We Study Billionaires - The Investor’s Podcast Network - TIP196: (Part II) Buffett & Munger Q & A at the 2018 Berkshire Hathaway Shareholders Meeting (Business Podcast)

Starting point is 00:00:00 You're listening to TIP. Hey, how's everyone doing out there? On today's show, we continue our recap of the 2018 Berkshire Hathaway shareholders meeting by playing the top questions we heard this year. If you missed last week's episode, I would recommend that you go back an episode and start there. So without further delay, here's the second set of Q&A that we found Noteworthy. I hope you enjoy.

Starting point is 00:00:23 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 welcome to the show. We're excited to have you guys back here for round two, where we're going to be talking about some of the top 10 questions that we heard at the Berkshire Hathaway Shareholders meeting this past year. So without further delay, Stig and I are just going to go ahead and kick this off and play the first question for you. This question comes from Key Lee and actually is directly about the issue of most.

Starting point is 00:01:06 He notes that Elon Musk this week on his Tesla earnings call said the following, quote, I think moats are lame. They are like nice in a sort of quaint, vestigial way, and if your only defense against invading armies is a moat, you will not last long. What matters is the pace of innovation. That is the fundamental determinant of competitiveness, unquote. So Warren, it seems the world has changed. business is getting more competitive, pace of innovation,

Starting point is 00:01:36 technology is impacting everything. Is Elon right? Elon says a conventional mode is quaint, and that's true of a bottle of water. And he says that the best moat would be to have a big competitive position, and that is also right. It's ridiculous. Warren does not intend to build an actual moat.

Starting point is 00:02:11 Even though there's a... acquaint. Yeah. There's certainly a great number of businesses. This has always been true, but it does seem like the pace has accelerated and so on in recent years. There's been more modes that have been, become susceptible to invasion, that seem to be the case earlier. But But there's always been the attempt to do it. And here and there, there are probably places where the motor is as strong as ever. But certainly you can work at, certainly should be working at improving your own moat and defending your own mode all the time. And then Elon may turn things upside down in some areas.

Starting point is 00:03:08 I don't think he'd want to take us on in candy. And we've got some other businesses that when it's always, you can look at something like Granables out there in the other room and it won't be technology that takes, takes away the business and in Granibles. Maybe something else that catches the young kids' fantasy or something, but there are some pretty good moats around. Being the low-cost producer, for example, is a, terribly important mode.

Starting point is 00:03:43 Something like GEICO, technology is really not brought down the cost that much. I think our position has there are a couple of companies that have costs

Starting point is 00:04:03 as low as ours, but among big companies, we are a low-cost producer and that is not bad when you're selling an essential item. So I think that this is just a fundamental difference between approaches, right? Like everyone's got their own investing approach. There's people out there that have made a billion dollars by value investing. There's people that have made a billion dollars by creating a brand new product, a call it electric car.

Starting point is 00:04:32 There's just all these different approaches. And Elon's approach has always been move fast, move way faster than everybody else in disrupt technology and create something that has never been done before. Buffett and Munger's approach is literally to find the most boring company you can possibly find that has these built-in indoctrinated habits that people have, call it Disney, call it, you name it, candy company, that people just go back and go back. Coca-Cola is another great example. And he views that as a moat.

Starting point is 00:05:09 And so it's just a difference in investing. neither one of them are wrong. I think you just got to look at it as a difference in approach. Yeah, you know, it's interesting what you're saying in terms of their approach. I mean, Buffett says he sees candy, basically what he was hinting at. He takes cheap products, you know, sugar, water, cookie beans, probably something else. Then he refine it and he makes expensive chocolate. I mean, that's great. So he is spending less money on his product that he's charging for them. And that is how the conventional way is of making money, or at least what Buffett has been doing. And then you have a guy like Musk. I mean, I don't know if Elon Musk ever

Starting point is 00:05:47 made money the conventional way. And I'm not saying this to insult him anyway. If anything, I'm just I really admire the person. But for instance, he started with PayPal. I don't know if PayPal ever made money while he was partly owned by Elon Musk. I mean, they boosted the top line. He was super important in terms of eventual selling it. And basically, you know, they gave people $10 for free, which cost them a lot of money, as long as they would spend that $10 sent to someone else. So he took that money and invested in SpaceX that has never made any money. In Tesla, it has never made any money. Now, his net worth is really, really high, but it's all in stocks that doesn't make any money,

Starting point is 00:06:29 and that's how he's been growing his company. Of course, the plan is that eventually those assets will make money at some point in time, but that's just not his approach. He's successful because he's disrupting all the time. I don't think Buffett disrupted anything. And I don't think he will claim that he has disrupted anything. That's not his goal. He just has a very different approach to this.

Starting point is 00:06:47 No, I don't know if his modes are lame. They might be lame, but they're still very profitable. I don't think that game has changed at all. All right. So let's go ahead and hop on the next question here. This question comes from Vlad Koptiv in Ukraine. He says, capitalization of cryptocurrencies approached that of Berkshire, and Apple last year.

Starting point is 00:07:11 And clearly the idea behind crypto will affect conventional banking groups where Berkshire is a shareholder. You always say you didn't go into too much detail to obtain an understanding on cryptocurrencies. So what factors caused you to say that it's a bubble? If you had bought gold at the time of Christ

Starting point is 00:07:28 and you figure the compound rate on it, you know, it may be a couple tenths of 1%. The it essentially is not going to deliver anything other than supposed scarcity, you know, because you can only mind so many. But so what? I mean, what does it produce itself?

Starting point is 00:07:59 You know, the check is a wonderful idea. Just imagine how the world would be without being able to write checks or have wire transfer of funds. But it doesn't make the check intrinsically itself worth a lot of money. And if you said you can't use something cold check with a little piece of paper, you'd do something else to transfer money. I think that any time you buy a non-productive asset, you are counting on somebody else later on to buy a non-productive asset because they think they can sell it to somebody for more money.

Starting point is 00:08:31 And it's been tried with tulips, and it's been tried with various things over time. And it does come to a bad ending. I'm having, you have a hard time, you can think of, think of raw land. I mean, the Louisiana purchase was, say, $15 million for $800,000 or so square miles of land. In fact, you're sitting on land that came with the Louisiana purchase, and, and so what we pay, we paid $20 a square mile, and, you know, 640 acres in a square mile, and you're down to $3.3.3.

Starting point is 00:09:07 three cents or something. So that was a pretty good purchase of an what was then a non-productive property. But it depends. But it's very hard. You can buy stamps. Bill Gross got everything. Collected a wonderful stamp collection.

Starting point is 00:09:23 It sold for more money in the end. But it's dependent on somebody else wanting to buy, hoping they will sell it for more money and so on. And in the end, you make your money out of productive assets. If you buy a farm, you try to estimate what the crops, what amount per acre of soybeans or corn or whatever may be raised

Starting point is 00:09:48 and how much you have to pay the farmer that farms it for you and what your taxes will be and various things. And you make a conclusion based on what the asset itself will produce over time. And that's an investment. When you buy something because you're hoping tomorrow morning you're going to wake up and the price will be higher, You know, you need more people coming and do it than are leaving. And you can get that, and it will feed on itself for a while, and sometimes for a long while, and sometimes do extraordinary numbers. But in the end, but they come to bad endings, and cryptocurrencies will come to bad endings.

Starting point is 00:10:26 And along with the fact that there's nothing being produced in the way of value from the asset, that you also have the problem that it draws in a lot of short. charlatans and that sort of thing who are trying to create various sorts of exchanges or whatever it may be. It's something where people who are of less than stellar character see an opportunity to clip people who are trying to get rich because their neighbors are getting rich buying this stuff and neither one of them understands. It will come to a bad ending, Charlie. Well, I like cryptocurrencies a lot less than you do. And so to me it's just dementia.

Starting point is 00:11:15 And I think that people who are professional traders that go into trading cryptocurrencies, it's just disgusting. It's like somebody else is trading turds and you decide I can't be left out. To the extent that this brought, we're being well, webcaster on the world. I hope some of our stuff doesn't translate very well. Oh my God. So this is interesting. I agree with a lot of the things he was saying there with respect to having to have somebody else come into the asset class in order for the value that go up. Completely agree with it. The part where he says it's going to have a bad ending, that's where I don't know that I necessarily agree with him. I think that the crypto space has a

Starting point is 00:12:11 ton of utility. You go out there and you read any of these top ranked books, one's written by New York Times bestselling authors and people that have put a lot of time and effort into understanding what this is and what value it creates to society, which is you have a fixed monetary baseline, you don't have central banks manipulating things, all of that stuff. You basically have a global currency. I think there's value in that. And so I fundamentally disagree with Buffett and Munger on the long-term, utility of crypto. But I do agree with what he was saying there where, let's just say Bitcoin, for example, people have to continue to come into this currency and stake out a claim to some

Starting point is 00:12:56 of these coins. And that population of people has to continue to grow for this thing to go in value. And if that doesn't happen and it just stays where it's at, and let's just say some people leave and step out of the currency, you will lose money. So he's just saying, he's just saying, not in the business, him and Charlie Munger are not in the business of trading currencies. They're not in the business of trading commodities. I know they have some futures contracts, but mostly that's for insurance purposes for the types of businesses that they deal in and it's hedges to protect themselves so they can manage the finances in the business. But these guys are not currency and commodity traders. And so they don't dabble in this stuff. And I think that that's some

Starting point is 00:13:41 context that people have to understand with some of this stuff. My personal opinion, I would not be the least bit surprised if something like Bitcoin or any other crypto coin that takes a large significant market cap is doing quite well in five years from now. That wouldn't surprise me. Could these things go down and have a terrible demise like he was saying? Absolutely they can. For anybody to say that they can't, I think they're living in a fantasy land and they've never seen how things can shake out sometimes in financial markets. So I think that they had interesting comments. I think Charlie Munger there was definitely going for the crowd appeal

Starting point is 00:14:19 in trying to make everybody laugh at the end, which, you know, was kind of funny. I kind of enjoyed his comment. It was pretty funny. So the first point I had was him talking about buying a productive asset, which is just such a Warren Buffett kind of thing to say. And I think it's a good learning objective for anyone going into investing, that perhaps you don't want to buy gold. which is always his historic sample of,

Starting point is 00:14:44 it needs to produce something before he can return a cash flow to you. So whenever he made his investment in Coca-Cola, the reason they went up in price was because the company made more and more money for a share and also in aggregate. So his investment became more and more valuable. And that's just how it goes. The more money a company makes, the more value becomes. There's an exception to this.

Starting point is 00:15:08 And this is just a cheap shot of Tesla. You can almost like draw a line of the more money that they're losing, the higher the valuation is. I know that there's not to be said about that. And you can all say, well, what about the top line? And you can talk about that. But the general rule of thumb is the more money a company is making, the higher the price would be. So sorry for the cheap shot of Elon Musk. I'm just amazed you can lose $2 billion every year. People think you're a rock star, including me, and still pay $50 billion for losing that $2 billion every year. But anyway, guys, going back to the discussion about cryptocurrency,

Starting point is 00:15:43 in a way, I think that Buffett doesn't understand it. And I think Buffett will probably agree with that in the sense that he doesn't not want to understand that. That is not historical competence, and he doesn't want it to be historical competence. But I think he's right in the sense that if you hold a productive asset over time, it will be a lot more profitable for you than owning unproductive asset. call it Bitcoin, I'll call it gold. But that's not the same as saying that an unproductive asset has no value. I mean, again, if we talk about gold, gold has utility. So even your dentist

Starting point is 00:16:18 will tell you that gold has utility, even if you don't see it as a store of value, which is typically why people would buy gold in the first place. It still has value because you can use it for something. So I kind of feel that Buffett was almost arguing against himself whenever he was talking about the check. And I don't know if it was just like me misinterpreting what he was saying, but he's talking about that there's a value of having access to a check, because it's a more smooth way of paying. And I think it would be crazy to think that we won't continue to see disruptions in the way that we make payments. Then we got credit cards. Then we could pay online. We have all these different tools, all these different methods that makes it easier for us to spend money and to live in the society.

Starting point is 00:17:11 And not saying that it has utility, which is not the sell what he's saying. He says it's not productive. But I want to say it has utility. And whenever it has utility, it has a value. Now, the market cap for cryptocurrencies might be $200 billion or something like that. And I'm not the one to say if it's $2 million or $2 trillion or whatever that is. and that would be a different discussion. But I think it's important to understand that this new method has utility one way or the other,

Starting point is 00:17:39 whether you see it as a store of value or if you just see it as a simple way of paying as inefficient as it is, it has some kind of value. And that's really what a lot of investors are trying to figure out and not the one who are only speculating into cryptocurrencies. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year, bringing together activists, technologists, journalists, investors, and builders from all over the world. many of them operating on the front lines of history. This is where you hear firsthand stories from people using Bitcoin to survive currency collapse, using AI to expose human rights abuses, and building technology under censorship and authoritarian pressures.

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Starting point is 00:22:06 All right. So let's go ahead and jump into the next question here. Okay. This question comes from someone who says, I am a Berkshire employee and shareholder. I read an investigative article from ProPublica on the Washington Post that many of Berkshire's various units only offer 401K plans with high fees. They're actively managed rather than the low.

Starting point is 00:22:27 cost indexes you have advocated as the best path for savings for retirement. The article's author said he contacted the company and nobody would comment. Will you do something to improve our 401k offerings to match your investment philosophy? And from an operational perspective, how did this happen given your strong views on the topic? Well, I've absolutely said what many, many times through annual reports and our managers know what I think about the attractiveness of having an

Starting point is 00:23:01 an index fund option, but they all have different plans, different histories, and they run their businesses. And who knows, you know, which particular, if you go back to the older businesses, they have defined benefit pension plans generally. Nobody puts them in anymore. Then the question is, you know, do you transition to something else?

Starting point is 00:23:24 In the end, we overwhelmingly let our managers make those kind of decisions and others. And my guess is that a very high significant percentage of people who have work at a company that has a 401k plan will have an index fund option, but they may not in some cases. The only thing we, I think we have asked the companies, to have a limit on the percentage, I think, that they might put in Berkshire stock through the 401K. But we don't want people whose jobs are tied to Berkshire. We certainly don't want me in a position of encouraging, put 100% or something of their savings. And in Berkshire itself, I don't want to be in that position. But I don't think even there

Starting point is 00:24:21 We've insisted on any company doing that I think we've probably made that When we've been asked about it once or twice I think we've given them that suggestion But the managers were on the companies The employees, if they feel And some of our companies have human relations departments, if they feel

Starting point is 00:24:37 that they'd like different options or something like that You know, they should make those views known to the managers And in some cases the managers I think will pay attention to them and others they probably won't. We've got a wide variety of managers that run our businesses, and we're not going to start trying to run them from Omaha. Charlie? Well, I think you're right.

Starting point is 00:24:59 That has happened, that business of the high-fee choices, because we've delegated the whole subject to the managers of the subsidiaries, and so no attention at all is being given to the employee choices at headquarters. And what you're pointing out is that a lot of the employees in the subsidiary, would do better if they indexed instead of choosing what they did choose. And my guess is you're absolutely right about that. And if there are any people managers in the business today, I hope we'll do a little better at encouraging better choices.

Starting point is 00:25:35 Yeah, although I would, we wouldn't want them, we don't want them to interfere too much in directing what they, it's, you know, we can take over human relations. No, it's up to the managers, but we wouldn't. object to a little different viewpoint. And we have made it very clear what we think. I mean, they just, some of them don't listen to us. So I really, really like this question and this exchange because it says so much about how

Starting point is 00:26:08 Berkshire's run. And I think there's just a lot people can learn from the way these two responded to this. So just a little context for people that might not understand. where the question was coming from, Buffett is always telling people that the best way for them to get a return is just to take your money and invest every month into an index fund that's a low-cost ETF. That's his advice for people. And so one of the employees, one of the operational subsidiaries that falls under Berkshire doesn't have the option to invest in a low-cost ETF. And they were basically like, hey, you preach all this stuff and I work for your company

Starting point is 00:26:45 and I don't have this as an option. And these guys, if anything that their response shows you, it shows you how decentralized this business is. It truly shows you that Buffett is sitting there in Omaha with his staff of call it 30 people. And they're basically doing, they're looking at all the accounting of all these businesses that he's bought through the years.

Starting point is 00:27:08 And that's it. I mean, he's giving little to no guidance to these people. I think his guidance is if he doesn't like the manager, he gets rid of the manager and put somebody else in. And like, that's his leadership style. And it's like, hey, run with it. I don't know how to do your business. Just do it. And if I have some questions that might assist me in my next stock pick or operational subsidiary that I'm going to buy, I'll give you a call so you can help me out.

Starting point is 00:27:32 But, I mean, they are hands off. I mean, this is crazy how hands off they are. how many businesses that are this size would be, you know, sitting in a shareholders meeting with 30 to 40,000 people there listening and him basically saying, yeah, you know, you're right, we should offer something like this at your level. But, you know, if the middle manager doesn't want to offer it, then we're not going to do it or you're just not going to have that available. Like, that's crazy. That's crazy. But I think if you pull back why these two have been so successful, I think, that this is one of the main reasons why they've been so successful is because they haven't dictated their culture, they haven't dictated what it is that they want to do to all these operational subsidiars because it would just be too freaking complex. And so although there's problems at certain levels, and this is a great example of one of those problems, because when you look at this, their culture, if they're trying to manage this across, I don't know how many

Starting point is 00:28:38 operational subsidiaries they have, but I'd guess it's around 70. If they're trying to manage this across 70 different companies, there's just no way. And when you look at why so many mergers fail, it almost always comes down to the clashing of cultures between two different companies and one trying to dominate the other and then just shifting people around, shifting brands around, all of that. They don't deal with this. They just buy the company and they say right in their shareholders, you know, notes that the management has to come supplied because they can't supply it. That's the way they do things. They have a method and they stick to that method. They don't deviate from it and they just continue to do it over and over again. And I think that their response

Starting point is 00:29:23 to this was just really surprising, but I think it also is part of their secret sauce. Yeah, I think it's a great point, Preston, because how do you grow a company to like one of the, what, five, ten largest companies listed companies on that? planet in one generation. Well, you do that because you don't micromanage. Say he had 70 companies. Like he could only be putting out fires like 24 hours a day if that was his approach. And he probably wouldn't have gotten to that point in the first place if you wanted to go in and talk about this is how the 401 plan should be across the businesses that I own. I mean, think about if you took up a problem like that, how many other problems that Buffett would need to fix too?

Starting point is 00:30:07 He would never have time to sit down and allocate his time to what he does best, which is just allocating capital. And he's really, really good at that. Perhaps allocating capital is not what he's even best at is being the best business owner. And what he figured out whenever he was allocating resources as a business owner was that his time is just not well spent. I'm putting out fires and setting up pension plans for various companies. But I do think that it's a legitimate concern to have, and I understand the person asking the question. I think it's a legitimate and relevant question to ask.

Starting point is 00:30:43 I also think that the response really speaks to the shareholders saying, yes, I know why this might seem unreasonable, but I can only do one thing. That is leading by example, and he's been very vocal about his view on low-cost J-Fs as a best way to save up for retirement for the vast majority of people. and then let the companies do what they do best, despite all the mistakes that make, they probably would do a better job than he would, and then he can do what he does best. All right. So, well, let's just hop into the next question here. Hi, I'm Brady Ritchie from St. Louis, Missouri, shareholders since 1996. Terrific. Warren, you and Charlie have been critical of business schools in the past and what they teach.

Starting point is 00:31:28 With respect to value investing in super investors of Graham and Doddsville, You featured the returns of many great investors with different backgrounds, work, and education. With the lesson being following the philosophy is the key. To be successful today, does it still just fall back to Chapter 8 of the intelligent investor? And what do you think of programs and designation such as CFA, CFP, etc., which purport high standards yet rooted heavily into academia? I went to three business schools, and at each I found a teacher or two. I went to one specifically to get a given teacher, but each one of them I found a teacher or two that everybody got a lot out of.

Starting point is 00:32:22 So we're not in anti-business school here at all. we do think that the priesthood, say, 30 years ago, for example, in terms of, or 40 years ago, in terms of efficient market theory, they strayed pretty far, in our view, from the reality of investing. And I would rather have a person, if I could hire somebody among the top five graduates of number one, two, or three of the business schools. And my choice was somebody that had, was bright, but had Chapter 8 of the intelligent investor, absolutely, it just was natural to them.

Starting point is 00:33:15 They had it in their bones, basically. I take the person from Chapter 8. This is not, what we do is not a complicated business. It's got to be a disciplined business, but it does not require a super high queue or anything of the sort. And there are a few fundamentals that are incredibly important, and you do have to understand accounting, and it helps to get out and talk to consumers and start thinking like a consumer in many ways in certain industry, and all of that. but it just doesn't require advanced learning.

Starting point is 00:33:57 And I certainly, you know, I didn't want to go to college, so I don't know whether I would have done better or worse if I'd just quit after high school. You don't read the books I read and all of that. I think that if you run into a few grade teachers, and they really change the way you see the world to some degree. You know, you're lucky, and you can find them in academia, and you can find them in ordinary life.

Starting point is 00:34:31 And I've been extraordinarily lucky in having great teachers, including Charlie. I mean, Charlie's been a wonderful teacher. And any place you can find somebody that gives you insights into things you didn't understand before, maybe makes you a better person that you would have been before. You know, that's very lucky

Starting point is 00:34:52 and you want to make the most of it. If you can find it in academia, make the most of it, and if you can find it in the rest of your life, make the most of it. Charlie? Well, when you found Ben Graham, he was unconventional,

Starting point is 00:35:05 and he was very smart. And, of course, that was very attractive to you. And then when you found out it worked and you could make a lot of money which is sitting on your ass. Of course, you were an instant convert. And so...

Starting point is 00:35:21 It still appeals to me, actually. But the world changed. Before he died, Bill Graham, I mean, Ben Graham recognized that the exact way he sought undervalued companies wouldn't necessarily work for all times under all conditions.

Starting point is 00:35:40 And that's certainly the way it worked for us. we gradually morphed into trying to buy the better companies when they were underpriced instead of the lousy companies when they were underpriced. And, of course, that worked pretty well for us. And Ben Graham, he outlived the game that he played personally most of the time. He lived to see most of it fade away. I mean, just to find some company that's selling for one-third of its working capital and figure out it could easily be liquidated and distribute $3 for every dollar of market price.

Starting point is 00:36:13 lots of luck if you can find those in the present markets. And if you can find them, they're so small that Berkshire wouldn't find them of any use anyway. So we've had to learn a different game, and that's a lesson for all the young people in the room. If you're going to live a long time, you have to keep learning. What you formerly knew is never enough. So if you don't learn to constantly revise your earlier conclusions and get better ones by, You are, I always use the same metaphor. You're like a one-legged man in an ass-kicking contest.

Starting point is 00:36:51 If anybody has suggestions for another metaphor, send them to me. Graham, incidentally, one point, important point, Graham was not scalable. I mean, you could not do with really big money. And when I worked for Graham Newman Corp, here he was the dean of all analysts and, you know, he was an intellect above all others around that time. But the investment fund was $6 million, and the partnership that worked in tandem with the investment company also had about $6 million in it.

Starting point is 00:37:35 So we had $12 million we were working with now. You're going to make adjustments for inflation and everything. But it was just a tiny amount. It wasn't really scalable. And the truth is Graham didn't care because, He really wasn't interested in making a lot of money for himself. So it had no reason to want to find something that could go on and on and become larger and larger. And so the utility of Chapter 8 in terms of looking at stocks as a business is of enormous value.

Starting point is 00:38:10 The utility of Chapter 20 about a margin of safety is an enormous value. But that's not complicated. stuff. I finally figured out why the teachers of corporate finance often teach a lot of stuff that's wrong. When I had some eye troubles very early in life, I consulted a very famous eye doctor. And I realized that his place of business was doing a totally obsolete cataract operation. They were still cutting with a knife after better procedures. I said, why are you in a great medical school performing absolute obsolete operations. He said, Charlie, it's such a wonderful operation to teach. Well, that's what happens in corporate finance. They get these formulas,

Starting point is 00:39:04 and it's a fine teaching experience. You give them a formula, you present the problem, they use the formula. It's, you get a real feeling of worthwhile activity. There's only one trouble, it's Boulder Dash. Yeah, whenever you hear a theory described as elegant, watch out. You know, imagine. 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 00:42:54 talking about business school and how teachers make things more complex than they need to be. I can't stand cap M. I think cap M is so worthless. And I kind of think that's what they were talking about there at the very end is these cap M calculations on basically determining what the value of businesses based off of, you know, the volatility and everything else. It's just so crazy, in my opinion. You know, the thing that I think sets people apart, you talk to anybody with a lot of experience and valuation, and they almost just immediately want to talk multiples. You know, one of the things that I found interesting when I had a conversation with Ray Dalio, personally, I was with a friend. And Ray asked my friend, he said, you know, so what's

Starting point is 00:43:41 the multiple on that? Like, he just cut straight to the chase. It wasn't anything that was a very, you know, they were talking about certain purchases on the private equity side, smaller purchases, like under $100 million. And Ray was just like, so what's the multiple look like on that? And that's where his, you know, immediate conversation went. These guys that really understand this stuff. They're not doing things that are crazy. They're doing things that are simplified. They're getting straight down to the basics. And then they're really trying to understand the competitive landscape. of the underlying assets of the business and how that won't be impaired moving forward. And business schools just have a tendency to make things way, way harder than they need to be.

Starting point is 00:44:21 The drills that you're learning in business school is valuable. But in application, you're just not doing it that way, right? Am I crazy? I mean, it's just fun to hear them talk about this stuff. So Stig, I want to hear your thoughts, bud. So this was my absolute favorite question of all of the. them and definitely also my favorite response. Oh my God, not just having been a business student myself, but also being teaching. You know, this is, oh, there's so many inherent flowed in

Starting point is 00:44:55 this system. I found it really insightful what he said about. He would rather hire a person who read and understood chapter eight of the intelligent investor rather than being graduated from a top five business school. Chapter eight of the intelligent investor, that's about Mr. market and how stock prices are irrational and how to act in a rational market. And I completely agree. And I really, really like what he said about that. And he even talks about chapter 20 of the intelligent investor later in his response, which is the margin of safety, which is basically, you know, you need to estimate what the intrinsic value is and then buy it at a much lower price. So you have a margin of safety if you're wrong. So there are some fundamental things about

Starting point is 00:45:39 stock investing, that you simply don't learn in business schools. And if you haven't gone to a business school, you might be like, that doesn't make any sense. Why would I pay tens of thousands, if not 100,000 of dollars for someone who is just telling me that stocks are always priced perfectly? And yeah, that's absolutely a horrible experience. There was this other question that was asked during the meeting that we didn't have a chance to play, neither in this episode or the previous one, where there's basically this business student going up there and then asking Buffett and Munger, please give me your equation and your inputs for valuing in business. And please also give me a stock ticker so I can go back home and mimic everything you just

Starting point is 00:46:23 said and have the magic formula. And Munger just said, if you want a formula, you need to go back to business school. And that was just such a spot-on response to that because there's no. magic formula and it's incredible going to these meetings. And it was definitely the normality the first time, but have gone to quite a few of them, there's always this guy who is saying, give me the equation so I can go home and replicate the entire universe of stocks and buy the best one. And Buffett and the manga always has the same response. You know, we can't give that to you because it doesn't exist. You have to estimate your own castles first. Before you can do that,

Starting point is 00:47:02 you need to learn about businesses. You need to learn about life. You need to learn about accounting. And whenever you feel that now you can estimate the value of a business, guess what? You have to keep learning so you can keep readjusting that value of the business because it's always changing because the world is changing and you need to improve your skill set, which was also what Monger is getting at, that you need to keep learning. That's really the key advice. I do want to say in defense of business goals, if your college professor, the way that you're commentating is that the less time you can spend on a ton of different activities, the more productive

Starting point is 00:47:42 is your time. Say you can spend it on research, or you can spend it on playing golf, whatever you want to do. There's a lot of incentive in terms of not doing your job well. And one of the things that this comes into effect is grading papers. So if you're teaching a finance course, you have all the incentives in the world when you're doing exams, the tests, and all that to give people. people attest and then multiple choice, where they don't have to think for themselves at all or just look up a formula or for them to calculate something so you can say, yes, it's right or yes,

Starting point is 00:48:15 that's wrong. But that's not how to think about stock investing. So if I could give you an example, like whenever I taught, I had assignments with students saying, here are the financial statements of this company for the past 10 years come up with the intrinsic value. And the students were so frustrated by that type of exercise because I never tried anything like that. They were like, is it $53.35 per stock? I mean, that was the questions I was getting.

Starting point is 00:48:43 And it's like, that doesn't matter. Like, I will grade you based on the arguments and based on which kind of model you chose and why you chose it. Not because you're using the right formula. And that's just not the way that we incentivize teachers, incentivize academics in this country. we are incentivized them to give really, really bad assignments that are really, really fast to grade because it's cheaper for everyone. Now, the students might suffer because they don't get the required skill set in school, but the academic system prosper from doing that.

Starting point is 00:49:18 And just like the last point here about incentivizing people. Say that we incentivize teachers on teaching investing courses, not on the amount of hours to put into the, the teaching. Say that we compensated. So if they lost money on their portfolios five years after graduation, it would be reflected negatively in the teacher salary. What would happen? Well, the teachers would probably start saying, only invest in treasury bonds. There would be this new discipline in academia like, why you can only invest in treasuries and how to get an A plus in calculating the yield of whatever that you can, by the way, just look up online. Because you

Starting point is 00:50:00 incentivize teachers to do that, but if you incentivize teachers and professors to say only upside, and the downside was just always paid by, you know, the investor himself or the asset management company, then you would probably have a new course called VC investing, you know, venture capital. How can you turn one dollar into a gazillion dollars? Because that's what you will incentivize. So I know this probably also comes from a place of frustration having taught three years, investing courses and finance courses, accounting classes. But I think you get the, what you pay for. And this is just an inherent problem that we have in the system. So whenever Preston talks about Cabem, which is a horrible, horrible theory that no one should use, it's easy to grade

Starting point is 00:50:41 papers and it's easy to cheat. And it gives this great learning experience. It's useless. But you have all the other factors that you incentivize in the system. So I think we really need to look there before we talk about magic formulas that are not there, by the way, in the first place. All right, so let's go ahead and play the last question we had from the meeting. Facing the fast-growing machine intelligence, how would you see the new competition impact the capital allocation productivity in the future? For Charlie, what is the first principle of capital allocation from general economic interest point of view? Thank you. Well, two questions, machine intelligence. I'm afraid the only intelligence

Starting point is 00:51:26 I have is being provided by something that's not a machine. And I don't think I'm going to learn machine intelligence. If you ask me how to beat the game of go with my own intelligence, I couldn't do it. And I think it's too old for me to learn computer science. Generally, I think that the machine intelligence has worked after all the machine now can be the best human player of Go. But I think there's more hype in that field than there is probable achievement. So I don't think the world is going to be changed that much by machine intelligence.

Starting point is 00:52:13 Some, but not hugely. And what was the other question? Well, one was machine intelligence. I think he was getting a capital allocation. Oh, yeah. Yeah, well, that's such a general question. Generally speaking, we're always trying to get the best to get something that's worth buying.

Starting point is 00:52:39 And the human mind rejects that if you're in academia because you could come in and make one declaratory sentence at the opening of the semester, and you would have anything to do for the rest of your time. So people want to find some formula. It's what I call physics envy. These people want the world to be like physics. But the world isn't like physics outside of physics.

Starting point is 00:53:05 And that false precision just does nothing but get you in trouble. So I would say you've got to master the general ideas, and you've got to work to improve your judgment slowly the way all the rest of us had. And I don't think most individuals have much. hope of individual gain from machine intelligence? No, I don't think that... I'm impressed when machines be go or something of disorder or even when the chess or whatever it may be.

Starting point is 00:53:44 I don't really think they bring much to the table in terms of capital allocation or investing. And I may be missing something entirely. You know, maybe I'm just blind to what's out there. You're missing a lot of very remunitive fee-earning twaddle. Well, that takes care of that. So we'll go on to Station 8. So I really liked this question because I think it really highlights how skeptical they are of new technology in general.

Starting point is 00:54:16 And I'm not saying that their comments are accurate by any shape of the imagination. They might be very inaccurate. But I think it shows you how skeptical they are to invest in anything or to buy into anything that just has no proven track record. This is just how they operate, you know. So I'm a big believer in AI and kind of where this is all going on all these deep neural network stuff. I think that it's going to change cars. It's going to change medical in a major way. There's just so many things that I think that this is going to impact in a very dramatic way in 10, 15 years. And it doesn't seem like they see it that way at all. They obviously know about that.

Starting point is 00:55:00 this. That's why they keep bringing up the game of go because they understand that deep mind Google's AI arm is playing the game of go and proving that it can be humans and all that kind of stuff. So they're very aware of what's happening. But they're skeptical. And I just find that interesting. I find it very interesting. And I don't share the same opinion as them, but I think that the question and their response is worth highlighting to the audience so people can form their own opinion. You know, honestly, Preston, like, whenever I heard them for this question, I was like, yes, I want to hear from Buffett and Munger. What do they think about? Like, how is this going to change things?

Starting point is 00:55:40 And they said, we don't know. Probably not a lot. And I was like, huh, me, you know? That was kind of like the feeling that I had. But I don't have a great opinion on that either. I think it's clear to see in some of the other disciplines, you know, whether it's cars or medicine. I think there's a lot to gain there. And just like a handoff, we read Martin Ford's book, Rise of the Robots,

Starting point is 00:56:04 with a lot of applicability for AI. And that was an amazing book. But it didn't touch on investing. And I think that at least so far, I haven't seen a lot of good literature about the impacts on AI. And it's probably not reasonable or fair if I say this because I'm not the one to validate it. So what would it take for me to say it's good? I mean, I have no clue what's going on. Even Buffett has no clue what's going on with AI.

Starting point is 00:56:34 It makes sense in trading. And I think that the results that you have seen so far is that they trade really well. The AI algorithms, we haven't really seen them identify modes and like long-term investments just yet. But that's not the same as saying we can't do it. It's just because it's so new that we don't have any valid track record to really see that. What is your personal opinion, Preston? How do you think that AI will change the investing landscape over the next decade, if ever? You know, I don't know, but I do think that it is going to have an impact.

Starting point is 00:57:08 I think that it's going to take a lot of jobs out of Wall Street and a lot of big banks, my personal opinion. You know, we were talking about the stock pick AI EQ, which is one of the first, you know, deep learning ETFs out there where no human is making any decision is just the robot. and some of the picks that it had in its portfolio. This thing, last time I checked, it was actually outperforming the market since inception, and it had a very rough start. Like the first month was very bad, and now it's actually outperforming the market. So I'm watching that very closely. I'm kind of seeing what's happening.

Starting point is 00:57:42 And, you know, as it gets a track record, I think, you know, any professional trader would tell you it'd have to beat the market for three to five years before they would even entertain it as being something that's, you know, proving that it's doing better. but I know I've got my eye on it. And to be honest with you, I kind of feel like it's going to outperform. But that's just based on gut and nothing, you know, how could I back that up with anything other than just saying that it's my gut? All right, guys. So that concludes our second part episode of the Berkshire Hathaway Shareholders meeting. We had so much fun with our audience. You guys are just amazing. Thank you so much for the people that did come out. We had so much

Starting point is 00:58:23 fun with you. And we really look forward to all those opportunities that we have to sync up and meet people face to face. And this was just an incredible opportunity. We really enjoyed covering these questions. As you can see, some of them are not what you would expect. And some are, you know, exactly what you'd expect. But hopefully you guys have learned some interesting things by the 10 questions that we covered over these two episodes. All right, guys, that was all the Preston and I had for this week's episode of The Investors podcast. We see each other again next week. listening to TIP. To access the show notes, courses, or forums, go to theinvestorspodcast.com.

Starting point is 00:59:00 To get your questions played on the show, go to Asktheinvestors.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. This show is copyrighted by the TIP network. Written permission must be granted before syndication or rebroadcasting. PID! POD!

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We Study Billionaires - The Investor’s Podcast Network - TIP196: (Part II) Buffett & Munger Q & A at the 2018 Berkshire Hathaway Shareholders Meeting (Business Podcast)

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