We Study Billionaires - The Investor’s Podcast Network - TIP245: Part1 - Berkshire Hathaway Shareholders Meeting Q&A - Warren Buffett & Charlie Munger (Business Podcast)

Starting point is 00:00:00 You're listening to TIP. All right. So once a year, billionaire Warren Buffett and Charlie Munger hold their annual shareholders meeting for Berkshire Hathaway. And like rock and roll groupies, Stig and I cling to their discussions and provide some of the more interesting responses here on our show. So on our episode today, we're going to be playing some questions and answers that address Berkshire's large cash position, their ownership of Apple, their thoughts on managing other people's money and much, much more. It's always fun to cover this meeting each year, so get ready for our review of Berkshire 2019.

Starting point is 00:00:37 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. Hey, everyone, welcome to The Investors podcast. I'm your host, Preston Pish, and as always, I'm accompanied by my co-host, Stig Broderson. And like we said, in the introduction, we're going to be a lot of be talking about the Berkshire meeting. And so what we're going to do is we're going to play the first question that we think that you guys might enjoy. So here you go. My question concerns your repurchase of Berkshire shares. In the third quarter of last year, you spent almost one billion buying Berkshire B stock at an average price of $207. But then you got to a period between December 26th

Starting point is 00:01:31 and April 11th, when the stock languished for almost four months under 207, even as you were sitting on an enormous pile of 112 billion. My question is why you did not repurchase a lot more stock unless, of course, there was for a time an acquisition of, say, 80 billion to 90 billion on your radar. Yeah, the question, whether we had $100 billion or $200 billion would not make a difference, or $50 billion, would not make a difference in our approach to repurchase of shares. We used to have policy of tying it to book value that, but that became obsolete. The real thing is to buy stock, repurchase shares.

Starting point is 00:02:27 when you think you're doing it at a price where the remaining shareholders have had are worth more of the moment after you repurchased it than they were the moment before. It's very much like if you were running a partnership and you had three partners in it and the business was worth $3 million and one of the partners came and said I'd like you to buy back my share of the partnership for $1.1 million and we'd say forget it and if he said $1 million we'd probably say forget it unless and if he said 900,000 we'd take it because at that point the remaining business would be worth 2 million 1 and we'd have two owners and our interest in value would have gone from a million to a million and 50,000 so it's very simple arithmetic most companies

Starting point is 00:03:15 adopt re-purchase programs and they just say we're going to spend so much that's like saying we're going to buy XYZ stock and we're going to spend so much here we're going to buy a company and we're going to spend whatever it takes. We will buy stock when we think it is selling below a conservative estimate of its intrinsic value. Now, the intrinsic value is not a specific point. It's probably a range in my mind might have a band maybe of 10%. Charlie would have a band in his mind and it would probably be 10%. And ours would not be identical, but they'd be very close.

Starting point is 00:03:54 and sometimes he might figure a bit higher than I do, a bit lower. But we want to be sure when we repurchase shares that those people who have not sold shares are better off than they were before we repurchase them. In the first quarter of the year, they'll find we bought something over a billion dollars of worth of stock, and that's nothing like my ambitions. But what that means is that we feel that we're okay buying it, but we don't salivate over buying it. We think that the shares we repurchase in the first quarter leave the shareholders better off than if we hadn't,

Starting point is 00:04:36 the remaining shareholders, better off than if we hadn't bought it. But we don't think the difference is dramatic. And you could easily see periods where we would spend very substantial sums if we thought. the stock was selling at say 25 or 30% less than it was worth and we didn't have something else that was even better. But we have no ambition in any given quarter to spend a dime unless we think you're going to be better off for us having done so, Charlie. Well, I predict that we'll get a little more liberal than repurchasing shares.

Starting point is 00:05:14 I was going to give you equal time, but then... Oh boy. not just love Charlie Munger. So in the first quarter of 2019, Berkshire bought back $1.7 billion back in shares. And this is more than in 2018 altogether. So it sounds like it's a lot of shares, but for a company well over $500 billion in market cap, it's not really moving the needle. However, I think if you are an investor, it has a few important implications. So the first one might be obvious in the sense that Warren Buffett thinks that the stock is slightly undervalued compared to the mild conditions. So if you want to be fully invested in equities with a strong

Starting point is 00:06:04 focus on protecting your downside, Berkshire might be an option. Especially because Warren Buffett hints at using substantial sums if the stock is undervalued 25 to 30%. If he does not have any other place where you can put the money, it would likely go into Berkshire, which again is a protection for you on the downside. Another question that was played here during the meeting, they even talk about putting as much as $100 billion in buying back shares. And I don't think you should be caught up too much in the numbers. That's really not the point.

Starting point is 00:06:39 But more than Warren Buffett is really ready to apply all the money where it's put to the best possible use, which is also why he does not want to allocate a fixed amount every year for share of purchase, as you see so many other companies are doing, because it is very interesting that if you go through various earnings calls, you hear so many times from management that they're saying that they might have paid out, say, $500 million in dividends and then bought back shares for another $500 million. And then they're saying they're proud of paying back or rewarding their investors with $1 billion for that quarter. For a value investor, that is sort of not. I mean, if the $1 billion could be put to better use by reinvesting in the business or to make

Starting point is 00:07:27 an acquisition, you're really not paying back the investor. You're actually destroying investor value. And I think the final implication is really how much the size of Berksia Hellerway is constraining Warren Buffett. You know, if you have $100 billion in cash, there's just a limited amount of options for you. You can't put $100 billion. to work in two many public companies. And one of the very few you can do that with, you know, that's a company like Berkshire. So buying back shares might mean that this is the best way

Starting point is 00:08:00 to put the money into use, but it is in a very limited universe. So, Stig, I'll be honest with you. This response was just, I don't know. I was pretty frustrated listening to this. And it's not anything new that we haven't heard from previous shareholders' meetings. I'm pretty sure you could pull up any shareholders meeting for the last 20 years,

Starting point is 00:08:23 and you're going to hear him talk about share repurchases and how the price has to be right and has to have the right intrinsic value or else they're not going to do it to bring shareholder value for the existing owners. He says that all the time. But Carol's question here, I thought, was extremely well-framed. And I think it was well-framed in the fact that she's addressing the fact that, that he just keeps growing his cash pile and he's not buying any companies with it. He's not even buying his own stock with it. And what he's really getting at is if you're going to buy a little bit

Starting point is 00:09:01 in buy a little bit, I mean a billion. But that is a little bit in the grand scheme of how much he's sitting on. He's sitting over a hundred billion. So when you talk about it as a percent, that's less than one percent of buying his own stock back. So if you're you, you're going to, you're going to buy less than 1%, why not buy 10% or 20%, you know what it is that you're buying. So it's just a little confusing and it sends mixed messages to the marketplace. So are you buying it because you think it's value? Or are you buying it for some other reason that just doesn't make any sense at all? I was just very, I'm frustrated with his response.

Starting point is 00:09:42 And then I think whenever he handed over to Charlie and Charlie just, you know, Charlie's response was, I don't want to answer it is really what he was doing. He's just batten the question away as if he doesn't have to respond to it. And I think that they do need to respond to it because what they're effectively choosing is they're saying, I think my cash gives me a better position than buying back my own stock. I don't know how else you could see it any other way. That's just me. I think that their actions speak way.

Starting point is 00:10:18 way louder than their words here. And I just think this was such a terrible response to such an important question that I've been looking at their actions for a couple years now. And it doesn't seem like they have a good response to it. And you know, I will say this on their behalf, a lot of the times they don't like to publicly talk about why they are putting on certain position. So this position of cash, maybe they think it's very advantageous to not be telling the market why they're sitting on so much cash and they're valuing the optionality of that cash for some reason. And I think it's important to pay attention to that. So although I'm frustrated with their lack of telling people why they're doing what they're doing, I am paying

Starting point is 00:11:06 close attention to what they're doing and trying to understand it for myself. 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.

Starting point is 00:11:42 many of them operating on the front lines of history. This is where you hear firsthand stories from people using Bitcoin to survive currency collapse, using AI to expose human rights abuses, and building technology under censorship and authoritarian pressures. These aren't abstract ideas. These are tools real people are using right now. You'll be in the room with about 2,000 extraordinary individuals, dissidents, founders, philanthropists, policymakers, the kind of people you don't just listen to but end up having to. having dinner with. Over three days, you'll experience powerful mainstage talks, hands-on workshops on freedom tech, and financial sovereignty, immersive art installations, and conversations

Starting point is 00:12:23 that continue long after the sessions end. And it's all happening in Oslo in June. If this sounds like your kind of room, well, you're in luck because you can attend in person. Standard and patron passes are available at Osloof Freedomforum.com with patron passes offering deep access, private events, and small group time with the speakers. The Oslo Freedom Forum isn't just a conference. It's a place where ideas meet reality and where the future is being built by people living it. If you run a business, you've probably had the same thought lately. How do we make AI useful in the real world? Because the upside is huge, but guessing your way into it is a risky move. With NetSuite by Oracle, you can put AI to work today. NetSuite is the number one

Starting point is 00:13:08 AI Cloud ERP, trusted by over 43,000 businesses. It pulls your financials, inventory, commerce, HR, and CRM into one unified system. And that connected data is what makes your AI smarter. It can automate routine work, surface actionable insights, and help you cut costs while making fast AI-powered decisions with confidence. And now with the NetSuite AI connector, you can use the AI of your choice to connect directly to your real business data. This isn't some out it's AI built into the system that runs your business. And whether your company does millions or even hundreds of millions, NetSuite helps you stay ahead. If your revenues are at least in the seven figures, get their free business guide, demystifying AI at netsuite.com slash study.

Starting point is 00:13:55 The guide is free to you at netsuite.com slash study. NetSuite.com slash study. When I started my own side business, it suddenly felt like I had to become 10 different people overnight wearing many different hats. Starting something from scratch can feel exciting, but also incredibly overwhelming and lonely. That's why having the right tools matters. For millions of businesses, that tool is Shopify. Shopify is the commerce platform behind millions of businesses around the world and 10% of all e-commerce in the U.S. from brands just getting started to household names. It gives you everything you need in one place, from inventory to payments to analytics. So you're not juggling a bunch of different platforms. You can build a beautiful online store with hundreds of

Starting point is 00:14:42 ready-to-use templates, and Shopify is packed with helpful AI tools that write product descriptions and even enhance your product photography. Plus, if you ever get stuck, they've got award-winning 24-7 customer support. Start your business today with the industry's best business partner, Shopify, and start hearing... Sign up for your $1 per month trial today at Shopify.com. slash WSB. Go to Shopify.com slash WSB. That's Shopify.

Starting point is 00:15:14 com slash WSB. All right. Back to the show. All right. So I don't have anything else to add for this one. So we'll just go ahead and play the next question here. This question comes from Vincent James of Munich, Germany. There has been a lot written about the recent impairment charge at Kraft Hines.

Starting point is 00:15:35 You were quoted as stating that you recognize that Burr, are overpaid for Kraft Times. Clearly, major retail change are being more aggressive in developing house brands. Amazon has announced intentions to launch grocery outlets, meaning that as Mr. Bezos has often stated, your margin is my opportunity. The more fundamental question related to Kraft Times may be whether the advantages of the large brands and zero-based budgeting that 3G is applied are appropriate and defensible at all in consumer foods. In other words, will traditional consumer good brands in general, and Kraft Heinz in particular, have any moat in their future?

Starting point is 00:16:16 My question is, to what extent do the changing dynamics in the consumer food market change your view on the long-term potential for Kraft Heinz? Actually, what I said was we paid too much for Heinz. I mean, Kraft, I'm sorry. The Heinz part of the transaction, when we originally owned about half of Heinz, We paid an appropriate price there, and we actually did well. We had some preferred redeemed and so on. We paid too much money for Kraft.

Starting point is 00:16:44 To some extent, our own actions had driven up the prices. Now, Kraft Heinz, the profits of that business, $6 billion, we'll say very, very, very, roughly, I'm not projecting them out. I'm not making forecasts, but $6 billion pre-tax on $7 billion of tangible assets. is a wonderful business, but you can pay too much for a wonderful business. We bought Seas Candy, and we made a great purchase, as it turned out, and we could have paid more, but there's some price at which we could have bought even Seas Candy, and it wouldn't have worked. So the business does not know how much you paid for it.

Starting point is 00:17:22 I mean, it's going to earn based on its fundamentals, and we paid too much for the craft side of Kraft Heinz. Additionally, the profitability has basically been improved in those operations over the way they were operating before. But you're quite correct that Amazon itself has become a brand. Kirkland at Costco is a $39 billion brand. Now, all of Kraft Heinz says $26 billion, and it's been around for, on the hindsight, has been around for 150 years. It's been advertised billions and billions of billions of dollars in terms of their products. And they go through tens of thousands of outlets. And here's somebody like Costco establishes a brand called Kirkland,

Starting point is 00:18:13 and it's doing $39 billion more than virtually any food company. And that brand moves from product to product, which is terrific if a brand travels. I mean, Coca-Cola moves it from Coke to Cherry Coke and Coke Zero and so on. but to have a brand that can really move, and Kirkland does more business than Coca-Cola does, and Kirkland Act operates through 775 or so of stores, they call them warehouses at Costco, and Coca-Cola's through millions of distribution outlets.

Starting point is 00:18:45 So brands, the retailer, and the brands have always struggled as to who gets the upper hand in moving a product to the consumers, and there's no question in my mind that the position of the retailer relative to the brands, which varies enormously around the world in different countries. You've had 35%, even maybe 40%,

Starting point is 00:19:10 the private label brands and soft drinks, and it's never gotten anywhere close to that in the United States. So it varies a lot. But basically retailers, certain retailers, the retail system has gained some power and particularly in the case of Amazon and Walmart and their reaction to it and Costco.

Starting point is 00:19:32 Kraft-Heinz is still doing very well operationally, but we paid too much. Well, it's not a tragedy that out of two transactions, one worked wonderfully and the other didn't work so well. That happens. There can always be mistakes made when you've got places in your rearrange, reorganizing them to do more business with the same number of people. And we like buying businesses that are efficient to start with. But the operations of Kraft Heinz have been improved under the

Starting point is 00:20:08 present management overall. But we paid a very high price in terms of the craft part. We didn't, we paid an appropriate price in terms of Heinz. Very interesting response. So back in 2015, Berkshire Bordcraft Heinz together with 3D capital. And I know it's quite easy for us to say here in hindsight, but for quite a few value investors, it was sort of a big surprise how much Buffett really paid. At the time, it was around 25 times earnings of a company with a mid-digit growth

Starting point is 00:20:43 and not really with an outlook of ramping up that growth. And for instance, for Heinz, a 20% premium to the price was added before the deal. Now, since then, you had an impairment charge of a little more than $15 billion, and this is primarily related to the U.S. refiguated food and Canadian retail divisions and the trademarks for Kraft and Oscar Myers. An impairment charge is really that the value of that has been written down, so you will have that less equity as an investor. Now, that being said, I think it's so liberating to hear the CEO of a huge company being so.

Starting point is 00:21:23 so upfront and being completely honest with their mistake. It's not rare these days. Yeah, you know, Stig, I don't know that I really have too much to add to what was said during this one. I think that it's just important for people to hear his thought process, how he can reanalyse himself objectively. And I think that that's probably his super strength here is he can look at himself objectively and say, hey, this was a good decision, this was a bad decision unemotionally. And so many people can't do that. And I think that that's such an important part of his secret sauce of who he is and why he became who he is, is because he's able to do that. So let's go ahead and jump to the next question here. I'm 27 years old and aspired to be a great

Starting point is 00:22:12 money manager like you two one day. My question to both of you is how did you know you were ready to manage other people's money. Well, it's a very interesting question because I've faced that and I sold securities for a while, but in May of 1956, I had a number of members of my family. I'd come back

Starting point is 00:22:35 from New York and they wanted me to help them out with stocks as I had earlier before I'd taken a job in New York and I said I did not want to get in the stock sales business. I enjoyed investing. I was glad to figure out a way to do it, which I did through

Starting point is 00:22:50 a partnership form, but I would not have done that if I thought there was any chance, really, that I would lose the money. And what I was worried about was not how I would behave, but how they would behave, because I needed people who were in sync with me. So when we sat down for dinner in May of 1956, with seven people who either were related to me or one was a roommate in college and his mother. And I showed him the partnership agreement. I said, you don't need to read this. I said, here are the ground rules as to what I think I can do and how I want to be judged.

Starting point is 00:23:29 And if you're in sync with me, I want to manage your money. I won't worry about the fact that you will panic if the market goes down or somebody tells you something different. So we have to be on the same page. And if we're on the same page, then I'm not worried about managing your money. And if we aren't on the same page, I don't want to manage your money because you may be disappointed when I think that things are even better to be investing and so on. So I don't think you want to manage other people's money

Starting point is 00:23:55 until you have a vehicle and can reach the kind of people that will be in sync with you. I think you ought to have your own ground rules as to what your expectations are, when they should send you roses and when they should throw bricks at you. And a father-in-law that gave me everything he had in the world, you know, but, and I didn't mind taking everything he had in the world as long as he would stick with me and wouldn't get panicked by headlines. and it's enormously important that you don't take people that have expectations of you

Starting point is 00:24:26 that you can't meet. And that means you turn down a lot of people. It means you'd probably start very small when you get an audited record. And when you've got the confidence where if your own parents came to you and they were going to give you all their money

Starting point is 00:24:40 and you were going to invest for them, if you've got the kind of confidence that you'll say, I may not get the best record, but I'll be sure that you get a decent record over time. That's when you're ready to come. go on it. Let me tell you a story that I tell young lawyers who frequently come to me and say, how can I quit practicing law and become a billionaire instead.

Starting point is 00:25:01 And so I say, well, it reminds me of a story they told about Mozart. The young man came to him and he said, I want to compose symphonies and I want to talk to you about that. And Mozart said, how old are you? And he said, 22. And Mozart said, you're too young to do symphonies. And the guys said, but you were writing symphonies when you were 10 years old. He says, yes, but I wasn't running around asking other people how to do it.

Starting point is 00:25:31 We wish you're well. And actually, we really do because the fact you ask that sort of a question isn't, to some extent, indicative of the fact that you've got the right attitude going in. It isn't that easy to be a great investor. I don't think we've got made it. So, Munger being a little harsh here, I don't think there's any issues with asking more experienced people for advice. But I think his point is more directed at there were quite a few questions at any books

Starting point is 00:26:04 at Hallaway shareholds meeting, which is more like, tell me when I should invest in, I don't want to put in the work to find the very best stocks. And it's just hard to find any successful money manager for good reasons who are giving away that information for free. but I really love Buffett's response here. As so many of our listeners, I consider a career money management at some part in time. And I think Buffett's response really explains to us why so few people are in successful.

Starting point is 00:26:33 You know, 99 plus percent of corporate jobs in the money management industry is really in an environment where you're not truly matching the expectations with the investors. And you really can't remove that noise and that pressure from yourself. and having that on you, it's just going to be very, very difficult to be successful. So Buffett has a quote that he says, I'm a much better investor because I'm a business owner, and I'm a much better business owner because I'm an investor. And so this gentleman's question about becoming an investment advisor or doing a partnership, kind of like what Buffett had done, managing other people's money.

Starting point is 00:27:13 I would argue that one of the things that made Buffett so strong at understanding how investing works and finding these companies is because whenever he was a kid, going back to the Mozart example, you know, 10 years old, when Buffett was, you know, really young in his teens, he was out there throwing more newspapers than any other kid, you know, in America. He was he was making tons of money as a kid. He was owning businesses. He had, pinball machines. He was doing all sorts of business ventures. And so he was wired for it from the very beginning. He had, he grew up with a business mind in the way he thinks about things. He didn't start off, you know, thinking that I'm going to be the nothing but stocks and manage other, give me other people's money so that I can invest that in this passive way of owning businesses. No, he had a business. He had his, you know, the pinball story is unbelievable. If you've never heard the pinball story, I'd look that up and dig into it some more. But Buffett was running his own little micro businesses.

Starting point is 00:28:22 He understood what it was to have a top line. He knew what it was to have net income or profit at the end of his expenses. And I think whenever you do that and you run a small business, you just approach your investments from a completely different lens than somebody who, you know, went off to. school and maybe never ran a business ever and they're trying to buy passive investments and they've never run anything operationally and Buffett had. So it's always interesting to hear Charlie tell that story, the Mozart story. He really likes telling that. I think I've heard him say that almost every single shareholder meeting that I've ever gone to. And I think it's an important story that he tells because there's a lot of truth to that. You have to be the person who's going

Starting point is 00:29:13 out there and trying to get after it and trying to build your own business. And you just can't, you've got to learn from other people, but at the same time, you've got to have some experience of your own. And I think that's really kind of the point. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a stock two or running an enterprise GRC program, VANTA keeps you secure and keeps your deals moving. Instead of chasing

Starting point is 00:29:55 spreadsheets and screenshots, VANTA gives you continuous automation across more than 35 security and privacy frameworks. Companies like Ramp and Ryder spend 82% less time on audits with Vantta. That's not just faster compliance, it's more time for growth. If I were running a startup or scaling a team today, this is exactly the type of platform I'd want in place. Get started at vanta.com slash billionaires. That's vanta.com slash billionaires. Ever wanted to explore the world of online trading but haven't dared try? The futures market is more active now than ever before, and plus 500 futures is the perfect place to start. Plus 500 gives you access to a wide range of instruments, the S&P 500, NASDAQ, Bitcoin, gas, and much more.

Starting point is 00:30:46 Explore equity indices, energy, metals, 4X, crypto, and beyond. With a simple and intuitive platform, you can trade from anywhere, right from your phone. Deposit with a minimum of $100 and experience the fast, accessible futures trading you've been waiting for. See a trading opportunity. You'll be able to trade it in just two clicks once your account is open. Not sure if you're ready, not a problem. Plus 500 gives you an unlimited risk-free demo account with charts and analytic tools for you to practice on.

Starting point is 00:31:19 With over 20 years of experience, Plus 500 is your gateway to the markets. Visit Plus500.com to learn more. Trading in futures involves risk of loss and is not suitable for everyone. Not all applicants will qualify. Plus 500, it's trading with a plus. Billion dollar investors don't typically park their cash in high-yields. savings accounts. Instead, they often use one of the premier passive income strategies for institutional investors, private credit. Now, the same passive income strategy is available to investors of

Starting point is 00:31:53 all sizes thanks to the Fundrise income fund, which has more than $600 million invested and a 7.97% distribution rate. With traditional savings yields falling, it's no wonder private credit has grown to be a trillion dollar asset class in the last few years. Visit fundrise.com slash WSB to invest in the Fundrise income fund in just minutes. The fund's total return in 2025 was 8%, and the average annual total return since inception is 7.8%. Past performance does not guarantee future results, current distribution rate as of 1231, 2025. Carefully consider the investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income fund's prospectus at 3,000,

Starting point is 00:32:41 fundrise.com slash income. This is a paid advertisement. All right, back to the show. All right. So I don't have anything else to add for this one. So we'll just go ahead and play the next question here. Question on technology and company's biggest holding now. Given that Apple is now our largest holding, tell us more about your thinking. What do you think about the regulatory challenges the company faces, for example? Spotify is filed a complaint against Apple in Europe on antitrust grounds, Elizabeth Warren has proposed ending Apple's control over the App Store, which would impact the company's strategy to increase its services businesses. Are these criticisms fair? I will tell you that all of the points you've made, I'm aware of, and I like

Starting point is 00:33:25 our Apple holdings very much. I mean, it is our largest holdings. And actually, what hurts in the case of Apple is that the stock has gone up. And we'd much rather have the stock. And I'm not proposing anything we'd rather have the stock at a lower price so we could buy more stock and importantly if apple and they authorized another 75 billion the other day but let's say they're going to spend a hundred billion dollars in buying in their stock in the next three years you know it's very simple if they buy it at 200 they're going to get 500 million shares they've got 4 billion 600 million out now and so they'll end up with 4.1 billion under that circumstance they're buying it at 150 they'd buy in 667 million shares and instead of owning what we would own the first case we'd now

Starting point is 00:34:17 the divisor would be less than 4 billion and we'd own a greater percentage of it so in effect a major portion of earnings at least possibly has been it's at least been authorized will be spent in terms of increasing our ownership without us paying out a dime which i love for a business wonderful business and the recent development when the stock has moved up substantially actually hurts berkshire over time we'll still lose my opinion will do fine but we're not going to get into uh we're not going to dissect our expectations about apple you know for people who may be buying it against us tomorrow or something we don't we don't give away investment advice on that for but we have all the things you've mentioned.

Starting point is 00:35:11 Obviously, we know about. We know some. We've got a whole bunch of other variables that we crank into it. And we like the fact that it's our largest holding, Charlie. Well, in my family, the people who have Apple phones, it's the last thing they'll give up. It's not a bad item to have. So very interesting response.

Starting point is 00:35:30 Apple is by far Berksie Holloway's largest equity holding. It's worth around $40 billion. and it's more than 20% of the total equity portfolio. Now, as you could tell, Buffett is not too happy about commenting on the operational challenges. And this is not really because it's Apple. He has that as a very general rule. The key really to understand his response is also to understand the bigger picture of Berksa's value and how Apple and his other top holdings play into this.

Starting point is 00:36:02 And it was sort of interesting to hear Buffett's take on share repurchase. not just because Apple just approved a $75 billion buy-back program, but because Tim Cook, as the CEO of Apple, had a conversation with Warren Buffett about just that. He actually said to, to Big Quake from CNBC not too long ago, that he had a list of the smartest people to guide him in various fields. And on top of that list, whenever it came to stock buyback, that was Warren Buffett. And so he got his number and gave Buffett a call.

Starting point is 00:36:36 and he was like, I don't know if he's going to pick up, but he did, and he said he was very grateful for Buffett's advice. Now, that being said, I think it's important to understand how to read Buffett's portfolio. Stucks are reported on a mark to market basis, so the price that is reported on the final day of that quarter, that is directly reflected into the stated earnings of that company. That's simply just the accounting rules. So, for instance, for the first quarter here in 2019, the stock market has soared and Buffett has reported $21.7 billion in profit compared to a loss of $1.1 billion last year. Those numbers are more or less irrelevant because a lot of that comes from Buffett's top portfolio that performed really, really well. The number you should rather be looking for is the

Starting point is 00:37:27 operating earnings, which is the earnings from all the businesses that Berksia Heatherway owns and which is worth more than Berksia's entire equity portfolio. That number shows that the operating earnings is $5.5 billion and it has a modest 5% growth year over year. If you want to focus on his stock portfolio, my suggestion is really to focus on the top 10 of his holdings since the value of those are more than 80% of his total portfolio. But one of the key takeaways is really that accounting for operating businesses, that is somewhat stable whenever it comes from equities is just all over the place. Apple has soared 30% this year

Starting point is 00:38:06 that will move the reported earnings in the short term but not change the overall intrinsic value of Buxa Helloway. So for this one, Stig, I don't really have too much to add based on what you had said. The only thing that I would say is whenever I'm looking at Apple today at the, just trying to do my own intrinsic value on what I think that this thing's worth because he's talking about Apple plowing a lot of their free cash flow,

Starting point is 00:38:33 a lot of their liquidity back into the business through share repurchases. I look at the current price being way better opportunity than the rest of the S&P 500. As far as the yield, I think you're getting a much higher yield by repurchasing Apple stock than you are investing that in the S&P 500 as an index, probably about twice to three times the return as the S&P 500. So that's, you know, those are great things. You can see why Buffett is really happy about that. it doesn't involve him using his own liquidity in order to do it. So he can protect that optionality of his cash, yet Apple is just reinvesting in itself. So that's going to be good for him. And you can see why he's probably pretty happy about that idea. All right, so let's go ahead

Starting point is 00:39:20 and move out of this segment where we're covering the Berkshire meeting and we'll go into a question from the audience. I hope you won't be too disappointed in the responses from Preston and me now that you'll listen to Buffett and Munger. But this question comes from Paul. Hi, President Stig. This is Paul from London. I've been looking at a company for a while now, and from what I can tell, the fundamentals are quite good. However, in the last year, I noticed this company taking on a tremendous amount of debt, with a large portion of the debt used to fuel stock buyback, and I'm not quite sure how to interpret this. Can you please share your thoughts behind leverage buybacks, whether this might be a red flag or perhaps something else? Love your show,

Starting point is 00:39:58 keep up for good work. I think this is a great question, Paul, and especially at a time where buybacks are at an all-time high. I think there are a situation where leverage buybacks can make sense. However, there are so few cases that my general rule is that unless you're really certain that the management are very, very good capital allocators, it's a red flag. Today, with a high valuation, you might already question why you want to buy back stock in the first place for so many companies. And if that's even fueled by debt, I would be even more concerned. It's really hard for me to come up with the rule for how often leverage buyback is a wise decision, but it's definitely single digits. One example I'd like to highlight for leverage buyback is Bethbath beyond.

Starting point is 00:40:45 You know, in fiscal year 2015, they took on a $1.5 billion in debt, and they more or less used all that for buybacks. They actually repurchase for $2.2 billion. So, including the income, that they generated, more or less everything would just put into buying back stock. And they bought back shares primarily in the 60s range and even in the 70s, at a time where the company were competing fiercely with Amazon and was squeezed and needed to reinvest in their own business. So what has happened since? The business is now seeing severely declining profits. It was training at $10 not too long ago. So really to sum up, Paul, unless you can make a conservative valuation of the company, and you find it severely undervalued, and you know that the management

Starting point is 00:41:30 has a good track record for being good capital allocators, I would likely stay away from the company. It might be the first sign of a less competitive management that is too short-term focused. So I have to agree with Stig here. I don't think that it's a good sign whenever you see a company acting in that way. I think it might be also, you're seeing so many buybacks right now, I think with interest rates as low as they are, you're seeing companies that feel like maybe they can pull this off without too much of a concern where they're basically borrowing money, then they're paying a dividend and they're just acting strange like this. I just don't think that it's good fundamentals. And I think that it's something that should definitely raise some red flags. I would love to know the ticker so I could give you better advice than just generic advice.

Starting point is 00:42:19 But I definitely think it's something that should be on your radar and something that you should. pay very close attention to. The only caveat that I would add to that is it obviously comes down to how much the company is borrowing relative to their ability to operationally and quickly pay that off and how much other debt the business has. So if they don't have a lot of debt in other areas and they're doing this and they can easily say their debt to equity ratio is really low or they have a very reasonable current ratio. Those kind of things would give you an idea of how much is too much. And you just got to take it all.

Starting point is 00:42:59 This is why we say you can't use just one metric or one ratio in order to determine whether something's good or bad. You have to kind of look at all the interdependencies of these variables. But I would look at some of those kind of things to help you determine whether it's a little too much. All right, Paul, so as a token of our appreciation, we're going to give you access to one of our free courses on the TIP Academy page on our website. The course that we're going to give you is our intrinsic value course. And our intrinsic value course teaches people how to determine the value of

Starting point is 00:43:31 an individual stock. It also teaches you how to think about the market cycle and when you're buying your stock. And it also teaches you some stuff about options trading. So we're really excited to give you this course. If anybody else out there wants to check out the course, you can go to TIP intrinsic value.com, or you can just go to our website and click on Academy, link at the top of the page, and course is right there. So if anyone else wants to leave a question on the show, go to Ask the Investors.com, and if your question gets played on the show, you'll get a free course. All right, guys, that was all the press I had for this week's episode of the Investors podcast. We really look forward to playing the second episode about this year's

Starting point is 00:44:07 Berksa Halloway's annual shareholders 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 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. Thank you.

We Study Billionaires - The Investor’s Podcast Network - TIP245: Part1 - Berkshire Hathaway Shareholders Meeting Q&A - Warren Buffett & Charlie Munger (Business Podcast)

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.