We Study Billionaires - The Investor’s Podcast Network - TIP289: Intrinsic Value Assessment of Berkshire Hathaway by Jake Taylor (Business Podcast)

Starting point is 00:00:00 You're listening to TIP. On today's show, we have Jake Taylor from Farnham Street Investments to talk to us about the intrinsic value for Berkshire Hathaway. Although this conversation was recorded prior to the aggressive market sell-off, today at the end of March, Berkshire Hathaway currently has one of the top 20 enterprise values relative to its earnings power for the entire U.S. equity market. During the show, Jake talks about Buffett's recently released shareholder letters, and he also gets into all the reasons why Berkshire is.

Starting point is 00:00:30 currently trading at an attractive price relative to all their stocks on the market. So without further delay, here's our conversation with Jake Taylor. 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 guys, welcome to The Investors podcast. I'm your host, Dick Bruterson, and as always, I'm accompanied by my co-host, Preston Pish. We are here today with Jake Taylor, CEO of Philem Street Investments.

Starting point is 00:01:14 Jake, thank you so much for joining us here today. Thanks for having me on the show, guys. So, Jake, on today's show, you'll be pitching Berkshire Hathaway, and you'll provide your estimation of the intrinsic value of the company. But before your pitch, let's hear more about your investment framework. Could you please elaborate on your stock selection process and how it has or hasn't been influenced by Warren Buffett and Challemonger? My investment process is kind of difficult to explain because it tends to be just looking for things that make sense to me. And there's no real Morningstar style box that you can check

Starting point is 00:01:51 that says buying things that make sense to me. So I end up being very opportunistic and going into a lot of different places, whether it's just buying outright cheap assets when they're available like a net net, all the way up to paying up a little bit more for a good company that has good cap allocation and a long runway to redeploy capital at potentially high returns. So obviously Buffett early on was a very quantitative based investor and bought only very cheap things. And for most of my career,

Starting point is 00:02:23 I've been more that way. And it's only until recently that I've felt a little bit more comfortable paying up for a good culture. And where my thinking has evolved in that is one, I think you have to have read a lot and been in the game for quite a while to have the trust in yourself that you can recognize those kind of opportunities. The other problem is that it's very difficult to get to that point in this particular market for me because it seems like that's kind of what everyone is realizing recently. Compounders have become very popular and for good reason. It makes business and investing sense.

Starting point is 00:03:00 It's just the prices I feel like maybe have gotten a little out in front of you. front of what might project into good returns for a lot of these businesses. So, while I recognize it, I've been pretty slow to actually implement it because the price I felt like hasn't quite been there yet. Another interesting thing I've been thinking about lately on that front is everyone's looking for companies that have really high returns on invested capital. And I've been wondering if perhaps that you might be better off looking for ones that are more moderate, maybe like the 10 to 15 percent range. My thinking of that is that if you have extraordinarily high returns on capital, that is a signal that other entrepreneurs may want to come and

Starting point is 00:03:39 compete those away from you, or at least share in some of that high return. Maybe at the 10% range, you're sort of flying under the radar and you're able to compound for a really long time at 10% as opposed to a short period of time at, let's say, 50%. And the better bet is to take the longer duration 10% one, most likely. So it's kind of like I've heard Peter Thiel talk about how companies who are actually monopolies, they don't advertise it. They're trying to hide it. Google will talk about how they're only a certain percentage of the entire advertising

Starting point is 00:04:14 industry. They won't frame it as online advertising or search even worse, right? So in the same vein, maybe the better bet is to look for more mid-range kind of ROIC and see what you can find there as opposed to like, the highest flyer ones. So Jake, on February 22nd, Buffett sent out his annual shareholder letter. And I'm just kind of curious what your key takeaways were from the letters this year. I thought it was interesting that he removed the book value column for the first time,

Starting point is 00:04:43 which kind of tells you how much book value maybe as a metric for Berkshire has decayed in Buffett's mind. He's been talking about it for a while, but he finally stopped reporting on that. I mean, you just look at that market value, though, from 1965 to 2019, at 20.3% return versus the S&P's 10%. And it's like, it's such an amazing testament to doing something right for a really long time. And just the obscene compounding that can take place is just truly incredible to actually see it spelled out. Look at the float number, 1970, $39 million. Today, $129 billion. Absolutely unreal how big Brookshire has gotten.

Starting point is 00:05:24 My last one was interesting to see him to say that Jeet Jane and Greg Abel will be more involved in the meeting this year, which I think gives us some hints about succession planning. And I thought it was actually a little bit odd that Todd and Ted wouldn't be included as much. He didn't mention them at least. So those were my takeaways from this year's letter. But in general, I would have probably given it an average rating. Other ones I've liked more. But anytime you can hear what's on Buffett's mind is worth taking a few minutes to read it. For someone like you have been reading all his letters, it is interesting to see how, especially

Starting point is 00:05:59 the last, say, 10 letters. I think he's giving away less and less. I guess that's how I look at it. There's still good lessons to be learned, but it seems like he's a different mode. It seems like he's a bit more in a legacy kind of mode than he is in the, let me educate you about business mode. But it's definitely worth the read, and we'll make sure to link to that later in the show notes. Big, could you talk to us about Berksa Heatherway? I know we're going to talk about the valuation at the end, so we'll get to that. But talk to us about Berksa Heatherway.

Starting point is 00:06:31 How would you outline the business for someone who's not too familiar with the company? In my mind, it's a supercharged S&P 500. It's very U.S.-centric bet. The insurance operations are way above average in the industry. And then you have someone doing capital allocation that's the greatest of all time. And typically you're buying it for less than the market's typical price due to some kind of a conglomerate discount. So in my mind, it's not a bad plug-in or an S&P 500 exposure if you wanted that instead. Could you talk to us about the five major segments of the business?

Starting point is 00:07:12 Sure, yeah. I mean, you have the insurance operations, which are big. You have a railroad inside of their, Burlington, Northern. You have Berkshire Hathaway Energy, which is used to be mid-American and now is growing quite a bit. They put a lot of money to work in both energy and railroads and earn that interesting 10% kind of regulatory return like we were talking about return on capital. And then you have a marketable securities portfolio of a lot of blue chip companies that are baked inside of there. Then you have what's called the MSR, which is the manufacturing service. and retail. And those are a bunch of grab bag of different businesses, some bigger, some

Starting point is 00:07:55 smaller, all the way down from precision cash parts, which is making high-tech aircraft manufacturing all the way down to shakes and burgers at Dairy Queen and everything in between. So you have the whole swath of the U.S. economy. So let's specifically talk about the insurance division. So the property casualty insurance business has really been the engine propelling Berksa Heatherwey's growth since 1967. It was the year that they bought the National Indemnity and the sister company National Fire and Marine. Now, today, Berksa Helloway holds 6.4% Maggiya, and their only trailing state farm is the biggest underwriter in the country.

Starting point is 00:08:38 The float, as you mentioned before, stands $129 billion. dollars. How do you see Berkshire perform when it comes to market share and profitability in the next decade specifically for the insurance division? I do recognize that they are very disciplined in their underwriting and the data point that I used to back that up is that they've underwritten profitably in 16 of the last 17 years. That's a pretty good track record if you know the insurance industry. I found it very interesting that it seems like Geico's been a little slow to adopt telematics, which things like snapshot that Progressive has, which is basically trying to figure out like how much risk do you actually take while you're driving? Are you speeding or are you

Starting point is 00:09:20 accelerating or slamming on your brakes all the time? Which is surprising to me, given Geico's history of targeting originally government employees, that's the GE part of GEICO. So they were looking for populations that had lower risk profiles. And one way of ascertaining that would be to keep track of how people actually drive and then base their insurance rates on this telematics idea. But in the plus side of the category for them is that they've always had such a bulletproof balance sheet that they've been able to underwrite things that no one else would really be able to take on. They've always operated at like one less deal than they could have been doing all along or one less big insurance underwriting thing. And other companies, even in the

Starting point is 00:10:05 insurance industry, I've seen they're operating much closer to the full deals that they could do or even sometimes taking on leverage to do one more deal than they could have done. And then they're always kind of digesting that deal. So what it allows Berkshire to do is to use a lot of that float and invest it into equities, which earn quite a bit more than what most people were earning in their floats, all the other insurance companies, because they've stayed so far away from the edge of like being full deal maximizers and full underwriting capabilities. So their conservative nature in a weird paradoxical way has allowed them to actually take more risk with their float and their security portfolio.

Starting point is 00:10:48 I've noticed the thing too about underwriting with a profit 16 out of 17 years. And Buffett has been very upfront by saying that he does not expect that to continue happening. And you can put a lot of different things into that comment. And obviously one is that Buffett always likes to underplay whatever he's saying. I mean, giving the low interest rate level, you would expect for this to continue, at least for quite some time. The reason why I'm saying that is giving the low interest rate, you're supposed to underwrite with the profit. Because the risk re-return you can get elsewhere, a lot of that goes into equity due to different regulations.

Starting point is 00:11:24 Not all that can be put into equities. There is this matching principle. So depending on the length of the claim, you have to buy. even longer-term bonds, which might seem a bit weird these days with the interest rate, but that's just the way it is. It's not something we can do too much about. I'm sure Buffett would, if he could, but unfortunately, that's not the case. But the other thing that I found really interesting about how Buffett has been addressing the insurance business is also that he has a concern shareholders who's saying, with global warming, with everything that's been going on, what can we

Starting point is 00:11:59 expect in terms of insurance claims to Berkshire. And he says, you know, most of these things by definition are renewed so like he can set new premiums. And what he's saying is as much as it might seem bad one year, a lot of things are happening from an insurance perspective, it's actually a good thing because the premiums would just go up. And the more uncertainty that are in the market, the better it is to be an insurer because so many companies just have to have insurance. Now, Jake, let's talk about the growing. cash pile, it has been heavily debated for years among the shareholders of Berksie Hellerway. And today, cash and short-term investments are $128 billion. Whenever I say today,

Starting point is 00:12:42 I don't mean today, March 9, after the stock mug has been tumbling for weeks now. I mean, that's the latest filing that we have. And that cast pile was similar to what it was in Q3 2019. So as far as we know, it's not growing, but it's stack net at a very high level. Well, you know, I woke up this morning and the market was down 5% plus and we had circuit breakers going. So on days like today, you kind of have to love that cash pile, right? I mean, it's the optionality on it is growing with every tick down. I love the anti-fragility of that cash pile when you combine that with Warren Buffett's capital allocation skills. He's proven that he can put up great numbers, especially when the

Starting point is 00:13:28 opportunities come along, I should say. The only thing that I don't like about it is that it makes me a little bit sad that it's possible that he could be waiting for this one last chance to do some big deals that sort of cement his legacy. I've seen this before where grandparents are holding on to see that oldest kid graduate from college or something. And then once it happens, then they kind of let go a little bit. And it'd be sad to think that the longer that we can delay a crash and him putting money to work, maybe the more time we get with him. I would be a little bit sad if he was able to bag that last elephant. And now he's like, you know what? I've done everything I need to do in this lifetime and I'm ready to move on. What people typically do is they look at

Starting point is 00:14:11 the size of his portfolio. And I think here at the year end, it was around $240 billion. And then they look at the cash and they say, wow, he is a lot in cash. That's not how Buffett looks at it. He said actually just two weeks ago, I'm approximately 20% in cash right now. And I'm not because I'm including the $300 plus billion in operating businesses. Plus, we have multiple securities, and then we have cash. If you do the numbers, is a different way of looking at it. He's looking at 8% in equities, 20% in cash. Who knows, perhaps with everything that's been happening, he's not so much in cash anymore. And that really ties into my next question. Warren Buffett kicked his stock buyback program into high gear here lately, spending $2.2 billion

Starting point is 00:14:54 on share purchase in the last three months of 2019. And that's the most ever he's done in a single quarter. Now, this is not significant compared to the my cap of more than $500 billion. And a lot of investors see this as an opportunity to load up on shares. It should also be noted here that the trading volume on Berksie-Hathaway is exceptionally low. So in that sense of buying back shares, Buffett is restricted differently than other CEOs if he wants to repurchase a high number of shares because he so easily moves the price. He's been talking about how he looks with envy at other CEOs who could buy back at three, four,

Starting point is 00:15:34 five percent without moving a price. But because of the volume of Berkshire Hetherway shares that is just so low, he's been talking about, or at least he's been hinting, he doesn't talk too much about it, but he's been hinting of just 1% can actually move the needle in terms of influencing the price. But as much as we'll talk about valuation later, what do you read into the stock buyback here, aside from the obvious fact that Buffett at times have found the shares modestly undervalued as he puts it in his letter? A lot of people that I talk to like to think that this buyback program puts a floor under the stock. And he's talked before about in the 1.2 to 1.3 times book

Starting point is 00:16:15 value range is sort of where Berkshire will kind of quote unquote defend the stock price. But I'm not sure if I think that that's true or not. I think Mr. Market can do a lot of crazy things and it can still apply to Berkshire. They'd spent $5 billion over the last year to buy back 1% of the company roughly. So that's in the like $200-ish share for the B shares. Who on the other side is selling? That's something that I always like to ask myself. And when it comes to Berkshire shares, most of them are locked up in families who own the company. It's not the typical company that's owned by institutions or even like index funds. It's very underrepresented in indexes because of that. So I don't think that you maybe get as much panic selling either there.

Starting point is 00:17:01 So maybe it's unlikely to go on crazy sale as much as other companies, I think. I personally think that he would be better off looking for that next deal than buying out partners within Berkshire itself. And I don't think that there's a lot of willing sellers that will part with their shares at the prices that are really mouthwatering from a buyback perspective. It's just not the dynamics that I see in the company and the ownership structure. 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. In every conversation you have is with people who are actually shaping the future. That's what the Oslo

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Starting point is 00:21:55 partners, as he puts it. It is interesting, especially at these prices right now, at the time of the courting, Berksa Helloway is trading at 195, and it would be interesting to see how much he loads up on his own shares. In Q4, if we look at the numbers, the average buying price just for that quota was 215. So it might be, well, he would be buying back a ton. But keep in mind that as the price of Berksa Hellerway is now trading a much more appealing

Starting point is 00:22:20 prices, so is more or less all the stocks on the planet. You bring up a good point. Part of good capital allocation is thinking of your shareholders as your business. partners. And if you're buying back from them at crazy low prices, you're benefiting one group of your shareholders at the expense of another. And you're neglecting your duty as a captain of industry and as an allocator of capital and a steward of capitalism by taking advantage of one party over another. I think you almost have a moral duty to try to keep your stock price trading close to the intrinsic value so that if some partner of yours, aka a shareholder,

Starting point is 00:23:02 needs liquidity for something. Perhaps they have to pay for a surgery or there's a charitable thing that there's really important to them that they need the liquidity. You should do what you can to help them get the liquidity that they need to run their lives. I think that there's a lot that can be done that no one really talks about in capitalism by a CEO who keeps one shareholder group from taking advantage of the other too much. So that's really interesting. So Buffett has mentioned in his letter to shareholders that 98% of his shareholders going into the year are the same shareholders going out at the end of the year.

Starting point is 00:23:37 And I think it's kind of an interesting metric because it shows you how strong his share buybacks can be if he decided to use his significant cash position to conduct those buybacks. So something else I want to ask you about, Jake, is your opinions on. Warren and Charlie's age. There are many people that will argue that they're the true competitive advantage, or at least a significant portion of the company's competitive advantage. But as we all know, Warren is going to be 90. Charlie's 95, 96 years old.

Starting point is 00:24:09 So what are your thoughts about the company with them eventually going to be replaced? Yeah, I mean, you really kind of have to get comfortable with answering the question, is Berkshire a man or is Berkshire a culture or is Berkshire an ethos or even maybe like an operating system for a business? Super high integrity, decentralized to the point of abdication, as Munger has said, capital allocation, stock selection, insurance underwriting, taking advantage of opportunities. All these things are in the ethos of the company. I personally believe that they'll generally be okay. It's hard to imagine that there isn't some impact. So if I kind of go through each of the businesses, like the insurance operations, I think those don't change a ton.

Starting point is 00:24:57 I think they've got plenty of brainpower with a jeet to still manage that part. I know Buffett helps a Jeep, but deal flow, I think absolutely has to be impacted. How many business founders sell their business for less than they could probably get somewhere else to sell to Buffett specifically. That, I think, is a very real advantage that he's built as a way of cashing in on his reputational capital that he's built over the last 50 years of doing business the right way. He deserves to pay less than market because he has done such a good job with his reputation. I also think the performance of any CEOs in the subsidiaries of all these different companies, it could go down. I mean, when you are having to send a letter to Warren Buffett about your

Starting point is 00:25:43 operations for that year and report to Uncle Warren, like how you did and you want to make him proud, if he's not around, it could slip a little bit. I mean, I think that's just sort of natural human nature. I think the portfolio management side of things will be just fine with Ted and Todd. I think both those guys are really sharp. But it's hard to imagine that there isn't less of a moat post Warren and Charlie, just mostly probably because of the deal flow aspects. They have to get in line and pay what everyone else is paying for acquisitions, you're just not going to get the same kind of deals and therefore the same kind of returns on the businesses that you're buying because you're probably going to have to pay a little bit higher price for everything. So on net,

Starting point is 00:26:22 it won't be as good, but the ethos still makes it one of the better companies in the world as far as how clean they are and how they do business. So Jake, real simply, what's the biggest threat to Berkshire Hathaway, in your opinion? I would probably say complacency, and that can come in different ways. I think that this management team that's been around since 1965 deserves the benefit of the doubt on all things. They've earned it. However, as a shareholder, you can get complacent about when things start slipping a little bit. For instance, picking the book value out of the report, it's a little bit of changing the goalposts somewhat. I mean, the timing of when he's done it. And there have been a few other changes. I won't go into them because

Starting point is 00:27:06 they're down in the weeds for most investors. But if you want to read a deep dive on that, I would suggest checking out Semper Augustus's letter. I don't know if you've ever read that one, but Chris Blumstrand, I think, is one of the best analysts on the planet. And he does, call it a 50-ish-page write-up of Berkshire every year. He's a true, true expert at this company. But anyway, I think he's highlighted some of the places where they will change a little bit of things in reporting or move parts of the business and it'll be a little bit less clear, like how that business did or what the returns on equity were for that segment of the business, mostly in the name of trying to make the numbers easier for the average person to

Starting point is 00:27:47 understand, but for the very, very deep dive analyst, it clouds some of what we used to be able to know about the company. So those little kind of things can slip here and there that the disclosures part of things, because the management has earned such a reputation, you can get complacent about just assuming that they're always doing the right thing all the time, and that can get you into a dangerous place. Interesting. Speaking of those analysts and those people who are really into it, I have a very nerdy, geeky questions for you here now, Jake. How do you value the earnings retained by Berksa's non-controlled investments in public companies, giving that only dividends, or reflected in operating income.

Starting point is 00:28:30 And perhaps you can just explain the framework behind why is that even a topic worth discussing? Sure. So if you imagine these companies that are owned by Berkshire inside of Berkshire, but they're publicly traded companies, and they're doing their own business, they're generating their own cash flows, and sometimes they're paying dividends to Berkshire. And so if last year, their 10 largest holdings in their securities portfolio delivered $3.8 billion in dividends that got sent to Omaha checks that showed up in the Berkshire checking account. Well, those companies had another $8.3 billion in retained earnings last year.

Starting point is 00:29:08 So that's money that's created inside of the companies that they own, but that Berkshire doesn't really have control over it. It's still within the company. And when I say that $8.3 billion, dollars, that's figured out by taking the percentage that Berkshire owns of the company and then applying that percentage to what the total amount was. So just to make the math easier, like let's say that they own, let's say 10% of Apple and Apple earned 100 billion. Well, inside of that, you could imagine that Berkshire kind of earned 10 billion through their ownership of Apple.

Starting point is 00:29:43 I think you can't assign a dollar for dollar valuation to those earnings is that it could very likely be that company that is making the decisions on that dollar, what does it go to, could be making bad cap allocation decisions. And even making that dollar worth zero, like we've seen that before with companies that make stupid choices with the money that's generated, it does not accrue as shareholder value. It ends up disappearing. So the first kind of metric that we have to look at is what do they do with the money? And I think Buffett's obviously trying to choose companies that have the ability to invest in projects that will generate further returns on capital and keep this engine running and even growing. And so you can kind of start to see

Starting point is 00:30:24 why he's such a big fan of buybacks is because that instead of that dollar inside of that portfolio company going off into maybe a project that is destroying value, maybe it gets bought back now and his share of the company now increases. Obviously, the price paid matters for that as well. So if they're overpaying for their buybacks, then they are destroying value for the remaining shareholders, including Berkshire. And then the other part that I think you should think about there is that money stays within Apple or Wells Fargo or wherever it is that Berkshire owns. Berkshire's not having to pay taxes on it at the moment. So there's already, call it a 15 to 20 percent, maybe even 21 savings by not sending that money to Berkshire to then control. So there's no

Starting point is 00:31:12 easy answer there because it's very fluid on like what do they end up doing with the money. That determines the future value of what that retained earning was worth. But those are some of the parameters that I think about when I look at the retained earnings inside of the portfolio companies. 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 SOC 2 or running an enterprise GRC program, VANTA

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Starting point is 00:34:51 You know, it's fascinating. This is a topic that Buffett has been talking about a lot lately. I think this is a great accounting discussion and it's something that many young investors don't understand. I know Stig and I have talked about look through earnings for the non-operational subsidiaries numerous times on the show. And it's really neat to see him bring in it up more and more. And I think it's important because there's a lot of value there that's not immediately evident if you're simply looking at the income statement, the consolidated income statement for Berkshire Hathaway. Okay.

Starting point is 00:35:24 So with all of that said, talk to us about your intrinsic value for Berkshire Hathaway today. Well, I think there are different ways of doing it. I tend to be more on the simplistic side of my investment stuff. Like if I can't write it on the back of an envelope or on a short, short piece of paper in a few sentences, then it's probably too complicated for me to take a swing at. So for Berkshire, the first pass to look at it, and this will sound a little bit glib because the answer is going to be kind of silly. But if you imagine Berkshire as a bond that yielded 10%, and I think that's a reasonable actual approximation because their return on equity has been

Starting point is 00:36:05 10% for quite a while, and it's likely to be around 10% for a long time, just based on the projects that they're putting money into, thinking specifically regulatory yield of BNSF and BH Energy. So if you imagine a bond that yielded 10% and you could reinvest the coupons in the business at a continuing 10%, what would you pay for that bond today? How much would the market pay for a bond that yielded 10%? In my mind, safer than treasuries. Today's rates right now, I mean, it's like approaching, it goes towards infinity, right? I mean, that's why I said this is sort of like the glib answer. It's a ridiculously high number, which I think is more a reflection of today's rates being in my mind kind of ridiculous and not so much a reflection of Berkshire. So let's go to

Starting point is 00:36:55 a more real answer then. Some of the parts is a very popular way of analyzing Berkshire, which is basically just take all the different little business lines, add them up, and come up with some kind of a number. So my back of the envelope math for some of the parts is, you know, let's call BH Energy worth about 50 billion, the railroad worth about 100 billion, the MSR, the manufacturing service retail is call it 150 billion, insurance, call that a 30 billion, and then an investment portfolio, 370 billion-ish. You add all those up and you totals up to about 700 billion, which implies about a $280 per share for the B shares. quite a bit north of where we are right now.

Starting point is 00:37:37 So another way of looking at it, the business would be, let's just do a simple, what has Berkshire typically traded around as far as price to book goes? And the answer there is roughly, let's call it 1.75 times price to book value. Today's book value, let's call it $425 billion. That gets us to a $740 billion range of potential valuation. Okay, like that's in the ballpark of our sum of the parts. that makes sense. All of these things are all just triangulation data points. Like, any one is not better than the other. But if they're all kind of telling you the same story,

Starting point is 00:38:12 then maybe you're onto something. That's how I think about this. And then maybe the last one would be what it's called like a two-pronged approach. And that's basically like add up all of the investments and then try to put some multiple on the actual earning businesses and then add those together. And what does that number tell you? In my rough calculations, let's call it 260 billion. for equity, securities, another $130-ish billion for cash. That gives us a $390 billion for prong one. And then prong two will take the $24 billion of operating earnings and multiply that by 10.

Starting point is 00:38:47 That gives us $240 billion. Add those two numbers together and you end up with $630 billion as another mark. So all of them in the $700-ish billion valuation range. So just to recap that, you're saying that the price. of the Bias, that's right now trading around 195. We are looking at around 280 plus minus. Very interesting. Thank you for breaking that down for us. It is interesting what you would mention there about, you know, the potential discount because it is a conglomerate. I guess you would even have people saying that is actually the competitive advantage. Offberg's telling the way that it is a conglomerate

Starting point is 00:39:29 so the money would go where it's best used. I guess there is also a discontaliburant. I guess there is also a count two Berksa Heatherway because it has not been performing as well here over the past years. It's actually been trading the SP 500. I think that's probably also one of the reasons why whenever I talk about it being a good price and all that, and I think most of our listeners will already know, I am long Berksa Heatherway, so you take it for what it is whenever I'm complimenting Jake about why Berks-Hall-Way is such a great investment. I am obviously biased. And it kind of leads me into the next question, which is something that, which is about precision sizing, which is just always such an interesting topic to discuss, especially for a

Starting point is 00:40:08 company like Berksa Heatherway. Many investors have different rules from themselves whenever it comes to position sizing. For example, investor might have a rule that he or she won't build a position in a single stock with more than 10% of that portfolio. Now, Warren Buffett is previously in his letters to shareholders commented on how many investors holding Berksa Heatherway as their biggest position in their portfolio, most noticeable himself with more than 99% of his net worth. He would estimate that more than 90% of the shareholders has Berksa Heatherway as by far the biggest position. Please elaborate on how you see position sizing.

Starting point is 00:40:44 And if Berksie Heatherway is an exception to the rules that we may have imposed on ourselves, given that it's such a diversified company already and may have the downside protection that you mentioned before. It very much comes down to your own personal preferences and risk tolerance of how much exposure you're willing to take on any one facet of a business or economy or any one person. So the first thing you have to ask yourself is about the opportunity cost. Do you have anything else that might do better than a relatively safe, call it 10% per random type of return profile?

Starting point is 00:41:23 If you do, then Berkshire may be sort of an anchor in your portfolio. and maybe you don't want too much of it. I don't think that Berkshire is terrible as a bond proxy, maybe especially for someone who's a little bit younger relative to the prices of bonds today. So how much are you willing to do you want as a bond allocation? Berkshire may fit the bill of that a little bit like we just talked about, you know, if it was a 10% bond.

Starting point is 00:41:47 A lot of portfolio managers who I've talked to in respect, they often will use Berkshire as a cash proxy. So if they don't have anything else to invest in, rather than hold cash, they'll just stick it in Berkshire. I don't think that's a terrible strategy. However, the whole point of cash is that it doesn't move around at all. And Berkshire definitely moves around. I mean, in 1998, Berkshire was trading at three times price to book value, right?

Starting point is 00:42:10 And typically it's been 1.7, but we've seen it below book value also. So to think that it's just this like solid anchor that never moves around and provides the liquidity that you want when you need it, and I'm not so sure about that. The last thing I would say is that because it is so U.S. centric, it could form a bit of a home country bias that is common for a lot of shareholders. People tend to own more of whatever country that they live in because they just feel like they know it better. And if so, if you are a U.S. investor and you already own a lot of other U.S.-based securities and things that are tied to the U.S. economy, then being Long, Berkshire is just more of that same thing. And so

Starting point is 00:42:54 you may not have as much diversification, geographically speaking, and you may end up suffering even stronger to a home country bias. But all in all, I mean, it's pretty hard to imagine that Berkshire in Penn 20 years is not worth more than $500 billion. So if you have the stomach for long term, you could sleep comfortably at night earning probably a 10% roughly return on equity over a long period of time. And there are definitely scarier and harder ways of making money. I think you bring up a really interesting point and a good point. So Jake, thank you for your thoughts about Berksa Heatherway. It's always a pleasure to hear how people think about that business that we've been following since the very first episode here in the Investors podcast.

Starting point is 00:43:41 Now, speaking of that, I wanted to end the interview on a slightly more abstract note because not only are you a great investor yourself, you're also one of the thought leaders in the value investing community. I would like to relate this to whenever I first started to become interested in value investing. I think my motivation was like any other. I wanted to replicate if possible how Warren Buffett picked stocks. And that was why I got interest in the first place. Then after starting value investing for years and reading and rereading Buffett's wisdom, I slowly realized that it really wasn't just about the money. It's really the community around Berkshire Hathaway and Warren Buffett, it's not so much about business, but just as much about investing in a life

Starting point is 00:44:27 well lived. So in your amazing letters that you send out to your clients, you talk about how much of the human actions we see in the world can be explained by deeply embedded scripts designed to sort us into heresies. And I know that we are going a bit abstract here just from talking specific numbers about Brexit Heatherway, but I think it's a really good way of rounding of the interview to talk about value investing, like very specific, and then to look at more the grand scheme of things. Could you please elaborate on that specific quote and how you see this? Yeah, no, I think you're right to highlight that these guys are heroes for a lot of us, but I think the amazing thing is that they're such good teachers, and we've benefited from

Starting point is 00:45:11 them being willing to share all that they've learned. It would have been very easy for them to just hide out, never talk about any of this kind of stuff, and share it. with us and just make all the money that they ever wanted to make in the world. But we'd all be much poorer spiritually than otherwise. I try to reflect back that same thoughtfulness when I can and that same spirit of sharing and being kind to others and paying it back that these heroes have been so intellectually generous. Whether I'm successful or not, it could be debated. But you mentioned one of the client letters that I wrote. And in that letter, I looked at what law Lobsters and Warren Buffett have in common.

Starting point is 00:45:52 And then actually Buddhism as well. So those three very weird things. And here's the punchline of that letter. Lobsters will fight each other for space and mates and territory. And when they're able to win in a fight and get that space, they have a bump in serotonin inside of the lobster. So it's this chemical that makes them feel good when they win. and the lobster who loses has a decrease in serotonin and ends up often retreating and then dying not that long after.

Starting point is 00:46:23 And so nature has created this system where we have these chemicals that make us feel good when we're at the top of the hierarchy. And we have that exact same serotonin molecule floating around in our brains when we sort ourselves into hierarchies that the lobsters do. And lobsters are really old. They're older than dinosaurs. So, like, this serotonin mechanism has been with us and been with biology for a very long time. And we're just as subject to it as other creatures are. So what does that have to do with Warren Buffett? Well, I think one of the key insights about Warren Buffett is that he's always been willing to follow

Starting point is 00:46:59 his own inner scorecard and not be holding to serotonin hierarchy sorting and trying to show off and be more than he is. Like, he is very true to himself and including thinking for himself when it comes. to investing and his personal life too, that are very colorful. I think what the takeaway for all of us is to try to recognize when we are in a hierarchical situation and can feel ourselves being drawn towards sorting and instead trying to opt out of that. I think Buddhism has some interesting principles in it that are really about opting out of that serotonin matrix that a lot of us live in. So, buy all those things together for your investment portfolio, that thinking for

Starting point is 00:47:43 yourself, ignoring Mr. Market, or taking advantage of Mr. Market when you can, all these things all tie back together. And hopefully they also lead to a life well lived on your own terms that at the end of the day, you've minimized your regret and you feel like you did things your way. So, Jake, this is a great segue into your book, The Rebel Allicator. In fact, we have another show on our network that's hosted by Sean Murray, and it's called The Good Life, and he interviews you about all the different aspects of your book, and we'll have a link to that in the show notes if people want to check that out, and I would encourage you to check that out. Talk to us a little bit about the book, and also talk to us about this idea of sorting and how it's demonstrated

Starting point is 00:48:25 in the book. A lot of the impetus of the book came from having studied a lot of different managers and the decisions that they make around capital allocation and seeing a lot of what to me seem like unforced errors by people who were plenty smart to make the right decision. None of the math is hard, but the emotional quotient part of the equation and really following your own inner scorecard and doing what you think is right was ignored. And that's how the errors ended up coming together. People wanting to show off about some big merger and acquisition that was destructive for most of the shareholders, but they got to feel like they were the big man on campus because of it. That is a hierarchical sorting kind of thing, bragging about how much

Starting point is 00:49:09 revenue you have, but not being profitable. We see that a lot. So I wanted to write a book that hopefully would give those managers and then also through other proxies, investors who could recognize managers who are doing that, a little bit of a playbook on how to think for themselves, to have the confidence to do it. And so, crazy enough, I ended up deciding to write it in a a fictional story format that hopefully baked the lessons in and we're able to resonate with the reader a little bit more than just a dry nonfiction explanation of all of these cap allocation principles. So if you look at what the book really is, it's the karate kid if Mr. Miyagi was like a Warren Buffett character. So that's the kind of spoiler for the story.

Starting point is 00:49:56 Preston and I are definitely huge fans of your book. And another person who is a big fan of your book, that is Chalienmonger. So if you listen to the episode that Shammari did with you, Jake, people actually have a chance to hear what you and Chalemanga talked about for 20 minutes after he called you more or less out of the blue to talk about the book. We'll definitely make sure to link to that in the show notes. This has been absolutely amazing, Jake. Why can the audience learn more about you, your book, and Phnom Street Investments?

Starting point is 00:50:28 Yeah, I write quarterly letters for my clients, but they're publicly available. And those are at Farnham-Street.com. It's pretty easy to sign up there. I go on Twitter, probably more than I should. It is a very fun place to be a lot of times in the financial space. So my handle there is at Farnham, Jake 1. Pretty easy to find. I do a podcast with a couple of friends who you are well familiar with Tobias Carlisle

Starting point is 00:50:53 and Bill Brewster, this value after hours. It's like if three buddies got together after work, a long day at the office, buying companies, and then kind of we're talking about the inside part of baseball for investing. That's what the show is approximating. It's a lot of fun to do. We do it once a week. But yeah, otherwise, if anyone wants to reach out to me, my email is five good questions at Gmail, all spelled out, F-I-V-E. So I'm not too hard to find. And as far as the Rebel Allocator goes, it's available on Amazon in print, digital, and audio. So you can check it out there. That sounds amazing. And again, we'll make sure to link to all of that in the show notes.

Starting point is 00:51:35 Jake, thank you so much for taking the time to speak with Preston and me here today. Thanks for having me, guys. All right, guys. So at this point in time in the show, we play Kristen from the audience. And this question is very timely. It's from Nathan. And the question is about Brooksahe Heatherway. Hi, Preston and Stig. My question is about Berkshire Hathaway and stock and owns in its portfolio. If Brookshire already owns a specific stock in its portfolio, how do you think about considering to buy more of it individually, taking into account the fact that you already have some exposure to the stock through Berkshire's portfolio? Nathan, I think that's a great question.

Starting point is 00:52:08 I don't think that there are any issues with you getting a bit more exposure to any of the stocks in Buffett's portfolio, because when you do the math, you have very little exposure to almost all stocks in his portfolio. Keep in mind that Buffett's stock portfolio is less than half of the value of Berksa Heatherway in the first place. they have a lot of operating companies too. Not even Apple you have too much exposure to. Now, Apple is the biggest position in Berkshire Heatherway's portfolio,

Starting point is 00:52:35 which is more than 10% of the market cap of Berkshire Heatherway in the first place, and is almost a third of the entire public trade portfolio. But even so, consider if you have 10% in Berkshire, and then 10% of that are made up of Apple shares, you would still only have 1% exposure in your portfolio to Apple. Now, Apple is a little more. It might be closer to 1.5 or 1.7. In this example, if you have 10% in bucks a hellaway, but in any case, it is very little. So even for Buffett's portfolio that is very top heavy and just an example, if you look away from the top 10 holdings,

Starting point is 00:53:15 the 11th biggest holding is just a bit more than 1% are Buffett's entire public trade portfolio. So it's really not significant. It's really my way of saying that you shouldn't think of Buffett's stock picks at all whenever you consider your own portfolio, unless you only hold Berksa Hathaway in your portfolio or very close to only holding that one stock. But where I do think that you should pay attention is that Buffett like all other money managers with more than $100 million on the management has to disclose which price that buy stocks at. And that may give you a good indication of which stocks that are currently undervalued. You can find those prices and those picks at Guru Focus for free, and we even have a resource in TAP Academy where you can check out

Starting point is 00:53:57 Buffett's picks together with other super investors like Guy Speer and Monis Paprai, and take a closer look at their portfolio. We'll make sure to link to both of those resources in the show notes. And then four times a year, the stock picks become available. It's February 15, May 15, August 15, and November 15. That doesn't mean that I'll do the same thing as they do, but I do use Buffett's picks and other Super Investors' picks as inspiration and perhaps put a few on them on my mental watch list for further investigation. So Nathan, great question, but I really can't add much value beyond Stig's response because I pretty much agree with exactly what he said.

Starting point is 00:54:38 So with that, Nathan, for asking such a great question, we're going to give you free access to our intrinsic value course for anyone wanting to check out the course. Go to tip intrinsic value.com. That's tip intrinsic value.com. The course also comes with access to our TIP finance tool, which helps you find and filter undervalued stock picks. If anyone else wants to get a question played on the show, go to Asktheinvestors.com, and you can record your question there.

Starting point is 00:55:05 If it gets played on the show, you get a bunch of free and valuable stuff. All right, guys, that was all that Preston and I had for this week's episode of the Ammasters podcast. We see each other again next week. Thank you for listening to TIP. To access our show notes, courses or forums, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decisions, consult a professional.

Starting point is 00:55:30 This show is copyrighted by the Investors Podcast Network. Written permissions must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP289: Intrinsic Value Assessment of Berkshire Hathaway by Jake Taylor (Business Podcast)

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