We Study Billionaires - The Investor’s Podcast Network - TIP246: Part 2 - Berkshire Hathaway Shareholders Meeting Q&A - Warren Buffett & Charlie Munger (Business Podcast)

Starting point is 00:00:00 You're listening to TIP. On today's show, we pick up on the second half of our questions and answers that Warren Buffett and Charlie Munger provided from the 2019 Berkshire Hathaway Shareholders Meeting. They answer some really interesting topics like why Berkshire continues to sit on so much cash versus investing in the S&P 500 Index, the impact of AI and automation, amongst many other exciting topics. So without further delay, here's our second part coverage of the Berkshire Hathaway Shareholders meeting. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most.

Starting point is 00:00:41 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 we're just going to jump right into this, and we're going to play the first question for you guys. My name is Faroze Cayume, and I'm from Mississauga in Canada. and now live in New York. My question is how to best emulate your success in building your circle of competence.

Starting point is 00:01:16 Given the environment today in investing is a lot more competitive than when you started out, what would you do differently, if anything at all, when building your circle? Would you still build a very broad, generalist framework? Or would you build a much deeper but narrower or focus, say, on industries, markets, or even a country? And if so, which ones would interest you?

Starting point is 00:01:37 Thank you. Yeah, well, you're right. It's much more competitive now. When I started, I literally could take the Moody's Industrial Manual, and I could go through page by page, and at least run my eyes over every company and think about which ones I might think more about. I would just do a lot, a whole lot of reading.

Starting point is 00:01:57 I'd try and learn as much as I could about as many businesses, and I would try to figure out which ones I really had some important knowledge and understanding that was overwhelmingly most of my competitors, I would also try and figure out which ones I didn't understand, and I would focus on having as big a circle as I could have, and also focus on being as realistic as I could about where the perimeters of my circle of competence were. I knew when I met Lorimer Davidson in January of 1951, I could get insurance. I mean, what he said made so much sense to me in the three or four hours I spent with him on that Saturday.

Starting point is 00:02:39 So I dug into it. I could understand it. My mind worked well in that respect. I didn't think I could understand retailing. All I'd done was work for the same grocery store that Charlie had, and neither one of us learned that much about retailing, except it was harder work than we liked. And you've got to do the same thing, and you've got way more competition now. If you get to know even about a relatively small area, more than other people do, and you don't feel the compulsion to act too often, you just, you wait till the odds are strongly in your favor. It's still a very interesting game.

Starting point is 00:03:14 It's harder than it used to be. Charlie? Well, I think the right strategy for the great mass of humanity is to specialize. Nobody wants to go to a doctor that's half proctologist and half dentist. You know, and so the ordinary way to succeed is to narrowly specialize. Warren and I really didn't do that. And we didn't because we prefer the other type of activity. But I don't think we can recommend it to other people.

Starting point is 00:03:45 You know, it's responses like the one that Charlie Munger just had that just make you just smile and just love that guy. I mean, I don't know how you can get funnier than him. I would just tell you that I think that the most important thing that they said in their response, and I don't know that they really knew how to answer the question to be honest with you. But I think that the most important thing that they said was you just have to be a knowledge pig. You have to be trying to improve yourself at any and all times. And if there's an area you don't know well, you've got to do things to try to learn it better. That doesn't mean that you become the resident expert in it, but you've got to get better. at the things that you're just weak at.

Starting point is 00:04:27 And then the things that you have a natural God-given talent for, maybe you dig into it more to become just that much better than everybody else. I think that that's all they're saying here. But truly, my big takeaway is you've got to learn, learn, learn. These guys always had a book in their hand. They were always doing something to improve themselves. And for people that aren't intimately familiar with Charlie Munger and Warren Buffett, I'd tell you, they study all the time.

Starting point is 00:04:53 They're constantly trying to improve them. You know, I have a lot of sympathy for the guy asking the question. It makes a lot of sense to ask because the investing universe is so big. Where should you start? And where should you invest? Why not ask Buffett of all people if you got the chance? Now, what Buffett really talks about is going one step further back. But it's really the very core of Berksa-Halloway's structure. And this is whether we talk about this specific meeting or, say, managing multiple subsidiaries. Or on Buffett and Berksa-Hen Halloway is all about empowering people. He does not tell the CEO his subsidiaries what to do, nor is he telling that new investors should focus their call commentances on, say, India or

Starting point is 00:05:36 only to buy fake securities. It does not start there for you as an investor. It really starts with what you have a natural flair for and where you have an interest, and often they go hand-on-hand. And based on that, you can gain a competitive advantage to your competitors by being more knowledgeable. And if you don't know where to start, I really love his thoughts about start reading a ton of business and investing books and then see what you naturally gravitate towards. Because that's probably where you're going to have an edge. You know, it's like asking about Jordan how to be a successful basketball player. If you don't have a natural flair, talent, and interest, you'll probably not be successful anyway. All right. So moving along to the next question.

Starting point is 00:06:23 Larry Fink of Black Rock has predicted that in the near future, all investors will be using ESG, environmental, social governance metrics to help determine the value of a company. I'm worried we don't score well on everything from climate to diversity to inclusion. How well do you think Berkshire measures up on those metrics and are they valuable metrics? I think in reality we measure up wealth. We don't want to be preparing a lot of reports and asking 60 subsidiaries. each to do something where they'll set up a team and then mail things to headquarters and then we'll supply them to somebody who if our stock goes up some is probably going to sell

Starting point is 00:07:03 it anyway. We want our managers to do the right things. We give them enormous latitude to do that and I think that our batting average really is quite good. I mentioned this in the annual report. I can't imagine another company like it, but here we are with $500 billion of market capitalization. and we do not have a consolidated P&L monthly. We don't need it. I can't imagine any other organization doing that, but we don't need it. And we're not going to tie up resources, people resources,

Starting point is 00:07:34 doing things we don't need to do just because it's the sort of standard procedure in corporate America. And corporate America is very worried about, in general, they're very worried about whether somebody's going to upset their apple cart and with activists and everything. So they want to be very sure that every shareholder is happy on issues like that.

Starting point is 00:07:56 And unfortunately, we don't have to worry about that, so we don't have to run up a lot of expenses, doing things that don't actually let us run the business better. Well, I think in Berkshire, the environmental stuff, has done one level down from us. And I think Greg Abo is just terrific at it. And so I think we score very well. And it gets the so-called best corporate practices, I think the people talk about them don't really know what the best practices are.

Starting point is 00:08:25 They just know what they think are the best practices. And they determine that based on the whole cell, not the whole work. And so I like our way of doing things better than theirs, and I hope to God we never follow their best practices. I'd like to point out one thing on independent directors. I mean, I've been on 20 public company corporate boards, not counting any. Berkshire or its subsidiary. So I've seen a lot of corporate boards operate. And the independent directors in many cases are the least independent. I mean, if the income you receive as a corporate director, which typically may be around 250,000 a year now, if that's an important part of your

Starting point is 00:09:12 income, and you hope that some other corporation calls the CEO and says, how's so-and-so as a director, your CEO says, oh, he's fine, and never raises any problems. And then you get on another board at 250,000, and that's an important part. How in the world is that independent? I mean, I really, just on observation, I can't recall particularly any independent director where their income was from the board was important to them. I can't recall them ever doing anything in board meetings or committee meetings that actually was counter to the interests.

Starting point is 00:09:55 I'd probably behave the same way in the same position. 250,000 here is important to you? Why in the hell would you behave in a way that's going to cause your CEO to say to the next CEO say, this guy acts up a little bit too much you know, you'd really better get somebody else.

Starting point is 00:10:12 You don't get invited to be on boards if you belched too often at the dinner table. Well, the blue chip stamps, we had a director who said, I don't see why you guys would be so important just because you own all the shares. Charlie and I used to have to cool off after the blue chip stamps meetings.

Starting point is 00:10:28 We and Rick Garron owned what percent probably called? 50 percent. Yeah, 50 percent. And they'd appointed all the – it came out of a government settlement or something. And it was not an ideal form of decision-making. And they just had a different calculus in their mind that we did. I can understand it, but I'm not going to replicate it. I absolutely love this discussion.

Starting point is 00:10:52 We wanted to play this to show you how different Warren Buffett and Charlie Munger think about everything in business. And I'm not the one to tell you what they do is right or wrong, but I do want to say that every successful company starts with integrity in abundance. And that integrity, whether you agree with the decisions or not, is the very foundation of why Berksa Hellerwey, today is a 500 billion market cap company, starting for more or less nothing in the 60s whenever Buffett took over. Let's take a quick break and hear from today's sponsors.

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Starting point is 00:15:22 Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right. Back to the show. So, Stig, you talked a little bit about this one after the first question about pushing authority and pushing responsibility down. to the next level. And you heard a little bit about that in the second part of the way they were answering

Starting point is 00:15:48 this question. And it really kind of came whenever Charlie Munger was talking when he said, you know, we take care of all that at the second level, not at the top level. And I think what he's saying is we charge our, we put so much responsibility in our managers and our operational subsidiary CEOs beneath us that we charge them with that responsibility in order to handle it. And if they're not doing their job, well, then we will replace that person and we'll get rid of them if we don't think that they're taking care of things that they need to be taken care of. For people that aren't real familiar with Berkshire Hathaway, they'll be

Starting point is 00:16:22 blown away that a company with a 500 billion market cap would only have a handful of people at the headquarters level. And that's truly, I mean, you can literally fit in one picture. You'll see this in the shareholders' annual report that comes out once a year. They have a picture of their entire staff in Omaha, and it's literally like 40 people. And that might be more than what it actually is. It might be in the 30s. I can't remember what the number is, but it's 30 to 40 people that are there in the picture. And it's kind of amazing to think that you'd have a company that's worth a half a trillion dollars. And those are all the more people that are at the top of the business. Everything else is pushed down to the next level for them to manage. And that's their model. That's how

Starting point is 00:17:07 they operate. So just some really fascinating points there. For people that aren't real familiar with the last part where they're talking about board members, people sitting on the board that are representing the shareholders' interests. And what he's talking about is if a person's sitting on a board and they're collecting most board members, if it's a large company, are collecting around a quarter of a million dollars a year. And they attend four meetings a year and have a little bit more responsibilities throughout the year, but not a lot. And so what he's saying is if that's a person's primary salary, like they're bringing in a quarter of a million dollars a year because they sit on one board and that's basically it. That person

Starting point is 00:17:46 cannot act on behalf of the shareholders. That person's going to act on behalf of the shareholders that are going to keep them on that board so that they can just, they're basically buying their vote. They're controlling that person's vote because they're reliant on that income of a quarter a million dollars to continue to sit on that board. And so that's where Buffett and Munger both are frustrated with that model. They obviously don't have that model on the Berkshire board, but they see this in other companies and they don't want that to be replicated in their own board structure. So that's what some of that conversation was if you weren't following at all. All right. So let's go ahead to the next question. Warren, you are a big advocate of index investing and of not

Starting point is 00:18:31 trying to time the market. But by you're having Berkshire hold such a large amount of cash and T-bills, it seems to me you don't practice what you preach. I'm thinking that a good alternative would be for you to invest most of Berkshire's excess cash in a well-diversified index fund until you find an attractive acquisition or buyback stock. Had you done that over the past 15 years all the time keeping the $20 billion cash cushion you want. I estimate that at the end of 2018, the company's 112 billion balance in cash, cash equivalence, and short-term investments and T-bills would have instead been worth about $155 billion. The difference between the two figures is an opportunity cost equal to more than 12% of Berkser's current book value. That's a perfectly decent

Starting point is 00:19:27 question and I wouldn't quarrel with the numbers. And I would say that that is an alternative, for example, that my successor may wish to employ, because on balance I would rather own an index fund than carry treasury bills. If we'd instituted that policy in 2007 or eight, we might have been in a different position in terms of our ability to move late in 2008 or 2009. It has certain execution problems with hundreds of billions of dollars than it does if you were having a similar policy with a billion or two billion or something of the sort. It's perfectly rational observation and certainly looking back on 10 years of a bull market, it really jumps out at you. But I would argue that if you're working smaller numbers, it would make a lot of sense. And if they're working with large numbers, it might well make sense at the future.

Starting point is 00:20:23 You know, we committed 10 billion a week ago, and there are conditions, and they're not remote, they're not likely in any given week or month or year, but there are conditions under which we could spend $100 billion very, very quickly. If we did, if those conditions existed, the capital very well deployed and much better than in an index fund. And so we've been, we're operating on the basis that we will get chance to, to deploy capital, they will come in clumps in all likelihood, and they will come when other people don't want to allocate capital. Charlie, what do you think about it?

Starting point is 00:21:03 Well, I played guilty to being a little more conservative with the cash than other people, but I think that's all right. We could have put all the money into a lot of securities that would have done better than the S&P, with 2020 hindsight. Remember, we had all that extra cash all that, period, if somebody was. come along in the way of opportunities and so on. I don't think it's a sin to be a little strong on cash when you're as big a company as we are. I watched Harvard use the last ounce of their cash,

Starting point is 00:21:34 including all their prepaid tuition from the parents, and plunge it into the market at exactly the wrong moment and make a lot of forward commitments to private equity. And they suffered like two or three years of absolutely agony. We're not going to change. We do like having a lot of money to be able to operate very fast and very big. And we know we won't get those opportunities frequently.

Starting point is 00:22:01 You know, in the next 20 or 30 years, there'll be two or three times when it'll be raining gold and all you have to is go outside. But we don't know when they will happen. And we have a lot of money to commit. And I would say that if you told me I had to either carry short-term treasury bills or have indexed funds and just let that money be invested in American generally,

Starting point is 00:22:26 I would take the index funds, but we still have hopes. And the one thing you should very definitely understand about Berkshire is that we run the business in a way that we think is consistent with serving shareholders who have virtually all of their net worth in Berkshire. I happen to be in that position myself, but I would do it that way under any circumstances. We have a lot of people who trust us, who really have disproportionate amounts of Berkshire competition. compared to their net worth if you were to follow standard investment procedures. And we want to make money for everybody, but we want to make very, very sure that we don't lose permanently money for anybody that buys our stock somewhere around intrinsic business value to begin with.

Starting point is 00:23:12 We have an aversion to having a million plus shareholders, maybe as many as two million, and having a lot of them ever really lose money if they're willing to stay with us for a while. and we know how people behave when the world generally is upset, and we have a real disposition toward that group. This was one of my favorite questions asked during the meeting, if not the very best question. Buffett's idea of having plenty of cash, aside from the around $20 billion cushion he would need for his insurance business

Starting point is 00:23:47 and if everything goes south, aside from that is really to be able to pull the, trigger if a big buying opportunity comes along. And as any good capital allocator, he wants to deploy the money where it's best put to use. And where is that, which was really what the question was all about. Now, the $10 billion deal he briefly mentioned that would just settle right before the meeting, that was a $10 billion for Occidental Petroleum, where Berksie Halloway could collect an 8% dividend on preferred shares and the right to buy 80 million shares at a pre-negotiated price of $62.5. Now, this is a great deal if you're a shareholder, and these deals do not come along as often

Starting point is 00:24:30 as we would like. And even though the last 15 years, which was what the question was all about, has generally been a bull market. I think it's worth a discussion if the opportunity cost is so high from having cash that it might even outweigh the potential benefit of foregoing a few big deals. Especially keep you in mind that the $10 billion could easily be freed up from an index fund if needed somewhat fast and deployed into the deal. And really, I don't like Munger's response about how Berkshire Hallaway could make more in hindsight. I kind of feel like he's dutching the question too much, because this is more a question about a conceptual change in how to allocate cash. And before too long, they might not be struggling with deploying $100 billion

Starting point is 00:25:18 dollars in cash. Given the share size of Berkshire Hathaway, it might soon be $200 billion in cash whenever it's a trillion dollar company. And what then? Having a significant part of that cash parked in an index fund, I think would likely be a good idea. And I was happy to hear that Buffett opened up for that possibility for his successor. You know, Stig, I'm with you on this. I like this question hands down the best out of all the questions from the meeting. I think it's the most pertinent question because it's the most realistic for me. You keep hearing him go on CNBC and all these different talk shows and he's saying, yeah, you should be indexing. It's probably the best thing to do for the typical investor out there. And yet he's sitting on $100 billion

Starting point is 00:26:01 of cash. And it's really hard to see what he's doing on his balance sheet and then hear what he's saying and it just does not match up. And I think that him retaining a lot of cash to do big deals is one thing. So if he wants to sit on 60 billion or 50 billion in excess of the 20 billion buffer, I think that makes sense. I'm just kind of surprised that he's not even allocating a small portion of the 100 billion plus to maybe the S&P 500 or the Russell 2000 or whatever. I'm just a little surprised that he's not allocating some. Call it $10 billion, 10% of the cash position or whatever. And you rarely see him interrupt the person as they're asking the question. In fact, I don't know that I've ever heard him kind of jump in mid-question

Starting point is 00:26:51 and start responding to it. And that's kind of what you heard him do here with Carol Loomis's question. He didn't even want her to go any further. He just started saying, hey, that's a fair question. It was kind of, it was an interesting way in which he responded, and it was not typical of him to respond like that. So I think that that also demonstrates that it was a very fair question. I think that he answered it reasonably. I think he owned up. He said, hey, maybe you're right. Maybe I, maybe we should have been doing that. And that's why I like Buffett. And I think that's why most people like Buffett is because he's just so open. And he's open to the opportunity that, hey, maybe I am wrong. Maybe I could have done it a little bit better. And I think that's such a

Starting point is 00:27:30 great characteristic for people to see and observe. But anyway, let's go ahead and jump to the next question. Hi, Warren. Hi, Charlie. My name is Carrie. And this is my daughter Chloe. She's 11 a weeks. It's a very first Berkshire meeting. We're from San Francisco, and we have a question on employment for you. As both a major employer and a producer of consumer goods, what do you make of the uncertain outlook for good, full-time jobs with the rise of automation and temporary employment? If we'd asked that question 200 years ago, and somebody said, with the outlook for development of farm machinery and tractors and combines and so on, meaning that 90% of the people on farms were going to lose their job, it would look terrible,

Starting point is 00:28:24 but our economy and our people, our system, has been remarkably ingenious in achieving whatever we have now, 160 million jobs when throughout the period ever since 1776 we've been figuring out ways to get rid of jobs. That's what capitalism does and it produces more and more goods per person. And we never know exactly where they're going to come from. I don't know what occupation. Well, if you were in the passenger train business, I mean, you know, you were going to that was going to change.

Starting point is 00:28:59 We find ways in this economy to employ more and more people. and we've got now more people employed than ever in the history of the country, even though company after country and company, and particularly in heavy industry, that sort of thing, has been trying to figure out naturally how to get more productive all the time,

Starting point is 00:29:18 which means turning out the same number of goods with fewer people or turning out more goods with the same number. That is capitalism. I don't think you need a worry about American ingenuity running out. When we started with 4 million people, with 80% of the labor being employed on farms.

Starting point is 00:29:38 So this system works and it will continue to work. I don't know what the next big thing will be. I do know there will be a next big thing, Charlie. Well, we want to shift the scut work to the robots to the extent we can. That's what we've been doing, as Warren said, for 200 years. Nobody wants to go back to being a blacksmith or scooping along the street, picking up the horsemen,

Starting point is 00:30:02 or whatever to help people used to do. we're glad to have that work eliminated. And a lot of this worry about the future comes from leftists who worry terribly that the people at the bottom of the economic pyramid have had a little stretch when the people at the top got ahead faster. That happened by accident because we were in so much trouble that we had to flood the world with money and drive interest rates down to zero. And, of course, that drove asset prices up and helped the rich.

Starting point is 00:30:32 Nobody did that because they suddenly loved the rich. It was just an accident and it will soon pass. I do think that no matter what we're discussing, it's too easy to say this is what history shows. There is something that does work and therefore it will continue to do so. But the important thing is to understand why something has happened and not just observe that something has happened. It is likely what Buffett and Munger do think, though,

Starting point is 00:31:01 But another part of it might also be that there are major employers and it would be hard to say otherwise. But if we do look at job creation, we can generally divide it into two groups. We have physical and we have cognitive jobs. So for the physical jobs, that was what we traditional have seen in agriculture. And as Buffett also mentions, we were replaced by machines because they have better physical capabilities that we as humans have. And then we started to work in factories. Now, factory jobs can be automated because machines can do it better and faster than us. But what happens when AI machine learning takes over cognitive jobs?

Starting point is 00:31:40 For instance, the job of a doctor. For many diseases today already, machines can diagnose much better than doctors. And for many fields in law, we already see that machines can do repetitive tasks much better than educated lawyers. So it's not a natural law that we will create more jobs than humans. there will definitely be new jobs, but not necessarily more than job destruction. That is left to be saying. Rather, I would say that just as it's a natural law that machines would replace us for

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Starting point is 00:35:28 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 fundrise.com slash income. This is a paid advertisement. All right, back to the show. For the most part, this is an interesting discussion. And I think it's a discussion that you hear a lot amongst investors and people trying to understand the impacts of artificial intelligence and all the innovation that's happening in the tech industry. And I hear this argument that Munger and Buffett are talking about, hey, when you look back at the last 200 years, you would have been able to probably kind of hear this same argument at any point in time because technology is always revolutionizing the labor

Starting point is 00:36:15 force and how people are going to be employed in the coming years. I also want to say that I'm also familiar with a thing called normalcy bias, which is people having the opinion that because something's never happened or a situation's never happened to them before, that that that reason alone is why it won't happen to them in the future. And I think that it's just important to kind of have a balance between having an appreciation to not fall victim to normalcy bias, but also take at face value. What they're saying is this is something that happens. People technology will uproot jobs in the labor force. And typically what's happened is people find new ways to get employed and the market

Starting point is 00:36:56 is continually evolving and changing. Like them, I have no idea what implications this is going to have. But I do know that it's going to be quite fascinating. And there's going to be like anything, huge opportunities, especially for investors, in this area if you stay current, try to read as much as you can, try to understand what it is, and understand where the market's going. And there's opportunities there too. So you just can't look at the doom and gloom and the negative side of it. There's absolutely a positive side of every negative piece that's out there.

Starting point is 00:37:28 And I would just challenge people to try to find how you can take advantage of something like that. All right. So at this point in time they show, we'll play a question from the audience. and this question comes from Kyle. Hi, Preston Stig. My name is Kyle and I'm from Philadelphia. First off, I want to thank you guys both for the incredible information you guys put out on the podcast. This definitely helped me become a much better investor. So my question is, some companies forego profits in the short term in order to expand and grow,

Starting point is 00:37:55 creating an accounting loss for several years. Think Amazon. Would you guys consider buying a company using this business strategy? And if so, what would you look for to go about valuing it, given they have no current earnings. Thank you guys. Great question, Kyle, and very timely, now that we're doing an episode about value investing and Berksa Helloway, we actually have covered your question a few times before here on the show about how to value a company with no earnings. Or should I say, we talked about it, but not really explained how to do it, primarily

Starting point is 00:38:28 because we don't know. As a value investors, we discount the future expected cash flows, and if we don't have any, or if you can't make meaningful predictions, we really can't use our normal valuation approach. Now, the reason why I still wanted to play your question is because we, as investors, should not only ask what is the approach or the equation to how to value a profitable business versus how to value an unprofitable business. These are questions that Buffett has been asked multiple times before, so I actually took the liberty to tweak your question just a little into something I think would be more interesting, perhaps a bit more relevant for all of us. Rather, I would like to discuss something I hardly see covered, namely what is in between.

Starting point is 00:39:15 So please allow me to elaborate. So everyone basically knows how much profit any public company is producing. You know, it's all in a financial statement. Successful investors are better at predicting how much money the company will make in the future. After all, it's the future in cash flows you've been titled to as an investor. Now, as a value investor, you're looking for a company that already has a proven track record of being very good of making money and can be expected to make more money. Manga talked about this during the annual shareholders' meeting.

Starting point is 00:39:47 He was not unhappy about not spotting Amazon because that was not within historical competence. And as you mentioned, Kyle, it has not until recently made money. Rather, Munger is kicking himself for not investing in Google. So let's take Google as an example. You might for good reason to say that so much have been said about Google and it's hard to find any future cash flows that the market has not accounted for. But I think Google serves as a great example, not just because Munker mentioned it, but really as an understanding of the current cash flows and projecting future cash flows.

Starting point is 00:40:21 As you might know, the vast majority of Google's revenue that come from digital advertising, actually as much as 85%. And this is primarily through AdWords and AdSense. The industry grew as much as 21% last year with Facebook and Google capturing the lying share. And also you have Amazon coming into this market now, speaking of which. Now, conventional valuation metric would allow for you to determine how much you think the industry will grow and how much of that growth Google will capture and you can fairly easy come up with intrinsic value. That is definitely a vital part of the equation. And then you had to figure out if you think that Google currently trading and a little more than

Starting point is 00:41:00 21 times enterprise value to earnings before interest in tax is high for a company with those growth prospects. It's really up to you. But where it really starts to become interesting, Kyle, is what you refer to with Amazon, the short-term pain for the long-term profitability. For Google, you should pay attention to the division they refer to as other bats. At first glance, it's nothing to be impressed about. You know, in the fourth quarter in 2018, for example, These other bets lost $1.3 billion, and this was in revenue on only $154 million. But still, there's a good reason why he should pay attention, because in other bets, you have Google's long-term investment. You have multiple companies, including Caligo, very interesting company that is combating aging associated diseases.

Starting point is 00:41:49 You have deep mind, the British AI company founded by Dimmis Hasebis, which is perhaps the most famous AI company in the world, and has shown very promising results so far. And perhaps even more famous, you have Waymo, Google's self-driving car project, and by most experts said to be the most developed self-driving project on the planet. So, instead of thinking in terms of how do I value unprofitable companies and how to value profitable companies, respectively, I would rather refer to what famous value investor, Sanchibak, say,

Starting point is 00:42:24 called Emerging Mode. And that was something he talked about whenever we had him here on the show. So what he would do is he would focus on companies, and it could be company like Google. So really good companies. And if you think the trade and a good valuation to ensure that you have a decent margin of safety, then you should really scrutinize the existing business model and also the projects that the company has in that pipeline when making your valuation. And by doing so, you also ensure that you have a sizable upside.

Starting point is 00:42:54 So, Kyle, fantastic question. I'll also make sure to link to the pitch that we have here on the mastermind group in Q2, 2018, where we specifically talked about Google if you're more interested in that company, but also to our interview with Sanjibakshi. The concept of emerging mode, that's definitely something that is often overlooked, even in the value investing community. So, Kyle, I don't have too much more to add other than what Stig said there. My only addition would be, personally, I look a lot at the top line, especially, now because I think you're seeing extremely large companies, call it Google, call it Amazon, that when you go back to the early days, the Benjamin Graham time frame, and he's talking about growth companies versus value companies, back then you didn't have companies that were the largest market cap businesses on the planet in a growth phase of their life cycle. At that size, they weren't growing at the speed that we see today. And so my argument for, let me just use a company that's out there right now,

Starting point is 00:43:59 Tencent, huge company, massive, multi-billion dollar size company. And yet you look at their top line and the rate at which that company is growing and it's growing like crazy. And that's not something that you saw 50, 60 years ago is a growth rate on a company of such that size. So what I would tell you, for me personally, I am very scared of investing in a growth company that's very small that I don't really understand at an intimate level. So publicly traded business that's out there, that's a small cap. I don't know it like I know my own business or something that you might own operationally. So that's why I say I'm a little scared of owning something like that because the top line revenues or sales could. be dependent on one critical thing that then just poof, it's gone in the next quarter, and then there goes your investment, there goes the share price, because it's so heavily

Starting point is 00:45:00 reliant on that top line. But when you're dealing with a large cap company, I would argue the disappearance of that revenue or that top line is so much more difficult for it to disappear because you're dealing with so many assets on that balance sheet that are driving that top line. So I guess what I'm trying to say is I'm more comfortable if it's a large cap company. I'm personally looking at the revenue growth and I'm looking at the rate of that revenue growth and I'm tracking the change in that rate. For me, as I'm looking at potentially investing in a quote unquote growth-like company. So that's the only thing I want to add to what Stig said.

Starting point is 00:45:41 And I think some of his points are just right on top. target, super important for people to understand, but this would be the only thing that I would add in addition to that. So, Kyle, as a token of our appreciation, we want to give you access to our brand new tool that we have on our website called TIP Finance. We're going to give you an entire year subscription free to this new tool. And what this tool does is it allows you to filter value picks for the entire U.S. stock market to find the Warren Buffett style picks in a very quick and efficient way.

Starting point is 00:46:10 Not only does it help you find great value picks, but it also helps. You helps you find great momentum picks at the same time. This way you don't fall into the trap of catching a falling knife or a value trap. It helps you find those companies that are great value but also have good momentum characteristics. So we really hope you enjoy this tool. And for anybody else out there, if you want to check out this tool on our website, just go to the investors podcast.com. And in our top level navigation, just click on the finance tab.

Starting point is 00:46:37 And it'll take you to this tool. All right, guys. That was all that Preston and I had for this week's episode of the Investors Podcast. We see each other again 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.

Starting point is 00:47:02 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.

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