We Study Billionaires - The Investor’s Podcast Network - TIP140: Warren Buffett and Charlie Munger at the Berkshire Hathaway Shareholders Meeting 2017 (Part 1) - (Business Podcast)

Starting point is 00:00:00 You're listening to TIP. Hey, how's everyone doing out there? So today we're really excited because we're going to be doing a recap of the Berkshire Hathaway shareholders meeting. And this is actually going to be a two-part episode. So today we're going to play the first part. And next week you'll hear the second part. And what we're going to do is we're just going to go through what we thought were the most

Starting point is 00:00:20 important questions and answers that occurred during the meeting. After we play the question and answer, we're then going to provide our comments, steganized comments of what we thought about the way that they responded to the question. So we really look forward to these two episodes every year because we have the opportunity to tap into the thoughts of Warren Buffett and Charlie Munger and it's just really fun to do. Preston and I have really been looking forward to this first part episode. And in this episode, we'll be talking about individual stock picks. So we're going to talk about IBM, Apple, and we'll also talk about Why Warren Buffett and Chalemanga really like Jeff Bezos, the CEO and founder of Amazon,

Starting point is 00:01:02 and why Warren Buffett considered it to be a huge mistake not investing in Google. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. All right, so like we talked about at the intro of the show, we're just going to dive right into the questions for the Berkshire Hathaway shareholders meeting, and here's the first question. Hello, Mr. Buffett, Mr. Munger. My name is Grant Gibson.

Starting point is 00:01:43 I'm from Denver, Colorado, and this is my fifth consecutive year here, so thank you for having us. Thanks for coming. Appreciate it. With all due respect, Mr. Buffett, this question is for Mr. Munger. In your career of thousands of negotiations and business dealings, could you describe for the crowd which one sticks out in your mind as your favorite or is otherwise noteworthy? Well, I don't think I've got a favorite. But the one that probably did us the most good is a learning experience with Seas Candy.

Starting point is 00:02:12 It's just the power of the brand, the unending flow of ever-increasing money with no work. Sounds nice. It was, and I'm not sure we bought the Coca-Cola if we hadn't bought the C's. I think that a life properly lived is just learn, learn, learn, all the time. And I think Bercher has gained enormously from these investments. decisions by learning through a long, long period. Every time you appoint a new person that's never had big capital allocation experience, it's like rolling the dice.

Starting point is 00:02:49 And we're way better of having done it so long. But the decisions blend, and the one feature that comes through is the continuous learning. If we had not kept learning, you wouldn't even be here. You'd be alive probably, but not here. There's nothing like the pain of being in a lousy business to make you appreciate a good one. Well, there's nothing like getting into a really good one. That's a very pleasant experience, and it's a learning experience. I have a friend who says, the first rule of fishing is to fish where the fish are,

Starting point is 00:03:25 and the second rule of fishing is to never forget the first rule. And we've gotten good at fishing where the fish are. Yeah, that's only metaphorically. I went to fish with Charlie once. There too many other boats in this. damn water, but the fissure's still there. Yeah, we bought a department store in Baltimore in 1966, and there's really nothing like being an experience of trying to decide whether you're going to put a new store in an area

Starting point is 00:03:49 that hasn't really developed yet enough to support it, but your competitor may move there first, and then you have the decision of whether to jump in, and if you jump in, that kind of spoils, and now you've got two stores where even one store isn't quite justified. how to play those games, those business games, you learn a lot by trying. And what you really learn is which ones to avoid. I mean, you just stay out of a bunch of terrible businesses. You're off to a very great start as right. Because we've tried them all.

Starting point is 00:04:18 But you can really learn because the experience is low a light eating cockle burgers. And it really gets your attention. Well, we won't expand on that. All right. So, I mean, I don't know how you can't smile. listening to that. It's funny because when Stig and I record the show, we have Skype up so we can see each other as we're recording because we're in two different locations. It was funny because both of us just had the biggest grin on our faces. We were listening to that. You know,

Starting point is 00:04:48 Stig, I would open up and I, for me, the key point for this is just the learn, learn, learn part. And you know, for us, this is just the common thread. If there is one common thread, you know, And we get asked this question a lot on Twitter and other places like, what's the one thing you learn from studying all these billionaires? I mean, that is it. There's nothing more that stands out than learn, learn, learn, learn as much as you possibly can at all times. So, here are these two say that. It doesn't really come as much of a surprise, but I think it's really a very, very important thing. And I'm glad we're kind of starting off this entire two-part episode series with that because that's the thing that you really need to take away from these two more than anything else is these guys are total learning machines.

Starting point is 00:05:29 just an exponential level. And I really like what Charity said about Seas Candy and how they really learn from that experience. And I think the learning outcome that they had for that experience is that a product like Seas Candy has pricing power. So think about what he talks about when he talks about chocolate and think about what you talked about in terms of retail. So if you look at something like chocolate, you have something that's really, really cheap

Starting point is 00:05:56 in marginal cost. but you can put a high price on it and perceive it as high quality. It's not expensive ingredients. I mean, clearly good chocolate will have more expensive ingredients, but the mark out on such a product is really, really high.

Starting point is 00:06:10 And one example that Warren Buffett has come up with a few times, even though he was not in this response, is that he talks about, you can go home to your wife and say, I bought sodas on sale, and your wife would say, that's good. You know, we got cheap sodas in the house now.

Starting point is 00:06:24 But you can't come home and said, I bought you discounted chocolate for Valentine's Day. You just don't have the same type of pricing power when it comes to that. And you can look at it in the sense that thinking about how much retail in the U.S. right now that's just hurt by Amazon.

Starting point is 00:06:39 You can't raise the price in the book because you could just buy the book another place online. Yeah, this was their big, for me, when you look at Seas Candy, this was their turning point where they really understood the power of a brand and they understood that that's a competitive advantage

Starting point is 00:06:53 that is very difficult to erode once you do have it. And so you heard, his comment there about Coca-Cola. He said, we might not even bought Coca-Cola if we didn't buy C's first because they learned so much by buying C's candy through a branding standpoint in how much that adds as a competitive advantage that then they went on to buy Coke and they went on to buy a lot of other companies that had a really strong brand because they knew how powerful that is in the long run that it doesn't erode like many other competitive advantages

Starting point is 00:07:22 that people think that they have. A brand really holds up over a long period of time. So Let's go ahead and play the next question. Warren, for years you stayed away from technology companies saying they were too hard to predict and didn't have moats. Then you seemed to change your view about technology when you invested in IBM and again when you recently invested in Apple. But then on Friday you said IBM had not met your expectations and sold a third of our stake. Do you view IBM and Apple differently?

Starting point is 00:07:51 And what have you learned about investing in technology companies? Well, I do view them differently. Apple, I regard them as being a quite different business. I think Apple was much more of a consumer products business in terms of sort of analyzing modes around it and consumer behavior and all that sort of things. It's obviously a product with all kinds of tech bill into it, but in terms of laying out what their prospective customers will do in the future as opposed to, say, on IBM's customers, it's a different sort of analysis.

Starting point is 00:08:22 That doesn't mean it's correct, and we'll find out over time. But they are two different types of decisions, and I was wrong on the first one, and we'll find out whether I'm right or wrong on the second. But I do not regard them as apples and apples, and I don't quite regard them as apples and oranges, but it's somewhat in between on that. Charlie? Well, we avoided the tech stocks because we felt we had no advantage there, and other people did. And I think that's a good idea not to play where the other people are better. But you know, if you asked me, in retrospect, what was our worst mistake in the tech field? I think we were smart enough to figure out Google.

Starting point is 00:09:01 Those ads worked so much better in the early days than anything else. So I would say that we failed you there. And we were smart enough to do it and didn't do it. We do that all the time, too. We were their customer very early on with Geico, for example. And we saw these figures are way out of date. But I remember, you know, we were paying them $10 or $11 a click or something like that. And anytime you're paying somebody, 10 or 11 bucks every time somebody just punches a little thing where you've got no cost at all.

Starting point is 00:09:28 That's a good business unless somebody's going to take it away from you. So we were close up seeing the impact of that. And I know the guys. I mean, they actually designed their prospectus. They came to see me. And they, a little bit after the original one, when they went public, a little bit after Berkshire even. And so I had plenty of ways to ask questions or anything of the sort to educate myself. But I blew it.

Starting point is 00:09:48 We blew Walmart too. When it was a total cinch, we were smart enough to figure that out and we didn't. Yeah. Yeah, figuring out, execution is what counts. Anyway, and I could be making two mistakes on IBM. I mean, it's harder to predict, in my view, the winners in various items, or how much price competition will enter in to something like cloud services and all that. I made a statement the other day, which it's really remarkable.

Starting point is 00:10:17 And I was asked Charlie whether he could. think of a situation like it, where one person has built an extraordinary economic machine in two really pretty different industries, you know, almost simultaneously as has happened. From a standing start at zero. From a standing start at zero with other competitors with lots of capital and everything else. To do it in retailing and to do it with the cloud like Jeff Bezos has done, I mean, people like the Melons invested in a lot of different industries and all of that. But he has been, in effect, the CEO simultaneously of two businesses starting from scratch,

Starting point is 00:10:55 that if Andy Grove had Intel used to say, you know, think about if you had a silver bullet and you could shoot her and get rid of one of your competitors, who would it be? Well, I think that both in the cloud and then retail, there are a lot of people that would aim that silver bullet. Jeff, and he's done a different sort of game. But he's, you know, at the Washington Post, he's played that hand as well as anybody, I think, possibly could. So it's a remarkable business achievement where he's been involved actually in the execution, not just bankrolling it, of two businesses that are probably as feared by their competitors almost, as any you can find. Charlie, I think on further lost.

Starting point is 00:11:34 Well, we're sort of like the melons, old-fashioned people who've done all right. And Jeff Bezos is a different species. And we missed it entirely incident. We never owned a share of Amazon. All right. A couple of various different things going on there. So they were originally talking about the IBM pick and how Buffett said that he blew it. They got it wrong. Now we're talking about the Apple pick that he just recently had done. And then they transitioned into just the enormous appreciation for Jeff Bezos and Amazon and everything else. And also they talked about how they missed the boat on Google. So they kind of hit the whole gamut of all these big tech companies. I think it was really interesting to see. how, I mean, he really does understand the Google model as far as he was talking about the click rates that GEICO pays. He said something like $11 or $12 that they were paying for customer acquisition that they're paying off the Google to get somebody to click on one of their ads. So he understood it.

Starting point is 00:12:31 And then he says that he understood it, but just didn't action it. I found that whole exchange very interesting. And it was neat to see how they kind of regret some of their decision making. But it was also interesting to see how they basically, the way that I interpreted it at least was that they've made huge mistakes like this in the past. They call them mistakes of omission where they just didn't buy it. So it seemed kind of typical to some other mistakes that they had made where they just hadn't pulled the trigger on ideas that they knew were going to be huge. And these were just some more to add to the list. Let's take a quick break and hear from today's sponsors.

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Starting point is 00:17:08 That's Shopify.com slash WSB. All right. Back to the show. I basically think it's not a question about whether or not they understand tech. I think that's probably a wrong way of looking at. It's whether or not they understand the business model and how sustainable the business model is. Yeah. And what he's saying is, you know, Google has a very sustainable business model.

Starting point is 00:17:33 You know, you might pay $10 for a click. And if you do that 10 times, and Google actually provides this information. So it might show that you actually acquire a customer for every 10 click. Okay, so basically you're saying it cost me $100 to get one customer. What is my profit on one customer? So you actually are willing to pay a lot of money for using Google services, even though Google might not have no marginal cost to do it. I mean, this is an even better business model than C's Candy.

Starting point is 00:18:01 And I think that what frustrated for M Buffett is that he understood that. He understood what Walmart did, but he didn't pull the trigger on it. Well, I think he brought up a good point, Steg. I think the thing that he understood the model, he understood the value, but he didn't understand the long-term sustainability of it at the time whenever it was at a price it would be worth paying, you know? So I think that that's kind of what they were getting at with a lot of that exchange. It's really interesting.

Starting point is 00:18:26 The previous year, they had huge compliments for Jeff Bezos as well. Like both years, last year and this year, I mean, they are just, treating Jeff Bezos like he's the god of business. And, you know, I think there's a lot of people out there that would probably say that he might be. Yeah, and I also think it was interesting that he talked about IBM. Also, because this is definitely an investment than Charlie Munger hasn't been too happy about. And Warren Buffett also, you know, openly said in another interview, you know, it was his decision. And he's saying that, you know, I made a mistake. And so he actually sold one third of IBM. He says he values it differently now. One might consider

Starting point is 00:19:03 the reason why he didn't sell his entire position, whether or not it's because it's more than $10 billion. So it's not as easy to unload, I guess. I mean, he was open about it. And I think that also builds a bond of trust that he's so open about that. You know, for the Apple pick, back when they initially took a real small position,

Starting point is 00:19:22 I want to say they only took about a billion dollars, small relative to their market cap. They took a billion dollar position and it wasn't real big. I wrote an article in Forbes on the valuation of where that was at. And I want to say at the time it was trading it maybe 100 and 105 somewhere around in there. And in the article, you know, I did a discount cash flow model on it. And it was based on that price point, I was expecting it to do like 11% annual return based on that price. And this is all in the article that I wrote. I want to say I wrote this back in January maybe

Starting point is 00:19:53 of 2017. And we'll put this in the show notes if anyone wants to read the article that I wrote on Forbes for this. But since that time, this thing has exploded. I mean, it's gone up. I know it's in the 140 range now, and it's gone up quite a bit from whenever I wrote that article, justifying why I think Berkshire Hathaway made a smart decision. So now it's obviously not priced at 11 percent because it's gone up so much, but it's still priced at definitely better than where the S&P 500 is, and that's why I think you're seeing Berkshire continue to increase their position on it. So let's go ahead and play the next question. This question is from Franz Tromburger of Austria, and it concerns.

Starting point is 00:20:33 intrinsic value, which is neither, Warren, he may amend this, my definition here, but which is neither a company's accounting value nor its stock market value, but is rather its estimated real value. So the question is, at what rate has Berkshire compounded intrinsic value over the last 10 years, and at what rate, including your explanation for it, please, do you think intrinsic value can be compounded over the next 10 years. Yeah. Intrinsic value, you know, can only be calculated or gains in retrospect, but the intrinsic value, pure definition, would be the cash to be generated between now and judgment day,

Starting point is 00:21:20 a discounted at an interest rate that seems appropriate at the time, and that's varied enormously over a 30- or 40-year period. If you pick out 10 years and you're back to May of 2000, You know, we had some unpleasant things coming up, but I would say that we've probably compounded at about 10% and I think that's going to be tough to achieve, in fact, almost impossible to achieve if we continued in this interest rate environment. That's the number one question. If you ask me to give the answer to the question, if I could only pick one statistic to ask you about the future before I gave the answer, I would not ask you about GDP growth. I would not ask you about who was going to be present. And a million things, I would ask you what the interest rate is going to be over the next 20 years on average, the 10 year or whatever he wanted to do. And if you assume our present interest rate structure is likely to be the average over 10 or 20 years, then I would say it'd be very difficult to get to 10%. On the other hand, if I were to pick with a whole range of probabilities on interest rates, I would say that that rate might be, it might be somewhat aspirational and it might be doable.

Starting point is 00:22:28 You would say, well, we can't continue these interest rates for a long time. I would ask you to look at Japan, you know, where 25 years ago we couldn't see how their interest rates could be sustained, and we're still looking at the same thing. So I do not think it's easy to predict the course of interest rates at all. I would say the chances of getting a terrible result in Berkshire are probably as low as about anything you can find. chance of getting a sensational result are also about as low as anything you can find. My best guess would be in the 10% range, but that assumes somewhat higher interest rates, not dramatically, but somewhat higher interest rates in the next 10 or 20 years than we've experienced in the last seven years.

Starting point is 00:23:13 Charlie? Well, there's no question about the fact that the future with our present size is, in terms of percentage rates of return, is going to be less glorious than our past. and we keep saying that and now we're proving it. Do you want to end on that note, Charlie, or would you chair? Well, I do think Warren's right about one thing. I think we have a collection of businesses that on average has better investment values than, say, the S&P average.

Starting point is 00:23:44 So I don't think you shareholders have a terrible, terrible problem. And I would say we do have more of a shareholder orientation than the S&P 500 is as a whole. I mean, this company has a culture where decisions are made. As an owner, as a private owner, would make them. And frankly, that's a luxury we have that many companies don't have. I mean, they are under pressures today sometimes to do things. One of the questions I ask, the CEO of every public company that I meet is, what would you be doing differently if you owned it all yourself? And the answer, you know, is usually this, that, and a couple of other things. If you would ask us, the answer is, we're doing exactly what we would do if we own

Starting point is 00:24:28 all to stock ourselves. Anything further, Charlie? I think we have one other advantage. A lot of other people are trying to be brilliant and we're just trying to stay rational. It's a big advantage. Trying to be brilliant is dangerous. What an awesome exchange. How funny is Charlie? Charlie's unbelievable. Oh my God. He's the best. He's hilarious. So I was grinning so much whenever I was listening to this response because anyone who listens to our show, we talk about interest rates all the time, kind of nonstop. And I'm sure that for some people, they might be wondering why we talk about interest rates so much.

Starting point is 00:25:05 And there right there, you can see why we talk about it so much, because everything is based on this. All the valuations of the stock market, every asset on the planet is based off of interest rates. So whenever you hear him say, and I really got a very pessimistic vibe, as to where he thinks interest rates are going to be over the next 20 years. You heard him throw out Japan and for anybody who's not familiar with interest rates in Japan, but they're basically pegged at zero and they have been for two decades now,

Starting point is 00:25:35 or they've been close to zero for next to two decades now. I don't find that as a coincidence that he threw Japan's name out there when he's talking about where the interest rate environment in the U.S. is going. Because, I mean, you've heard Stig and I say this numerous times on the show that that's kind of where we think things are going. or those are the pressures that are revealing themselves through quantitative easing and everything else with the central banking policy, that that's where interest rates are going to go. So they didn't come out and say that.

Starting point is 00:26:03 You can interpret what they said any way you want. That's how I'm kind of interpreting it. And maybe I'm very biased in the way that I'm interpreting their comments. Yeah, I really think it was interesting to hear about what he thought that Berkshack could compound their intrinsic value with. And, you know, he talked about how in the past 10 years, years, it might be around 10%. And then he actually started off being a bit pessimistic about being able to repeat that. And then he actually kind of, after talking more like, yeah,

Starting point is 00:26:32 you know, we might do another 10% on average if the interest rate doesn't increase too much. I couldn't help but thinking, you know, if it is true that they can compound that with call it 10%. And without going too much into detail, I'd say that Berks has probably a reasonable overpriced at the moment. I don't see it as super overpriced as you see some of the other companies out there. So let's just for the S&M argument say, you know, we might not completely agree on the estimate, but let's say it's fairly valued. And you can compound with that. If not 10%, then 8%. Now, if you compare that to call it S&P 500 at a Shielder P.E, you know, would justify, call it 3% or whatnot. Hmm, that's interesting. Should we start to do like a dollar cost

Starting point is 00:27:18 Averaging approach into Berkshire instead of the market, if that's the approach to you're following. Because what Chalamonga is also saying is, you know, we have better quality companies on average than these S&P 500. And I agree with that. Almost all of their companies, they're profitable. It's not the same thing as for SNP 500. So I think I was left with this idea about, hmm, is the value in Berkshire also because they're so well positioned if the interest rates should go up. They're sitting on $90 billion in cash right now. That's what I think his last comment was really hitting at whenever he said.

Starting point is 00:27:54 The advantage we have is we're not trying to be brilliant. And I think what he's really saying is our advantage here is we're sitting on $90 billion of cash, not trying to do something too fancy is what I think he was trying to say, just in a more clever way to say it than the way I said it. Yeah, and I'll definitely say that even if the market should crash tomorrow, whether or not it's because of interest rates, hikes or not, I have no idea what's going to happen with Berkses price in the short run, but I definitely know that the intrinsic value of that company won't be affected almost at all because they're sitting on so much

Starting point is 00:28:26 cash. And another thing is that if you look at the accounting, they have 160 billion stock portfolio right now, but it's still less than the subsidiaries, the operations. That's actually the main business. It's not the stockpicks. Warren Buffering, Childmonger are business owners. They're not stock pickers at all. I'm laughing because I might have had that conversation.

Starting point is 00:28:45 three to five different times whenever I was in Omaha of like, you know, for me, this is the big irony. So like you go out there and everyone from the finance industry is there. You know, you got everyone from Wall Street. You get all these people that come out that are stock pickers and hedge fund managers and everything else. And the irony is Warren Buffett and Charlie Munger's brilliance is in running an operational business.

Starting point is 00:29:12 You know, like these dudes, if they have a dollar to invest operating, They're going to put it there every single day of the week. And whenever they can't find something good to do with it from an operational standpoint, then it flows into a marketable security of, call it, you know, Apple at this point. That's not where they start. And this is what I find so funny is everyone, I think the reason so many people just look at Warren Buffett as this stock picker, which, in my opinion, he's not, is because that's what most people can replicate with a very small sum of money, but none of them really understand what is true brilliance is, and that's being

Starting point is 00:29:49 an operational manager and CEO of a real business and investing operationally. Yeah, and, you know, this is not something that Preston and I are just interpreting. This is something he's putting in his owner's manual, and he talks very highly about it. Like, this is the first step. You know, we want to widen the mode of assistant businesses. Then we want to buy new operating businesses. It's like, might as well, securities, I mean, that's down the list, just above we purchase our own stock.

Starting point is 00:30:16 But I think this is a really important point that so many people miss is that distinguishing factor between being an operational capital allocator versus doing it from a non-operational standpoint with his marketable securities. But okay, let's go ahead and play the next question here. Hi, Warren and Charlie. My name is Vicki Wei. I'm an MBA student from the Wharton School of Business. This is my first time to be in any means.

Starting point is 00:30:45 I'm really excited about it. My question is, where do you want to go fishing for the next three to five years? Which sectors are you most bullish on? And which sectors are you most bearish on? Thank you. Yeah. Charlie and I do not really discuss sectors much, nor do we let the macro environment or thoughts about it and our decision.

Starting point is 00:31:08 We're really opportunistic. And we obviously are loading at all kinds of businesses all the time. It's a hobby with us almost, probably more with me than Charlie. But we're hoping we get a call, and we've got a bunch of filers, and I would say this, true of both of us, we probably know in the first five minutes or less whether something is likely or has a reasonable chance of happening. And it's just going to go through there. And the first question is, can we really ever know enough about this to come to a decision? And that knocks out a bunch of things.

Starting point is 00:31:38 And there's a few. And then if it makes it through there, there's a pretty good, reasonable chance we're going to, We may do something, but it's not sector specific. We do love the companies, obviously, with the most, we're on the product, where consumer behavior can be perhaps predicted further out. But I would say it's getting harder for us anyway to anticipate consumer behavior than we might have thought 20 or 30 years ago. I think that that's just a tougher game now.

Starting point is 00:32:05 But we'll measure it. We'll look at it in terms of returns on present capital, returns on prospective capital. A lot of people give you some signals. and let's know what kind of people they are even in talking in the first five minutes and whether you're likely to actually have a satisfactory arrangement with them over time. So a lot of things go on fast. But we know the type of business we'd kind of like to end up in,

Starting point is 00:32:26 but we don't really say we're going to go after companies in this field or that field or another field. Charlie, you want to... Yeah, some of our subsidiaries do a little bold-on acquisitions that make sense. And that's going on all the time. I would say the general field of buying whole companies, it's gotten very competitive. There's a huge industry of doing these leveraged buyouts. That's what I still call them.

Starting point is 00:32:53 The people who do them think that's a bad marker, so they say they do private equity. You know, even a janitor, call himself the chief of engineering or something. But anyway, the people who do the leverage buyouts, they can finance practically anything in about a week or so through shadow banking

Starting point is 00:33:13 and they can pay very high prices and get very good terms and so on. So it's very, very hard to buy businesses. And we've done well because there's a certain small group of people they don't want to sell the private equity. And they love the business so much. They don't want to just dressed up for resale.

Starting point is 00:33:33 We had a guy some years ago came to see me and he was sick. at the time. And he said, look, I've got a fine business. I got all the money I can possibly need. But he said, there's only one thing it worries me when I drive to work. Actually, there's more than one guy that's used the same term.

Starting point is 00:33:54 There's the only one thing it bothers me when I go to work. You know, something happens to me today. My wife's left. You know, I've seen these cases where executives in the company try to buy them out cheap where they sell to a competitor or all the people. He says, I don't want to leave her with a business. I want to decide where it goes, but I want to keep running it. And I love it.

Starting point is 00:34:15 And he said, I thought about selling it to a competitor. But if I sell it to a competitor, you know, their CFO is going to become the CFO of the new company. And they're, you know, on down the line. And all these people who help me build the business, you know, a lot of them are going to get dumped. I'll walk away with a ton of money. And some of them will lose their job. He said, I don't want to do that. And he says, I can sell it to a leverage buyout firm with the protocol themselves private equity,

Starting point is 00:34:41 but they're going to leverage it to the hill. And they're going to resell it, and they're going to dress it up some. But in the end, it's not going to be in the same place. I don't know where it's going to go. He said, I don't want to do that. So he said, it isn't because you're so special. He says, it just isn't anyone else. If you ever proposing to a potential spouse, don't use that lie.

Starting point is 00:35:03 But that's what he told me. I took it well. And we made a deal. Well, logically, unless somebody has that attitude, we should lose in this market. I mean, you can borrow so much money, so cheap, and we're looking at the money as pretty much all equity capital. And we're not competitive with somebody that's going to have a very significant portion of the purchase price carried in debt, maybe averaging, you know, 4% or something. And he won't take the losses that it goes down and he gets part of the profit of it goes up.

Starting point is 00:35:35 Yeah, his calculus is just so different than ours, and he's got the money to make the deal. So if all you care about is getting the highest price for your business, you know, we are not a good call. And we will get some calls in any event. And we can't offer something that wouldn't call it unique, but it's unusual. The person that sold us that business and a couple of others,

Starting point is 00:36:00 actually it's almost word for word, the same thing they say. They are all happy with the sale thing. made very happy. So they have lots and lots and lots of money. And they're doing what they love doing, which is still running the business. And they know that they made a decision that will leave their family and the people who work with them all their lives in the best possible position. And that's in their equation, they have done what's best. But that is not the equation of many people. And it certainly isn't the equation of somebody who lies and borrows every dime and they can't with the idea of reselling it after they'll maybe dress up the account and do some other things.

Starting point is 00:36:39 But when the disparity gets so wide between what a heavily debit, debt finance purchase will bring as against an equity type purchase, it gets to be tougher. There's just no question about it. And it will say that way. But it's been tough for a long time and we've bought some good businesses. Yeah. This was a fun exchange to listen to because, I mean, they are really beating up private equity firms. because they're so leveraged whenever they're doing their buyouts. And they're voicing their frustration because they're going against a lot of these guys

Starting point is 00:37:11 when interest rates are at next to nothing. So these guys can borrow, the private equity firms can borrow at just ridiculous levels. And where he said that the calculus is much different for them than it is for us. What he was getting at is because these private equity companies are so leveraged. They make a couple improvements. They dress it up and then they try to resell it. Their return on the small amount that they're actually putting up for some of the equity is astronomical because they're so leveraged at such a high level and it's such a low interest rate.

Starting point is 00:37:39 That's why it's difficult for them to compete. Now, me may be reading into this too much is that this was an ultimate sales pitch by both of them. This was Munger and Buffett at their best, basically putting out to the world, this is why you want to sell your business to us and why we want to buy it if you're a good person. and you want us to take care of your family if something happens to you. And I really think that was a very delicate and strategic and smart sales pitch so that they can do more bold-on operational businesses underneath of the Berkshire Vale. I completely agree with your Preston.

Starting point is 00:38:17 And if you think about it, this is not a bad deal. I mean, even as a business owner, say that your company is worth $8 billion and you have an offer from a private equity company, they're willing to pay that price, or you can go to Warren Buffett and get $7 billion. Now, I'm sure that a lot of billionaires that would take the extra billion, but if you also know that they will fire people you like,

Starting point is 00:38:43 that they will destroy the culture that you build up your life work, could you live without that extra billion? I think a lot of people can, and that's really where he's hitting at. That's the people he's trying to appeal to, who doesn't want the leverage buyout. And for me, it was a great salespace also because I actually think it's smart, but it's also something that creates value.

Starting point is 00:39:02 And I like that too. So selling to Berkshire, if anything, could be seen as an insurance policy if you were a billionaire. And I like the way that he kind of framed that without saying that. Yeah. No, I totally agree. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up.

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Starting point is 00:42:44 I'm from Shankar and I'm from Gurney, Illinois. Thank you for doing everything you do for us. I have a question that two of you have largely avoided capital allocation mistakes by bouncing ideas of one another. Will this continue along into Berkshire's future? I'm interested in both headquarters and at subsidiaries. It can't continue very long. I don't get defeatist, Charlie. Any successor that's put in at Berkshire, capital allocation.

Starting point is 00:43:20 abilities and proven capital allocation abilities are certain to be uppermost in the board's minds or in the current case in terms of my recommendation Charlie's recommendation for what happens after we're not around. Capital allocation is incredibly important at Berkshire. Right now we have 280 years, 90 billion of whatever may be of shareholders equity. If you take the next decade alone Nobody can make accurate predictions on this. But in the next 10 years, if you just take appreciation right now is another $7 billion a year, something on that order. The next matter during the decade is going to have to allocate maybe $400 billion or something like that,

Starting point is 00:44:09 maybe more. And it's more than already has been put in. So 10 years from now, Berkshire will be an aggregation of business. This is where more money has been put in in that decade than everything that took place ahead of time. So you need a very sensible capital allocator in the job of being CEO of Berkshire, and we will have one. It would be a terrible mistake to have someone in this job where really capital allocation might even be their main talent. It probably should be very close to their main talent. And of course, we have an advantage at Berkshire in that we do know how important that is,

Starting point is 00:44:52 and there is that focus on it. And in a great many companies, people get to the top through ability and sales. Sometimes they come from the legal sides, all different sides, and they then have the capital allocation sort of in their hands. Now, they may not establish strategic thinking divisions, that they may listen to investment backers and everything, but they better be able to do it themselves. And if they've come from a different background or haven't done it,

Starting point is 00:45:23 it's a little bit, as I put in one of my letters, I think it's like getting to Carnegie Hall playing the violin and then you walk out on the stage and they hand your piano. I mean, it is something that Burscher would not do well if somebody was put in who had a lot of skills in other areas but really did not have an ability of capital allocation. I've talked about it as being. something I call a money mind. People can have 120 IQs or 140 IQs or whatever it may be very

Starting point is 00:45:51 similar scoring abilities in terms of intelligence tests and some of them have minds that are good at one type of thing and some of another. I've known very bright people that do not have money minds and they can make very unintelligent decisions. They can do all kinds of other things that most mortals can't do but it just doesn't it isn't the way their wiring works and I've known other people that really would not do that brilliantly. They do fine, but on an SAT test or something like that. But they've never made a dumb money decision in their life. And Charlie, I'm sure, has seen the same thing.

Starting point is 00:46:24 So we do want somebody, hopefully they've got a lot of talents, but we certainly do not want somebody if they lack a money mind. Charlie? Well, there's also the option of buying in stock, which, so it isn't like it's some hopeless problem. One way or another, something intelligent will be done. and a money mine will recognize when it makes sense to buy in stock and doesn't. In fact, it's a pretty good test for some people in terms of management, how they think about something like buying in stock.

Starting point is 00:46:55 Because it's not a very complicated equation if you sort of think straight about that sort of a subject. But some people think that way and some don't, and they're probably miles better at some of than something else. But they say some very silly things when you get to something that seems so clear as whether they're buying in stock makes sense. The first thing I want to add is, I really like how they talked about that the person that should replace them eventually,

Starting point is 00:47:25 their job would be great capital allocators. And basically what he's saying is, you should see more CEOs with that role. Very, very often you would see people raise to the top, not just in big companies, but all over the world. But what he's saying is, that's probably not what you need in this job. He'll be allocating more money.

Starting point is 00:47:46 He said over the next 10 years that they have been, you know, throughout history. He was talking about $400 billion. And I'm not saying it was surprising, but it was very insightful also when he talked about. It is probably someone in the organization. Or he almost definitely said that because it's so important with the culture that they understand that. So he revealed a bit more about that. Yeah, I don't really have too much more to add. I just, I guess the number, it's just amazing to me that the 400 million that this person's going to have to, you know, it's going to be Buffett. He's going to be around for another 10 years. I'm an optimist here. That he has to, I mean, he has to allocate another $400 billion and compared to what he's already allocated. It's like a, it's almost double, you know, that's, or one and a half times what he's already allocated. That's totally crazy. And to do that with the interest rate environment and everything else he's going to be up against. It's going to be, it's going to be an.

Starting point is 00:48:41 interesting decade coming forward. So, all right, guys, so that concludes our Q&A that we were going to play for the episode. We also want to just highlight how much fun we had with our community out there at the meeting because we had about 150 people from the TIP community come out to Omaha for the meeting this year. And we had just a blast. And for all those people that came that are listening to this, thank you guys so much.

Starting point is 00:49:07 For me, it was such an honor to meet you and to hang out. Saturday night, just so everyone knows, on Saturday night, we went out and did a pub crawl in the old market there in Omaha, and we hit up four different bars, just had a blast. I mean, I don't know how you can have more fun than we had when we were out there. So if you're wanting to do something like this next year, I guarantee you we're going to go again. So, you know, we'll have that stuff up on our website. But if you're listening to this and you think it'd be really interesting to go and listen to Warren Buffett, hang out with all the people from our community, have a blast.

Starting point is 00:49:41 Just keep that on your radar for next year. Around Christmas time is when you need to start preparing to go to this meeting, which happens at the first week of May every year, because the planning and stuff getting flights is sometimes a little bit tricky. But keep that on your radar if it's something you want to do because we make it a point to go to this every year and it's such a blast. So thank you to our community for coming out and spending the weekend with us. So we have quite a few things we like to talk about before we round off the show.

Starting point is 00:50:09 The first thing is that we will make sure to have a link in our show notes for this episode where you can go back and listen to last year's annual meeting. And Presta and I played a Q&A and provided the comments just like we did on this episode. It was episode 87, but I said we'll also be linking to that in the show notes. But more importantly, we're super stoked to launch a value investing song here on the Master's podcast. And don't worry, it won't be me and Preston rapping like we did on episode 92. And that was actually a lot of fun for us. And we do apologize because we know that it was probably very painful for you to listen to. So no, we're not rapping. It's a song by Brittany Collins.

Starting point is 00:50:57 And she is the president of our local CHAPE chapter in Houston. And boy, can she sing. Her song is called Mr. Market and it's about Warren Buffett, P. Ratesos and everything about value investing. So, here we go. Good morning, Mr. Market. Well, what do you say? What do you say about your price today? Does it fit within my requirements? That means it provides a high margin of safety to protect my principle.

Starting point is 00:51:39 When things get crazy, I'll minimize risk to prepare for retirement. Research and reviews I can identify the intrinsic value. When the market's overvalued and the stocks are undervalued, it's still a go. Well, Buffett taught me it's okay to buy you with a low p ratio. Of course there's no guarantee, but it works with my buy and hold strategy. So, Mr. Market, I'll give you this opportunity. Just go lower, I'll say no to you.

Starting point is 00:52:39 I won't buy a company just because of your quote. I must understand it and it must have a moat. Not forget about the trustworthy management team If your price hasn't decreased from yesterday What makes you think I'm gonna buy today? I'm okay waiting for the perfect opportunity Research and reviews I can identify the intrinsic value

Starting point is 00:53:18 When the market's overvalued and the start, stocks are undervalued, it's still the goal. Well, Buffett taught me it's okay to buy it with a low P ratio. Of course there's no guarantee, but it works with my buy and hold strategy. So Mr. Market, I'll give you this opportunity to just go a lower, I'll say no to you. Because you work for me, Mr. Market, Mr. Market, Mr. Market. Oh, yeah. Market's overvalued and the stocks were undervalued.

Starting point is 00:54:18 It's still a goal. But Buffett told me it's okay to buy you with a low P.E. Wow. How amazing was that. Honestly, whenever Preston and I heard this song, We couldn't wait to ask Brittany if she would allow us to include it in the Berkshire episode. Brittany even created a video for the song and exclusively for the listeners of The Investors podcast.

Starting point is 00:54:55 You can also download the song through our show notes. But guys, that was all that Preston and I had for this week's episode on The Investors podcast. We'll see you for the second half of the Berksa Holloway annual meeting next week. Thanks for listening to TIP. To access the show notes, courses or forums, go to theinvestorspodcast.com. To get your questions played on the show, go to AskTheInvesters.com and win a free subscription to any of our courses on TIP Academy. This show is for entertainment purposes only. Before making investment decisions, consult a professional.

Starting point is 00:55:31 This show is copyrighted by the TIP network. Written permission must be granted before syndication or rebroadcasting. Thank you.

We Study Billionaires - The Investor’s Podcast Network - TIP140: Warren Buffett and Charlie Munger at the Berkshire Hathaway Shareholders Meeting 2017 (Part 1) - (Business Podcast)

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