We Study Billionaires - The Investor’s Podcast Network - TIP810: Berkshire Hathaway 2026 Valuation w/ Chris Bloomstran

Episode Date: April 26, 2026

Stig has invited legendary investor Chris Bloomstran from Semper Augustus to teach us how to value Berkshire Hathaway on today's show. Semper Augustus has an outstanding track record with a compounded annual growth rate of 12.4% on equities since its fund's inception on 2/28/1999, compared to 8.5% for the S&P 500. IN THIS EPISODE YOU’LL LEARN: 00:00:00 - Intro 00:04:25 - What the intrinsic value of Berkshire Hathaway is, and what type of return you can get going forward 00:21:39 - Chris’s opinion on Greg Abel’s first letter to shareholders 00:38:39 - How should Berkshire management be compensated? 01:05:36 - How to think about valuing OpenAI 01:12:42 - Why S&P 500 share buybacks don’t benefit investors 01:22:53 - Thinking about investing risk from sudden loss vs. the slow decline of an asset manager 01:29:03 - Why Buffett reads Chris’s annual letter Disclaimer: Slight discrepancies in the timestamps may occur due to podcast platform differences. BOOKS AND RESOURCES Join the exclusive ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠TIP Mastermind Community⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Join ⁠⁠The Intrinsic Value Conference⁠⁠ in Omaha this May 1, 2026! Stig’s  2025 interview with Chris Bloomstran about Berkshire Hathaway.  Stig’s  2024 interview with Chris Bloomstran about Berkshire Hathaway.  Stig’s  2023 interview with Chris Bloomstran about Berkshire Hathaway.  Chris Bloomstran’s website.  Read Chris Bloomstran’s annual letters. Buffett resource on CNBC.  Alex Morris’ book, Buffett and Munger Unscripted. Follow Stig on ⁠⁠X⁠⁠ and ⁠⁠Linkedin⁠⁠. Related ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠books⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ mentioned in the podcast. Ad-free episodes on our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Premium Feed⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. NEW TO THE SHOW? Get smarter about valuing businesses through ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Intrinsic Value Newsletter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Check out ⁠⁠⁠⁠⁠The Investor’s Podcast Starter Packs⁠⁠⁠⁠⁠. Follow our official social media accounts: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠X⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ | ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠LinkedIn⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ | ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Facebook⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Try our tool for picking stock winners and managing our portfolios: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠TIP Finance⁠⁠⁠. Enjoy exclusive perks from our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠favorite Apps and Services⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Learn how to better start, manage, and grow your business with the ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠best business podcasts⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. SPONSORS Support our free podcast by supporting our ⁠⁠⁠⁠⁠sponsors⁠⁠⁠⁠⁠: ⁠HardBlock⁠ ⁠Human Rights Foundation⁠ ⁠Plus500⁠ ⁠Netsuite⁠ ⁠Shopify⁠ ⁠Vanta⁠ References to any third-party products, services, or advertisers do not constitute endorsements, and The Investor’s Podcast Network is not responsible for any claims made by them. Learn more about your ad choices. Visit megaphone.fm/adchoices Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm

You're listening to TIP. Today's episode is one of my absolute favorites of the year, and it's becoming a bit of a tradition. I'm joined once again by my friend Chris Broomstrand from Semper Augustus. Chris is one of those investors I've learned so much from over the years, and every time we sit down, I'm reminded why. He has this unique ability to combine very deep analytical thinking with very practical, real-world understanding of how business actually work. Now, to me, Chris is the top authority when it comes to Berkshire. And as always, we publish this conversation right before the annual meeting.

We dig deep into what Berkshire is worth today, how to think about intrinsic value and what is actually going on under the hood. We also discuss Greg Abel stepping into Buffett's role, how Berkshire should be managed going forward, and what investors should pay attention to right now, not just when it comes to Berkshire, but across markets. So, if you care about valuation and understanding business. at a deeper level, you're going to love this one. Since 2014, with more than 200 million downloads,

we have interviewed the world's best investors, studied deeply the principles of value investing, and uncovered many compelling investment opportunities. We focus on understanding businesses and intrinsic value, investing accordingly, and sharing everything we learn with you. This show is not investment advice. It's intended for informational and entertainment purposes only. All opinions,

expressed by hosts and guests are solely their own, and they may have investments in the securities discussed. Now for your host, Stig Broderson. Welcome to the Amherst's podcast. I'm your host, Stegbrederson, and I'm here, Chris Brewstrand, and this episode has been published the weekend before the big one. And of course, we're talking about the Berksa-Halloway annual shareholds meeting. Chris, welcome to the show. I think we're making this an annual tradition, but always fun to catch up. and look forward to the conversation. Thanks for having me. You're bad, Chris. I think, you know, I was going through some of our older conversations.

I think this might be the sixth time we're on, and it's always around this special time of the year. So we have this window after your wonderful, wonderful letters being published, but then just before Berksia. And so this is it. This is the pregame banter. Are you excited about the weekend? I am. It's my favorite week of the year. My favorite. It used to be two days. used to go in on Friday and back on Sunday and had my little group of friends. We'd have a glass of Burgundy and have a steak dinner, go to the meeting, get up early, go to the meeting, repeat the Burgundy and steak dinner and then go home and then started going to the Markell meeting.

And any more, I go in on Wednesday and usually have three or four speaking engagements. So it's a little more of a production and the meeting just got bigger and bigger. But the people that go, the people that I've known for years and new people you meet, there's something special about the Berkshire community. that you just don't find anywhere else. There's something that Warren and Charlie created that attracts all these quirky people that share a similar value system. So it's fun and to have the changing of the guard and have Greg running the show

and Warren in the front row is going to be very different, but it should be a great weekend. Yeah, how do you feel about it? I mean, I'm sure there's going to be a very special feeling this year without Buffett. I'll imagine that he would be sitting there with the board of directors, but he won't be up on stage. I think that is confirmed. How is the meeting going to be different other than the obvious fact, I guess?

Well, they've said it's going to be shorter. I like the fact that Greg and Ajit are going to field questions about the operating companies and the insurance businesses, and then he's going to include Adam and Katie on stage as well to get a little more color from the subsidiaries. And so where Warren and Charlie would spend, well, six hours plus fielding questions, Some with very little business relevance. They were able to talk a lot about teaching and life and wisdom.

And I expect this to be a heck of a lot more business focused, which will be great. It's going to be shorter. But hearing from these folks that are running the subsidiaries about what's going on and what concerns them is going to be great. Wonderful. And Chris, let's jump right into it because I wanted to talk about your annual letter. And I feel a bit torn about telling you this, Chris, because I know I'm supposed to read the letter from A to C. And I actually do do that. But first, like every good crime novel, I have to figure out who the killer is. I have to look at the intrinsic value update first. So I would go in this case

straight to page 148 and see what's the value. What is Chris's assessment of the intrinsic value? And of course, you provide different methods. But let me just start by asking, how? How much has the intrinsic value of Berksie Hallaway changed from 2024 to 2025? And what have been the major drivers behind that? Well, as you know, because you've read the letter for a long time and we've talked now for years, I've got four essential methods that reconcile to each other that help put Berkshire's intrinsic value in a framework. I do a sum of the parts. I do a gap adjusted financials.

And those are somewhat related. The gap adjusted financials are a great teaching tool because there's, There's so many different moving parts inside Berkshire that require adjustments to gap earnings to kind of get to what I call economic earnings. It's just a useful section from a teaching standpoint. And then you've got a very simple price to book. In recent years, I've used 175% of book value, stated Berkshire's book value before non-controlling interests.

And then the old classic two-prong method, because for years, if you go back 25 years, 20 years, Warren would give you on a per share basis, marketable securities, they would give you the operating earnings, and you could apply whatever multiple you wanted each, and you could back out whatever you wanted. And so he took those out and he put them back in, and he changed his methodologies, and I went back and forth with it, but I still do that. And so that'd be similar to a price to book. And I find over different periods of time, some of my measures are more meaningful and more relevant than others. You tend to get distortions.

So, for example, the railroad and even the energy business, but the railroad in particular, are under-earning, I think, relative to what they should earn on a normalized basis. Well, I don't make an adjustment for the under-earnings in the railroad, which is still under-by a billion. Now, it's been improving in the last couple of years dramatically, but they've still got a ways to go, and Greg addressed that in the letter this year. But then on underwriting, where Berkshire is still unlawful, over-earning what I think they would earn on a normal basis, where we all strip out earnings

from the stock portfolio, both realized gains and unrealized gains and losses. I also strip out underwriting, whether it's aberrantly high or aberrantly low, and assume that Berkshire is going to underwrite over time at a 5% pre-tax. And so, well, they're still over-earning, albeit less this year than the prior year, I don't make that adjustment. So at the moment, on an earning power basis. Berkshire looks like it's earning less than I think it probably would on a normalized basis. And then for the year, you had the stock portfolio require some work to figure out what the return was. I come up with 13.7%. You've got to take the 13F holdings, the non-13F holdings, like the Japanese trading companies. I put those together and the portfolio was up 13.7 on a total

return basis. And that drives in addition to retention of earnings and what Berkshire earns on an operating basis, that drives the capital of the business, the book value and the assets of the business. So book value grew 10.5%. And so I come up with, when you just do a simple average of my four methods, a progression of 9.3% year over year, which gets you to a little over $1.2 trillion, almost $1.5 trillion by market cap would be intrinsic value. And on a per share basis, that went from the B shares. A year ago, we're $5.22. I've got them at $570 per share. now and the A shares are up to $855,396. So at the current price this morning, the stock's trading at about 85 cents on the dollar

a fair value. We had a chance to buy it a couple times. So Berkshire stopped buying shares back in 2024. Greg announced a couple of weeks ago after the stock declined post the earnings release that he had initiated cherry purchases again and consult with Warren and made sense in that the valuation relative to intrinsic value, at least per my calculation, was back down to where it was in 2024 when they stopped buying shares back. So, I mean, Greg made the announcement of the stock rose.

We can go down a rabbit hole for a minute if you want. But even beyond my gap adjusted earnings, simply taking operating earnings, which Berkshire has a supplemental release to the 10Ks and the 10 Qs, and they'll strip out from gap earnings, the earnings from the stock portfolio, and they'll break out earnings by subsidiary, so the railroad, the energy operation, the MSR group, and the insurance operations. And the world took that operating earnings release this year and said, oh, my God, quarterly earnings were down 30 percent, and year over year they were down by almost 7 percent. Well, they really weren't on an economic basis, and so there were three or four really key

things that the media misses and most commentators miss on it. And so where operating earnings were $44.5 billion for the year, that was down by almost $3 billion year over year. So a number of things transpired. So one thing you've got to do is adjust for currency movement. So in the footnote to that operating earnings release, they tell you about any gains or losses on the currency translation of Berkshers denominated in foreign currencies. So they've got a bunch of money, 15-ish billion borrowed in yen, and they've got a smaller amount of euro borrowings, and they've got even a smaller amount of pound sterling borrowings.

Well, all of the Japanese debt that they borrowed at 1.2% went to finance the purchase of the five Japanese trading companies in intervals over the last few years, and they own about 10% of each of those. When you own a foreign asset that trades publicly, the Japanese trading companies trade in Tokyo. If the dollar declines against the yen on a translation basis, that helps on a reported basis the value of your holdings and vice versa. If the dollar rises, that harms the value of those holdings.

Well, for the 2024 and 2025, in 2024, you had a $600 million change loss. on currency, and then you had a $1.1 billion gain. In the next year, the delta there was $1.7 billion. I strip that out, and I think you should strip it out, because the currency movement is getting translated into the stocks, but Berkshire ignores the changes in the value of the stocks from reporting their earnings, reporting their operating earnings. Well, likewise, they have to mark to market the value of the debt. So if the dollar declines against the end, it helps the stocks, but it identically offsets the face value of the debt.

Now, in a realistic basis, if Berkshire chose to just refinance or repay all that debt at the moment, and the dollar had harmed its position against the end, they would have a loss. But you have an identical offset movement in the end. So you need to strip those two out. Well, then you get into each subsidiary. If you look at the main key moving driver, you look at the main key moving driver. The railroad was up, its earnings were up almost 9% for the year. The energy business was up almost 7% for the year.

And the manufacturing service retail groups earnings were up four to half percent. Well, those three key drivers of value are half of Berkshire's value and half of its economic earning part. They were all up, not down for the quarter. They were not down for the year. And so within each of those moving parts in underwriting. So Berkshire's been selling Apple and a handful of other stocks. So its common stock portfolio is lower.

So its dividends earned are lower. Now its cash investments are way higher, but the Fed started cutting interest rates in 2024. And so Berkshire is earning less on its T bills. And so its earnings are down from those two and those naturally are driving operating earnings down. But on an underwriting basis, Geico went through a period in the pandemic. where they, it was just awful.

You made a whole bunch of money in the pandemic and then coming out of it, everybody was driving again. And so for a time, they had to give money back. All of the auto insurance companies had to refund money in various iterations. Geico did their give back program where they gave you a 15% on the role of your six-month policy. Well, then you had a period of inflation. You had inflation and used car prices.

You had supply chain disruptions. You couldn't get parts. Inflation was running 9, 10%. So all of a sudden, the auto is, industry and GEICO went from minting money for a short period of time of the pandemic to losing a bunch of money or breaking even at best. And so one by one, the state insurance commissions gave the auto insurance companies price increases sufficient to where the industry went from suffering to minting, minting money. So GEICO in 2024 underwrote it almost an 80% combined,

which is incredible because they normally write at four. I think for the year, 2024, they were underwriting at 82%, which is essentially an 18% pre-tax profit margin. Well, in 2025, they still underwrote at an 85% combined. So there was some deterioration. But that's still a 15% pre-tax margin where against they would normally, they in Progressive, try to underwrite at 4 in the industry, breaks even over time. So the industry is still really profitable. Well, when you get into the footnote and you know what's happening in auto, they had price increases, nobody's getting price increases now because the industry is making a ton of money. For a period of time when they couldn't get profits, enough realistic price on an auto policy in

California, they stopped writing business. And to do so, they stopped advertising in markets where they didn't want to write. And so their policies enforced cascaded down. Well, here in this hard market, last year, they put their good on the gas, which they should be when they're as profitable as they are at the moment, you want as much business as you can get. So their underwriting expenses went up by 270 basis points. They spent over a billion dollars more in 25 and 24 on auto. And so they increased their policies enforced by 5%. They didn't get price. That was all volume. And so to me, the thing is still really profitable. But then in reinsurance, if you know how the insurance game works, your actuaries establish loss reserves, which will evolve over the life of policy.

In auto, it's a very quick tail business in the first year, two-thirds of your losses develop because you wreck your car, and the insurance company pays to get it fixed right away. So, 65% is paid in year one, another 20% is paid by year two. And then the last three years are longer-term resolutions of things like lawsuits and medical claims, but it's all paid out in five years. If you have a workman's comp policy, that thing might pay out over 30 years. So you establish a loss reserve and then Berkshire's got their loss triangles in the footnotes. And every year, they will assess the degree to which losses are developing in line with either favorably or unfavorably against what the actuaries

had originally estimated and what they reestimate each year. Well, Berkshire being Berkshire is always conservative and you don't find many periods where they've where they've not been conservative reserving so they tend to have positive reserve development in 2024 they had one point seven billion dollars in positive reserve development meaning they were too conservative by a factor of one point seven billion dollars for all of its prior years underwriting in 2025 it was still positive but by only one point one billion dollars so it was 600 million dollars less, I would make that adjustment for those differences. And then Berkshire being Berkshire in its manufacturing service retail group, every year they occasionally take these small charges

against Goodwill for asset impairment because they've got a gazillion businesses inside Marmon. They've taken some write downs on one of the trucking businesses, extra lease. So in 2025, there were $1.4 billion of write-offs, right-downs of Goodwill. The prior year, they were, it was $1.5 billion net, $400 million in the prior year. So there was $1.1 billion more additional write downs in 2025 versus 24. Those are not operating. Those are simply a reflection of businesses that we bought. Don't have the earning power anymore relative to what we paid for them.

Most companies will exclude those from earnings. Berkshire just throws them into operating earnings. So where for the year, it looked like operating earnings declined by almost $3 billion. No, they were actually up by $1.1 billion, but the world reacted, nobody in the media got it right, and the stock just started getting just beat up. So Greg comes in with an acknowledgment to where he and in consultation with Warren's fair value is, started buying the stock back. I wish they hadn't filed and told the world they were buying it because I doubt they're going to get that much bought because the stock jumped back up. Now, the reality is, and Greg acknowledged it, we're in a tough market. There's too much capital and reinsurance. There's too much capital in a lot of the property lines. Even an auto holding on to market share is going to be tough because if the industry is really profitable, your competitors are going to lower prices. So Berkshire is now classically running off insurance business. They're not renewing policies.

And they've got a history of not writing business when it's unfavorable. I've got a letter. I put the letter from the table from Berkshire's 2004, I think it was annual letter. the history of whatever they called it, portrait of a disciplined underwriter. And so for 13 years in a row, they ran insurance premiums down from $232 million to $50 million because insurance prices were not adequate.

Berkshire does that. Nobody else does it that way. And they're in the process now of shrinking insurance premiums, both in reinsurance and in some of the property lines within the surplus and the primary group. So long-winded, about earnings and my gap adjusted, but even on the operating earnings, you've got to make some translations to operating earnings to actually figure out what's going on or where economic

profitability is. And so if you put it all together, Berkshire did grow their earnings operating earnings last year by over a billion dollars. I think the price to buck and the two prong are probably a little more reflective of value today because there's an under-earning in a couple of the subsidiaries that are pretty key like the railroad, which I think, think Berkshire has a chance to resolve some of that, but it doesn't get accounted for in some of my numbers. So some are more conservative than others, but I think, you know, 9.3% growth in intrinsic value is kind of in line with what I would expect annually on average for the next 10 or 15 years. And that would be between 10 and 12%, which is what it's been for the last quarter century.

The days of compounding at 28% a year are gone. But I think if you look at the moving parts of Berkshire, the key moving parts, they can grow the earning power of the business by 10 to 12%. And kind of what they do with share repurchases, you got to look at it on a per share basis anyway. And so that's probably more than you wanted, but I think intrinsic was up a little. And so here we are talking in mid-March.

This will be out closer to the meeting. But if you linearly grow earning power and intrinsic value by 10%, you know, maybe instead of 570 on the, the B shares, they're worth $580 or $5.85. Shouldn't do it with precision, but the stock is trading it up a reasonable discount to fair value to where maybe a little bit cheaper. Berser buys a bunch back and we've got a bunch of clients that don't own it or don't

own enough. And I was buying it in August on the B shares at $460, was buying it a couple of weeks ago, 480. 480 is kind of the new 60 when you're six months on. And I like the stock down and not up because we've always got cash and cash. and cash flows to put to work. And we like buying stocks cheap. And I think Greg's going to wind up doing the same thing.

Well, let's talk a bit about Greg, Chris. And first, as you say, your letter, and I'm probably going to say this 10 times throughout this recording, it's absolutely outstanding. And I would encourage everyone to go through all of your methodologies in terms of how to value. I think that I'm not saying that everyone has to do it every year, but I think you need to do it at least once or twice

and understand the strength the weaknesses of each. I think it gives you a very good picture of the bigger drivers. No, actually, you should do it every single year with all of them. I should actually say that. But Chris, you gave me a handoff to talk a bit more about Greg. Like you, I speak with people in the value investing community all the time. And it's been quite anticipated the first letter here from Greg. Like, what could we expect? And I just say, like it feel like people have been all over a place, at least in my ecot chamber here. Some have been very positive. And others have been. been honestly borderline indifferent to put it nicely. And I think I speak for many of the

show, Chris, whenever I say that I don't respect anyone's take on anything Berksa related as well as yours. So not that you're going to be the tiebreaker here, but I can't help but put you on the spot and ask you, what should we think about for Yeables' letter this year? I thought it was good. You know, first time writing, he's not going to be as funny ever as Warren, but I think he hit on all of the things he needed to touch on. He paid a nice, brief, early tribute to Warren, as he should have done, really demonstrated that he's a Berkshire guy. I mean, he gets the culture, he gets the integrity, he gets the value system of the place. I like the fact that he took the letter that he wrote to Berkshire's almost 400,000 employees,

and he broke that up into a handful of sections and elaborated on each of those talking points, demonstrates that he gets it, that he gets the conservatism of Berkshire. Talked about specifically some of the businesses were earning cash flow from operations basis, which I like to see Berkshire earned $44.5 billion. Talked about pilots, improvements, and that it was throwing off over a billion, maybe a billion for cash from operations. Talked a little bit about the Oxy Kim deal that was his deal, the Bell Laboratory. the pest control business they bought, address sherry purchases.

So I think he's the right guy for capital allocation, demonstrated that he gets it, got into the nuances of some of the subsidiaries far deeper than Warren has done, especially in recent years, but even perhaps entirely, talked about insurance and some of the things that I talked about a few minutes ago with Berkshire still writing it an 87% combined. I mean, that's more profitable than they should be. And he's not going to say it like that, but he says. hey, we're still writing in an 87% combined. Talked about GEICO, talked about some of the

headwinds that they're going to face, which we just talked about. There's going to have pricing pressure from some of the competitors. No insurance commissioner is going to give you price increases when the industry is too profitable. So either profitability gets eroded for loss inflation or from too much competition and it's probably the nature of property casualty insurance, especially auto, probably the latter. I mean, you're going to see a lot of pricing pressure in price competition from Geico's competitors. Talked about repos, talk about Adam Johnson, Katie's going to be at the meeting. His move to have Adam who runs NetJets oversee 32 or 30, I think it's 32 of the operating

subsidiary. So this is what Greg's Doug. Greg has been running Berkshire, effectively as its CEO since 2018 when he became vice chairman. And he's gotten his arms around all those businesses. He knows what he could handle. Warren has said the guy just lives, breathes, all he does is Berkshire, balances, still coaches hockey. So he's got a balance in his life, but he's gotten his arms around this business.

And he's leaning on Adam, who he has a lot of confidence in to be essentially the CEO, just overseeing 32 of the businesses, because Greg can't handle the direct reports from all those companies. Warren's approach was, I'm not going to oversee anything. I mean, I buy you, I'll let you run your thing. you know, if you call me for help, I'll pat you on the back, say good luck, you'll solve it, you're smart guy. Greg's been much more involved.

He's proven that he's much more involved. And now he's got Adam helping with that. And so I thought it was a good letter. I don't know what else the world would have expected him to get into. He spent however many pages it was, 16 or 17 pages. And he talked about culture and he talked about the big moving parts and summarized the key subsidiaries and what was going on with those businesses. I thought it was fine.

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Wonderful. It's not easy to follow someone like Buffett. You know, it's almost like, what do you want whenever you win the Super Bowl? You want to win another. You know, it's difficult to make everyone happy in this world. But he said he's got, I mean, you can't fill the shoes. The expectation bar is really high. And he seems humble enough that he gets it, that he knows he's not going to be the next war. He'll have a shorter leash with all of the Berkshire watchers, both in the media and otherwise. And he's seemingly perfectly fine with that. I mean, he gets what his role is. And I thought he conveyed it pretty adequately and nicely in this year's letter, his first of what I hope are many. Yeah. I wanted to speak with you about a specific paragraph in his letter. This is page 16 for

anyone who is so inclined to print it out. So I'm just going to quote it here, Chris. At Berkshire, equity investments are fundamental to our capital allocation activities. Responsibility ultimately resides with me as CEO. Ted Westler manages about 6% of our investments, including a portion of the portfolio formerly overseen by Ted Kum's. Ted's impact extends beyond these investments as he continues to pay a broader role in accessing significant opportunities, providing valuable input on our businesses, and supporting Berksia in various other ways." Chris, whenever I read that, I put that in my magic mag here, and I made an exclamation point, and then I said, ask Chris that question.

I was really curious to hear what your take was. There's a few interesting notes about that. I mean, A. Warren and Charlie hired Ted and Todd. Todd left to join J.P. Morgan. He'd been running Geico, wearing different hats. He was part of the triumvirate with J.P. Morgan and Goldman to try to fix health care. And they threw up their hands that this is unfixable. I'm not sure that there was a role at Berkshire that matched what Todd thought his role might be. And so he moved on, which was fine. I think Ted probably picked up Ted's a good investor. I think he picked up Todd's portfolio. My guess is a bunch of that portfolio has probably been sold, which we'll see, I would guess, in the next 13F filing. But I like the structure. And when he said that Ted is running 6% of the investments, he didn't specify whether that was of the stockport, the $300 billion stock portfolio or the $700 billion combined assets, which are now over $120 billion at the holding company or $4. it was just the 580 or whatever that are in the insurance operation.

So whether he's running 6% of 700 billion or 6% of 300 billion, don't know, it's north of 18 billion. I like how Greg's role and even Ted's role have evolved in that capital allocation needs to be done by Greg. It needs to be done by Warren's replacement. because when you get into the teeth of a financial crisis or a recession, you're weighing opportunity cost. And so of the $370 plus billion in cash, there's probably $100 billion round number that's dedicated to the insurance operation that either needs to be held as cash or fixed income. Berkshire doesn't have a lot of fixed income securities.

They have mostly T-bills. So Berkshire has, call it $270 billion plus another $40 billion a year that are generally, by the operating companies to put to work. I think instead of judging his letter, judging what Berkshire does at the next opportunity, and he said, we need to be opportunistic. Warren acknowledged that in 0809, he screwed up and he didn't do enough. So he got the $5 billion and the $3 billion into the G and the Goldman Preferreds, got some of the Dow preferreds, the warrants later did some of the Bank of America. But on the stockport, he didn't do a lot in the stock portfolio. And Berkshire has had cash reserves that have averaged.

averaged about 14% of firm assets since 1998, he could have swung a lot harder and it acknowledged that he should have swung a lot harder. We're all going to judge Greg. I'm going to judge Greg by how hard he leans into opportunity when it comes and it's only going to come in a crisis or a recession. You may get a chance to buy the one-off business, but you're going to do some of it in the stock portfolio. You're going to do some of it buying whole businesses. And as is Greg in the letter elaborated on Ted's role? I mean, Ted's running a sizable amount of capital, but I'm certain that they're talking regularly. The next big opportunity to buy an entire business are to get a big chunk of money at cost. They got 36 billion, Warren got 36 billion invested in

Apple at cost. Ted's role may be running a farm system. I think my guess would be when Greg does an oxy Kim deal. One of the four, folks inside Berkshire, he's going to lean on for an opinion is going to be Ted. So Ted's role is beyond just running his little corner of the stock portfolio, but he's looking at deals. If they're looking at buying companies, Greg's going to have more than his own set of eyes on these deals. He'll have folks on the board that have expertise in various industries that he'll rely on.

So Greg, Greg's got a roll at X. He's got his network of managers within the business. And so as he approaches capital allocation, it's not. just Greg sitting in an office in Des Moines making decisions. He's got the Berkshire Empire at his disposal, and Ted's going to wind up being an indispensable part of that. I mean, that's how, if I was running it, that's how I would do it. I think that's how it's evolved. And so I like that commentary because it confirms what I think is probably the right way to tackle the capital allocation levers, which is Greg's rolling. It's hugely important that he gets it. And then he's got the willingness

to swing hard when it makes sense to swing hard. And just because the media tells you, oh my God, this cash pile is out of control. They're too conservative. Now, they're going to do it on Berkshire's terms. And I hope he's the right guy for the job because we're going to get those opportunities. And as you know, it's not easy.

When you're staring down the barrel of a financial crisis, it's not that easy to pull the trigger. In retrospect, it's always really easy because you can pinpoint how ridiculously low prices were and how great the opportunity was. I think he'll do it, but I'm not going to judge Greg until after the fact, and that maybe this year, it may be five years from now, maybe 10 years from now. I hope it's not 10 years, and I don't think it'll be 10 years because I've got that little section in my letter about the opportunity costs to holding cash, and you will never

recover if you're sitting on cash earning 3% for too long. If you compound stocks linearly at 10%, this is what you're going to be. my table shows. You take $100, it becomes $110 at year one, it becomes $121.21 in year two, it becomes $259 at year 10. I mean, pretty soon at five or six years and stocks don't compound linearly, nor does Berkshire. But you get to the point where you've got to have a 30 or 40 or 50% drawdown to have justified owning the cash. And so at the next big opportunity, he's got to put $300 billion, on the order of $300 billion to work. if sufficient opportunity exists.

And if you get through a cycle like that in a period and they find they can't do it, that they don't have the opportunities to buy whole companies, there are plenty of places in the stock market to put that capital to work. I mean, there are among the largest cap companies in the world in the United States. There are some really good businesses that they could buy 10% of, 15% of and that are liquid or not to do it pretty easily. But you got over at the right price. And so I'll judge him harshly.

The shareholder community should judge him partially if he doesn't swing hard at the next big chance. It'll be interesting to see when that happens. You know, Chris, I was speaking with your mutual friend, Tobias Kyle Lyle here the other day, who actually, not that it's super important for the listeners, he was actually the one who introduced us back in the day. And we talked about Berksia's valuation. For the record, I came up with a very lazy method and $547 per Bisha. I should probably send Toby a message and say, don't listen to me.

You should probably just read Chris's letter. I'm sure he already is doing that and us. He's not listening to me. Anyways, Chris, we talked about Greg Able's compensation. That was actually the way I wanted to take it. And we talked about how his new compensation is the CEO of $25 million. In a way, it was an obscene amount of money in a way it wasn't compared to, you know, what is the angle are you comparing to what others in that position?

would make? Are you compared it to the $100,000 that Buffer were making before? Then there is the dynamic with how many shares do you have? And there are so many other things to this. And so I wanted to ask you, Chris, what are your thoughts on the compensation package for Greg Abel? And which compensation model would you have preferred? To me, it's the right way to do it. When Greg and Ajit got promoted, moved up, kicked up to vice chair of operations and insurance, they had matching salaries. And I don't remember where they started, but they were 17 million and they were $18 million. And a couple of years ago, they were 20 or 20, I guess, 21.

Greg, now that he's CEO's 25 million. I don't think there's no better way to do it. Compensation is a hard thing. He's already rich. And he's in his early 60s. And he's at the age where the typical CEO who knows that he or she's going to be in that chair for four years and they're going to get an obscene. amount of stock options and restricted shares. They're highly motivated to get the stock up, and then you've got these goofy compensation schemes and different performance hurdles,

some of which are better aligned with shareholders than others. Greg's already rich. He was paid out for his modest 1% ownership position in Berkshire Hathaway Energy, three years ago, four years ago, whatever it was, for $870 million, so call it $6,000.6,000. million net attacks. He turned around. And prior to that, I was a little, I wouldn't say, concerned. And I don't know how much liquidity he had. And he had that big BHE position that was illiquid, privately owned on paper. But I think he owned five A shares and just a couple B shares. And so I own more than Greg. And Greg was running around his vice chairman for a bunch of years. And you thought, gosh, you really want to see the CEO or the CEO to be own more of the stock.

but when he was paid for his BHE position, he turned around pretty quickly and has cumulably bought, I don't know, 100 plus million, 110 million dollars at cost of Berkshire, which on a market value basis is pushing 180 or 190 million dollars. And presumably he's got other equity market investments. I don't think he's going to be a guy that has 30 homes and owns islands. I mean, he's going to live within his means like Warren has. And so I don't think there's a performance hurdle that would be suitable other than the fact that Warren trusted him in a role that we hope he's in for a long time. The shareholders trust him. He's got a responsibility to Berkshire. And I think he's taken that on very positively.

And so if I were in his shoes, I wouldn't want to disappoint Warren. I wouldn't want to disappoint the board. I wouldn't want to discipline the shareholders. I wouldn't want to disappoint myself. So I'm going to exert every ounce of energy that I have. This is me speaking for Greg. I mean, I'm going to do everything I can to make sure that Berkshire and I are successful over what hopefully is a 20-year run.

And he said, I'm not going to get as long of a run as Warren because in 1965, Warren was 35, and I'm 62 or 63. But hopefully I get a couple decades doing this thing. And because he gets the culture and he's not going to put the business in harm's way, there's no return on equity hurdle. There's no hurdle that would wind up being short-term in nature that I think would be an improvement over being paid a sum of money, a good sum of money. It's not outrageous.

It's way less than a lot of CEOs make. It's not a trillion-dollar pay package. And then to turn around and say, yeah, I'm going to buy the stock with all my money is essentially Warren for years and years and years and Charlie making $100,000. It's, I don't need the money. I'm already rich. I'm motivated by the responsibility of running Berkshire Hathaway. So I think in Berkshire's case, and it's rare, but they've never given a stock option away to anybody.

They have never given a restricted share away. The board is extremely, I mean, silly how little they're paid per board meeting, a few hundred dollars per board meeting. You make a little bit more if you're on the audit committee. But the board all owns big positions in the stock. And everybody's bought them and paid for him out of pocket. Aijit owns far more than Greg, but he's been around Berkshire since 1986. Every share he bought was paid for out of pocket. And so there's an alignment when you reach into your own pocket and chunk down very real capital.

Your livelihood is driven by how Berkshire does. And you could argue that the Aijit's compensation should be tied to how the insurance operation does. And Greg should have been compensated by how the operating companies do. But no, I mean, they're in it for the entirety of Berkshire. And there's a benefit to having all of these businesses under the Berkshire umbrella. And so Ajid is approaching his role, no differently than Greg. And that's A, maintain the culture, B, never put the business in harm's way. And let's just grow the economic earning power of the business as best we can without

subjecting the business to undue risk. And so I like the comp structure. You know, I like the constructs too, Chris. And I think that there are a lot of people who might be thinking, shouldn't it be tied to this KPI or that KPI? And I'm going to use a metaphor here that's probably not going to work well. But we did start our conversation before we hit recorder talking about a bit about the stones and music.

And aside for the stones, I've been listening to a lot of the Beatles throughout my entire life and probably read too many books about the lyrics. And there's still like this interview that Paul McCartney is doing when he's being asked about the meaning of this and that. And he would very often come back to, you know, don't overthink it. In this case, it just rhymed. And so, of course, there are then a lot of other meanings with a lot of other songs. But I don't know if I can necessarily use this metaphor here to talk about the

comp structure because I think for a company at Lightburgshire-Hathaway, there is a lot to be said about, quote, unquote, the optimal construct. But it really comes down to the integrity of the person. And I've seen a lot of obscene compensatial structures, and we're going to talk more about that later, Chris. But at the end of the day, it really comes down. What I've seen, it comes down to integrity. I've seen some terrible structures that sometimes it led to good results, not because of the structure, but because the person who managed that company was just really, really good person.

And I think there's only so much you can do with incentives. And this is not going to be very helpful. I think, and this is my own. I'm not a psychologist by any means, but I think a lot of it comes down to good parenting. That's my own conclusion. Sometimes it's like, why is this person behaving so well? He probably had good parents. Like, it's definitely not because of this thing here in his compensation.

No, he's like, he's just honorable guy, and that's why he's managing that company well. Yeah, there's a lot to integrity and morality, and either you've got it or you don't. And there's no pay package, there's no compensation structure that's going to alter behavior in how you're wired. I think it's unfortunate the way most compensation systems are structured with a modest salary performance bonus that may or may not have hurdles. And then you've got longer term and shorter term hurdles on your performance shares, your restricted shares. There's just too much short-termism that comes with the way most com structures are structured. And it's the ones that align properly, things like return on capital, where you tend

to get better behavior. But you're right. It boils down to the people. So speaking of which, your gentleman who famously said, show me the incentive and show the outcome. And of course, there are a lot of caveats to that. But I was looking at your portfolio here the other day, Chris, at least with what is public available.

And I was curious, whenever you look across your portfolio, what do you think is the most shareholder aligned compensation structure? and what concerns you the most? And then, if I can add another question to that, how much misalignment with shareholders do you tolerate if the underlying business is exceptionally good? So none of these are perfect. You just don't find a comp structure might, oh, that's the gold standard. You know, I found the Ark of the Covenant.

So what I found over my 35 years managing money reading proxy statements is you just have to get used to tasting a little bit of your vomit. And if it's too much vomit, then you need to move on. And that's generally when you found somebody that doesn't have the integrity or what have you. It's funny. You know, I love AI for its search capability. And so recently I took, I said run the Semper 13F, Gemini, I said run Semper's 13F portfolio

and summarize the top 20 holdings by through their proxy statements on how each company's compensation systems work. And I wanted to see how accurate it was. I'll be good. I mean, it was absolutely accurate. I mean, it pulled out my top 20 holdings,

U.S. holdings, the ones that we disclose in order and summarize the, the bonus hurdles, the short term hurdles, the performance hurdles. And it nailed the ones that I think get it right. I mean,

Cummins, I've talked about Cummins many, many times and how they've got to return on on capital hurdle motivation. Dollar General. It has a three-year rolling return on invested capital. Then they throw in their bonus, which uses EBITDA, which is a terrible way to do it. Olin does an adjusted cash flow and a return on invested capital.

They don't have an opportunity set to reinvest in the business. So you want to measure the business by its operating cash flow in a cyclical business over time. The ones that I really struggle with are the ones that are adjusted EBITDA heavy or where you're motivated. by sales growth with no tie to profitability. So Starbucks is in the middle of turning around. They've got a new CEO that I like. Couldn't stand the prior one. And I forget the name of the acronym for their program, but they're measuring return, measuring comp based on back to Starbucks based on same store sales growth and operating income. Well, there's no tie to the capital at earned at each of the stores. Decker's, which we made a big position. They've been a huge growth story, and they're compensated based on revenue growth and pre-tax income. It's suitable for what they do. They don't have an EBITDA structure. They run net cash on the balance sheet.

They've never resorted to leverage, so you wouldn't run an EBITDA. But EBITDA, which is above all the lines, if you're motivated by EBITDA and revenue growth, you can put a whole bunch of business on the books and not have any of it make any money, because if you've got a lot of interest expense and your capital intensive business, and you've got big maintenance cap X, you may throw off a lot of EBIT dot cash flow, but you may not make any return on capital. And so those structures wind up being pretty poor. And more often than not, you see it in the way companies make acquisitions and how they deal

with their own company shares. And so you've got to be careful with comp and make sure you're not too disaligned, but you almost always taste a little bit of your vomit with everything you own. I love the way you said that. And I'm sure after testing out, Jemina, you went straight out and bought more alphabet stock. No, it's just a bad joke. You know, Chris, I wanted to tie two of my favorite annual letters together here. Of course, your letter and then Buffett's.

And specifically, I'm talking about the 1999. And I'm really, I really like that in such good company, because you're actually one of the people here who would set me straight if I don't quote the right letter, even if it's back in the 90s. But, you know, back then, Warren talked about profit margin mean reverting, and he was, I guess you could say he was also bit wrong, but historically correct. And in your recent letter, you point out that, and I'm got to quote here from the letter, the S&P 500 now trades for 26 times current earnings against the second highest profit margin in the history of the stock market. That's against all stock markets anywhere in the world, ever. High prices mixed with high margins are typically a recipe for me, Eauker returns or worse, in quote. And so, first of all, very eloquently written, but I wanted to ask you, some would say that we enter a new normal. And I know it's always painful when you say new normal, but some would say that we have entered a new normal technology has allowed profit margins to fundamentally be higher due to just new business models.

Now, what would you say to that? Well, I think that's right. Profit margins are durably higher than they were when we were more of a manufacturing-based economy. Warren's 1999 article and fortune was the amalgamation of a series of speeches that he gave one honoring Ben Graham, I think at Columbia. But essentially he was, essentially he was saying we're at a secular peak without saying we're at a secular peak. And margins and multiples were high. And he noted correctly, but ultimately wrongly, that margins were range bound. And I think he used a range of 4% to 6.5%. And in 99, the profit margin on the SP 500 got up to 7.5 or 7.6%

wherever it wound up getting. So that was above the historical norm. Now, at a moment, they hit 8.9% in 1929. But from the point of that secular peak, he was right. And a high multiple to earnings, mid-20s, multiple to earnings contracted when margins came back down to 5.8%. So he was correct. Where he was wrong, and what he didn't see was margins by 2021 growing to 13.3%. And then falling in 2022, but recovering back to 12.8% most recently. Now, of that increase from mid-sevins or mid-sixes, wherever you would have put the prior range, double it to current levels, 3% of the increase has come from lower and lower interest rates, even though rates ran up in the last few years. We still have an extraordinarily high amount of debt on the corporate balance sheet,

but the interest rates are so much lower than they were for several decades that the interest burden, the interest expense, has been lower, and that contributed three points to profit margin. The tax code at the corporate level for a lot of years was 35%. It changed a handful of years ago to 21%. That added 1% to the after-tax margin. which I thought would get competed away right away. It did not.

But then what you wouldn't have known in 99, and maybe you would have for the Microsofts of the world, the Cap Light, but Microsoft in 99 was doing a 37 or 38% margin on 20 billion of sales. So they were making $7.5 billion. And it didn't take any capital to run that business. And then along came Google and along came the others. And so the profit margins of those businesses,

with the exception of the retail side of Amazon, but the AWS side of Amazon, you've got a handful of very, very profitable businesses from a margin standpoint. And so margins double. Now, I do think there's still a mean reverting aspect of margins. But I've seen papers and commentary say that because margins are higher, multiple should be higher. Well, I don't think that's right at all. I mean, if you could argue that returns on capital are durably higher, then I think the multiple on a higher return on capital business should be higher. But if you look at the return on equity and nuances to how it gets overstated in the current environment based on sherry purchases above book value, based on

write-offs and write-downs over time, based on the number of the amount of historical assets that are carried at historical cost in what's been an inflationary period for the last few years, book values are understated, meaning returns on equity are overstated. So I don't think you've had a durably wide, meaning across the whole stock market, across the whole S&P 500, increase in returns on equity. You sure have had it in a handful of tech businesses and other companies. And I'd say two things. And I've got my five factor work that we've had in the letter for two or three years,

four years maybe, where I take the five variables that make up return, dollar sales growth, change in the share count, the multiple and the margin, which all. All four of those are multiplicative factors and then whatever your dividend yield winds up being. To argue that the high current margins coupled with very high multiples, you can bake in scenarios for each of the five variables and it's really hard to get to more than a 5% return. And depending on where margins and multiples head from here, you can get to a loss for a decade, which is what happened after the 1999 peak. Two interesting things. One, when Warren talked at length many times about the tailwind that he enjoyed

from growth in real GDP per capita, the United States was the economic engine of the world, that was the case. And real GDP per capita, and I've got a table in the letter that breaks this out by deciles, grew it over 2%, 2.5% for decade, decade, it wasn't the same rate of growth every decade. But when debt levels reached 200, total credit market debt reached 250% of GDP in 2000, now 300, almost 350%. And in even more recent years post the financial crisis, the government piece of total credit market debt is now over 100% of GDP. At a point, more and more leverage is dilatrious economic growth. It's a law of diminishing returns. And so indeed, for the last 25 years, real GDP per capita is growing 1%, a little bit less than half its rate of growth. And this is

adjusting for population growth and for inflation. And I would say if the long-term PE, which was always 15, in the last quarter century, if you take it now over 100 years, it's probably 16 or 17 would be the long-run average PE, growth is a big component to what you should pay for an asset. Faster-growing asset warrants a higher PE, lower-growing asset, lower-growing asset, lower- if aggregate growth on a real population-adjusted growth in the economy, maybe the long-run average is not 17 or 16 or even 15, maybe it's supposed to be 13. And then you take these cap-like businesses that have been just unbelievably successful. The MAG 7 were 8% of the S&P 500, 14 or 15 years ago. They're 37% of the stock market saying they're trading at 30 plus times earnings. They also have

very high profit margins and on average in the low 20s. Well, my roundtable to Lippomania in the fall, I made the joke, these things are rapidly turning into EBAAs stories, which is incredible because they were net cash on the balance sheet, free cash generating machines that didn't take any capital. And here you are all of a sudden in this AI arms race. And all of a sudden, increasing proportion of cash flow from operations is going to CapEx, these companies have gone from net cash in some cases to a little bit of net debt. You don't have enough cash flow from operations to support cherry purchases to support all

of the things the companies spend money on if they're going to dedicate this vast amount of money to CapX. And so when you put cap X on the balance sheet, regardless of the number of years over which you amortize it for depreciation, you're putting depreciation expense, which largely is maintenance on the balance sheet. and now you're putting interest on the balance sheet, which is interest expense. And so all of a sudden, you've got depreciation charges, which are going to grow very rapidly. They will trail the growth in CAPX.

So to me, the profit margins of what had been cap-lite businesses are not only at risk, but they're far more likely than not to contract over the next period of years. How quickly they contract? I don't know, but they're going to come down. I don't see that there's enough revenue possibility in the relative to the AI money being spent, the CAPX on AI being spent for chips and data centers and what have you to support current margins. And when you overlay high margins with high multiples, which is what you have at an extreme with those handful of tech businesses, which were properly rewarded for their economic success.

And they were properly rewarded with high multiples. I think you're at an inflection point and you could say it's an inflection point for the S&P 500, but it's probably an inflection point for the most richly valued of this large corner of the S&P 500. So long answer to your question, but Warren was wrong and I don't think the margin goes back to a range of four and a half percent to six percent. You take margins down from today's 12.8 percent to 10 and you're going to crucify a 26 multiple earnings. So multiples come in when margins come in. Wall Street investors in general don't like compressing profit margins. And they punish the stocks with lower multiples, lower and lower multiples when margins come in.

And I think there's a heck of a lot of risk margins for reasons related to the CAPX, but also reasons related how the economy is structured and competitive forces. So to me, there's a mean reverting, but it's at a higher level. It's at a durably higher level. But I think Warren then was right about the mean reversion, and he would likely, if you put them on the spot, say the same thing today. Let's take a quick break and hear from today's sponsors. Every business is asking the same question right now. How do we make AI actually work for us?

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Sign up for your $1 per month trial today at Shopify.com slash TIP. Go to Shopify.com slash TIP. That's Shopify.com slash TIP. All right. Back to the show. Well, Chris, we should continue talking about multiples, but perhaps it's more multiples on revenue more than multiples on profits.

You have this wonderful section here in your letter about your contrasts the era of AI, canals, railroads, autos, electric fiber telecom. It was very thoughtful. And what I would really like to, you zoom in on is this section here you have about valuing open AI. So that goes back to my initial point about speaking about multiples. And you break down each funding round and then you ask, what can go wrong? So let me, tongue in cheek, admittedly, Chris ask you, what can

go wrong? Well, broadly, I touched on it in my comments just recently. The cap X number, even just out of the big hyper scalers were just shy of $400 billion last year. On $400 billion of CAPX, if you're writing off the asset over 10 years, which is too long, there's a debate over whether it should be three or four years or five or six years. It's not about the debate. It's you're putting depreciation on the income statement depreciation expense, and it's a real expense. It's a real charge. If your depreciation schedule linearly on a straight line basis is 10 years, on 400 billion of cap X, that's $40 billion of depreciation expense. As far as I can tell, aggregate revenues supported on this incremental cap X are about

$30 billion. And now we're going to spend projections of perhaps three or more trillion dollars cumulently over a five or six year period of time. On $3 trillion to make a 15% return on the capital that's spent, you need $450 billion dollars in profit. The four big hyper-scalers all have cash flow from operations at just over $100 billion. And I'm talking incremental profitability required from revenues that are now $30 billion. So who knows who winds up winning.

If there can be a winner, I equated AI to past capital cycles. Capital cycles involve big capital expenditures in the past, largely funded by debt. The current iteration, oddly being funded by these companies that have enormous free cash and cash from operations, which is changing rapidly because those numbers are starting to exceed cash flow from operations. And then you've got peripheral players like Open AI. And they're all vying to create these models that train first and then infer. But the dollars being spent are incredible. So if you go back over the history of Open AI, I thought it would be fun to go through the various of their 16 or 17 funding rounds. and Microsoft came in early with a couple of funding rounds at $11 billion.

The valuation at those moments was something like $28 or $29 billion. So to me, I'm not a venture capitalist, so I would be a terrible venture capitalist because I don't have vision. But if I'm going to put $11 billion in a business, I want to own $11 billion of the capital or the assets. And there may be a lot of growth to come, and I get that. And so I'm kind of tongue in cheek about that. But Microsoft was pretty rational. But then they had these success of funding rounds. And I think cumulatively, Open Eyes raised something like $73 billion by year end.

They're doing a $100 billion funding round at what they hoped was an $830 billion valuation. I think they just did it at $750. But Nvidia came in with capital. Masa came in, SoftBank came in with capital. And so here's an entity, Sam A's Open AI that's raised, call it, They've already burned through 50. They're burning through it fast. And the valuation rounds just went higher and higher. So, two years ago, not even two years ago, a year and a half ago, they did one. This is after Microsoft. Microsoft stopped putting money into it. And they negotiated it well because they own the IP. So if Open AI fails, Microsoft owns an AI chat GPTs AI. So you had a funding round in October of 24, they raised $6.6 billion. at a $157 billion valuation, 157 is a lot greater than 6.6, but 6.6 would be for a fraction of the business. Then they did one a few months later, 40 billion they raised at a $300 billion valuation.

Then they did one just this past October at a $500 billion valuation, but the same $6.6 billion that they collected in the earlier one, insiders were cashing out. So they did a $500 billion valuation and the insider sold $6.6 billion worth of the private company stock. Now the Now they're running out of cash and they're raising another $100 billion. So you and I could build car plants. We can build models if somebody's willing to give us a whole bunch of money. But you ask, what could go wrong? Well, the entities that have more resources and that are embedded in more architecture.

So Google has essentially committed outspending everybody. And they've all committed to outspending each other. And most of the CEOs of these companies have said, yeah, we could be making a big mistake, but we can't afford not to do this. But Google's got, they're already their ad-supported platform, meta, which has their Lama free, is massively ad-supported. Anthropic is just, my understanding is, and there's even an article in this morning's journal, they're just killing Open AI with the success in corporations with their clawed models.

And so Open AI's share of AI search has, drop from mid-80s to mid-60s and it's falling fast. You've got regulatory risk. We're going to find out on fair use. The Europeans are very aggressive in this front. And you've got a, you've got a lawsuit from Elon when Sam A flip from where this thing is a not-for-profit, which is what he and Elon agreed to at the outset. Elon put, I think, $38 million into this thing. Sam A flip over a couple different degrees to now a fully for-profit. They're planning on going public and Elon's suing him and it's not going to be a lawsuit with an M in front of the Illions. It's not going to be a millions lawsuit. It's going to be a billions lawsuit. So there's

opening eye specific. And the guy, Sam, went to high school, same school as my daughter, three quarters of a mile from where I'm sitting right now. I don't cheer against people, but when the guy sits there on a stage a couple days ago and says, intelligence, we're going to sell it like a utility, like water or electricity, my skin crawls a little bit. And so I don't think they will raise enough money to have the resources to be the one that wins this thing. Maybe they do, maybe they don't. I don't need to play in the game. But I think it's a tough hurdle.

But it's a proxy for it's going to be a tough hurdle for the aggregate of all of these guys in this arms race. Because the numbers are just frankly staggering. And I don't see how you've got enough revenue and then profit opportunity. to make the whole thing generate a return on capital. Yeah, and I'll just casually mention that, for those of you who are watching the video, that Chris is sure that is saying, Tullipomania and the name of his company is Semper Augustus. I'm not hinting at anything. I'm just casually mentioning that, Chris, I can't help myself.

I should probably preface this by saying that one of the favorite parts of your letters is whenever you talk about share purchases, and here we're not talking about Berksa, we're talking about the general stock market. And I have to say this year's letter did not disappoint. So you point out that once reported for 2025, the S&P 500 combined share repurchase has liked to exceed a trillion dollars. That's a T, I just want to say for the record. And so someone tuning in might be thinking, wow, that a trillion dollars has been returned to shareholders. That must be amazing. And over a quarter of a century, companies have spent more than half of their profit,

you're buying back shares. I think you made it out to 2.7% of market cap annual on average. But then you also look at the aggregate share count and has not botched, really. So impressive, but perhaps not the right way of being impressive. Can you, Chris, think of anything regulatory that could change in favor of shareholders? Or do you think that you're basically at its core fighting a losing battle whenever it comes to basic human nature, whenever you're looking at this creature that's being created with jayr purchases? I think you're fighting a losing battle.

And you've had various Congress people, senators, representatives talk about banning sherry purchases. Well, there's nothing evil about a sherry purchase and done intelligently the way Berkshire's done it over time, the way we like to see our companies do it is. There's an acknowledgement that the stock is trading a discount to fair value and we don't have a better use for the capital. So buy your share price and when it's cheap, if we've got opportunities to make good and great returns on equity or capital doing something else, then we should do that first. and don't do it with leverage and excessively put the company at risk just for the sake of tricking the share cap. The trillion is interesting because if you do, I don't know, where earnings wound up officially once all the companies reported for the fourth quarter, but I think it estimates when I put my letter together were 263 in change per share for the S&P, which is, I don't know, $2.5 trillion dollar. So a trillion, which is a big number, and it's the first time that number will be a trillion, is 40 whatever, 44, 45% of net income should probably rather look at the repurchases as a percentage of cash flow

from operations. But on average, cash from operations is roughly going to match net income. It's materially different for some businesses, but on average, they tend to be pretty close. And so a third or 40% of profits on average for the last 40 years have gone to share repurchases or of cash from operations. It's staggering to think that over the last quarter. So if you go back to the late 90s, if you go back to the 90s, the share count for the S&P grew dramatically. It grew by something like 40%. Microsoft share count was just growing exponentially because they were giving six or seven percent of the shares per year to their employees, not just the top executives, but everybody was getting shares. They were getting stock options.

And it was wonderful as the stock went up because you got an option at 30 bucks a share. Now it was 60 bucks in shares. You doubled against your cost. And Silicon Valley hadn't figured out offsetting dilution with sherry purchase. And then you had the big market crash and the tech bubble imploded the S&P dropped 50%. The NASDAQ dropped 80%. There were people that had exercised stock options where the stocks had then declined so much that they had a tax liability that exceeded the value of what their shares were worth. And so they shifted from stock options to a larger preponderance of restricted shares, which are less dilutive because you're not giving away as many shares. shares, there's no option component to it with a restricted stock, whether it's got a performance

quotient to it or not, is basically the value of the stock at the moment you give it away and you earn it over some vesting period with or without some performance hurdle. So you had a period of 15 or 20 years where the issuance of stock to employees, largely executives, largely the top executives, was about 2% of outstanding shares per year. And then for a bunch of years, they were buying back on average, they being the S&P 500 aggregate of companies were buying back 2.7%. So there was a period of time where they shrunk the share account by seven-tenths of 1% per year.

Then you get periods like the financial crisis where the banks blow up and they have to recapitalize and the share count balloons up. So what you get is a buy high, sell low mentality because most companies aren't price sensitive to their sharey purchases. They're simply trying to offset the dilutions that's coming from giving huge, huge dollar amounts of money. I mean, compensation packages that are way higher than Greg's $25 million. And so we've gotten to the point now where there's more need for capital. So since June 2020, the share count's actually risen by 3.3%, which is staggering to me that you can spend a trillion

dollars and the share count still goes up. And now for 25 years, there's no change to the share count. In fact, for 25 years, it's grown by 1.8%. But you're essentially, if 30 to 40% of what every company makes goes to retire shares, you have not shrunk the share account. Who got rich, the executives? And you could say in the case of the shareholder, those repurchases supported the stocks. And that's why we're trading at 26 times earnings today. And that's probably the case.

But those were dollars that didn't go into reinvestment and property plant and equipment. or acquisitions, that was money that was spent simply levitating a stock to make executives rich, driving up the stock price to higher and higher levels. And at 26 times earnings, even if you take the mag seven out, 22 times earnings for the S&P 493, the sherry purchases have been largely folly because they're not executed the way they should be executed. I don't know what fixes that. Because if you get the job as CEO when you're 60 and they give you a bunch of stock on the barrelhead because that's what your competitors get and that's what the compensation consultant says you should get, I'm going to get rich by driving the stock price up for

four years. And I may be aggressive with my accounting. I may set performance hurdles back to the aligning shareholders that are not aligned. And I don't know how you fix that. I don't think there's any regulatory scheme that can fix it. More likely than not, the action of the stock market and a deep recession, a really deep recession, may serve to fix it. But I guarantee you that the proxy voting companies, when they weigh in on governance, don't look at it the right way. They don't look at it this way. Those folks are not aligned with shareholders' best interests. They're aligned with ESG and DEI and all kinds of crazy stuff. Berkshire should be a proxy on how to do it, but it can't be. And I go back to Greg's

compensation and him saying I would buy the stock back. He was fortunate to be in a position to be rich when he became CEO. And he got rich because he owned 1% of BHA. The next CEO is not going to come to the party with a net worth of six or seven or $800 million at the moment he or she becomes CEO. And so the compensation of that person needs to be sufficiently high relative to the 1.2 or 3 trillion of assets. And it'll be a larger number depending on how many shares, Berkshire buys back over time, but you want the comp to be high enough. So the CEO might need a $25 million. Sorry, I mean, it's crazy it sounds to somebody needs $25 million. That's a reasonable amount of comp to run a business the size of Berkshire Hathaway. We could talk all day about

sherry purchases and executive compensation. It's so badly done in so many places that when you find it done reasonably well, it's pretty glorious. Yeah, I like the way that you I like the way you think about it, Chris. It's almost like saying what is the buffett says about leverage, that if you're smart, you don't need leverage. And if you're not smart, you definitely should not use leverage. And it's sort of like the same thing about, you know, if you're not already financial independent,

and like you probably are not the right person to run Berksia in the first place. But you should also be compensated really well because you have a lot of responsibilities, but it's sort of like this chicken and that kind of thing. So thank you for your perspective on that. But I'll add to that sherry purchase thing, even though a trillion is a big number, kind of back to the AI and the KAPX spending, those numbers are so big. In $650 to $750 billion for the current year, they're going to consume more than all of the

cash flow from operations from Microsoft, Meta, Google, Amazon, that there's less capacity to keep buying the stocks back. And so you've seen sherry purchases among some of those 20 largest businesses start to decline. And that also, back to the argument about PEs and multiples and what the right numbers are, even though a trillion is a big number, it's shrinking. I've got a chart in the letter that shows repurchases a percentage market cap going down and down and down. Well, that's partly a function of the prices, the valuations, the P.E. is going up and up and up. but if fewer dollars are committed to the sherry purchase,

one of those big supports for stock prices goes away because now the dollars are going into the ground in data centers or into space, which go off on another tangent. So they may not be the supportive salve that the market has had. And so for that, if we keep giving executives two or three percent of the companies per year, you may see the dilution factor go up and up and up. It's been pretty modest in the last five.

years, but that could very well increase. And a rising share count is deleterious to the investor's return. It's one of your five, it's one of your four multiplicative factors. Chris, I wanted to end this interview here on a bit more of a philosophical note, perhaps, because I really like how you started your letter by talking a bit about guys' choice not to manage outside capital and giving his health situation. And of course, what has unfolded is, not defeat by any means. It's really a really shows courage and integrity and putting family and clients first, especially whenever it's incredible, difficult. And I should say you're shifting away from Guy and talking about this in general terms. It really makes one thing about how none

of us are immune to negative health events. And sometimes cognitive decline can be gradual and hard for us to see. And so, you know, as investors, we often talk about the downside point. And so, protection in businesses that we invest in. But I'm curious to hear how you think about that for Sembro Augustus. And beyond planning for something catastrophic happening, you know, like being hit by a bus metaphorically, what kind of structures and safeguards have you put in place to ensure that if your judgment were to deteriorate slowly, perhaps in a way that's very difficult to self-detect, that you ensure that your clients are fully protected and you would continue to operate with this discipline. And I feel a bit torn about asking your question

because I kind of feel like it comes across as very rude. And that's not at all my tension with the question. I was curious to hear if you thought about it. Well, for those that don't know what you're talking about, Guy Spear, mutual friend of ours, is deep in the Berkshire world as an acolyte. He runs a really nice business called Aquamarine. He's got a very good long-term track record. He's struggling with a pretty bad form of brain cancer. And he had his family join him at one of my dinners in Omaha last year. And he was in recovery. And we thought full remission and thought he was in good shape. And it came back late last year and, you know, praying that he gets through it. He's got a wonderful family.

But he made the very, very difficult decision to focus on his health and his family and close his firm and return the capital to his investors. And that's just a brutal thing because I'm sure, like Warren and Charlie, like me, I mean, I hope, I'm 57 years old. And my plan is to go out either in a pine box like Charlie did 34 days shy of his 100th birthday or to struggle enough with my vision where I'm having a hard time reading 10Ks at age 95 to pass the baton. So we'll never sell the firm. I hope at 50s. I get at least another three, three decades to do what I'm doing. I love what I do. I've never felt like I were doing this thing. I've got a responsibility to our clients. If I were to get hit by the proverbial bus, institutions are just going to move capital. We've got an obligation to people that have been with us for a long time that entrust us with capital. But if I were to not get hit by a bus and to have cognitive decline, and I worry about it because I played football at a high level and had number of concussions. So, you know, you sit there on a Saturday or Sunday morning and go, oh, geez, I'm drawing a blank on remembering somebody's name. Hopefully, that's not the football. Maybe it's that I'm getting older, or maybe it's the fact that I had too much red wine last night on the weekend, some combination of the three.

But I think, so business-wise, if something were to happen suddenly, Chad knows the portfolio like the back of his hand. We've got young investment people working with us that are evolving and growing. we have a plan in place to essentially, respectively, with a good friend of mine, merge our operations in the event that I or he, running his firm, would depart suddenly. So he's somebody that I'd be very comfortable having my family's capital with and my client's capital with. So we've got that in place as well.

But I think to your point about a slow cognitive decline, we talk about Tulipomania, this is my roundtable where I've got 30, 32, really my best friend's, colleagues, contemporaries, peers in the investment world that I've got to know over the years. We get together for four days in St. Louis and go through 12 or 13 companies and have a lot of great discussions and eat well and drink well. Between my family and my colleagues and even my clients, many of whom are as much friends now as they are clients, I've got enough people in my universe that would, I believe, would be candid and say, Chris, you know, you're starting to slow down you need to do something, you need to think about not being, having your finger on the trigger

of capital. I'm confident that there's are enough people that think enough of me, that know me well enough and that I trust and mutually, there's a mutual trust that I would do the same for them and I think they would do the same for me. So without expressly, I became able to say that with certitude, I've got friends who say, Chris, you're an idiot. You need to stop. You've got, you know, early dementia and you need to focus on family. And I think we're set on that front. I hope it doesn't come to that. I mean, I really do think the pine box, although, you know, I may not get 100 years because as Charlie, or Warren said a couple of years ago, after Charlie had passed, he noted that A, having neither of them been athletes, that the non-athletes bodies tend to live

longer and you're sitting like, oh my God, I played college football. Well, that just scratches a few years from my life. But then he said, obviously, the women tend to outlive men and noted that In his later years, he was convincing Charlie to do the sex change operation. You know, I could contemplate something like that to add a few years to the runway. Kidding aside, I think between sudden how you go bankrupt, Bill, well, gradually at first and then suddenly, well, that's either how you go out and either physically go out suddenly or you mentally go out gradually. And I think we've got a pretty good formal and informal structures in place to accommodate

either or any combination of the two. I'm very happy to hear that, Chris. And of course, you thought about it. So thank you for your very eloquent response. Chris, before I let you go and give you a hand off to where people can find the letters, the homepage, is there anything that we haven't covered that we should cover here in our conversation? No, I mean, I think this is great.

I'd encourage everybody. I'll tell the story. So we didn't cover it. We didn't get to it. But a couple of years ago, I started off my letter with my story of, I don't know, 10 years ago, I was trading a bunch of messages with Warren and about something different. But I noted that I just calculated that Berkshire could decline by 99.3% in share price and still have outperformed the S&P 500. And in his correspondence back with the other stuff, he noted, Ben Graham would be proud, but let's not test the math.

So there I was a couple of weeks later at Charlie's meeting in Westcoe and Pasadena. I said, hey, I came up with this number and ran a buy him and he said, Chris, that's just simple compound interest. That's not impressive. And so you just slink away and go back to your seat. You just brushed me. So in going through last year and then I updated this year with better numbers, I was able to, we were able to calculate market returns, S&P 500 returns from all of the big secular peaks and troughs over the last hundred years. So 29 peak, 32 trough, 37, 42, 66 peak, so on and so forth. And it's pretty amazing the differentials of putting

capital to work near a secular peak, not even at, but if you do it at a secular peak or at a secular low, the difference in compounding series. And so I ran the numbers over time and it's amazing how much disparate, how widely disparate that the return. get from the famous Ibbotson 10.5%. But I realized something. So you've read the letter. Maybe you didn't read this part, but there's a section, I think, from pages 94 to 104 that everybody should read because it's my tribute to Warren and I talk about the track record. And there's several things in it. His performance record versus the S&P at the moment he announced his retirement and first weekend in May, there was no trailing 1, 2, 3, 4, 6, 7, 8, 10 year

return, Berkshire outperformed in every yearly interval looking backward as of that date, which is pretty incredible. But on a 99% return, so what would be the single best day in the history of the stock market, the U.S. stock market, to put money to work? What single day would it be? I'll ask you. Was it just right after the Great Depression? There was a, and you were like, people think it's this date, but it's the other date. Is that the segment you talked about? That is. Okay. Yeah. June 1. So S&P. 500. June 1, 1932, the S&P had fallen 86.2 or 86.4% from its peak in 1929. The Dow Jones, which is what you talk about, had fallen 89%.

And kind of more famously, I think it was July 8, 1932, that the Dow traded at its low. But the S&P's low was on June 1, 1932, at $4.40. On the day of the Dow low, it was $4.41. So it was a penny cheaper a month earlier, five weeks earlier. And any of that, from that day, so if you could put money to work on that day, would you for a third of a century, and you would have made 15% per year and change by having bought the low for the next third of a century through September 30, 1964? So compounding at that rate for that long, you turn each hundred dollars.

into just about $10,000. So, Hunter Bagger in a third of a century. Wow. Would you be willing to lose 99% of your money on that date? And you know where I'm going with this. September 30, 1964, and put your money in one company stuck for the next 61 years. Well, yes, you would have. because on that 99% decline from the measurement period, the first, the beginning of the fiscal year when Warren got control of Berkshire, Berkshire compounded at 19.7% and grew each $100 to $6.1 million.

The S&P could have fallen 99% from $10,000 to $100 and still grow. So during that period where Berkshire grew to $6.1 million at 19.7% by growth. growing at 10%, the S&P grew from $100 to $45,000. So $45,000 to get $6.1 million. That's how you can fall 99.26% or whatever it is. But you can do it twice. Because if you do the whole record from the single best moment in history of the stock market to buy the S&P 500, June 1, 1932, you compounded it at 12. Whatever, I think it was 12.1%, maybe it was 12.5%. But you grew $100 to $4.4 million. Berkshire grew $100 to $6.1 million in 33 fewer years.

So Berkshire Hathaway on Warren's watch outperform the S&P 500 over nearly a century buying the market at the absolute low. And I think, and I said in the letter and we'll see if Warren will agree, because he's going to read that part at least. whether Charlie would have been impressed with that. Because even though it's just pure compound interest and pure algebra, seeing the start to tail S&P compounding at 12 and change from $100 to $4.5 million, knowing that Berkshire grew up to $6.1 million for each hundred is pretty impressive.

And that's the legacy of the track record. And then I've got more of the testament to what he did for teaching and integrity and the way businesses should be run. So there's a 10-page section of the letter. that I hope even if you don't like getting into the accounting nuances of conglomerates, there's about a 10-page testament to Warren that's partly track record and partly human record, that is pretty fun reading. At least it was fun writing for me.

Yeah, and I should probably also say, Chris, because I heard you, and I think you also mentioned this year on the podcast, the people who read your letter, there is a self-selection of those people. And I very often talk with my team about it, and they were like, can we really talk about this? Isn't this too niche? I'm like, you probably can because there's a self-selection and the people who are not interested, they're just going to drop off. And then you're really going to be with kindred spirits. And so to me, it's whenever people are telling me that they're reading your letter, Chris, I just know they're awesome people.

It's that simple. Well, I think there's a quirkiness to people that are listening to your regular podcasts or reading my letters. There's an intellectual curiosity about the investing world that people self-selecting to listening to you or reading me or listening to us talk once a year. That's probably true. Yeah, that's probably true. I can't help us sneak in one quick question here before that you go. Would Warren read your letter and send you a note each year? Or like, what's the kind of the relationship? How does it work? Well, one of the biggest honors and surprises that I had was, geez, might have been 2002.

I've got the letter hanging in my office, but I received a letter from Warren. letting me know that a friend it has. And our letters have only been on our website in public since the 2015 letter. So we would send our letters just to our clients, send to my 30 or 40 quirky friends, right? Somehow my letter made its way to him and he wrote that somebody, friend of mine sent me, friend of mine, what I'm talking about now, a friend of mine being Warren, sent me a copy of your January 1, 1999 letter, which I thoroughly enjoyed. And if you'd have any of your prior letters, please send him my way and any future letters,

I'd love to read anything you write. And so he's been reading my letters. And we have some back and forth and over the years. But so I mean, I write the thing at a level where I know Warren's going to read it. I also know my clients are going to read it, some of whom are more sophisticated than others. I also know students are going to read it and learn from it. So I try to write to a myriad audience that have different levels of, sophistication, but I always put a reasonable amount of effort into it knowing that he is looking

at it every year. What a motivation to have. You know, I also can't help but talk about this labor of love that it really is. It seems to me like there is this ethos in the value investing community. It probably comes all the way from Benjamin Graham where even though you don't have to, you're supposed to help the next generation. It's just part of the honor code for a lot of better words. And I'm really happy that you're helping the value investing as much as you are, Chris.

So thank you for a service to the value investing community. If I can, I don't know if I'm in the position where I can thank you on behalf of the value investing community, but I truly believe that you're doing a massive service to all of us. So thank you for that. Well, you're nice to say that. And I appreciate that. It means more than you'll know.

As I said in my tribute to Warren, he didn't have to teach. I mean, the archive of the Berkshire letters, the older letters were Warren teaching. about executive compensation and disciplined underwriting and nuances on accounting. And he didn't have to do that. He could have just written a quick three-page letter about the subsidiary and dotted the eyes and crossed the tease, but he taught. And then he entertained students and he would speak on campuses. In later years, he would have large groups of students come visit. And so I'm fortunate and blessed that, I don't know, seven, eight, nine, ten times. There's no consistency to it, but I find myself being asked to speak on college campuses. I've been at Notre Dame

every year for the last several years. I've spoken at Columbia a bunch of times in New York. I've spoken in my son's investment principles, Warren Buffett class, which my friend Harvey Eisen put up the money for and tried to get Warren to fly down to attend my talk and have dinner the night before. This was just last year, and not because Warren did it and not because he had to teach, but you know, his mentor, Ben Graham was such an important figure for him. Warren and Charlie have been such important for us as Berker acolytes that what little that I've learned over time, I take immense joy in being able to share. And when young investors or students, I find they're reading the letter, it's pretty gratifying. And I'll never be as great of a teacher as Warren. But what little I know,

I'm happy to share and I do it with more verbosity for sure. I've been trying to get, even told Warren, I'm trying to shrink the letter. I told him a few years ago, I was going to shrink it by 2.6 pages a year so that when I was his age, which was then 91, we'd have matching length letters and he wrote back and said, you're going to have to recalibrate because when you read my letter a few days after your release years, you're going to see it's the shortest one that I've ever written. And I've done nothing a lot. I tried to cut 35 pages of my some of the parts intrinsic,

value commentary out and a couple of friends said, Chris, it's your letter, just do it. People that think the letter's too wrong. Anyway, they're going to think it's too long, whether you write 50 pages or 180, whatever it was this year. You know, it's funny you should mention because I do remember that you mentioned that in the past. He wanted to make it shorter. Then it was like 182 pages, and then we still have some appendix. That was completely unintended. I commit, I'm going to commit to you now, Stig. This will be the secular peak. of the Semper Letter.

Okay. Well said. Chris, I won't take up more of your time. Thank you. I just want to say it's been absolutely amazing. As it always is, this time of year, we get to talk about your letter, Berksia, the stock market. The price is absolutely right whenever it comes to a wonderful, wonderful letter. It's completely free.

Where can people find it? Well, you get what you pay for. They're all on the website, Semperagustis.com. We've got the archives of the letters and a bunch of the podcasts that I've done in recent years. various interviews, some of the stuff with Kate Welling. But as soon as you drop this, we'll have it posted and we'll keep it up. So we've got the archive of the letters and then a separate tab for interviews and podcasts. And I'm still on Twitter, though, less.

In fact, during the letter writing process this year, my Twitter account got hacked, my ex account got hacked, some cryptocurrency group, I got a notice. I was working on the letter. I got a notice thing. So somebody's logged in from an unfamiliar device, change your password, And by the time I saw that 30 minutes later, my password had been changed. I couldn't get into the account. And in short order, there was a Solana-based outfit that was sending out messages using my user profile.

And it was a process to try to get the service people at X to fix the problem, which they finally did. But it took a couple weeks and way more man hours and energy on Semper's end to try to recover. that than we wanted. So I'm there, but I don't post as much on the site. I usually, when something material happens at Berkshire, I talk about it and I still have fun, but I only look at my Twitter account, my ex account, once every week or two now. Okay. Wow, that must be a scary experience. And I also just want to say, for the record, if anyone named Chris Broomster and they're trying to sell Ms. Solana coins, I don't think it's you. You could take that as a compliment. Rest assured, it's not. All right. Thank you so much for a time.

time, Chris. Thanks, Dick. This was great. Always fun talking to you. Thanks for listening to TIP. Follow the Investors podcast on your favorite podcast app and visit the Investorspodcast.com for show notes and educational resources. This podcast is for informational and entertainment purposes only and does not provide financial, investment, tax or legal advice. The content is impersonal and does not consider your objectives, financial situation or needs. Investing involves risk, including possible loss of principle and past performance is not a guarantee of future results. Listeners should do their own research and consult a qualified professional before making any financial decisions. Nothing on this show is a recommendation or solicitation to buy or sell any security or other financial product.

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