, And so it didn't help that. So we, back to, we tell the community like, hey, if you want a good seat, this is the time we're going. It's a little bit embarrassing to even say the time. But we got there.

Starting point is 00:05:35 What time do we get there? $4.50 in the morning? Yeah. Well, Preston, to be honest, we actually came in Italy. That is even more embarrassing. So let's put it this way. Our community got there at $4.50. And then we were lost on the road.

Starting point is 00:05:48 It's probably more my fault than it was Jim's fault because we had a group of people that We're riding with us. Jim Hardin, who listens to the show. He's a good friend. He came out the first time we went out there. Jim was driving. I was kind of navigating. We had about, you know, five GPSes that were taking us to a century link, but not the one where the meeting was at. So we got lost. One good thing was is when we were lost, they had a Walmart that just happened to show up. And it was pouring rain outside. So we're like, hey, let's just stop and get an umbrella because none of us had umbrellas. So we run in, we get our umbrella. and when we go on our way and we show up, we showed up probably like 5, 10 in the morning. So our poor community was there. You know, we probably had the 50 people plus standing in the rain out there before we arrive. So we apologize to everyone for being so late. But we got there and we somehow were able to kind of finangle ourselves into the line. And Dave Buck's wife helped us out tremendously to get everyone corralled into the same spot in line.

Starting point is 00:06:51 So we're there in line and everyone's, you know, we had enough people that had umbrellas. We kind of made like our triple canopy umbrella layer. So everyone could kind of like walk from umbrella to umbrella like underneath of this canopy that we kind of made of our 50 or 60 people that were there in the morning. And it was great because although they didn't open the doors, I think what time did they open the door? Seven o'clock Stig? Yeah, I think I actually did it somewhat earlier this year like half past such or something like that which was really good because it was really pouring rain.

Starting point is 00:07:22 Yeah, they opened them a little early. I think they felt really bad. I mean, it was like a torrential downpour outside. So everyone's there kind of networking again, even though it's like five in the morning and it's pouring down rain and we're all out there and we're just having a good time. And I know it doesn't sound like a good time, but it was. We actually, we were dry and having a good time chatting and we were there. We got in.

Starting point is 00:07:44 The doors open. We're just running down these halls. And, you know, Stig and I had. mapped out the route to go to sit in a certain section that we wanted to sit in from a previous meeting. So we went in and just kind of ran up these steps, went down another aisle, and then we were right in the section we wanted to be. And for the most part, everyone kind of got to sit together because we were so early in the line and kind of got into the building, you know, oh man, we had great seats. It was phenomenal. So now for the part that probably everyone's

Starting point is 00:08:16 actually interested in, and that's the meeting itself. And what Stig and I did, instead of giving our opinions on different points or whatever, we recorded five of the best questions that we kind of took away from the meeting. And what we're going to do is we're going to play those questions. And these are questions from the audience to Warren Buffett. And we're going to listen to the question and then we're going to listen to Warren's response. And then we're going to stop the recording. And then Stig and I are going to kind of talk about what it is that he said and our thoughts. on it. So one of the things that I want to tell you is before we play these questions, there's a lot of echo in this CenturyLink Center. So although I wish we had a better quality sound that we can

Starting point is 00:08:58 play for you, this is what it is just because of the environment in which we recorded this. But I think that the content that you're going to hear is really important. So that's why we're going to continue to play this. Okay. So without further delay, here's the first question. Good afternoon, Mr. Buffett, Mr. Bunger. I'm John Bore from Iowa City, Iowa. When interest rates go from zero to negative in a country, how does that change the way they value a company or something? Do you choose a high valuation because the discount rate is not paid low?

Starting point is 00:09:36 Or on the other hand, do you choose a low valuation because the cash flow is likely to be poor? Well, going from zero to minus a half, is really no different than going from four to three and a half. I mean, it has a different field obviously if you have to pay a half a point to somebody, but if you

Starting point is 00:09:56 have your yield or your base rate reduced by half a point, it's of some significance, but it isn't dramatic. What's dramatic is interest rates being where they are in town. I mean, whether it's zero, plus a quarter, plus a half, minus a half. We are dealing with the situation, essentially,

Starting point is 00:10:15 very close to zero interest rates. And we have been for a long time and longer than I would have anticipated. The nature of it is that you'll pay more for a business when interest rates are zero than if they were like 50% when Volker was around. And you can take that up and down the line. I mean, we don't get too exact about it because it isn't that exact of science. But very cheap money makes me pay a little more for business. than when money was a what we previously thought was normal rates and very tight money would cause me to pay somewhat less.

Starting point is 00:10:55 I mean, we had a rule for 2,600 years that he south lived around 600 BC, but he didn't happen to know what it was BC, but you know, he can't know everything. And it was a burden of hand is worth doing the Bush, but a burden of a hand is worth doing the Bush, but a burden of And now it's worth about nine-tenths of a burden in the bush. And Europe, you know, if it spends on how far out of the bush it's, but it keeps getting worth less, it should go along. So these are very unusual times that way. And if you ask me whether I paid a little more for precision cash parts, because interest rates are around zero, than if they've been 6%, the answer is yes. I try not to pay too much more, but it has an effect.

Starting point is 00:11:40 if interest rates continue at this rate for a long time, if you ever really start thinking that something close of this as a normal, that will have an enormous effect on asset values. It already has some effect. Charlie? Yeah, but I don't think anybody really knows much about negative interest rates. We never had it. And we never had periods or stasis, like,

Starting point is 00:12:05 except for the Great Depression. We didn't have things. like happening in Japan, great modern nation playing all of monetary tricks, Cambrian tricks, having those tricks, and mired in stasis for 25 years. And none of the great economists have studied this to our children, understand it either. But we just do the best we can. And they still don't understand it. No.

Starting point is 00:12:33 Our advantage is that we know we don't understand. It's interesting though. I mean, we are, it makes for an interesting movie. And it does modestly affect what we pay for businesses. The question, I think, is such a profound question. And it gets to the heart of asset valuation whenever you're talking about interest rates. And when interest rates continue to push lower and lower, and now they're at zero. You heard Warren say that he paid a higher premium.

Starting point is 00:13:09 to own castaway parts because of the fact that interest rates are so low. And he said that he paid a higher premium today than he would have if it was, you know, back whenever Paul Volcker had rates at 15%. This goes back to an idea when Stig and I had Colin Roche on the show. And one of the things that Colin and I were kind of debating back and forth, I said, you know, you go back to 1980. The reason that you had asset prices at such a lower multiple on the stock market was because interest rates are so high and then as interest rates went down, that's why you're seeing a higher

Starting point is 00:13:41 premium on asset values. That gets to exactly what Warren Buffett just explained there in that response that he provided. The other part to this that I think is really interesting is their opinion that negative interest rates have never happened before. And if you don't understand it, you're thinking about it correctly. That's their exact quote. And I find that really interesting. And I think it's their way of saying, hey, we have no idea how this is going to end. We have literally no idea how this is going to end because this is something we've never seen before. So, you know, your guess is as good as ours. And I think if you're trying to come up with a model or say that you're going to invest a certain way because you know what's going to happen,

Starting point is 00:14:23 they think that that approach is very concerning. And you need to maybe be a little bit more open-minded as to how this might all play out. Stig, I'm curious to hear your thoughts. on all this. Yeah, I really like the question too. And also because it's something that we discussed on the podcast before. And now you're referring to Colin Roach. And I think he was open to the same idea as Jeremy Siegel out there is talking about that this might be a new normal, having interest rates or low, at least something that we will have for a long time. And perhaps that was along the same lines as Warren Buffett was talking about. Because

Starting point is 00:15:00 what will happen when interest rates go up again? Well, clearly, the asset prices will drop, and Ron Buffett knows that. So when he is saying that he is paying more for precision cash by the otherwise would, I think that's a really interesting indicator of how he's looking at macroeconomics. Perhaps he simply failed that his opportunity cost of holding too much cash was getting too expensive. We talked about this many times before. Do you really want to chase 4% returns right now? And you just have to relate yourself to Warren Buffett. I can see why he's doing what he's doing. He has so much cash. He has another understanding of this.

Starting point is 00:15:37 But if you're new into investing, I would say perhaps you should just hold on to money and learn a lot more about the current environment before you simply start to invest. Because my main concern is that with negative interest rates, this will actually change the behavior of banks. And Warren Buffett, he's saying, well, going from 4 to 3.5, that's not that different. that going from zero to negative 0.5. I'm not so sure about that. I would be sad if banks would start to lend out money to people that were not credit

Starting point is 00:16:10 worthy because they feel obligated to do so. And it is part of the mechanism why the rates are so low. It's because they want banks to start to lend out money so we can have more growth. And I'm just thinking, so did we ever have a situation where we were lending out money to people that couldn't afford the assets that they were acquiring? Yes, that just happened before the great financial crisis. So you have people having mortgages that they have no chance paying, and they were barely hanging on.

Starting point is 00:16:39 And the hope was the weak mortgage in high real estate prices. Is it a bubble like that we're going to have all the next five or ten years? Is that what we're hoping for with keeping interest rates or lower even negative? I think that's my main concern. I would love if Warren Buffett could address some of those concerns as well. So one of the things that I've noticed with Buffett is he really does not even like to broach the subject of what he thinks could potentially happen with all this. He just stays way away from it. Now Charlie Munger on the other hand has recently, and I mean in the last couple months, kind of come out and been a little bit more vocal than Buffett on what he thinks might go down here. And it was I think Monday morning after all of this Munger was being interviewed. And he really compared what's happening now in America to Japan in 1990. And Stig, we've been saying this for what?

Starting point is 00:17:33 A year, more than a year, that that's kind of where we saw all the timing and everything. And so when Munger came out and said that on the following Monday that he sees that where the United States is right now as almost being in parallel to where Japan was at 1990, I was like, wow, that's awesome to really kind of hear that from a guy of his stature and his knowledge and to know that. that any opinion that Munger has is probably really closely tied to what Buffett's thinking as well. So then Munger said, you know, I wouldn't be the least bit surprised if we kind of go into a bare market for 30 years or, you know, the next 30 years could be really difficult. And so when you think about a 30 year bear market, that idea sounds crazy to a lot of people because all they know is that the market always goes up in the long term. But here's something that I'll tell you.

Starting point is 00:18:23 If you were a bond investor from 1940 to 1981, you were in a 40-year bear market. If you owned a bond that was a long-term bond called a 50-year or whatever from that time frame, or if you invested in bonds at all during that time frame, you lost money because interest rates were going up for 40 years. Then if you were a bond investor, like Ray Dalio, for example, you know, 60% of his portfolio was in bonds from 1981 until now, if you were in. in that market for the last, call it 30 years or whatever, you were in a bull market for that entire period because interest rates had gone from, what was it, 16% in 1981 on the 10-year

Starting point is 00:19:04 treasury to almost nothing now, that whole period, you're making money in the bond market. So now you've got to understand. And the stock market, you know, in Japan, perfect example, Japan's stock market from 1990 till really kind of now, they were in a bare market. it went down for nearly 25 years, 30 years, and that's something that could happen. People need to open their aperture to the idea of different arrays of possibilities here. And I think that they need to really be open-minded as to how all this could play out. And I don't want to necessarily spin this that it's all going to be negative and whatnot.

Starting point is 00:19:44 But I think that that possibility really needs to be in people's mindset as they're thinking through some of this stuff. Yeah, I love that you refer to Chalemonger because what is really deliberating about Chalemonger compared to Warren Buffett, in my opinion at least, is that he's just so honest. It's really clear that Warren Buffett. I love Warren Buffett. It's not like that. He's just very clear that he's very cautious about what he's saying. He don't want it to be misunderstood.

Starting point is 00:20:09 Chalemonger he doesn't care. And the interesting thing is that you would think that all these people, say 40,000 people come to Omaha, they're all Warren Buffett fans. And they are. But I think they're even more Charlie Munger fans because they're so hardcore into value investing. And he's actually the one really saying things as they are. And I found that very significant over there. I completely agree with you 100%.

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Starting point is 00:24:35 slash WSB. That's Shopify.com slash WSB. All right. Back to the show. Charlie is the one that really kind of makes the meeting worth going to, in my opinion, because he's the one who's hilarious. I mean, just hilarious with some of his comments. If Charlie wasn't there, you would not have the same experience. Guaranteed, you would not have the same experience. But, okay, so enough about that one. Let's go to the next question. And we got some, I think we pulled some of the best questions of the weekend. There was some really good ones and there were some really bad ones.

Starting point is 00:25:10 There was a guy who stood up and he was talking about some parallel between Harry Potter and Berkshire. It was kind of funny. It was more entertaining than anything. Okay, so let's go to the next question here. Yeah, the question is from Larry Leppowitz of Boston. The year-in balance sheet for manufacturing service and retailing operations shows total current assets of 28.6 billion of which, of which, cash and equivalents are $6.8 million. Meanwhile, total current liabilities are $12.7 billion, implying networking capital, and $15.9 billion. It has become increasingly common for companies

Starting point is 00:25:50 like Apple and Dell to finance their business via their suppliers, in some cases with negative working capital. Why is it necessary for these work-share businesses to have so much work on capital, particularly so much cash? More generally, how do you think about efficiently managing the working capital of a business segment so large, sprawling and essentialism. Yeah, well, we have access to cash every place in Berkshire. So we don't, at present it really doesn't make any difference, whether we have it at certain subsidiaries or other subsidiaries.

Starting point is 00:26:26 So we do not, we have to just cash. As I pointed out the best, we'll never go below 20 billion of cash in clients and stay comfortably above it. but allowing for the perforter that's going to have times we'll do account over 60 billion of consolidating cash. We don't really worry much about what pocket it's in. It's not making anything anyway at these levels. Now, if rates move higher,

Starting point is 00:26:58 we've actually got the mechanics in process to do sweep accounts. That's right. So I would pay no attention to the particular cash that's being held in that category there. The cash in Bertrandaway Energy, the cash in the railroad, we have independent levels that we don't guarantee their debt. They run with ample cash, and we would not look at sweeping that down the minimum. But if you talk about 40 or 50 of our miscellaneous subsidiaries, we will go to a sweep account when you're getting zero. When you're getting zero, maybe much difference where you get zero. So I think the fellow is over analyze it a little bit, but I understand why he didn't.

Starting point is 00:27:47 One is I guess is why don't we imitate some of these other people and pay our suppliers a lot more slow. So we have more money. That's a big thing in business now. And last year, a Walmart, for example, went to almost all their suppliers, as I understand it, certainly the companies do we've been able. And they basically had a list of half a dozen things that they wanted the present suppliers to agree to win. And one of those things was more extended terms. And each of our companies made their own decisions. But my guess is they got more extended terms from most of their suppliers, maybe a very high percentage of their suppliers.

Starting point is 00:28:35 And they have gone from, I don't remember the exact request, whether they went from 30 to 60 days or what it was. But they got a meaningful extension. So you will, you know, in a couple years or a year, it takes time to implement. You'll see higher payables relative to the sales. at Walmart that you saw a year or two ago. And they are under a lot of pressure, competing with Amazon and others. And that's one of the ways that they expressed it.

Starting point is 00:29:08 And I've seen it down other places. And it's conceivable that one of our subsidiaries might deeming wise to do it, but I don't think they will. I mean, I think that the pressure on the ash, not that high and I think the pressure for the desire for great relations with suppliers will probably overcome most of our managers minds any desire to start extending terms. Yeah, I think it's hard to do that brutal. When you're rich and the supplier is, I think that the suppliers don't love.

Starting point is 00:29:50 And so there's something to be said for leaning over. many over backwarded to have a well-and relationship with both suppliers uncovers. All of this. Okay. So for this one here, the thing that we were really trying to get at was just their discussion on what are they doing with their cash? And kind of you've got all these competitors and they really kind of got into the Walmart, Amazon thing with talking about how much cash do they have on hand in order to kind of run their business. And the person was saying that they have a really small, if not negative working capital. And that's really kind of getting to the cash flow

Starting point is 00:30:35 that's flowing through their company. And the person was saying, hey, Berkshire, you're sitting on literally like $70 billion of cash. Why are you sitting on all that money? And they really didn't answer that question as far as I'm concerned. But I think that what was an interesting point that he was making was it's at zero percent. I can't get yield anywhere. So why would I go doing anything fancy? I think that just basically having the liquidity is more powerful and more value, if you will, than doing anything else. And it's not necessarily just from that response because he kind of hit on that on some of the other responses through the Q&A that morning. But that was my takeaway from the way he responded. And I think it might be in another question. So I don't want to

Starting point is 00:31:24 to jump the gun too much. But Charlie Munger makes a comment in one of the questions when he says, you know, back in 2009, it was really nice having all that liquidity, wasn't it? And that's, I think, what they're really getting at with the fact that they're sitting on so much cash and getting literally no yield. And this is something I think that's really important for people to think about. If you're sitting on $70 billion and let's just say, well, why doesn't you just go buy, you know, a 30-year bond at whatever percent yield, We'll call it a 2.5 to 3% yield on a 30-year federal bond. Well, think about it this way.

Starting point is 00:32:00 Let's say interest rates do go up in the future, and we're just kind of dead wrong at the direction that all this is going. If he's sitting on, call it a $50 billion position in a 30-year treasury, he is going to get taken to the schoolhouse, and he's going to lose a lot of money in that position. So both Charlie and Warren are saying, we don't know what's going on with interest rates. we have no idea what's going to happen in the next five years with interest rates. So we're just more comfortable sitting on all this liquidity and waiting to see what happens and seeing what kind of cards are dealt. It's early, it's like a card game. It's early in the draw.

Starting point is 00:32:38 They don't know what kind of cards are going to be coming their way, but they do have a big stack of chips sitting on the table that they are ready to play with if they do get dealt some good hands. So that's how I read it. And I'm curious to hear Stig's opinion on this one. Yeah, I think it was really interesting to hear his discussion about CASS as well. And he was talking about a sweep account. If you're not completely familiar with that term, it's basically a combination of two or more accounts at a bank where it's really useful of managing a steady cash flow between a cash account and to make scheduled payments, but it also an investment account where the cash is able to accrue a higher return. But as World Buffett is saying, it's not really

Starting point is 00:33:16 that important because the return you can get from having that is basically the same as just having cash, and he just wants a flexibility. I think one takeaway, especially if you're starting analyzing companies, that really understanding what a negative networking capital is. So basically, you are looking at the cash flows coming in within the next 12 months, which is the current assets and the cash flow going out the next 12 month, which is the current liabilities. And he's talking about how you can actually run a business with a negative network capital. And it might not make in a sense because how can you run a company when you have more cash going out, the more money coming in. And basically, what a company like Walmart is doing is that since

Starting point is 00:33:56 they get cashed right away from the customers, and they can actually have the suppliers finance that whole system. Basically, they have money coming in, but it would take, say, 30 or 60 days before money coming out. So say that they would take the $100 and buy a fixed asset, say, wanted to use it to open a new store. Then suddenly you would have a negative networking capital, but you will actually have suppliers financing the growth of the company. And that was what this whole discussion was about. So if you're starting out analyzing companies and you heard about, well, you want a positive networking capital or a higher current ratio than one, as often referred to, you know, generally that's a sign of health. But you have companies like Walmart, I think Apple was mentioned

Starting point is 00:34:42 as well. ExxonMobil is another example where it actually makes sense to have someone else financial growth. So I think for that it was an interesting discussion as well. You know, it's funny, Stig. I remember, oh man, what was it? Two or three years ago, you and I having discussions way before the forum, it's probably maybe even excess of three years ago, you and I having discussions about negative working capital with Walmart and the current ratio being below one on our forum like three or four years ago. I remember that. So let's go to the next one here. What do we got for the third question that Stig and I kind of picked out of the meeting?

Starting point is 00:35:24 Floated and negative interest rates is something that's been discussed a few times today. Mentioned his implications for a return on the flow. I was wondering, how should shareholders value the 25% of the flow that's been created by retrocessional reinsurance where the business is booked at an underwriting clause? And at times, it has adversely developed. Cliff brings up some of our business in the insurance business we take with the probability of some underwriting loss in order to get to use the money for a very long period of time. And it would look under today's interest rates like we can't do much with that. There's two answers to that.

Starting point is 00:36:07 We don't think of the duration of the kind of contracts we have, we don't expect these rates. but we could be wrong. But the second one also is that we do think that occasionally we will get chances, even in periods of low interest rates, to do things that will produce quite a bit, very reasonable returns. And we're measuring it in the potential utility to us with our really pretty unusual flexibility. in respect to the deployment of funds and this long period

Starting point is 00:36:51 when we'll have an opportunity perhaps to come up with one or two things that we can deploy money at a rate that may be quite a bit higher than other people assume now the money can be deployed. Charlie? We're only to pay a little money now to have a certainty

Starting point is 00:37:11 of having a lot of money available in case something really attractive comes up in a quick, difficult time. It's an option cost. It's an option cost for him. And that option came in handy in 2008, 9, for him. Did it ever? I love Charlie Munger. Did it ever?

Starting point is 00:37:34 So what they're getting at here is, again, what we were talking about with their float. They've got all this cash that they're sitting on with their insurance company. And the guy, the guy's question, I think, is a really. really good question because he's saying you're booking your insurance contracts at a loss. And he said, when you're sitting there and you're looking at this large pile of cash and you're not able to get any type of yield anywhere on the market and you're just getting zero percent, if you will, and maybe worse than that, and it is worse than that after you account for inflation, you know, aren't you guys concerned? And Buffett and Munger were kind of like, no, we're not

Starting point is 00:38:12 concerned at all because we're sitting on so much of it. And I think that what they're really, that whole discussion was a discussion of liquidity. And it goes back to what we're saying in an earlier response. They value liquidity. And I think that that's something that so many investors miss is the power of having that war chest stacked with cash for when things do go bad. And Buffett said, he started off his response saying, we can make a very substantial. And He says, and he kind of like rephrase, he says, we can make a good return. And he was confident that he's going to have that opportunity soon. So that's how I read that.

Starting point is 00:38:52 I think that there's a total discussion about liquidity. I think one of the more interesting points with this is just how difficult it's going to be for some insurance companies to be profitable in the future just because they're so dependent on going into some type of fixed income asset that will give them some yield on that float and all that. cash that they're sitting on for the day that they have to pay out their potential claims. And this is a huge issue. Negative interest rates. And this is where I think a lot of academics come off the rails. And they don't think about the third and fourth order effects. Well, when you take a deep dive into the insurance industry and you think about what negative

Starting point is 00:39:31 interest rates and the implications that will have for insurance companies, it is insane. It's horrible for insurance companies because they can't do anything with all that money to reinvest and keep their rates affordable. turn a profit. So this is a huge issue for them. Yeah, I think it was a really interesting discussion, especially because it was about insurance and was also about reinsurance, but basically, when Warren Buffett talks about reinsurance, it's him insuring other insurance companies. So it's basically the same procedure. And they were talking about the float. And basically, I think Warren Buffet is really the person that made float like a popular term in investing. Basically, that's

Starting point is 00:40:09 when people pay up for their insurance, when they pay the people. premiums, he have a chance to invest that money, and that was also how he grew with a company. But one must also understand that he can't just collect, say, $100 billion in cash and then go in and buy stocks of IBM or whatever, Warren Buffett with fancy. That's just not how it works. Flood is composed of two things. It's the claim reserves and the premium reserves. And if you look at the claim reserves, that's the assets that set aside to satisfy all the claims that they're likely to incur of the current date. So there must be some kind of The claims has to be matched with reserves that are set aside.

Starting point is 00:40:47 So they can't just go out and buy stocks because stocks can drop in price and in value. So usually they are obligated one way or the other to hold a lot of bonds. And that comes back to the thing that Preston was talking about before. So what do you do when you can't make any kind of return? So that's a problem for insurance companies. So basically what I found was really interesting is that he's talking about those two pillars. or that was actually the person asking the question. You have underwriting, which is basically you coming up with the insurance,

Starting point is 00:41:18 and then based on those premium, you can go in and reinvest it. So think about the current environment. Think about that you can only get, say, a 2% return. In that case, you need to have a nice profit on your underwriting. Say, on the other hand, that you could get a 10% risk-free return in the market, and that has been the case. In that situation, it might actually make sense to take, a loss. So basically, you insured people you know, you know it would cost you money because

Starting point is 00:41:46 then you can go in and reinvest it at a higher risk-free rate. So a lot of great things to dig into in this question. I think it was really interesting in hearing Warren Buffett's answer. I have one quick follow question for you, Preston. Given your background and how much you started Warren Buffett, have you ever personal considering going into insurance stocks? Yeah, I've owned some in the past, absolutely. Did you know how to read the balance sheets? Because I've got to be completely honest. I look several times in insurance companies. I also owned one and one point of time. I found it so hard to read the balance sheets of insurance companies. Yep. I totally agree with you. So yeah, I think that whenever I was invested in them, I knew a whole lot less than what

Starting point is 00:42:27 I feel like I know now. I think whenever I look at an insurance company right now, it comes down more to real rates, real interest rates. So when you look at real interest rates today, they're literally slightly below zero. They're kind of in the negative territory here in the United States because inflation, when you account for inflation and the nominal interest rate, when you combine those two together, that gives you the real rate. And I think that's what's important when you're talking about whether underwriters in an insurance company are underwriting at a profit or a loss.

Starting point is 00:42:59 And I think that it's so incredibly important for the CEO of the company who's running it, to be able to kind of anticipate when that real rate becomes, like right now, it just recently turned negative. They've got to be underwriting these things at a profit. They can't be underwriting these things at a loss because they literally can't take the money anywhere to invest it with any kind of yield. So that's where I think if you have a great manager like GEICO, I mean, the best in the business running GEICO. So they understand that. They are making very informed decisions. I mean, And the only way to invest in GEICO is to own Berkshire Hathaway because it's a fully owned operational subsidiary. But some of these other insurance companies, I didn't necessarily think about things that way, call it three or four years ago.

Starting point is 00:43:45 I just didn't have the knowledge at that point in time to understand it in that light. But if I was going to do it today, that would be one of the main things that I would be looking at. Are they underwriting at a profit or loss based off of real interest rates would probably be one of my main drivers? Yeah, I just find interesting, Preston, you just say, well, back when I did know as much, yes, I would own insurance companies now that actually know what's happening, no way. Well, and I wouldn't even say that right now I know what's happening. That's a bold statement in itself. But no, I mean, I think you just got to be honest with yourself. I think when you look at things, there's absolutely, there's so many companies that I've owned that looking at it back in

Starting point is 00:44:26 hindsight, the deal has worked out well for me, but it probably wasn't necessarily all due to my astute knowledge of the business. It was probably more of my luck on. Yeah, there was one of those bull markets where you were just making a profit. Everyone else was making a profit because it was just going one way and you might be thinking that you were really smart at reading balance sheets of insurance companies or whatnot. Yeah. It goes back to my buddy Brian Rutherford, who's the professor up at West Point, just making his statement. You know, he had the cadet and, you know, the cadet says, oh, in the last year I did a 10% return. And, And Brian's immediate question was, well, what did the S&P 500 do?

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Starting point is 00:48:37 And this is question number four. I work for the largest real estate investing solution that work online called BiggerPockets.com. We're seeing investors starting to get concerned that the real estate market is a big profit similar to the run of 2005, six, and seven that led to the crash in 2008. Warren, in 2012, you told Becky quit that if you had a way to easily damage them, you'd buy 100,000 houses and rent them out. How do you feel about the real estate market today?

Starting point is 00:49:08 It's not as attractive as it was in 2012. They, you know, we're not particularly better at predicting real estate markets and where our stock markets or interest rate markets. And it's driven to some extent by these low interest rates, but there are certainly properties that are being sold at very, very low cap rates that striking is having more potential for loss than gain. But again, you can borrow money for very, very little.

Starting point is 00:49:38 And you think you're getting to some very safe asset 100 basis points or 150 basis points higher. There's a great temptation to do it. I think it's a mistake to do that. But I could be wrong. I don't see a nationwide bubble in residential legal state now at all. Most of the country, you are not paying bubble prices for residential real estate, but it's quite different than it was in 2012.

Starting point is 00:50:15 And I don't think the next time around the problem is going to be a real estate bubble, I think, It certainly was because, in a very large part of what happened in 2008 and 9, but I don't think it would be a rubric of that. Charlie, nothing to have. Okay, so that was, I thought that was a really interesting question. And a huge shout out to our good friend Josh Dorkin, because the person asking the question was from bigger pockets in his podcast. So Josh, I don't know if you, you listen. to our show, but it was great to hear one of your folks from your audience there asking the question at the meeting. Well, I wanted to play this one because there's so many people out there

Starting point is 00:51:00 that either own a house, own some form of real estate investment, and I just want people to be able to hear Buffett's response to the real estate question and what he thinks that's at right now. So I don't think he really had too much of an opinion other than do I think real estate's way overpriced like it was back in 08? And his answer is no, I don't think so. I think that one the things that gets into like a really interesting discussion, just like stocks and just like any other financial asset, as interest rates, federal interest rates change. That's going to change the way the market use any asset price, whether it's real estate or stocks. So when you look at what form of interest rates really impact the real estate market, you're really talking about

Starting point is 00:51:43 longer term interest rates. So it'd be like the 30-year bond. And when we look at where that's at, It still has a little bit of room to go lower if the federal government would want to push it lower. Whenever they did Operation Twist, this is the U.S. Fed doing monetary policy, quantitative easing with what they called Operation Twist. The whole point of this was to drive down the long-term interest rates of like the 30-year bond. I think that during the next credit contraction, they're going to have to do something similar in order to keep long duration, long-term bonds, the 30-year treasury in check, and it's going to have to stay down. If that would start to come up and then that would start to go up, that's going to, I think that's going to be very detrimental to real estate prices.

Starting point is 00:52:32 That's my opinion. I am not an expert in real estate, but that's what I think that they're going to have to do. And I think that the Fed is going to do everything they can in order to keep that rate where it's at, if not drop it lower in order to keep, you know, asset prices in check. But, I mean, you get into real estate's very local. You know, from one city to the next, it changes tremendously. So we are not experts in real estate, but those are some of my thoughts on top of what Warren had said. Stig, I'm curious to see if you have any further comments.

Starting point is 00:53:00 Are you going to pull with Charlie Munger here? Yeah, I love when Charlie said nothing to add. He didn't want to just speak about nothing. He was, I think all his points was really concise. And whenever he started talking, I was paying much more attention. as he was saying, then compared to Warren Buffett, perhaps because Warren Buffett was speaking like 95% of the time. But I agree with you, President. I'm definitely not an expert in real estate either. I am concerned. I think real estate could be one of the asset classes where you might see a bubble

Starting point is 00:53:31 if the central banks still behave irresponsible. That would be my take. But I don't think we're in that territory yet. But clearly, if they need to high rates, you'll probably see the real estate market, just as the stock market taking a big market. dive. But no, let me pull a child and say nothing to add, mainly because I don't know. Now, I really do think that the critical variable moving forward with real estate is really kind of that long-term bond yield. If you do see that go up, I think that you could potentially see issues in real estate. But for the most part, I don't see the Fed allowing that to happen. So, let's go ahead and go to question number five, and here it comes. I just have a simple question for

Starting point is 00:54:13 you, how would you explain IBMs in the mobile? I'm sure that's a simple question. Well, it has certain strengths and certain weaknesses, and I don't think we want to get into giving an investment analysis of any of the portfolio companies that we own. I think I'd probably better leave it there, Charlie? Yeah, it's obviously coping with the

Starting point is 00:54:48 set of change in the computing world. It's tempting to something that's vague an industry. God knows whether it's going to work. Obviously, you're aware of the world. I don't think Warren knows either. Now, find out whether there are strange to strange. But it's a feel of a lot of intelligent people trying to get vague in it.

Starting point is 00:55:11 How bad was that? That response, Stig, how bad was that? Yeah, it was horrible. It was like, well, it has some good sides and some bad. Oh, my gosh. When I heard this, I was like, they're not even serious. These two were not even serious with this response. I think they are licking their wounds on this IBM thing,

Starting point is 00:55:38 and I think they're a little baffled at how this has been playing out. And, you know, this is this is my takeaway with IBM. And I learned a lot through this as well because I lost a little bit of money on IBM. I definitely did not come out on top in that position. I had it for, I don't know, maybe a year. And then when they just continued, when their revenues just kept missing and missing, I was like, I'm getting out of this thing. Like, they do not have this under control.

Starting point is 00:56:06 And when I was looking at their strategy, you know, their business model, I hate the fact that they're a service-driven kind of model with a big premium on expertise. And then all of their competitors are just knocking the socks off of them by low margin type business. I just, you know, I got out. I was like, hey, this was not a good idea. I misread this and I got out. So these two continue to plug away. And, you know, IBM continues to miss their revenues.

Starting point is 00:56:36 How many years now? Five years? Yeah, almost since Buffett brought into them, I want to say. Yeah, they need to come up with a response. Now, Buffett kind of pivoted. He said, I don't want to talk anything about the portfolio positions. What he meant by that is any company that we own that's a non-operational subsidiary, meaning we don't have a controlling vote, that's what he was referring to.

Starting point is 00:57:00 Like, I don't want to make a comment on it because I might buy more or I might sell the position, was really kind of what he was inning at there. having been the meetings in the past, they have talked about IBM a whole lot more than that. That was the weakest response I think I've ever seen. The person's questions was a great question. What's their moat? And they've got tons of IP, but I think that their model is what's broke in that they're not going after Amazon and Google in the right direction as far as, you know, these guys are going to tear them apart because they're trying to destroy the margin where IBM's trying to build their margin. and I think they've got the wrong approach.

Starting point is 00:57:38 Yeah, and Charlemonga, he actually was asked the same question. I think it was last year or the year before. And back then he was talking about that IBM might be a company with many resources, but they had really mixed performance and they had difficulty growing revenue. And then he actually had this remark about it was really important that Berksa Halloway paid a very reasonable price to establish ownership in the position in the stock. Well, it wasn't a good answer. it was definitely a better answer, but I think it was clear to me, at least how I read them,

Starting point is 00:58:09 that IBM is not Chalemonger's pick. At least that's how I read it. Chalemonga, he can't see how IBM can succeed. Clearly, Preston, not even a fraction of the same level as Chalmonga, but I remember Preston, we actually discussed IBM. Actually, I had a chance to pull up an old email he sent to me back at October, 20 October 2014. What's that say? The subject was IBM at 168. that's the only thing. But I remember around that time we discussed it and we're like, we really can't see how they can grow the revenue. I mean, it might just be asked they were not tax-avvy enough,

Starting point is 00:58:48 but they had this idea that they weren't to expand to South America and then they wanted to do something in the cloud. And to me, it didn't make a lot of sense. So a lot of good reasons why I didn't invest in IBM back then, but I just couldn't see how they could, not just grow, but how they could just sustain the earnings that they were having. And I think if Warren Buffett asked Chalamanga, he would probably be saying the same thing. Yeah. Yeah, no, I agree. And hey, they're hanging in there. So it'll be interesting to see how this one

Starting point is 00:59:19 plays out. And for a guy who says he doesn't invest in anything that he doesn't fully understand and really kind of stays away from technology stocks, man, it'll be interesting to see what they say next year. But so those are the five questions that we pulled out of the meeting. There was obviously tons more. They ask questions just so you kind of understand. These questions go from, what time do do they start? Nine or ten o'clock and then they wrap it up probably around three o'clock with an hour break for lunch. So the questions just go on and on. I mean, if you're a person who enjoyed listening to some of those responses, you would love the Berkshire meeting. If you were listening to those and you were like glazing over and falling asleep in your car, you probably might want to skip the Berkshire

Starting point is 01:00:00 meeting because that's pretty much what the whole meeting's about as those kind of questions. We did this. After we were done, we went to the Nebraska Furniture Mart. So if you've read any of Warren Buffett's biographies, there's this really awesome story about Warren Buffett buying a furniture company from a lady named Rose Blumpkin. And so that's just like right down the street. How many miles away stick? Maybe five, 10 miles from where we were at the CenturyLink. Yeah, that was pretty close. So we go there. They had like a couple of different options for food. You could get some pizza. You could get a barbecue again. And so the food was real cheap. I mean, we just went in there, kind of had some meals. We walked around the Nebraska

Starting point is 01:00:40 Furniture Mart for people that had read the story about Rose Blumpkin. They could see it. It's just huge. If you've never been doing Nebraska Furniture Mart, they're just massive. So we walked around the store a little bit, kind of, you know, just the whole community, just hanging out. It was so much fun. So after that, we had our premier event. Everyone in Omaha is going to these, you know, really fancy swanky steak dinners, having these big guest speakers come in. So Stig and I were like, you know what, let's invert, baby. Let's do this completely opposite of everyone else. And let's do something that is not classy.

Starting point is 01:01:17 Let's do something that just gets down to the raw part of interaction and getting to know people. and so we had our pub crawl. So we go to the old market in Omaha, which is this awesome area, a bunch of kind of bars and social settings. I'd say we had 60 people again probably come out, a couple different new faces, a couple old faces kind of left from Friday to Saturday. But in total, we probably had 60 to 70 people that came out Saturday night. And, you know, we just started off at the first bar.

Starting point is 01:01:50 Everyone kind of got one drink and started socializing, just having a good. good time. And we had it planned so that there was a specific time that we had moved to the next bar. So the story that this originated from, so I got this idea for these pub crawls whenever I was attack helicopter pilot stationed in South Korea. And what we did is we would stay at one bar for 45 minutes to an hour. And just so you know, we're not going to really be talking about investing for the rest of the show. It's more social and like funny stories. So if you don't want to hear the funny stories and you guys can kind of turn it off and maybe go to another episode. But we're going to be talking about our fun times that we had out in Omaha for the rest of the episode.

Starting point is 01:02:32 So I learned this trick when I was in Korea where we got on a pub crawl and I think we had our time down to like an hour at each bar and then literally GPS timed. Like the time was very important because in the last minute at the bar, what we would do is we'd start this slow clap and we'd just slowly build it. And, you know, if there was 30 or 40 people or whatever, we'd just slowly start clapping and clapping and clap and get louder and louder. And then we'd start chanting something. And then everyone would just walk out the bar, like right on the minute of whenever we were, our time slot was done for that particular bar and we go to the next location. We were there in Omaha and everyone knew the slow clap was coming. So everyone's like checking their phone for what the GPS time was.

Starting point is 01:03:16 It's like 559. And everyone's like looking, Preston, it's 559. We've got to start to slow. And so we'd start the slow clap. We'd build it up. And then everyone. And we had like 60, 70 people all in this bar slow clapping. And then the people that were like eating that were there that weren't part of our group, they're looking like, what is happening? Are these people going to like break out into a dance or something?

Starting point is 01:03:38 Like, what is this? I think they thought it was like a flash mob or something that was going to put on YouTube. They probably thought we were going to do a flash mob. So we're there clapping and building up. Then everyone starts chanting. T.I.P. for the Investors podcast. TIP, TIP, and then we like just left.

Starting point is 01:03:56 And so what we were trying to do is just build this crowd of people through the night that would join our group and come out. But man, did we have fun? So we walked out the first bar and we walked on the street. And I kind of coordinated it so all the bars were within, you know, a couple like 100 feet of each other. It wasn't a long walk to the next location. And we did this from, I think we did maybe six bars. maybe even seven, I can't remember. But as people kind of got tired and wore out, they either stayed with us or left.

Starting point is 01:04:26 And I think at the end of the night, it was, you know, one o'clock in the morning. And we still had a good 20 people probably in our group. I mean, we had a lot of people that were still hanging around there at the end. But what a fun night. I mean, we had so much fun. And you know what was great was everyone kind of let their hair down. They really started talking with each other. When we changed from one bar to the next, people kind of got dislocated from the

Starting point is 01:04:50 the group that they were talking to before and they kind of assembled themselves with maybe even a new group as we moved to the next bar. So it was a great setting for people to really get to know everyone that was there. And I mean, we just, we carried on and had a blast. I think people in Omaha when they saw, you know, 70 people walking down the street going into, and then when we walked into the bar, when we walked into the next bar, 70 people just come through the door all at one time. And the bartender's like, what in the world is happening? And we're going to, and we walked into the bar. We're coming in and we all know each other. I mean, it was just hilarious. That was our Saturday night. It was definitely so much fun. Sunday, we had another brunch. Great setting, a bunch of pool tables and they had a buffet. The food there was phenomenal and just really had a great time. And we got pictures for all this stuff. And so what we're going to do in the show notes of this episode, we're going to have the pictures of the event. So you guys can kind of go in there and you can look at some of the different places that we went to. You can see us partying and carrying on and then pictures of us at the shareholders meeting.

Starting point is 01:05:55 I'll tell you, folks, if you want to go to this event, we are going next year. We are going to do this again. And to be honest with you, we were so inspired by our community and had so much fun with our community, Stig and I have decided to stand up a live events tab on our website. And we want to do more events and more outreach with our community. So what we did is if you go to the Investors podcast, you go to the top level page. You know, we have this kind of our mission statement at the top where we say, number one, we like to have fun.

Starting point is 01:06:27 Number two, we study billionaires and read all the books that they read. And then now it says number three, if you want to connect with us with live events, check out when we might be in your hometown. And if you click on that link for the hometown, you can see Stig's going to be holding some events over in Europe. I'm holding some events here in the U.S. In fact, I'm holding an event in Seoul, South Korea. In June, I'm having an event down in Huntsville, Alabama, in July.

Starting point is 01:06:53 And then in September, I'm having an event in Baltimore. And then Stig, you were saying that you were going to hold an event over in Denmark? Yeah, I'm really excited about that. And the first event, that would be the first weekend of July, so the second and third of July. Perhaps we'll do that in my apartment, depending on how many people who show up. Other than that, we might just go out. Let's see what will happen. And then the first weekend of October, so that would be the first of the second of October.

Starting point is 01:07:20 And I'm going to host that in Seoul, South Korea. I'm going to relocate there in late July. So I think it will be a great opportunity to meet up. And it's not just to network with me, definitely to network with the community. At least that was I found to be the main contributor to the trip going to Omaha this year. So I hope I'll see a lot of you guys over there. Yeah, I totally agree with you, Stig. I think that if you are going to come out for one of these events, what a networking opportunity.

Starting point is 01:07:52 For us, I mean, I'm sitting there on Friday night having dinner with our community, and I'm sitting next to a good friend now. His name is Moss. He was the economic advisor to Nelson Mandela. I mean, those are the types of people that are listening to the show and that we're getting to hang out with. I mean, what an honor. It was amazing. And the conversation was just phenomenal. So you never know who's going to come out to one of these networking events.

Starting point is 01:08:17 So that's the thing that I'll tell you is come out for this thing so you can talk to other people. And man, there's some really successful people in this community. And they come out to these events. So even if you're a college student, come out, meet some people, learn some stuff. It's just a phenomenal event. And Stig and I just took so much away from this. And we have just really one person to thank for this. And that's you, our community.

Starting point is 01:08:43 Thank you so much for everything that you guys do to make this possible to come out. We enjoyed your company far more than you could ever realize and enjoyed this event because of people like you that are listening to the show and that came out. So lots of exciting things happening within our community. And we just highly encourage you. Check out that tab. We might be in your hometown like next week. You never know. So keep looking at that.

Starting point is 01:09:07 Please come out for these events because the more the merrier, it'll be a lot of fun. and we'll get dinner, just kind of go to a social setting and really kind of have a good time to interact with each other. All right. So kind of a long episode. Hopefully you guys enjoyed the questions. Hopefully you guys enjoyed the stories. If there's anything we can do for you guys, hit us up on email.

Starting point is 01:09:25 If you attended this Omaha meeting and you have some pictures that you would like to have put up on the site, please send those off to me and we'll get them added into the site. But really, that's all we have for you guys this week. 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.theinvestorspodcast.com. Submit your questions or request a guest appearance to the investors podcast

Starting point is 01:09:52 by going to www.org.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. Thank you.

We Study Billionaires - The Investor’s Podcast Network - TIP 087 : Attending the Berkshire Hathaway Shareholder's Meeting (Business Podcast)

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