We Study Billionaires - The Investor’s Podcast Network - TIP484: How Warren Buffett Became the Greatest Investor to Ever Live (Part 2)

Starting point is 00:00:00 You're listening to TIP. Hey everyone, welcome to The Investors Podcast. I'm your host, Clay Fink. And on today's episode, I'm going to be continuing my discussion covering Warren Buffett's investment career. Today's episode is part two of a two-part series. In case you missed the first episode, you may want to go back and check out that episode first. It's titled TIP 482 in the podcast feed if you're interested.

Starting point is 00:00:26 It's the same title, how Warren Buffett became the greatest investor to Live, labeled Part 1. During Part 1, we covered Buffett's childhood and college years, the work he did with Benjamin Graham at Graham Newman, who his biggest influences were in his development as an investor, how he came around to acquire Berkshire Hathaway, his biggest investment lessons learned, and so much more in his early career. At this point in the series, we are in the mid-1970s. During this episode, I'll be touching on his purchase of Guyco, Nebraska Furniture Mart, and Coca-Cola, how Solomon Brothers nearly destroyed Buffett's entire investment career, how he ventured through the 2000 tech bubble and crashed to follow, as well as how Berkshire weathered through the great financial crisis

Starting point is 00:01:11 in 2007 and 2008. At the end of the episode, I'll also be mentioning his largest investment, which might be considered the greatest trade of all time. So make sure you stick around until the end to hear about that. Before we dive into the episode, I'm really excited to share an upcoming event hosted by The Investors Podcast Network. Beginning on Monday, October 17th, we are launching a stock pitch competition for you all to compete in. In the first place, winner, will receive $1,000 plus a year-long subscription to our TIP finance tool and more.

Starting point is 00:01:44 You won't want to miss out on your chance to win $1,000. If you are interested in participating, please visit theinvestorspodcast.com slash stock dash competition. The last date to submit your stock analysis will be on Sunday, November 27th. Additionally, you will need to be signed up for our daily newsletter, we study markets, where we will announce the winners. All entries can be submitted to the email newsletters at theinvestorspodcast.com. Again, to get more info, please go to theinvestorspodcast.com slash stock dash competition. Best of luck to those participating. With that, I really hope you enjoy part two of this Warren Buffett deep dive.

Starting point is 00:03:04 the stock, he noticed that the company had far less reserves than it needed to pay out future claims, and the situation was worsening quickly. He made a visit to the CEO to try and bring some sense to the reality of the situation, but he wasn't interested in what Buffett had to say and hustled him out of his office. In early 1976, Geico had its worst year in its history, posting a $190 loss.90 million loss. The management team at Geico was then going through chaos. The board decided that they would need a new set of management to get back on their feet. They were then looking for help from other insurers financially to keep them from going under. Geico's stock price peaked out at $61 and dropped all the way down to $2, nearly a 97% decline. Loyal long-term shareholders were

Starting point is 00:03:54 now in a bind, knowing that most companies that declined by that much never recover. But on the other hand, the reason the stock was so low was not only because of the business's performance, but because so many shareholders had bailed out on the company and lost faith. Benjamin Graham held on to his shares, and Buffett decided that if GEICO were to turn things around, they would need an extremely highly capable manager. Buffett decided that Jack Byrne was capable of doing so, as he understood insurance very well. Additionally, he was a fantastic leader and a great salesman, so Buffett decided to purchase $4 million worth of shares, he knew that GEICO was strapped for cash, and part of his margin

Starting point is 00:04:33 of safety was being the backstop provider of capital in case the company really needed it. Byrne and Buffett worked together to convince Solomon to provide GEICO financing. The only way GEICO would survive was to get financing. Geico knew that, and the investors knew that, and became hesitant because GEICO was so desperate for money. In practically no time, the stock quadrupled to $8 a share once they sealed the deal with I'm sure that the GEICO deal helped Buffett realized the importance of his investments being in the hands of quality management. Burn was a perfect man for the job and had a ton of work

Starting point is 00:05:09 to do to turn the company around. He did absolutely anything he could to ensure the survival of GEICO, even if it meant pulling out of unprofitable states and dropping unprofitable policyholders if he didn't get the rate increases he needed through regulators. By 1977, Buffett and Munger's Empire rose to over half a billion dollars, and they controlled more than half of Berkshire Hathaway and 65% of a company called Blue Chip, which I haven't touched on yet, there's quite an interesting story behind why they were purchasing that company. Berkshire Hathaway and Blue Chip owned National Indemnity, Rockford Bank, Seas Candy, Westgo, 10% of Washington Post, a quarter of Pinkerton's detective agency, 15% of Geico, and a bunch of other stocks, including newspaper companies.

Starting point is 00:05:58 As Alice Schroeder put it in her book, The Snowball, quote, The Great Engine of Compounding worked as a servant on his behalf. At an exponential speed and under the gathering approval of a public gaze, the method was the same. Estimate an investment's intrinsic value, handicap its risk, by using a margin of safety, concentrate, stay in the circle of competence,

Starting point is 00:06:20 let it roll as compounding did the work, end quote. By 1979, the new Federal Reserve Chairman Paul Vossohn, Volker raised interest rates to 14% to try and get inflation under control. In 1981, President Ronald Reagan implemented tax cuts and started deregulating businesses and the bull market of the 1980s had begun as prices of stocks started catching up with the growth in corporate earnings. In 1983, Berkshire purchased Blue Chip making Buffett and Munger full partners for the first time. Munger at the time owned 2% of Berkshire shares and was the company's vice chairman. Buffett and Munger both had the same view in treating shareholders like partners. As stewards of

Starting point is 00:07:02 others' capital, they took this job extremely seriously. They made it very clear that they won't play accounting games, they don't like to have a lot of debt, and they are seeking to achieve superior long-term results. This sounds like such a simple approach to business, but so few public companies would operate in a similar manner in working to achieve superior long-term results solely to the benefit of the shareholders, and not to solely enrich the management team that is in charge. They also wrote to shareholders that they have no intention of selling any of the good businesses that Berkshire owns, and they're very reluctant to sell subpar businesses as long as they expect them to generate at least some cash and feel good about the management

Starting point is 00:07:43 team and labor relations. One private company that Warren was very interested in as a wholly owned business was a retailer in Omaha called Nebraska Furniture Mart. Buffett had gotten to build a relationship with the owners and had submitted offers to them in the past that they weren't accepting, but the family was coming around to the idea of selling. They didn't want to sell to just anybody, though, because many members of the family worked in the business, and they wanted to have owners that would treat them right for the years to come. Some buyers might get into their business and tell them how to run it. Others might make the purchase with debt and try and do some financial maneuvering to try and resell it to someone else, so they really wanted to be sure they sold it to

Starting point is 00:08:22 somebody that had the same interest they did. Buffett ended up coming to a deal to purchase Nebraska Furnisher Mart for Berkshire Hathaway, and he said he would only get involved with two things, capital allocation of the business, and selecting and compensating the person who would run the business. The Furnisher Mart received an offer from someone else for $90 million, but Berkshire only paid $60 million. This is all because of the trust that Warren had built with the owners. Shortly after the purchase, Berkshire's auditors went through the Furniture Mart's business and determined that the store was worth $85 million. Nebraska Furniture Mart is still owned by Berkshire to this day nearly 40 years later.

Starting point is 00:09:04 Jumping ahead a little bit, in 1985, Buffett was already a big fan of media. He agreed to spend $517 million on Capp Cities for 15% of the company, which was a television network. This included him as a player in the biggest media deal in history, which totaled $3.5 billion. That same week in 1985, Buffett yielded a $332 million profit from a single stock, General Foods, when it was taken over by Philip Morris. Buffett at this point had crossed the billionaire threshold at the age of 55, a title that was only held by 14 people, according to Forbes. Buffett's fame continued to ascend with Berkshire's stock price.

Starting point is 00:09:46 as the stock which was originally purchased by Buffett for $7.50 was now trading at over $2,000 per share or up 26,000 percent and he was showing no signs of slowing down or stopping. Buffett's success caught the attention of many academics who believed that the modern-day market was efficient and no one was expert enough to beat it. Even in universities today, you hear the same thing, that you aren't going to be able to beat the market over the long run. I personally believe that to be false, however, I also believe that most people probably aren't cut out to try and outsmart the market and beat it without putting in the necessary time and attention to do so.

Starting point is 00:10:27 If markets actually were efficient, there isn't any chance that Buffett would have been successful as he was. The proponents of the efficient market hypothesis believe that anyone who did beat the market was no different than a lucky monkey picking stocks thrown at a dartboard that just happened to do well. or they might mention that for every Warren Buffett, there are thousands of other investors who achieved a poor result trying to beat the market. One thing I do believe is that the efficient market hypothesis does convince normal everyday

Starting point is 00:10:56 people that don't care about studying finance and investing that it's simply okay to just own the overall market and go about doing your job and living your life. So that way, you don't have to worry about constantly studying up on your investments and reading reports on the companies they own. At this point in the 1980s, Buffett had a decision to make. He had grown Berkshire and made all of his long-term shareholders tremendous returns on their investments, but he wasn't making the large management fees like he was in the early days with his partnerships. He was purely just managing Berkshire as the CEO in growing their book value, hence growing the value of his personal shares

Starting point is 00:11:35 with it. Because Buffett wasn't charging a management fee, this was a fantastic deal for shareholders and a not so fantastic deal for Buffett, which would be uncharacteristic of his younger self, but he had become so attached to Berkshire, he just didn't want to let it go. He could have liquidated some of Berkshire's assets, paid out the profits to Berkshire shareholders, and went out to start another partnership if he really wanted to, but he didn't. Instead, he chose to be CEO of Berkshire and build a business that would be around for many decades to come. So in that way, Buffett did leave a lot of money on the table on behalf of Berkshire.

Starting point is 00:12:11 shareholders. By the mid-1980s, Buffett had gotten reconnected with Solomon Brothers, run by a man by the name of John Guthrend, who had helped save Geico back in 1976. Under Goodfrey's leadership, he took Solomon from a second-tier firm to the top of Wall Street. In 1985, Solomon's profits hit over $557 million. Due to the fierce competition, Solomon had begun losing their top traders to other firms with larger compensation packages. Solomon's profits had been severely affected by the surprising staffing costs. They lost their largest shareholder which sold out their shares to a corporate raider. Gutfriend then pushed the panic button and called Buffett to save Solomon from the corporate

Starting point is 00:12:55 raider. Buffett, who was a big fan of arbitrage opportunities, liked that Solomon was an arbitrage machine. Unique arbitrage opportunities allowed investors to make a handsome profit, with little to know where it's taken. Sensing the desperation from Gutfriend, Buffett said he would buy seven million in preferred shares in Solomon as long as it made a 15% return, which was a return that was typically only found in junk bonds at the time. They came to a deal at a 9% coupon that

Starting point is 00:13:22 would convert to common stock at $38 per share, so Buffett had practically no risk, assuming that Solomon didn't end up going bankrupt, but he had a limited upside in the deal. I found this particularly to be an interesting development as Buffett tended to avoid Wall Street, but now he had found himself right in the middle of it, as he had found himself right in the middle Lovett, as he and Munger were now on the board at Solomon. The media question, Buffett, why had he become the largest shareholder of a Wall Street firm after talking negatively about Wall Street in the past? Buffett responded that Goodfriend is an outstanding honorable man of integrity. This purchase was not timely, as in 1987, the historical Black Monday hit the markets,

Starting point is 00:14:03 which costed Solomon $75 million. On October 19, 1987, markets all over the world, dropped by 20% or more in a single day. Buffett was also having internal struggles with the company. He didn't always agree with how the company operated, and he wasn't sure whether he should speak up or not because he knew that it wasn't likely that they wanted to hear his advice on how to run the business. Originally, he invested in the business because he believed in Gutfriend. He stuck to his guns hanging on to his investment in Solomon, while speculations went around the media that the two were having a falling out and rumored spread that Buffett would be selling his position. Around that time, Buffett had come around to purchasing Coca-Cola stock as well,

Starting point is 00:14:46 a stock he is very famous for owning as him and Charlie sipped the beverage during their annual meetings in Omaha for the whole world to see. For years, the stock was too expensive for Buffett to consider. After the company's bottlers had gotten into a price war, this brought down the price of Coke stock to $38 per share. Although it was still relatively expensive, Buffett saw an opportunity similar to American Express where the stock was producing a waterfall of cash, but in his opinion, the market had overreacted to the temporary headwinds the company had faced. Buffett, who was one to not let opportunities go to waste, purchased 14 million shares of Coca-Cola at a cost of nearly $600 million. Because he was so widely followed up to this point,

Starting point is 00:15:30 it wasn't too long after that Berkshire stake in the company doubled to $1.2 billion. There was so much demand for the stock after the announcement that the New York Stock Exchange had temporarily halted trading of the stock. Buffett is a big fan of dividends, and out of curiosity, I did a quick search on how much Berkshire gets paid in dividends from Coca-Cola. Today, Coke pays Berkshire $672 million in dividends per year. Coca-Cola's quarterly dividend today is 44 cents, which has doubled since 1995. One of the famous Buffett quotes is, I try to invest in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will, end quote.

Starting point is 00:16:12 And that reminds me of the type of business Coca-Cola was because the product practically sold itself due to how strong and established the brand was. 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 Forum is entering its 18th year bringing together activists, technologists, journalists, investors, and builders from all over the world, many of them operating on the front lines of history. This is where you hear firsthand stories

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Starting point is 00:20:33 Buffett and Munger had been through a series of disappointments and setbacks with the company. The financial results were subpar, and the executives continued to be very interested in the bonuses they could obtain, which is a great way to annoy Buffett if that is your number one priority. They disagreed with much of what went on in the boardroom. The board would get upset at Buffett when he suggested that the company's employees take a pay cut. They would call Buffett the greedy billionaire who loved money. Buffett still didn't want to back out of his investment.

Starting point is 00:21:03 Next thing you know, Solomon had a scandal come to light that had the potential to jeopardize Buffett's entire career. A Solomon employee was found to have broken the Treasury Department's auction bidding rules several times in 1990 and 1991. Many of the insiders knew about the deal when it was happening, but Buffett's started to find out once regulators started investigating the issue. The U.S. government issues treasuries and would work with large financial institutions to offload those treasuries and raise money. Essentially, Solomon was manipulating the market by buying up a lot of the treasuries as a U.S.

Starting point is 00:21:37 government issued, holding onto them and profiting where the market squeezed and the prices of those treasuries rose after short sellers were squeezed out of the market. Shortseller losses were estimated to be over $100 million, and several small firms went bankrupt because of the manipulation by Solomon. In order to get around the regulations at the time, they had submitted unauthorized bids in customer names in order to accumulate Treasury securities. Since the government had no national policy to provide loans to investment banks who were in financial trouble, Solomon was at risk of going bankrupt very quickly. Buffett started to become very involved in the business to do what he could to get the company back on his feet. He conducted 15-minute interviews to determine

Starting point is 00:22:22 who should run the firm at this point, as many in the company had been fired. Now one of Warren Buffett's most famous quotes is, it takes 20 years to build a reputation and five minutes to ruin it. Buffett was not going to let the Solomon case destroy his reputation if he could try and prevent it. And Buffett at this point knew that his reputation was on the line with Solomon. The government no longer allowed Solomon to purchase Treasury securities, and Buffett wanted to change that by convincing them that what had happened in the past most certainly will not happen again in the future. Buffett testified on behalf of Solomon and made it clear that he wanted to make things right and find out those who are guilty for letting this happen. He stated referring to Solomon's employees,

Starting point is 00:23:05 quote, lose money for the firm and I will be understanding. Lose a shred of reputation and I will be ruthless. I think the way Buffett approached this situation led to many having an enormous amount of respect for him because he didn't want to sell out and just run away from the situation. He wanted to do whatever he could within his control to try and make things right for everyone. Buffett also mentioned his front page test, I quote, I want employees to ask themselves whether they are willing to have any contemplated act appear the next day on the front page of their local paper, to be read by their spouses, children, and friends with the reporting done by an informed and critical reporter.

Starting point is 00:23:45 Buffett was restless for months dealing with this issue and contemplating whether it was possible for Solomon to make it through. Solomon was fined $190 million plus an $100 million restitution fund, which was the second largest fine in history. It was estimated that $4 million in profit was made by the company from trades by one employee, but this scandal ended up costing the firm $800 million in lost business, fines, and other expenses in the end. After coming out of the Solomon deal intact, Buffett then had the opportunity to meet Bill Gates in 1991, who was 25 years younger than Buffett. Once the two had met, they were deeply immersed in conversation, asking each other all sorts of questions. Buffett was interested in what Bill was doing at Microsoft,

Starting point is 00:24:33 knowing that he probably wouldn't understand any of what he said. Bill ended up telling Warren that he needed to buy two stocks, Intel and Microsoft. And he was trying to convince Warren that he needed to get a computer. And Warren wasn't really convinced that he needed a computer, given that he didn't think it could do anything that his mind could already do. As mentioned previously, Warren never did trust technology companies as investments because he had seen so many tech companies come and go as their products became obsolete. But his interest was piqued at least a little bit by Bill, so he did end up buying 100 shares of Microsoft, which for Warren was a minuscule purchase. Throughout the 1990s, Warren was laser-focused on looking for the next

Starting point is 00:25:15 company to buy for Berkshire, but it wasn't an easy task. At this point, he had spent a total of $1.3 billion on Coca-Cola stock. He bought a shoe company called Dexter and had been buying more American Express as well. He negotiated to buy the remainder of GEICO's stock, 52% of the remainder of the company for $2.3 billion. That's quite a lot more than he used to purchase the first 48%, which was just $46 million. By early 1996, Berkshire stock rocketed to $34,000 per share, valuing the company at $41 billion, making Buffett's net worth a whopping $16 billion. That year, 5,000 people from all 50 states attended the Berkshire Hathaway shareholders meeting. Since the Berkshire shares were so expensive that most people really couldn't afford them,

Starting point is 00:26:07 investment funds started to pop up that would try and mimic Warren's investment portfolio. But they would be buying the same shares that Buffett did, but be doing so at much higher prices, and they were also charging these hefty fees. So in response, Berkshire and Buffett decided to release the B shares, which traded at 1.30th the price of an A share. So $34,000 per A share would be equivalent to owning 30 B shares that were trading at around $1,133. After May 1996, 40,000 new owners could call themselves shareholders, and this forever changed the character of Buffett's quote-unquote club.

Starting point is 00:26:45 In Buffett's 1996 shareholder letter, he said that virtually all stocks were overvalued. Might I add, this is way before the insane tech bubble where, you know, we're all aware of that occurred in 1999. In the meantime, Solomon had been losing key senior employees left and right to other firms, and the new CEO, Derek Mugan began to see the for-sale sign heading for Buffett's chunk of Solomon's shares, and he began to plan ahead. He made a pitch to the CEO of Travelers Insurance, and he ended up biting on the pitch. He paid $9 billion for all of Solomon, essentially bailing Buffett out of his problem. On a number of other occasions during the 1990s, Buffett saw how having too much debt can get a firm into trouble. This was a problem for Solomon, as well as a number of other

Starting point is 00:27:31 companies that got into big financial trouble, which caused potential contagion in the markets, where one firm failing can potentially lead to a number of other firms failing as well, and it can completely turn into a financial crisis and can turn into a catastrophe very quickly if they aren't bailed out either publicly or privately. When people with leverage got too greedy and got themselves into trouble, this is when Buffett would come in with plenty of cash and pick up assets and businesses that were trading for pennies on the dollar because the other party is just so desperate and has no other choice but to sell out for cheap. To apply this to my own life on an individual level, it reminds me of the current times we are living in today. There's just a lot of

Starting point is 00:28:11 uncertainty out there in the financial markets. One year ago, the 10-year Treasury was trading at 1.5% and today is trading at a 3.3% yield with the CPI inflation at over 8%. This has the potential to have cascading effects, worsening economic conditions, and the potential for contagion that I mentioned earlier. Personally, I believe it's much better to be the person with low levels of debt and plenty of cash because you have the ability to buy assets for the cheap if the opportunity ends up arising. On the flip side, some with little to no cash flow and lots of debt aren't in that same position to take advantage of such opportunities. This is what Buffett is doing just at an immensely larger scale.

Starting point is 00:28:54 Now, in 1998, as markets were really taking off, Berkshire purchased NetJets for $725 million. NetJets was a company that sold timeshares in Jets, which opened Buffett up to get to know a network of famous people such as Arnold Schwarzenegger and Tiger Woods. Buffett also simultaneously announced the purchase of Reinsure General Re, which provided insurance to insurance companies themselves. He made this acquisition for a whopping $22 billion, which did. dwarfed any other purchase he had done in the past. He made this purchase using Berkshire Hathaway stock rather than cash, which meant that Buffett likely thought that Berkshire was overvalued at the

Starting point is 00:29:33 time. It was getting a much better bank for his buck by paying with stock, which was trading at $80,900 per share that year. At that time, Coca-Cola was up 14 times over a decade, making Berkshire's stake worth $13 billion. However, that didn't mean there was no room for the stock to come down, as it reached a 40x multiple in 2000. Despite Buffett probably knowing that stocks like Coca-Cola, which he owned massive stakes in, were probably overvalued, he refused to sell any. In 1999, a few of his companies had hiccups

Starting point is 00:30:06 as Coca-Cola was actually having management in growth issues, and General Ree had lost $1.5 billion. Some had begun to question whether Buffett still had the magic touch, as he owned zero technology companies while tech was just soaring through the roof. At the end of 1999, the Dow was up 25%, the NASDAQ was up 86%, while Berkshire was actually down nearly 20%. People were really freaking out and saying that Buffett's time was up.

Starting point is 00:30:36 Historically, Berkshire had a value premium solely because they had Buffett leading the charge, and most definitely that value premium had disappeared in the market's eyes. Especially with Coca-Cola laying off 6,000 people, in general re, losing, more money than any company Buffett had ever owned by a large margin. In public, Buffett remained exactly who he was and repeated the same ideas that made him the best. Buy with a margin of safety, stay within your circle of competence, the idea of Mr. Markets shifting emotions, and that stocks are pieces of real businesses and not numbers on a screen to try and click and get rich quick on. One thing that separated Buffett from almost every other investor in 1999 and 2000 was his ability

Starting point is 00:31:22 and willingness to think for himself. Many other investors were chasing tech names and trying to get rich off them because that's what all the other fund managers were doing because it was actually working at the time. Well, it was working until it didn't work anymore. Buffett stuck to his guns and remained rational when everyone was losing their minds over any company with Doc. in their name. There really wasn't any price Buffett would pay for a technology stock, as he said, quote, when it comes to Microsoft and Intel, I don't know what the world will look like 10 years from now, and I don't want to play a game where the other guy has an advantage, end quote. In March 2000, Buffett announced that Berkshire was so cheap that they would consider offers

Starting point is 00:32:06 to buy their own stock from shareholders who were willing to sell. This was a huge sign for the market that maybe the market was wrong, at least considering that Buffett, who's very picky on his selections, thought buying shares in his own company was one of the best deals available. Before Buffett and Berkshire could buy back a single one of their shares, their stock rose by 24%. One shareholder at the annual meeting even had the guts to suggest to Buffett and Munger that they should invest 10% of Berkshire's assets in technology, but Buffett just responded that real bursts of speculation just tend to eventually get corrected. Of course, as we all know, Buffett ended up being correct that things would eventually have to revert to the mean.

Starting point is 00:32:49 The NASDAQ peaked at roughly $1,700 in March 2000, and then declined by 53% to nearly $800 by October of 2002. Alice Schroeder went into details on a speech Buffett gave at the University of Georgia, where he was asked about his biggest mistakes he had made. The first that he mentioned was ironically enough purchasing Berkshire Hathaway and spending 20 years trying to revive a failing textile mill. He also mentions the mistakes of omission, what he didn't do rather than what he did do. One was failing to buy stock in a company called Federal National Mortgage Association, which was a big winner at the time. Another being not investing in Walmart. Most commonly, these mistakes of omission was due to his cautious approach of investing in only making a purchase

Starting point is 00:33:37 if he was really sure that it would end up working out. He also explained to the students his quote-unquote 20 punches approach to investing. He stated, you'd be very rich if you thought as having a card with only 20 punches in a lifetime, and every financial decision used up one punch. You'd resist the temptation to dabble, you'd make more good decisions, and you'd make more big decisions, end quote. This quote ties back to Buffett's idea of diversification. He would generally tend to save up a lot of cash, always searching for his next big investment opportunity. And when he found such an opportunity that he was certain on, he would bet big on it. Buffett says that, quote, the stock market is a no-called strike game. You don't have to swing at everything. You can

Starting point is 00:34:22 wait for your pitch. End quote. It's easy to fall into the trap of swinging at every single investment opportunity that comes your way. But ripe opportunities do not come frequently, so Buffett would patiently wait for the pitch he was sure he would do well on. As we all know, on September 11, 2001, the tragic 9-11 event struck the World Trade Center in the United States as a whole. Buffett went on television to say that he was an optimist on the future of America and was confident in America's ability to overcome such tragedies. He wouldn't be selling any stock, and if the market fell enough, he would likely be a big buyer. Buffett often referenced what is now known as the Buffett indicator, which compares the value of the overall market to the GDP of the economy.

Starting point is 00:35:07 He was never a macro investor, but he would use this indicator to help gauge the overall sentiment in the market and called it, quote, the best single measure of where valuations stand at any given moment, end quote. This indicator essentially told him at the time that even though stocks have fallen substantially, there's still room for them to fall even more. The day after the 9-11 tragedy, the Dow fell by 7%, which was the largest point decline ever in a single day. Buffett's insurers estimated $2.3 billion in losses. As Schroeder put it, Buffett's best opportunities always came at times of uncertainty. When others lacked the insight, resources, and fortitude to make the right judgments and commit, cash combined with courage in a crisis is priceless, said Buffett.

Starting point is 00:35:57 Buffett went on a buying frenzy as he purchased a group of junk bonds at fire sale prices. He bought the underwear maker, Fruit of Loom, Picture Framemaker, Larson Jewell, Northern Natural Gas, and a number of others. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer.

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Starting point is 00:39:42 As we all know, low interest rates incentivize individuals, businesses, and governments to borrow money because it's cheap to do so. In the market of mortgages, Wall Street packaged these loans together and sold them to investors through CDOs or collateralized debt obligations. It was widely believed that these CDOs contained. no risk as the loans were packaged together, and the risk was spread out across thousands of individuals. In his 2002 shareholder letter, Buffett called these CDOs toxic and were time bombs. In his 2003 shareholder letter, he called these financial weapons of mass destruction.

Starting point is 00:40:18 Buffett didn't know when or if it would happen, but he knew that these types of financial products or derivatives could lead to a major problem for the economy and the financial markets. Munger agreed with him, as he stated, I'll be amazed if we don't have some kind of significant blow-up in the next five or ten years, as these products were lightly regulated and subject to minimum disclosures. What they were seeing was one, easy money through low interest rates, two, lax standards for lenders handing out money for those who are borrowing, and three, lax regulations from the government,

Starting point is 00:40:53 as they were assuming that these financial institutions would police themselves. If there were large losses at these financial institutions, this could lead to a credit seizure and a global, quote-unquote, run on the bank, so to speak. That same year, Buffett visited another college, Georgia Tech, to speak to them. He told them that the best investment they can make in life was in themselves. He also told them to be mindful of who their heroes are, as his hero was Benjamin Graham who completely changed his life. And he gave the advice to only work for those whom you admire.

Starting point is 00:41:25 I really like Buffett's advice around choosing your work and your career because that advice alone just had a really big impact on my own life. Buffett says that while salary is an important factor when thinking about your career, you don't want to take a job just from the money, and you should never work for people who make your stomach churn or who keep you up at night. Do what you love and work for whom you admire the most and you've given yourself the best chance in life you can." Meanwhile, in the press, Buffett continued to sound the alarm bells on the systemic risk in the markets, specifically in the housing and the securitization that was happening around mortgages. There was a massive housing boom that would persist through 2006. By one estimate,

Starting point is 00:42:09 total global debt had quadrupled in less than a decade. Up to this point, Berkshire had built a massive cash pile of over $40 billion. Berkshire had always made its best investments in times of fear and panic. When there was fear and panic across the market, was Buffett's cue to really start going shopping for businesses. In the 1960s, he bought American Express. In the 1970s, he bought Geico in Washington Post. In the 1980s, when everyone thought stocks were dead, is when he was being greedy in buying stocks like Coca-Cola. Ever since, stocks have boomed, he had been patiently waiting for others to become fearful again and recognized that it might not happen again in his lifetime, as he had just turned 75 in the mid-2000s. On October 23, 2006, Berkshire Hathaway

Starting point is 00:42:59 became the first American stock to trade above $100,000 per share, and by the end of 2007, it reached $149,200 per share, giving Berkshire a market cap of over $200 billion. Buffett's fortune loan exceeded $60 billion. Although Buffett had been mainly purchasing wholly owned businesses in the 2000s, he did purchase 20% of the stock of BNSF, Burlington Northern Santa Fe, which was a U.S. railroader. He also was getting into the energy industry as he added stakes in Conoco Phillips and N-R-G. energy. Another interesting bet that he made was writing four put options on various markets around the world that would expire between 2019 and 2028. Most likely, Berkshire would lose nothing on these,

Starting point is 00:43:48 assuming that the entire global economy didn't fall apart. Berkshire owned Home Services of America, which was the nation's second largest real estate broker, and they collected statistics around the housing market. Buffett says that in late 2005, in early 2006, the speculative of bubble and housing had peaked. As prices started to decline, number of homes for sale rose, and the length of time houses were on the market lengthened. The first serious fallout in the real estate bubble appeared in April of 2007 when New Center Financial, the country's largest subprime lender filed for bankruptcy. In August, the global margin call had begun. In over a period of eight months, the financial world imploded in a credit crisis to the extent no one had seen

Starting point is 00:44:34 since 1907, when J.P. Morgan himself had to intervene and save the banks from failing. On March 13, 2008, a bank run began on Bear Stearns, who was the weakest of the investment banks, as its lender started refusing to roll over its loans. Buffett refused to bail out Bear Stearns, who was on the brink of collapse. But the Federal Reserve stepped in and guaranteed $30 billion of Bear Stearn's debt, which was the first time the Fed had ever bailed out an investment Bank. Shortly after, the Federal Reserve announced that it had orchestrated a sale of Bear Stearns to J.P. Morgan Chase. Buffett realized that the Fed was in a really tough situation, and he didn't have a great answer to what they should do. If they did nothing, a financial meltdown

Starting point is 00:45:21 and catastrophe would most certainly occur. If they stepped in and saved the banks, it would potentially lead to runaway inflation and loss of trust in the U.S. dollar, which they had the power to create out of thin air. Buffett knew one thing. He didn't want to be in a position where he depended on the kindness of others to provide him with money when he needed it, because that can put you in desperate and unfortunate situations. He made sure to always have plenty of cash around, so he didn't need to depend on anyone. As Alice Schroeder put it, in the long history of Buffett's career, having the foresight to avoid the risky financial instruments that felled so many other companies would rank among his greatest achievements, end quote. And it's a good thing that Buffett was in

Starting point is 00:46:05 this position as mortgage lending companies Fannie Mae and Freddie Mac were sinking under the weight of the bad loans the government had insisted these companies make. Buffett again was asked to participate in the bailout, which he declined from putting money into what appeared to him to be a black hole in which the money might never come back to him. By September of 2008, both had failed and were placed under conservatorship to help them get back on their feet financially. This is the question that was hanging on everyone's mind. What is too big to fail? On Monday morning, September 15th, the government delivered the answer. Lehman Brothers entered the largest bankruptcy filing in the history of the U.S. at $639 billion after the Federal Reserve failed to rescue it beforehand. The very next day,

Starting point is 00:46:55 the Fed injected an $85 billion emergency loan. loan into AIG, which was essentially a government takeover of one of the world's largest insurers and essentially wiped out AIG's equity holders. Therefore, in the government's eyes, Lehman was not too big to fail, while AIG was. This was the type of catastrophe that Buffett had feared for years, as Lehman alone failing was so enormous that it alone could cause contagion to spread across the entire financial system and bring the whole thing to the ground without any intervention from the Fed. Morgan Stanley was suspected by the market to be the next to fail, as it had fell nearly 50% in one day. There was a wave of short selling on the banks pushing their prices down

Starting point is 00:47:41 immensely, so the government issued a temporary ban on short selling on a number of stocks. This ban infuriated hedge funds because this forced them to sell some of their stocks instead of simply hedging their bets with a short position. On September 23, 2008, Berkshire stepped in and invested $5 billion in Goldman Sachs' preferred shares that paid 10% nominal interest on the shares, which included warrants as well to buy $5 billion worth of additional shares. They did a similar deal with General Electric as well to buy $3 billion worth of common stock and $3 billion in preferred stock, which paid 10% interest.

Starting point is 00:48:20 On October 2nd, Congress signed the Emergency Economic Stabilization Act to make $700 billion in emergency funds available to the Treasury. Berkshire's company Mid-American Energy also stepped in and offered to purchase another company, Constellation Energy, for $4.7 billion, as they were in a dire situation as well. It was another one of those no-lose deals for Buffett. Months later, Constellation was offered a much higher price by someone else. and ended up going through with the new bid, but Berkshire's company profited over $1 billion in their exchange. Buffett then publicly stated that stocks were cheap enough for him, and they might get even cheaper, which they did. He said that looking for the bottom in a market mayhem is a fool's game, and that stocks are the best protection against inflation, and that's where all of his personal

Starting point is 00:49:13 investments into the stock market were going to be heading towards over the next year. The financial crisis expanded late into 2008 and 2009, and next came the bailout of automakers and massive intervention by the central banks around the world. It was like a light switch turned off as credit-shocked consumers just simply quit spending their money. This led to a negative feedback loop that cascaded downwards, as the S&P 500 closed down 38% in 2008, and Berkshire had fallen 32%. Treasury yields soon reached nearly 0%, but credits still remained virtually non-existent.

Starting point is 00:49:51 Meanwhile, Buffett was happy to lend to the right businesses if the terms were satisfactory. He lent $150 million to sealed air at 12% interest, $300 million to Harley-Davidson at 15% interest, among a number of other deals of similar size. Berkshire also purchased a $2.7 billion position in Swiss Re for 30% of the insurance, giant. During the shareholder meeting that followed, Buffett was still optimistic on the long-term future of the U.S. economy, stating that it had survived two world wars, many panics and depressions, and civil unrest. At various times, he had discussed what he expected to be inevitable inflation and the decline of the value of the U.S. dollar. Yet, it was the quote-unquote

Starting point is 00:50:38 unleashed potential of the human race that caused economies to grow over time and be more productive. Of course, the U.S. economy did come back around, and inflation actually did not come, at least through the CPI inflation measure for the decade ahead. Warren's most notable investment in the 2010s had to be his purchase of Apple. Forever, Buffett had been known as the guy who never invested in technology, even though the world was clearly moving in that direction in many ways. Buffett stated that he didn't view Apple as a tech stock in the very least. He went into Apple because he came to the conclusion that the break,

Starting point is 00:51:14 brand and moat they've built was extremely valuable and was likely to persist well into the future. Berkshire Hathaway first started purchasing Apple in 2016 after the stock had a sizable pullback with slowing sales of their iPhones. One thing that Buffett saw in Apple was that it was more of a consumer product like Coca-Cola. Millions of people are using Apple products throughout their daily lives, plus they are picking up a new product every couple of years. According to the 2021 annual report, Berkshire owns 9707 million shares of Apple at a cost basis of $31 billion and a market value of $161 billion. So clearly, this was a home run bet for Buffett. Because of how much it has grown and the size of the investment he put on, it's around 46% of their stock portfolio today.

Starting point is 00:52:05 I think that Buffett not only likes that Apple is a cash-generating machine, but they are also proponents of share repurchases. In 2021 alone, Apple repurchase $85.5 billion of their own shares and paid out $14.5 billion in dividends to shareholders. So Buffett's stake in Apple increases each time Apple purchases their shares, and he really doesn't have to do anything to have his stake continue to increase in that manner. So what are the biggest lessons in how Boren Buffett has been known as the best investor to ever live? How did he accumulate tens of billions of dollars even after his 65th birthday? As someone who loves math, we can look at the math of how investing works. Alice wrote her rightfully named her book covering Buffett, The Snowball. Buffett's snowball of wealth started at a very young age as he sold his first pack of chewing gum

Starting point is 00:53:00 at the age of six and bought his first stock at the age of 11. As we all know, the earlier you get started with investing, the better. Next, he continued to invest over the course of his lifetime. He was extremely frugal as he knew that $10 today would eventually be worth $100 or even much more than that if he had invested it successfully over many years. And finally, he let compounding do most of the heavy lifting for him, as today he is 92 years old and has accumulated over $96 billion in wealth. On top of these basic investment principles, he was extremely ambitious and an avid reader and learner. Over the course of his life, he read through Moody's manuals over and over and over again, and he would devour any investment book

Starting point is 00:53:49 he could. In selecting who would take Warren and Charlie's place at Berkshire, he said he chose the only individuals he could find that read as much as him and Charlie. To say that he was obsessed with learning how to earn money and compound capital would be a massive understatement. I think it's important to know that it's simply not enough to just have intelligence or to read a lot of books. What really separated Buffett from the rest is his ability to take what he learned and apply it well. A number of Buffett's peers were highly intelligent, highly disciplined, and highly dedicated, but it was Buffett's ability to integrate the investment strategies of Graham, Munger, and Fisher, into his own approach is what puts him above all the rest.

Starting point is 00:54:35 All right, that is all I had for part two of how Warren Buffett became the greatest investor to ever live. If you guys enjoyed this two-part series talking about Buffett's journey over the years, I would really appreciate it if you share these episodes with just one friend. This will help us continue to grow the show and allow us to continue to provide great content to you all for free. Also, make sure you stick around to check out next week's episode. I have in store for you, which covers exactly how Warren Buffett invests today. In the giant world of

Starting point is 00:55:06 stocks, it can be difficult to narrow down the significant number of options for us to sift through, so I think you'll find that Learning Buffett's approach will help you figure out what exactly makes a great business, as well as maybe find some weak spots in your current investment process. Thank you so much for tuning in. I really appreciate it and hope you've enjoyed this series on Warren Buffett thus far. With that, I'll see you again next week. Thanks again. for listening to TIP. Make sure to subscribe to millennial investing by the Investors Podcast Network and learn how to achieve financial independence.

Starting point is 00:55:40 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 - TIP484: How Warren Buffett Became the Greatest Investor to Ever Live (Part 2)

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