We Study Billionaires - The Investor’s Podcast Network - TIP500: Berkshire Hathaway Shareholder's Meeting and Intrinsic Value w/ Stig Brodersen and Clay Finck

Starting point is 00:00:00 You're listening to TIP. Today's episode is episode 500 of We Study Billionaires. And what a better way to go full circle than to do an episode about the Berkshire Heatherway annual shareholder's meeting, the very place where a podcast was born. Back in 2014, I met up with Preston, his dad and three other members from the website called Buffett's Books. We were all there for the first time to learn from the Oracle himself and to meet fellow value investors.

Starting point is 00:00:27 On the flight back from the event, the idea of starting this podcast was first proposed. So, here we are, 500 episodes and 8 years in. Today, I'm joined by my co-host Clay Fink to talk about the Berkser-Hetherway annual shareholders meeting in 2023 and the four free events we're hosting for the listeners of this podcast. And even if you're not attending, make sure to skip ahead in the episode. Clay and I discussing how much Berksa Heatherway is currently undervalued and we're doing a deeper dive into Berksa Heatherway's biggest equity investment, Apple. You are listening to The Investors Podcast, where we study the financial markets and read the books

Starting point is 00:01:10 that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Welcome to The Investors podcast. I'm your host, Dick Broderson, and I'm here with my co-host, Clay Think. Before we jump into the intrinsic value assessment of Berksie Heatherway and the company's biggest holdings, Apple, Clay and I would like to talk about the annual share host meeting in May 2023. And it might seem like it's longing into the future, but this is an event you have to plan well in advance before hotels and flights are sold out. Next year is going to be special because we have four free events for the listeners of the show, and we hope you want to meet out with Clay and me and the other host of the show.

Starting point is 00:01:55 William, our host from Richard Wise and Happy Year will be there. And Trey, our co-hosts from We Study Building and Us will be joining us too. Clay, I hope you are as excited as I am. I'm very excited, Sting. I haven't had the opportunity to hang out with you yet at the Berkshire event. To my surprise, many members of the audience are excited as well. A number of people have actually reached out to me already about the event. So as always, I'm very excited to get together with the hosts and with the audience.

Starting point is 00:02:21 We have a couple of great venues and events planned, and I know these venues will take great care of us. And it's not often that I get the chance to meet up with you, Stig, along with members of the audience. So it's going to be a great time. I completely agree with you. It is kind of weird, like whenever you're telling to people like, so, do you know your coworkers? Like, how often do you hang up? And the answer said is like, never. I think this is going to be the first time because we're on three different continents. So it is definitely going to be interesting. But of course, the main event is not the events with us host as

Starting point is 00:02:52 much as we would like to say so, but the event that Warren Buffett is having Saturday on May 6. Clay, for those listeners who have not been to the event before, could you please explain what it is. Yeah, so Berkshire Hathaway, like any company, has an annual meeting where they get together with shareholders and talk about the company, how they did over the year, and how they plan to execute their business strategy going forward. This allows the shareholders the chance to vote on manners related to the company and to vote on the selection of the company's board of directors. Most people aren't going to, you know, vote for the board of directors or anything like that. And, you know, these shareholder meetings aren't really a big deal for most companies.

Starting point is 00:03:33 Most people aren't excited to go to the Apple meeting or Amazon meeting. But for Warren Buffett's company, Berkshire Hathaway, it's estimated that 40,000 people travel to Omaha, Nebraska of all places to attend the meeting. This is one of Omaha's largest events of the year. Omaha's not your typical tourist destination. So it's quite a big deal for Omaha in terms of commerce and getting people to go. come to the city. And this is an event that's really grown over the years. I believe maybe in the mid to late 90s is when it really started taking off and Buffett really started to get a lot of attention from people

Starting point is 00:04:09 all over the world. And it's an event that's known as the Woodstock of capitalism as value investors from all over the world travel to the event. And when I think about why that really is, I think part of it is that Warren and Charlie sit down for the whole day and they answer questions and people just love to be there in person. You know, you and Preston originally, you want to be great investors. So you started studying Warren and Charlie and you're like, man, there's so much more to these guys than the investment side. You know, they just offer so much perspective on life, the right way to do business, the right way to live a great life. And I think the other part of why it attracts so many people still to this day is that we never know when the meeting will be the last for Warren or Charlie.

Starting point is 00:04:52 And luckily, we've been blessed with them remaining in their positions for so long on the board for so many decades as Buffett first took ownership of Berkshire all the way back in 1965. I believe Charlie's 98 years old and Warren's 92. So if you've met anyone that's 90 plus years old, it's pretty remarkable to think that these two sit down for six, seven hours, answer people's questions. They have no idea what the questions are going to be. And I just can't even believe it. But it's just something you kind of have to experience if you're into value investing like you and I are Stig. I think outsiders would call it something similar to a cult or to a religion as, you know, when you hear at the meeting that some of these families have their entire wealth tied up in Berkshire Hathaway

Starting point is 00:05:37 shares and have been that way for many years, you know, they just don't trust anyone else to manage their money other than Warren and Charlie. Yeah. And thank you for explaining this, Clay, because it is sort of like difficult to imagine if you haven't been. I remember the first time I went. It was in 2014. And I wasn't really sure what to expect. I've never been to an annual meeting before. I also have to say, I've never been to anyone since. So I wasn't really sure what to expect. And if you watch these videos on YouTube about how it is, and you're like, that's not how I thought an annual meeting was supposed to be like. It wouldn't they just be like someone in the zoo voting on stuff? It just didn't really know what to expect. And Clay, I don't know if

Starting point is 00:06:14 you could paint a bit of color around like what is happening on that day, Saturday, May 6th. The meeting is scheduled for May 6th, as you mentioned, May 6th, 2023. And I'll just kind of paint a picture for the entire weekend because there's a number of events going on in Omaha. I typically just do the shareholder meeting that's run by Berkshire Hathaway. But on Friday, there is a shareholder shopping day at the CHI Center during the afternoon. Then during the evening, there's a shareholder shopping night at Borschim's. Additionally, there's also the credential pickup during the day, as well, at the CHI Center if you still need to get your credentials. I plan to receive mine through the mail.

Starting point is 00:06:54 I'd like to just get mine ahead of time so I don't have to worry about it that weekend. There's more information on that on Berkshire's website about getting credentials as we get closer to the meeting. Then on Saturday, the doors for the meeting open for the CHI Center downtown. They open at 7 a.m. And the Berkshire Hathaway movie starts at 8.30. This features a bunch of funny and entertaining commercials related to Berkshire subsidiaries in their largest public holdings. And then the Q&A session is what we're all really there for. And that starts at 915. Yeah, so Warren and Charlie are up there answering questions. And just recently, they started bringing up Ajit, Jane, and Greg Abel, their vice chairmen's up to answer questions as well. So they jump in from time to time two. They answer questions from 915 until

Starting point is 00:07:41 around noon, and that's when the lunch break is from noon until one. So anyone's able to pick up, I believe, a sub sandwich there. And then at 1 o'clock, the Q&A session resumes. And then at 3.45 p.m. is the formal business meeting. And I think by then a lot of the crowd kind of clears out as a lot of people are there, maybe to just see Warren and Charlie or sit in on some of the Q&A session and say, hey, they went and saw Warren Buffett in person. So I personally don't like to sit for hours on end. I like to get up and walk around a little bit during the meeting, stretch my legs out. I believe on the first floor of the CHI Center, there are a bunch of booths for the businesses that Berkshire owns. So it's kind of nice to just be able to walk around and look at some of the businesses they own,

Starting point is 00:08:26 whether it be the booth for GEICO, Seast Candy, if you wanted to buy some chocolate, Coca-Cola. Good opportunity. Just walk around, network with others, chat with, you know, maybe members of the TIP audience and check out all the businesses at Berkshire owns. Yeah, and another great thing is that Buffett is an avid reader, as I'm sure everyone knows. And there are quite a few books that him and Charlie really like. So what they do is that they invite the authors of those books. And you can speak with, I think Chaldeen is there, the author of influence. Adam Meath is going to be there.

Starting point is 00:08:56 He wrote the book. I want to say it's called The Complete Financial History of Berksie Heatherway. Gillian Siegel is also going to be there, Cici author of Getting There. Fun fact, Marri to Brian Lawrence did we also had on the show. We also had Gillian on the show. So at the top of head, I could mention three, but there are a ton of a ton of other authors there, it's always a lot of fun to just walk around in, and a great place just to network with other people from the value investing community. Yeah, and then after the formal

Starting point is 00:09:19 meeting at 530, they have a little picnic or meal or whatever you want to call it at Nebraska Furniture Mart if you'd like to pick up a free meal there. The only difficulty is it's over on 72nd Street, which is probably a 15 or 20 minute drive from downtown. So maybe you have your car there or you have a rental or maybe Uber over to Nebraska Furniture Mart. That's one of the businesses that Berkshire owns. And it's quite incredible how big that building is with all the furniture, office stuff. That place is just a work of art in terms of capitalism to learn more about just one of the businesses that Berkshire owns.

Starting point is 00:09:54 And then finally on Sunday, Berkshire hosts a 5K run, which I've never attended. But this past year on Sunday, I also went to the Markell brunch, which this previous year in 2022 was Sunday morning at the Marriott downtown. So yet another event to connect with others. But here shortly we'll be talking about the TIP events we'll be doing as well. I just wanted to mention if you're not familiar with Markels. They are typically referred to as the baby Berkshire. And they do a lot of the same things.

Starting point is 00:10:22 If you're really geeky about it, as I guess we are, there are some differences also. So they're having their event this Sunday. And there's always a lot of interesting people around that event too. So we're going to talk about our program later. But I think Clay, that we might go as well. That's how it's looking right now. Partly because some gain of the CEO, he writes really interesting write-up, you can do a Q&A. But again, this is just another great networking events where you're going to meet up with really

Starting point is 00:10:44 anyone in the space. And then a lot of people, they fly out Sunday. And perhaps we'll get to some of that later. But some people stay. And it's often like the hardcore people who also like take Monday off or at least fly out very late Sunday. So please don't get me wrong whenever I say that the quality is like really, really high of the people who go Saturday, but also say like those people who stick around for like Sunday,

Starting point is 00:11:03 they really mean that they're not just there for one event. they're really there for the entire experience and really immersed themselves into the value investing community. And talking specifically about Berksa's event, I don't know if this is the right way of looking at it, but to me it's kind of like whenever I would go to a football game. Just like a football game, you can watch everything much better from the convenience of your own home. Snacks are better, closer to the bathroom, Wi-Fi is better too, by the way, but there's something very special about sitting in that room with Buffett, Munger, Tim Cook, 40,000 other value investors. And there's just this energy in the air, you just can't replicate it. And the first meeting I attended from 2014,

Starting point is 00:11:40 I thought Buffett's event with the Q&A was why I was there. And I also have to say that that is really cool. But I want to say that what I really remember and really stuck with me was the networking events throughout the weekends. It's almost like everyone who go to the Q&A with Buffett and they're just like hyped up and then everyone go out. I don't know. Again, there's this energy in the air. That's just amazing. Clay, perhaps just to make it as approachable as possible, could you talk about some of the other events that you attended last year, just as an example for what other kind of unofficial events you can attend at the Brooklyn meeting? Yeah, so 2022 wasn't quite what we have planned for 2023, but I can dive into what I did 2022 as well. On that Friday, Robert Leonard, host of our

Starting point is 00:12:22 Real Estate 101 show, him and I went to Guy Spears meet and greet at a bar in downtown Omaha. Luckily, William Green, host of our Richer Wiser Happier Series, was kind enough to get Robert and I into that event as I believe it was invite only. I know there are a number of other events and groups getting together over the weekend, whether it be on Friday or Thursday. But what I did was attend guys event for 2022 on that Friday. Then on Saturday, the TIP community got up bright and early, I guess, around 40 or 50 of us in the TIP audience and a couple of us hosts met up at 5 a.m. If we had met a little bit later in the morning, then I'm sure more people would have showed up, but I think going that early kind of deterred some people that wanted to get more rest.

Starting point is 00:13:10 Then we had to wait towards the front of the line for a couple hours. So I had the opportunity to get to know some of the audience members and the doors opened at 7. So we had a couple hours there to chat and get to know each other a little bit. Doors opened at 7 and then the group kind of really got spread out because it's kind of just like total chaos with that many people trying to find a seat. I sat with Folkert, who was a TIP fan from Germany. And I also sat with Trey Lockerbie, our host of We Study Billionaires. Then Trey and I and a number of other members in the audience, we went to that picnic that I mentioned earlier, that's at Nebraska Furniture Mart. And then finally that night on Saturday, we went downtown and met with members of the audience

Starting point is 00:13:50 of the bars downtown for the night. And then finally, on Sunday, Trey and I went to the Markell brunch and got to network with many people in the value investing community. A number of people I've interviewed on the Millennial Investing Show and a number of people that I've, you know, chat with you on the show, too. It's just like, it's pretty crazy how people come from everywhere to come and meet at this one place for this value investing type event. And that was one of the really striking things to me is how far people will travel

Starting point is 00:14:17 to get together with like-minded individuals. And you think about people coming from New York, California. I mentioned I sat with someone from Germany, even met one of my previous guests that's from New Zealand. So it's quite an interesting experience that I look forward to each year. It is amazing how it draws people like, I don't know if I should bring myself in as an example. I guess New Zealand might be even further away. But to me, it's like 22 hours door to door.

Starting point is 00:14:40 Like, I'm going on three different flights to go to Omaha. And it's because it's worth it. And of course, I am biased whenever I say that the best networking events that we have is the TIP events. I guess I'm supposed to say that, but I do mean that. But, you know, thinking about it like this, aside from Clay, who is so lucky that he lives right next door, most people have to fly in. And you don't spend thousands of dollars and take time of your work. And you don't do that unless you're really, really serious about it.

Starting point is 00:15:03 And I guess that's one of the reasons why those networking events are just so much more valuable. For example, Robert and Trey were two of the hosts who attended the TEP events before we eventually hired them. Clay, I think it's the same as the case with you. I did meet you. I wasn't going because I think it was 2017 that you went. So it's not so much in the sense that, oh, we go there because it's a hiring event. That's not so much the point. The point is just more like you meet up with people and at least in my case, I can say that you might end up doing business with them.

Starting point is 00:15:29 I kind of feel like to cliche now, but such high quality people that you want to see, like, can we help each other out? Sometimes it's just a favor. It might end up with someone doing business together one way or the other. Clay, we, TIP, have four events. Could you please talk about our free events and what we have planned? TIP has booked a great venue for each day, Thursday through Sunday. So four different events, one for each day. Just to meet up with the audience, we put together an itinerary for you guys.

Starting point is 00:15:57 So no need to stop your car and jot down notes as you're listening to this. It's all on the itinerary that is linked in the show notes and it will be on our website as well. And we'll also be sending this out to our newsletter subscribers, subscribe to We Study Markets. If you'd like to get signed up for the newsletter, you can go to The Investorspodcast.com slash newsletters or just simply Google We Study Markets. Essentially, it'll just be a meet and greet where the hosts and the audience members can connect and get to know each other. And it's also just a great opportunity for all of us to, like I said, connect with like-minded individuals because it's not often you get to chat with others about

Starting point is 00:16:37 Warren Buffett, Charlie Munger, and the like. I'll also mention that the CHI Center is located downtown and all of our events are downtown just to make it as easy as possible for everyone. Our Thursday event is at a place called the Blat Beer and Table, which is a bar downtown. That'll be from 7 to 9 p.m. We have a space booked that will hold up to 60 people. We'll cover the drinks for everyone up to a certain amount. And we will also have appetizers there as well for anyone as we all just socialize and chat. And I'll just mention here that we'll be giving free drinks and appetizers for all four of the events. So I'm not saying it four times. So the Thursday event is at the Black Beer and Table downtown 7 to 9 p.m. Then Friday, TIP booked a larger space at a place called

Starting point is 00:17:24 Blue Sushi. This is also downtown from 3 to 7 p.m. I expect this event to be a little bit busier as a number of people will be flying in probably Friday morning or maybe early afternoon. Then Saturday, we're at Blue Sushi again from 7 to 10 p.m. And I expect this to be by far the busiest of the four events. Everyone will be in Omaha. It'll be after the event. They're ready to go out and have a good time. So Saturday is when everyone wants to go out. And since we have to up early on Saturday, maybe not as many people go out on Friday. And then finally, on Sunday, we will have another event at the Blatt, and that's from 7 to 9 p.m. This one will be likely not be near as busy as the Saturday one. The Blat will hold up to 60 people and blue sushi

Starting point is 00:18:13 holds up to 110. So I'm thinking we might hit capacity stig on both Friday and Saturday, but we'll see how it all pans out. All the events will be first come, first serve, regardless of whether you register for the event or not, as we can't really guarantee that we'll have enough space to accommodate everyone heading to Omaha. Yeah, and like you mentioned, Clay, it's probably like if we're going to have any kind of, I don't know if I can use the term sold out since it's free, but if it's going to be full, it's probably going to be Friday and Saturday. That's where everyone, you know, flies in.

Starting point is 00:18:45 They're going to stay there for the weekend, typically without Sunday morning or whatnot. And perhaps because I am an introvert, I don't know. To me, it can be a bit overwhelming, like for big networking events. I'm also excited for Friday and Saturday, so please do not keep me wrong. I am perhaps even more for Thursday and Sunday because there won't be as many people and you can get and chat a bit more with each individual and really thoughts of those bonds that would last. So I just wanted to mention that and perhaps give a plug for why you might want it to come

Starting point is 00:19:09 for the Thursday event and Sunday event. It's going to be slightly different than Friday and Saturday. And those events have just a bit more of a, I don't know, it's not like people go crazy and get drunk or anything like that, but like Friday and Saturday are just a bit more like going out, going out, whereas Thursday and Sunday are a lot more quiet, and people are typically there a lot more for business reasons, for like a better words. Anyways, if I'm going to throw that a word to you, perhaps you can talk a bit more about how to register for the events.

Starting point is 00:19:35 If you'd like to attend any of the free events to meet the TIP host and hang out with the audience, it's really important that you register for the event, so we know how many we need to plan for. I included a link to register for the event in the show notes, so please be sure to register for the events you plan to attend. The link to register is also included in the itinerary if you get a hold of that. It would really help us also. If you just register for the events, you're sure you're able to attend. As of today, I expect a number of our hosts to be in attendance with Stig and I. It's likely that T. Laugherby and William Green will be able to make it to a

Starting point is 00:20:12 couple of those. And then a few other of our YouTube hosts and newsletter writers and podcast hosts will be able to attend as well. So TIP should be well represented there. Then for the actual Berkshire meeting itself, I wanted to mention that I decided I'm not going to wake up prior to 5 a.m. this year. I remember quite well how tired I was by midday. And I know U.S. Dig will be showing up, you know, later around 9 or 9.30. So I decided that I'll be getting to the meeting around 650 a.m. if anyone from the audience would like to meet up, you know, with me and the rest of the TIP audience, then you can meet me there at the CHI Center at 650 and then we'll go and get in line at 7. We won't be able to get the best seats in the house

Starting point is 00:20:55 since we're not going at 5 a.m. So if you'd like to get good seats, you probably want to get there before 6, but the TIP community will be getting in line around 7. I also set up a WhatsApp group chat that is linked in the itinerary and the show notes, which makes it easy to communicate with the hosts and with the other members of the audience. For example, I know here in 2022, many people use the chat to connect with others and, you know, for example, get an Airbnb set up. So one guy, Lewis from Colorado, I believe, got together with others and, you know, got a Airbnb together to kind of coordinate staying. And you could go there to ask, you know, what hotels people are staying at. You can see how people are getting around town or just

Starting point is 00:21:36 ask any miscellaneous questions. So being a part of the WhatsApp group, you know, really makes things easier for everyone as it just makes the communication between us all just seamless and you're able to ask me questions if there's anything TIP related that you need to know. 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 from people using Bitcoin to survive currency collapse, using AI to expose human rights abuses, and building technology under censorship and authoritarian pressures.

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Starting point is 00:26:01 And Clay also want to say that I feel your pain about getting up really early I remember the first time I went, I was up at, I want to say about 3.45, because we talked about being there at like 5 a.m. or something, and we had to, I think we had to do a stop before we actually went there and we were staying in Iowa at the time to save some money. And there was definitely something about being that like really early and feel the energy. But it was also hard. And so I guess what I'm trying to say is that if this is your first time and you're, who knows, jet-liked anyway, like go there, go like really, really early and like get the full experience, If you've done it before and you also want to do something Saturday night, which is a blast,

Starting point is 00:26:38 perhaps consider going there a bit later, at least after the Q&A, go back to the hotel and sleep. I mean, for me, flying in, I was living in Sweden at the time, but like for me, flying in, like doing the whole thing for like 3, 45 in the morning, of course not going back to the hotel, but like wanted to do the furniture, mat, like, doing all the events that you sort of read about whenever you follow Buffett. And then also to like to do your thing Saturday night, it was a bit rough. It was a lot of fun. But, you know, I think for me, this time, if I can give in kind of, especially if you've done it before,

Starting point is 00:27:06 you don't have to get in as early. And if you can get like a nap somewhere in between, it typically is a good investment for Saturday night. But we are quite excited to see how this pans out. We haven't really done the same thing about booking venues, the same way we're doing this time. You know, in the past, we have pop crawls. And they've been a lot of fun. But as we continue to grow, it has become increasing a hot to jump from bar to bar because sometimes they're just not room enough. I guess last time, we were like, I don't know, 250 people at some part in time and listeners of TAP. And it was just like, that's a bit challenging. So this time, we decided to book four venues and ask the audience to come and meet up with us there instead.

Starting point is 00:27:42 Clay, most people who are listening to this episode likely haven't been there. Perhaps they're considering it might be the first time. I would think that a lot of them have the same questions. At least I can hear now that the questions I have whenever I started, that's the certain questions I see all over our WhatsApp group. We have a website with all the practical information, but I wanted to run through some of the most frequently asked questions with you. How to get access to our events and who typically attends our events? There's two places to look to get information about the events. The easiest would just be to click the link in our show notes, or you can go to

Starting point is 00:28:15 Theinvestorspodcast.com slash Berkshire. That website shows essentially our itinerary information, what's planned, where we're meeting, what time we're meeting, all that. The itinerary is also included in the show notes. As for who attends our events, really, it's just fans of the show, people who want to meet the TIP hosts, or people who just want to hang out with like-minded individuals. If you've listened to this far into the episode, odds are you would be a great fit to come hang out with us.

Starting point is 00:28:45 As you mentioned earlier, you've also met people in the audience who you eventually ended up hiring. So if you happen to have any interest in working for TIP or just meeting Stig and the rest of the host, then I think this is a great opportunity to connect with us, see what TIP is all about, and what opportunities we might have for you. Thank you, Clay, for bringing that up. I just want to emphasize, even though I kind of feel I've been doing this pretty poorly until now, that it's not like, we're doing events for like just general networking,

Starting point is 00:29:12 see if we can help each other out, talking about investing, talking about Buffett. All of that being said, I have noticed that quite a few people that we have hired on the team have either been people we met at the event or someone who attended the event. And we just got to get to know each other later. And so if I can just do a plug, we have a position open for right now at the time recording for a financial writer, but also a new YouTube post. And you can always be updated on the current openings at the investors podcast.com slash careers. It's the investors podcast.com slash careers. And we are, of course, like any other growing company, always looking for talent. So if you think that TAPE could be a fun place to work,

Starting point is 00:29:48 especially Thursday and Sunday might be fun for you to attend. We have a bit more time to get to know each other. But I kind of feel like I'm making this sound like it's going to be a networking slash hiring event. It's not so much the case. It's more like we're all fans of the whole value investing community. And that's why we hear. I think that's important for me to emphasize. When I was looking back through our chat in the WhatsApp group last year, it was pretty funny looking back at all the pictures. People were sending each other. You know, people were going crazy trying to get a picture with Monish Pabri, Toby Carlisle, Morgan Housel, Lee Liu, Guy Spear. The list goes on on the types of people that are at this event. You never know who you'll run into or really what

Starting point is 00:30:27 opportunities might present themselves for this. So, you know, just talking about it, it's getting me quite excited, even though we're plenty of months away from the actual event. And Clay, now that you bring it up, I should speak to Toby. I haven't talked to him, but I'm pretty sure he's going. He usually is going. It could be fun to invite him to some of our events. Yeah. So it's really the Hoosoo in the Valley investing community. And then, of course, Tim Cook, which I guess is even more well known. But Clay, perhaps for those who are just interested specifically in the Berkshire event, at least, I guess, especially if you're there the first time, that is the one event you don't want to mess. How do you get access to Buffett or, I should say, Berkshire, see a whole lot of event?

Starting point is 00:31:02 Yeah, so anyone can attend the Berkshire Annual Meeting who holds at least one share of stock. You don't need to own the $430,000 Berkshire A share. You just need one share of Berkshire B, which is under $300. And, you know, there's still even a work around that. You don't have to have a share of Berkshire B. But that's the easiest way to get a hold of a credential to get in. And another way to do it is just to know someone like you, Clay, who is a shareholder and then get what are your credentials? Like, no one is checking or like looking up that you are the actual shareholder. And very often what happens whenever you order those credentials is that you get four. And many people go there alone. So they always have quite a few they can give out.

Starting point is 00:31:45 Clay, perhaps you can talk a bit more about that process about getting those credentials. So Berkshire sends out their annual report, and inside that, their inclusive form in which you can mail in your credentials for your proxy statement. And, you know, I usually do that one or two months in advance. So since the meetings in May, it's probably in the March time frame that I'd send that in to Berkshire. And like you mentioned, Stig, each shareholder gets four credentials. And since many people are coming from all over the world and the mail is going to Omaha, can take some time for shareholders to get their credentials, especially if you're so far away. So you really don't need to worry too much if you mailed your deal in two months earlier

Starting point is 00:32:25 and you still haven't got it back in time for the meeting. A lot of the people in the TIP audience are going to request for credentials and they're going to bring extras to come to the meeting. I can't provide any guarantees, of course, but if you happen to not be able to get your credentials that you mailed into the office and get back, odds are you're going to get it back. in time if you do it plenty of time ahead. But in the case where you don't get in in time, don't cancel your trip to Omaha. It's likely that many people in the TIP audience, many of the hosts will probably have extra credentials if you meet up with us on Thursday or Friday before the meeting.

Starting point is 00:33:00 I would be very surprised, Clay. Without making any promises, I would hate for anyone to fly to Omaha and then think that they had a credential through us and then didn't. We had one event one year. I want to say there were like 60 people and we just asked around not every single person, where we just like said whenever we met people, if they had any extra credentials, if they could just put it in the box. And I think we ended up with like 80, 90 extra credentials. And that was just like 60 people. I completely agree with you. Please make sure to go to Omaha. I found it really, really hard to believe that we won't have extra passes. And also like the security. I guess I don't want this golf wrong, but like they have to check that you do have the credentials with you. It's not the most, how can I put this efficient security like I would not be surprised if you could just get in without showing it.

Starting point is 00:33:43 because they don't really have an incentive for you not to go there. Of course, there's like a limited amount of people like, I don't know, 40,000 people who can attend. But you're going there and you're going to spend money there and they want you as a customer. And like, they have no incentive to be like, no, you don't have this credential. Again, I don't want to over promise and I'm pretty sure that we're going to have enough. But I just remember going to my first event, that was the one thing I was most concerned about. And it quickly turned out it was the last thing anyone should be concerned about. How about we talk a little bit about accommodations because one of the most common questions I get in the WhatsApp chat is what hotels I recommend. So maybe I pass it off to you and ask you where you'll be staying in Omaha.

Starting point is 00:34:22 Yes, thank you, Clay. And going from something that isn't painful to something that's a bit painful, that is accommodation. And it's just, you know, the prices just through the roof that weekend, especially Friday and Saturday nights are pretty crazy. During the first two events I attended, I stayed in Council Bluffs, Iowa, which is around, you'll probably know this better than me, play with like 15, 20 minutes away, something like that. So it's a three-star hotel, and it's a little cheaper due to the location, but you probably would still end up paying a few hundred dollars per night for those two nights. On every other day, it's much, much cheaper.

Starting point is 00:34:56 Another option is staying downtown so you can walk to the events. It's more expensive, and again, I need to point out the irony that we are value investors and we care all about price, but we go to a city that's normally cheap, but it's Manhattan prices that specific weekend. Just as an example, I stayed at a two-star hotel in just a perfect location, and it was the cheapest I could find, but still I paid $276 for the room, and my door couldn't close, and I didn't have hot water. So I just wanted to mention that whenever you go there, that it's just expensive with the

Starting point is 00:35:29 accommodation, and another thing is just, I don't want to discourage you from going. It's well worth going because there are other options including Airbnb, but you really have to be prepared to spend some cash for your accommodation. This year, I'll be staying at the residence inn by Marriott Omaha downtown, old market area. That's the full name that I pulled out from Google. Google tells me it's a three-star hotel. I haven't stayed there before, but the location is really nice. And I'm flying out Wednesday and then leaving Monday. So that's five nights and I'm paying north of $2,000.

Starting point is 00:35:57 So it's not a fancy hotel. I just want to say that for it, at least not based on the photos. It's a probably decent. It's like a three-star hotel. That's what Google is telling me. But it is just expensive. So if you're not into hotels or you want to save some cash, perhaps you look into Airbnb or something like that. I know it's also been popular in the past to find someone you can share accommodation with through the WhatsApp group. So that might be another way to go. And then there's also this other option, which is quite interesting, that some employers have a budget for college training seminar, education. And sometimes they would approve an event like this. So you might be able to get some of the cost covered by employer. So, Clay, I wonder if you have any kind of home field advantage, given that you're based in Lincoln, Nebraska, just an hour away. Because it's, I can talk like whenever they hear myself, I kind of feel that what I'm doing is not the most optimal thing, especially if you want to save some cash and you're flying in.

Starting point is 00:36:45 Where will you be staying? I'm not the best person to ask for advice on where to stay, because I went to really cheap and easy route since I'm from Nebraska. I'll be staying at friends that I know that live in Omaha, and since I only live roughly an hour away, I'll also have my car there as well. So I don't have to worry about Ubering around. Although, I do think Uber's are great in Omaha and not overly expensive, maybe $20 to $25 to get to Nebraska Furniture Mart, for example, but obviously depends on how many drivers there are and whether

Starting point is 00:37:18 Uber prices have changed over the years. But I do think Uber's are great. And, you know, it would be ideal to stay downtown. But like you mentioned, downtown is going to be more expensive because almost all the events that are going on in Omaha are going to be downtown. And like I also mentioned earlier, there are many people in the chat that kind of organized an Airbnb where four or five people all stayed at, just a giant house with multiple bedrooms. So if I were traveling to Omaha from outside Nebraska, I would probably prefer to stay downtown, maybe check some of the prices and see if it fits within your budget.

Starting point is 00:37:52 Otherwise, you know, you mentioned Council Bluffs, which is essentially neighbors, Omaha, essentially the same city. And also, there are, of course, hotels in other areas of Omaha as well. I know Berkshire, they've posted on their website to link some hotels they recommend. So that might be a good place to start for some people. Yeah, and I just wanted to highlight that whenever you're listening to this or whenever this is being published, it's going to be like six months until the event is there. But make sure to win a book now. Whenever I was booking my hotel, I don't know if this is like a hotel. kind of thing, but they said like three rooms left, and it probably is. But I have experienced in the past where I booked a few months in advance that I could only find like one or two hotels,

Starting point is 00:38:35 unless I really wanted to go super, super expensive, which I didn't. So just a piece of advice if you want to go. You really have to be out there early. Clay, do you have anything you want to talk about for events, for the meeting before we transition to the next segment of the show? What we're going to talk about the intrinsic value of Berksake Helway? If you're going to be traveling to Omaha, I encourage you to check out the itinerary for our TIP events. If you plan on meeting up with us, be sure to register using the link on our website or on the itinerary. And I'll just echo what you said where, you know, the earlier you book this stuff, your hotel and your flight, the better, because I'm sure the prices are only going to get worse as we

Starting point is 00:39:13 approach it. And as many people kind of book last minute and when they decide to go. So, yeah, the more you get ahead of this stuff, the better. Yeah, I think that kind of hits. on everything important. I'll be in the WhatsApp group chat if you have any questions. And that helps other people too because they'll be able to see the questions too. So yeah, how about we just talk about Berkshire Hathaway stock? Yeah, so Clay, this is one of my favorite topics. I love talking about Berksa Heatherway, love talking about the intrinsic value. And there's just something beautiful about it because we are, at least many of the listeners here, were told how to think about intrinsic value from Buffett himself. So using some of those techniques valuing his company,

Starting point is 00:39:50 there's just something beautiful about it. So, Berksa Heatherway's stock is the one I've held on to the longest. I bought it back in 2013, and I'm still holding on, and I'm glad I did. It's the biggest individual stock position that I have. It's around 9-ish percent right now of a total investable portfolio, and it's around half of everything I own individual stocks. So I do have some exposure to the stock myself. So who knows, it might mean that I'm biased, but it's certainly a stock that I'm following quite closely. Whenever you look at the landscape of US stocks today, it seems like Berkshire has held up a lot better than the general market. So, as an example, over the past 12 months, in absolute numbers, Berkshire is down less than 1%. But you might not find that super appealing, but the SEP 500, for example, is down 20% in the same time. And what's interesting about Berkshire is that whenever there is a bear market, typically perform better. Again, they might still at drop in price, but comparatively, they are performing better than the general stock market. Whenever there's a bull market, they typically don't perform as well. But whenever you crunch the numbers

Starting point is 00:40:50 in absolute numbers and you both add in the bull markets and the bear markets, Berkshire is performing better than the stock market. So I just wanted to mention that. And Buffett has done this for a very long time. Clay, I know you looked into the return of Berkshire from 1965 whenever Buffett took over. So as an example, let's say that you invested $10,000. How much would you have accumulated in the SP 500 compared to Berkshire Hathaway. This is just mind-boggling whenever you consider the compounding effect. Yes, I put together a number of episodes on Buffett and his company Berkshire Hathaway. If someone hypothetically would have invested $10,000 in Berkshire Hathaway back in 1965, that would have led to $284 million at the end of 2021, versus if you invested in the

Starting point is 00:41:38 S&P 500 at that exact time, you would have accumulated $2.68 million. So, So in terms of the return difference, it's 20.1% for Berkshire Hathaway and 10.5% for the S&P 500. So it just goes to show, you know, how much that additional compounding, how far that really goes when it's applied over a period of 56 years. And, you know, it's kind of funny how Buffett really got ridiculed, you know, in 2021 and 2020, especially when people were comparing Berkshire Hathaway to something like the ARC fund with the high-flying growth stocks. And after reading through Buffett's biography, that period actually reminded me so much of the 1999

Starting point is 00:42:18 tech bubble where many investors and fund managers just said that Buffett's strategy was dead. The days of value investing were gone. And tech was where the money was to be made. And during that time, really, you were the crazy one if you hadn't bought any tech stocks. Like, that's how extreme it got. That's where everyone was making money. And I believe Berkshire, you know, it was just a dog during the 99 tech bubble. and it was really just the pinnacle of FOMO investing.

Starting point is 00:42:44 Well, history has shown that when people say that Buffett's value investing strategies are dead, is typically the buy signal for Berkshire, at least relative to whatever's hot in the market. So 2021 and 2022 was no different, as you just referred to Berkshire holding up much better than most stocks in the market. So Stig, I'm curious, given the drastic performance over the many decades, what do you think of Berkshire's valuation today? Well, I'm still bullish on Berkshire at the current price. I don't think it's crazy on the value, but I do think it's trading and appealing value. Or I do think it's trading an appealing price. And I just wanted to clarify, it's very important that we distinguish between price and value. Whenever I talk about the price at the time of recording, Berksia is trading at $289. That's the price.

Starting point is 00:43:32 We're going to focus on the value. What do we truly think it's worth? For this intrinsic value assessment, I'd like to focus on the B shares and the intrinsic value of them. As you might know, Berkshire has A shares and B shares with different voting rights and a different corresponding price to those stocks. For retail investors, there's no need to focus on voting rights. That is certainly the case for Berkshire's shares too. So Berkshire A shares are trading at a 1,500 times the price of a B share. And B shares have at 10,000 of the voting right rather than a 1,500 voting right. But unless you have a lot of shares and you want to have a say on how Berkshire is run, there's really nothing to be concerned about.

Starting point is 00:44:10 Those rolling rights really doesn't matter. And by the way, Buffett owns a ton of the stock, even though he's doing everything he can to give them away. And he won't be all ruled by investors, at least not for a very, very long time. So even if you wanted to have a say and had a lot of money, it probably would make any difference when you look at what that would cost you. So there's really no added value with the A shares. So just a bit of history to the BCS. They were originally issued in 1996 as many investors wanted to invest with Buffett but couldn't afford a single Asia which at the time was trading at $30,000.

Starting point is 00:44:42 And that air share is trading at around $430,000 today. You might know this saying that when the ducks quack feed them, and that is exactly what Wall Street did at the time. So they bought air shares and sold small pieces at a premium to the public. Buffett obviously didn't like the scrublous practice. So he issued B shares. That's all intents and purposes were the same as A shares. just trading at a lower price. And then in 2010, we had a 50 to one stock split, which is why the BCS today is now trading at 50 times 30 or 1,500 times the price of an Asia. Before we do our

Starting point is 00:45:14 intrinsic value assessment of Berkshire, I always find it interesting to look at insider buying. The reason my insider buying is interesting is that you're looking at which prices are people buying at, like those people who know the company better than anyone else. For example, no one understands the value of Berkshire better than Buffett. So as much as I would like to do my own assessment, I can't help but look at how Buffett values Berkshire. If you follow Buffett's writing, you also know that he will only repurchase shares if you can buy them at a discount. So what Buffett would call a conservative assessment of the intrinsic value. In other words, if you can buy shares at a lower price than what Buffett had Berkshire is buying them at, you're likely getting a good deal. So if we look all the way

Starting point is 00:45:51 back to the Q1 filings, we can see that Buffett, for example, bought most of his shares back between $312 to $322, and that was back in February and March. And you might then be surprised to learn that in Q2, he only bought very little back and only in June for the average price of 276. And you might be thinking that doesn't make any sense, why wouldn't he buy much larger quantities in Q2 than Q1 because the price is lower? We also know that Buffett had a lot of cashed like more than $100 billion at the time, so it's not because he was cast strapped and he couldn't do it. The reason is that opportunity cost changes all the time. When Berkshire stock is cheap, it's often because other stocks and other companies are cheap too.

Starting point is 00:46:29 In this situation, whenever we're seeing Berksha's stock fall in price, it's not anything near what the rest of the stock market is doing. So everything else equal, despite Berkshire seemingly being cheaper, the rest of the stock market is cheaper too. And we also have to keep in mind that buying back shares is not Berkshire's first priority. Buffett has said this during multiple shareholders meeting that he would rather reinvest in the businesses that Berkshire already own or buy whole new businesses before they buy back their own shares.

Starting point is 00:46:57 That requires cash, and that is why Buffett in Q2 bought less of Berkshire stock. At the time of recording, Berkshire just released the earnings for Q3 over the weekend, and the market just opened. Buffett bought back $1 billion worth of Berkshire stock, and that is less than a 1% annualized buyback yield. So it's very, very little. The shares are brought back between prices of $282 to $296. So with the current price of $289, you are somewhat in the market.

Starting point is 00:47:27 middle of what Buffett is currently buying back shares for. And keep in mind that when the interest rate, as has happened this year, goes up, all other assets, including Brexit Helloway, goes down in value. So that's just another thing to keep in mind. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a SOC 2 or running an enterprise GRC program, VANTA keeps you secure and keeps your deals moving. Instead of chasing spreadsheets and screenshots,

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Starting point is 00:50:51 This and other information can be found in the income funds prospectus at fundrise.com slash income. This is a paid advertisement. All right. Back to the show. Another interesting thing worth considering Stig when it comes to the insider buying is, you know, who the next leadership team is going to be once Warren and Charlie are gone. I noticed that Greg Abel had purchased shares in the insider buying activity.

Starting point is 00:51:16 What are your thoughts on that? Greg Abel is a very interesting character because he's vice chairman of the non-insurance operations and he's widely expected to form the leadership with a G. Jane, who's the vice chairman of insurance operation. So this won't happen before Buffett and Munger steps down for whatever reason, but that is the expectation then right now. Then we're also going to have Ted Wessler and Tom Coombs and they will be managing financial assets, including the equity portfolio.

Starting point is 00:51:42 but not be running the actual business. But going back to actually answering your question, to me it's interesting to see giving how central Greg's role is, or Greg Able's role is, that he bought back shares in the open market. First, perhaps, I should say, and now I'm sort of like dodging your question, but Berkshire has a different approach

Starting point is 00:51:58 to giving out stock options to key people. They don't. Buffett wants the executive to think like owners and not just becoming shareholders because they're getting free stock in the company. That's not how to think about running a business, if you ask Buffett. He also talked about how he wants his executive and board members to already be financial independent.

Starting point is 00:52:16 Like, the driver should not be for them just to make more money. They should be a greater goal. And he doesn't believe in just incentivizing people with money. I kind of like that because it's a good signal that they know how to handle money. And if they know how to handle money and they're themselves financial independent, they also have the back of the shareholders. They don't have to cater to a CEO or like they can truly be independent and take the tough decisions that you otherwise would not be able to do if you were not independent or if you really needed the

Starting point is 00:52:44 money to become re-elected to the board or whatever it might be. But to your question, in a finding from September 29, Greg Abel bought 68 Asia's, which is worth today around $30 million, an equivalent price of $270 per Bisha. And he made the purchase on behalf of a family trust. To this story, I want to mention that Greg Abel has tied up a big part of his net worth in Berksa Hathaway Energy, where he recently sold his stake for 80s. $870 million. So he's in no way in the same boat as Buffett, where more than 99% of his net worth is tied into Berkshire Heller's stock. But it is nonetheless a strong signal that an insider who knows Berkshire almost as good as Buffett find the purring price somewhat attractive.

Starting point is 00:53:25 Again, he bought it around 270 and we arrived out at 289. That's not how to value a stock. It's not a few percentages here and there. You want the margin of safety. But I just found that interesting. A bit more information about Greg Abel, even if Berkshire would default, which I guess none of us think is going to be the case. He will probably be okay. I talked about his net worth before. He also has a $16 million salary plus a $3 million bonus from his current job. And I can't help but say that I hope he will follow Buffett's example whenever he leaves by tying up more of his net worth into Berkshire. Of course, this is a tough act to follow. Buffett, as mentioned before, has more than 99% of his net worth in Berkshire Hathaway stock and he takes a $100,000 salary.

Starting point is 00:54:06 But let's do our valuation. So whenever we look at the earnings power from the operating businesses and normalize them, and this is one of the things that Buffett talks about, like it should be focusing on the short-term net income. That's not too relevant. They own a bunch of equities too. All of that goes directly through the bottom line in the income statement. So like if it's a bull market, it looks like Berksha is a lot more profitable than it truly is, and vice versa, if it's a bare market.

Starting point is 00:54:30 So he really want you as a stock analyst to focus at operating earnings. And if we normalize them, we get around $30 billion pre-taxed right now, then you could assign appropriate multiple. Generally, the higher quality and the more expect them to grow, the higher you can assign that multiple. And then, on the other hand, you can also say that a higher interest rate gives you a lower multiple since you have different opportunity cost. If I have to sign a multiple, I want to assign around 15.

Starting point is 00:54:57 And I do that because of what I just said before, the interest rate is going up, which is not good for the multiple, but the assets are really high quality. So that's sort of like posted it in the other direction. So in very rough numbers, multiply 15 with 30, you have $450 billion for the operating part of Berkshire Holloway. Then today you have $300 billion in equities. This is approximate number. I just pull up the Q3 filing and says $306 billion.

Starting point is 00:55:21 But same same. We're trying to make a somewhat accurate assessment. Again, if you have to focus on 1% here, 1% there, that's not the way to value your stock. You want approximate numbers. I think there was this saying that you want to be approximately right, not exactly wrong or something like that, and I kind of feel that's also the case here. So for simplicity, I assume that whenever Berkshire has 300 billion equities, that is also worth around 300 billion

Starting point is 00:55:44 dollars. It also depends very much on how you want to value Apple that is 40% of his portfolio. I know Clay that you're going to talk a bit more about it here later in this episode, but without derailing the conversation too much, and we can talk into any specific holdings, but like if I generally and broadly look into the stock portfolio that Berkshire owns, I would say that it's approximately fairly valued. If you have to put me on the spot, I would probably say that it is slightly undervalued, but it's so close that let's just for the sake of arguments, say $300 billion. It's a round number. Then you also have a $109 billion in cash. You can choose to add this number as you would use a more creative route. You can also assign

Starting point is 00:56:24 a optionality of that cash, because historically that's been very profitable for Berkshire to have that. And you might even add that to the earnings power if you want to. But whenever I've been doing all of that, I will come up with a valuation around $900 billion for the company. That will give you an intrinsic value of Ebersia of around 400. If you want to know a bit more about valuation, I interviewed Chris Broomstrem here on the show back on episode 438. This was back in April, and he is doing a brilliant job breaking down four different ways of how to value Berksia. He came up with $429 of his intrinsic value for Abesia. I'm a bit more conservative, and I also want to say that I think we all want to buy

Starting point is 00:57:02 $1 bill for 50 cents. And I'm definitely guilty as charged. I also want to say that for a company like Berkshire Hathaway, I might be okay with a slightly lower margin of safety because it's a more stable company and has a very solid downside. So depending on what your goal is, this is a stock that I think would be a good stock to buy. It would be a good stock to buy, even though you can probably argue that you can find stocks out there that are trading at a significantly lower discount to intrinsic value? Well, if we assume that the intrinsic value for Berkshire Hathaway is $400 and the stock at the time is trading at 287, then that's still a pretty good discount for a stock that's widely known. It's roughly 28%, which definitely seems quite compelling for those that may want to initiate a position

Starting point is 00:57:48 or maybe add to their current position they may have. One item I like to look at too is the earnings yield for a company like Berkshire, because oftentimes, when I'm investing in stocks, individual stocks specifically, I'm often investing for the future growth of that company, such as a company like Apple, for example. I expect Apple to continue to reinvest back into their business and increase their earnings, and they have opportunities to do so, I believe. However, when I think of a company like Berkshire, I almost think of it as like a bond whose earnings happen to grow over time. So I'd like to take a look at, okay, how much earnings am I getting today when I purchased Berkshire shares? So you mentioned the $30 billion from the operating

Starting point is 00:58:35 business pre-tax. And if I apply a conservative tax rate of 21%, it's likely lower for Berkshire, but I'm going to use 21% for this example. That brings the post-tax operating earnings to $23.7 billion. Then if I do the look through earnings of their stock holdings and say, okay, for the stocks they own, what earnings are looked through for Berkshire? So I used a spreadsheet that Adam Mead put together for the audience when he was on our show. And I pulled in Berkshire's most recent 13F filing. And I came up with $17 billion in look through earnings for Berkshire. So adding those two together, that gives us $40.7 billion in earnings. And when you divide that by the market cap of roughly $630 billion, and I get a 6.5% yield on the bottom line earnings.

Starting point is 00:59:27 Considering the 10-year treasuries at 4%, you know, it is a higher yield, but obviously it comes with, you know, maybe a little bit more volatility. So it's important to have that longer term time horizon too. Thank you, Clay, for highlighting that. I also wanted to paint a bit more color around the interest rate. Like most of the listeners to this podcast, they have been used to very low interest rate. And all of a sudden, the interest rate is just skyrocketing in very, very short period of time. and it has impacts on all financial markets, and that also includes Berkshire Heatherway.

Starting point is 00:59:56 One thing that I mentioned before is that you can now attribute more value to cash for a company like Berkshire. It's not just sitting in the bank. It's invested in something with a very short duration. And Buffett was previously asked about this during one of the annual shareholders meetings. And he's talked about how the cash that Berksha has is invested in short-term treasuries. And at the time, it was with a median duration of four months. I would imagine it's somewhat similar right now.

Starting point is 01:00:20 If you do that today, you have an annual return of around 4%. It just doesn't make any sense for a company that works at their size not to do that whenever you have so much cash. And there's a very low downside to that because even if the interest rate go up, it doesn't have too much impact on the value of those bonds. It's more or less the same as bonds. It just gives you a bit of return too. So it also means that as the interest rate is going up, the optionality value, or for example,

Starting point is 01:00:46 investing in common stock is different too. Buffett is not chasing a 4% return, that's for sure. But you can think about it like this. If he can make 4% safely in bonds, short-term treasuries that comes at no risk, well, he needs significantly more now in opportunity costs to invest in something else where he doesn't have that safe return. Also wanted to mention that this should not be confused with the bonds that Berksja are buying for the insurance operations. This is through a process that's called matching. As an insurance operation, you need to match the claims. So claims of XYC will happen to one of your customers to make sure that you have money on hand whenever that is due. And that claim will be worth less, not worthless, but worth less,

Starting point is 01:01:26 whenever the interest rate is immediately high. But when the new policies are underwritten, the income for those bonds will also be higher. And I should also say that the situation today is a little weird because we have an inverted yield curve. Typically, you have a higher return on your longer duration bonds. So, for example, the 10-year yield would be higher than a two-year yield. though it's not the case at the time of recording. Another thing I would like to highlight for you to consider if you were to invest in something like Berkshire is that we are entering inflationary period or you might even say that we are certainly in the middle of it. And I would much prefer to have an expert like Buffett managing the company than any other CEO. Most CEOs have no

Starting point is 01:02:04 experienced managing company in times of high inflation. And after they came down in early 1980s, Buffett has. And I've learned a lot more about inflation from him than any other investors or CEO, like he really gets it. And I think that there is an underappreciation among many people in leadership right now who thinks that either this is transitory inflation or it's probably going to be somewhat the same. It's not the same managing company if the inflation rate is 10% or higher as opposed to 2%. It's just a very different beast. And I feel very comfortable having Buffett on my team in times like these. Having said all of that, Clay, I want to talk a bit more about Apple. Apple is around 40% above its portfolio. So that's around 120%.

Starting point is 01:02:45 $20 billion. And this is a company that's $600 plus billion. So approximately fifth of the market value of Berksa Heatherway, that's Apple stock. And I know that you look a bit more into Apple. And to value Berkshire, you could also argue that you need to be able to value Apple stock. So I wanted to bring that extra component into the mix. So, Clay, please take it away here. How do you assess the intrinsic value of Apple?

Starting point is 01:03:09 First, I wanted to hit a little bit on the inflation piece you were talking about. I've thought a lot about inflation and I've done quite a bit of research on inflation recently. And I was quite surprised to see that over the past decade, the theme has really been growth investing. Growth has vastly outperformed value throughout the 2010s until just recently that has turned in 2022 specifically. But when I look at past decades and how growth and value has kind of compared, some of the best decades for value relative to growth has been during times of high inflation. So if you look at

Starting point is 01:03:46 the 1940s, the 1970s, the 1980s, as well as the 2000s. The 2000s, I don't believe, is quite as inflationary as the others, but during inflationary times, value stocks thrive relative to growth. So that alone makes me a bit more attracted or makes Berkshire a bit more of an appealing investment for me. So with that, I'd like to transition to talk a little bit about Apple. I recently released an episode talking all about the intrinsic value of Apple as well as Dollar General. That was episode 489. And during that episode, I came to the conclusion that Apple's price today around $140 per share is either fairly valued or possibly slightly undervalued. All just kind of depends how the growth of their free cash flows play out into the future.

Starting point is 01:04:32 During my assessment, you know, which may be slightly optimistic, it probably depends on who you asked. I assumed a 12% growth rate of their free cash flows for the first five years, and then 9% for the following five years, years, six through 10. And then I trailed off the growth to 6% for the following 10 years and then 3% after that. And for that scenario, Apple is expected to achieve a return slightly above 10%. But of course, Apple's growth might not be quite as good moving forward. So I also consider the possibility of the recession hitting or something pushing the free cash flows down for the coming year. So I brought down those free cash flows by 20%. And then I just use the same growth figures going forward. And that still put the stock around the value it is today, which is $140. And that's using a discount rate of 10%.

Starting point is 01:05:29 So that essentially means that if you purchase the stock today, using those free cash flow assumptions, you would achieve roughly a 10% return. You know, again, some might say that was a bit optimistic. So I was interested to see what their recent quarterly earnings report showed because, you know, there's so much pressure on stocks today with the macro environment we're seeing. They released revenue of $90 billion for the most recent quarter, which was up 8% year-over-year from $83 billion. The quarterly earnings per share were $1.29 per share, and that was up 4% per year. But their earnings over the entire fiscal year 2022 was up 9%, so a little bit better than just the

Starting point is 01:06:11 quarter alone. And considering the macro environment and how well many other stocks have weathered through this, I think it was a pretty good quarter for Apple. And the two segments I like to keep my eye on when looking at Apple is their iPhone segment and their services segment, because I think those are two really key pieces for them. Their iPhone sales were up 7% on the year. So fiscal year 2021 was $191 billion. Fiscal year 2022 was $205 billion. And then for the services segment, that was up 14% year over year for fiscal year 2022 from $68 billion to $78 billion. And one insane statistic that stood out to me was their number of paid users for their services. That's up to 900 million, which is an increase of 154 million, which is just insane to think about how they'll

Starting point is 01:07:04 likely be hitting a billion users for their services segment for fiscal year 2023. And I think one reason I like to look at the services business, it's a smaller segment of their overall business today, but it's one of the key drivers for their growth, one, because it's one of their faster growing segments, and two, it's much higher margins. Their gross margins on their services segment is 70%. Plus, the recurring revenues that services business brings is very good for them because that recurring revenue is valued much higher than, say, an iPhone sale or their AirPods, where they need to sell it over and over. The services is much less friction for their business. So, for example, if someone purchases Apple Music for 1099 per month, and many of these users that purchase Apple Music are going to buy it and have it for the next five years plus, and they make that purchase once, and it just gets pulled out of their bank account each month.

Starting point is 01:07:59 So within their services business, I also want to touch on what else they have in there. They have Apple Pay, they have Apple Care, they have their ICloud segment where they charge a monthly fee to store their data. So on top of the many successful products they sell, they're also really good at expanding their ecosystem and their value proposition through their services business. Now, hitting more on the iPhone sales, the iPhones consisted of 52% of their revenue for fiscal year 2022, and their services business increased from 17% to nearly 20%. And Apple's revenue overall grew by 8% while their free cash flows actually grew by 20% year over a year. I think it's

Starting point is 01:08:39 also really important to note that the dollar has strengthened significantly over the past year, as Apple does business outside of the U.S. and many other countries. Just looking at the DXY, the DXY over the past year has increased from 94 to 110. So other Fiat currencies in that basket that Apple is accepting, those are declining in value, which puts some pressure on their earnings because they're earning in something that's outside the dollar while the dollar strengthens. And then they report those earnings in dollars. And that's a really good point you bring up play, which is also why whenever you go through earnings calls, they talk about what's the revenue number, an absolute number, but also what if it was in constant currency? And I think that's important to keep in mind.

Starting point is 01:09:22 And it sort of like goes back to the whole thing about inflation too. There is only so much you can do in different markets when the price is going up or whenever the exchange rate changes. If people are used to paying $1,000 and now you're in Europe and it's, let's call it a thousand euros, there's only so much you can do. Like consumers in Europe don't really care too much about the value of the dollar. They're looking at how much money do they have and what can they spend. And so in times of inflation, in times of having a currency that's going against you,

Starting point is 01:09:49 there's only so much that you can put on the consumer. And of course, you can make the argument that a company like Apple can put more than due to the brand value can put more than other companies. But still, your margins just tend to be hit even for a fantastic company like Apple. And so I just wanted to mention that. I'm sorry, Claire, kind of felt like I stopped your train of thought there. Now, looking at what Buffett's done with Apple, you know, ever since he entered the position in 2016, it's just done spectacularly well,

Starting point is 01:10:16 yet Buffett's continued to buy more. In his most recent 13F for Q2, 2022, Berkshire purchased 4 million shares of Apple at roughly $160 per share. And when I analyze a stock, I like to look at how the multiple for the stock has changed over time because different stocks and different industries trade at different multiples. So you can't compare two different industries based on just the multiple alone. So looking at Apple, for example, their multiple has been trading at elevated levels ever since the pandemic hit.

Starting point is 01:10:46 Zooming back to 2016, when Buffett first bought, the price of free cash flow, for example, was around 10. And then in 2017, 2018, it was in the 15 to 17 range. And then in 2021, it hit nearly 30, so nearly double where it was a few years prior. And then now today, the price to free cash flow is around 20, giving investors just based on this multiple free cash flow yield of around five. And, you know, Apple isn't a company that's going to make Buffett or make us rich over the next decade. But I do think it is a company that will continue to grow, thus likely providing a reasonable rate of return relative to the overall market. It's more so what Buffett says, are great company trading at a fair price. And I don't believe that today's price is a bargain by any means.

Starting point is 01:11:33 You mentioned the buying 50 cents for a dollar earlier, but especially it's not a bargain since many other stocks in the market have fallen. So there might be a lot better opportunities in other sectors of the market. But again, I just think Apple's a great company trading at likely a fair price. And I'd encourage the listeners if they'd like to learn more about Apple, get a bit more of a deep dive. They can check out episode 489 where I dive a little bit deeper into my analysis and, you know, what's inside their business. And so to your point, Clay, Buffett did buy stock in Apple in Q2. And I wanted to offer a new percentage. perspective to this because Apple is also buying back roughly around 5% back of their shares a year.

Starting point is 01:12:15 So by owning Berkshire, you get a bigger share of Apple's ownership in two different ways. You own more and more of the ownership of Berkshire and in turn, Abel because Buffett is buying back shares in Berkshire, and you own more of Aval because they are buying back shares. And it might not seem like a lot, but the compounding effect of this is really immense. I remember there was one annual letter where Buffett talked about that he trained his position a bit in Apple and there would have been some talk about what that means. And Buffett says, oh, wait, you actually own a bigger part of Apple now than you did before. Just because we are selling a bit of Apple, which I should say is not the case today. He's actually adding. But just because he's

Starting point is 01:12:49 selling a bit of Apple, you might still end up with a larger ownership shares of Apple due to those two reasons. Yeah, Buffett loves share repurchases. I feel like a lot of meetings, he mentions it or tell some story. He did it in 2022 of a company he's owned for decades. And he just showed how his ownership has drastically increased while he hasn't purchased any more shares. So Buffett's definitely a big fan of buybacks. And I think that's why he likes Apple a lot more of some of these other bigger tech companies with wide moats. It's because Apple acts more like a mature company where they want to see those bottom line profits and then they shovel a lot of that into the share repurchases. Yeah. And Buffett also talked about how a human Tim Cook have these conversations

Starting point is 01:13:31 about how to best allocate capital. So I can't help but think that some of that has rubbed off a bit on Tim Cook. Who knows? All right. Well, I really hope you guys enjoyed this conversation. For those of you making the trip to Omaha, we really look forward to seeing you there. I know it'll be a great time. It's something I look forward to each and every year. So again, we'll be sure to include those links in the show notes. And if you'd like to learn more about Apple, you can go and check out episode 489. And Stig has done plenty of conversations and intrinsic value analysis on Berkshire Hathaway. So we'll be sure to link those in the show notes as well. Thanks for tuning in.

Starting point is 01:14:06 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 theinvesterspodcast.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 - TIP500: Berkshire Hathaway Shareholder's Meeting and Intrinsic Value w/ Stig Brodersen and Clay Finck

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