Berkshire Hathaway Part I

Transcript from https://podmenti.com/t/415345b88aef5e51

Gonna need some of that um you know, running like the the goo that you eat.

Oh man, I should have brought a snack.
Well,
Great thing about not being alive, we could always just take a break if need be.
It's true.
Oh, Warren and Charlie don't take a break. Oh my God, we what are we doing? We should have brought peanut brittle and cherry coats. Well for part two, peanut brittle and cherry cokes are are mandatory.
Mandatory. Ugh.
Well, that's okay because we're not really talking about Berkshire today. That's right.
Yeah.

Welcome to season eight, episode five of Acquired.
the podcast about great technology companies and the stories and playbooks behind them.
I'm Ben Gilbert, and I am the co-founder and managing director of Seattle based Pioneer Square Labs and our venture fund, PSL Ventures.
And I'm David Rosenthal and I am an angel investor based in San Francisco.
And we are your hosts.
Let's talk about the 10 most valuable companies in the world.
The first nine are tech companies.
There's of course the big five in the US.
Plus Tesla, of course, because it's twenty twenty one.
Of course. And then you have Tencent and Alibaba from China.
The ninth T S M C the Taiwan semiconductor manufacturer.
And the tenth.
the only non tech company.
It's a one hundred and eighty-two year old company that started as a textile mill.
In New England.
Berkshire Hathaway.
As most listeners know, Berkshire is far from a textile mill today.
It is a holding company, unique in every way and by far the most successful in history.
A few of the companies that they own outright include Dairy Queen, Duracell, Fruit of the Loom, Geico, NetJets.
C's candies and even
Brooks running shoes.
Seattle company, right? Oh yeah.
Oh yeah, and I'm super loyal. I I I ran up Mount Psy wearing'em the other morning.
Nice.
They also own large pieces of many of your favorite publicly traded companies, including Amazon, Johnson Johnson, Coca-Cola, American Express, Kraft Heinz, Verizon, GM, MasterCard, Snowflake.
And now they even own over a hundred billion dollars of Apple stock.
And somehow
The man behind it all, Warren Buffett.
has claimed that purchasing Berkshire Hathaway was the biggest
investment mistake he had ever made.
And for many of you, you're probably learning that Warren Buffett purchased Berkshire Hathaway and it was not something that he founded, uh, which is the first takeaway from this episode. He claims we will cover this again much later in the episode.
But he claims that purchasing Berkshire Hathaway
cost him two hundred billion dollars in opportunity cost. Well when you compound something over fifty years, you you can uh you can come up with some large numbers. So what the heck is this company? How did it come to be and why is it that even at an all time high for the stock
So many analysts think it is underpriced today.
Well, to do this right, we are gonna need more than one episode.
Even an acquired sized episode. So welcome to our first part of our two part series.
on Berkshire Hathaway.
And in this first part.
Most of it won't even be about Berkshire the company.
It's about the man, Warren Buffett.
and his mental iterations and learnings that would shape what Berkshire would come to be.
People always try and reduce what Buffett does to a simple strategy.
Or even a few pithy quotes.
In reality, Warren has learned, adapted, and reinvented his strategy at least four distinct times over the decades.
In doing the months of research to prepare for these episodes, David and I both learned just how much Warren's thinking evolved.
to create the absolutely unreplicatable juggernaut.
That Berkshire Hathaway is.
Today.
So on this episode
We bring you the story of Warren Buffett.
The learning machine.
Are you an acquired Slack member?
If not, what have you been waiting for?
It is a stellar community discussing all things acquired, recent episodes, but more importantly, it is just a genuine, smart group of people having a thought, nuanced, and respectful discussion about the tech and investing news of the day.
You can join at acquire.fm slash slack.
All right listeners.
Now is a great time to talk about a new partner of ours here on Acquired, Lagora.
The agentic operating system that is redefining how the world's best legal teams work.
Yep. It's sort of obvious that AI is gonna completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Ligora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?
So the founders did exactly what great founders do.
operate with obsessive customer focus.
They embedded inside a massive law firm.
For months.
They sat with the lawyers just watching how the work really gets done.
And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Legor's Bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work.
and do higher value work. And this means that the pie can grow even as each individual task takes less time.
And they recently launched Lagora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.
And Lagora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Ligora numbers essentially
speak for themselves. When they have a head to head pilot with their top competitor, they win seventy percent of the time. Lagora now has over a hundred thousand lawyers on the platform from twelve hundred legal teams in fifty countries.
And crazily, they went from one million
to a hundred million in ARR.
In about.
Eighteen months.

truly insane numbers. And that is the real test.
Plenty of things demo well, but the question is whether a busy associate actually reach for it during crunch time, or whether a partner trusts it before going into a conversation with a major client.
If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at Lagora.com/slash acquired.
And just tell him that Ben and David sent you.
All right, lastly, to keep this short and sweet, if you are not an acquired LP, you really should just become one. And aside from all the things that we tell you every episode about the LP program, we just did a really cool new thing. We called it a community QA.
with the founder of Levels, Josh Clemente.
after we had him on on the show and we thought what wouldn't it be cool to let all the LPs uh pepper him with questions and interact with him. That was super fun. If you missed it, you can check out the recording in the LP Google Drive. And uh if you are not already a limited partner.
You can click the link in the show notes or go to acquired.fm slash LP.
Cannot wait to see you in there.
All right.
David, I think we are ready to do it. Listeners, as always, this show is not investment advice.
And you know, like Warren Buffett, we would never profess to give you investment advice. All of our best ideas we will keep
a deep dark secret, maybe until long after we've executed them so we can sort of tell the world about our wonderful investments. But
David and I may have investments in the companies that we discuss. They show us for educational entertainment purposes only.
We hope you enjoy it.
And without further ado.
David Rosenthal.
Where are we starting the story?
I have been a proud Bruxer
Hathaway shareholder of of the B, not the A, for pretty much my entire life.
The greatest things that

Parents and grandparents gave me.
was a few shares of Berkeley when I was
We'll take.
Never sold them.
Very smart investment on their part.
what's your sell date on him? What's your uh where where are you exiting the position?
Uh never.
As as it should be.
As it should be. Okay. Before we dive into history and facts, we owe a big, big
Big thank you.
to Alice Schroeder and her wonderful book.
The snowball.
Which I at least used as my main source for this episode.
Ben you read uh
Yeah, Buffett, the making of an American capitalist.
uh a great book by Roger Lowenstein. I thought this book was awesome. People talk about Snowball all the time as the one as the sort of more
popular uh Buffett biography. I thoroughly enjoyed this book, so I think you can't go wrong. Yeah, we'll we'll get to
Compare and contrast as we go here.
But Alice's own story is pretty amazing. I didn't realize to looking this up.
She was an equity research analyst on Wall Street covering insurance companies.
And she wrote to Warren in nineteen ninety eight
Asking to talk to him.
And Warren had never talked to
Wall Street research analysts.
Before but for some reason he
Takes her call.
And uh she was the first
research analysts to initiate coverage on Berkshire.
Kind of amazing.
And then in two thousand three
Another author approached her about writing a book together on Buffett.
She talks to Buffett.
And he says, Well why don't you just write it instead and I'll give you
Full access, like thousands of hours with him. Oh wow family, everybody. It's amazing.
Amazing story, so
Definitely go check out both the Snowball and Buffett.
Great books.
Highly, highly recommend.
And listeners, we'll have to see how this goes. This is the second time I think the New York Times would have been the first one, but where David and I both just read separate books and I think we both read'em cover to cover. Obviously we've got a few dozen other sources that we use for this as well, but uh we may have stories that uh one another does not know about.
We shall see.
Okay.
So I'll go first.
And start.
Appropriately enough.
Back in eighteen.
Sixty seven.
with a journey from
New York to Omaha.
undertaken by a young gentleman named Sidney Buffett.
who was working for his father's farm in Long Island.
But he quits.
Because he feels like he's not getting paid enough and like
So many
young people, young men
Of his generation, he decides to go west.
To seek his fortune.
And he ends up
In Omaha.
Nebraska.
He got part of the way west.
Uh part of the way, West, I think his
maternal grandmother grandfather was already there in Omaha. That might been why he headed there.
But the other reason
was that
Omaha was a boom town at the time. So it had existed for a long time. It was a
kind of pit stop on the uh
the trail west, the the Oregon Trail or the California trail.
For gold prospectors heading out west.
But after
The Civil War, the US Civil War,
Lincoln decrees that
Omaha is gonna be the headquarters of the new
Union Pacific Railroad.
And uh which is gonna connect up
the West Coast of the United States with the rest of
The country and the town.
Takes off.
No.
Interestingly.
Union Pacific is still around and operating today.
ironically, as the second largest
rail company in America after, of course.
Burlington Northern being first.
Owned by Hathaway. But that won't come until part two.
So Sydney gets to town.
He decides he doesn't want to be a farmer anymore.
He instead wants to
sell products from the farm. He opens up the first
Grocery store in Omaha.
And um
He runs it. And then
Effectively passes it on to his son, his son Ernest Buffett. Um
I think actually technically sets up a different store, but it's like the family business, so
Ernest, his son is running
The legacy of the
Grocery store.
In
Uma huh.
And
As Alice points out in the snowball, Ernest was very, very aptly named.
As uh as we'll see.
Under Ernest's management of the store,
His quote that he likes to use is
The hours are long, the pay is low.
The opinions cast in iron.
And the foolishness.
is zero.
Hardcore.
Yeah.
Hardcore.
So
Typical of this sort of uh
New entrepreneurial.
Middle class.
Ernest and his wife.
Henrietta.
You know, they they're fine with their children working in the store, but
They want them to get a good education and become
Professionals.
So most of their children go to the University of Nebraska.
including their third son, Howard.
who majors in journalism and
Works at the
Daily.
Nebraskan school newspaper.
While he's working there, he meets a freshman who comes in and is applying for a job.
Layla Stahl.
whose father owned a local newspaper in
Nebraska.
And
They meet.
They hit it off, they marry.
Course these are Warren's parents that we're talking about.
And
Amazingly. They meet at the college newspaper. The uh very fitting. The newspaper business
is gonna play a large part in uh
young Warren's life to come.
So
Howard graduates in nineteen twenty five.
He and Layla Mary.
And as was typical of the time, unfortunately she
drops out of school. By all accounts she was like an incredibly
Promising student.
very good at math. Uh her professors were very disappointed when she drops out too.
Mary Howard and and become a housewife.
Howard, of course, he wants to go into journalism and eventually politics.
But Ernest is having none of it.
His son needs a
Respectable professional.
Career.
Uh the No Nonsense Ernest.
So he instead uh suggests that Howard might want to do something
you know, more more useful, something more like selling insurance.
So the just ironies continue to mount here.
Boy, we've got newspapers already, we've got insurance already. It's like either Berkshire Hathaway basically has an index on the American economy or
the forces that would then shape war in forever are sort of already playing a role in his life. They're already stacky here. Probably some of both.
Probably some of both. Maybe more the latter because
There's one more chip to stack.
Which is Howard
For two years he's a insurance agent selling.
Insurance.
But we're in the late nineteen twenties now.
And it's the Roaring Twenties. And it's go go time. And
Howard after a couple years decides, you know
Maybe this insurance stuff is pretty boring. Uh, you know, my my customers here in Omaha, they they don't want insurance anymore.
They want stocks, baby.
So he switches careers.
Two years out of school.
And goes from selling insurance.
To being a stockbroker.
In
Omaha.
I had to like look this up thinking about this. Like well, you know, you hear about stockbrokers, like what what does it mean to be a stockbroker in
Omaha in 1927. So you gotta remember like there's no Charles Schwab uh for one. I mean, Schwab was hugely innovative. Right. So how are you
Brokering stocks if you're not on the floor.
Right. Like so
There's
the exchange, the New York Stock Exchange in New York.
But then
For all the rest of the
Retail.
public in America, how do they get stocks?
You've got a local
Broker.
Is your sort of like combination.
Financial advisor plus, you know
exchange access, you know, your
You call your broker or
More often.
He calls it, it was always a he at the time.
Uh.
He called you.
And would say
Hey, you know, I've got this great stock that you might want to think about getting into. You know, I I I know you and your portfolio, your investment objectives.
And you would chat on the phone with him for a while or you'd go to his office and then you would sign up and
You would buy shares, he would then call
The exchange back in New York get a
A traitor.
on the line and then buy in your name.
Some shares. Oh, so they would get a trader on like it it wasn't like the brokerages bought these big blocks and then they would sort of like sub it was like
Your broker would like call a trader on the floor to execute your trade.
Well, I think it was kind of both. I think that was if you wanted a specific
Trade to happen.
But more often what would happen was the big
banks and financial firms and trading houses in New York.
They had like product that they needed to move, you know, they had issuances that they needed to move, they had trades that they were doing, they needed counterparties to the trades.
And so all these local stockbrokers
distributed throughout the country. They were like the distribution and sales force. Like
Yeah, people talk about sales and trading back in the day and as part of investment banks. The sales part of it was
sales to these, you know, an effort to educate all these local brokers.
To then recommend
And push.
Stocks to the clients.
Yeah.
Pretty fascinating. I mean a and at this point in history
Investing isn't really like a
profession with a lot of sort of science behind it. It's kind of looked at as gambling, right? Like buying stocks.
Totally.
Fundamental analysis.
Does not exist yet. It's like
people think about stocks is exactly gambling is the right word.
you know, tickets to bet on a horse. Like, oh, I like the name of this company or I like what they're doing, but nobody's thinking about
What's the capital structure of this company? What are its revenues? What are its growth prospects?
That's not how this works.
So Warren.
would later in life, as we shall see, uh he would do a brief interlude working for his father at the firm as a stockbroker himself.
He called
What they did.
Equivalent to being a quote unquote prescriptionist.
Versus being a doctor.
It would be like if you were
You know, a medical professional and you got paid
Based on the
type and amount of pills that you prescribe to your patients versus the actual like outcomes'cause you're just getting paid by the commission on every every stock that you sell. Like the incentives are totally misaligned.
Oh, you're making me pull forward my first playbook theme already.
Like this is one of war I mean, we're not he's not even born yet in this story, but this will ultimately be one of his very first realizations is
What is the point of me researching the crap out of these companies and picking stocks
When all I'm getting paid for is just to move product.
You know, it's like a total, like you said, total incentive misalignment. Total incentive misalignment. But but let's let's stick on Warren's father, like
Nineteen twenty seven he switches over to becoming a stockbroker.
Things are really great. They're humming. The family's doing great.
For two years and then
October twenty ninth.
Nineteen twenty nine.
Amazing I don't think we've talked about this on this show yet. Amazingly, no, we've made it a hundred and fifty plus episodes without talking about Black Friday. Black Tuesday.
Black Tuesday. Black Friday is a much happier uh event. Uh uh a real capitalism fest. Not a capitalism fest on uh Black. Black Tuesday, of course we're talking about the stock market crash.
On Black Tuesday.
Over I think it actually wasn't that bad by modern standards. I think the Dow dropped like uh in the low teens maybe percentages on Black Tuesday, but it was still shocking to people.
The real problem is over the next three years after Black Tuesday.
The market loses ninety percent of its value.
Could you imagine that? Like that's unbelievable. I mean, during the in two thousand eight, I think the market lost like close to fifty percent, maybe.
But ninety percent people are just wiped out. Like it's
Yeah, like the way that it's described in in Lowenstein's book is that
What was unique and remarkable about the Great Depression was that
even the smart money got wiped out because the people who sort of realized, ooh, things are cheap now, the the crash is over
would buy in and then even they lost all their money.
And of course that is the thing um to fear when everyone's screaming by the dip.
Uh, and of course that hasn't happened to this level, as you're saying, since nineteen twenty nine, but
Just
Crushed everyone.
To grossly oversimplify.
You know, w what at least I think
Happened.
And why it hasn't fortunately happened since is
So the stock market crashed.
And that led people to panic and that led to runs on
Banks people wanted their cash out of banks. Banks were, you know, not nearly as institutionalized as they are now, and there was no FDIC insurance.
that was put in place after the crash.
So
When there runs on the banks that led to
Bank.
Failures.
So when the
when all these local banks failed, the Fed
had to I think raise
Interest rates.
Because it was like
borrowing was so hard now. There's so much less like
capital base available to borrow. So the interest rates had to go
Up. So you've got an economic shock. Oh wow. And then interest rates are going up. Like imagine like when coronavirus. Right. Like when coronavirus hit the Fed slashed it to z you know, less than zero and same during two thousand eight.
So no, it's a double whammy of like
Economic shock.
plus major interest rate hikes. And that just like that led to
It was a decade of you know, more than a decade really until World War Two.
The stock market, the Dow
Wouldn't return to its
High before the crash.
Until nineteen fifty four. That's twenty five years. That's a quarter century just
Lost.
Crazy.
Crazy, crazy.
Okay, so back to
Howard and the Buffets.
Howard does something pretty crazy, right? So like it's you know, it's bad.
Warren is born uh less than a year after
Black Tuesday on August thirtieth, nineteen thirty.
Warren Edward Buffett is born.
The next
year. It wasn't until thirty one, Howard was working as a stockbroker for Union State
Bank.
And the bank fails. So not only is Howard out of a job
But all the family's money is
At the bank. So
They got no money.
They got no job.
And
Howard and Layla now have two kids.
So what does Howard do?
He does the
A hundred percent total contrarian move.
First he does try to go.
To his father to Ernest and
And get a job at the family grocery store. Ernest is like
I can't
I don't have any money to pay you. I can't
Employ you.
So Howard.
Sets up his
On
Stock brokerage firm. So we're in the middle of the Great Depression. Really? After the crash.
And he just like well I know to be a stockbroker. Now he's not totally crazy.
Because
You know, the world is melting down.
But for anyone who
Does still have some
Well
Left.
They need something to do with it. Like they're not gonna put it in the stocks that they were in before the crash.
So Howard has this sort of business plan.
He starts going around Omaha to anyone who still has any
wealth left and he
advises them on
hyper conservative investments that they can
use their capital for so like
utility companies, municipal bonds.
That kind of stuff.
And it works, like there's actually demand for this kinda.
So he's placing all these hyper conservative securities.
Uh he ends up making
I think pretty quickly, like way more money than he was making at the old job.
Wow, I didn't realize that he sort of broke out on his own there and started his own brokerage.
Yeah, started his own brokerage.
Uh it would eventually come to be known as Buffett and Fawk.
And so the family actually
You know, Warren has no memory of this.
of these two years of really hard times, but kinda skates
Through the depression.
Fairly well off.
His dad bought the dip. Exactly.
So
Warren.
Unsurprisingly.
to anyone who's heard of him, which is probably everybody listening to this podcast, turns out to be an extremely
Mathematical.
Yeah.
So he's like always counting things. This is things counting bottle caps, he's counting his weight.
He's running all sorts of analysis even as a little kid. Did you see he like was counting the occurrences of letters in like newspaper articles, and then he and his friend would like tally them up and make bets on
which letters were gonna appear more often than others. Like he was he was counting completely arbitrary things just to count them.
You might say that uh he has some budding O C D developing in his personality. He was writing down license plates that went by. I mean it was
Hardcore.
It was hardcore.
So
Then famously.
As the story goes, there's actually a picture of this.
For Christmas when Warren is six years old.
He receives one of those
money coin changers like that you wear on your belt, like the old style
Uh I actually had one. Me too I got one from my grandpa.
Oh, amazing. But the little like crank that you push down, the little like lever.
Yep, and then it spits out, you know, one coin at a time and there's the separate slot for quarters and dimes and nickels and pennies.
I mean that thing was so cool.
So Warren gets this and he becomes obsessed with it. This is like
You know
The combination of
Counting and
Collecting things.
analyzing and and money. He's just like
He wants to get as many coins as he possibly can to stuff into this thing, and then he starts keeping jars in his drawers of all the all the money.
It's amazing.
So
He starts to think like how can I get more money?
He goes, I assume, to his grandfather to the grocery store.
And he buys packs of gum, like in bulk.
And then he starts going around door to door in the neighborhood and selling individual
Packs of gum.
to mothers in the neighborhood for five cents a pop.
Amazing. Uh then he starts you know he he kinda gets this racket going.
Then he starts selling soda.
Door to door he starts selling magazines. Didn't he like on a vacation, he like goes and buys some Cokes and he's like wandering around the edge of a lake selling Cokes for like twice as much as he bought'em for.
I don't think this was in the snowball. What uh Yeah, it's it's exactly that. And it was Cokes, I remember that, despite his soon to come Pepsi addiction.
His earliest childhood sales came from Cokes.
Amazing. So he's starting to accumulate the beginnings of the Warren Buffett wealth.
When he's
Ten years old.
Howard.
Takes him on one of his trips to New York.
And to Wall Street.
And
This is amazing. You f you probably read this too.
Warren actually gets to meet
The legendary Sidney Weinberg, who was the head of Goldman Sachs.
At the time. He's ten years old. Warren Puppets' ten years old.
And

Sydney Weinberg and uh
supposedly as they're le you know, Warren's sitting there starstruck the whole time.
And uh as they're leaving, Sydney supposedly turns to him and says, What stock do you like, Warren? And unfortunately in the snowball league, Alice doesn't
Say what Warren responds. Like I wanna know what the hot pick is. Uh
But he's totally Starstruck. This makes a huge impression on him.
And uh
Before they come home after the Weinberg meeting
His dad takes him to
The
The stock exchange, the New York Stock Exchange to the building for lunch.
And uh this great, like amazing lunch in this sort of gilded building.
And after lunch a waiter comes up to the table.
With a tray.
That has all of these
different types of tobacco on it.
and rolling papers for cigars and Warren realizes that like oh after lunch at the exchange
You
get like a custom cigar made for you, like you choose the tobacco. And uh or it's as he's like he you know he has no interest then or ever in in smoking a cigar or
even in any of these trappings of wealth, but he realizes like
If this is how
They roll at the New York Stock Exchange every day.
There must be so much money here. I gotta find a way to get me some of this. Do you know if he got to like see the trading floor as a 10 year old?
I I think so. I think so.
Have you ever been?
No, have you?
Yeah.
So I went when I was sixteen or something as part of a a high school trip where there was uh someone who had taken a class that I had previously taken who who worked at the stock exchange and sort of got us in and we went on the balcony and all that. And um
It leaves a mark. I mean looking out at this, th this would have been
Two thousand five or six, something like that. So it was mostly already computers and the people that are there are, you know, you don't have people making every trade live on the floor the way that you did would have in those days. But even then it le it leaves that impression, especially as a teenager.
uh how much gravitas there is there. That that's sort of the central clearinghouse of equities in our nation. Yeah. It's a
Impactful experience. Yeah. It's like
It's capitalism.
There, incarnate.
So
Warren says that this trip
And the wealth that he
Saw it at the stock exchange.
And at Goldman.
He says he didn't want
He didn't
have any desire to have any of the fancy stuff.
But he says he did want independence. He said I realize
Wealth could make me independent.
Then I could do what I wanted with my life. And the biggest thing I wanted was to work for myself. I didn't want other people directing me.
The idea of doing what I wanted to do every day was important to me.
Yeah.
That that certainly happened.
It certainly happened. It just like resonates so much. I feel exactly the same way.
So when he gets home, he decides that he's gonna set a goal.
to amass this wealth that's gonna get him the independents that he wants.
He tells you
All of his family and friends
That his goal is he's gonna be a millionaire.
By the age of thirty five.
Being a millionaire.
And
those days would be equivalent to about fifteen to twenty million dollars.
in net worth today.
So
You know, gosh today. I mean like like the anybody can do it and it's great in doing our entrepreneurial
Start up.
Friendly, you know.
ecosystem. It's probably not totally crazy if a little kid said that they wanted to
A massive twenty million dollar fortune by the time they were thirty five.
In Omaha in nineteen forty.
This was like totally nuts.
Yeah, I'll bet.
I mean the other th it reminds me so much too of the
You know, he would say several times throughout his life, and I'm gonna paraphrase that he doesn't wanna be rich to be rich. He wants to
you know, have a lot of money'cause it's fun to have a lot of money and it's fun to watch it grow. And you can sort of already see that in like
His ambition here
Is not
to make some specific impact or to get to do a certain thing because he has passion for it. It's like, no, no, I want to be a rich person.
And it's fascinating how even so early in his life he's just unabashed about that. I mean, there's so many like I think we're talking to every founder right now that's going out and
like fifty percent wants to be rich and fifty percent wants to accomplish the mission that they're on and they're like, I'm here to accomplish the mission that we're on. Cause we've all had it brow beaten into us that like it is it is not virtuous to want to be ri and he's like, No, no, no, no, no. Like
I want to be a rich person.
And later in his life he would also decide, like, I wanna be likable, I wanna be
you know, an icon in America. I wanna be a platform for learning. I wanna teach. But at this point he's like
I wanna be a rich person. I just want to be rich, yeah.
It's kind of amazing. Even the fifty percent of you know
People and founders out there who
Like
Do just want to be rich. So you would never say that. It's a very Buffett uh sort of singular focus and frankly
Like
not caring about what other people think of him to just
Have that.
Yeah, just come out with it.
So this is pretty amazing.
He's ten years old.
He has this goal.
And he figures something out at the age of ten that just
Drives the entire rest of his life.
And I think it's something that like ninety nine point nine
percent of people out there in the world
Never figure out.
Which is
This
Concept that money
Can create more money.
Which is obviously compounding, which we'll spend.
Must have
the breast of, you know, the next several hours here and several hours on the next episode talking about
But he figures this out. Like it just f simply reduced to that. Money can create more money.
And the way he figures it out, the story goes
He
had gone to the library and taken out a book called One Thousand Ways to Make One Thousand Dollars. Uh one of those like books that could only exist in like the forties and fifties. Yep.
And um
One of the one thousand schemes that it describes in the book is
Is
that you could buy a penny weighing machine.
So these things used to exist. They're like
Scales in
Public?
That would be on like street corners and in drug stores and stuff.
And um
You would weigh yourself on it. I guess'cause like home
Scales. Oh, I've seen these in like grocery stores.
Yeah.
And uh and so you'd pay a penny, you put a put a penny in the slot, and then you'd get to
Weigh yourself. And um
And so the scheme in the book is that oh, you just go buy a penny weighing machine and then you collect the money over time and eventually you'll get a thousand dollars out of it.
So Warren reads this and he's like, Wait a minute.
What if I buy one weighing machine?
And then once I earn enough money from it.
I use that money to go buy another weighing machine.
And then I'll put it in a different spot.
And then
I've got these two weighing machines both earning pennies every day.
Well
the rate at which I'll earn enough to buy my third weighing machine is gonna be
Half as much.
Time and then I can buy my fourth weighing machine and you know another third is less time.
And so he figures this out. He apparently literally starts writing out, you know, essentially compound interest tables in his bedroom in his notebook, dreaming about all these weighing machines that he's gonna have. Oh, it's so crazy. Amazing.
Other kids would be like
Thinking about using all this money to buy bubblegum or baseball cards or something. And he's ten. Like I I knew that later as he gets into his teenage years, he's um
You know, he's got a little pinball servicing business, but like at
He's ten.
It's crazy.
It's Ted. So yeah, so you alluded to he never does do the weighing machines.
But when he's in high school, yeah, he he buys. He doesn't actually end up buying, he just like does the formulas to see what it would be. No, he he just does the formulas. Yeah. Oh wow.
But he does buy used pinball machines in high school and like he makes a
ton of money off these things. He puts them in barbershops.
It's great.
Do you know why he got out of that business?
The pinball? No, I assume just'cause he graduated high school.
No, this is a call back to our uh uh Nolan Bushnell episode.
Warren found out that this was a business that if you get too powerful in it, then you start having to contend with the mafia for uh, you know, who who's getting a a cut of doing that servicing. And he basically was like, Well, I don't want anything to do with that. And he and his friend got out of that business.
Wasn't Nolan saying something about um
The pinball machines were were linked to like bootlegging too during prohibition. And like bootlegging, money laundering. Yeah. They've got sort of a storied history there. That would then bleed into arcade games too, because I think one, it was an outcropping of f of the other. That's right. These are these are doing more in uh less scrupulous early years.
Well, and he he had this whole game too that he was running where um
He and his friend would basically
pretend that they weren't the guys in charge, that they worked for some bigger company. And so whenever they'd get like, you know, harassed for something or they would complain about prices or something like that, they would say like, look, we're just the, you know, we're the hired hands. Like we're not the guys in charge. We gotta we don't set the prices. It's such a good bit.
Oh worry.
So great.
So the other thing he does when he gets back from the New York trip is uh of course
He starts.
Buying stocks. He's got his dad, the stockbroker, right there, so he's got the line he can go buy stocks.
So he um
He convinces his big sister Doris to pool all of their money together.
About like two hundred, two hundred fifty bucks.
between them. And uh
And he decides he's gonna buy
shares, uh preferred shares in a company called Cities Service.
So they
Together, you know, he's he's the sort of managing partner in this partnership. Uh they buy six shares for thirty eight bucks a share.
And immediately the stock goes down to twenty seven bucks a share.
So not a not a auspicious beginning.
Doris is like freaking out about this. And Warren feels
Horrible. It's like eating him up.
So the stock does recover to forty dollars a share.
And Warren just unloads it. He's like great, get the money back. Give Doris our money back.
But it keeps going.
Like
Pretty quickly.
The stock goes to over two hundred dollars a share.
But Warren had already unloaded.
Me and Bitcoin in twenty fifteen. Yeah. Like this is exactly what ten year old Warren. If only Ben, if only you'd learn these lessons at age ten. Yeah.
Blew it.
So I'd say the incident makes an impression on him. He says he learns three lessons from this. I think he actually only learns one, but
The first that he says he learns is
Don't fixate on the price you paid for something, it's irrelevant.
The second is don't rush to grab a small profit. Stay focused on the big long term wins.
The irony is he would violate rules one and two, like many, many, many times until he was about forty years old. So uh as we shall see.
But the third lesson.
He does learn.
Which is that you can't control other people's emotions around money. So if you're gonna take money from anybody
You need to make sure one
That you're not gonna lose it. And he's talking about his sister here.
And two
That
You need to do something to manage
Their emotions or their
ability to affect you.
So that they don't freak out and cause you to do
Une economic things.
Yeah, Warren might have sold it forty dollars anyway, but
Certainly that his sister was breathing down his neck.
to sell it. You know, it reminds me of um
The early Sequoia days. Yeah, an Apple.
Warren decides it's best if the clients don't see how the sausage is made, so to speak.
Which would absolutely inform his uh
you know, his his perspective on some of the partnerships he would do in the near future where he would not tell people the stocks he was buying on their behalf. Which like
I remember reading those words and being like, What? This is like a a blind, undisclosed pool that he's running, but it's so easy to see how uh
You know, these early experiences make him realize
Yeah. Like if you wanna be
you know, the completely independent free thinker that you are doing your own
fundamental analysis and not moved
not only by the current price that things are trading at, but of the emotions of your investors or the demands of your investors for their tax consideration or for whatever reason they want to withdraw funds, then you better figure out how to hold and manage money on your own terms.
Totally.
Totally.
So
Meanwhile, shortly after the New York trip
Howard's career takes another turn.
Pearl Harbor happens.
And the US, of course, enters World War Two.
Uh Howard is a like staunch
Isolationist.
And very and define that for us like like xenophobic, like anti trade, anti
It's unclear to me if he was xenophobic. I mean he probably was. I I wouldn't imagine he was the kind of person who loved foreigners, but he was certainly very against America entering the war.
Uh and he hated F D R and Rosevelt. He was like a
Die Hard Republican.
as apparently were many people in Nebraska at the time.
'cause he runs for Congress inspired by
the US entry into World War Two, which he thinks is the worst thing that has ever happened.
Uh and he wins. So
The family moves to Washington and Howard becomes a
US Congressman.
Warren though.
He hates it. He wants nothing to do.
With Washington. He loves Omaha. He wants to go back.
So he campaigns his family to let him go live with
The grandfather, with Ernest.
back in Omaha and Warren's like this is gonna be great, you know, me and Gramps, we're gonna become industrialists, we're gonna be partners, buddy buddy, we're gonna be like, you know, the Rockefellers and the Morgan, this is gonna be great. He moves back.

Grandfather.
And Ernest puts him to work in the store as a stockboy. And Warren's like, Wait a minute, I thought we were partners here.
Yeah, I I like the business you're running. I don't so much like the work that I have to do inside of it.
Yep. So
Manual labor, stocking the shelves.
Extremely low pay.
Where it's like this sucks. I gotta get out of here.
Did you read too that like his grandpa was withholding a penny or two each day to simulate social security?
To like show Warren what it was like to have to pay different levels of taxes.
Oh so great. So great.
Ironically.
Somebody else.
Would
feel this exact same way about working for Ernest Buffett.
A few years earlier, though they would not intersect,
One Charles Thomas Munger.
So crazy.
Like how nuts is it that Charlie Bunger worked
For Warren's grandfather in the same job that Warren did a few years later, and they never met until what, their thirties? Something like that. Yeah, until nineteen fifty nine.
They never met.
Wild.
Crazy.
So
After this summer.
That uh
Warren thought would be his future.
Industrialist summer.
He's like Alright, take me to Washington, I gotta get out of here, get out of the store.
He goes.
With the family to DC.
Where he
devises a new way for making money to earn his fortune.
He gets a paper route.
Delivering the Washington Post.
Amazing. Like beautiful foreshadowing.
And uh
When he can profess that
I rose all the way from paper boy to chairman, albeit with some, you know
Leaving the and coming back in between. Yep. It's an amazing journey. An amazing journey. And of course the IC would later become
The chairman of the Washington Post and partner
K Graham.
W was Byrne the chairman he I think he was the chairman, yeah, and Kay was the CEO. I think that's right. I mean I think he got a board seat commensurate with his investment, and I think she gave him the chairman role'cause she had so much sort of respect for his council.
Well, we'll hear more about that in part two to come.
But
He's got this paper around now. And remember he was selling gum and soda door to door back in Omas like this is great. Now I've got
The way the literally my foot in the door to all of the housewives in Washington, DC
I you know, I I deliver'em the paper, but I can sell them magazine subscriptions. I can sell them calendars. I can sell them all sorts of stuff.
So he starts
An empire in the streets of the suburbs of Washington, D C.
And he's doing crazy stuff. Like he's ripping off
the labels on subscriptions that I think people had like put out to throw away. So he was basically
understanding when subscriptions would expire so he knew who to go sell what subscriptions to at what time. There's a brilliant strategy.
Warren loves digging in the dirt for stuff.
Yep.
So
By the time he is in high school
In Washington.
He's earning
A hundred and seventy five bucks a month.
which is more than what his high school teachers are making.
And almost as much as the average
US worker's salary at that point in time. Wow and Warren's in high school.
Totally crazy. He's a mass okay, he's not spending any of it, of course.
He's amassed over two thousand dollars in savings.
Which you know.
is the equivalent of like
I don't know, forty, fifty thousand dollars today. Like how many high schoolers do you know that have
A masked self made.
Almost a full Bitcoin in savings. And and how many high schoolers do you know that firmly understand what the value of that is compounded seven percent every year for another eighty years? Like you know that Warren is looking at that stack, imagining its future potential.
Totally. So now he's got like some real actual capital to invest.
What does he do?
He's still buying individual stock, still playing the stock market.
But he really, you know, he wants to be this like industrialist businessman.
He's decides he's gonna buy
an actual business. He's fifteen years old.
So he
Buys.
A tenant.
Farm.
In Nebraska.
Back home.
No way.
Twelve hundred dollars.
Uh so a tenant farm, he he buys a farm, an active farm with a tenant
on it that is working the farm,'cause Warren's not gonna work the farm, like no way.
And the deal is with with tenant farmers is
The tenant farms the land.
And the profits from
The crops.
Get split fifty between the tenant.
And uh
owner of the farm.
Half the returns to capital, half the returns to labor. Yep.
And of course if the tenant also gets to live there in addition to getting half the profits, right?
Indeed. Indeed.
Wow, it's like Warren's first yielding asset.
It's his first cash flow business.
Hm.
So
Warren graduates high school in nineteen forty seven, at age sixteen.
I don't d he might have skipped a grade or maybe he was just young. It certainly sounded that way.
Sounded that way.
And he goes to
Where else?
the University of Pennsylvania's Wharton Business School, which
Than is
Probably now.
I still sort of think of it as like the preeminent you want to be an undergrad
business major, you know, in the US or anywhere in the world, like
Wharton is the place to go.
But it's really his dad who makes him go. He doesn't want to go to school at all. He's like, I already know all this stuff. I just want to go get to work.
And he wants to stay in Nebraska. I mean, he doesn't like going east. It's never been a great experience for him, and he's only comfortable doing it because he's like my dad's in Washington, so you know, I have some family sort of close, I'll do it.
Sure. So he does it.
He doesn't study, you know, he like aces all the tests, you know, it's sort of ridiculous. Uh, after two years
His dad loses his congressional seat.
And the family moves back to Nebraska.
And Warren.
uses this excuse to say, Hey, why don't I transfer
to the University of Nebraska.
At Lincoln, be back closer to home.
He also has something else in mind.
Which is
He knows if he goes to Nebraska he can take a lot more courses, accelerate and graduate in three years and just get
Out of there.
Yeah, I don't think he was like loving the social scene of college. I mean, he wasn't a drinker, he wasn't going on lots of dates.
He had his eye on the prize.
And uh for him that was making money and he frankly thought he was smarter than all of his college professors at Wharton. So I I think I mean he probably was. With Warren Buffett, it's uh you know, it's he's not wrong. He was probably pretty obnoxious about it. So
At Lincoln, he goes to the Lincoln Journal newspaper.
And he gets a job managing the country circulation.
Which means he now has fifty paper boys reporting to him all across the countryside in Nebraska. Uh, so he's
That's his side hustle.
He loads up on courses. He finished his degree a year early.
So he's nineteen now. He's just graduated college.
He's ready to start his business career for real.
But unlike when he went to undergrad, he actually does see some value in
In some further
Education.
He decides there is a graduate school that he wants to go to that would actually be worth it.
And that is to go to the prestigious
Harvard.
Business school.
And he's so sure he's gonna get he's gonna like look I you know, I bought my first business at age
Fifteen
I met Sidney Weinberg when I was ten, like
There's no doubt I'm gonna get in. He writes his application, it's all about being an investor and
He goes and he does his interviews.
Sure he's gonna get in.
And he gets
Rejected.

Which Harvard Business School would forever
forever be regretting. Totally. Now I mean
I don't know. I don't know exactly what Harvard Business School was looking for in uh
in uh nineteen forty seven at the time.
But I think kind of sort of
Either not or unbeknownst to Warren. I don't think he cared either way. I think this idea of like being an investor
What sort of thing?
des classe, you know, like what you wanted to do. I mean,'cause investing, you know, people were still
Still hangover from the depression.
And it was war time. I think what you wanted to do is you wanted to be like
Madman. You wanted to work for, you know
A big
firm you wanted to climb the ladder, you wanted the stability, like this idea of like being an investor and on your own. That was not what was proper.
At the time.
A and Ben Graham is only really starting to publish the intelligent investor, like this notion of how to analytically and
And from fundamentals do investing.
You know, this still very much looked at as uh investing equals casino. Yeah, we're we're still not quite in the era of that.
being r respected and and frankly most people that are doing it are pretty much hucksters are looking for their their uh
Just to make their commissions on the trades. And the people who were not, who were good and professionals and
Fantastic at their craft at this point in time.
Most of them are Jewish.
Uh which
Yeah, I
I assume there were probably some Jews at Harvard Business School, but not a lot.
Uh kind of viewed as a Jewish profession. This is gonna come up in a big way in a minute.
Ben Graham's Jewish. The anti Semitism that was running rampant at the time can't have helped things. Totally. You know, Sidney Weinberg, Jewish like Goldman Sachs, it's a Jewish firm.
And uh
It was very much, you know, they were outsiders, they were not the establishment.
So
Uh Warren uh is shocked.
By his rejection.
From HP S.
He starts looking at the course catalogs for other business schools just to like, Oh man, well what am I gonna do?
And he happens to see
In the Columbia.
uh graduate school business.
Course catalog.
That there is a course.

By his hero, Benjamin Graham.
And David Dodd.
Of course. And he's like, Holy crap.
He would he would joke later. I assume this is a joke. He said you know, he would write a letter to them to plead his case to get into Columbia saying, I thought you guys were dead. I didn't realize you were alive and teaching classes.
'Cause he had like just picked up their book and was like, This is the you know, he what, the intelligent investor I think is the one he probably read and was like, This is incredible.
So Graham's book
the intelligent investor.
Had just come out.
And Warren was obsessed with it.
Now, Graham and Dod together had written
Published security analysis.
Back in nineteen thirty four.
But that was a textbook. That was like an academic you know I I haven't read it, but like it's super thick, dense. It's it's not meant to be.
Readable.
The intelligent investor is like the Danny Kahneman thinking fast and slow.
you know, version of like uh you know, it's case studies, it's like
Distilled down for public consumption. And and for listeners out there who have read the uh intelligent investor, you're probably thinking, wait, that was supposed to be the not dense one? Different era. Different era. Yep. So
Warren's read, you know, the Intelligent Vester and he's he loves it. He's like this is
Amazing. And and what
The intelligent investor and security analysis in a
even more dry way before it, what they did was they espoused they were like
Hey.
you should think about stocks and investing in stocks systematically and based on the fundamentals of the companies that they represent
And as pieces of a business, not like tickets on, you know, horse race bedding here.
And they basically introduced the idea of the discounted cash flow.
Like this is the first notion that like stocks are
you know, the market cap of a company is uh representative of the sum of all future positive cash flows, or I guess f all cash flows uh discounted at a certain rate back to today. And you know, th this sort of um
forcing you to look and say, does the price of the stock today reconcile with
What you actually believe the business will yield or produce.
In its full lifetime.
You know that that was
Frankly novel.
It was.
And
So Dod is the chair of the finance department at Columbia.
But Graham, he's an adjunct. He's a practitioner, so
Uh Warren is just so gaga here because not only is he like, you know, a professor, apparently, but he wrote this book.
Graham.
Runs
Essentially like the first hedge fund in the world.
Uh he runs the Graham Newman partnership with Jerry Newman.
They are a partnership that invests in stocks on
Wall Street.
Like there's nothing Warren wants to do more than be like these guys. Right. I can literally go take a class from a guy who is actively employing at a real investment strategy on Wall Street, mind blown.
Totally.
So the deadline for Columbia has passed by the time he
gets figures this out. So he writes a letter to Dodden Graham.
And he's basically just like begging them to let him in.
Well
Lo and behold, guess who
at the time was chairing the
admissions committee.
At Columbia Business School.
It was Dod.
So Dad like gets this at at um
You know.
Reads it and is like All right, well
Uh I'm just gonna unilaterally.
Let this kid in. No interview.
No discussion, no formal application.
They just send Warren on a note and be like, All right, you're in.
You're starting in the fall.
'Cause this is like, hey, we we basically see ourselves in you. Like no one is writing us about this thing that we're doing, and here you are crazy excited about this super dry, relatively unrespected thing that we're doing in the world. Yes, come join us. Come join us. So the fall of nineteen fifty
Warren arrives in New York City.
At this point he's compounded his net worth up to ten thousand dollars, which is a lot of money. Uh five X what it was in high school five years earlier.
But he still can't stand to part with any of his money. So rather than
Staying in the dorms at Columbia or renting an apartment.
He
Rents a room at the YMCA for a dollar a day. Oh my God. This guy is truly cursed with having a firm grasp of the future value of his money compounded in the way that he feels he can
get a get a return on it. I mean it we can we can talk all we want about
the virtue of compounding and the eighth wonder of the world and
Frankly, I feel like I have a new understanding for it.
based on doing all this research.
It's only like now that I'm feeling the heft of truly like what if I just put a thousand dollars in a savings account, not a savings account, but in an index fund and accessed it fifty to seventy years from now and you're like, Oh my God, it turns into like a a real big amount of money almost no matter what. And it's like you you all know this, but
when you're warren and you've actually done all these calculations and all you're thinking about all the time with singular focus is the future compounded value of this money.
How could you ever spend a dime? I mean, it truly is
cursing to your lifestyle. Yeah. I mean Alice writes about that. The
Every time.
He looked at
Spending money.
He would
Not see the sticker price for things, he would see it
times eight or ten or twenty of what that money would be worth in the future.
And just to come back and say it, so we all have a firm understanding here, if you took that thousand dollars and you want to invest it for seventy years, say getting a ten percent per year return on it.
Which would be
Good, like that would be a very good return. Yeah, I think it's a little bit outpacing public markets. That's eight hundred thousand dollars 70 years from now.
And like
You know.
uh seventy years from now, my money has a lot less utility to me than it does today, because I will have not had it my whole life, which is the curse. But if you're Warren and all you're seeing all the time is that money in the future
My gosh.
Well, and I think that's the difference between Warren and most normal people too, is
That money in the future probably has about the same utility to him.
'Cause it's not about what he can buy with the money.
It's just about the stack of money. Yep. For Warren it is a scorebo game, not a utility of the cash game.
Yep.
Totally.
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That Ben and David sent you.
Okay, so he shows up.
Uh Columbia.
In the fall of nineteen fifty.
Signs up right away for
Ben Graham's seminar.
Uh, which is in the spring semester.
So he's already read the intelligent inventor cover to cover, you know, he's wearing out the pages so many times. He knows everything.
But he really like he's such a go getter for this. He like he really wants to impress Graham.
in the seminar in the spring.
So he sees I guess in um
Moody's an S P
put out like stock manuals at the time that was the main

people like Warren and and and Ben Graham and and
Newman and and everybody browse through looking for stocks.
He sees that
The Graham Newman partnership.
owns fifty five percent of and Graham is on the board.
Of this little company in Washington.
Called the
Government Employees Insurance Company.
Interesting.
Hm. Sounds familiar.
I mean if Ben Graham's the chairman, like surely Warren wants to know more. Yeah.
Well.
Surely he wants to know more, but the government employees insurance company isn't mentioned anywhere in the Intelligent Investor and
You know, the rest of the intelligent investor is full of case studies and talking about different stocks and
But they don't talk about this company there. Why's that?
Warren decides.
Hm. I wanna go investigate. I'm gonna find out more about this.
Company. This
Uh Gico, if you will. Uh for short.
I'm gonna go pay them a visit.
So he hops on the train.
From Penn Station.
Goes down to Washington.
On a Saturday morning.
And uh he just shows up at the office and he knocks on the door and he persuades a security guard at Geico to
to see if anyone's who around who could talk to him.
Uh Warren sort of
Presumptuously at this time. Although I guess he was signed up for the seminar says
uh that he's a student of Ben Graham's and Ben Graham is the chairman of the board, so you know.
Might want to let me in, have somebody talk to me. Uh eventually.
The company's head of finance, Lorimer Davidson, is there that Saturday morning and he
It's like all right, kid, come on to my office, I'm gonna he's figures I'm gonna do like a
A a good Samaritan deed. Give this kid ten minutes of my time here.
Well it turns out that
uh Lorimer or Davy, as everyone called him.
He wasn't just like a finance dude at
Kijk out.
Not that there's anything wrong with being a finance dude. I guess he was a finance dude in a certain
Respect.
He had been an investor in a
Bond salesmen.
Before
joining Gyko. So he was like he was a lot more like Ben Graham than uh
Just an employee at Gaico.
The story of Geico, the founders had
thought that they could make auto insurance cheaper.
By having commercials with geckos in them. No by selling
the auto insurance direct to customers without using agents.
And to be as cheap as possible and have the best
underrating profile is possible.
They also needed very responsible.
Drivers so.
They borrowed an idea from USAA, which targeted military families for insurance.
They target.
Government employees for sure and sense the government employees insurance company. It's also amazing that their hunch that like government employees are gonna be
less prone to accidents than the general public was right, that they could actually underwrite to
you know, we can give these people cheaper premiums'cause they're gonna be less expensive to us, like that that worked out for them.
I mean I guess.
Seemed like a reasonable assumption, yeah, that if you work for the government you're
Maybe more.
Less likely to
Drive under the influence of alcohol or you know.
Who knows?
Either way it worked.
So
One of the two founders, after a bunch of years, wanted to sell
the family wanted to sell.
and uh their stake and hired Davy to help find a buyer
Davy brings it to Graham, which is how Graham
But the company he ends up negotiating a deal to buy uh at a discount to the asking price, of course.'Cause it was fully privately owned, right? It was not a full company. Fully privately owned company, yeah.
So he buys out the fifty five percent state the family owned for a million dollars.
And then he turns around and puts Lorimer in charge of
Managing Gico's own.
Investments.
So Warren happened on the mother load meeting this guy here. Like he you know, he's like a Graham disciple. He runs all the investments at Geico.
So Warren just starts peppering him with questions. Lorimer's super impressed. He's like, Who is this nineteen year old kid?
They talk for four hours that Saturday morning.
And Davey tells Warren all about
How GIGO works, how the insurance industry works.
Tells him about this magical thing called float. And uh Warren is like, he has seen like the revelation.
of uh you know God has handed down the ten commandments
On the mount. You mean you have other people's money that they're loaning you for free that you can do stuff with until you need it?
Huh.
And you may not even ever need it. Well, that's an interesting idea.
Yeah.
So what is this float idea and how does GECO and all insurance companies work?
the premiums that the customers pay
I go for their audio insurance.
That cash comes in the door on
Day one.
And
Gaica's expenses, they have to pay out claims on insurance claims.
Later. So
You pay the
Policy premiums up front.
But then when there are accidents and stuff and then they go through court and blah blah blah, it could take years before you have to actually pay out
Any money if you pay out any money at all.
Right.
Right, yeah. Supposing you have a good government employee that never wrecks their car, you might just make money.
You might just make a lot of money and never have that you sit on and you never have to
Pay it up.
And if you
manage it well, you can make investments with it. And that's what
Lorimer is doing a geco, he's using all this float.
To make investments.
And he's doing that.
Pretty damn good job of it.
Th there's sort of like two things that that Warren realizes this that like I never fulget before about insurance premiums.
The first is
This is alone.
That someone is making you.
At zero percent interest.
You're like, Well, that's a pretty good loan. Like I don't I don't have to
The service, the debt.
Well like
That means that I basically can make more profits because I don't have to take a cut of my profits every month to pay down the debt. Awesome. It's a interest free.
Yeah. The second amazing thing is wait.
It's not one person that loaned me money. It's a gigantic set of thousands or tens of thousands or hundreds of thousands of people that are paying me money.
Well then what that means is they're predictable.
Because
That's not just somebody wakes up on the wrong side of the bed and says that they want their money back.
Like
the worst thing that can happen, save for some hurricanes to foreshadow the future a little bit, is that like
one person wrecks their car and maybe another person's car, but nobody's wrecking all my customers' cars at the same time. So that's the second thing that's amazing. And the third thing that's amazing is it's not a collateralized loan.
So
You don't have to have something in your business that sort of like
warrants you being able to take on this big debt load.
It's just a big uncollateralized interest free distributed loan to you that you get to do something with until you need to pay it out.
And especially back then.
there was much less regulation about capital requirements for insurance companies and well, all financial institutions. So they really didn't have to
Keep any cash reserves. I mean they could kinda do whatever they wanted with the money.
Speaking of do whatever they want with the money, I think what was happening back then is that
as you would sort of imagine in the early days of insurance.
you would want your premiums to basically equal the amount of money that you would need to pay out in the future.
What happens now is it's assumed that you can do interesting things to earn money on the float. So
I and I didn't know this till doing the research. When you
pay for your car insurance, they're actually collecting less in premiums than in total they will owe out to everyone. So you need to do something interesting with the float.
In order to make it so that
the insurance company doesn't go under, which I never I I I never realized that. It's kind of like a
I suppose that probably happens with competition where everybody's just lowering and lowering their premiums until they realize gosh, we effectively can sell our insurance below cost because we can invest the float.
Yeah.
And Gyko's got the additional advantage, which it still has to this day, of
They don't employ agents. So they just have a fundamentally better
Cost structure.
Then all of their
Competitors.
Which means more money they get to play with.
I bet if you call these guys by going direct, they can save you some money in like fifteen minutes or less on your car address. How much money do you think they could save you? Like fifteen percent?
I would imagine there. I I can't imagine what the cost of customer acquisition is through an agent, but it seems like they could at least rebate that to you.
Yep. One one final flash forward here before we go back to the story.
Everyone should go to BerkshireHathaway.com, one to bask in the full glory of this beautiful website.
Uh but secondly
Please observe that there is a banner to purchase Geiko insurance on the Berkshire website.
Is the one thing that they do on that website other than a series of blue links to a shareholder documents, and it is an ad for a Geico. It's like the most hilarious use of
of web real estate now. Hey, we have our car insurance through Gaico.
It's cheap.
It's great.
All right, all right.
Enough of this. Uh so
That the next Monday, this is on Saturday.
On Monday, Warren goes back.
To New York City.
And immediately liquidates seventy five percent of his portfolio.
And loads up on Geiko. When he's seventy five percent concentrated in Geico.
He's like in love and he thinks I'm gonna show up at Graham Seminar. I'm gonna tell him about this. I'm just he's just gonna go, Gaga, like this is amazing. I'm gonna be his boy. It's gonna be like, you know, his dreams of Ernest back in the day.
Well he shows up at the seminar and he tells
Grab.
What he's done.
Graham is not that impressed.
He's like, You put seventy five percent of your portfolio into Geiko? What are you nuts?
Yeah, because Graham, first of all, is not a one stock guy. He's a distributed, you know, portfolio approach guy. And second of all, I'm sure his next question was
Yeah, and would you pay for it? So
Geico was not a typical investment for the Graham Newman partnership.
They probably only did it'cause he was able to wheedle a deal out of uh Lorimer and the family.
And there's a reason why it wasn't in the intelligent investor.
So Graham's whole
Strategy. His whole mantra, like
He you know, basically like he and Dad, you know, basically invent
Discount of free cash flow discount of cash flow evaluation, you know, fundamental analysis, all that.
And what comes to be known as value investing.
But there's like a major problem with what they're doing, which
Honestly, like
this conflation that Graham

between fundamentals and value investing persists to this day and is still why there's like religious wars about value versus growth investing.
And that's that he thought there was a very specific way to practice fundamental investing.
What he and others called cigar butt.
Investing.
And what does he mean by scarbets?
This is
Crude, but
The analogy is that like you could be walking along the street in those days in New York and you might see
smoked cigar butts lay in the street in the gutter.
And some of'em might still have a little bit of cigar on it, and so you could pick it up for free, not pay anything for the cigar, light it up and maybe still be able to get a puff or two.
out of these cigar butts for free. Uh and the analogy the reason why this analogy is used is that
Grams.
Whole like

He wanted companies that were
Quote unquote.
Worth more dead than alive.
And he actually writes an article by this name.
And what this meant was he looked for companies where like the book value of the assets so like the cash on hand.
the value of their, you know, land, property, buildings
If you shut the company down today, stop taking money from customers, paid out all your liabilities. Stop the business.
And you just sell off in a fire sale. Everything
In the building.
Would you make more money from what you're selling off than what the market cap of the company is?
Trading hat. That was what he looked for.
Which in that era, I mean, you could find those because you didn't have tons and tons and tons of people whose eyes were always on these stocks trying to figure out
Hey, is anything trading below the book value that it should be trading below? And you know, you could find'em pretty often. You could find'em and
Not only there were far fewer people participating in the market and
Far less data available.
But the people who were participating
They were mostly, you know, handicap and horse races. They weren't
Thinking like this, so
Stocks that weren't
Hot.
There were a lot of them out there. And so
Graham referred to he had he had kind of three big insights.
He and Dodd.
That revolutionized.
Investing.
One was this concept that a stock is
A piece of a business.
Uh with
cash flow profiles and going concerns and you should value it as such.
Two was that price and value are two very different things. And the price of a stock on any given day
May or may not reflect the actual value. Price is what you pay, value is what you get.
Exactly. And you can and that you can use this to your advantage. Yeah, this concept of Mr. Market and Mr Market comes to you every day and quotes prices for
what you own and what you're looking what you're contemplating owning, but he's schizophrenic and one day he'll quote high, one day he'll quote low, but the value stays the same.
Right. It's uh it is the notion that it's he's your business partner in the venture and every single day he comes to you offering to buy out your stake.
at a price that is either too high or too low.
Almost never exactly reflecting the the actual intrinsic value. And uh every single day you have the option to decide to sell or buy more.
Yep.
Very true. So points one and two.
Great, I totally agree with.
Point three, I also agree with, but I disagree with the interpretation.
And that's this concept of a margin of safety. The famous
Ben Graham, Warren Buffett, Charlie Munger, Margin of Safety.
And of course the way that
Graham wanted to apply that is buy companies that are so cheap, they are literally free of risk.
Yep.
Yep. And
So
You know, it makes sense. Like investing involves risk, as every disclaimer in history has told you, and involves uncertainty.
Uh you don't know what's gonna happen.
So ideally you want enough downside protection built in.
That
You'll do okay no matter what.
That makes sense. And yes, you do want that.
But Graham's way of looking at this, as we said, was I'm only gonna buy things where
If we literally shut down the business and sold off everything.
On hand.
We would get our money back or
More.
There's
Two problems with that. Both on a downside and on the upside.
On the downside, as we shall see.
Sometimes
the liquidation value of the assets of a corporation
aren't worth as much as you think they are. So you can try to sell off
the property plant equipment. But if they're no buyers or no buyers at the price that you want
Well, just'cause it says it's worth something on the books doesn't mean it's actually worth that.
Uh so that's one problem.
The bigger problem though is that like
This is the ultimate small ball way of making money. Like your upside is so fundamentally capped when this is how you're looking at the world. Like
You could go do a hundred of these cigar butts.
Or you could buy one Geico.
And just hold it for twenty years.
And make way more money.
Yeah, it's fascinating. Th the way that I have been thinking about this
I think the closest analogue
is basically to gross margin in an operating business.
Where if you're running a tech business with super high gross margin and high fixed costs, like, yeah, you gotta spend on the fixed costs, but then you get that gross margin forever without having to change what business you're in.
But if you're in the business of selling lattes, then every single time you need to go and pull a new espresso.
And so
For Graham. This is the like stock equivalent of that analogy.
Yeah, he's in a high velocity business of constantly needing to go and buy a new security.
sell it for more than it's worth, go buy another one, sell it for more than it's worth. And you're gonna make, you know, h his uh notion is never count on making a good sale, have the purchase price be so attractive that even a mediocre sale gives good results.
But you're gonna incur transaction costs every time. You're gonna need to pay taxes every time. Like you're gonna have to do the work of actually identifying what you wanna buy and sell every time. It's a high
Cogs business.
Yep.
And it takes a lot.
long time.
So sadly, tragically.
By the next year.
Oh Warren has succumbed to Graham's
Exhortations here.
And uh Warren sells all of his Geiko stock in nineteen fifty two, early nineteen fifty two.
for fifteen thousand two hundred and fifty nine dollars. He makes over a fifty percent
I R on it, which is amazing.
But if he just held on to the damn thing.
He would have made, you know, hundreds of times more.
of his money.
But of course the gram way to an analyze that business is like
Hey, it's actually trading. Right. Yeah. The its price is at or above its value, so it's time to get out.
Yeah.
It's so interesting. I just want to take a step back for a second here and just reflect on that for a minute. Cause this whole growth versus value thing, if you think about value in this narrowly defined concept of like, let's just keep using the cigar butt analogy. You you pick up the cigar butt, you smoke it, and it's done and now you've throw it away. Like
There's all the work we talked about of identifying the cigar, butt, the transaction cost of picking it up, of puffing it, of paying the tax on your gain of the puff and then discarding it and having to go through that whole process again.
But the whole notion of growth investing is
Well, wouldn't it be nice if
that cigar actually got larger and larger and larger faster than you could smoke it.
And like not only do you have to not incur all those transaction costs there, but
If you're willing to take some risk.
and be smart about analyzing what risks you're gonna take.
the business could sort of grow, the value of the business could even grow faster than the way that it's being priced in the market.
That's sort of this like completely
novel concept that exists outside the universe of what Ben Graham was willing to consider an investment.
Totally.
Now, to be fair to Graham.
You know, he was doing all this through the depression. Like
If you live twenty five years
And the stock market.
is flat to down for twenty five years. Of course you're gonna think this way. Yeah.
And of course
We are all a product of our environment and I I think one of the phrases that is a a buffetism
That sort of
applies to this is you know, we've talked about is the market uh
a weighing machine that where the market basically if you think about a weighing machine, then it effectively equates value to price. Whatever you are spending is what it's worth.
Or is it a voting machine where people are sort of setting price and voting on the price independent of the weight or the value of the actual underlying security? And this is where the realization sort of comes in that
In the long run, it is a weighing machine, but in the short run, it's a voting machine, the stock market.
Totally. And sometimes the short run.
Less.
Longer than you would think.
Yep.
So all that said.
Cigar butt investing was still a sound strategy in the nineteen fifties.
Uh, you're kinda like in the land of the blind, you know, the one eyed person is is king or queen or whatever. So uh you know, the the Graham approach works.
And Warren is just like
Lappen it up.
So he takes the seminar.

Only student.
Two.
ever receive an A plus in the class.
From Graham. Side note.
Also in that same class with Warren.
is one Bill Ruin.
who was a stockbroker at the time at Kitter Peabody.
And was auditing the class.
And he realizes he's like man, this Buffett guy, like, he's going places. I'm gonna
Become friends with him.
That would pay off handsomely, as we will see at the end of the episode.
So
After graduation.
Warren
Yeah, he wants more graham. He can't get enough.
So he goes to Ben and and to Derry Newman and says
Hey.
Can I get a job at Graham Newman? Can I can I work for you guys and
It was a pretty small place. I think there were only like six or seven people working there.
They talk about it and uh
Graham though turns him down and says
You know, I'd love to hire you. You're the best student I've ever had, but um
Jerry and I have a have a pretty strict policy here.
And that is that we only hire Jews.
And uh
He would later recant on this and would hire Buffett in a couple of years.
But it makes sense, like you know, Graham was British, I think.
And this is effectively like an affirmative action type comment, right? Where he's saying we want to make an opportunity here for those who have been sort of persecuted and discriminated against. Exact and this is, you know, nineteen fifty two.
World War Two ended four years ago.
And Graham was
Yeah.
Believe British European
You were born in Europe.
You know, this is like
It's a small firm, but they're like hey, you know
We're we're pretty committed to giving.
choose an opportunity here.
So
Warren.
Is heartbroken.
But not deterred.
He goes.
Back home to Omaha.
decides, Okay, well if I can't join the Graham Newman partnership
I'm just gonna set up my own partnership. I'm gonna do it myself.
But both Graham and Howard Warren's dad talk him out of it.
They both say, Hey, you need some experience first working for someone else before you go and do your own thing. And the natural thing to do is why don't you go work for your dad's old brokerage firm, Buffett Fox.
So Warren does.
And he becomes the dreaded
Prescriptionist.
Working for
His dad, and he just hates it. Hates it, hates it, hates it.
He's getting paid on commission, selling stocks. The whole idea of there's a room full of people.
who are tasked with moving a stock and calling all their customers to say you should buy this thing. It's about the most anti Warren Buffett thing I can possibly imagine. Totally. He's just like it's like organ rejection. So he's, you know, he's making his calls, he's doing what he has to do, he's moving the trying to move the product, but he gets on the phone with people and he's like, you know, he'll do whatever he has to do, but then he's like
Hey, but there's this company called Gico. They're a agentless insurance company. You should really consider buying that as well. And people think he's nuts, they're like
insurance company that doesn't have agents, I want to talk to my agent. Like
That's weird.
So he doesn't have a lot of
Success. D to C, baby. They got this great website. Yeah. Uh so
There are two good things though that come out of his
To your
Interlude. Actually, I am curious, how did Gico work back then? Without is it by mail? Is it by phone? Presumably the whole thing's done by phone.
That's actually a good question.
I assume phone.
There might have been some tie in with the government agencies that
You know, maybe there was like marketing that went out to agency employees
I don't know exactly. All right, well we'll have to we'll have to do a spin out Geico episode at some point.
Yeah, we will. Well, it'll come up again in part two. Don't worry. Uh Warren gets another bite at the apple.
So to speak.
So two good things that come out of this little interlude back in Omaha.
One
He reconnects with
one Susie Thompson.
whose father, Doc Thompson,
was a dean at the University of Omaha and had
managed Howard's political campaigns.
And Warren somehow persuades Susie to marry him.
Which
Shocking given uh
what Warren Buffett was uh h his personality and what he was like back then.
And two
He also after dutifully, you know, working for a while at the brokerage,
Persuades his dad to set up
The first
the Warren Buffett partnerships with him.
Called Buffett and Buffett.
And basically
Warren puts, you know, some of his money in and
His dad put some of, you know, the family's money in.
And Warren just gets like some more capital under management to invest here. So it's his first sort of taste of being uh being a principal.
Yeah.
And I just to add a little more color to that comment you made on on sort of what Buffett was like back then and got Susie to marry him, you know, i he
was and is a person of singular focus in his life.
And he's sort of in his old age started to do more things, but he was never a socialite. He was never someone that was
you know, deeply diving into other people's interests and
you know, socializing to be social. He he was a person that has always wanted to invest and make money. And so of course he did set his eyes on, hey, you know, I want to marry Susie and I'm gonna make that happen. Well there are all these stories about it, like family dinners, even like they'd have friends over and
He Warren would just wander off upstairs and start go reading annual reports in the middle of like a dinner party.
Yeah.
He was like a like a wild man who uh all he did was invest in stocks.
However, uh
The flip side of this
These personality uh quirks of Warren.
are he is very singularly focused and he's very persistent.
So
Despite the rejection from Graham Newman.
Warren continues to write letters to Ben and Jerry
Constantly talking about his ideas, talking about stocks he's looking at.
He travels to New York frequently just to go see them and drop in.
After two years of this.
Jerry finally sits down with Ben and is like
You know, we've got this
Anti anti Semitism uh rule here, but um
Maybe we should make an exception and and and hire this kid. He's pretty special.
So Ben relents.
He uh he calls up Warren and he's like all right.
You really want to come work here.
Fine, we can make it happen.
Well you don't need to ask Warren twice. He accepts on the spot. I don't think he even talks to Susie about it, even though they have
their daughter little Susie at this point, uh, and they're living in Omaha. He just accepts on the spot.
They move them back to New York.
At a moment's notice.
He literally shows up
at the Graham Newman office a month before his initial start date.
He's just like, Yeah, you're not paying me this month, that's fine. I'm like I'm here. I'm working. That's awesome. Uh once again, he doesn't want to pay New York City housing prices, so he moves the family into a crappy apartment.
in White Plains.
Even though
You know.
He's like pretty rich already from everything he's been doing.
And he's now working at like
the most prestigious hedge fund.
in the world and you know, he's paying like
You know, God knows how much, like fifty bucks a month for an apartment way outside the city.
That's crazy. Is it fair to call it a hedge fund? Like what differentiates a hedge fund versus just like a
Institutional money manager.
That's a good question. I mean
I don't think really.
I mean, I don't think they're taking like huge short positions or anything like that at this point in history. I don't think so. I think they would
Sometimes short.
Stocks.
Famously.
I wasn't gonna put this in the script, but um
He was a real pain in the ass in in high school.
Uh arguably.
real pain in the ass for his whole life. And uh
In high school
He hated his teachers so much that uh he knew that they all had the teachers pension was mainly invested in AT stock. And so Warren went out and shorted AT stock and brought the short
the slips in and like put him on his teacher's desk just to show he was betting against their retirement funds. Oh, and in high school they would have like he was already sort of seen as sort of a savant, so that probably would freak people out.
Yeah.
Uh what like what does he know that I don't? Yeah, he was he didn't really care about people's uh
feelings, at least when he was in high school.
So he lands he's he's
At Graham Newman.
Unsurprisingly, he just like
Crushes it.
Pretty
quickly within another two years.
you know, Ben and Jerry are consulting him on everything that they do. Warren's coming up with most of the investing ideas that they're doing. He's involved in every decision that the firm makes
And uh he's really hitting his stride.
So much so that
Ben at this you know, Ben is a we're not gonna get super into it. He's he's a very colorful character, shall we say. Uh had uh
Three wives, I think.
And then
The story goes, I think he he started up a relationship
After his last marriage,
With
The girlfriend of this is a at the end of his life with the girlfriend of
His son after his son died. Anyway, he's a character. So he
He's ready to retire. He wants to move to California, live the good life.
So he and Newman is also getting old, Jerry's getting old, he's thinking about the same
They offer
to make Warren a general partner at the firm.
And have him essentially
Continue, Graham Newman.
I assume they s would sort of stay as like
You know.
partner emeritus or something like that.
But this time Warren shocks them.
And he's like Yeah.
No.
Remember that whole m on my terms thing that I really care a lot about?
Yep. He's like, I don't know, I don't want to run your firm.
If I'm gonna run a firm, I'm gonna run my firm.
And
You know, I'm just here in New York to work with you guys. I don't actually like it in New York. Susie wants to be back in Omaha.
I I would do it in Omaha. So
They end up winding down the firm.
And Warren and Susie and
Little Susie, uh their their daughter.
move back to Omaha in nineteen
Fifty six.
This time for good.
So
Here's the plan.
Tell me how how well you think this is gonna work.
Warren's net worth is about one hundred and seventy five thousand dollars at this point after working at Graham Newman for two years.
So it's a f a few million dollars by today's
Yeah, so the average year salary for a worker in the United States at that point
is four thousand eight hundred dollars.
And he has a hundred and seventy five thousand dollars. Wow.
Saved up in in the bank account. And
He's twenty six years old.
So
The plan is
Uh and they have two kids now. Uh Howie's been born.
So the plan is he's gonna retire.
And
He says, You know, made my fortune. Uh, Susie really wants me to like
You know, be a father and all that. Uh, be involved at home, you know, small requests.
Alright, I think I I can retire.
And um
If I set a budget that we can live on in Omaha
Yeah, I'm gonna enjoy the good life. This is so not warm.
He says I I think we can we'll set a budget of twelve thousand dollars a year.
Remember the
Annual
I'm going to go.
Yeah. Like close to three X.
that he would be spending every year.
We'll buy a nice house in Omaha. This is huge. We'll live like kings.
And then, you know, I'll still have the rest of the money. That'll be compounding. It'll grow
Great.
It'll all be fine.
And how much does he have in the bank again?
A hundred and seventy five K.
So that's uh what, six point eight percent. So that's probably about what he thinks he can generate passively by just leaving it an index fund and so he's he's effectively I'm sure he thinks he can generate more
Right.
You know,'cause he's he's still gonna dabble a little bit. He's gonna do a little bit of active management just on
You know, his own capital. Why why do I feel like this didn't happen? I don't remember this part of the book. This did not happen. So he's uh despite his uh retirement
You know, he's hanging out with family and friends and stuff and they're talking to him and
All he could talk about is money.
And so eventually some of these people are like well
You want to manage my money?
And uh
And where it's like, Oh, okay, twist my arm. I don't even know what you're doing. I got some ideas. Yeah.
I got some ideas.
So he starts setting up these little vehicles
around Omaha with family, first like immediate family and then a few
Close friends.
to manage their money in addition to his own money that he's managing.
And uh
He structures these things actually really I r I really like the way he structures these. So he says, remember these aren't
These are people he really cares about.
You know, in in his own warren way.
He structures them as partnerships.
Where there's a four percent
Annual return hurdle.
And
Any returns that he generates above
Four percent.
He as the general partner in these partnerships keeps half of the upside of those returns.
Half. I thought it was twenty five percent. Uh no, it was half. Uh at least according to the snowball.
Wow. So
That's pretty huge. I mean that's like fifty percent carry effectively. But but
There's the four percent benchmark return.
So if it underperforms four percent, then he gets no no money.
And he's not paying there's no fees, right? He's not paying for the feeling. There's no management fee.
But it's even better. This is why I think it's actually pretty fair and I really like this structure.
He
personally puts himself on the hook for a quarter of the downside.
So
Any money lost
I think between zero and four percent return it's like a neutral zone where nothing happens.
Mm-hmm. I think if there's any capital lost
He will personally cover
twenty five percent of the losses of his partners.
Which is
These are pretty good incentives.
Yeah, he's so good at incentive alignment. Totally. And he he hadn't even met Charlie yet.
So he's finally living the dream, he's fully independent, he doesn't work for anyone else.
He's got the you know
He sort of has a partnership like Graham Newman, but it's it's all
Part time, you know, he has no employees.
They're all separate partnerships. It's all friends and family.
It's a a little over a hundred thousand dollars in total in outside money. So not not that much money.
And he does
Everything. Everything himself. So the investing, the accounting, he he files all the taxes himself for the partnerships. He has no employees.
Um no outside services. His
total expenses for doing all of this in nineteen fifty six. You ready for this, Ben?
Lay it on me.
Amount of the
To twenty two dollars and seventy one cents.
It's like our accounting at acquired where all the labor's free.
Yeah, totally.
And that's
between all of the gains that he generates and taking in some more money.
By the end of the year he's managing over half a million dollars.
for less than twenty three dollars in cost. That's pretty good, uh pretty good feel on that.
So word starts going around Omaha that like, hey, Warren's back in town.
And so wait, let me understand real quick here. So this twenty five percent of the downside
Is that like
GP commit where he was putting his own money in and that money was just at risk, or was he sort of like additionally on top of that saying, I will reimburse you for twenty five percent of your losses.
Wow. So he actually
At this point in time, at first I thought this was weird, but then I understood it later.
He does not
really put in any of his own money. He only puts in a hundred dollars into each partnership. He's keeping his own money separate.
Which at first I was like, Well that's weird, but
I think he did that because these are friends and family the goal is
to make returns for friends and family.
He's essentially making the same investments separately with his own pool of capital. I see. And then later when he consolidates it all, he puts in
all of his family's money as well. So I don't think he really thought of it as like, Oh, this is a
fee generating scheme. Right. It's just that yeah, each one of these is the pool of capital for my friends. Yep.
Yeah.
Uh so
Word sites going around Omaha that
Warren's back in town.
He's taking on money if you want to invest with him.
So
He st he can't help himself. He starts he's loving this. He's going around town, he's meeting with everybody
He can't stop pitching. He's raising money for his uh retirement.
activities.
One family he gets introduced to is the
Davis family in Omaha.
The husband of which is a prominent doctor.
Intern.
They decide to invest a hundred thousand dollars.
in this venture.
After discussing amongst the family uh while while Warren is there,
Saying, you know, Warren
You really remind us of a really bright young man who actually grew up uh
Next door to us. Uh now lives out in Los Angeles. You guys are like the spinning image of one another.
Uh really bright guy we remember. He was the smartest kid we ever knew.
He's left Omaha now. He lives out in Los Angeles. We'll have to we have to introduce you when he's back in town sometime.
Uh Charlie Munger is his name. More more on that.
To come in.
But it was a while, right? Like this was
Yeah. The seed was planted, but they wouldn't meet for years. So that was in nineteen fifty six and
The dinner that the Davises would organize
Would not happen until nineteen fifty nine. So yeah, three more years.
Before uh
Warren and Charlie would meet.
Mm.
So
This all goes pretty well. And a couple of years later.
Do do you know the one other term that he asked of the Davises and then he would ask for everyone else going forward after that? Ooh, no.
So this gets to his desire for doing business his way and not having other people sort of influence
w when he does distributions or anything like that. He is open for business one day of the year.
to his clients. And that day is December thirty first.
And on that day they can either take money out or put money in.
But other than that
It is managed by Warren and secret.
And so he does not have to disclose what he is buying or selling, nor can they take money out.
Ah, interesting. I knew that
He obvious what
the holdings of the partnerships were, but uh
I didn't know that it was only that one day that uh
That you could take money in a interesting.
So um
This goes pretty well, pretty quickly.
Warren's rounded up.
Uh nearly a million dollars.
across seven different partnerships.
And after the
first year or so of running this.
His
Stake. So his intention with this effectively carried interest.
That he sets up the half.
fifty percent of the profits above.
The four percent benchmark.
Thresh.
Is um
He wants to essentially grow his
Equity ownership of these
pools. He's not gonna like take that money out in
Cash.
Of course he's not. There's transaction costs, there's taxes, there's Warren Buffett. He's Warren Buffett. So um
He does so well within the first year or so.
Yeah.

are on paper.
eighty three thousand dollars.
Which is what, like almost half of what his net worth was when he started this thing.
And
Due to that, he owns nine point five percent.
Of the
combined partnership, uh starting from, you know, essentially zero, his hundred dollars that he put in. He now owns almost ten percent.
Of these pools.
And that's of course because in that very first year when the Dow finished the year down eight and a half percent.
Buffett made ten and a half percent that year for his his partners.
Pretty good.
Pretty good.
So he now has enough capital.
under with the million dollars.
At his control.
that he can start to do the kind of things that Graham Newman used to do. So we didn't we didn't really talk about this, but
There was another aspect to the cigar butt style of investing. It wasn't just that
Ben and and Jerry and then Warren when he joined.
would look for companies with book value above trading value.
They would then
amass big positions in those companies try and get themselves on the board like Graham did with Geico, although he didn't need to
be agitate with Geico, but with the other with the cigar butt companies
They would then like agitate actively to get the companies to liquidate assets and distribute the cash out to shareholders.
Oh, it does like a hedge fund after all. Yeah, these guys are like uh uh they're like Bobby Axelrod out there. Yeah, like corporate raiders.
So now with a million bucks
at his disposal. Warren can start to do this. So the first of uh the companies does this with is a company called Sanborn Map. He puts
thirty five percent of the capital of the partnerships into it.
Gets control of the company.
forces it to split itself.
It too.
And makes a quick
Fifty profit on the spin off.
Mm-hmm.
But boom, like he's shooting fish in a barrel. He can do this all day.
Bye.
The end of
Nineteen sixty.
Total capital is up to two million.
And Warren's share is worth a cool quarter of a million dollars or thirteen percent of the partnership.
In nineteen sixty one. And let me pause before you go into nineteen sixty one just to recap a few of the returns here year over year.
The second year he made forty one percent. The third year he made twenty six percent.
The fourth year nineteen sixty, he made twenty three percent. All well the Dow is having some good years, some bad years. So it's losing money sometimes, it's making money, sometimes Ward hasn't lost a dollar, he's outperformed every single year, he stayed positive every year. In fact,
the partnership results as a whole so far, if you compound over those four years.
are a hundred and forty one percent compared to the Dows.
Forty three percent. So uh you know, whatever Warren is doing is working.
Well then.
Nineteen sixty one. I don't have the down numbers in nineteen sixty one, so I don't know relatively how good this performance was.
The the Dow numbers in nineteen sixty one are twenty two point four percent. Twenty two point four. So pretty good year. Pretty good.
Warren does
Forty six percent in sixty one.
Which not only
You know, generates a bunch of returns.
Compounds the capital.
The partners though like, please take more of our money.
Bunch more money flow in.
The partnerships
are managing over seven million dollars.
In total.
Which is larger than Graham Newman ever was.
Wow.
And let me start uh quoting from some Buffett annual letters here, because this is a is an interesting phenomenon. He was a wonderful writer. He he had sort of trained himself both in public speaking, um, and and taken some classes in that and in writing, and he wrote these
as I'm sure many people would guess, some prolific
shareholder letter to his partnership every year.
That actually is not something that he did in the early Berkshire years. It took him years to start doing that again.
But he really felt like it was incumbent upon him to do this when he was running these investment partnerships. So let me just read from you a few of these.
Nineteen sixty two.
If my performance is poor, I expect the partners to withdraw.
Nineteen sixty three.
It is a certainty that we will have years when we deserve the tomatoes. Nineteen sixty four. I believe our margin over the Dow cannot be maintained.
Nineteen sixty five. We do not consider it possible on an extended basis to maintain the sixteen point six percent point advantage we had over the Dow. This goes on and on and on where Warren continues to caution, I don't think this is sustainable.
I don't think we can keep crushing it as hard as we are. And he does this to this day every year in the Bruxa letter. Fifty years later. Oh amazing. What sixty years later.
Unreal.
Yeah.
So
At this point in nineteen sixty two
When he's now bigger than Graham Newman ever was
He finally gets an office. He'd been working out of
their spare bedroom at the Omaha house all these years, doing everything himself.
He gets an office, he hires a couple of people.
He consolidates all these various vehicles into just one vehicle.
The Buffett Partnership Limited.
And this is when he puts all of his own money in as well.
So
He's got a single vehicle. He's now
You know, I don't know if he ever said he officially unretired, but like
He's in business. He's in business. Um
He also codifies in these letters he's sending out a few official quote unquote.
Groups.
for the partnership. Uh just like
Don Valentine did back uh
And Sequoia in the early days to their limited partners. And uh there are a few rules in there. Uh the the last one
Kinda like you were saying, Ben, hallmark of the
Buffett style for years to come.
I cannot promise results to our partners.
What I can and do promise is that A
Our investments will be chosen on the basis of value, not popularity.
B, we will attempt to bring risk of permanent capital loss.
Not short term quotational loss.
To an absolute minimum.
by maintaining a wide margin of safety.
And C, my wife, children and I have virtually our entire net worth invested in the partnership.
Pretty good ground rules.
Bye.
Halfway through that year.
Uh nineteen sixty two, when he consolidates everything.
Warren is thirty one years old.
And his net worth crosses the million dollar.
Mark. So he's achieved his dream. Ah, he made it. He made it four years early.
The next year in nineteen sixty three.
Buffett finds.
The
second great investment of his lifetime.
And also the second great mistake that he would make on the back end of it is
Uh the first of course being Geiko.
American Express. So this is great. Some listeners probably already know this story here.
And before we dive into this story.
I think the framework that I would use for if you're listening to this and hearing a lot of this for the first time.
You know, you heard about
Gaiko.
You know, you're sort of hearing these
puzzle pieces.
Where there's a lesson learned from each of these companies that
Buffett was sort of the first to figure out that these businesses are each interesting in a puzzle piece way that fits in with other businesses that
It in the sum of its whole
could create this kind of unbelievable capital efficient flywheel.
Uh and I don't know if flywheel's the right term. Puzzle pieces put together into a beautiful puzzle or mosaic might be the right term.
But it really is like him understanding all these unique types of businesses that have these characteristics that he can then use in the future. And American, I feel, is sort of like the second big lesson for him after he learns about the insurance business that put the first one. Well, I think you're totally right about the puzzle piece.
fitting together aspect.
He learns that.
in his third greed investment.
Which will be the
Last one we'll cover on this episode. So that's that's coming up.
Okay.
So back to American Express. In nineteen sixty three.
You know, Buffett is he's still.
under the gram spell here. Like he's looking for cigar butts. That's what he's doing.
Uh is looking for deals. And Amex is no cigar.
As Charlie Munger would later put it, he's looking for fair businesses at good prices.
Great prices. Yeah. Fair businesses at great prices. Not great businesses at fair prices. Yep. Exactly, which is the
Charlie way of doing things.
that Buffett would later.
Wisely adopt.
So
You wouldn't think that Amex, you know, Amex is at this point
It's still widely respected today, but back then American Express is like
the most trusted financial services company in America.
Uh, it had been around already for close to a hundred years. The travelers checks business.
Uh some
Many listeners are probably not familiar with travelers checks, but was it just an absolute juggernaut and an amazing business.
The idea was if you were traveling
And this is before credit. I did this growing up.
Yeah, me too. Uh even when I was in college when I studied abroad, my parents got me MX Travelers checks.
The idea was
You would go to your local American Express office.
Give them money.
Cash.
they would in return give you travelers checks, which were essentially like a guaranteed paper.
For that amount of value backed by Amex.
And then you could take those checks anywhere where you traveled and if you like lost'em, you could go to
MX, but more importantly, when you're traveling internationally, you could use this as a way to get
Funds in whatever the local
Currency was.
Right,'cause wherever you're traveling doesn't know about your hometown bank and may not even know about your home country bank. And so this is the way to have your credit accepted everywhere. Right.
There are no ATMs.
And credit cards are still.
early, early days, although Amex was a pioneer there and had the American Express.
Credit card.
Anyway, it's this.
Gilded institution.
In nineteen sixty three.
They
have a small subsidiary of the
Company.
That
Issued operated warehouses and issued
Warehouse receipts.
Uh so what does this mean? It's like
The equivalent of a traveler's check.
For warehouses.
You would have
Warehouses full of
A commodity of something.
Say salad oil in this case, soybean oil to be exact.
And you would get it.
MX to come in.
Inspect the warehouse and issue paper.
That says like, Oh yes, there are XYZ tons of
Soybean oil.
in this warehouse.
And then you could take that paper.
And you could collateralize it, you could borrow against it, you could trade against it.
Yeah, you're essentially financializing
This
Product is
Pretty.
Brilliant.
business that Amex was in, but it was small. This was much smaller than their consumer business.
So all this is great.
Until a pretty uh shady commodities trader.
Named Anthony.
Tino de Angelis.
In
New Jersey.
Of course. Of all places.
Decides.
That he's gonna pull one over on Amex.
He
has his warehouses with him, he decides to fill his tanks
Which were supposedly filled with
Soybean oil.
With sea water instead.
And defraud the
Inspectors and then collateralize it and borrow against it and uh, you know, run a Ponzi scheme, essentially.
Didn't he like try and bet with it? Like he then
Took it.
And made some risky investment.
With his
check that said, hey, this is worth so many tons of salad oil, and then he ended up like basically losing it all. Yeah, there's something about like
Uh had to do with the futures market and like
It was crazy. I mean, you can't make this stuff up. It was something with like Russia and the Soviet Union.
their soybean crop failed that year and people thought they were gonna have to buy US soybean
oil and then they didn't and so the price collapsed. Anyway, ridiculous stuff.
But anyway, suffice to say, he's now got uh a piece of paper that someone's coming and saying, Okay, give me what that piece of paper's worth.
And of course, not only does he not have it
But
There's nothing in the warehouse to back it up either. So the piece of paper is worth zero.
Uh so all in it comes to a
Over a hundred and fifty million dollars worth of fraud.
That happens.
And
Theoretically, Amex is on the hook for this. Now, legally it's debatable, like
Tino defrauded them, so
you know, whether they should actually be on the hook or not is debatable. But like they're American Express. They're the CEO says, like we're gonna, you know, settle. We're gonna with the creditors, we're gonna we're gonna cover this.
This scandal like rocks.
MX stock on Wall Street. So the share price drops by over fifty percent.
And analysts and people out there think the company's not gonna survive.
Buffett though.
Thinks otherwise, he sees an opportunity.
So he and his new employees
They go around Omaha and New York and a bunch of other places.
And they just start like interviewing
Consumers and talking to them at banks and saying, like, hey, what do you think of Amex? Have you heard about the
Soybean oil scandal, the salad oil scandal.
Are you still using the travelers' checks? Are you using the credit card?
And consumers are like
I I haven't heard of this. Scandal? What are you talking about? Of course I trust the travelers checks.
Um
So and Buffett figures that
MX can
easily absorb all of these losses, even if they covered the whole thing out of cash on hand. They have over two hundred million dollars of cash on hand.
Plus
over five hundred million dollars afloat from the travelers checks business.
Yeah, and this is a similar lesson that he learns from Geico, which is
Look.
All of this
Debt.
that the company has th that that they owe out to these people with travelers checks.
As long as there's not a scandal, they're not gonna have a run on us. They're not gonna come at us all at once. It's a sort of portfolio distributed liability.
And so
As long as I do my diligence and I assume that there's that consumer confidence hasn't been rocked and there's not gonna be a run on Amex, then
Hey, we're actually in good shape.
So
He
Makes a huge bet.
On Amex.
At this point in time
The partnership BP L
Buffett Partnership Limited.
has over seventeen million in capital.
Buffett puts
Three million into Amex right away. Like a huge position.
At this time.
And eventually.
He puts
Thirteen million in total.
into Amex and owns five percent of the company.
Amex ends up settling the case the next year for
Sixty million dollars.
The stock goes through the roof.
And they make two and a half times their money on the thirteen million dollars invested.
So amazing when
Second great investment.
You know, of his career.
And similarly second
Incredibly stupid decision.
Once he gets up two and a half X, he sells it all.

Brutal.
Brutal. Brutal.
He did not listen to our Sequoia Capital Part One episode.
He did not.
And
This is something that he sort of saw too that is a departure from Graham and wouldn't really come about until later with like Coca-Cola, but this is the first sort of twinkle of it of Buffett really recognizing the defensibility, the moat that comes from brand.
Because brand doesn't show up on a balance sheet.
But
It's a huge asset.
And so it's one of these things where I think Buffett's starting to, you know, flex a little bit and say, Hey
I actually can
analyze these businesses a little bit beyond the black and white numbers that are showing up on the financial statements by doing a little bit of a a different form of diligence and assigning value to things that are a little bit less tangible than than previous value investors have in the past.
Yeah, I mean there's Ben Graham.
I could you imagine talking to Ben Graham about brand and the value of brand? He would like kick you out of his office.
Ben Graham wouldn't even talk to you about
product. Like he's he's like if you're talking to me about pri I'm not interested in hearing your opinion on the how the company's product, blah blah blah, show me that it's underpriced relative to book value. I can't imagine taking that to brand. I want to know how many machines they have in the factory and what I can sell them for.
Yep.
Totally. Uh so that's the Amex story.
Right around the same time, in parallel.
Buffett find another cigar butt.
That he is just
Over the moon, excited about.
And this one he hears about from a friend, uh, I think in New York.
Dan Cowan.
It's a failing
New England textile manufacturer.
Whose stock was selling for
Well less than the book value of assets.
I think about fifty percent. Yeah. I think.
The
I have the numbers here. Yes. So the book value of all the property, plant and equipment and cash on hand
at this company is twenty dollars a share.
And the stock is trading at seven fifty.
So Warren is just like
His eyes get real big.
Real, real big here.
So what is the company we are talking about?
We are talking about Berkshire.
Hathaway.
So Berkshire.
The company.
It was really Hathaway.
had its origins way back in
New England Wailing Times like like Moby Dick style.
Which
Side note, I tried to read that book once and I was like, Oh, this will be cool. It's like a whaling adventure. It's an American classic.
That is the most difficult book I've ever tried to read. I got like fifty in and
I was like no.
It's your intelligent investor. Yeah, totally. It was it was the uh security analysis if I needed the intelligent investor version of it. There you go. Yeah, I mean I think the the way to think about New Bedford was like they were an industry town and their industry was whaling and whaling oil.
And then when they sort of pivoted as a town and needed a second industry textile sort of cropped up based on all the competency and talent and labor and stuff that they had in the town.
the business leaders in town sort of collectively decided that
Textiles was gonna be the thing. And yeah, we think about whaling now and it seems
Barbaric and it totally was.
But it was the biggest industry in America. So New Bedford, Massachusetts.
was the wealthiest
Town in America during the whaling years. I did not realize that. Yeah, this was not like some little thing.
There's a reason why Melville wrote his novel about whaling.
So
In eighteen eighty eight, after the whaling business was in decline,
Thankfully,'cause it was horrible.
Horatio Hathaway and Joseph Knowles.
Found
Hathaway manufacturing company.
Which would then go on to acquire and merge with a
bunch of other mills over the years.
Um
There's just sort of one problem with this.
business plan that the elders of New Bedford come up with.
Which is that building textile mills in New England was a really
Really dumb idea. Really dumb idea.
Why is that?
Because
You know, if you think about it, like what what do textile mills do? They take cotton, raw cotton from the south. You know from the south and they turn it into, you know, yarn, finished products, et cetera.
uh Berkshire Hathaway eventually would
become I think the largest or one of the largest producers of men's suit linings.
Yep. Synthetics too, like polyester. Yep, synthetic. So
You you're importing this cotton from the south, right? That means that like
The cotton's gotta get on ships.
And come up to New England.
Well, if you're gonna put a bunch of cotton on ships.
You could also send it to places that have a cheaper cost than the former wealthiest
Town in America. Or just not put it on ships. Well, not not in the beginning.
In the eighteen eighties you had to put it on ships because the climate in the south, the humidity was such that
You couldn't like there were problems with with producing the Uh so they needed to send it to some cooler climate. You needed to send it to a cooler climate. But you didn't need to send it to New Bedford.
Massachusetts.
It's so like okay, it's not great off the bat.
But then in the early twentieth century
Industrial air conditioning.
Is invented.
And now you don't need to put it in ships at all. Like just build the
Factories, the textile mills there.
Which people didn't. So
The business is kinda limping along.
But it's been operating for a long time. So there's like a lot of mills.
Lot of planting equipment.
There is a decent amount of cash on hand.
By this time in the sixties, he
It's run by a descendant of Knowles named Seabury Stanton.
And Stanton, he's like the Don Quixote figure of like the New England textile
business industry.
He is all he sees himself as like
Preserving
The legacy
The wonderful institution of
So
Textile manufacturing in New England.
And he is gonna do everything he can.
To protect
And bring the industry back to his
Glory days. So
He is every year just spending millions of dollars.
Outfitting all the mills with all the latest technology, doing everything he can to like bring back the glory days.
Yes, he he has not once heard of the sort of like
Buffett esque notion of uh you know, what's your return on invested capital in the business. No no no if we have capital spend it. Just pour it into the business.
Horrid and he's he's like a noble.
So Warren hears about this from Calvin and he's just like, Oh, this is gonna be amazing. I'm gonna make so much money here.
He starts buying the stock.
Seabury.
Once he finds out that
Buffett is is buying the stock.
He starts buying the stock himself.
Uh she's like oh
I don't want anybody taking my baby away from me. And let alone, you know, these guys that have a reputation of being corporate raiders.
And
At first Buffett is happy about this'cause he doesn't really want to own this company. He's like, Oh good, the price is going up.
Once it gets to a certain point.
I'll sell it.
And if I sell to Seabury, like all the better. I don't really care.
So
He goes and he meets with Stanton.
They discuss
the company making a tender offer.
Two.
Bye.
Outstanding shares, in particular Warren's shares.
And they
have according to Warren, they have a handshake deal at eleven dollars.
And fifty cents.
A share.
And Warren says, Great
If you want a tender offer at that price, I will sell my shares.
He goes back to Omaha.
Gets a letter in the mail.
Tender offer is announced.
At eleven dollars and three eighths.
Eleven and three eighths dollars.
So what's that?
Three seven, three eight, something like that.
Yep, so twelve and a half cents a share less than what they talked about. And this like I still don't understand. I've read a lot about this. Nobody, including Warren
can really seem to
Explain.
why Warren gets so worked up about this.
'Cause that's not in his personality. Like he cares a lot about money.
But it's not in his personality to get worked up about things or to get emotional.
About stocks.
But he goes off the deep end. He is like
Pissed.
The best explanation I've seen is sadly his father
Howard was was dying around this time uh and passed away right around this time. And
Must have been.
Affecting Warren.
Well, and and Buffett is also uh
You know, he's he's built a lifetime reputation on doing right by his word and in dealing in good faith, and I have to imagine that
You know, facing off against someone who is not dealing in good faith and is sort of reneging on an agreement that can't sit well.
Totally.
Although, you know, the the Munger version of what to do here would be
When somebody deals in bad faith, you just don't deal with them.

It would have been
completely understandable to say like
All right, fine, whatever. I'm just gonna sell my stock at eleven and three eighths.
Get out of this. Be done with it.
Still make a lot of money.
If you wanna
You don't fight.
It would be also totally rational to just
hold the stock and say I'm not
Selling. Instead
Warren says, Screw you.
I'm gonna launch a tender offer for your shares.
Oh which is so uncharacteristic for him.
He starts canvassing the entire shareholder base, trying to get anybody to sell him shares. He is on a mission like a man possessed.
That he wants to get control of Berkshire Hathaway.
And kick Stanton.
out of his company.
big ish company at this point. I think it's something like fifteen thousand people work.
in the mills.
Yeah, it's it is not a small company.
It would become a small company, but it is currently a large company. It's now a non existing company except in name.
So by April nineteen sixty five
Warren gets enough shares to get himself elected to the board.
The next month
He stages a a boardroom coup, essentially.
Also
Very uncharacteristic of him.
He forces Stanton out and installs himself as chairman.
He's one.
And his prize is
The super crappy company And it's not like like what's he gonna do?
He he could shut down the mills, but then he's gotta lay off like fifteen thousand people and have the whole town of New Bedford hate him.
But then what what's he gonna do with the buildings? He's gonna sell the buildings to whom? He's gonna sell the equipment to whom. Right, the the whaling industry's done. Every other textile manufacturer is also not doing great at this point.
Like
It's a pretty terrible asset to own other than
If
he really could have liquidated it for book value, then awesome. But frankly he couldn't have. And he's got this reputational thing, which I think we're seeing come into play here, and we'll definitely see more of it in the the second episode in the series, which is
Buffet.
deeply cares about his reputation and will ultimately derive a tremendous amount of value from his reputation. And so he doesn't want to be seen as this raider who comes in and destroys the local economy and shuts down the mills. And so
He basically doesn't.
Like he makes a deal with himself, with the rest of the company, with other and he's like, look, we're just gonna
I think like you probably know better than I do, but basically not continue to invest like crazy, only make very smart investments, eventually make no additional investments into the company, but at least keep it running.
Yes. So um
He would say to Alice in the snowball about this.
About Bricks.
Quote, so I bought my cigar butt and I tried to smoke it. This is amazing. You walk down the street and you see a cigar butt and it's kind of soggy and disgusting and repels you, but it's free.
And there may be one puff left in it.
Berkshire didn't have any more puffs.
So all you had was a soggy cigar butt in your mouth.
That was Berkshire Hathaway in nineteen sixty five.
I had a lot of money tied up in that cigar, but
I would have been better off if I had never heard of it in the first place.
Oof. What did you say at the top of the show it cost him in terms of compounded opportunity capital? So yeah, in twenty ten he did the math.
And claimed that
Not only was purchasing Berkshire
The worst biggest mistake of his investing career.
But had he
Taken the money that he put into Berkshire.
And instead just invested it directly in
An insurance company?
By twenty ten he he figures he would have made about two hundred billion dollars in incremental returns.
Ooh. But
Lobs said.
You can only connect the dots looking backwards.
Not looking forwards.
And now there's an energy company that bears its name and uh real estate brokerage that bears its name and
On and on and on.
So
Not only that.
But I do
Think if he hadn't
But
Brookshire.
I don't think he would have figured made his third
great investment. Or at least wouldn't have made it in the same way
And figure it out.
The same thing.
lesson from it that really drove the entire
rest of his career and and what Berkshire Hathaway would become.
So
The next couple of years, despite all this bricks or nonsense, things go great.
Thanks to American Express at the end of sixty five, the partnership has thirty seven million dollars in assets.
Buffett's net worth is about seven million dollars.
And that year, nineteen sixty five, the Dow did fourteen percent, and of course, uh Buffett's partnership did forty seven percent. So still uh not only beating the Dow, but positive every year of its existence so far.
Crazy.
So
All this success is sort of building up and and weighing on
On Warren.
So in
January of sixty six.
Thanks to you.
Now knowing from you that on December thirty first was the day that partners could take money out or put money in.
On
December thirty first of sixty five.
Partners invest another six point eight million dollars.
In the partnership. Wouldn't you?
Yeah. All in, baby.
So for the first time Warren doesn't know what to do with all the money.
He starts.
Setting aside some
Cash.
Reserves. Like he's never done this before. He's always been a hundred percent
Invested.
And he starts to worry that
He might not.
be able to find enough
Good investments for all the capital he now needs.
To play.
As he is cautioning in his letters every year.
Yep.
So
He
Closes the partnership to new capital at that point. Says
Not gonna take any more capital.
continue to invest this and compounding, but like there's danger in
Getting too big. I might not be able to perform in the same way. This is like a disciplined seed stage venture capitalist saying, No, I don't want to grow my fund size. I don't want to have to change my strategy and invest in different things. I want to stay true to the the thing that I'm good at.
Yeah.
So this is
Uh before we get to his third grade investment.
I think maybe in part because of this mindset of like I'm gonna stay true to do what I'm gonna
He makes
Like the biggest missed opportunity
Ever.
Maybe in history. Uh this is I was
Teasing Ben over the last couple days, texting him saying
I've got something.
in this episode that I I don't know if you know
But it is just the most unbelievable.
Thing that you will never imagine.
In nineteen sixty seven.
He writes his partners.
saying that he's introducing a new ground rule.
to the partnership.
And this one is quite literally the opposite of Don Valentine.
He says
We will not go into businesses where technology
Which is way over my head.
is crucial to the investment decision.
I know about as much about semiconductors or integrated circuits as I do about the mating habits of
Of the stronch. Uh it's a Polish word. It means beetle in Polish.
Typical, you know, war and way with words here.
This is
Very unfortunate. Very uh what was the company? Very unfortunate.
Decision.
Let's see, nineteen sixty seven. It predates Microsoft by seven years, predates Apple.
Uh uh it it's way after IBM. What's around this time?
Deck?
Or no, it's post deck. Oh no.
You'll get it if you think about it enough.
I mean is it Silicon Valley Origins, we've talked about it in a lot of it.
Uh
Just pre Sequoia.
Sequoia started in seventy two, but this is all the the crew that Don Down. Arthur Rock investment.
It is an Arthur Rock investment.
Is it Intel?
We're talking about Intel here.
No way!
Get this.
So
Buffett at this point.
Is on the board.

College in Iowa.
He's a trustee of Grinnell College.
Which by the way he was introduced to by Susie
Uh Susie became
An incredible civil rights activist and
Grinnell College was involved in the civil rights movement and uh
Martin Luther King spoke at
Grinnell College six months before he was killed and Susie brings Warren
to the college to listen to King speak, and like Warren is like wow incredibly moved by Dr. King.
And so he decides after that to join the board. Th they were trying to recruit him to to join the board.
And um
So he does.
Do you know who else was on the board? One of Grinnell College's most famous
Alumni.
Alongside Warren Buffett.
Uh noise or more or bingo.
Robert Noyce. Wow.
Alumni of Grinnell College, inventor of the integrated circuit.
Part of the traitorous eight who left Shockley semiconductor to start Fairchild.
And then co founder
Of Intel.
With Gordon Moore.
And Andy Grove.
Is on the board.
Of Grinnell with
Warren.
Not only that.
But Warren, of course, chairs the
Endowment investment committee.
Ecranelle, right?
Of course, that would make sense. Mm-hmm. Um
When Noise leaves to start Intel.
And Arthur Rock is putting the deal together to finance Intel
Noise brings it to the investment committee.
At Grinnell College. Oh man. It says hey, there's a hundred thousand dollar piece. I think Grinnell
should invest in this company. I think this is really gonna be big. I know what I'm doing.
He saw the deal.
approves the investment.
And Grinnell does invest a hundred thousand dollars in the Intel seed round, effectively.
But Warren never goes near it.
For
the partnership for himself. And in fact says I will never
Invest in technology companies.
Unreal. And basically held to that for another forty five.
Five plus years.
Totally. Not until Apple. And I
Well,
I haven't done the research yet.
I think Apple bubbles up within Berkshire from Todd Tom's now.
Not from Warren.
I mean talk about sins of omission. Like this is before Sequoia. Imagine if Warren
had financed
Intel.
Warren Buffett could have been Warren Buffett plus Sequoia Capital.
Wow.
And what realistically, what would he have done with it if he did invest in it? Like he's never invested in business. So first of all, he's never invested in technology business to this point. He's never invested in something that early, right? Everything he's bought has been
These
Public.
You know, they're they're pieces of public companies. Yep.
Established uh ongoing cash flow businesses. Yeah. The Buffett Partnership doesn't wholly own any businesses. So the it's it's
It doesn't even own anything private, right? Every single thing is a SEC registered. Well, Berkshire is now private at this point. Okay.
I'm just trying to do a little bit of math on like would he have held it, how long would he have held it.
You know, a all of these things. But
Uh here's the thing. Like this this whole like
War noise justifies not doing
Technology investments by, you know, his whole circle of competence thing that really is a Charlie Munger thing, but that weren't adoptively.
I stay within what I know, my circle of competence, I know the boundaries of my competence.
This doesn't make any sense to me because
He invests in plenty of businesses that he doesn't know.
Anything about at the beginning. Like textiles, like uh insurance, you know, like retail. Yeah. And the question is like are the dynamics in those businesses more closely related to each other than they are to technology businesses. Like our
Our high growth
pre product market fit or like pre-scale technology businesses just so completely different. Yep.
I think that's w maybe what Warren thinks, but I
He's got some kind of mental block here,'cause like
With Intel, you got noise and more and Andy Grove.
Coming from Fairchild, like you know what Fairchild is.
It's established.
It's an amazing business.
And they've like we've got
The thing we're gonna basically dethrone I don't know.
Anyway, I just read this and I was like jaw on the floor.
It also goes along with his notion of independents of thought, that like he doesn't really care what other people think about a company, that if he doesn't understand it from first principles in a way that he's sort of
gonna build it up from fundamentals, then it's not his cup of tea and he's not investing. I mean that is a very
All this sounds like Warren Buffett to me, but it turned out to be a bad decision. It does. I mean
That's warning for you.
So
Anyway.
Back to the story. I just thought that was so amazing.
Yeah.
So
Berkshire, meanwhile.
unlike Intel is quickly becoming a major problem.
Buffett of course stops Stanton's, you know, investing in the business.
But once you stop.
Investing like they were already uncompetitive. Now they're
wholly uncompetitive.
And they're just
You know, losing
Money.
So he says, like, Gosh, I gotta do something like Berkshire's gonna burn through
All of its millions of dollars a cash reserves if I don't do.
Something here.
the business down, as we were saying.
Right.
So
He starts thinking about like well could I just
Buy something else.
Within
For sure.
Use the money that's sitting there.
And essentially just kinda transform the business.
Around it.
So he starts looking around.
And there's a company right there in Omaha.
That he's been eyeing.
For a while.
Called national indemnity.
And this is the third.
great investment and where we're essentially gonna leave.
the investing portion of this story.
And national indemnity, David, to me sounds like an insurance company. Would that be right? That would be right. It is run by Jet Jack Ringwald.
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Okay, so back to national indemnity and jet jack.
Ringwald.
So
What national indemnity does they're very different than
Gao.
Indemnity National
They ensure super esoteric risks.
Like
You know, Gyico wants the
Boring.
Safe driver
You know, low risk.
Wide aggregate.
Insurance.
These guys want like the whole in one policies, right? Like what we were talking about on the uh the Virgin Galactic episode with the X Prize. They would be
Ensuring the X Prize. They want the riskiest
craziest, wildest stuff out there as
Jet Jack was famous for saying there's no such thing as a bad risk.
Only bad rates.
And of course, he's right. You could price anything as long as you price it right. So and they were very good at pricing risks and and
Jack famously like
He would
personally go dig into they once there's some story about
You're once insuring like a settlement on a murder case or something like that.
Whoa.
Maybe it was a murder case or maybe it was something.
And uh
Like he went personally and like did a bunch of detective work to figure out like how likely it was that the case was gonna go one way or the other, and then he praised the risk.
So and they happen to be like right down the street from Warren's office.
Yeah.
Oh my god.
I feel like half of like the Berkshire orbit companies are like, Oh, Warren happened upon them in Omaha and they happen to be these like
best in class businesses. It's so folksy. Yeah. It's hilarious.
And
Differently in how they did this than Gico, but similar to Gico.
National got to use its float.
For a super long time.
Because most of the policies they were writing
Never.
Cashed in. Like they were the type of things they were ensuring where like
It was long tail stuff, like stuff that was
very unlikely to happen.
So they just get used to the money for a long, long, long time.
Jack though, he's getting older, he's considering selling the business, but it's his baby. He's super
super fickle about it. Like you know, he wants to sell, but he doesn't really want to sell.
Uh and you make noises about it every now and then.
Warren knows all this.
So in February nineteen sixty seven
He catches him
In sort of a dour mood.
Uh, they're like having lunch or something at at some point. Warren's courting him.
And
They work out a deal in fifteen minutes. Fifteen minutes or less to sell your company. And Warren's like, I'm gonna buy this company for Berkshire, not the partnership. This is it, I'm gonna transform Berkshire into insurance company.
So they hammer out a one page deal.
at the price Ringwall wanted, no audited financials.
Uh promise to keep the company in Omaha, promise not to fire any employees.
Ever literally gives Jet Jack
Everything he wanted, like no reason to say no.
And they do it.
And
Jack even sticks around and continues running the business'cause he can't like disengage.
Uh, he's obsessed, uh, which Warren wanted anyway, so it's great.
Puzzle piece.
That's like a little little learning Warren's gonna employ later. Yep. Yep. He's just adding to his uh adding to his quiver of
Tricks of the trade here.
So
It becomes part of Berkshire.
And
In doing this deal, uh it's unclear how much Warren thought about this ahead of time, or more like he was just looking for something to buy for Berkshire.
But
He sort of stumbles upon
This is probably like the single
Greatest.
And say.
Yeah.
Buffett has across his entire career.
Of marrying
On insurance business.
With the
First one in Berkshire, but then
Many
Operating
Companies.
And so how it works is it so he know he already knows going back to Gaigo that
within s the insurance business, you have float, you can invest the float.
That's great.
And then you can compound your capital for free, essentially.
The
Problem though.
Not that it's a problem, but the limiter on this is that
You do
Need to keep some cash on hand.
As an insurance company.
Because like
You gotta pay out some policies, like you know, on any given
Month.
You might need to pay some stuff out. So you can't just go invest
All of your capital into
Other things.
But if you actually
combine an insurance operation
With
Other you know, non insurance.
Operating.
Businesses.
You
Can invest.
All of your capital. All of your float.'Cause an operating both consumes capital but also spits off cash. Also produces the capital. And so you can keep
The capital from the float.
Tied up in the operations.
of operating businesses and then buying more operating businesses.
To attach.
And then if you ever need to pay off claims
Well, you just pull a little capital over from the cash flow every month that's coming out of
Say a railroad. Or say like, you know.
Anything that's very predictable, like a candy store or a dairy queen, or you know, what have you.
This is
Brilliant.
Because
This now.
Enables.
But Warren, through this insight,
To start building up a
A two sided flywheel.
of more and more insurance businesses and operations that generate more and more float.
that he can then invest that capital in more operating businesses, which generate more
Monthly cash flow.
Which enables him to take on more and more float.
And you can start to see how this ping pongs back and forth.
He actually writes a paper.
after the national acquisition.
Where he talks about the capital requirements for insurance companies in this insight. And he says, by most standards, national indemnity is pushing its capital quite hard.
It is the availability of additional resources in Berkshire Hathaway that
that enables us to follow the policy of aggressively using our capital
Which on a long range basis
should result in the greatest profitability within national indemnity.
Berkshire could put additional capital
International.
Should underwriting turn.
Sour.
So boom. Bricks are still a dog.
But the insight was huge. Like he can go out and just run this playbook all day long.
It's
Amazing.
Right. So this is the beginning of Berkshire morphing from
a series of textile mills into
a holding company that has all these incredible cash flow f flywheels happening inside of it.
Yep. And it's not just a holding company. Unlike the
you know, nifty fifty conglomerates of the sixties, which were just like holding companies for the sake of
Being holding companies. Right.
It's a holding company with a purpose.
Right, like these companies actually benefit each other rather than just
Hey, we have a whole bunch of capital, so we're gonna roll up companies that never really interact at all.
Yeah.
Yep. And it and I should say it's not like the products interact, it's not like the managers meaningfully interact.
The way that
And this is a little foreshadowing here, but the way that Berkshire will eventually run is capital is managed by the central head office. And when a business, you know, needs cash or produces cash, it could
Goes to the head office, and the capital allocation is done there. But all the actual operations of the businesses are done inside the business. And so it's this insight that.
the synergies or the flywheels or the connectivity, whatever you want to call it, don't have to happen.
the managers of the businesses actually dealing with each other, it can happen at the capital allocation level.
Yeah.
And it also gives foreign you know, look
Warren is already a what's in a generation talent when it comes to capital allocation.
But it gives them this huge margin of safety because back to the Ben Graham, you know, uh concept.
He doesn't have to chase cigar butts anymore because his cost of capital
is way lower than
Anybody else.
Out there.
He's got all these policy holders lending him money for free in a non delutive way. Like it's not really debt. It's not really equity. It's just free cash that he gets to play with. Yep. So he can go buy businesses and craft them onto this flywheel.
And he has this margin of safety where like even if he doesn't you know, he does make great
Investments in great purchases.
But even when he doesn't
It's he's still benefiting from it because he's adding on to this capital flywheel.
Yep.
Yep. And it's a s uh national indemnity is such a good pickup for Buffett, too, because he's the master of probability. I mean, if we go back and look at Amex
You know, the the market was scared off because there could have been a run on Amex.
But Warren looked at it probabilistically, figure out the probability of it actually happening was low, assessed the expected value, multiplying the probability by the
sort of potential outcome and was like, oh, this is an expected value positive bet with a margin of safety.
And he's just a genius probabilistic thinker. And so when
you apply someone like that to owning an insurance company, not only is he a brilliant probabilistic thinker, an individualistic decision maker who doesn't need third parties to give him social proof
that if something's a good idea. Now there's this third leg of the stool also, which is sort of this um
master capital allocator. So the capital allocation, the probabilistic thinking, and the
individualistic decision making, he's now got these like three crazy tools at his disposal, and owing an insurance company is awesome for someone like that.
Yeah. And he's playing with a stacked
deck here. Like he can't lose. Yeah.
So no wonder he becomes the best investor of all time.
Well so
We're about to see some pretty excellent returns here.
Through nineteen sixty seven and nineteen sixty eight. Uh the Dow does well in sixty seven. It's at nineteen percent, uh nineteen percent return that year.
we're starting to kind of see some go go action going on in the market. Nineteen sixty eight's a little cooler, but it's seven point seven percent.
Um, across those years, uh, Warren did thirty six percent in the Buffett partnerships in sixty seven, then had its best year ever with a fifty-n return in nineteen sixty eight.
Like
He's untouchable. He's just like he's like Steph Curry. He's just draining threes here. It's uh I mean if if we look all the way from fifty seven through sixty nine
The Dow, the compounded results of the Dow were 153%.
The compounded
Results of the partnership.
were two thousand seven hundred ninety five percent. It's a twenty eight X.
That we are dead over the twelve years of the Buffett partnership.
He's just like playing out of his mind.
Yeah.
Unreal.
Wild.
But
Hopefully we've painted on this episode.
You know, there's um
Probably the best quote.
Uh I don't think we said this at the top of the episode, but probably the best quote
About
Buff it.
Yeah.
has ever most apt quote that has ever been said about him.
was in a Forbes piece.
That came out.
I think right.
Around this.
Time.
Which and it says.
Buffett is not a simple person.
But he has simple tastes. And so hopefully we painted a picture here of like
He's a really complex dude. Like, you know, he comes across folksy, he drinks his Coke, he eats his peanut brittle, but uh He doesn't use a computer for his analysis, but like
There is deep, deep analysis. Yeah, and there's a lot of
There's a lot of psychology going on in his head.
So
You think like I mean, this insight, this whole thing about insurance, the float, the flywheel and the operating business is
This
Insight.
Should have and did.
drive the entire rest of his career. Like the next
Five decades.
Is
This is the
But he doesn't see it. Like he's really worried at this time.
The what started a few years ago of
I don't know that I can invest all this capital in the partnership.
I don't know that I can keep generating these returns.
Close the partnership to New Capital.
I'd have to go buy really big businesses or buy businesses outright to deploy this much capital and I don't have access to that. You know, these are the types of businesses we can buy and we buy smaller shares of'em.
Yep. So in sixty seven, he writes a letter to the partners
saying, quote, I am out of step with present conditions.
On one point, however, I am clear, I will not abandon a previous approach.
The cigar butt investing strategy.
Whose logic I understand, although I find it difficult to apply in the current environment.
Even though it may mean forgoing large and apparently easy profits to embrace an approach which I don't fully understand, have not practiced successfully, and which possibly
could lead to substantial permanent loss of capital.
You'd like his
He's like
mentally struggling here with this dichotomy times have never been better.
And he's never been more worried.
Yeah, his
I mean he is Ben Graham through and through at this point in his life. It's rule number one, don't lose money. Rule number two, see rule number one.
And
Then you also have this thing going on where
Because everything is so tied to the purchase price rather than the betting that you'll be able to generate a positive outcome.
His mood is tied to purchase prices. So even though everything's going up
He's looking at it like
This sucks. Like I can't find anything attractive to buy.
And it's all
You know, he's almost his mood is very much inverse of the market.
And he's feeling I think like I've got so much to lose now. I've got all these gains.
Yeah, he's not playing like he's got nothing to lose anymore. He's playing like he's got everything to lose. Yep.
So he's in such a bad place that even after this
Brilliant.
national indemnity pickup for Berkshire.
In nineteen sixty eight
He tries to unload Berkshire. He tries to
Wholesale sell it.
Tim Munger and David Gottesman, who is an investor in the partnership.
And um
Fortunately for Warren.
They're
I'm either too smart or too dumb to take him up on it. They but in typical Charlie fashion, Charlie's l looks at it is like
You're telling me you want to sell this thing.
And you want me to buy it.
Knowing that you wanna sell.
Why on earth would I buy something knowing that you want to sell? And Mars like the mutual admiration and respect there is so telling. So telling. So telling.
So
By mid nineteen sixty nine.
Warren's like he's done.
Uh, he starts making plans to wind down the partnership. He's
He's like dejected. He's gonna hang up his spurs. After his greatest year ever. After his greatest year ever.
You know.
Definitely there was some
Tension with Suzy as well, where Susie was like
We're worth like
Many, many millions of dollars. Like what are you doing here? And interestingly, many millions of dollars, but he's still kind of an unknown person.
Like Wall Street doesn't yet know the name Warren Buffett the way that they would in the next couple decades. And he's not sort of being called on. He's not a celebrity investor. He's not in informing the public on investing.
I this is very much just about staying private and making money.
Yep.
Yeah.
So
On memorial day, nineteen sixty nine.
He writes a letter to the partners.
And he says if I am going to participate
In the investment.
Business.
Publicly, I can't help being competitive.
I know I don't want to be totally occupied without pacing an investment rabbit all my life.
The only way to slow down is to stop.
And then he says he's giving notice.
Of his formal retirement at the end of the year.
He's gonna wind up the partnership.
Distribute out.
All the securities.
To the partners in the beginning of nineteen seventy.
That's it.
He's done.
He's walking away. He's like Jordan.
Going to play minor league baseball.
It's a it's a very apt analogy. It's exact. This is the last dance. Except it's not really the last dance.
The partners are shocked.
They rightly
Never thought.
Warren could give up the game.
Of course he can't give up the game, as we'll see next time.
They ask Warren what to do.
He thinks about recommending them to Charlie.
But Charlie at this point is like I don't know, I don't want a bunch of new investors either. I'm worried about the market too. So he sends the big investors to David Gaddisman at First Manhattan Bank in New York. His big firm can manage big clients.
And the small one.
The small investors he ships over to
Bill Ruin.
Uh, who had uh back from his class with Ben Graham.
Bill had just left Kitter Peabody and was setting up
His own fund, the Sequoia Fund.
Not to be confused with Sequoia Capital, but
Equally.
Incredible performance over the last year.
Sixty years.
And that's kinda where he leaves it. So January nineteen seventy.
He liquidates all the public securities.
He unwind the partnership. At this point he owns twenty six percent of the partnership.
He gets sixteen million in cash.
Eighteen percent of Berkshire.
twenty percent of diversified retail company, which was a joint venture he had with Charlie
owning uh department stores.
Ill advised place to invest.
We we keep mentioning Charlie here, do not worry, stay tuned, we will have the full Munger story in part two.
In part two.
And uh
two percent of blue chip stamps, which is another Charlie
J B.
And that's it. He also owns the Omaha Sun, which was like a vanity purchase, uh to get back to his
Newspaper roots.
And the partners have to decide with the
private companies, Berkshire Diversified Blue Chip and the Sun
Whether they wanna
Sell.
their stake and Buffett says he's happy to buy their stakes from them if they want to sell or if they want to keep them.
So he writes a long uh FAQ to the partners.
Including
Should I hold my stock in the private companies.

All I can say is that I'm going to do so.
Hold the stock.
And I plan to buy more.
Uh so with that cryptic statement.
He drops the mic.
He's out.
Out of the game.
And he owns how much of Berkshire Hathaway at this point?
Eighteen percent.
Hm.
As he rides into the sunset.
And I think that's a good thing.
That little cliffhanger is probably a great place to leave it on history and facts.
for this first half of Berkshire Hathaway.
I don't know. We're at about three hours, too. That's enough. Should we go another hour? We could talk about the part after this where he tries to figure out what to do with his life while the market is doing crazy things or
You know, the little bit of warm water that he gets into with Charlie and uh
The Feds. Um but maybe maybe let's hold on that and and we'll uh we'll start
Part two off with some of that wandering.
Pre
going all in on Berkshire Hathaway.
Uh back Lake Jordan. We're in the four five.
Yeah.
Well
Boy do we have some fun.
Playbook things to dive into this episode.
The first one that I have I actually
I decided to leave Berkshire Land for a moment to illustrate the point.
So
The point
That I wanted to make is
Sure, Warren Buffett is really into compounding. Like I think that would be an understatement, and everyone in the audience is probably chuckling if they've made it with us that far.
The another fascinating thing is David, you just mentioned he took this distribution in cash at the end of the window.
Um and I what I'm thinking is
Ah, that's gotta kill him.
to have to take these transaction costs, these taxes. Like he must have really wanted to wind down the partnership to make that happen.
And
To illustrate the point of how much transaction costs and and taxes can interrupt the beautiful thing that is compounding.
I went to a a paper that was written
in May of twenty twenty from the Yale School of Management.
Bye.
AJ Wasserstein.
Mark Agnew and Brian O'Connor.
who are uh collaborators with someone that we have had on the LP show.
David, do you know who that person is?
Hamilton?
Will Thorndike.
Will Thorndike. Yeah, I should have gotten that. Author of The Outsiders who came in on our book club. Of course. And they did some great analysis in this paper called On the Nature of Long Term Holds, where they basically ran a little simulation and showed what would happen
If you held something that had continuous compounding
for twenty five years and you pay taxes once in year twenty five.
Or if you had continuous compounding happening where you
Paid taxes every five years. Basically if you withdrew in cash and then reinvest it in the exact same or an equally producing asset.
And is is this assuming taxes are all long term capital gains? Yep.
Yep, it's assuming twenty five percent, which would be some combination of federal capital gains and some state tax as well.
So if you invested one dollar
and just let compounding do its thing for twenty five years, you would end up with twenty four point nine dollars at the end.
And this is uh
assuming a compounding rate of
Fifteen percent.
So you you know, you take your dollar
Twenty five years later, it's worth
twenty five dollars.
Now if you pay taxes every five years
That same dollar.
is worth sixteen point eight dollars.
So it's a fifty percent.
increase in the amount that you are left with at the end if you just don't interrupt compounding by doing the thing that all humans want to do, which is manage the money, do stuff, be active.
And I think that it's this brilliant insight that Warren has sort of like
begun to have here. I think in the Buffett Partnership, he moves stuff around much more than he later would in Berkshire Hathaway, but this sort of uninterrupted power of compounding
You know,
taxes, transaction costs, whatever the things are.
If you can find yourself betting on a winner and just let it ride.
That is the very best strategy you can possibly employ. And I it it feels to me at the end of this story, he's like he's really starting to grasp that.
Yeah.
Well, it's kinda like um
So there's this great this is
We go way.
out there in left field, but
You know, hey, we're three hours into this episode, so who knows how many people are still listening.
There's this great book called Transitions.
by William Bridges. And it's wonderful. And it it's
about psychologically dealing with transitions in your life, even if it's like a good transition, like getting married or
Or having a kid or you know, um
Uh and bad transitions too, like big changes in your life.
And
The whole theme of it is that
When you have a transition, like
The old you needs to die.
Before the new you can
Arise. And to my I kept thinking about this.
Through this.
story here in this part one of like
Warren was so successful.
He was the most successful Ben Graham disciple.
That there was more successful than Ben himself.
Mm-hmm.
That wasn't gonna work anymore. And
He needed to get to start to
understand these things that you're talking about.
And
He needed to
Symbolically.
You know, die the old Warren.
To have the new one.
Arrive.
And I think that's what happened here with the closing down of the partnership, whether he knew it or not, almost assuredly he did not. He needed to close the chapter.
On
Like that.

To start to embrace.
Some of these very
Different philosophies.
Yeah.
It's fascinating.
That's a really good point. I've never thought about that sort of like literal let the old you die thing that way.
It's a really good book.
Recommend it to anyone.
Well speaking of Ben Graham, this notion of independence of thought, there's a Ben Graham quote that the stock investor is neither right nor wrong because others agreed or disagreed with him. He is right because his facts and analysis are right.
And this is something that I think as a a venture investor is so difficult.
because so much of the success of a company when you're investing in it depends on its ability to in the near term raise future capital uh from someone who is not you. So it encourages this sort of herd mentality of do other people perceive this to be a, you know, hot company in the in the same way?
Whereas what Ben Graham is looking at is the complete opposite side of the spectrum, no growth at all, exclusively looking at cigar butts. It's like
you have to hang your hat exclusively on your independent analysis, which is way easier to do when you have a book value staring you in the face and you're only gonna do basically a one time transaction on it.
But it is, I think, a thing, this sort of independence of thought and is something that we can all bring a little bit of Ben Graham into our lives and
It's funny because
the positive and the negative hit you in different ways.
When other people are telling you you are right, it's very easy to accept the idea that you are right.
When other people are telling you you are wrong, you know that
Hey, maybe what I'm supposed to do is be contrarian here and trust my gut.
And it's funny how
You want to say, Well, look, just because other people are telling me I'm wrong, it doesn't mean I'm wrong. But if other people are telling me I'm right, I'm definitely right.
Uh
Totally. I I think you raise
A really good point in there too. Two good points. One
Yeah, we could all use a little more.
Pen Graham in our lives.
But
People talk about
value investing in venture and
Blah blah blah. And like, you know, some people try to do it, other people bemoan why
It doesn't happen.
You raise a really, really good point, which is that
It kinda can't because
You'd need other people to believe.
Two.
And
Unless you're gonna be willing to just wholly a company yourself.
But even then, like
Th that's A a slippery slope, but but B
Y the company needs to
Recruit employees. It needs to recruit
partners and needs to recruit customers. Like you can't just be
You gotta be bringing people into the fold. You gotta be a missionary to succeed in
Startup world.
Right. Yeah, it's funny how uh it basically it in a growth company and in a very small growth company especially
You cannot be the oldie believer, otherwise it won't work.
Yeah.
Which maybe is a reason why
As painful as it is to go back and
Talk about it.
Maybe is why
Buffett investing in Intel and technology never would have worked in the first place.
He just wasn't in a mindset to be able to
Think like that.
Yeah, it is a completely different way of thinking.
Well speaking of uh
not being in the right mindset.
you know, Buffett spinning down the partnership in its very best year ever, or after its very best year ever. This is sort of like there's there's a a boom time going on. And that's a terrible time for Warren to be buying. And I think that the classic Warren Buffett aphorism
Be fearful when others are greedy and greedy when others are fearful springs to mind where
It's easy to say.
This guy shut down his investment partnership when everyone else was being greedy. You know? Like he did not when he returned fifty plus percent then. Right.
It's crazy. Like what what most people would say, let's go raise so much more capital to deploy.
It it is like a a really
adherent to principles approach of uh you know, if you truly do believe the fearful when others are greedy and vice versa comment, it there is no better illustration than that.
Yeah.
And interestingly though.
I bet he would probably also say it was the wrong decision.
You know, I mean like the right decision in the long run because it enabled Berkshire, but like
In a vacuum, like
He was crazy.
He sort of kept going.
Yeah.
Maybe.
I mean that's the whole sort of Bill Gurley, uh enjoy every last minute of the upside. You never know when the downturn's gonna happen, so you have to invest through all cycles.
That's true unless you're Warren Buffett and you can actually pick the cycles.
Like so far he has proven and we will see in future years too, he is remarkably good at having a lot of cash when he needs a lot of cash and being fully invested when he needs to be fully invested.
Yeah.
That is true. That is true. Don't time the market unless you're the oracle of Omaha, I think is the second part of that phrase.
Well he does have a saying that uh
I actually first heard from

of all people very different uh approach than than Warren, although great in in his own way.
But um
The quote from him. It's not timing the market. It's time.
In market.
Which to your point.

Do as I say, not as I do. He also says invest in index funds.
And
Goes out and is incredibly concentrated himself.
Right.
Yeah, I mean it's it's funny listening I was watching the I'm gonna flash forward here a little bit, but I was watching the first recorded annual meeting, the ninety four annual meeting with he and Charlie, and he's remarking on um
Well sure, if you have
no conviction then you're any better than any fool at picking stocks. You should go own as many stocks as possible.
You gotta be diversified. You gotta, you know, uh be covered in case of downturns. If you feel like you're investing in managers who are excellent and have fortified their businesses so that they'll be excellent through all cycles.
Then you should own as few of the businesses as you possibly can.
I own one. I I trust the managers implicitly. It's just a very Warren Buffett quip, but for all of us who are taught diversification,
That's another way of saying that we should all be reverting to the mean. And uh if you believe you actually have a gift and or have an edge, then
You know, bet on your ability to perform superiorly, which he has done.
Incredibly well.
Yeah.
A couple others here that I think are worth highlighting.
And I'll save a lot of these that are better illustrated in part two.
I think the one that I really want to harp on here is
Buffett's singular life focus and obsession was
is getting as much money as possible and watching it grow.
and doing it in the most ethical stand up way possible on his own terms.
And
what we're witnessing is just the result of that singular focus of that
complete maniacal singular focus when applied by someone who is a genius savant at that.
And also has
trained himself to become a master communicator.
And I think there's just very few examples in the world where someone
truly is world class at something and is singularly focused on it. And I think that when you have that, that is when you have these
You know
ten sigma events. Or or I don't know how many uh the standard deviations from the mean this is, but
it is this performance is uh remarkable and enduring. And we'll talk about this in grading, but this is a twenty nine point five percent compounded return every year for twelve years.
Partnerships. Yeah. It is, you know, you mentioned Michael Jordan. I don't think that's a ridiculous analogy. And I I think Jordan's singular focus on winning.
I think is a very, uh a very reasonable comparison. He's naturally the best in the world. He is the hardest working and he's singularly focused on it. So I think that's very apt.
Totally. There's a um
I just pulled up there's a wonderful quote from uh Mike Moritz that uh
I love that uh was in uh the book Leading that he wrote.
With Sir Alex Ferguson.
It says.
The great ones eliminate all distractions and focus only on what matters.
Shut out the things that don't matter and don't let their time get stolen away.
People forget how few hours there are in a year. You must focus on what's important and not do
What's not?
And I mean, we haven't talked about his work habits, but like Warren is the singular embodiment of that. Like
He sits in his office all day and he reads annual reports.
Period.
Right.
six plus hours a day he's just reading. And the other hours he's talking to Charlie.
Right. And there's massive life trade offs to that. Like if you've decided that that's the thing you want to do and that's what makes you happy, great. But do not pretend that it doesn't come without trade offs because like
For someone who wants a well rounded life,
Yeah, that's not it. You're not gonna get it.
Totally.
Uh the last one that I'll highlight here and then I'll save the rest for part two,'cause there's so many other things here worth discussing, but I think they'll be better illustrated by the
full embodiment of Berkshire Hathaway as it is today.
is the secrecy of his ideas.
Not to get too much into power, but I think he was actually counterposition to every other stock picker who got paid to look smart in the short term. Warren did not care about looking smart in the short term. His business was not that. He wanted to make the most money long term, so he stayed quiet about his ideas to like a religious extent. And
he never ever wanted to move the market or cannibalize that rare, really good idea that he had by sort of showing his hand too early and trying to appear
Smart.
And he didn't have that national brand. He was never paid on commission or transactions.
He aligned the business model with his long term goal and that was totally counterposition to the market.
Yep.
Totally agree.
aligning the business model.
Yep.
Cute.
Only one I throw in there.
Which will probably also come up in part two, but uh but I think it really came out here in part one is just like the
I say this all the time.
It's the Sequoia capital.
Let your winners run. Like
Selling Gyko, selling Amex.
Those were
massive mistakes.
And as brilliant as
all the things that Warren did and as brilliant as his performance was
in this first part of his career.
It's just impossible for me to look at it and uh think
Man, it could have been ten times better.
Had he not made
Two
Very simple mistakes.
And when you're saying just like Sequoia, you're talking about like the hard learned lesson of selling Apple and making a six million dollar profit on it.
Yeah.
So true.
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Well, all right.
As a little precursor to grading here, let's do a quick value creation, value capture. On these episodes, we always compare how does the value that they create compare to the value that they actually capture.
You know, is it very little like Wikipedia? Do they capture a lot like Google does? And then of course a second part, how does the value
created for the world, not just for shareholders.
compare to any value destruction. So sort of talking from like an ethical moral perspective. Well on the first one, David, you might say, well, Warren Buffett, he's a pure play investor
So that
By default means
He's just capturing as much value as he's creating. Like he's not out there innovating and creating a new product for the world. He's not a value creation type person.
So I'm curious your thoughts on that. Like on part two, that will definitely not be true. Like I think Berkshire Hathaway from this point forward will have lots of value creation to talk about. But what about up to this point to nineteen seventy?
You know
What companies
created value for the world that otherwise
wouldn't have created net new value because Warren was involved. Yeah. Well, I mean and even
Stepping back and looking at the whole
Ben Graham Entourage and
Cigar butt.
Investing.
Like you could make a super real argument that it's all that is value destructive investing. Coming after companies and breaking them up and liquidating them, like there was a going concern providing value to customers that is no longer going.
Oh and not employing people and like
Yeah.
There is definitely some value destruction here.
Now I think you could also argue about
the cigar butt investing in Ben Graham.
That
Before
Him and them.
There was
just rampant speculation that was happening. And that's ultimately value destructive.
For everybody too, so
He did lay the groundwork for
Fundamental.
Investing.
value based investing in the purest sense of the word value, not as anti growth, but as like
True.
investing in value as opposed to
Speculating.
So that's all great for the world.
Right, if you think about all the like pensions that invested from the Graham era through today that, you know, generated money for their
the the people whose pensions they support, like
That's awesome to the extent that they had access to public equities that were no longer sort of just treated as lotteries. Yep.
So yeah, and then
Warren.
You know, gosh. I don't know. It was
Probably neutral to Berkshire Hathaway, his involvement.
Like
He stopped investing in the business. But the business was gonna die.
That's a good question.
It is interesting because I the the least charitable view that you can take on investors, like pure
Investors.
is that you're just reallocating piles of money. So you're not creating new value for the world.
And
That's
like the least charitable in lots of ways. I mean, if you think about the ways that great venture investors are value add, like
Yes, there's something there to bringing a lot more than capital. If you think that
some of the things we'll talk about in part two where someone with a really strong reputation can sort of come in and save a business who, you know, has has is sort of in the midst of blowing up
like a Solomon brothers or something like that. Like that is much more than reallocating money from one pile to another. So you are legitimately creating new value for the world.
It's interesting though in
up to nineteen seventy, th where we've sort of covered here, I'm not really sure you could make an argument that what the Buffett partnerships were doing was in any type of value creation.
Yeah, I don't really think so.
It laid the groundwork for a lot of value creation, but
Yeah.
Yeah.
Th it's actually very interesting to examine, like, in the financial sector pure play investors, what else is value creative? Well you can
If you increase liquidity in markets, that's value creative. If you come up with more innovative instruments that allow for
I I guess it's again, companies to get funded faster or companies to get funded with fewer fees.
that provides value. Warren's not really doing any of this at this point, though.
No.
No, not at all.
Yeah.
Not at all.
It it's just coming at it from the other side,'cause normally when we're talking about a new tech product that's created, we start from a place of well, they created all this value. Did they capture it? And with pure investing and pure finance, you're starting from this place of like, well
All right.
They definitely were moving value from one place to another, but where did they grow the pie?
Yeah, I don't think they really did at this point.
No.
Okay, so grading.
The Buffett partnerships.
returned thirty percent
For twelve years.
Compounded.
So
That's a twenty eight X.
David.
How how do you think about that? Yeah. Is is that an A? Is that a C? Well
It's interesting, right? We were talking
before the show about how
We're gonna approach this question.
And I think it depends like everything, the lens through which you look at it.
If you look at the Buffett partnerships.
Like
A fundament
Which they essentially are.
It's essentially a hedge fund.
Mm-hmm.
Any fund that returns
twenty eight X over a you know twelve year standard ish lifetime of a fund.
That's incredible. That's one of the greatest of all time.
You know, the
I they're
maybe some Sequoia and benchmark funds that are
Approaching that, but I don't think any of them hit.
That
Number.
No, I think the super fantastic recent benchmark fund was like a twenty five X. Right.
So
Even that and that had what like
Uber
And We work and Snap in the same fund, I think.
Yeah.
Yeah.
So
Yeah.
From a fund grading it through that lens.
A plus.
No doubt.
Now
Interestingly though, if you were to look at it
relative to a individual
Company investment.
Which I think would be a stretch. I think it is much more like a fund. It is a fund for a company.
It's not that impressive these days.
You know, that you would
uh return twenty eight X on an individual
Investment over twelve years.
I mean
There are individual investments in crypto these days that are returning twenty eight X in six months.
Well, I mean it it's been twelve years since bitcoin was invented and it's returned sixty two
No, I'm sorry, six point two million X. So crypto's a whole different So that just blows it out of the water.
It's really interesting though. Like I don't
Back in these times
There probably wasn't anything that was returning on
This level.
an individual style. I mean intel for sure, but like the concept of, you know, venture investing or
Investing in private companies. We're talking about like
Maybe
fifteen people in the world that did that.
Yeah, that's a great point.
Yeah, so it's a I hadn't thought about normalizing for the time period.'Cause I mean I thought about when I looked at this
The numbers sort of jump out at me of like
Oh, I have an IRR number on a twelve year fund. Like cool, let's compare it to Venture.
Oh, I have a cash on cash on a twelve year phone. So like a twenty eight X
on a ten year fund with a two year extension, like this is a top point one percent venture fund.
You know, this is like people say I want to be top decel, I want a three X, I want a five X, like
Funds don't twenty eight X, especially with the inflation adjusted millions that Buffett was investing then. So it's a
It's a crazy impressive feat. I mean I
Like just to assign a letter. This is an A plus and frankly the fact that A they never lost money.
They they not only beat the Dow, but they had a positive return every single year.
Crazy impressive. And a positive return.
with the option to take your money out. So the there is not an illiquidity premium
Unlike Venture, you know, it's just crazy. And actually beats the now, granted Berkshire Hathaway has been around a lot longer and
It uh today.
And they're managing way more money than the Buffett partnerships ever were. But
You know, this thirty percent or twenty nine point five percent
Definitely beats the pants off of Berkshire's uh uh returns, you know, s ever since Warren went full time, which we'll talk about in the next uh next episode.
What is full time?
I think Warren was just a man ahead of his time.
Yeah.
Yeah.
Hey plus we're dancing around trying to
figure, but yeah, it's an A plus.
No doubt.
Yeah.
Alright, Carvates.
Carve outs.
Mine.
is a very, very
Very
Different.
way of thinking, investing, looking at the world, but
Fascinating.
Balaji
Srinavasan.
on the Tim Ferris show.
Another three hour
Podcast.
That came out a few weeks ago.
Wildly fascinating.
Balaji is uh
A very interesting character that many people in tech know he was a
partnered Andre Son Horowitz for a while. He founded Council. He was
Uh founder of uh
company called earn dot com, I think that Coinbase acquired, then he became the CTO of Coinbase.
He's a
crypto evangelist, trans human evangelist, transnational, you know.
Anyway.
Very interesting podcast. Lots of
Seemingly out there ideas discussed, but uh
Always worth considering these things. I really enjoyed it.
Yeah, I gotta it's it's like next on my cue to check out. I I it's like right after all the stuff that I was listening to to do the Berkshire research. Yeah, we haven't had a lot of time for uh other carve outs recently.
I will say this is the first time I've started research like months in advance, just like giddy to do this episode, so
I know.
This was so fun.
Alright, mine is also something that I listen to via audio. You can
read it via text as well, but since I'm a such a big audio consumer, I chose to listen and uh hearing it straight from the horse's mouth.
I much prefer it to reading, especially in this case.
Packy McCormick wrote a wonderful piece called Not Boring One Year In, and I can't recommend reading it and especially the narration and hearing it in his voice enough.
I don't know if it just particularly resonated with me because
you know, we're friends with Pack, and we've been watching his journey, or if his journey is just like remarkably similar to acquired, so just reading it, I'm like just
the screaming in my car while listening to it. Yes. Like at certain moments. Uh, but it is the most
Awesome open book cathartic.
Telling of his first year.
I can't believe it's only been a year. What a crazy crazy thing he's accomplished.
And
The biggest

There's both a process and not a process.
And he's like, I have certain things that I do
Because I need to get
the content out once a week or twice a week. And so I I have a set schedule that I need to follow.
But I d I never actually know like what the content's going to be, and I need these lightning bolts of creativity. And I would say that David and I aren't quite as wide in the gamut that we run of like where the
You know.
A not boring piece can look quite different than the sort of what acquired's mold is, although recently who knows.
But I definitely know that thing of like, okay, there's a set of activities that I need to do to go generate ideas and then I can
at some point I need to narrow and pick one and then I need to run with one of those ideas. And I think that's a for a person who is
creating on any sort of regular schedule, be it creating in products you're making, creating in the the blog stuff you're writing, creating in podcast, whatever it is, like that is such a real emotion to identify with and um
Package does such a great job writing about it. I think anyone who makes stuff should go read.
Not boring one year in. Yeah, it was so good. I
Loved that piece.
Packy, my friend, you are gifted.
Indeed.
Well
As we wind down here, we should say there is a uh
A Berkshire Hathaway
twenty twenty one annual shareholder meeting that will be coming up on May first.
So if you like David and High
are becoming sort of a converted buffet head.
That is a great thing to tune into and watch on uh that lovely Saturday on Yahoo Finance. Uh we will have part two coming out.
here in the near future. We definitely look forward to talking about all things Berkshire with you, both
past as we've covered on this show.
Up to the present as we'll do on part two and looking into the future with the Berkshire annual meeting.
So um tune into that if uh if it sounds interesting.
It's Warren and Charlie on stage.
Just fielding questions for hours and hours and hours on end. So
It should be pretty good.
We should totally
In post COVID times.
A
Go. Go.
Next year.
B
Be like all you know artists and steel.
And just do the same thing. We should like we should totally do this. We should just like
Get up on stage and then we should have
All of our sponsors, all of our partners. Oh my gosh, out in the concourse. Out in the concourse. Uh we'll have bronze bus of Warren and Charlie. Thank you to our good friends at Tiny.
Yeah. And uh
We'll just have a we'll have a big acquired fest.
I'm in. Let's do it.
All right, I'm gonna keep the wind down brief, everyone. If you like this episode, share it with your friends. Um if you have a friend who's a value investor or not a value investor or you talk about this stuff with, share it. Feel free to share it from social media. If you're getting excited about the annual meeting coming up for Berkshire, feel free to point people to this as a resource.
And uh it's definitely one of the things that inspired David and I to do it.
Become an LP.
We love our LPs. We love everyone, but we love our LPs the most.
Join the Slack.
It's a great conversation there, and I'm sure there'll be much discussion of this episode there.
I think that's all I got.
Listeners.
Thank you so much, and we will see you.
Next time. See you next time.