We Study Billionaires - The Investor’s Podcast Network - TIP298: Part II - Warren Buffett & the 2020 Berkshire Hathaway Shareholders Meeting (Business Podcast)

Starting point is 00:00:00 You're listening to TIP. Hey, everyone, welcome back to our second part discussion of the Berkshire Hathaway shareholders meeting. Like last week, Stig and I have collected the best questions and answers from Warren Buffett's annual meeting and we add some commentary to help the audience learn the tips and tricks for financial valuation. So without further delay, here's our second part episode of the meeting. You are listening to The Investors Podcast, where we study the financial markets and

Starting point is 00:00:28 read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Hey everyone, welcome to the Investors podcast. I'm your host, Preston Pish. And as always, I'm accompanied by my co-host, Stig Broderson. And here we are, part two, Berkshire Hathaway. Always excited to go through these. You ready to do this, Stig?

Starting point is 00:00:56 I am. So let's go ahead and play the first question. Here we go. I got a number of variations on this next question. Some more polite than others. This one's right about down the middle. It's like many, I'm a proud, Burrower. Harkshire Hathaway shareholder. However, in comparing the performance of Berkshire with the S&P

Starting point is 00:01:11 500 over the last 5, 10, or 15 years, I've been disappointed in Berkshire's underperformance. Even year to date, Berkshire is trailing the S&P 500 by 8%. To what would you attribute Berkshire's underperformance? Well, I can't imagine ever selling my Berkshire stock. At some point, money is money. The truth is that I recommend the S&P 500 to people, and I happen to believe that Berkshire is as about a sound as any sense. single investment can be in terms of earning reasonable returns over time, but I would not want to bet my life on whether we think the S&P 500 over the next 10 years. I think there's a, you know, I obviously think there's a reasonable chance of doing it. And we've had periods. I don't know how

Starting point is 00:01:55 many out of the 55 years we've been doing it or at, I don't know how many we've beaten or not. I mentioned earlier that 1954 was my best year, but I was working with. absolutely with peanuts, unfortunately. And I think if you work with small sums of money, I think there is some chances, some chance of a few of people that really do bring something to the game. But I think it's very, very hard. It's certainly gotten tougher for us with larger funds.

Starting point is 00:02:24 And I would make no promise to anybody that we will do better than the S&P 500. But what I will promise them is that I've got 99% of my money in Berkshire and most members of my family are, and not be quite that extreme, but they're close to it. And I do care about what happens to Berkshire over the long period about as much as anybody could care about it. You know, caring doesn't guarantee results. It does guarantee attention.

Starting point is 00:02:51 Greg? I would agree one that there's never guarantees, but when I look at the assets we have in place and the teams that are in place, i.e., you're committed to Berkshire, but we have dedicated teams, that equally are dedicated to Berkshire and they're sure going to give it their their best effort every day. And when I look at the assets and the people, I think we have, as you said, you can't guarantee it, but we have a great chance of sure giving a good effort to help perform it. It's hard to imagine getting a terrible result of Berger, but, you know, anything can happen. And what I do know is it would be easier to be running $5 million than

Starting point is 00:03:33 our book net worth at Berkshire at the quarter end, I think, was $370 some billion, which is down, but it's still greater than the book net worth of any corporation in the United States. I mean, maybe there's some federal corporation that has more, but in terms of, and it may be the greatest in the world, I'm not sure. And that makes life difficult in some ways, too. Right. And the potential of our operating businesses are substantial. When you think we've talked about energy,

Starting point is 00:04:03 you touched on it that that infrastructure is continuing to change theirs. We're ready for $100 billion of investment opportunities there. If we just look at the business over the next 10 years and the infrastructure that's required and how it's changing, substantial, substantial investments there that just tell me we have very good prospects. And we're well positioned to pursue them, which again, to me, when you look at our core business, as you touched on them, Burlington. the insurance and energy, our downside is very nicely protected. We have three really core great

Starting point is 00:04:41 businesses. Yeah, and we're better positioned than anybody in the energy business. Just because we don't have dividend requirements, we've retained 28 billion of earnings over 20 years that you can't do it if you run a normal public company. And we've got a huge appetite and the country needs it. The world needs it. And we are a very, very logical, well-structured, well-managed, I would say, because it doesn't involve me, company, to participate in just huge requirements around the world now. They're slow, and they involve governments, and I mean, state governments.

Starting point is 00:05:19 And there's a lot of, it's not anything that happens dramatically. It will happen. And Berkshire should participate in a huge way. We can do things in insurance, nobody else can do. That doesn't mean much many times, but occasionally it may be important. So there are some advantages to size and strength, but there are disadvantages to size too. If we find some great opportunity that for a billion dollars to double our money, that's a billion pre-tax and that's $790 million after-tax and on a market value of $450 billion or whatever it may be,

Starting point is 00:05:58 It doesn't amount too much, unfortunately. We'll still try and do it if we can. Yeah. So for me, this conversation is really a great question, first of all. But when I go and I look at the chart, and I love using Trading View. And Stig, I'm sharing my screen with you so you can see what the chart that I kind of created while I was listening to the audio clip. And with Trading View, you can go in and you can look at a company, but you can also

Starting point is 00:06:25 denominate the company in whatever currency you want or basically whatever ratio you want to compare it to. So what I did is I went to Trading View. I typed in Berkshire Hathaway, which is BRK.a, and then you put a division symbol there and then you put what you want to compare it to. So I put the S&P 500. And when you do that, you see this really, really interesting chart where you can see Berkshire Hathaway, and I put it in a weekly view so I can look out 20 years on the chart. And you can see that before quantitative easing started, and Stig, you can see I put quantitative easing there with the blue line. Yeah. You can see Berkshire is just crushing the S&P 500. And then from quantitative easing till now, it's completely just gone sideways. It hasn't beat it.

Starting point is 00:07:13 It hasn't really done that much worse. I guess you could say from the top or from the bottom of the 2008 period that. It has, but in general, looking at the chart, it's really flattened. I'm going to take a screen capture of the chart that we're looking at right now as we're talking about this, and we're going to put it into our show notes so people can look at this chart that we're talking about. I wonder if some of these macro factors, these central banking factors, are actually making their ability to compound that much harder, and they don't even realize it.

Starting point is 00:07:47 Or it's just such a nuanced thing that maybe nobody can understand why that's a way. playing out. But I just, I find the chart fascinating. I find it really interesting that from that point forward, they've had a difficulty to outperform. And Stig, I'm kind of curious to hear your thoughts. The way that I was thinking about this was not so much in terms of quantitative easing. Then yet again, we previously, we talked about how value has really been crossed during the Corona crisis, which is also a part of the question like how it's performed just this year. And we have just seen like the fang stocks performing really, really well compared to more traditional companies like Berksa Heatherway.

Starting point is 00:08:25 And that was also what Buffett was getting at before, whenever he talked about, you know, having the highest book value. And clearly book value is not the same as the actual value. And Buffett has talked a lot about that. But a company like Berksa Heatherway is just very heavy in those companies, you know, railroads, for instance, like together with insurance, like two biggest companies within Berksa Heatherway. So they haven't been performing as well.

Starting point is 00:08:47 And we can compare to a company like Apple. In all fairness, Warren Buffett actually took a $70 billion stake into Apple. But generally, looking at Berksie Heatherway, that's not the type of company. So just from that alone and also knowing that the S&P 500 is so much driven by fang stocks and have been for a long time around the same time as QE, which is to some extent coincidental, I think that also plays a huge factor. We've just seen that they really play out. But I actually I really like this question because I think a lot of investors are thinking they have the S&P 500 as the benchmark and they want to know whether or not the S&P 500 will upperform that. So let's talk about the valuation. Whenever I look at the valuation of the two, let's just first take the S&P 500.

Starting point is 00:09:36 Well, right now it's trading at a CLEPE of 26. So we talked about the CLPIA quite a few times here in the show, but it's the average inflation adjusted earnings from the previous 10 years. And then because of the crisis that we're seeing right now, we can definitely make the argument that the companies in the index generally have a hard time sustaining their earnings, at least in the very near future. So I would even say that the GDP of 26 is sort of low compared to what it really is. And then whenever you factor in that 15% unemployment and then the stock market almost being expensive as it were before, to me the S&P 500 actually still looks very, very

Starting point is 00:10:16 expensive, especially if you think about the underlying assets. So instead, let's look at Berksie Hetherway. I know I'm talking about a position. As you know out there, Berksie Hetherway is my biggest equity position, so take it for what it is. But if you look at Berksie Hathaway's cash in equity positions, it's roughly $300 billion. And the market cap is roughly $400 billion. So you're basically getting Berksie's operating businesses for $100 billion. So how well has the business performed? Well, it's around $24 billion over the past few years, and it clearly won't be the same, say, in the next 12 months. But those 80 companies, like, they're very, very strong companies and buying them for $100 billion, all the operating companies

Starting point is 00:11:04 of Berksie Heatherway, I think that's the steal. So again, depending on your assumptions, I would say that Berksa Helloway is probably worth anywhere between $210, $250, even with whenever you factor in the crisis. And here, I would really like to also give a handoff to the interview with Dick Taylor, the CEO of Phanim Street Investments in episode 289. We'll make sure to link to that in his show notes. And he also gives his take on the valuation. If anyone is then asking, so, stay,

Starting point is 00:11:36 assuming that we are then, at Berksie Holloway, I think the day of the recording, it's trading around 172. So let's say we're doing a 20 or 30% discount. Does that mean that I want to jump into Berksie Heatherway? Perhaps I'll add to it, perhaps not. But I think the most important thing is to go away from the premise of the question because the premise of the question was really should I invest in Berksa Heatherway or the

Starting point is 00:12:01 SNP 500? I don't necessarily think that's the right question to ask. I can easily understand if people are asking that question. But I think you might want to think what should my benchmark be and what are your alternatives, really? So sorry, Prest. I saw you had a remark there. No, so I'm looking at the chart even more. And there's two periods on the chart that are really quite drastic in the drop of Berkshire Hathaway compared to the S&P 500. both of those major drops occurred at the same time that the government was conducting massive amounts

Starting point is 00:12:39 of stimulus. I can't say that there's a correlation there. I just find it interesting that that's the case. And so let's just say that there is a correlation there. And if you have an expectation that there's going to be a lot more stimulus moving forward, well, then that might be a concern for a holder of Berkshire Hathaway. But there's nothing that I could do in order to show that that correlation is that. there based on the number of data points that we had. But there's definitely something interesting

Starting point is 00:13:04 going on with the chart. So I highly encourage people to take a look at the chart. It'll be in our show notes. I think just to basically sum this up, there might be some sort of correlation or causality with what the Fed is doing. I think last time we talked a lot about sound money. I think that if we do compare the S&P 500 to Berksaam, we look at some of that performance, let's just call it sound business. And I think one of the really, really good things to say about Berksa Heatherway, regardless of the valuation, is that it's a very, very sound business. And whenever I look at the discount of cash flows short term and long term, I like Berksa Heatherway better. For me, in terms of performance over the next decade, it just makes a lot more sense

Starting point is 00:13:45 to me to make one bit and not the other. Okay, so let's go ahead and go on to the next question here. All right, this question comes from Adam Schwartz in Miami, Florida. He says, Berkshire is the largest holding in his partnership, which also houses most of their net worth. He says Berkshire's invested in many capital intensive businesses through the years, railroads as an example. How do you think about the inflationary or even deflationary risks for all of the capital intensive businesses and could this prove to be an existential problem for businesses? Kind of referencing what you were just talking about that,

Starting point is 00:14:18 eventually the bill for the debts being issued comes due. Will it eventually come from all businesses through some combination of higher tax rates on corporations, increased wages for the lower middle class. Well, I certainly think that increased corporate taxes are a much higher probability than having lower corporate taxes. So I think that we got handed as a corporation a big chunk of what used to be the government's profits from our business a couple of years ago. And it would depend on, to some extent, which party is elected and

Starting point is 00:14:54 and whether they have control of both houses as well as the presidency and who knows what else, we could very easily have higher corporate income taxes and perhaps much higher corporate income taxes at some point. And in terms of capital intensive businesses, they're just not as good. If you can find an equally good business, I mean, in terms of operations that doesn't require capital. I mean, the seas never required capital. It didn't grow, but it's, it just doesn't, it didn't take money to expand it. And it's delivered enormous sums to us. And because we own it within Berkshire, to redeploy it elsewhere, didn't require a lot of tax expense, either at the corporate level or at the personal level.

Starting point is 00:15:49 So you really want a business, and everybody wants a business that doesn't take any capital to speak of, and keeps growing, it doesn't take more capital as it grows. Now, our utility business, energy business requires more capital as it grows. Our railroad business, to some extent, requires more capital if it doesn't grow even. So capital intensive businesses, by their nature, you know, are not as good as something where people pay in advance and you don't need the capital. I mean, if you look at where the top market value is in a $30 trillion market, you know, if you take the top four or five companies that account for, you know, maybe $4 trillion or so of that $30 trillion, basically they don't take much capital. That's why they're worth a lot of money because they make a lot of money and they don't require

Starting point is 00:16:38 the money to any great extent in the business. We own some businesses like that, but it's certainly not the railroad and it's not the energy business. They're good businesses. We love them. But if they didn't take any capital, they'd be unbelievable. But that's just, that's what we've learned

Starting point is 00:16:59 from 50 or 60 years of operating businesses that if you can find a great business that doesn't require capital when it grows, you've really got something. And to a certain extent, because insurance uses the kind of assets we would like to own anyway, are

Starting point is 00:17:17 insurance business doesn't really take capital. It requires having capital available, but we're able to invest that money largely in things we'd like to own anyway. So we're particularly well suited for the insurance business. And it's really been the most important factor in our growth over the years, although a lot of other things contribute. Greg, you're in a capital, you were in a capital intensive business. Tell us about it. Well, I think there's no question. Obviously, we'd prefer to be in a less capital intensive business. But there are unique opportunities there.

Starting point is 00:17:54 And the one I would touch on when I think of inflation or even potentially as we go through this crisis and maybe a prolonged one, or depending on how long it takes to recover. I mean, we aren't any unique, when we're looking at energy or rail, we do have a certain amount of pricing power. and it's through our regulatory formulas or how our arrangements are with our customers. So if we then were to move into an inflationary period, it's not perfect protection, but those businesses generally can recover a significant portion of their costs, even in an inflationary environment and still earn a reasonable return. They're not going to be great returns, as you highlight it weren't,

Starting point is 00:18:39 but they're still going to earn a reasonable return on their capital, even in an inflationary period. There may be some lag and some things like that, but there's still going to be very sound investments. Oh, yeah. If there was 10 for one inflation, make it extreme. Yeah. We'd be happy we own the railroad, very happy.

Starting point is 00:18:54 Well, we'd be investing a lot of capital in it, but that business, in my view, is a very, very solid business for many, many, many, many decades to come. I said originally we bought it with a hundred-year time horizon and I've extended that. So it will earn more dollars, if there's a lot of inflation.

Starting point is 00:19:14 In real terms, who knows, but it would earn a lot more dollars and a lot of the energy projects would, but it's better if we don't have inflation and it's better if we don't have capital. If we can find the same sort of businesses that aren't as capital-intensive. We've got capital.

Starting point is 00:19:29 I mean, we're ideally positioned for capital-intensive businesses that other people have trouble raising capital for, but they've still got to promise decent returns. 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,

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Starting point is 00:23:49 All right. Back to the show. So I think this question is really kind of at the heart. of everything that's going on right now. This is a phenomenal question. It's something that I read in Warren's shareholder letters back in the early 80s was this idea of owning assets that are intangible versus assets that are tangible because they have inflationary impacts. I think I might be misquoting this. I think it was his 1983 shareholder letter maybe that I read this. It was in the early 80s. I do know that. He talks about this idea that if you own intangible assets and inflation

Starting point is 00:24:28 is happening or there's these currency moves that are happening, you can just adjust the price of your product because it's an intangible product or the goodwill is naturally carried into that change in the inflationary impacts. So when you look at how he has positioned himself in the last 20 years, a lot of the businesses that he's been forced to buy because he has so much money and he has these value investing principles are capital intensive businesses because you weren't going to buy Google or some of these other businesses that have a lot of intangible assets for a discount. You just weren't. You were paying a premium for them. And then they just continued to devour everything technological in the world. And so I can see how he's got himself into the position

Starting point is 00:25:15 that he's at based on the core values that he holds dear to him. But he was basically answering the question saying, yeah, we've got a lot of capital intensive businesses and that's not good is really the essence of his response in my opinion. So Stig, what do you got? I'm kind of curious to hear your thoughts. I love discussions about inflation, especially whenever it comes from Warren Buffett. He's written some amazing articles about inflation and what that means for stock investing in And you can learn a lot from that and we'll make sure to link to some of those writings too. Buffett talked about before, you know, about the book value and how that was the highest in America, if not in the entire world.

Starting point is 00:25:55 You talked about the Googles or Apple. You know, you can mention a company like that. They have so many intangibles that don't have a big book value. That's just not how you measure companies today. I mean, book value is still important for a company, at least to some extent, for a company like Buxa Hathaway, more traditional companies. For intangible companies, it's more or less irrelevant. It has a very, very different implication

Starting point is 00:26:20 whenever you're making your evaluations. Now, I love that I have a chance to talk about inflation. Again, it's very interesting. Press and I've been starting that a lot. And we talked to DeF Booth, you're not too long ago who talked about the major deflationary pressures that we may be saying, I just want to clarify a few things

Starting point is 00:26:38 whenever we do talk about inflation, whenever we're talking about this current crisis, what we typically see in the time of crisis is that there will be deflationary pressures because so much credit is pulled out of the system. Now, that is not the same as saying, oh, now we're just in a time generally of deflation. That's very, very different. When credit freezes, you have these deflationary pressures, and it might be in a few quarters, it might be in a few years, but it's typically something that's very short-lived. We have talked a lot about Redalia and we have done that for good reason.

Starting point is 00:27:13 He is like, I would recommend for everyone to not just read his previous books, but also like the articles he's doing on LinkedIn right now. And my wife always teases me whenever we go to bed because she would be reading her fun books and I'll be sitting there with Radalio's writing. And one thing that I underlined just last last night. You nerd, you total nerd. I'm such a nerd, you know. I read about inflation and currencies before I go to bed. I mean, who wants to sit next to a nerd like

Starting point is 00:27:40 that, right? And then you dream about it when you go to bed. And then you dream about it when I go to bed. It's horrible. I'm laughing because I'm right there with you, bud. No, what you mean? You know, I remember the last time we were hanging out with our wives and we took them out for ice cream. The first thing I remember was I was very impressed because you knew how to order ice cream in Korean, and I had no clue how to do that. So I do remember that. But I also remember that every chance we had to, like, go away from the conversation was probably about ice cream or something, you know, like normal people talk about. People were like, let's talk about AlphaGo or whatever.

Starting point is 00:28:13 It was around that time that was very popular. And we're talking about inflation. We're talking about, oh, my God. It's lucky that we are married, huh, Preston? We could never. Anyways, going back to Ray Dalio. So he done this study of 750 currencies that have existed since 1700. Since then, only 20% of those currencies remain, and they all been heavily devalued, including the US dollar.

Starting point is 00:28:42 I don't see that changing. So I just think that's very important to put into the mix. Like short term, we might see a few changes, a few quarters. No, long term, we'll just continue to see that happening. But if you see how inflation has moved over the past centuries, it typically doesn't go like that 2% a year, you know, whatever you hear about in the news. Whenever you go in and see some of those graphs, like it's in like major, major moves. And then it's sort of stabilizes and then there's a major move again. Typically because of something like war or going off

Starting point is 00:29:19 into a new monetary system, whatever the reason is, but that's how it's going up. We'll make sure to link to some of that in the show notes. It's probably easier to visualize than actually for me just to sit and talk about. And I think that is so important to understand. But ever you're talking about inflation, whenever you hear 1, 2, 3%, whatever in the news. So, sorry for digressing. We talked about ice cream and how big nerds you were, Redallio. I'll try to bring my point back home to Berksie Heatherway. Berksie Heatherway does have a business that is somewhat inflation protected, and they

Starting point is 00:29:52 were talking about that, but it's definitely not nearly as protected as it could be, even though they do have pricing power, which helped mitigate some of that inflation effect. All right. Let's go to the next one here. All right. This question comes from Charlie Wang. He's a shareholder in San Francisco. He says, given the unprecedented time of the economy and the debt level, could there be any risks and consequences of the U.S. government defaulting on its bonds? No. If you print bonds in your own currency, what happens to the currency is it can be a question, because you don't default. the United States has been smart enough, and people have trusted us enough to issue its debt in its own currency. And Argentina is now having a problem because the debt isn't in their own currency.

Starting point is 00:30:43 And lots of countries have had that problem, and lots of countries will have that problem in the future. It is very painful to owe money and somebody else's currency. But listen, if I could issue a currency, Buffett Bucks, and I had a printing press, and I could borrow money on that, I would never default. So what you end up getting in terms of purchasing power can be in doubt. But in terms of the U.S. government, when Standard & Force downgraded the United States government, I think it was Standard & Force some years back. To me, did not make sense.

Starting point is 00:31:17 I mean, in the end, how you can regard any corporation as stronger than a person who can print the money to pay you. I just don't understand. So don't worry about the government defaulting. I think it's kind of crazy, incidentally, this should be said, to have these limits on the debt and all of that sort of thing and then stopped government arguing about whether it's going to increase the limits.

Starting point is 00:31:43 We're going to increase the limits on the debt. The debt isn't going to be paid. It's going to be refunded. And anybody that thinks they're going to bring down the national debt, I mean, that, you know, there's been brief period. and I think it's in the late 90s or their bots when the debt's come down a little bit. The country's going to print more debt. It's going to, the country's going to grow in terms of its debt-paying capacity.

Starting point is 00:32:07 And the trick is to keep borrowing in your own currency. So I have never disliked a Warren Buffett comment more than this one. I mean, I really, really dislike his response on this. But let me put it this way. he's right in what he said. It's just the way that he said it, right? So is the U.S. going to default on their money or on their debt? Nope.

Starting point is 00:32:35 They sure as heck aren't. They're going to print it and they're going to fulfill all of those debt obligations. And boy, the people owning that are going to really hate that experience. He had a really key phrase in there. He said, what you get in purchasing power can be. in doubt. And he said it real fast and he said it like it was a nothing burger, but it was the crux of the entire response. Right. So let me just ask this question. If your purchasing power goes from 100 to zero, was that a default? In phraseology, yes, that's a freaking default,

Starting point is 00:33:12 man. Like you lost everything, right? If your purchasing power goes from 100 down to 1, you lost all your purchasing power. It's worthless. But in legal terms, Did you default? Nope. You sure didn't. So that's why I don't like the way he responded to this question because he almost comes across as a lawyer and he doesn't really explain the essence of the question. Like the intention of the question is a good intended question.

Starting point is 00:33:41 And I think he gave a really slimy response to it. So Warren, you get an F from me on this. So I found the response really interesting. And I found interesting in the sense that all debt does not create equal. I think that's one takeaway. And he also debunked the myth that all public debt should be paid back. Often we tend to confuse government debt too much with private debt. And there are definitely a lot of overlaps, but it's also different.

Starting point is 00:34:11 Basically, all nations have debt one way or the other. There are a few exceptions. Now, the U.S. clearly has to service the debt. And the wonderful thing, at least in the short term, is that being the dominant resorts currency, you can only do that as long as the world trusts you. And that was sort of like what he was getting at there in the end, where he was saying, you have to borrow and print in the same currency. Otherwise, it doesn't make any sense.

Starting point is 00:34:37 And the US isn't in a situation where they can do that. Then he mentioned Argentina. And they can also, I mean, they can print all the currency that they want. It just won't be valuable if it's their own currency and they borrow in USD. Now, I would like to talk about can you pay off public debt? And you can. It's very rare that it happens, but to do that, you have to grow the economy faster than your current account deficit. Now, the current account deficit primarily comes from trade deficit, at least in the case of the US, and then the interest payment of the already high debt. And the main issue is really that

Starting point is 00:35:14 the US is a very rich country. And that's actually great. But whenever we're not, you talk about public debt, it's the drawback because everyone in rich countries, including ourselves, they want to consume and we also want cheap goods. So in reality, it is just very, very difficult to pay that off. So either you basically have to consume like a much poorer country, or you had to accept that the prices of all domestic-produced goods would be significantly higher because that's what happens whenever you start trading less. So you have to sacrifice standard of living. And Buffett clearly realized that that won't be possible. Now, partitions talk about it a lot, but no one really wants to make the sacrifice. So the second over-affected that

Starting point is 00:35:57 is really that you need to maintain the dollar as the global reserve currency, and you need to maintain that trust. As long as you don't have that anymore, that's whenever it's going to be really, really ugly. All right, let's go to the next question. So this question I was looking for one of these because I got several questions that came in similar to this. I was looking for one of these a moment ago. This one's from Andrew Winkie. He says, can you ask Warren why he didn't repurchase Berkshire shares in March when they dropped to a price that was 30% lower than the price that he had repurched shares for in January and February? Yeah. It was very, very, very short period where they were 30% less. But we, I don't think Berkshire shares relative to present value are at a significantly different discount than they were when we were paying somewhat

Starting point is 00:36:48 higher prices. I mean, it's like Kane said or whoever it was it, you know, the facts change. I changed my mind, what do you do, sir? You know, we always think about it. But I don't feel that it's far more compelling to buy Berkshire shares now than I would have felt three months or six months or nine months ago. It's always, it's always a possibility. And we'll see what happens. Greg, you think about repurchasing shares. I mean, generally. No, I think our approach warns the right approach. I mean, you're always, I can't really add anything other than the, the approach is the right approach. We approach it when we see it's the right thing for our shareholders to be repurchasing. And that doesn't mean we're repurchasing all the time or the, or the

Starting point is 00:37:38 view doesn't change. There could be a price relative to value at the time, not relative to what it was worth a year ago. I mean, the value of certain things have decreased. Our airline position was a mistake. Berkshire is worth less today because I took that position than if I hadn't. And there are other decisions like that. It is not more compelling to buy the shares now than it was when we were buying them. It's not less compelling. I mean, it's swash, but we didn't do any. It's not gotten, the price has not gotten to a level or not been at a level where it really feels way better to us than other things, including the option value of money to step up in a big, big way. Let's take a quick break and hear from today's sponsors. No, it's not your imagination.

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Starting point is 00:41:49 So I just want to start off by saying, as we've played all the questions we're going to play for both episodes, I think Becky Quick should be the only person that's allowed to ask questions at these meetings from now on. Like, having gone to my fair share of these meetings and sat through them, like, dude, Becky crushed it with her questions. She was asking really good questions. And when you go to the meeting, I'm always highly annoyed at half the questions that come up because they're just so just nonsensical and of no value added.

Starting point is 00:42:23 I think Becky crushed this. So Becky, quick, I'm sure you're not listening. but in the very odd chances you are, Bravo, great job. I don't really have much to add on his response because I think he just totally sidestepped it, and I don't think that he even provided a good response. I think they're wanting him to get into, well, why are you seeing the valuation different now than you were when you purchased it 30% higher? And he just didn't want to even broach the subject. So I can't really comment on it.

Starting point is 00:42:50 It seemed to me like they might be interested in conducting repurchases here in the future. And so he was avoiding the question. But Stig, I'm kind of curious to hear what you think. He typically always get the how do you value stocks question, and he also gets the what is what is Brooks to Hellerway worth now? You know, like, could you please save me a lot of time? So I don't have to do the valuation. You just give me a number and I can just put in my limit order.

Starting point is 00:43:14 And so it's interesting, reading through Buffett's latest filing, he bought most of his stocks back at $214. So the person asking the question would be thinking, why is he not just? buying a ton back right now, you know. There's a lot of focus on that cash position he has, and a lot of people want him to pay out dividend. Interesting enough, not too many of the actual shareholders, but a lot of people want him to pay out dividends or buy back shares. So especially in recent years, you've seen more, more low questions popping up, which Becker Quick was also referring to. The amount of shares that he's buying back is around 1.7% on an annual basis.

Starting point is 00:43:52 That's the buyback yield right now, giving the current market cap. Now, Buffett sort of hinted at a few different things that the fact has changed. And what I put into that was that you can't really use the buyback price of, say, 214, too much as a benchmark. Because even though that Berksow is now trading, I call it 20% lower, the value of the business has also changed because the value of the discounted cash flows in the next few years have changed. And that's just basically what makes the biggest difference, like whenever you start discounting

Starting point is 00:44:25 those cash flows and try to figure out what is the intrinsic value today. So from a mathematical perspective, that is why something like a crisis actually has a somewhat significant impact, even on a company that has been existing for its long, Spurks, a Holloway. But clearly it's not anywhere near 20% whenever that happens. But what also read into this was he talked about opportunity costs. And it's just very important to understand, like, yes, Berkshire Heatherway is cheaper, but if all other stocks in universe are also cheaper, you know,

Starting point is 00:44:56 that's whenever you need to figure out what you should do with your cash pile. So I think that was one key takeaway I had. And then the last thing was that it's a very thinly traded stock, even in a time like this. So whenever the stock plunge like 30%, but it looks like it's more or less overnight, it really wasn't. But for a company at the size of Berksia Heatherway, it was almost like overnight. You can't just go in and buy like all your stock at when. Whenever it hit 162, I think it was, before it bounced back.

Starting point is 00:45:25 All right, that was the four questions that we selected from the Berksa Hellerway Annual Shareholds meeting. We always thoroughly enjoy having these discussions and sharing them with you. But at this point in time, the show, we'll play a question from the audience, and this question comes from Jeff. Here we go. Hi, Stig. Hi, Preston. My name's Jeff Mason, and I'm an investor in Victoria, British Columbia, Canada.

Starting point is 00:45:48 I wanted to thank you both for all of the knowledge that. you've shared and all the great guests you've had on your show, it's really improved my confidence as an investor. My question relates to some advice that I've heard from guests on your show, and I've also heard it in some of the great trading books. The advice is don't sell your winners. I've tried to follow this advice in my own trading and investing, and I've found I'm often disappointed. It doesn't seem like very good advice. So my question to both of you is, do you follow this advice? Do you sell your winners? and in what situations would you definitely hold on to your winners as long as you can?

Starting point is 00:46:27 In what situations would you definitely sell them? Thanks so much and have a great day. Jeff, great question. I think first of all, I look at a sell order as a point where I'm going to have liquidity and then I have to have some other opportunity that's going to outperform what I think the previous holding is going to do. So if let's just say I own something, I have a massive gain, and if I sell it, I'm going to have a massive capital attacks, a capital gains associated with it. And so let's just say that that was a long-term holding. So whatever principle I get from the sale, I now have 15% less of that that that's lost due to capital gains tax. When I employ that new capital, what kind of return am I expecting to get out of that?

Starting point is 00:47:15 And then when's it going to basically exceed the previous holding or the previous valuation that I had for the other business as far as return goes? So that's kind of like the mathematics behind my thinking whenever I do exercise a sell order. Another time that I'll sell that doesn't follow that model is if I think that there's just something fundamentally wrong with the business. And I think that there is some type of issues. and I just want to liquidate the position. So that's typically because there's impairment on their balance sheet for one of their major assets that I think there's some competitor that's come in is going to basically take all the market share. It's going to cause a lot of punishment for the pick. So those are kind of the two main ways that I look at it.

Starting point is 00:48:02 Now, how do I manage some of that risk? If you asked me 10 years ago, I would tell you that what I just described was exclusively how I look at selling positions. Today, I would tell you that I also incorporate the momentum status of our, you know, we have a momentum tool on our TIP finance. One of the nice things about this momentum tool is it looks at statistical volatility ranges of a pick, any pick. And it's tailored towards that pick. So like, let's say the S&P 500, it's going up. It's going within a certain volatility range. And then whenever it steps outside of that volatility range, the momentum tool says something's different.

Starting point is 00:48:38 this is most likely going lower because it's outside of this trading volatility range, and then it turns it into a red status. So the way that the tool's working is it's basically selecting a stop limit for that underlying pick, and that stop limit is dynamic. And so as the price goes higher and higher, the stop limit keeps adjusting higher and higher. And so I use that tool, especially for indexes, I use that tool because it's really hard to come up with an intrinsic value for the S&P 500 outside of just looking at the price to earnings. And so my opinion is that if the price goes through that volatility range and hits that stop

Starting point is 00:49:16 limit on an index, it's more macro related than it is earnings related or functioning of the business. So I use that to also assist me in knowing when to stop holding a winner. And so for example, like the S&P 500 on our TIP momentum tool, the thing has been green for a very long period of time, and it recently went red, and then it just went back into a green status. So there's a tax realization to that, but there's also the implication that I'm protecting my downside risk, because if the market would crash 40% in a day, which you had in 1987 or some other events that were very deep, you're protecting yourself from those types of events. So I would add that in there as well as a way that I also protect my downside risk and that I continue to hold winners that just keep on running.

Starting point is 00:50:07 I really like the question too. And actually, I would like to put into the mix a few fun facts about Buffett before I go into my own strategy, which is very similar to what you also described there before Preston. But I think Buffett is one of the best example of not selling your winners. The vast majority of Buffett's portfolio, it's concentrated in just a few companies, including American Express, Apple, Bank of America, and Coca-Cola, which is a very famous example of a position that has worked really, really well. And all the investments that I just mentioned before, they have been very profitable. And aside from the Apple acquisition that was initiated back in 2016, it's all stocks that he has held for a very long time. Now, I really agree

Starting point is 00:50:48 with that sentiment because in the sense that I really sell my winners too. Generally, jumping in and out of winners hard, and if you find really good stocks that are compounders, You don't want to jump in out of it too often. Part of it is tax, as President mentioned before. If you live in the U.S., that's 50%, so in that sense, you just have to be more right than wrong. So really, to sell your winners, it has to trade a lot higher than intrinsic value. So say a company like in Berkshire Hathaway, trading 172 today,

Starting point is 00:51:17 like if there was going to 300 tomorrow, like, yeah, clearly I would take the tax loss. I would take the tax on that and sell my position. But the more chemical gain that you have earned, the harder it simply becomes. You know, Coca-Cola being example, like I mentioned before, Buffett built that position for $1.3 billion, and I think the last time I looked it up, it was trading around $18 billion. So it's a lot of tax he has to pay, even though the Coca-Cola at times have been quite expensive. It just doesn't make any sense.

Starting point is 00:51:48 Stig, I just have something I want to add on to what you were saying there real fast. So with the example that you provided with Berkshire Hathaway's price, let's just say it doubled. In the past 10 years ago, I would have said, yep, let's sell it. Let's move it into the other undervalued picks that I have. And then if the price comes back down to where I think the valuation is, then I'll start reaccumulating it. Today, I would tell you if the price doubled, I would continue to hold it until I would see the price volatility go below the stop limit. just because maybe the market is going to continue to, I mean, you saw this with Tesla where the price just went crazy. It went up to like 600 bucks and I'm like, this is maddening, right? Like this

Starting point is 00:52:29 price is nuts. And then it ran to a thousand. So if you're using a momentum indicator for your point where you're going to exit the position that just keeps running, you would have continued to hold Tesla. It would have gone up to 1,000. And then when it started to drop back down, call it at 800 or 700 or whatever it was, your stop limit hits, that's when I would sell. I allow it to keep running because I have no idea how much fear of missing out the market's going to price into that run. But then I rely on that volatility range to help me know when it's time to pull out of that and then go into the other undervalued picks that I'm finding on the market. It's really unfortunate that you talked about Tesla because it really had like

Starting point is 00:53:12 interesting segment about the inefficiency of the stock market. And whenever we now have primed everyone to thinking about Tesla, I don't know if I can really bring my point back home with that. But I guess my point is that the market is relatively efficient, at least over time, it has proven to be. And so whenever I'm saying that and using that as my premise, and please forget everything about Tesla, then Preston just mentioned whenever I'm doing this segment here. But sometimes, whenever you do invest in a stock and it goes south, like really, real south, that momentum can really save you because guess what? You can be wrong. Like, you can't be wrong. And sometimes whenever it drops 50 or 60 percent, that's not because the market is terribly inefficient.

Starting point is 00:53:59 That's just because you're wrong. You're just analysis. Your facts are just wrong. And that's why I think it's so valuable. Looking away from tax here, that you have some sort of tool that can go in and say, hey, you might be right. The whole world might be wrong, but you might want to take two seconds and reconsider. Perhaps you are wrong. And perhaps that's the time when you need to get out of that stock. This is a really simple math exercise that I think many investors don't understand. If the price goes down 50%, now you need 100% gain in order to get back to neutral to where you were. And the way markets work is, it's almost like if you went and you had to destroy a building, you can push a button, then the whole thing just falls apart really

Starting point is 00:54:46 fast. But if you're going to reconstruct it and build it back up, like you see these stadiums that they explode that they get rid of, it happens in an instant. You can destroy things in an instant. But then to rebuild it, it takes forever. And so that's one of the other reasons why I really like the stop limits on momentum is because it takes a lot of the emotional piece out of it that you naturally have when you buy a company. And it's just saying, hey, statistically, there is something that's different. Right. At this point in time, there's something that's different. So you can either keep falling your emotions or you can just look at it from a mathematical standpoint and protect your downside so that you're not having to rebuild in the event that you're

Starting point is 00:55:24 wrong. And that rebuilding might take five years in order to get back to neutral. Or you can just, you can take a systematic loss and move out on your next pick and protect your downside risk. So when Buffett has his rules of rule one, don't lose money and rule two refer back to rule number one, I think the essence of that statement is this idea that when you have a 50% downturn, it takes 100 to get it back. Or if you have a 30% downturn, it takes X to get it back, which is way higher than 30%. So that's important for new investors. I think many new investors don't understand the implications of that, especially if you've never lived through a significant downturn. All right. So, Jeff, I'm really excited to tell you this because you're going to get a

Starting point is 00:56:08 year-long subscription to TIP Finance where we have this momentum tool and we have these stop limits that are published right there on the chart for every single pick that you'd look up. And we're just really excited to be able to give this to you. So anybody else out there, if you want to get a question played on our show, go to Ask theInvesters.com. You just click a little button. You can record your question. If it gets played on the show, you get a one-year subscription to our TIP finance tool. So for anybody else out there, if you want to check out our tool, just go to Google and type in TIP Finance, and it'll be the first thing that comes up, and you guys can check

Starting point is 00:56:39 out the tool there if you guys want to look at it. All right, guys, this was a lot of fun, and we would love to gone to Omaha meet up with you in person. That's definitely the plan to do that in 2021. And Buffett actually mentioned during the meeting that it was still Chalemonger's plan to go there. It was just a bit too painful for him to go to be in front of, camera and not doing the event and all, then go all the way back to LA. But guess what? The biggest

Starting point is 00:57:04 news at all that I learned from this annual shareholds meeting was that Chalemonger is using Zoom every single day. And I'm like, if Chalemonger is using Zoom every single day, what can we count on anymore? Like, what has the world come to? But guys, sorry for goofing out there at the end. This was all that president I had for this week's episode of the Amhersters Podcast. We see each other again next week. Thank you for listening to TIP. To access our show notes,

Starting point is 00:57:34 courses or forums, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decisions, consult a professional. This show is copyrighted by the Investors Podcast Network. Written permissions must be granted before syndication or re-broadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP298: Part II - Warren Buffett & the 2020 Berkshire Hathaway Shareholders Meeting (Business Podcast)

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