We Study Billionaires - The Investor’s Podcast Network - TIP446: Berkshire Hathaway Annual Shareholders Meeting 2022

Starting point is 00:00:00 You're listening to TIP. In today's episode, Trey and I discuss the Berkshire Hallaway annual shareholders meeting. We do this once a year and it's always one of my favorite episodes. In this episode, we'll play some of the best audio clips from the Marathon Q&A session with Warren Buffett and Chandermonger, and Trey and I will paint some color around it afterwards. If you like Trey and me and are part of the Berkshire tribe, you'll absolutely love this episode. So without further delay, here we go. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most.

Starting point is 00:00:39 We keep you informed and prepared for the unexpected. Welcome to The Investors Podcast. I'm your host, Dick Broderson, and today I'm here with my co-host, Trey Lockerbie. Unfortunately, I couldn't be at the meeting this year, but you were there, Trey, together with our host, Clay Fing from Million Investing, Robert Lennon from Real Estate 101, and William for Richer. Why is it happier? How was it to be back? Well, I think it was really refreshing to be there. For lack of a better word, it was really exciting. The energy in the room was palpable. When Buffett and Munger first took the stage, the whole 30 to 40,000 people did a standing ovation, which I just thought was, I had never seen that before at the meeting. And I think it just showcased how privileged people felt to be there and how appreciative they are to be there.

Starting point is 00:01:36 And, you know, Warren's 91, Munger is 98. They could have easily just not done this. They are more than entitled to do another virtual event, stay at home, be safe from COVID and everything else. But they went all in on this. I mean, yes, you had to be vaccinated to be there, but there was no masks required. You know, no one was wearing masks. So they were totally up there, vulnerable in a way, taking on the realities of the world and facing them directly and prioritizing the opportunity to meet with their partners, as they put it,

Starting point is 00:02:09 in person. And that really spoke volumes for everybody in the room. I think everyone was really appreciative of it. How was the TEP event? Do you have a chance to hang out with the community? Yeah. So Clay from our millennial investing show did a really great job coordinating a bunch of different meetups. We did a early morning meetup before the actual meeting itself where we all got together at 5 a.m.

Starting point is 00:02:31 And then Clay and I hosted a little bit of a gathering at the Nebraska Furniture Mart for their barbecue. And then we did a bit of a bar crawl, although the bars were, I got to say, more populated than they've been in the past. There was one bar we tried to get into that had over a two-hour wait line just to get in. So Omaha was going off, you know, probably in ways that the rest of the rest of the time. of the entire year. So it was a very busy event. We had multiple meetups. I was really great to see so many people that I've just known virtually for a number of years now and get to see them finally in person, people from other podcasts, people from other media outlets, people who listened to the show. It was just an overall really, really great opportunity to see everyone and meet them

Starting point is 00:03:18 in person for the first time. I'm so sad that I couldn't be there. And a long time ago, I had a kidney transplant. And so I had a compromised immune system, unfortunately. So whenever I had this conversation with my doctor and I was telling her that I wanted to travel 24 hours, you know, half across the globe to sit in a, you know, dome with 40,000 other people who also travel from all over the world. She was like, no, don't go. So that was really the reason why I would have loved to gone back. Luckily, Charlie and Warren, they seemed like they were in good health. I mean, they didn't look 16 based on the recordings that I saw, but like, I think there is a reasonable probability that we can still go many years. I don't know. How was it to be in the room that energy? And how did they look, Tray?

Starting point is 00:04:03 Well, first of all, I mean, completely understandable that you wouldn't be there. And I think you did, you made the right decision. But they did actually come across very healthy. That was one thing that I took away from it. I do think Munger fell asleep at one point during the discussion. But, you know, he's 98 and that's kind of to be expected. And I will also say that one thing that's just always amazes me is just how much they inhale the peanut brittle on stage. I mean, they're eating candy for six straight hours. So they're getting a little bit of that sugar high and a little bit of energy from that. But overall, they seemed really healthy and really energized. Again, to do that kind of marathon discussion for over six hours at that age is just always

Starting point is 00:04:45 impressive to me. So the way for these meetings go, if you haven't watched it on YouTube or having been there is that there's a bunch of questions. Actually, not. I should say not too many questions this year. I don't know if you felt the same way, trade. It seemed like I wouldn't say the Buffett was, because it's Buffett more than Munger who is responding to these questions. I wouldn't say he was rambling, but he definitely talked more longer that he used to.

Starting point is 00:05:08 So there weren't too many questions. I don't know. Am I right about that? You're spot on there, Stig, because he even touched on this when they came back from lunch. But essentially, I guess the historical average for the first half of the discussion, is somewhere around 14 or 15 questions that they answer. This year, it was only seven. And I think that's because, you know, I think Buffett had prepared quite a bit that he wanted to talk about. And I got the sense that it didn't even really matter what the question was. Each response was

Starting point is 00:05:36 averaging, you know, 10 to 15 minutes long just for one question, which obviously was just as enjoyable for me because you're getting to see the kind of inner workings of how his brain thinks and what he spends all year thinking about, you know, what he's kind of prioritized. to touch on and create as talking points is always interesting to me, but it probably would have been nice to have a little bit more diversity as far as the questions because, you know, at these meetings, as you and I know really well now, you get a lot of the same questions very often. And it's kind of almost rare these days that you get something that really challenges him or something that provides a response you haven't heard before. And I think with more questions in the

Starting point is 00:06:15 mix, there might have been more of a probability of that happening. Yeah, and I think it's a good point that you raised. So the way it goes is that you had Becker Quake from CNBC, and so she's the one representing all the shareholders who couldn't be there, so people having a chance to email her. And so I think she was like every other time. And then there were different podiums for the people actually sitting there, going out there. And, you know, I have to say, and I don't want to sound disrespectful to, you know,

Starting point is 00:06:41 people actually going there and asking these questions, I really like whenever Becky is curating them. Like, for the virtual events, in some ways, they were actually better just because, you know, she's really good into you and she picks really good questions. Whereas, you know, you have a lot of people coming up there and basically what they're asking, you have that same thing this year is, tell me, please, Warren Buffett, which stock should I invest in today? And, you know, anyone who's been following these meetings, we just know, Buffett doesn't like those questions, so he doesn't give a good response. And, you know, he does a song and dance and stuff, like a really high quality question from Becky. So I just wanted to mention that. No disrespect to the people because there were quite a few really, really good questions,

Starting point is 00:07:19 but just like overall, Biggie just does such a wonderful job. I completely agree. And while there were many other people there, analysts asking questions, there were a number of other standout guests. So there were, you know, obviously Bill Gates was there, as he usually is. But he's no longer on the board, if you remember of Berkshire. And Tim Cook from Apple was there, which is probably also not surprised. given that Buffett is now the largest independent stake in that company. But then you had people

Starting point is 00:07:48 like Jamie Diamond, you know, from J.P. Morgan Chase. And I even saw Charlie Rose, a number of other kind of A-less celebrities that were there. And I think that just added to this sense of this being sort of the annual mecca for economics events, you know, of the entire year where people came from far and wide all over the world. And even people like Jamie Diamond, Tim Cook, you know, they spent the day there to listen to Buffett, even if he was rambling. Everyone paid their respect to be there and participate in sort of this annual gathering of to kind of distill as much as we can from the Oracle of Omaha. And when I speak about rambling, I kind of really mean it in a way because when he first came out, he spent 36 minutes talking before we ever took a question. So that just

Starting point is 00:08:38 kind of shows you how much, and that was only Buffett, no one else on stage, that was just Buffett. It was almost a diatribe, and it touched on a number of different things, but I was really actually taken by how much time he spent talking about kind of the question, which is, what is money? He put up a photo of a $20 bill on stage and displayed it for everybody. And look, I think he's very aware that the topic de jour is inflation and it's, you know, crypto and it's all these things that everyone is kind of flocking to in the midst of all this rampant, either asset price inflation or even CPI inflation. And that was very top of mind, apparently, for Buffett. But he made it a very distinct point to come out and say, look,

Starting point is 00:09:22 everybody, this is a dollar or a $20 bill. And it's always going to be a dollar in the eyes of the IRS. So yes, you can go gamble with your crypto. You can go do XYZ. But at the end of the day when you have to pay your taxes, this is what the IRS and the government are going to accept. And he really made that a point. And what was kind of also interesting is he definitely acknowledged, he said, this dollar might be worth, quote unquote, dramatically less over time. So he wasn't trying to say, look, hey, this thing's going to be a dollar is a dollar, is a dollar. But he's saying this could be a dollar that's one penny, you know, 10 years from now. But it's still what the IRS is going to accept. The fact that he spent that much time on that topic,

Starting point is 00:10:03 even though I think, you know, we can argue it's misguided in a number of different ways. I think that it was an interesting point that he took a lot of time to get across to the audience. It's something very important to him that he wanted everyone to hear and acknowledge. And I thought that was just something that was kind of remarkable. Can I also just say that he was hilarious? I mean, he was almost a stand-up comic this year, especially in those first 36 minutes, he was just knocking it out of the park. There was one point where he was talking about how the subsidiary.

Starting point is 00:10:33 areas of Berkshire shouldn't use banks. They should just go to him, you know, because he's better than a bank, quote unquote. And some guy in the audience yelled out something that was, you know, you couldn't hear. And Buffett goes, was that a banker, you know, back there at the back of the room? He was angry. I mean, he was so witty and quick. And again, for being 91, just impressive to not only hold the microphone for that long, but also to make jokes along the way. It's remarkable. It showed it was, and I couldn't tell the difference. Like even before, you know, before COVID, and we had the last event, like Buffett seemed like himself. And, you know, I hate to say, like, but the last event I went to just before COVID, like, Munga also fell asleep during that

Starting point is 00:11:14 meaning. So, you know, no change there. So let's go to the first question. Like we said there in the introduction, we're going to play the question, going to hear what Buffett and Mung has to say Afterwards and then, Trey, now we'll go in and provide some additional comments to that. So here we go. Hello, Warren and Charlie. It is great to see you both and the wonderful Berkshire managers. Our thanks for everything that you do. My name is Rajiv Agarwal and I am from New Jersey.

Starting point is 00:11:42 My question is on market timing. You have always said that it is impossible to time the markets. Yet, if you look at your track record, you have had amazing timings with some of your key decisions. You got out of the stock markets in 1969, 70, you got back in 72, 70, 74, when the markets were really cheap. You did the same thing in 87, 99, 2000. And today, we are sitting on a significant amount of cash when the markets are going down. My question is, how do you time the big market moves so well? We'd like to offer you a job first. I will take it. The interesting thing is, you know, obviously, we have the faintest idea what the stock market is going to do when it opens on Monday.

Starting point is 00:12:36 We never have had. We have never made, Charlie and I, I don't think, and all the time we work together and tell you something later on maybe about how learning takes place. But we have never, I don't think we've ever made a decision that we're either one of us either said or been. thinking we should buy or sell based on what the market is going to do. No. Or for that matter, on what the economy is going to do. We don't know. And the interesting thing is, sometimes I get some credit someplace for the fact that, you know, how wonderful it was, that we were optimistic in 2008 and when everybody was down on stocks and all that sort of thing. You know, we spent a big percentage of our net worth at a very dumb time.

Starting point is 00:13:25 And I shouldn't say we, it's I. We spent about $15 or $16 billion, which was a lot bigger to us then than it is now. We spent it in the last few weeks, a period of three or four weeks between Wrigley and Goldman Sachs and General. I had a terrible time, as it turned out. I mean, I didn't think, I didn't know whether it was going to be a good time or a bad time, but it was a really dumb time. And I wrote an article for the New York Times and buy a minute. American and all these things. Well, if I'd had any sense of timing and waited six months until, I think the law was in March, and in fact, I think I was on CNBC maybe that day or something,

Starting point is 00:14:07 but I totally missed that opportunity. I totally missed, you know, in March of 2020. We have not been good at timing. We've been reasonably good and figuring out when we were getting enough for our money. And we hadn't known. had no idea when we bought anything. Well, we always hoped it would go down for a while so we could buy more. And we hoped even after we were done buying and ran out of money that if it was cheap, the company would keep buying and in effect taking our interest up. I mean, that's stuff you could learn it in fourth grade. But it's not what's taught in school. So never give us any credit. Well, actually, give us all the credit. I mean, go out and tell everybody how smart we are, but we

Starting point is 00:14:52 aren't. We haven't ever timed anything. We've never figured out insights into the economy. I mean, when I was 11 years old, March 12th, I guess in 1942, you know, March 11th, I bought stock when the Dow was 90, well, it was 101 in the morning. It was 99 at the end of the day, I think. And, you know, now it's 34,000 or maybe it's a thousand less than it was on Thursday. But, you know, I just, you know, it's one decision. It's a good thing to an American business. And Harvard and Dalman had come to see me and it's 11-year-old and, you know, or General Mortar, pension fund or something. And, you know, they said, well, no, but we have to have a balance and we have to maybe have 60% of them. And then we have to sit around every three months and listen to a bunch of

Starting point is 00:15:43 managers. And it's just done better if they'd just taken some darts and thrown them and and just said, we're going to be in America, 50 years from now and 100 years from now, and we'll do better in Saxton. We will in bonds. It's amazing how hard people make what a simple game it is. But of course, if they told everybody what a simple game it was, then 90% of the income or more of the people that were speaking would disappear. So it's really a little, too much of us to expect of human nature that people will explain why they really aren't adding any value to what you can do by yourself or actually you're, I hate to use the example, but you can't have monkeys throwing darts at the page and take away the management fees and everything. I'll bet on the monkeys,

Starting point is 00:16:29 but I don't consider them a superior species and I don't want them to move next door instead of my next door neighbor, but that is the way it's just the way it has to be. You can really see the power of being a bottoms up investor and not focusing on the overall stock market. And whenever I see bottom up, it really means, that you're looking at the individual company and if you like the valuation and you get an adequate margin of safety, you buy it. It's not so much a question of what is the overall stock monitoring at. Having said that, of course, whenever you have lower valuations generally, it's just, you know, you just have a better probability for finding something you like.

Starting point is 00:17:06 You know, it's, you can equate this to your fish where the fish are. But that doesn't mean that you necessarily catch anything. Actually, one thing that Buffett specifically pointed to was in this question or in his response to this question was how they did not hit the button of the market in months of 2009. They spent all the dry powder that had in 2008. And, you know, if they had a crystal ball, they could have waited and bought a better prices. But the future is always unknown. And as it turns out that the investment that they did made in 2008, even though they could have made more money, it still worked out remarkably well. Some of the listeners to this podcast might know the deal that he made with Goldman Sachs. I think that's the most known one

Starting point is 00:17:49 from that period. And it takes me to another point which, at least to me, was the most exciting thing for the event and also because Berkshire Hetherway is my largest holding, or largest equity holding at least. And Berkshire has really put a lot of cash to work in Q1, 2022. We have to Keep in mind that before this recent buying spree, they've been a net seller of stocks for the past five quarters. And in Q1, Berkshire spent $51 billion. And Buffett mentioned multiple times, he didn't invest $51 billion. Like, it was Berkshire, so him and Ted and Todd. And over three weeks on Q1, they spent $40 billion. And so it was crazy in itself. So let's talk about some of the things that they bought. Chevron was one that was disclosed. Before, so this was at the end

Starting point is 00:18:41 of 2021. The fair value of Berksa's holding were $4.5 billion. At the end of March, it was value at $25.9 billion. So even though that it was also held by a soaring stock price, clearly he's been doubling down on buying shares. And we're going to see in the findings here really soon how many shares that actually was. What was already known going into this meeting was the investment in Occidental Petroleum. He spent seven billion dollars. And the reason why that was known. And the thing which Chevron wasn't was that he owns, or Berkshire owns 14%. And because Berkshire owns more than 10%, it would have to be filed and have to be disclosed immediately. If you have more than 10%, you're considered an insider. Whereas if it's less 10%, you regulate differently and you just have to disclose it in the next 13F filing,

Starting point is 00:19:29 which comes out 45 days after the end of the quarter. So sort of a big technical there, but to someone like a total geek like me, it's very interesting to see what comes out of a meeting like this, and some things we knew and some things we didn't. Yeah, and just on that point really quick, Stig, that's an important point because I think a lot of people speculate, at least myself, I mean, you can get caught up in trying to understand Buffett's position sizing, you know, and we can analyze that to death and say,

Starting point is 00:19:58 How much money is he putting to work and why? And sometimes the answer is just as simple as he doesn't want to go over 10% of the company. He might be even more bullish on that pick than the dollars would suggest, but it just comes down to that technicality that you spoke of that would limit his investment in something. One note about Buffett's investment in Allegheny, there was a question that was asked about, hey, on the date that you released your annual shareholder letter, you said basically, hey, we didn't find any opportunities.

Starting point is 00:20:25 and then now you've invested almost $12 billion in Allegheny. And it happened within like a week of the actual letter, or maybe in a few days, of the letter coming out to him investing this large amount. So you would ask yourself, I mean, how are you moving from zero to $12 billion within a number of days? And he highlighted the fact that the new CEO of Allegheny is actually an old colleague of his. He was very familiar with him, but also had been studying Allegheny for 40 years. He said he had four file cabinets full of data on the company over time. So when he had this opportunity to meet the new CEO in New York City, he kind of already

Starting point is 00:21:04 had in the back of his mind saying, okay, well, I'm going to meet with this guy. I've got a number of my head. Perhaps they'll move on it. And they end up doing so. And so to me, that also ties into the fact of what you were talking about, SIG, about bottom up investing. Because this day and age, when you see the market going down, it's really tempting for all of us to start thinking a little bit more macro. We can find ourselves being seduced by the market

Starting point is 00:21:28 and saying, should I buy in? Is this the bottom? Where's the trend line? It's going to bounce off of, you know, all these things. And this kind of investment in Allegheny for me was another testament of how Buffett is not speculating, right? He's not worried about the market and what it's doing at all. He had a number at his head on a company he had done years of decades of due diligence on and was able to make a quick decision, irregardless of what the market was doing, I believe, at the time. He would have made that number offer and they would have accepted it or not. But I just think that it's a difference between his style and a more amateur approach, I would say, where you get caught up thinking a little bit more about what is the market going to do tomorrow.

Starting point is 00:22:06 I think that's a really interesting point you have there, because if you want to learn more about the Allegheny deal, I actually talk with Chris Broom about that on episode 438. And another thing I wanted to take away from that specific episode with Chris was that he, talks about how Berkshire doesn't have as much cash as it appears that they do. So what Buffett did there in the first 36 minutes when he was just talking was he put up a slide with how much cash they had at year end and how much cash they have now. And at year end, they had something along the lines of $156 billion. It might be slightly incorrect. But I do remember on that slide that it said that they had 102.6 now. And also, like, just to be completely geek,

Starting point is 00:22:54 also have to say that that does not include the cast that have on the balance sheet at Burlington and also Berkshire Energy. So if we add that, we are around like 106. So the delta is around $40 billion, that they have. And so they have $106 billion right now in cash or caste equivalence. And it seemed like it's a lot of money, obviously it is. But according to Chris, he said that Buffett would probably not go below 72-ish in cash. And the reason why he said that was that $30 billion, that was the cushion, and $42 billion, was matching the claims that would have for a year worth of losses on the insurance business. They've put more money in in Q1 of 2022 than they did in all of 2008.

Starting point is 00:23:38 I know the dollars and the cash balances were different maybe then, but it just is such a testament to how he is not fazed by what the market is doing today. Yeah, and I think if you make the ratio on cash to how many assets they have on the balance sheet, it's quite low historically right now. So, yeah, he's still like a swing for the fences, so you've got to like that. And lastly, I think it's important to note that he actually bought more Apple, even though his position is almost quadrupled since he bought it. I mean, this is called watering your flowers, right?

Starting point is 00:24:11 He's watering your flowers instead of cutting your weeds. He's seeing a winner happening, and he's putting in almost $600 million more. into that position. And just talking about the financials a little bit more, Q1 year over year, the operating earnings grew 3%. And if you look back to Buffett's shareholder letter from 1986, he defines what operating earnings really is, in his opinion. He actually calls it owner's earnings in that letter. But I thought it'd be interesting to kind of touch on what owners' earnings are and why Buffett focuses on this as opposed to something like EBITA or adjusted EBITA, like the rest of the market actually focuses on. We actually have a course on this

Starting point is 00:24:51 on our website. You can check out TIP Academy to learn more about this. But essentially, owner's earnings is net income plus depreciation, amortization, non-cash items, deferred taxes, minus capital expenditures. So, you're more of the accountant than me, but maybe you want to touch a little bit on why he focuses on operating earnings and why he makes it such a point to focus on that as opposed to adjusted EBTA or even, you know, regular earnings that other companies focus on. So, Trey, that's a really good question. And that's because accounting tells you one story. It doesn't give you the full picture. And it actually reminds me before I actually, I don't want to sidestep your question. But there was actually one person who asked Buffett during the

Starting point is 00:25:34 meeting, if you were like writing the gap rules of like, what would you change? And he was like, well, you know, I'll probably resign because it is tough. You know, it's very easy to bash the But you know, it is what it is. And so there are many, many reasons why he focuses on owners earnings. And the reason why he calls it owners earnings. And I just want to say also for the record that the course that trade talked about before, it's completely free. You can find it on the website. But the reason for that is we are trying to figure out how much, what are the cash flows that we can expect as owners to receive if we own this company. And that's what you're trying to figure out. And so if you have something like EBITDA, EBITDA, is,

Starting point is 00:26:14 say is a number that Wall Street came up with, and it's used because you wanted to be able to compare different types of businesses across a lot of different industries. But it's not a very useful number for most businesses, because EBITDA is earnings before interest and tax depreciation and amortization. Those are real expenses. So why would you not include that in your analysis of what you actually get if you were the owner? And so he has this equation for how do you calculate what your true earnings are, and that is centered around the operating earnings. He does have one variable that's always trickier, and that's just how it is. Whenever you try to predict the future, it's always tricky. And that is, what is your maintenance capix?

Starting point is 00:26:58 And if Trey and I were looking at a company in like Buxa Hathaway, we'll come up with two different types of maintenance capix, it's simply a question of company spends a lot of money reinvesting back into their assets. Some of that is, It's growth capex, so expenses to grow the company, and some of that is expenses just to maintain the level of your ad. And there's no, like, easy way of saying, oh, it's like, you know, $22 million and $300,000 and $0.22. Like, it doesn't work like that.

Starting point is 00:27:30 It has to be an approximate number. Plus, of course, you have all the other things in the formula like, well, what are the operating earnings going to be? And so the point of saying this and what I'm trying to answer on Trace's question is really that there is like no finite number you can use whenever you're figuring out the owners earnings as more like a ballpark number. That number would probably be different for me than it would for Trey, but we would probably be, you know, somewhat in the same range one way or the other. And that's just how you do valuation. And so the best stock investors can calculate or,

Starting point is 00:28:03 well, I wouldn't say calculate. I would rather say estimate what the future owner's earnings would be and then discount it back to today and see how that relates to the stock price. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom.

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Starting point is 00:32:17 That's Shopify.com slash WSB. All right, back to the show. I think it's really important. He's touched on this in a number of different letters, and he touched on it again at this meeting. It's very much a point he wants to get across, and he scolds Wall Street and the accountants and analysts over this kind of thing. So it's just kind of something to keep note of. And Trey, another thing that you touched on before is that the best way to look at the financial statements for Berkshire is to look at the operating earnings. So the net earnings are all over the place for a company like Berksie Heatherway because they both

Starting point is 00:32:54 have operating businesses, but they also have their portfolio investments. So operating earnings for the first quarter of 2022, that was $7 billion. And the operating earnings for the first quarter in 2021, this is after taxes, that was also $7 billion. The two numbers are more or less identical. It's like $22 million difference. But in the first quarter of 2021, Berksia had a first quarter of $1,000. $4.7 billion investment gain, and the first quarter of 2022, it was a $1.6 billion loss.

Starting point is 00:33:27 And so that really messes up what you look at when you look at net earnings. That's not how you should value a company like Works Hallaway. You should first discount the operating earnings. What do you think that they will be? And, you know, that's somewhat easy to do. They're quite stable. And you probably have an idea. If you understand Berksor's businesses, you can probably make a reasonable estimation

Starting point is 00:33:45 and how that's going to grow in the future. And then you have to make an assessment of the stock portfolio and what you expect that to be. Also, you can assign a value to the cash. So that's sort of like the three-step approach that I would use to valuing Berksie Heatherway. But I want to throw it back over to you, Trey. One other important piece about the Berkshire financials that came out that's worth noting is the fact that they have bought back $60 billion worth of stock over the past two years, but there's been no buybacks as of April. And in April, if you recall, the stock price, at least for the A share, got over half a million dollars per share.

Starting point is 00:34:21 So people are always speculating around what is the intrinsic value of Berkshire. And you can kind of gauge that by when Buffett is either buying back shares or not. Maybe it's correlated to the fact that he was putting money to work elsewhere, which he hasn't been doing over the past two years very much. You could say that as well. But it's just always interesting to know at what prices he's willing to buy. up Berkshire shares and when he kind of backs off of that. And to another point, I talked about this on an episode with Michael Mobison about why buybacks are sometimes controversial. Buffett made a big

Starting point is 00:34:52 point here about why he thinks it's kind of asinine to think they're controversial because he compared it to, say, owning a farm where say you have 10 acres of farmland and you're collecting the money that comes off the farm and your neighbor has 10 acres of farmland as well. And then over the years, you just gradually take over his farmland without having to come up with any more capital. And that's kind of what happens when a corporation decides to buy back its own shares. It increases your position in the overall company because it's essentially taking those outstanding shares off the market. And yeah, that can sound like a great thing.

Starting point is 00:35:25 And Buffett definitely positioned it as such. But one thing he didn't really touch on here, which is why it's controversial, is because a lot of these CEOs have very short-term incentive structures in their compensation. So they come in and they're very focused on increasing. earnings. And one of the quickest ways to do that is to eat up the shares outstanding to kind of artificially boost the earnings per share. And this is only problematic really when they stop investing in capital expenditures, for example. And I thought it was so interesting to see his investments in Chevron and Occidental in this space, because I feel like the oil space is a great example of

Starting point is 00:36:00 this, where a lot of CEOs took all the stimulus, bought back shares, and didn't invest in capital expenditures to grow more drills or plants. And now we have this kind of lack of supply in oil, which is increasing the price. And it seems to be a very long-term problem. So yeah, I think Chevron Oxidon, they're going to benefit in the way from this. So it's just kind of interesting how the two go together. And one other example I have here about the share buybacks just to provide the significance of it is Berkshire Steak and American Express has increased from 11.2% in 1998 to now 20%, solely just based on the fact that American Express has been buying back shares. So I guess I'm just interested that he spent a lot of time on this and also

Starting point is 00:36:48 made it a point to say, hey, this isn't controversial so long as you're doing it with integrity, buying it as something undervalued. But Stig, I mean, this is not a topic, I think, to just kind of dismiss, but what's your opinion? It has been interesting that he didn't pick up any shares in April, giving everything that's happened last month. But, you know, again, the opportunity cost have also changed. You know, there's, I wouldn't be surprised at all if he made more investments because even though that you now have less cash, you know, the price is just more attractive. So one thing is, is to buy more of Berkshire. Like, the question is, what could it have done with that cash instead?

Starting point is 00:37:25 And then one last take, I guess, if we're speaking of Sherrod and Occidental, is just the fact that he did say the play there is not so much because of the price of oil, but that a fast transition to clean energy is highly unlikely. And I have to agree with that because that is kind of what we've been seeing with these supply chain disruptions. We're seeing that we can't just flip the switch over to clean energy as easily as we might have hoped. And I think that that's just made it more apparent for everybody that that's probably a longer term solution problem that we're working on, but is not as easy as a lot of people think. All right. So with that, we're going to go to the next question, which was from actually Dr. David Cass. And if you remember, I interviewed Dr. David

Starting point is 00:38:07 Cass on episode 443. So Becky chose this question from Dr. David Cass about unrealized tax gains. So here it is. A question from David Cass. He writes in, President Biden's fiscal 20-23 budget request would impose a 20% minimum tax on the unrealized capital gains for households worth at least $100 million. What are your views on this issue? And if you don't want to answer maybe Charlie does? Well, we'll find out. And we should, and for all honest, we should both say that we would be affected by, it's a hundred million, we'd both be affected. So our point of view is, and I have no point of view. Charlie, I have no point of view that I would want a tribute to do. I tend to stay out of the income tax things. I guess my policy is I pay whatever taxes.

Starting point is 00:38:58 They passed and I don't want to engage in lobbying about taxes. Okay, so I just thought this was an interesting take because, as you can see, Warren and Charlie kind of kicked the can on this question as they did with a number of questions here, basically because of its political nature. They don't tend to like that. But it's one of those things that's interesting because Buffett has gone on record to say, you know, tax me more. He's made different arguments for why wealthy people should be taxed more.

Starting point is 00:39:25 And he's even proposed different ways that people could do it. I'm not agreeing either way with this plan or if it's right or wrong. I just thought it was kind of interesting that he decided to kick the can on it. Personally, it's hard to justify, well, I don't want to touch on it. It's hard to not be political. So I just thought it was important to touch on this because we're coming up to elections pretty soon. With inflation where it is and asset prices going as high as they have, this is becoming more and more of a topic in the U.S.

Starting point is 00:39:57 and the populace, this is one of, the wealth gap is the surest thing to create dislocations in a society. And this quote unquote solution is just one of many, but I thought this came up and I just wanted to acknowledge that this question came up and Becky chose to ask it. I think because of the overall macro environment of where we're going with prices where they are. You know, I don't have a lot to this question. Like you, I found it interesting that Becky asked the question, Buffett had seemed to be protecting his legacy more or the recent annual shareholders meetings. I'm not just going to say like three, four, or five, but like I went through the CNBC archive some time ago and went through all of them. And it was, at least to me,

Starting point is 00:40:44 it seemed like he was more open that he was, I wouldn't say more honest because I don't find Buffett to be dishonest at all. But he probably wasn't as careful choosing his words because he wasn't quote-unquote Warren Buffett at the time. He was a very successful. as a manager. Whereas today, he is like the icon Warren Buffett. And every time he says something, you know, it's all over the news the next day. So I kind of felt that, yeah, that was probably why he was like king the can. He just didn't want people to get to get mad at him.

Starting point is 00:41:11 All right. So the next question we're going to play is a question about inflation. You know, that's something that's really, really hot. So I think everyone knew that someone would ask about inflation. Beckett did it in this case. And here's the question. This question comes from Andrew Kiesau from Minneapolis, Minnesota. He says last year, Warren mentioned that inflation had noticeably impacted the prices that Berkshire's businesses were paying and charging.

Starting point is 00:41:38 Given those inflationary trends have continued and in some cases accelerated since last year's meeting, could you comment on how this particular inflationary period ranks among previous such periods in the United States like the 1970s and 1980s? And what can American business, and citizens do to reduce the negative impacts that inflation brings about? Well, we've sort of attacked them, what you do yourself. And, you know, you develop skills that people are willing to pay for in the future, regardless of what the unit of exchange is. But in terms of inflation in our own businesses, it's extraordinary how much we've seen.

Starting point is 00:42:16 You know, I think you interviewed Erb Blumpkin at the furniture mart. And for two years, the prices have just kept coming in higher for these things. and we sell them for higher prices and people have more money than they've had before. And they like to buy. And there's certain things they can't buy. It's like during World War II. You got a lot of money created and people couldn't buy cars and they couldn't buy refrigerators and they couldn't even buy as much sugar or coffee or things as they wanted.

Starting point is 00:42:42 They had little stamps and gasoline and all kinds of things. Eventually, you get a lot of money in people's hands and you don't have very many goods. Prices go up. You can do all kinds of things. to hawk it down. And of course, inflation is never the same. Nothing in economics is the same. The second time after it happens in the first,

Starting point is 00:43:02 because the first affects people's attitudes in the second. And their attitudes always influence the activity itself. I mean, it is an interesting phenomenon. People write a textbook, and they write it based on the last various, and people read the textbooks, so they behave differently next time. And they wonder why they're getting a different result, and they got the time before. Anyway, we have sent out lots and lots and lots.

Starting point is 00:43:26 When I say we, I mean the United States government, we have sent out lots of money to people. And at some point, you know, the money can't be worth as much as it was when there was us money out. Here's an interesting figure that I think probably will astound you. Sounds me anyway. The Federal Reserve every Thursday puts out a balance sheet. The Federal Reserve, they're complicated institutions, but they do put out this kind of consolidated statement of all of the,

Starting point is 00:43:52 various Federal Reserve banks, all these things that have entered in the legislation over the years. And there's a balance sheet. And 15 years ago, roughly, if you look, you know, the Federal Reserve issues those notes I talked about a while back. And that's the one, there's the current one. And they print these pieces of paper. And they, one way or another, they got on the hands of people. Well, the interesting thing is, people said,

Starting point is 00:44:22 cash is dead and all that sort of thing, you know, cashless society. Well, there were 800 billion, go back 10 or 15 years, there was about 800 billion of currency in circulation. And if you look at last Thursday's report, you'll see there's something like now, $2.2 trillion of currency in circulation, 2.2 trillion. Now there's about, there's 300, well, there's 300, there's 130 million people. the United States. Let's look out of that way. And with 330 million people, and you have almost 2.3 trillion of currency in circulation, that's $7,000 per person. Every man, woman, a child, in theory, has $7,000 worth of currency. Well, you know, that isn't right. But you do know that the Federal Reserve's bookkeeping is essentially right. They've got that much that's out there.

Starting point is 00:45:18 I don't know whether it is. I mean, I don't know whether it's in Russia. I don't know whether it's in South America. I don't know where, you know, I don't know whether Charlie's got it all. I mean, it's a staggering sum, you know, cash is dead and yet we, on average, have $7,000 for every person in the United States. Now, while you're absorbing that, think for a moment what would happen if the U.S. government said, well, they work it out in private, and they decide that they're going to send Federal Reserve. And I'm not going to blame the Federal Reserve. If there's somebody back in Washington, besides you they're going to sit down a million dollars to every household in the United States.

Starting point is 00:46:00 And there are 130 million households in the United States or something like that. And they're going to mail you a million dollars in cash. And there were a couple of provisions attached to it. One is, if you talked about it in the next 30 days, the money disappeared. So it was like in one of those old TV shows or something, and poof, disappears. And after 30 days, you could spend it. Well, all of a sudden, the household wealth of the United States, Federal Reserve puts out an estimate, it's $130 trillion or something like that. So basically, you've doubled the household wealth.

Starting point is 00:46:34 And all you've done is mail out people, but you don't tell them you're doing it with everybody. You just say they won the lottery or whatever it may be. And now you've got an amount equal to household wealth that on average people have doubled it. They've got this extra hundred trillion of wealth. And in a month, I can spend it. Well, what's going to happen? Well, prices are going to go up. But are they going to go up immediately?

Starting point is 00:47:00 Well, you don't know the other guy got it. You just know you've got it. So you don't really feel like you've got to rush out, I think. But as soon as it gets around, but we've mailed out, if you look at the amount we've distributed the federal government. I'm not talking about the distribution of resources. We're talking numbers like that, and it affects prices. It has to affect prices.

Starting point is 00:47:22 We had 10 times as much you went home and you find out 10 times the net worth you had yesterday, but everybody else is the same thing. It doesn't increase the amount of bread in the economy or the number of cars. It just means that the price, the value of this is going to go down, and it's purchasing power. It can't buy more than exists. So it's a very strange period where we had lots of money sent out, the people, one way or another we're getting it, that they didn't find as many places

Starting point is 00:47:52 things to buy as before, and we had supply changes. But we have all these things happen. But at the end of it is they go out to the Nebraska Furniture Mark, they start buying things. And they do it with our other companies. And they do it in very peculiar ways. And now they're buying, I mean, one thing, you know, jewelry stores were generally speaking, not a very good business and and two years ago, every landlord that had a jewelry store, or multiple jewelry stores in their mall, you know, was wondering how they were going to get their rent. And now every jewelry store virtually is doing incredibly better than they ever dreamt with way less inventory because people who are just coming in and buy. They don't wait for sales. You know, when they walk in the

Starting point is 00:48:38 store, they're going to walk out and they're going to bought something. And, uh, They pay for it. They got the money. So we are seeing an unleashing of the fact that we've just mailed a law and money to be one way or another. It's very indirect and it all gets complicated. We talk about a big system, but this is what's happened. And I will guarantee you that if we just mail out a million dollars every household in the United States tonight, and you don't know that it's happened, you know, you don't really expect much to happen in behavior tomorrow, But somehow at some point, and then if you start doing it every month, we'll say, and people really know you're doing it, then they start anticipating it and buying at a time and forward.

Starting point is 00:49:21 I mean, there's a million things that happen in economics. But the answer is we've had a lot of inflation, and it was almost impossible not to have, if you're going to bail out the kind of money we've got up. And it's probably a good thing we did it. In fact, I think there was one point when the Federal Reserve, in fact, creates the money. If they hadn't done it, your lives would be a lot. worse, a whole lot worse now. And that was an important decision. And that's the way that's the, why you've had inflation and heaven knows. I mean, it could end. You can throw the country into

Starting point is 00:49:55 recession. You can do all kinds of things. Country's going to have recessions, incidentally, and it's going to have depressions periodically. And things don't, things will happen differently. And you'll read a newspaper today and you'll wonder a year from now, why was that reading the newspaper a year ago? I mean, it's just the way it works. I bought the, that's everything I know about economics and more. And Charlie can probably improve on it. Well, it happened on a scale this time we'd never seen before. Those checks that were just mailed out to everybody who claimed to have a business

Starting point is 00:50:23 and claimed to have employees. They probably drowned the country in money for a while. And you say they probably had to do it. But it was something that had never been done on that scale before. But we had a problem. we had in the head before. Yes. No, I'm not, I'm not saying it wasn't a good idea. I mean, in my book, Jay Powell's a hero. I mean, it's very simple. I mean, he did what he had to do, you know, when, when, if he had done nothing, it would be, I mean, he would be very easy to

Starting point is 00:50:55 engage in what you would call thumb-sucking that. And plenty of, I shouldn't say plenty of, but there are other Fed chairman that would have been sucking their thumbs and the world would have fallen around them. And nobody would have exactly blamed them. They would have blamed the virus and the Chinese and all kinds of things. Well, the really interesting company is Japan, where they, first they buy back all the debt, then they start buying back all the common stocks. Now, that's really weird. And what did they get? 25 years of stasis. Who would have predicted that? So, inflation. We, Trey and I probably talked about inflation on, I don't know, every other show for the past. I don't know how many years. It's crazy. And it's such a hot topic.

Starting point is 00:51:35 right now. One thing from the most recent letter that Buffett talked about was how Berkshire owns and operates more U.S.-based infrastructure assets than anyone else. And that is classified on the balance sheet as property plant equipment if you want to look it up. But the reason why I wanted to say that is that it's not a superior type of asset to hold in times of inflation. And it's not like it's necessarily unprofitable at all. Like the way that these utilities deals are made and all that, they're sort of like a guaranteed profit provided into it. But the inflation piece is very, very tricky. And the way to think about is more like a hierarchy of inflation. Of course, as you mentioned, like owning the assets are good because they come with earning power,

Starting point is 00:52:20 but they also comes with a lot of issues. So if you have tangible assets and Berksia, as mentioned, has a lot of them, they are the worst to have in time of inflation. Think railroads, heavy machinery, you know, any kind of power grid, whatever. You are paid in all dollars and you have to replace those assets in new dollars. Intangibles are in comparison better. You can think of Google search algorithm. Buffett has this example of Seas Candy that he's provided quite a few times in his annual letter. And you can look up the 1983 one. That's probably one of the better examples of that. But basically what it says is that you don't have to replace intangible assets. It could be a brand name and you have to do that for tangible assets. So you would prefer those intangible assets instead,

Starting point is 00:53:02 everything else equal. And then Buffett has this. I can't remember the last time he didn't provide this example during one of the meetings, but he talks about how you should invest in your own skill set, and that is the best inflation heads. And he typically provides the example of being the best doctor in town or being the best lawyer in town, and because you have pricing power if you invest yourself, and no one can take that away from you. Then finally, I couldn't help but point to the comment that Buffett had about Fed-J-J-Powell being a hero. Today, everyone is bashing the Fed. Some of it I'd say it's fair enough. But you also have to remember that hardly no one is working in a macume

Starting point is 00:53:41 definitely not Jay Powell on the Fed. For example, there's no doubt that what Powell has done during the pandemic has increased inflation. And Buffett also acknowledged that. And he also said, well, you know, you have to weigh pros and cons. One thing is that if he hadn't eased as much as what happened, the employment would have been worse off. And so the Fed has a dual mandate set by Congress in 1977. And that is to, and a quote, to promote effectively the goals of maximum employment stable prices and moderate long-term interest rates, end quote. And so what that means is that JAPAL has a really, really tough job. He has a very tough job because if you ease, generally, you lower employment, but you also increase inflation. And if you, if you're tight,

Starting point is 00:54:31 you do the other way around. You know, it's not bad for employment. but it's better for inflation if inflation is running hot. And so that being said, this is not me saying that Powell is a hero. Definitely mistakes have been made. But the point of me saying this, and I also think that's one of the reasons why Buffett wanted to bring this up was that in economics, you always have to say, and then what? I mean, nothing is easier than lowering inflation.

Starting point is 00:54:57 And a lot of people are saying, well, why don't you the Fed just high grades you twice as fast? You know, lower inflation and low inflation is what we need. And yes, then we'll go back to nothing would be easy in this world than to lower inflation. It's not like Powell having thought about, you know, hiking rates faster. But what is the alternative? And so right now the Fed is sitting there trying to figure out the least bad situation. There are most likely no smooth landing right now. I think there's been some, I've seen some research.

Starting point is 00:55:27 I want to say this is since World War II. But there only been three quote unquote soft landings where inflation has been lowered without employment being hurt, but at inflation levels, much lower than what we have today. So we are looking for the least bad situation. Trey, I want to rip back over to you. Yeah, so I have a few thoughts on this. I think it's interesting to even highlight J-PAL as a hero. And there's a lot of different ways to look at this. Sometimes you hear this idea that people are upset because the Fed is manipulating the economy. And you have to go back and understand that in 1913, they were developed specifically to do that. That is their job. So yes, he's manipulating the economy by the actions that he took,

Starting point is 00:56:09 but to your point, SIG, what's the best outcome for the world, for America? It's really hard to say. We can do armchair quarterbacking here and go back and say, you know, he should have done X, Y, and Z. But these guys are operating with speed as quickly as possible with the information they had at the time. And I think Buffett was acknowledging that as well. I was disappointed with his response, though, about just be the best you can be, and inflation will take care of itself. I have a big problem with that. I think it's certainly the most polished, scripted, PR-approved response. And from his position, speaking to 3 million plus people, you can easily understand why his questions would be as generic as that. But you don't have to look too far to see why that doesn't make sense.

Starting point is 00:56:56 For example, what's happened in Argentina, Venezuela, Lebanon, Turkey. These are places where hyperinflation has taken hold, and it doesn't matter if you're the best doctor. Your purchasing power is going down. And that's what we're seeing here in America, not only without the prices, but now with general goods. So we're getting it the worst from both ends right now. And I feel like that deserves a little bit more nuance that he could have given, given his position, even though he doesn't love making huge macro statements. But that in particular was a little bit disappointing, but also expected from him.

Starting point is 00:57:32 So yeah, inflation has been a hot topic. The Fed has been a hot topic. He's obviously taken side with the Fed. He had a big hand in the Fed's decisions. He's one of the guys that they call on to get advice. So he has some kind of inside experience on the decision. So, you know, he might even be biased that they did the right thing because, you know, he had a big hand in it.

Starting point is 00:57:52 So you have to understand that as well. My last point, though, as regards to purchasing power, and actually Preston Pish put up a great chart of this just today, which basically shows that, let's just take the U.S. stock market. From 2008 to today, if you adjust it for the M2 money supply, it's essentially flat. So that is highlighting the fact that people have this wealth appreciation experience, but in reality, the purchasing power has gone down. So for example, say your home's gone from half a million dollars to a million and a half dollars. Great, but you have to sell that house and go live somewhere, and you're probably going to pay a million and a half or more for the exact same house. So that just shows that everyone is in this together and the purchasing power has gone

Starting point is 00:58:33 down. So I would have liked a little bit more nuance around this discussion in particular. It has been such a hot topic. I think it was a little bit of a cop out with the, hey, just go out there and be the best you can be at your job and it'll take care of itself. That was just something that I felt the audience, especially, it just didn't go over very well in the room. I think you could actually feel some uncomfortability in the room from that response. It just felt a little bit tone deaf. Yeah, and to my point early about him providing a bit more, I think you referred to as poet answers.

Starting point is 00:59:03 I want to say it was back in the early 70s. He wrote this fantastic piece from Fortune magazine about inflation and how it hurts investors. I would really like for him to go through some of that. Be like, this is actually really, really bad. And here is how and here is how you can combat it instead of being like the, nice uncle Warren, which I guess you're also referring to. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up,

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Starting point is 01:02:55 that really stood out to me that I'm going to hang on to for a very long time, one of which was this idea of how optical illusions illustrate how your mind can shift from one thing to the other in a split second and how it can be applied to so many different things in life. So let's take a listen to this clip from Buffett. I started buying... stocks when I was 11. I've been reading every book in the library on it. I loved it. My dad, you know, it was his business, and I get to get the honors office, and I'd read the books down there, and I saved the money, and finally, by the time I was 11, I could buy a stock, and I could tell you, at that time, I went to New York Stock Exchange when I was nine. My dad took his to New York,

Starting point is 01:03:40 each kid to New York once, and he took me. I went to New York Stock Exchange, and I was in awe of it. I could tell you how the specialist system worked and the odd lot of arrangements, and I could tell you history of finance and all of these things. And then I started, I got very interested in technical analysis and charted socks and did all kinds of crazy things, hours and hours and hours. And save money to buy other stocks. and tried shorting and I just did everything.

Starting point is 01:04:14 And then when I was either 19 or 20, and I can't remember exactly where I did it or something, I picked up a book someplace. It wasn't a textbook at school, but it was in Lincoln, Nebraska. And I looked at this book, and I saw one paragraph, and it told me I'd been doing everything wrong. I just had the whole approach wrong.

Starting point is 01:04:39 I thought I was in the business of trying to pick stocks that would go up. And in one paragraph, I saw that that was totally foolish. And I left, I brought something that it's really interesting. Let's put up illusion one. Yeah, there we have it. You know, now, if you look at that, some people will see two faces. some people will say a base and some people will look a long time and only see two faces but the mind flips from one side to another and that's another saying some name for it that they call it

Starting point is 01:05:17 ambiguous illusions or something of the sort there's other things that talk about aha moments or or in the old comic strips with Popeye wimpy would have a little balloon over his head and the light bulb would go on. There's this point where all of a sudden you see something you haven't seen. Well, it took me. I had an illusion that I was looking at, we'll say in that one, two phases. Let's go to the, let's go to the one label two. If you're looking at it from one side, you look, it looks like a rabbit. If you look the other way, it looks like it. You're looking at a duck. And, you know, the mind is a very funny place. And I think people call it an apperceptive mass when you have all kinds of things going on your mind. And they're gone for years and they sit there and get lost. And then all of a sudden

Starting point is 01:06:17 you see something different than what you were seeing before. Now, it took me in stocks, which I was intensely interested in. I had a decent IQ and I was reading and thinking and you know, and it was important to me to make some money on it. Every, every motivation in the world. And then I read a chapter. I read a paragraph, actually, in chapter eight, I think it was, of the intelligent investor. And it just, it told me that I wasn't looking at the duck. I was looking, you know, now it was the rabbit, whatever it may be.

Starting point is 01:06:50 And whether you call it a light bulb, whether you call it, you know, a moment of truth, whatever it may be. And that's happened, that happened to me in Lincoln. I mean, it changed my life. If I hadn't read that book, I don't know how long I would have gone on, looking for head and shoulders formations and 200-day moving averages and the odd-lot ratios and a zillion things. And I love that kind of stuff. Except it was the wrong stuff I was looking at it. And I've had that happen, and Charlie's had it happen, I'm sure. It happens a few times in your life.

Starting point is 01:07:22 And all of a sudden, you see something important that why in the hell didn't the hell. I see this in the first place. Maybe it's a week ago. Maybe it's a year ago. Maybe it's five years ago. Maybe it's learning how to get along with people. I mean, whether actually it's better to be kind or not, you know, or whether, I mean, they're just learning how you want the world to love you, what you have to do or what it's,

Starting point is 01:07:53 you know what when you see it, but you didn't see it for 10 years before. And I don't want to. Charlie's got some thoughts on that or not, but that's happened in a few situations in business where I've looked at a company for a decade. And then there's something that just all gets rearranged in your mind. And you can say, well, why didn't I see this five years ago? I've had it happen a few times, obviously, and everybody here has. And just in different areas. their lives. And you think, how could I have been so stupid? Well, that's what Charlie's, when he was in the law practice, had a partner. Roy Tolls, and every smart guy that would get in trouble, usually with,

Starting point is 01:08:43 it was guys, and usually it was women. And, you know, they'd come into the office and they'd look, you know, downfaced and everything. And it seemed like a good idea at the time, you know, I mean, And their lives unraveled, you know, in many cases. So there's, there is that apperceptive mass that's sitting in there inside somehow. And every now and then it produces some insight. It's better, actually, if it produces insight into your behavior than whether it produces insight to make money. I mean, and some people never get it. And they wonder whether, you know, whether the kids hate them or whether there's nobody in the world that would give them.

Starting point is 01:09:28 the dam whether they live or die. In fact, they prefer they die because then they've been courting them for their art collection or whatever it may be. It's just, Charlie would say, you know, just write your obituary and reverse engineer it. And not a crazy idea. Charlie, I don't know. What do you know about that perceptive masses, which are optical illusions? Well, I know that that's the way the brain works and that it's easy to

Starting point is 01:09:58 get it wrong. And part of the trick is to get so you correct your own mistakes. And we've done a lot of that. Yeah. Frequently frequently way too late. Yeah, we've done better with the mistakes than we have with the good, reasonably good ideas. Well, it's so easy to overdo a good idea. That's what's going on now. You have a lot of good ideas that are being grossly overdone. Just tell me, tell me about one that hasn't been, but tell me later when the crowd isn't listening. Well, look what happened to Robin Hood, from its peak to its draw. Wasn't that pretty obvious that something like that was going to happen? Tell me again, what it should.

Starting point is 01:10:40 Robin Hood, when it came out and went public and he got a little lured, everybody in all the short-term gambling and big commissions and hidden kickbacks and so on and so on. It was disgusting. Yeah. and it says the last year and they got mad at you and they sold a bunch of their stock and they've got the money and yeah but now they're it's unwatt rabbling god is getting just but a lot of the insiders have right not no but they've gotten a lot of money from i mean they were big sellers as i remember that may be but there's a there's been some justice i have to agree with that I think this soundbite is so powerful because I think so many people in the audience can relate

Starting point is 01:11:27 to Buffett's experience. And this is one of the few times I've really heard him even talk or touch on the fact that he was in the early days doing things like charting out stocks and buying derivatives and just really speculating. And it's that optical illusion idea of your brain flipping and seeing something it didn't before when he picked up the Graham book and realized. that he'd been doing everything wrong. As he said there, I love that stuff, but it's the wrong stuff. And I think so many people when they get started in investing, they follow that exact

Starting point is 01:11:57 same path. And again and again, over time, he proves out the idea that buying businesses, through inflation, through all these issues that we're dealing with today, over time, proves out to be the actual best approach. I like that he also tied this back to Allegheny, where he had been looking at a company for decades, and then all of a sudden it flipped in his mind and said, oh, you know what, this is actually a buy. And then it goes on to touch on Robin Hood. And this is maybe an interesting other example where people might be changing their minds a little bit because Robin Hood was just, I think, the biggest story of 2020, even leading into some 2021. It's garnered a lot of attention. It's brought a lot of people into the market,

Starting point is 01:12:39 but it has some questionable structures in place as to how it makes money and actually how it advertises that to the people that are using the platform. And so, you know, Charlie's obviously not a big fan and said God is getting just, given that the stock price has gone down, I think 75% in Q1. So the speculation bubble has burst in this position exactly. And I love this clip with Buffett where he's saying, is it, why does it criticize anyone at all Charlie? Probably not, but I can't help it. I just thought that was just a classic Charlie clip that is so emblematic of their dynamic as a duo and what makes everyone fly out to the show. Yeah, I love the banter that they have between the two of them. And, you know, this is also something that I thought a lot about. And I probably come off as like a, I don't know, want to change the world, millennial or something like that. So that's going to be my disclaimer. As I'm saying this, I had Gaspia on the show not too long ago. And he talked about how whenever he was younger, he was willing to invest in anything. I don't think, so please don't hold

Starting point is 01:13:46 against Guy, I kind of like paraphrasing here. But his point was that today, whenever he looks at investments, he's always thinking, is this good for society? And he has this thesis that eventually we don't know when this is going to happen, but if this is not good for society, something bad is going to happen. And he mentioned, you know, Philip Morris as one example, and saying, you know, I would not invest in that today. You know, they had this big budget set aside for different lawsuits. You know, it's not healthy. So he had this idea that it was just a good idea that it was. just in the too hard pile. It was not something he wanted to do because, you know, karma happens and eventually would have to go wrong one with the other. And it seems to me that Charlie might feel

Starting point is 01:14:26 the same way about Robin Hood. They were actually approaching us as an advertised on the show. And the first thing I thought of was, this is absolutely amazing. The product is amazing, like commission free. Like, to me, they were sort of like what stood out, especially, you know, as some of the listists might know, I live in Denmark. So it's not uncommon for me to spend, you know, $50 on a trade or $80 on a trade or whatnot. And that's one, ladies and gentlemen. So if you had to sell it again, you also have to pay the same fee. And so, you know, I was looking at at brokers in the States. And, you know, I think e-trade at the time was like $10, which to me seemed like, you know, free, more or less.

Starting point is 01:14:59 And then this app comes along and it's entirely free. And so you sort of like get this, it really catches your intention. And then as you start to research more like, huh, how can you have a business model of being free? You know, Facebook is free. Well, if something is free, you're the product. And that's the case of Robin Hood. That's how they make money. That's because you are the product.

Starting point is 01:15:18 And you know, you might agree with that or you might disagree. But, you know, just think it's very important for you to make up that mind with yourself. Like, is this good for society or not? And perhaps investing quarterly. And I'm not saying that everything is black and white. I think a lot of people would look at Buffett and say, well, you invest into all companies. That is not good for the world. And so I definitely think there are some things that can be debarred there.

Starting point is 01:15:40 That's not my point at all. But I just wanted to mention because Robin Hood was brought up and I know Charlie's always been asked about Robin Hood. Every time I see an interview with Charlie, someone always, I kind of feel like they're trying to like see if they can get a quote for a newspaper or something like that. Because this sort of like wanted for him to talk about Bitcoin or for him to talk about Robin Hood just because they know they will get a quote. They can sort of like put it up there.

Starting point is 01:16:04 And I kind of feel like Charlie knows that too. All right. So let's go to the next question. And well, I probably shouldn't say question because I don't even remember the question. I don't think Buffett did either. But Buffet had a really, really long response. And then he said, like, I don't know, 10 men's in like, oh, by the way, we also bought something in Activation Blizzard. So here's the audio clip.

Starting point is 01:16:25 One of the things we bought, one of the things I bought, was bought for a different purpose by a different manager months earlier. He bought roughly 15 million shares of Activision. And I never paid. I know about the company, but I would just see it at the monthly report. But then on January, I don't know, 17th or 18th, something like that, Microsoft announced they were going to buy Activision for $95 a share. Now, when they announced that, at that point, Activision becomes a different kind of security. It becomes what Charlie and I used to call, well, everybody did 50 years ago. We call them workouts or something like that.

Starting point is 01:17:12 and they become known as arbitrage. Well, they're not really arbitrage, but their securities, those cases are common stock, whose value depends not on what the market price does, but whether a given corporate event occurs, an announced corporate event occurs. Well, Microsoft wants to buy,

Starting point is 01:17:34 Activision, we'll say it. Well, they said a $95 a share, and they've got the money, and obviously mergers and big mergers, tech companies, all kinds of things. I've got all kinds of problems with the world generally in terms of opinion. So you don't know what the Justice Department will do. You don't know what the EU will do and all kinds of things. But at that point, it becomes a different security.

Starting point is 01:18:01 And Charlie and I, 50 years ago, we used to do a lot of that sort of thing. And we, Dush Levy did it at Goldman Sachs, and we even went back one time, I think, on British Columbia power, didn't we? We certainly did. Yeah. Guy named Bennett was up there, and we were trying to figure out whether some takeover of the power business. I mean, we spent a lot of time analyzing the probabilities of announced deals going through when we call them workouts. Now, the turn became Arb. and it hasn't worked where overall too well in recent years.

Starting point is 01:18:40 Now, every now and then, I see something that I want to do in that field, but very seldom because they've got to be big. The profit is limited. They say you're going to get 95, you're not going to get 96, and if the deal blows up, you may have a stock that's at 40 or something. But we did it with Monsanto five or six years ago when Bayer was buying it. And we got very lucky because it turned out to be a terrible acquisition per bear. But it did go through because Bayer had the money.

Starting point is 01:19:14 And they went through with the deal, even though Monsetton came with a problem that nobody really understands to the extent of. And we did it with Red Hat when IBM bought it. So in any event, on September or whatever, I mean on January, whatever it was, 17th, 18, 19th, Microsoft announces it, and the stock, which had been at 60, let's see what, I may have a slide here, which I'll find, but in any of the stock, which had been in the 60s, went up to the 80, 81 or 2, and that looked like not a big enough spread to me for a few days, and then it settled back a little. So anyway, we now own 9.5%, not something like 9.5% of Activision. And if we went over 10%, we would file a report.

Starting point is 01:20:04 So in order that the news people don't feel that there's no news there, I can tell you that as of yesterday, well, about 9.5%. If we go past 10%, there'll be a form file with the SEC and so on. But it is my purchases, not the manager, who bought it some months ago. And if the deal goes through, we make some money. and if the deal doesn't go through, who knows what happens. But that's, I just want to be sure that if we do file that report, people understand very clearly because there's been some very mixed up stories on that in the past. We want to be very clear that it was Warren Buffett's decision

Starting point is 01:20:45 in that particular case. And he doesn't know what the Justice Department is going to do. He doesn't know what the EU is going to do. He never talked to anybody. Markers thought about it. He's just read a document. He's made his own assessment. And it can, change. And one time, I think we sold a few shares even when I thought it was a little higher than it should be and turned out those sales were not bad sale. So I just want to create a little news for you. And I want to, if possible, head off stories, which have been incorrect in the past, and which then get picked up by other media and corrections never get written. All the corrections were written by one inaccurate story, and they apologized even to me.

Starting point is 01:21:29 Both the reporter and the editor sent me a personal note of apology. They didn't expect to make a mistake, but when the other publications picked up the story, they didn't bother to pick up the correction, and millions of people were misinformed and probably, literally by the time it gets spread around. And this one, I will attempt to head off by telling you exactly what the facts are right now, And we'll see whether it go beyond 10%. But if, you know, it could easily be that if it went up a few dollars, it's still a $95 deal. It's still, we don't know what the Justice Department will do.

Starting point is 01:22:03 We don't know what the EU will do. We don't know what 30 other jurisdictions will do. One thing we do know is Microsoft has the money. So that takes that one risk out of it. I really like the way that Buffett talks through this because it really shows the complexity of investing and also the concept of resulting, which I think, is absolutely crucial for all investors to know. So let's go into a bit more detail about this type of investing.

Starting point is 01:22:30 It's often referred to as merger arbitrage or merge arbitrage betting, even though Buffett calls that out and says it's not really arbitrage. You know, by definition, arbitrage should be risk-free. This is not risk-free. So here are the things we know. We know that Microsoft has offered to buy Activision Blizzard for $95 a share. And this is a deal that's going to close in fiscal 2023. So the question is now, what should we buy the shares for?

Starting point is 01:22:58 And if this was truly arbitraised, if there were no risk, risk comes from the Italian word which is card in, which means to dare. It's not risk free at all. But so if that was the case, you know, you could make the argument you should buy the shares up to $94.99, assuming no time value of money, because you will always get $95 back. But no, there are risks. There are hundreds of. reasons why a deal won't go through. It could be financial problems. That's very often what

Starting point is 01:23:29 happens. And if you notice what Buffett said that before, he said, we know that Microsoft has the money. And that comment he has is actually very important. One of the common thing that happens in these type of things is they cannot get the financing place. It might be financed with debt. They thought they had the deal with the bank, but they didn't or the bank, something happened to it, whatnot. So financing problems, that's probably the most common reason why this doesn't work. Another one is due diligence outcomes. They could simply be something as similar as personality clashes, like, oh, we don't want to work with Microsoft anymore.

Starting point is 01:23:59 Like, we don't like the boss. We don't like the way to treat us. They didn't give us much as promised, not related to financial compensation, but related to something else. Or it might be something due to regulation. The government might come in and say, no, can't do that. All of a sudden, it's probably not the case for this specific example, but it could be you have too big of a mortgage share in this specific field.

Starting point is 01:24:19 So you cannot do that. allowed. And so if this happens, if any of this happens and the deal does not fall through, shares would trade significantly lower. I think right now, as we're recording this here in May 3rd, the share price is around $75. But if this happened, the share price would follow back. And then all of a sudden it becomes about the fundamentals of the business and not whether the company will be bought or not, because that's more like the event-driven thing here. So my point of saying all of this is that as an investor, whether or not we think that it's called a $75 is a good price to pay for share of this company, is that it comes down to your understanding

Starting point is 01:24:56 probabilities and the expected returns. As investors, we have to assign a probability to a given event. How likely do we think it is for the merger or acquisition to happen? And if we think it's, say, 8%, we can reverse engineer that to what stock price that would equate to. Tray might think it's 90% likely to happen, so he would be willing to pay a higher price that I would, if I would only think it would be 80% as likely. And we also have to keep in mind if we take the other side that nothing is 100% certain.

Starting point is 01:25:27 So that also implies that a price can be too high. I would say that if I could sell activation blitzed right on for $94, I probably would because I do not expect the probability of the event

Starting point is 01:25:39 happening to be high enough to justify a price of $94. Even though I do think it's going to happen, it's just not high enough. And that's even ignoring like the time value of money, You also have to consider that.

Starting point is 01:25:51 If it doesn't happen before, I don't know, 12 months, you also have to consider the opportunity cost of having tied up your money in that investment. And it's really important to understand the difference between probabilities and the results. Let's say that the event didn't occur. Let's say that this event falls through, like this acquisition for whatever reason. You would read on all headlines that Buffett has been wrong. It would say something along those lines. However, if you do that, you will be susceptible to what is called

Starting point is 01:26:20 resulting. Investing is not that simple. You have to factor in which price did Buffett by the stock ad. He certainly bought it cheaper than $75. And what was the probability of the event occurring at that time? Because even though you are right that the probabilities are, say, 80%, well, 20% of that time, the deal falling through will also occur. And I know I make it sound simple. But if something is 20% likely to happen, it does not mean that it won't happen. It just means that it It just means that it happens 30% of the time. And I think that's very important to understand whenever you talk about investing because you don't have perfect information.

Starting point is 01:26:58 You can only do estimations. Let's say I played chess with Magnus Carlson. He's the world champion chess. I haven't tried, but I'm 100% sure I would lose every single time. And this is a game with perfect information. That doesn't mean that the best player would always best the UBrigal player, even though you have perfect information, but it's most likely to happen. investing is not so in the short term.

Starting point is 01:27:20 And so even if you have the odds on your side, you would have to size your position accordingly to find another day. I know that was a very long explanation to that, but I just think it's very important to know this because it really encapsulates what we as investors should know about investing and some of the frameworks that we should evaluate both our successes but also our failures. I like to say that I came to Warren Buffett and Charlie Munger for investing, but stayed for the philosophy. And I think a lot of people can relate to this because one of the reasons we all trek it out

Starting point is 01:27:52 to Omaha is not just to learn about investing, but it's also to learn about how to live a great life. And one of the best sound bites for me that came out of this entire discussion was it was actually Buffett who referenced a quote that Charlie has apparently said in the past. And that was essentially write your obituary and then reverse engineer it. And what he's talking about there is, you know, your obituary is essentially this phrase that kind of sums up your entire life. And hopefully it says something to the effect of, you know, Trey was a very beloved person by all his friends and family and a very successful person in both business and life or, you know, whatever. That could just be a good example of it. So you say,

Starting point is 01:28:28 okay, if that's where I'm going to be at, you know, 60 years from now, how do I reverse engineer that to ensure that that's kind of the narrative for me as a human being once I kind of live on? That's my legacy. And to your point, SIG, these guys are trying to solidify their legacy. It explains a lot of the answers they gave to a lot of these questions, as you put it before. And this is just one of the best like bite-sized pieces I took away from this discussion and a great rule of thumb that I'm going to try and live by and kind of implement in my own life. That's why you meet some of the best people in Omaha. Like they're so, it seems like you have these values in common. I mean, we met each other at Berkshire. I mean, pressed well, not at Berkshire the meeting, but like through

Starting point is 01:29:11 through a Warren Buff through a Warren Buffet forum, you just meet wonderful, wonderful people who, yes, they are interested in money, and that might be the first attraction, but it's about so much more. And I would highly encourage everyone to go there, meet up with the TIP community and train me next year. It's difficult to describe. And I think, I hope we've done a reasonable job on this podcast, but I feel like we haven't because you sort of like have to be there. You have to feel the bus and people are standing outside of like 4.45 or whatnot in the morning. And you're like, isn't it just, you know, a Q&A session about investing stuff? Like I can watch it, you know, on Yahoo, finance or stream it. Like it is and it's not. It's sort of like, I don't know how to

Starting point is 01:29:55 best describe it, but you definitely watch sports in so many ways better home in the couch. But it's not the same as experienced Super Bowl life. It's just not the same. And yeah, you get better angles, you get better slow motion photo, yes. But whenever you're there, you're there, it's just, it's just magical. I think you nailed a stick. I mean, this is the Super Bowl of capitalism, right? This is the woodstock of capitalism, as they call it. And so you're exactly right. You kind of have to be there in the room. And it's a certain breed of people that show up. You are, if you're there, you're around your tribe and you really feel that. The people who are there are there for the long term. They're putting a large stake of their retirement, probably in this

Starting point is 01:30:36 company. We feel like partners of this company. And Buffett has done a great job over decades curating that mindset in letting us become what Larry Cunningham would call quality shareholders. I mean, that's the feeling you get. You get the feeling like you're part of a tribe, you're around the people that you resonate with and understand. And there's nothing like it. And to be quite honest, I don't know how many more years of this we have. they're getting up there in age, and I would highly encourage, I mean, I do like to say that sometimes it's kind of like seeing Bob Dylan in concert. You know, it's probably not as good as it was 30 years ago, but like he's still alive out there doing it. You better go see him

Starting point is 01:31:13 if you get the opportunity. And this is no different. I mean, these guys are legends. They're the top of their game, even in their 90s. And so it's a privilege to go see them. And I highly encourage it if you get the opportunity next year. So that sums up our Berkshire Annual Shareholder meeting episode. I hope you guys enjoyed it. Be sure to reach out to us and meet up with us next year. And with that, we'll see you again next time. 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 the investorspodcast.com. This show is for entertainment purposes only. Before making any

Starting point is 01:31:55 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 - TIP446: Berkshire Hathaway Annual Shareholders Meeting 2022

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