We Study Billionaires - The Investor’s Podcast Network - TIP350: Berkshire Hathaway Annual Shareholders Meeting 2021 w/ Stig and Trey

Starting point is 00:00:00 You're listening to TIP. It's that time of the year, dear listener, the Berkshire Hallaway annual shareholders' meeting. During this episode, Trey and I will play the most insightful responses from Warren Buffett and Charlie Munger and explain the implication it has to us as stock investors. We'll be covering why Buffett wasn't greedy when all of were fearful during the pandemic. And what we can learn from Buffett and Munger continuing to buy back Berkshire stock in the open market, and much, much more. Trey and I are super excited to share this episode with you.

Starting point is 00:00:28 So without further delay, let's talk to it. 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. Welcome to The Investors Podcast. I'm your host, Dick Bruterson, and I'm here today with Trey Lockerbie, my co-host. I have to ask, going into this, how was your weekend? Well, I was really looking forward to this meeting. Last year, if everyone remembers, it was a little dire.

Starting point is 00:01:11 I mean, the whole mood of the meeting was very different than previous years, and I was really looking forward to seeing how this year was different, especially having Charlie back. To me, it was like, you looked at Buffett last year, and he was sitting there with Greg Gable, and he was like in this huge place, and he just looked sad. You know what I mean? It was a bit different this year. Totally agree.

Starting point is 00:01:33 There was more pep in his. his step, if you will, and F, obviously, Charlie didn't disappoint. Oh, he never disappoint. Tell me how you really feel about things. You know, that's, that was hilarious. So I tried to pretend I was there, you know, I reread Paul Charles E. I always tend to do that around this time of year. It's like a good reminder to go into that.

Starting point is 00:01:53 I'm doing a book called The Complete Financial History of Berkshire Holloway by Anna Mead, which is just an amazing book. Like, you have to be quite nerdy about Berkshire Holloway if you want to enjoy that book because it's like 600 pages. and it goes through every single year of Berkshire's history when it's happened. So either if you're not excited now about that, you probably never will be excited about that. Even when through the whole rereading Buffett's latest letter, really getting into the mood and reading the 10-Q, obviously, that just came out.

Starting point is 00:02:20 So I have a very understanding wife. She looks at me and she can see I'm sitting there with this 49 pages of accounting. She just smiles at me. And if that's not true love, I don't know what it is. They deserve an award because, you know, my wife watched our kid all day Saturday while I spent over five hours at the computer watching the show in my office. So kudos to them. Absolutely. So, Trey, before we go into the Q&A session and some of our thoughts on that, any thoughts? I do want to touch on a few things that are happening currently and came out of the meeting that I think are pretty interesting. One is that Berkshire Hathaway, I think, has been kind of overlooked for a long time because

Starting point is 00:03:04 it's not that exciting kind of company that the fang stocks might be. It's not capturing headlines, but the operating earnings in Q1 year-over-year just grew 20%. And I feel like Berkshire's stock right now is sort of on this quiet tear. It's like just inching up and doing really well. And I think it kind of has just been operating under the radar to a certain degree. And right before Buffett started taking questions, they had this guy named Whitney Tilsen on the show, who's from Empire Financial Research, and they have them on, I think, almost every year for the most part. And he touched on his valuation model, which is kind of known as this two-column valuation model, which Buffett has actually endorsed in his annual letters.

Starting point is 00:03:45 And basically what you do is you take the cash and investments per share, and then a multiple, probably right now he was using an 11x, so 11x multiple on the pre-taxer. of all the operating businesses of Berkshire Hathaway. And then you add those two together. And he was coming up with a B share valuation of about $316 from doing that and an A share of about $473. So that was, you know, at the time of this recording, 13, 15% discount that is trading. So it's, even though it's been on this massive tear over recent months, it's still considerably undervalued if you look at it the same way. And what I like about that method that he uses is, First of all, it's very simple.

Starting point is 00:04:25 But the second of all is it's sensitive to market fluctuations. So the nuance is that, you know, that multiple. So, you know, at the bottom of the recession, maybe it's not 11 multiple, it's more like an eight. And that's because it kind of emulates what would happen in the private markets. So, you know, what would those operating businesses actually sell for on the private market? What multiple would they get on their earnings?

Starting point is 00:04:49 And that obviously changes with the macro environment. Right now, you could argue it's a little bit frothy. So, you know, an 11x multiple might even be conservative, to be honest with you. But I thought that that was really interesting. And it reminded me of my discussion with Larry Cunningham on the show because I touched on this valuation method that he wrote in his book, Margin of Trust, which I was also rereading over the weekend. And he had another very similar but simple valuation method that was, again, producing like

Starting point is 00:05:17 $400 stock prices. So no one has a crystal ball. But it's just interesting that these two parties have been publicly advocating that the stock is undervalued. And then we saw a good amount of share buybacks from Buffett as well. Buffett's keynote speech this year was, I'm not sure I'm getting the point. So I wanted to get your opinion on his keynote speech this year, Stig, because he was highlighting essentially that in 1989, five of the six top companies in the world were Japanese. And of course, in 1989, this is peak of the Japanese.

Starting point is 00:05:50 Japanese bubble, which was, I mean, unfathomable, right? Like the imperial palace of Tokyo was worth more than the entire state of California at that time. So we're talking about just irrational exuberance through the roof, right? And then, you know, obviously they've underperformed and is saying it politely for 30 years, right? And then he shows this slide of today where you've got most of the top companies are U.S. and we've gone from the biggest company in 1989 being worth $100 billion to now over $2 trillion, right? So this is just, you have to be involved. No one, I think in 1989 would imagine 100 billion companies, you know, rising to $2 trillion

Starting point is 00:06:28 over the next 30 plus years, and yet it has. And so we today probably can't fathom a $2 trillion company going to $34 trillion, the same amount of time. But that's almost mathematically what would happen. And my takeaway was either be in the market, probably, you know, the year. U.S. has a huge advantage for a lot of reasons. But there was also a little bit of an ominous foreshadowing that I took away from it too, which was like a lot can change. And maybe in that amount of time, it's not U.S. companies. So what do you think his ultimate point was with all

Starting point is 00:07:01 that? I think his point was created destruction and how important that is. Because one of the things you mentioned was that there were no companies on the 1989 list. There was also on the 2021 list, like none of them. And so it's just, things just change. And so if you look at the 1989 list, you know, you have well-known companies like Exxon-Momo. Back then it was just called Exxon, by the way. You have GE, you have IBM. You had Philip Morris as well. You still had companies that like well-know brands, but all of them have just been facing incredible headwinds for different reasons and recent that you probably didn't expect there to be in 1989. And he also mentioned, you know, perhaps, well, perhaps you should be investing in index funds. He said, like,

Starting point is 00:07:43 most investors probably can't pick individual stocks, you know, something has been, he's been drumming on for a long time. And I think this is living proof. The reason why he chose the 1989 that you showed before was probably also because, you know, that was really whenever Japan was like booming. And I think that if you just went 30 years back, which might seem like a more logical thing, perhaps the list looks different, perhaps there are more U.S. companies. But one of the things also talked about was that there probably won't be 13 U.S. companies in the top 20, 30 years from now or 32 years from now. And so that was sort of like what I took away from there. And perhaps that's, he always talked about the S&P 500 that's in the fund you should own.

Starting point is 00:08:23 And he even mentioned that during this meeting. I have to give my two cents, not because I'm smarter than more in a buffing anyway. Why not buy a global equity fund? Just thinking about everything that's happened and how well the U.S. has performed. And you're right, you know, There are so many good reasons why U.S. will continue to perform. There are also different reasons, you know, why the 21st century might not be the U.S. century in terms of the demographics growth. Just look at something like that that has really been a tell when the 20th century. You had the two Second World Wars and what happened then, and what that did to the industries

Starting point is 00:08:52 in the U.S., and there's just so many things where, like, we just don't know. And so I think that was a very interesting thing he went into the Q&A session with. Yeah, you're right. And I think that geography is probably less important. My opinion is moving forward, the geography of any company is probably somewhat more relevant than it's ever been, right? Because most of the top companies, you could say, yeah, they're U.S. base, but most of them are doing business globally, right? And that just wasn't the case probably in 1989. Yeah, and like Abel will have more sales international than they do in the States.

Starting point is 00:09:25 So you absolutely right. I did find it interesting that Munger recently took a position in Alibaba. I don't know if you saw that. I saw that too and I was like, was that a Lilloo play solely or did Bunger truly like, yeah, I read up on Alibaba. That's the one in a company I want to invest in. What do you think? Who's to say?

Starting point is 00:09:44 I don't know. But can we just also point out Munger's Freudian slip while we're talking about him because we're feeling Greg? I mean, we should probably play the clip, but this was comical. Munger essentially unintentionally revealed that Greg Abel will be the successor to Warren Buffett by saying that he will keep the culture as Berkshire continues in its decentralized manner. And I don't think that was an expected ad lib on his part. So, yeah, they were asked about succession. And, you know, Greg Abel, who was sitting there

Starting point is 00:10:15 and was the CEO of non-insurance businesses. And I guess that ever since the promotion of Ege Jane, who are the CEO of the insurance business and Greg Abel, ever since they're promoted to vice chairman, it's sort of like, I think everyone expected it would be one of the two. And no, I don't think that was on purpose either because you were looking at Warren Buffett's face. But when you were saying that you're like, what now? Amongers like, yeah, Greg will keep the culture. You just looked odd. Warren took a beat.

Starting point is 00:10:43 He sat there for a minute. I think, Molling, how do I? It was pretty funny. Yeah, it was interesting because, you know, Larry Cunningham, talking about his book, again, Margin of Trust, highlighted that his opinion was more or less that just like Berkshire itself has been decentralized. Buffett's role in the company will be decentralized. So he's one Superman, right, as Warren Buffett, but his responsibilities have basically been divvied up to Greg, to Ajeet, to Ted and Todd, and then having Howard as sort of the

Starting point is 00:11:13 chairman moving forward. That would basically maintain the integrity of the culture. That's sort of how he highlighted it. So someone had to succeed, Buffett, but it seemed a little bit, I don't know. I guess I was under the impression that it would ease into this sort of more decentralized leadership, but it's very much like, no, Greg's our guy, which I thought was a little surprising. You mentioned there Howard before. So just for those of you who don't know who Howard is, I know this is like you have this

Starting point is 00:11:38 small club and like everyone would know who EGID is or Greg is or Howard. So Howard Buffett, you can probably tell about his last name. That's Warren Buffett's oldest son. He will be none executive chairman. So he's there to make sure that the culture is still intact and he's there to ensure that he can't remove Greg Abel, should something unforeseen happen, which I don't think anyone expect to happen. But that's his role. He won't be a part of operations in any kind of way. Going to the next section here, the episode, so Trey picked the first question. We're both going

Starting point is 00:12:09 to play the question that Becky Quick did, news anger from CNBC, and then afterwards what Warren Buffett and Charlie Monker said. The first question I wanted to cover was literally the first question Becky Quick asked Warren Buffett. And I just love that she came out of the gates with this question because it was about being greedy when others are fearful. So let's listen. This first question that came in came in from Andy C's. He says he's the owner of not nearly enough B shares. He says, Mr. Buffett, you're well known for saying to be fearful when others are greedy and be greedy when others are fearful. But by all appearances, Berkshire was fearful when others were most fearful in the early months of COVID. Dumping airline stocks at or near the low, not taking

Starting point is 00:12:51 advantage of the fear gripping the market to buy shares of public companies at exceptional discounts and being hesitant to buy back significant amounts of Berkshire stock at very attractive prices. I'd appreciate hearing your thoughts surrounding this time and how Berkshire approached its decision-making, specifically after it was assured through the CARES Act that the government would provide a robust backstop to the financial markets. Well, of course, until late, until both monetary and fiscal policy kicked in. You knew we had an incredible problem. And I am, just as Charlie is the chief cultural officer.

Starting point is 00:13:25 I'm the chief risk officer of Berkshire. That's my job. We hope we do well, but we want to be sure we don't do terribly. But we didn't sell a substantial amount. I mean, we're a company with probably $700 billion worth of business to some we own in their entirety, some we own a piece of. and I don't know whether we were sellers and maybe 1% of the value of all the businesses we had at that period.

Starting point is 00:13:50 But the airline, it's kind of interesting with the airline businesses in particular, and then I'll get to what was done in fiscal monetary policy. But we had a few people, various subsidiaries of Berkshire, that wanted to go in for help from the government. And in some cases, they had minority shareholders owned a few percent, and they said, well, we're going to get killed by what's happening. when with the regulations that are being put out and stopping the economy. And they said, everybody's going in for them and why don't we go in?

Starting point is 00:14:23 I said, you know, Berkshire can handle it. This is for people that can't handle what's happening. And so we're not applying. But the airlines were the most prominent beneficiaries of what took place immediately. They got $25 billion, initially, most of which went to the big four airlines, and some of which went in as grants, not loans. You know, I think that was fine public policy. I think it was wishing it could go to every restaurant and dry cleaner and every small

Starting point is 00:14:52 business that really was out of business and had no one. They were made toast of, you know, basically. But the airlines, clearly what happened was not their fault in any way, shape, or form. It wasn't like 2008-9 when people blamed the banks and hated to see them help. So it was now airlines operate in bankruptcy. So it isn't like three of the four big ones who went through bankruptcy within the previous Denver. So the airlines were kind of used to operating in bankruptcy.

Starting point is 00:15:20 They would have kept operating, but it was perfectly proper for the airlines to be helped. The entire airline business, you know, you look at these figures of $2 trillion for Apple and so on. The entire big four airlines, they sold for about $100 billion almost. I mean, it's a very, very small. Combined, they wouldn't come close to making the. the cut. I mean, they wouldn't be in the top 50. So anyway, they went into the government. They needed the government help, or they would go bankrupt some of them. And, uh, I'm really the Congress, but Steve Mnuchin, too, but they decided they deserve the help, which I, I do not quarrel

Starting point is 00:15:58 with at all. But imagine if Berkshire was the 10% holder, which they had been of everyone in the airlines, they said, take it up in Berkshire. It's, be like one of our, they would have had, they might have very well had a very, very, very different result if they'd had a very, very, very, rich shareholder that owned eight or nine percent. And they didn't have that. You might not have gotten the same result. In fact, I would think you probably wouldn't. I mean, I can just see the headlines now. I mean, they, you know, because you've seen the headlines on some companies that took $100 million or two, you know, and really didn't need it. And some of them gave it back. And most of them gave it back. But you're actually looking at it probably at a different result than

Starting point is 00:16:39 if we kept our stock. But in any event, an industry that was really selling for less than $100 billion lost significant amount of money. They lost prospective earning power. I mean, right now, international travel has not come back. But I would say overall, too, the economic recovery has gone far better than you could say with any assurance. So we didn't like having as much money as we had in banks at that time. So I cut back some of the bank investment. But basically our net sales were about 1% or 1.5% and looking back, it would have been better to be buying,

Starting point is 00:17:20 but I do not consider it. I do not consider it a great moment in Berkshire's history, but also we've got more net worth than any company in the United States under accounting principles. And we've got six or 700 billion of generally. good businesses. And I think, as I think, I think the airline business has done better because we've sold and I wish them well. But I still, I still wouldn't want to buy the airline business. International. People really want to, they want to travel for personal reasons and business travel

Starting point is 00:17:52 is a other thing. And we've got a big exposure to business travel, of course, through the fact that we own 19% of American Express and we own precision cast parts, which services the, they are business very dependent. So we've, we've still got to be. big investment in air travel, a big commitment to it. But we wish the big four the best. And I think their managements have done a very good job during this period. So I just love this question because I think it was on the top of everyone's mind going into this meeting. A lot of us probably had expectations of Buffett. I personally did. I mean, at the trough of the 2020 recession, I thought this is Warren Buffett's magnum opus.

Starting point is 00:18:37 This is where he rides off into the sunset. This is where he deploys tens of billions of dollars and gobbles up all these companies and creates this legacy. And it was almost anything of the sort. I mean, he basically sold his airline positions and ultimately bought back some shares, which we definitely will cover. But it was just not the performance I think anyone expected. So I was really eager to hear Buffett's answer to this. And I thought he did an incredible job

Starting point is 00:19:05 reminding people how to think like an investor. And what he basically highlighted is that his role is the chief risk officer. And I love this quote. He says, we hope we do well, but we want to make sure we don't do terribly. And so I think that this came up a number of times in the meeting. And I just thought it was really important to press the point because it's not just the nominal numbers of tens of billions being put to work. It's tens of billions being put to work under the circumstances with the risks on the table, with the no knowledge. And Charlie pointed out later in the meeting that no one can call the trough, especially when you're putting billions of dollars to work. No one's going to buy the, you know, no one can call the bottom. And Buffett's no different.

Starting point is 00:19:48 And he was looking at it basically like, look, the risks on the table during that time were immense. and ultimately their net sales were pretty small, one or one and a half percent. So they didn't do a ton of selling, but the airlines, I think, was a particular one that was interesting because, you know, he mentions their exposure to American Express and precision cast parts and considers that exposure to air travel already as part of the portfolio risk, which I thought was really interesting as well. So, you know, as far as we were all wondering why he didn't deploy more cash, he just did a great job, I thought, highlighting the risks on the table at the time. And I think it highlighted one

Starting point is 00:20:30 other interesting point, which was that they could have deployed 50 to 75 billion, he said, basically dropping their cash position from about 16% of the overall portfolio of assets down to about 8%. So that kind of gave you insight, I think, as to how much cash he's comfortable holding. But they just couldn't do it. And I think a lot of it had to do with March 23rd, when Powell announced that basically they would backstop corporate bonds and all of a sudden all these companies that would have sold to Buffett, I think you got two phone calls, he says, right? But they didn't have to sell anymore. So he got front run, which we kind of all expected. But I just thought this was an interesting point highlighting that it's risk

Starting point is 00:21:07 reward. I think a lot of us think about the reward, but just bringing up the risk was an important point. You're right. Hindsight's 2020. You know, you look at what the S&P 500 did at that point in time and you're like, oh my God, you should just have bought at like the Mards Low. That's the way it looks. And you could give him some flag for that. But to your point, it was a very scary time. I would say it's still a pretty scary time depending on where you live and what you do. But it was so weird. And you saw this coming in. And we all have heard about something in Asia or something with a pandemic or something. And I don't know. I think not a lot of people took it seriously. And suddenly like the stock market just dived. And whenever we sort of realized that this was a big deal,

Starting point is 00:21:50 deal. Like, I would just have expected the stock market to slide. I already kind of felt to some extent the stock made was a bit pricey. I know a lot of value investors felt it was very pricey. And so, like, you saw that correction. You saw like the catalyst coming in. There was a pandemic. So I'm not saying it was like 1929, but, you know, just using that as your yacht stick, you took 25 years before you had the same valuation, right? So I don't think anyone expected, oh, it would just be later that year and then you would just go much higher. So I think it's probably too easy to fault Buffett or everything that was happening because what the media is looking at is the latest report said he had $145 billion in cash.

Starting point is 00:22:31 And it sounds like it's a lot of cash, but that was also not the cast he was referring to to your point, Ray, like he was talking 50 to 75. A lot of people who have followed Buffett have remembered he talked about like, yeah, we need to, you know, stash away 20 billion insurance claims. That number is probably close to being doubled now. it's a long time ago since he said that and, you know, the insurance business is just much bigger now. And so that's one part of the other part of this, that we didn't know what's going to happen. So he needed cash on hand to support the existing businesses.

Starting point is 00:23:00 The next question, perhaps I should then again say, you already mentioned that Becky Quick did an amazing job. I absolutely agree, you know, having gone to the meeting several times, there's so many bad questions. I love the idea that everyone can just go up there, just ask him question, but a lot of the questions are just really, really bad. It just kind of like waste of everyone's time. Someone got up there and be like, could you give me your equation for value in stocks? And he just hates that question or like, oh, Warren, what did you invest in? Like, past week? Like, there were so many bad questions. So having big and quick curate like the best questions. There were some brilliant questions there. It was just such a huge win-win because

Starting point is 00:23:38 you only have that, I don't know, three and a half hours where Warren and Charlie are like responding to questions. So why won't you just have the best? questions. But one of the many great questions that Big Cicuit chose was a question about Apple. So let's hear the question and Warren and Charlie's response. This question comes from Vittorio Aguichi from Switzerland, who writes in, why in the recent past did Berkshire sell some of the common stocks owned on Apple? If the company is considered Berkshire's fourth jewel, why didn't Berkshire buy more of Apple stocks in 2020? This seems to be counterintuitive. Well, we have 5.3% or something like that.

Starting point is 00:24:15 Now, it's going up in the first quarter because we bought in our shares, which helps our own shareholders expand their interest in Apple indirectly without laying out a penny. And then Apple's repurchase its shares and just announced another repurchase program. So let's say we look at Apple as a business that we own of 5.3%. Now, we've got it's a marketable security, so it shows up as way greater than any other marketable security we have. But, of course, if you look at our railroad, we mentioned, well, Union Pacific is selling for about $150 billion in the market.

Starting point is 00:24:52 We own one that's a little larger than the Union Pacific and making a little less money, but not much less. It's an extraordinarily apple. It's got a fantastic manager. Tim Cook was underappreciated for a while. He's one of the best managers in the world. I've seen a lot of managers. And he's got a product that people absolutely love. And there's an installed base of people, and they get satisfaction rates of 99%.

Starting point is 00:25:21 And I get the figures from the furniture marters to what's being sold. And if people come in and they want an Android phone, they want an Android phone, if they want an Apple phone, you can't sell them the other one. The brand, and the product is, it's an incredible product. It's a huge, huge bargain to people. I mean, the part it plays in their lives is huge. I use it as a phone, but I'm probably the only guy in the country. You know, maybe some dissentive of Alexander Graham Bells are doing the same thing.

Starting point is 00:25:51 But it is indispensable to people, and it costs, car costs $35,000. And I'm sure, with some people, have you asked them whether they wanted to give up their Apple or give up the, give up their car. When you make the choice for the next five years? You know, who knows what they do? But it is, and we, you know, we got to. a chance to buy it. And I sold some stock last year, although our shareholders still had their percentage interest go up because we repurched shares. But that was probably a mistake. And Charlie, and his usual low-key way, let me know that you thought it was a mistake, too, didn't Charlie?

Starting point is 00:26:30 Yes. I could only do so many things that I can get away with it, Charlie. I kind of used them up between Costco's Apple. So he probably, he very likely was right in both circumstances. It's an extraordinary business. But I do want to emphasize that in his own way, it's a different way, but Tim Cook is,

Starting point is 00:26:55 we see a lot of managers of a lot of businesses, and you're looking at two great ones on both ends here, he's handled that business so well. He couldn't do what Steve Jobs, obviously, could do in terms of creation. But Steve Jobs couldn't really, I don't think, do what Tim Cook has done in many respects. Well, I also think it's clear that

Starting point is 00:27:16 that list you showed of the leading American companies, it's been very important for America that we've done so well in this new tech field. I personally would not like to see our present giants brought down to some low level by some anti-competitive reasonings. I don't think they're doing a lot of harm any competitively.

Starting point is 00:27:40 I think they're credit to the Americans, credit to our civilization. And they're huge. And they're huge, and that's good for us. 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

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Starting point is 00:31:48 Go to Shopify.com slash WSB. That's Shopify. All right, back to the show. I wanted to talk about the Apple position, and originally it was either Tata, Ted, we actually don't know. They made the first purchase, and then later Buffett himself doubled down. The cost basis of that investment was $31 billion, and here at the time of recording is around $117 billion, and that is after $11 billion was sold off, which, by the way, seemed to be

Starting point is 00:32:21 something monger didn't agree with, which was interesting in itself. So if we look at some of the numbers behind the purchases, it was originally bought around 12 times earnings, and that was at the time whenever Apple had a net income of $45 billion. Today, the earnings multiples are closer to $30, and now Apple have $76 billion in net income. And Apple had been buying back stocks in the meantime, so now there are 22 fewer shares outstanding. So it's a very interesting deal. We're talking about $100 billion-ish profit so far. and it's by far the biggest equity position.

Starting point is 00:32:58 And so I think this is just such an interesting deal for so many reasons. It was a company for all of us to see, but not everyone, including me, pulled the trigger on the Apple purchase. And again, you know, hindsight 2020, you have a company that sells the products at premium luxury prices, but in contrast to how you typically do sales in luxury goods, you're selling into the masses. I mean, think about how amazing that is. And so, whenever you think about the price of Apple, you know, it really wasn't expensive,

Starting point is 00:33:30 you know, 12 times earnings. If you compare that to the rest of the stock market and the interest rate levels, I'm sort of looking at that today and like, what did I mess? I was looking at, you know, Buffett make that huge investment. I read the news. I went into Apple's filings. I read what they did. And I was like, no, they're just going to be disrupted.

Starting point is 00:33:49 It was incredible. I even have Apple products like I guess every other human on this planet. I'm still puzzled about that. But another thing I've just found interesting about this purchase is that it really shows that Buffett is right whenever it comes to his biggest bets. He has said himself that if removed the 15 best investments in multiple securities, his track record is really mediocre. Mishat and Dollars Apple is the most profitable investment that Buffett ever made.

Starting point is 00:34:16 And I expect that to be a long-term holding. Buffett in his latest letter calls it one of his four jewels. So that's together with GEICO, BNSF, and BHA. That was a lot of abbreviation. So if I can just unpack that a bit. So, Guyco is the, as I'm sure a lot of it, list us know, an insurance company, which is probably close to half of the value, probably a little less than of Berkshire. Then you have the railroad BNSF, which is, Buffett said that it was more or less the same value like the Apple position and the railroad. And then you had Berkshire Hathaway Energy, which is probably worth, probably worth around $60 to $70 billion. I'm just, I'm quoting here in numbers that we had Chris Broomstrand

Starting point is 00:34:59 coming on the show and talking about. And so those are like the four major ones, the four jewels, as Buffett calls it. And he talks about how he doesn't see Apple as just having a stock, you know, the whole thing about Buffett's like you should see it as a company and not as a, not as just as a stock, like a ticker on the screen. He just looked at this as one of the, his four core businesses, which I found interesting. I think that's a great point because you wouldn't think Apple fits into that portfolio with insurance, railroads, energy, and then Apple being the fourth jewel. The others feel more like entire industries wrapped up in maybe one company, but what does

Starting point is 00:35:39 Apple really represent as an industry? It's definitely a consumer product. It's a tech company, but which industry does it really represent if it's holding that part of a portfolio. It's hard to say. And you're right, Munger definitely, I don't know why they sold, to be honest. It's hard. I mean, taking a little money off the table, I don't think is ever a bad thing, but Buffett is the guy supposed to hold forever. So it was just an interesting move that they sold even a little bit. And obviously, Munger called it a mistake, which I have to agree with. It certainly was a mistake for me. I actually did buy Apple when Buffett announced that they had

Starting point is 00:36:11 taken a position many years ago. And I actually sold it in March, right? Because I had made something like 200% on it at that point and didn't know where the market was going, thought it was overvalued, got out of it, and it was a huge mistake. So definitely one of my errors that I can relate to him with. But it's just interesting. If he considers it to be the fourth jewel, why take money off the table? Yeah, I don't get that either. Like, you would buy if the price is wonderful or whatever Buffett would call it or at least fair for a wonderful company. And then perhaps if it reached some sort of excessive valuation you would sell. But at 30 times earnings, I wouldn't say that Abel is, it's definitely not cheap. That's for sure. But giving the growth of the company and the prospects

Starting point is 00:36:54 is probably to the expensive side, but it's not like it's crazy expensive. You just have to liquidate, which also for Berkshire would be quite difficult, giving how much they own of the company. To me, it's also a bit puzzling. Plus, they have to pay a lot in capital gains tax. Plus, it wasn't like needed that cash to invest in something else. I don't know. But hey, Buffett himself said it was a mistake. So, you know, perhaps. we're just agreeing with him that it was. Well, it's easy to, you know, play Monday morning quarterback, right? And call it a mistake.

Starting point is 00:37:21 So we can look smart now. Yeah, and, you know, we are talking about it's easier now that we know the track record. We also talked about before how, you know, in March we felt that, oh, like the market already tanked close to 40 percent and probably continue. And we're also talking about a deal where Buffett already made kind of $100 billion-ish, and we're criticizing him from not making $100 plus. It's hard to be Warren Buffett sometimes. People can be very opinionated, I guess, including ourselves, Trey.

Starting point is 00:37:49 Do better, Buffett. Right, exactly. All right, so let's go to our next question. Becky ultimately asks a question that is around MMT or modern monetary theory, which is essentially this idea that the U.S. deficit doesn't matter. It's basically alluding to this idea that some economists have been throwing around that we can essentially print our way out of any problem where the World Reserve currency, the fiat is by definition by decree, right? So it basically means like our dollars are backed

Starting point is 00:38:21 by our U.S. military. And as long as our military is strong and we command the global reserve currency, we can basically take on as much debt as we want and that the debt doesn't matter. That's kind of paraphrasing, but boiling it all down, that appears to be the theory behind MMT. Not to talk politics, but if you look at the fact that Biden has already in his first hundred days come out basically projecting a $6 trillion plan, if you add it all up together, that just shows you the kind of environment we're in. Back in 2008, when 800 billion seemed like astronomical, now we're talking about $6 trillion going to work in the U.S. And so this is MMT to some degree at work. Ultimately, I think what this question was getting

Starting point is 00:39:01 at is, where is the limit of MMT? Because obviously, at a certain limit, the expectations that inflation will run rampant. And Buffett touches on this, but also just kind of highlighting the general low interest rate environment that we're currently in and what ramifications that might have long term. So let's take a listen. What's your opinion about the economic theory MMT, especially the United States because it's the reserve currency for the world? The modern monetary theorists are more confident than they ought to be too.

Starting point is 00:39:32 I don't think any of us know what's going to happen with this stuff. I do think there's a good chance that this extreme conduct is more feasible than everybody thought. But I do know if you keep just doing it without any limit, it will end in disaster. On a related question, Elle Candle wrote in on this too and said, if you can borrow money at a guaranteed low or even zero interest rate, is it still worthy of borrowing money for not that guaranteed cost from the insurance operation? It reduces the value of float by a substantial amount. And we have a flexibility with our float that virtually no one has.

Starting point is 00:40:10 And I've written about this in the annual letter. But the value of float has gone down dramatically because everything is off of interest rates. And when you get to negative interest rates, if a country can borrow it, negative interest rates, you get into something that's kind of akin to the St. Petersburg paradox. and those of you want to go to search, you can find some interesting things on it. But it becomes infinite. It's a crazy consequence of a bunch of abstract mathematics

Starting point is 00:40:37 where you get there. But you lose gravity entirely. And, you know, if you tell me that I'm going to have to lend money to the government minus 2% a year, and I'm talking nominal figures not. You know, you're just telling me how I'll go broke over time. If I do that, so it pushes you to do other things. And, of course, we've seen it.

Starting point is 00:40:57 Well, we saw the rest of the world in even more extreme fashion, but nobody, Paul Samuelson, brilliant man. Nobody thought you could do this. And we don't really know what the consequences are. But we know there are consequences, obviously. All right. So getting back to this idea that Buffett is teaching you how to think, which I think is a big takeaway here. What I wanted to kind of highlight from Buffett's response here is that people have been lambasting low and negative interest rates around the world. and there's a lot of good arguments for why. But in Buffett's words, he's basically reminding you here that they're doing all of this to push you to do something else.

Starting point is 00:41:34 And I think it's just kind of important to remember that. It's not like they're just lowering interest rates in this malicious way. There's a reason for it, and it's supposed to push you to do other things and drive the economy. So the intentions, there are probably, they say the path to ruin is laid with good intentions. And maybe that's our case here. But the idea is that money is supposed to go elsewhere. And I think, obviously, we've been seeing that the money is basically nesting itself into

Starting point is 00:41:59 asset prices and not necessarily helping the real economy, quote unquote. But I just thought it was a good reminder that there is a reason why we are where we are. And to some degree, it's worked. We don't know the long-lasting effects. And as Munger really clearly points out, it will end in disaster, in his opinion. He didn't mince words there. But we don't know when. We don't know how long this will go on.

Starting point is 00:42:23 I mean, if you remember back in 2017, Buffett was more or less calling a shot that we were, you know, there was a big storm coming. It's 2021. And there's, me, it had a pandemic, right? That's a storm. But we recovered already. And stock prices have recovered and gone up then some. I mean, you just really can't know how this is all going to end.

Starting point is 00:42:42 But likely there will be adaption along the way. And one other point that I think he's made before that it was a good reminder. I thought it was also interesting that Buffett came right out of the gate saying he didn't think that the stock valuations were crazy. And he's alluding to the point that, you know, when interest rates are at zero or very low, it's like monopoly money. I mean, there's really no ceiling to these valuations. And I think that was slightly a different tone than he's had in the past. He's obviously made the comparison with interest rates to gravity before, but I just think he really took a position like, it's not crazy right now, which I just don't think I'd heard him say

Starting point is 00:43:19 as transparently as he did this time around. I think the bottom line here is that all of this will have an impact, but it's impossible to know. It was kind of reminding me of this quote from economist Hyman Minsky, where he basically said that stability leads to instability. So all of this money going into the system will have an impact. And it's kind of like, you know, when things are going well, we just keep raising the ante, right? We keep saying, that could be what the politicians are doing now. Hey, we've printed all this money. We haven't seen any negative effects. So let's go ahead and print more. And that amount of stability leads to instability.

Starting point is 00:43:52 And at a certain point, you take on enough risk, and those risks realize as losses, and that's where the trouble begins. One thing that I took away from this, this was actually not this specific question, but something else that Buffett and Munger talked about in the Q&A session was that Buffett said that him and Charlie constantly talking about whether they should deploy capital now, to your point about it perhaps being fairly valued or at least not extremely expensive, generally in the stock market, or just like sit and wait for better valuation. And that's just constantly what they're thinking about. And he said, well, he's not happy with the specifically

Starting point is 00:44:29 he mentioned 70 billion. He's not happy with how those 70 billion are employed, which is in cash right now. But he's happy about the other 700 billion, which is the company and how they're employed. So he was just like, yeah, you can't. Sometimes it's just hard to have your cake needed to need a tube. So, you know, it's, to me, to me, that was interesting. And now with the stock market an all-time high, which I know just by inflation itself, it would always go to all-time highs, but it was just interesting to hear him talking about, like, to your point, tray, that, yeah, it's probably fair. It's not that crazy right now.

Starting point is 00:44:59 I didn't expect he would say that either. So that was interesting. The other thing I also wanted to mention here, just going through the 10Q, and 10-Qs or the quarterly filings and then the 10-Qs, case, like the annual filing. So if you go to page 15 in your 10Q for those of you who would be so inclined. And so it's interesting because that breaks down the different debt obligations that Berkshire doing. And Berkshire has actually been issued in debt which says probably surprised some people why they'll be doing that. But it's just so the rates that they can be

Starting point is 00:45:33 getting, especially in other currencies, not just in the US, which is also attracted, but also in other countries. It's just one of those where if you have a long maturity with Berks you have in this case, sometimes the right time to borrow money is not always the right time to employ that money. And I kind of find just that interesting that they're taking these loans and sort of like sitting on the sideline trying to figure that out. And perhaps that was also one of the reasons why Buffett sold Apple, you know, having those $11 billion in, you know, as ammunition whenever something would come along that's just more attractive. It just hasn't happened yet, but that was something I just thought about. And then the last point I had was about

Starting point is 00:46:12 modern monetary theory. Now, we had someone from the audience sent me a message here the other day. His name is Jason Dealer, and he talked about, there was important that I should read the deficit meth by Stephanie Keller. And it's all about modern monetary theory. And we actually tried to read out to Stephanie Keller a few times to get her on the show, and we haven't been successful so far. But it was very interesting reading that book, because I generally couldn't disagree more. And because, you know, that book was a proponent of why modern monetary theory worked. But I also couldn't help, but be humble and be like, what if I'm wrong? Like this, like the book went against everything I ever been taught I ever thought. Trey was talking about before,

Starting point is 00:46:54 you know, you can just print out and print away, you know, as long as we don't have crazy inflation, you can just print away. And there are so many points where I'm just like, this just makes no sense. And so I just can't help but just be humble and be like, as frustrated as I was reading through the book, just reflection on some people also thought the earth was flat. You know, it's like, have I gotten something completely wrong here? Because it definitely seems like this whole modern monetary theory is catching on. Perhaps it is catching on the political system because people are typically elected four years at a time and you can just print and sort of like give it to the next person. I don't know. I don't want this to be political and I'm not aiming at

Starting point is 00:47:31 specifically politician when I'm saying this. I'm just saying that to me it still doesn't make any sense. I'm just curious what's going to play out here more than anything. Yeah, and I think the key takeaway here actually came from Munger, which was just that these people are all too confident in their ideas on both sides of the spectrum. I mean, it seems like both parties either on the MMT side or on the opposite side, they're very confident in their position. And perhaps we could be a little bit more open-minded, and the truth is probably somewhere in the middle. I don't know if it's as much of that kind of Copernicus idea of the earth revolving around the sun, but like different as far as like what we believe in now, but it could be. And so it's just time will tell and we'll

Starting point is 00:48:16 know the truth, but people who are claiming to know the answer now, I think you should be wary of. I love how monger can talk about not being too confident. And then there was the only like five seconds or something of the meeting he was saying that. And the rest, he was just, you know, He just had the truth, you know, the rest of the meeting, which is one of the reasons why you love Charlie Munger, because he always has the truth. So I kind of like this whole thing, which I'm also struggling with, and I guess so many others, like, you have the truth and you're preaching it, and the same time you talk about how you're being humble and not knowing the answer, and then you jump back to, oh, by the way, I also have the truth. It's an interesting dynamic.

Starting point is 00:48:51 That is such a good point. And there are a lot of moments like that, where you kind of feel like they were talking out of both sides a little bit. And that's been of struggle as of late, because it kind of ties back to the idea that these guys, look, there's a reason we spent our Saturdays listening to some nonagenarians, right? These 90-year-olds, prophetizing. And it's because they have so much wisdom and they're so incredibly smart. But I like that they even highlighted Larry Summers and how smart he is. And the idea is that you can be incredibly smart, but we're just humans at the end of the day and no one has all the answers. And I think there is just a dose of that sort of humble, I think that is where ultimate wisdom is, is just

Starting point is 00:49:32 recognizing that you don't have the answer. To their credit, at least they throw that in, but you're so right that so much the meaning, they definitely have the answer. 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 Vantza is a game changer. Vantza, 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 keeps you

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Starting point is 00:52:58 slash income. This is a paid advertisement. All right, back to the show. The next question was about share repurchase. And so one of the reasons why I wanted to play this question was because Buffett has found the elephant gun, at least in my opinion, you know, he'd been talking a lot about how he wanted to make a big acquisition, and it sort of hasn't happened. And people have been sort of like giving him a lot of life from not doing it. But I would say he spent $25 billion in 2020 on share repurchase, and he kept on repurching shares in the first quarter of 2021. So if that's not the big gun, I don't know what it is.

Starting point is 00:53:33 Perhaps people are expecting something bigger. But let's hear the question from Becky and Warren and Charlie's response. All right. This question comes from Denny Poland, a shareholder from Pittsburgh. A prominent senator recently categorized share buybacks as a form of market manipulation. You've often said that repurchasing shares at prices below intrinsic value benefits continuing shareholders. Could you and Charlie please elaborate on the higher order effect that these share repurchases have on society? They're a way essentially of distributing cash to the people that want the cash when other co-owners mostly want you to reinvest and it's a savings vehicle.

Starting point is 00:54:09 If the four of us sitting at this table decided we'd buy a few different. We form a little company, and we all put in a million dollars or something like that, and we buy the dairy queen franchises, and they're doing well. And three of the four of us want to keep buying more dairy queen franchises, and we're not done building and saving for the future. And we're in the wealth creation business. And the fourth one says, listen, I've gotten rich enough. I'd rather take some money out.

Starting point is 00:54:37 And, well, there's only two ways to do it. We can pay dividends all four of us, three of whom don't want it. And we can repurchase the shares at a fair price. If it's just the four of us, we pick out a fair price, and the fourth one gets bought out of his interest. I find it almost impossible to believe some of the arguments that are made that it's terrible to repurchase shares from a partner if they want to get out of something. And you're able to do it at a price that's advantageous to the people that are staying,

Starting point is 00:55:05 and it helps slightly the person that wants out. And a majority of the Berkshire share is a great majority. boat on dividend from time. We've got savers. Now, that's partly because we've advertised ourselves as being that sort of a vehicle. We've created that something. We've stuck with it for 50-something years, and people look, individuals, huge number, look at Berkshire as something they're going to own until they die. Now, their circumstances may change, their needs may change, but the savers generally keep saving. We just recently had somebody that bothered, came with us 60 years ago, and billions, of dollars and they just they didn't they weren't saving exactly for their old jays just just was sort

Starting point is 00:55:48 of built into them that they like to do it now plant will get a lot of money and so on and it's the most what could be more logical than if if a very small minority of your holders want to get out and most them want to stay in and the person wants to get out wants the money you don't give the money to everybody you give it to the one who wants it and you do it at a price that is beneficial to most partisan, a private deal, you'd work out the fair value. The market tells you the value in the case of a publicly trade company. Charlie, if you're repurchasing stock, just a bullet higher, it's deeply immoral. But if you're repurching stock because it's a fair thing to do in the interest of your existing

Starting point is 00:56:30 shareholders, it's a highly moral act. And the people who are criticizing it are bonkers. I absolutely love Buffett and Munger's response to this. very educational. And I wanted to paint some color around that, just sort of like to get more into depth with the whole thing about share repurchase, the point about is it immoral or not. So share buyback seems like it's tax minimizing because you don't pay taxes on unrealized gains. It seems like whenever you compare it to dividends, perhaps from the government perspective, dividends seem to be more fair because the investor would then pay the dividend tax whenever

Starting point is 00:57:06 hears you receive that. But you have to remember that share a purchase, can only be made with tax fronts from that company. So that's one part. And think about whenever the company is buying back CS, someone else is always on the other side of that trade. Like, you can't buy something unless someone is selling. And the person who is selling will have to pay capital gains tax on that. So I would like to throw something in, like a third point in,

Starting point is 00:57:27 and this was something we talked to money is about on episode 246, that even better than dividends and even better than share repurchase from a tax perspective is if you as an investor can, find companies that continue to reinvest in the business with a profitable outcome. That's really where you're going to save on taxes. And Amazon would be a good example of that. Amazon was not profitable for a long time if you look at the taxable income. What they did was they reinvested money that they could have shown as taxable income. They reinvested that in the business. So they have just recently started paying taxes. I don't think anyone, perhaps not even that senator they were talking

Starting point is 00:58:05 about hearing the question, would say that Amazon has been, have done a disservice to America in terms of reinvesting in their business and creating employment. And so, you know, when you think about that, reinvestment is just another way of not paying taxes. But as any business owner would say, it's you are doing a service not just to your own business, but also to society if you reinvest and create a better company. I kind of like how they hit that point home. Yeah, to be honest with you, Stig, this is my entire bull case for Berkshire House. The share repurchasing. I mean, if you extrapolate out their earnings and do the future free cash flows and just look

Starting point is 00:58:42 at the growth rates, this company throws off cash, almost like anything else. And you mentioned they're sitting around $145 billion of cash right now and having a hard time putting it to work. They have sized themselves out of the game to some degree. They're now in the 50 billion range for acquisitions. There's just not that many companies that are on the menu, right? This is, I think, just a trend that will continue for a long time. And it's one of the biggest reasons I'm bullish on Berkshire Hathaway long term is because, especially

Starting point is 00:59:12 in the era beyond Buffett and Charlie, you know, you got to think of the new management that comes in. They're not the allocators like Charlie and Buffett are. And they probably won't be expected to be. And I think they might be expected to do even more share buybacks. I'm just projecting, but that's my bulk case on Berkshire and one of the biggest reasons I hold the position. about bull. Munger had this wonderful quote. He said something about your bullet hire. I haven't

Starting point is 00:59:37 heard that before. It was kind of like a fun thing to say. I kind of like what you said because generally I do not like most companies' buyback policies. I really like what Berksha is doing, so please don't get me wrong. But generally, I don't like what you see as in P500 companies are doing. You see so many of these companies. You can say Apple since 2009. You can say, Walmart since 2006. There's just so many companies that buybacks yeah every single year, every single quarter. And so without being an expert in Apple and Walmart, I would say, I don't think those two companies have been undervalued every single quarter since then. And even if there were, let's take another hundred companies who weren't. So that's one of the things that frustrates me

Starting point is 01:00:16 whenever we talk about share repurchase and how that's, in Berksa case, it is good for the current shareholders. It's not always in the other companies. This is what's even more frustrating. We have something we call shareholder yield. And shareholder yield is dividends, combined, with share repurchases. So if they're like 3% dividend yield and 4% your buyback, it's 7%. But what frustrates me is that you have all of these managers who are issuing shares to themselves because they're saying, well, you know, we have to be aligned with the shareholders and we do that. And by the way, shouldn't we issue some stocks to ourselves? And then they call the shareholder yield. Let's just take an extreme example. Let's just say that they're issuing 1% to themselves

Starting point is 01:00:57 that giving year. And then they're buy back 1%. They don't pay out any dividend. They don't pay out any dividend, they don't repurchase any shares. And then they would still call the 1% shareholder yield. And I'm like, for who? And so that's one thing that frustrates me. And what they do at Berkshire, which I really like is that all the directors, they are buying in the open market, and they all have big holdings in Berkshire app. So I really like that. And on a somewhat really note, if we talk about Berkshares own share repurchase. So like you mentioned that before, in 2020, Berkshire bought back for $25 billion. And it seems like it's continuing. So if you look at the latest filing. Berkshire in Q1 bought back for $6.6 billion. So it's a small slowdown from

Starting point is 01:01:39 $9 billion in Q4 2020. I probably wouldn't put too much into that. The price has gone up, but I don't necessarily know if that's why they bought slightly less. Buffett also talks about how Berkshire is just cheaper than the market right now. But it's also because Berkshire is a very thinly traded stock whenever you compare the size. Obviously, it's not thinly traded whenever you compare to like a small cap or anything like that. But if you look at the market cap, it's a somewhat small trading volumes. Generally, and it probably shouldn't surprise you whenever you're thinking about it. Like Berkshire share shareholders, for the most parts are people who are there to buy and hold. There are

Starting point is 01:02:13 a lot of trading around obviously as with any other company, but that's also why it's thinner traded. So he can't always go in and just buy back shares at the giving price. That was just one point I wanted to bring home. And Tray, let's talk a bit about the valuation. Back on episode 346, we had Chris Broomstram on, and I can't speak for Trey, but I can speak for myself, and Chris is way smarter than me whenever it comes to analyzing Berkshire. You know, I've been reading up on Berkshire since 2014 whenever I took my first position, and I read through the filings, I read about the company, everything I can about the company, and then you meet someone like Chris, and you're like, yeah, let me just clone his analysis.

Starting point is 01:02:55 We'll make sure to link to that in the show notes. But I wanted to mention what his valuation were. So, his valuation was $365 for one B. Shia. With Ntelson, super smart investor that Trey referred to in the beginning, set 316. But what I like is that Buffett has stated multiple times and also states that in the filing that he would only buy back shares at a discount to a very conservative estimate of the intrinsic value of Berkshire. And as much as I would like to say that with Intelson and Chris Brunstam were the smartest

Starting point is 01:03:26 people and perhaps born is even smarter. Who knows? But the three of them are definitely in agreement that Berkshire is undervalued, which I find interesting. And Buffett has said multiple times that he has no intention of buying $1.1 of estimated value for a very real $0.95. And so he definitely feels that Berkshire is undervalued. And so if we look at some of the prices that he's been buying in four. January, he bought the BCS for $231 on average, February 237, and in March, 251. So who knows? Who knows what the actual intrinsic value is? But I wanted to mention that. And just to full disclosure, Berkshire is my biggest holding, so I'm perhaps unbiased. I don't know. But what are your thoughts on the intrinsic value of Berkshire, Trey?

Starting point is 01:04:15 Yeah, I think that the Whitney Tilsen approach is a very good one. And I would estimate that the stock is probably as much as 20% discounted at the moment. And it kind of goes back to the balance sheet because at the time of this recording, the market cap of Berkshire is around $643 billion. These guys are sitting on $884 billion worth of assets. Obviously, there's liabilities. But if you just look at the market cap to the assets they own, there's a big, about a 20% discount just there. And I think that I probably would estimate, you know, when I talked to Larry Cunningham and went over the more general approach that he took in his book, it was putting this stock price over $400 a share. And so I think at the time of the book, there was a different number of shares outstanding, so I want to say that. But the point is, I think probably in the mid-300 is probably how I'm kind of looking at the stock at the moment.

Starting point is 01:05:08 Now, it does raise another question, though, because this is what I think the Holy Grail is to some degree with Buffett is a position sizing. So what I'm always so interested in is when you read about, yeah, they put $5.5 billion of share repurchases or it's a 6% deduction. It's what I'm trying to game out of that is, okay, how is he looking at it overall at the portfolio? Why is he deciding to put $1.23 billion to work on share buybacks? I mean, Buffett isn't often referred to as a quant-style investor, but some of the numbers put

Starting point is 01:05:42 to work are down to decimal points or down to very specific dollar amounts. It's not like he's like, I'm going to put $1.5 billion into share buybacks. It's like a very specific number. And I'm always curious about how that relates back to his position sizing. Whenever I see that, I always thought that he had been telling his trader, because I don't think he's, he's plaguing them himself, but saying, we can buy in this range. And then they're just buying that range. I don't know. I think that's why you have those odd numbers. Yeah, but is that how you run your own portfolio? I'm kind of curious, right? If you're like, I'm going to take a position.

Starting point is 01:06:15 I understand easing into the position, and they have to do that just to kind of not give away their position to some degree. They're easing into it, and maybe we're just kind of catching a snapshot of the progress being made into a certain position. There's that consideration as well. I don't think it moved the market as much as Warren Buffett. As much as I want. Not yet.

Starting point is 01:06:34 Not yet, right? So for me, it's more like, hey, I'm going to put in an order for a thousand shares or 5,000 shares or whatever it is. So for him, he would have to spend months. Whenever he has to make those filings to the SEC, he can ask for permission not to disclose when he's buying it if he's still building position. Sometimes they can just take quarters. It's simply because there is so much that need to be done. So I would imagine for something like Aval, he might have said, in this range, please go ahead and buy. He previously talked about that he won't be buying more than 20% of the volume because otherwise he'd be moving the price too much. But then perhaps he just

Starting point is 01:07:10 As his trader, well, could we just in this range, whatever that range is, like from $100, $150, whatever that might be, just buy as much as you can, not more than 20% of the daily volume. And then, you know, let's see how many shares that is. I don't know. I might think about this too simplistically. I always thought that was how it went down, but I never had that problem of putting billions and billions of dollars to work. So I'm not sure how I would go about that. Okay, so I think that kind of sums up our viewpoints of the Berkshire Hathaway annual shareholder meeting. I thought ultimately it was refreshing to have Charlie Munger back in his seat.

Starting point is 01:07:44 And I just am cherishing each year that we have that because it's not going to last forever. And just want to acknowledge that that was a very special occasion. I think that there was a, you know, a little bit more just energy, even though he didn't have the whole arena full of people at his disposal, you know, the energy of these two guys in their 90s, taking on questions for four or five hours nonstop, is just impressive in and of itself. So I want to recognize that as well. But ultimately, I still felt like I learned a lot from this meeting, and it just made me

Starting point is 01:08:15 that much more excited to see everyone again in Omaha in 2022. All right. So now we're going to take a question from the audience. This question comes from Alvin, which is about the scuttle butt method, which is something Buffett has talked a lot about. And we felt it was very timely given the meeting. and this approach that I think a lot of people are considering at the moment. My name is Alvin and I'm from Perth, Western Australia.

Starting point is 01:08:38 I feel like I'm asking you guys a question from the past as I only just started listening to your podcasts and the current episode is only in the year 2015. I'm sure I'll get up to date in no time though. My question today relates to what's known as the Scuttlebutt method. I believe that investing and learning overall is a lifelong process. I've been investing for a few years now and in order to take myself to the next level of investing, I want to apply the Scuttlebutt method first brought about by Phil Fisher and widely talked about by Warren Buffet. My difficulty isn't so much in wanting to apply the Scuddlebutt method,

Starting point is 01:09:14 but it's more that I find it extremely difficult to get the opportunity to speak to key management in companies. Do you have any recommendations on how to get access to key management personnel aside from, you know, the typical networking that you would do day to day. Is it necessary for me to start a hugely successful podcast like yourselves in order to get access to these key management people? I'm also aware that Phil Fisher in his book, he says something that you should know about 50% about the company prior to approaching them and also remember that Warren Buffet in one of his annual stockholder meetings saying that he can base his entire investing decision purely

Starting point is 01:09:55 on a company's annual report. So appreciate all the work that you and the rest of the podcast team do for us, and it's really great that there are people like you in this world. Thanks very much, and looking forward to your reply. Alvin, I love that question. And thank you for the kind words. To the listeners who are not familiar with the Skullwad method, so it refers to a method of figuring everything out you can about the company

Starting point is 01:10:19 and its investing merits by really talking to everyone that you can who has knowledge one way the other about that. company. So it could be customers, vendors, competitors, former employees, existing employees, just people who have extensive knowledge about it. So you refer to what Buffett said about, should you be speaking to the management? And you might say, well, it's easy for Buffett because, you know, he's Warren Buffett. He can just call up people and they will answer the phone. But generally, I agree with his statement that you don't need to speak to the management to get a full picture of the company. Generally, you don't want the management to speak to too many

Starting point is 01:10:55 investors and perhaps not any investors at all. Think about if we can just call up Warren and Charlie and talk to me about X, Y, C, about your company. If we dated 100,000 other people would probably also do it and they wouldn't have time to do their job. So whenever you refer to to Buffett there, going back to that, yes, 10 Q's, 10Ks, there are immensely helpful. I would like to do a bit more than just reading 10 Q's 10Ks. And so I practice the Scottelbubbub method too. If I can just take a personal example, something that I'm looking into right now, it's Cerges Growth Proverties. Some of you might remember I spoke to Man's Pop Right about that back in episode 247. I'm just using this as a general example, so please don't take it for more what it is.

Starting point is 01:11:35 And then I'll try to hit your point about speaking with the management if it's helpful or not. So if you look at a company like Seratheath growth properties, you know, I've been aware of this company since 2015 whenever Buffett took a position in it because this was a personal holding of Warren Buffett. It wasn't through Berkshire. or as a personal holding, then Berkshire also became the prime lender afterwards, which was just interest in itself. We even have Harry Ramachandra on the mastermind group talking about this specific pick.

Starting point is 01:12:03 And then we fell out and stood the company because, you know, what we do as value investors is that we're looking through the discounted caslow model and trying to discount that back to today and figure out how much that's worth. And whenever you look at the financial statements, it's just, it's all made of numbers, you know, they're losing money every single year. And so you're looking at it and you're like, that makes no sense. So I did speak to mine's about it the other day and, you know, yeah, I should probably take another look.

Starting point is 01:12:28 So still not an expert at all in commercial real estate, which is what this company is doing. But the first thing that I did in this case was to read the 10 case, to read the 10 Q's, and then use that to figure out two or three key marables that you really need to pay attention to and sort of like track how they rest. But also, as you read through the report, you'll likely find more questions than answers. And so, for instance, for Saratitz in this case, you know, part of my analysis was that I wanted to figure out what's the cost structure of the company. You always want to know the cost structure of any company.

Starting point is 01:13:01 And not just today, but also how that developed. And so, again, knowing very little about commercial real estate, you know, I wanted to speak to people who knew as much as possible about the topic. So there weren't necessarily people who were like experts in this specific stock or this specific company, but they were in the real estate space. So some of them were relatively close friends, so you can just call them up, but You could also just perhaps communicate with people who are not close friends, and I'll get back to that later.

Starting point is 01:13:25 And it's sort of like just to figure out, yeah, they might not see it as an investment, but could they give you some insights into how that business work in general? And so if we take this specific company, it could be like getting understanding of how does it work whenever you rent commercial real estate. Well, you know, it's typically what's called tributtal net lease, which means that they're going to pay for the maintenance and they're going to pay for the property taxes. There are different things where like, oh, okay, when I know that, I know that. and I know the square feet price that they're going to rent it out for, I can sort of like come

Starting point is 01:13:54 up with the projection of the cost structure, which is, you know, something you need to know to value on that. I guess my point of saying that is that you don't necessarily need to speak to management, but I also don't need to speak to other fellow investors in this specific stock. It's great if you can. Please don't get me wrong. But you need to speak to people who do not look at it as a stock, but can just more tell you about, oh, this is just how the business works, more than anything else. And so I don't want to talk too much about Seratis. I think I think I'm going to pitch it at their future mastermind meeting. I think I sort of like need to whenever I've done a bit more research.

Starting point is 01:14:26 But what I would suggest to do if you're interested in the Skullwad method is something as simple as just Google it. Google who did an analysis of the stock. There are a lot of private investors out there. Go to a website like corner of Berkshire and Fairfax and like speak to knowledgeable people. Figure out who be doing analysis, you might be a bit timid and be like, would these people even speak to me? Typically, people will like to speak to other people who are passionate about the same thing.

Starting point is 01:14:53 And so, to your point, Alvin, yes, you probably need to know, call it 50%. I think that was the number you referenced before. Before you speak to people who actually done analysis, you don't want just to call them up and be like, oh, could you give me your investment thesis and I can record you and I can just hold on that. You want to have good questions. You want to do your own analysis first so you know what you're talking about. You don't want to waste other people's time.

Starting point is 01:15:16 But in this world, you can hook people up on Twitter, send them an email. the tip of you have a blog or something like that and just be like, hey, I'm really interested in this. This is a part of my analysis. What do you think? Specifically, this was something I did. I watched Brad from a stock partner a few times on YouTube. He's done some great work on this specific stock. And not to, I'm not telling anyone that you just call up Brad and you probably hate me for saying so, but I just asked him over Twitter, just sent him a private message and be like, do you want to talk? These are some of my thoughts. I'm curious to hear some of your thoughts. Can we help each other out? Obviously, whenever you do that, there are times.

Starting point is 01:15:49 You're typically speaking with people who have a bull case too. So there is a fear that you end up just patting each other on the back. It's like, oh, you're right. This is a great company. You know, Trey and I could fall into the same trap. We both long Berkshire. We're so passionate about we spent an entire weekend just listening to Buffett and Munger. And like, so if you can, you want someone who's who's shoring the stock or at least someone who's very critical about it. But going back to your point about should you then speak to the management? Well, based on those I would say, I'm not sure if it's truly an advantage. If I have to say, you know, a hundred percent of a stock analysis, that's all of it. I'd probably say less than five percent,

Starting point is 01:16:29 perhaps significantly less would be speaking to the management. It might even have a negative impact on your analysis. Most CEOs are good salespeople. That's how they became CEOs in the first place, even if you have access to the management. And they're bull on the company, too. you know, that's why they're part of the management, even if they're not, they probably would tell you that they are. You might go away from that meeting with an even greater bias to begin with because you've been influenced by these charismatic people. And so I guess what I would say is you don't have to speak to the management. What I do personally, both on and off the podcast, is I speak to people who are knowledge about stocks, form a mastermind group, and really have this open dialogue where you're not afraid

Starting point is 01:17:08 to tell someone that they're wrong and they shouldn't be afraid to tell you that they're wrong, but also make sure that people have really done their work. So you have to make a commitment to people that they want to give you good feedback, but they also need to really start at the stock. You need to match those expectations. Once you start reading into like 10 Q's and 10 Ks, and if you expect to get that kind of feedback and people haven't looked into that, it's okay. They can still give you available insights. Please don't give you wrong. But you sort of like need to adjust your level of expectations whenever you do that. Sorry, I kind of feel I went all over the place on my response to that, Alvin.

Starting point is 01:17:42 I hope that was useful, but I wanted to throw it over to U-Trey. Yeah, I don't know if I have a whole lot to add to that stick, except I do just want to highlight something that came to mind when I was talking to Tom Gaynor, who's the co-CEO of Markell Corporation, because Markell closely follows the Berkshire model, and Tom himself is very much a Berkshire or Buffett-style investor, I would say. So, Alvin, if you're looking to learn a little bit about the management company, let's take a page out of our discussion with Tom Gaynor, who is the co-CEO of Marke, because Markell Corporation because Markell really follows that Berkshire model very closely,

Starting point is 01:18:18 and Tom himself is very much a Buffett-style investor. And what he told me in our episode together is that the first place you should look to quantify the integrity of the management, if you will, is the amount of debt that they're using. And this day and age, we typically look at the interest coverage ratio. And obviously, the number, the higher, the better, right? So we typically like to look for something like 5 to 10. Berkshire's sitting a little bit over 14 at the moment, so they're definitely practicing

Starting point is 01:18:46 what they preach. And obviously, with a low interest rate environment like we're in, it's a little bit easier to cover the costs. So if interest rates go up, you might see that ratio change. But ultimately, I think it's a good place to start. If you're trying to glean a little bit of insight as to how the company is managing their money. And it varies across industries, but somewhere in the 5 to 10 range is probably where you

Starting point is 01:19:07 want to sit. And it can vary with the interest rate environments that we're in, of course, as well. So I think that's the first place to look. If you want to get a good insight as to how the management team is handling the money of the company. One other point I just wanted to highlight that came from Tom as well. Stig touched on this, but it's an idea that I've actually adopted very recently, which is taking that small position in a company in effort to learn more about it. I found it really fascinating that Tom does this with hundreds of stocks, and he actually mentioned that Buffett does this in his personal portfolio as well. So I think that that just helps get you some buy-in and take a very small position. It also helps alleviate some FOMO, if you have

Starting point is 01:19:47 that problem. But it's a good starting point. And lastly, I'll just say about the mastermind, I can't emphasize how important this really is. I have a text thread going with some friends, and it could be as easy as that for someone like you. Joel Greenblatt had the Value Investors Club, right? That's probably the most elite example of something like this. But it just shows you that the people at the top of their game follow this exact model as well. And it's just so important to obviously take in counter arguments, of course, but ultimately training yourself to be an independent thinker and coming up with your own conclusions. Just one quick thing to what you mentioned there, Trey, about taking position. And original Buffett did that buying it in his own portfolio,

Starting point is 01:20:26 because at the time you couldn't go online because online didn't exist at the time. So you needed to be a shareholder to receive the end report. That's sort of a lot. like one part of it. But the other thing is that you just learn differently whenever you have skin in the game. And it doesn't need to be a lot of money. It doesn't need to be like 10% of your portfolio or something like that. Just knowing that you have a bit of skin on the game, you just start to learn differently about the stock. And the other thing is also like whenever you communicate with different stakeholders of the company, it just gives you a bit more cloud whenever they're like, yeah, I actually own a part of the company. And just for you to have that, I think that's so important.

Starting point is 01:21:01 And the other thing is that a lot of people, whenever they start looking at a stock, they spend a lot of time, they buy it, and then they don't ever think about it again. Think about this, like Tom Gaynor that you're referring to here, Trey, and some of the other investors that we have on the show, and they're like, they're building a small position just to get their feedback, starting to learn more about it, reading the next filings, next qualifyings that are probably going to read slightly different, then start building that position. It's not like, you don't need to go to full position within a week.

Starting point is 01:21:30 That's whatever your criteria is for a full position, but that's not what you need to do. You just need to get started and learning. And yeah, as soon as you buy that first stock, it's just, you just do the 10x on how much you learn, how fast you learn about that company. So, Alvin, for asking such a wonderful question, we're going to give you free access to our TIP finance tool and our intrinsic value course. And if you're out there listening and you want to invest like Warren Buffett, there's no better place to start the intrinsic value course. and by using the TIP finance tool. So if you're interested, just Google TIP Finance. And if you want to ask a question like Alvin just did,

Starting point is 01:22:06 go to Asktheinvestors.com. We'd love to hear from you. Guys, the last thing I just wanted to mention here before we round out this show is make sure to follow us on Apple Podcast, Spotify, wherever you listen to your podcast. All right, guys, that was all that Trey and I had for this week's episode of the Amherstas Podcast. We'll be back again next week.

Starting point is 01:22:25 Thank you for listening to TIP. Make sure to subscribe to millennial investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision consult a professional, this show is copyrighted by the Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP350: Berkshire Hathaway Annual Shareholders Meeting 2021 w/ Stig and Trey

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