Berkshire Hathaway Part III

0:00 Going with Just water as my beverage this time. And no peanut brittle. Well, did you have a little heart attack last time after all that sugar? Yeah. I think you could hear it in my voice. I think I was a little higher.

0:13 I I am going with a uh vitamin water zero because we are gonna need the electrolytes for this marathon. Is vitamin water owned by Coca-Cola, baby. Coke. That's right.

0:25 I was on my run this morning and I was listening to the uh Adam Mead book that I referenced and I ran by uh Berkshire Hathaway properties, uh like house for sale. And I was just like, It's pretty hard to go through your day without using a Berkshire product or service. I'm so excited. I literally like woke up in the middle of the night last night, like and couldn't go back to sleep. I was so excited. Really? Yeah. I love it.

1:00 Welcome to season eight, episode seven 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 Resenthal and I am an angel investor based in San Francisco. And we Are your hosts.

1:24 Well, David. Here we are. The final episode in our Berkshire trilogy. I feel like uh we were texting about this. I feel like we're like Bungie developing the Halo franchise. You know, Halo Two was supposed to be the fight. We're gonna finish the fight, you know? Last time was supposed to be the end.

1:41 We're back for number three. And Halo Three was so good, man. Like It was so that was the best. See, now we have a lot to live up to. Well, listeners, we told you about Warren's literally perfect record with the Buffett partnerships in the sixties, where he generated a positive return and beat the stock market every single year for twelve years. We then wandered the path with Warren of consolidating his investments into Berkshire Hathaway. Joining forces with Charlie, swerving through regulators and coming out Unscathed. Question mark. Yeah.

2:15 When we last left off, Warren and Charlie were in nineteen ninety two finishing up an absolutely monster run of returning over twenty seven percent per year. For twenty two years. Woo. Spoiler alert. Not gonna be the case this time.

2:31 No, those were no doubt Berkshire's glory days. So today we will tell quite a different story, a story of what happens when a time tested investment philosophy gets confronted with systemic changes in the world, like the PC and the internet. And concurrently, while the world was changing, so was Berkshire, by virtue of their own success. So when you now need to write billion dollar checks to move the needle.

2:57 There's only so many places you can go knocking and All those places are quite visible to other investors too. So today On part three. We will tell the story of the large and mature Berkshire Hatway and examine what the future may hold with the next generation.

3:15 Well, listeners, are you an acquired Slack member? If not, come join us. The most recent thing that I want to highlight is the Digital assets channel. It is one of the best entry points I've seen on the web for people to discuss everything going on in the crypto landscape.

3:29 Yes, I just said crypto on the Berkshire episode. in a very thoughtful and nuanced way. Just great discussion going on there. It's also great for beginners. So as always, come join us, acquire.fm slash slack. All right listeners. Now is a great time to talk about a new partner of ours here on Acquired, Lagora.

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5:58 You can learn more at Lagora.com slash acquired And just tell'em that Ben and David sent you. And lastly, to keep it short and sweet, if you are not an acquired LP, you should become one. Click the link in the show notes or go to acquired.fm slash LP. We can't wait to see you there.

6:16 Well, David, before you take us in, listeners, as always. The show is not investment advice. David and I may And I think have already told you some of us do. have investments in the companies we discuss and this show is for informational and entertainment purposes. Only

6:31 David Rosenthal. Tell us a story. All right. Well, as you said at the top of the show Last we left. Warren and Charlie in nineteen eighty two, they

6:44 And um Particular Warren. Our heroes. Times have never Been better.

6:50 I mean it's great. Warren is a legend. Like he literally single handedly reversed A federal government decision. And Saved Solomon brothers. It's crazy. I mean his stature

7:02 Is unparalleled. Like nothing that the finance world or the corporate world or the investing world or the business world Has ever seen. He's the oracle of Omaha. People are flocking to the annual meetings, literally the annual shareholder meetings.

7:18 Course Woodstock for capitalism. Woodstock for capitalists are attracting thousands of people. And it grew uh of course there was like a handful of people that would gather in a basement, and then it was at a hotel, and then it was at a larger venue and and uh by this point He's entering arena territory. He's literally filling arenas like a rock star. Uh and Berkshire Stock.

7:41 the A'cause they're only well there it's not the A'cause there is no A and B yet. Just Berkshire stock passes ten thousand dollars a share. Far and away the highest s priced single, you know, share of stock in history. Buffett himself.

7:59 is worth over five billion dollars. He's rocketing up the Forbes list. But there is one person out there in America. And the world.

8:10 Who is moving up that list faster. Then Warren. And fate is about to bring these two gentlemen. Together. Oh man, so we we left on the Solomon Brothers saga and we're riding in with Bill Gates. Is that what you're telling me, David?

8:26 We're riding in with BG three. Still. Gates. Man who has been in the news a lot lately. Yeah.

8:34 Well, That's another topic for another day. So Back. In the previous

8:40 Summer of nineteen ninety one. Before Solomon. Which would start going down in the fall of nineteen ninety one. And wrap up in nineteen ninety two. But before

8:51 Everything really kinda hits the fan. K Graham. Arranges for a fourth of July Uh weekend bash. On Bainbridge Island in Seattle. What a wonderful place. Bainbridge is like one of the best places in the world.

9:06 Yeah, it's a mere ferry ride from Seattle and then you feel like you're Millions of miles away from civilization. Totally. See.

9:15 Part of the festivities. that are planned is that on the fifth of July of nineteen ninety one. They're gonna go over to the Hood Canal. and spend all day with a very prominent Seattle area family.

9:30 Mary and Bill Gates the second, better known as senior. And potentially their son Bill Gates the Third. might drop by at some point during the day. And this is where Bill Gates the Third, I mean, this is like famously his sort of family home growing up. He learns to swim out there. His father is a very prominent lawyer and angel investor and sort of galvanizer of the Seattle startup community from the early days.

9:54 His mom's on the board of the United Way. Yep. Yep, so all you know, uh this is long before Microsoft, but already sort of a prominent family in the area. Warren is a little reluctant to go on this trip, you know, this is not sort of his thing, but as he puts it, quote, anything for K So he goes out.

10:11 He joins Kay and a few others at this weekend. Similarly, Bill Gates the Third does not have a lot of interest in going out on the fifth for this all day event. He's super busy, he's running Microsoft, it's a public company, he wants to stay in Redmond and work, work, work. But Mary, his mom, forces him to come out. Bill would say later, as I told my mom.

10:33 I don't know about meeting a guy who just invests in money and picks stocks. Of course, he's talking about meeting Warren, but his parents are saying you gotta come meet Warren. Uh, Bill continues, I don't have many good questions for him. That's not my thing. I love how Gates judges the uh quality of his social time by the quality of questions that he can have for somebody. Quick side note, watching these old videos of Gates, I mean, we're so used to his polished image now, but when you go and you watch sort of videos of him from this time frame, especially in the early nineties, He's

11:03 Obviously so brilliant. But he's He's mad awkward. Yeah, and he's vigorous in the way that he sort of attacks lines of questioning and engages with challenges and it's Assuming you are not the subject of his ire, it is a really fascinating thing to watch and totally different than the gates you're sort of familiar with now. Yeah, that's a good point. Yep.

11:23 So Mary though forces Bill to come out. She's still his mom. But what he's gonna do, he's gonna come later in the day He's gonna fly in on a helicopter. So that he can, you know, get a good like half to three quarters of a day work in

11:36 Uh this is July fifth at Microsoft. I mean Yeah, we've talked about this on the show, but like Microsoft in nineteen ninety one, all throughout the nineties, until the DOJ case It was intense. Like they were Killers there. Yeah, you should think about it like Uber in twenty sixteen.

11:52 Totally. So Bill's plan is he's gonna fly in on the helicopter. And then he's gonna make the helicopter wait there. He'll eat dinner and then he's gonna Fly out and escape, go back to work.

12:03 So He's introduced to Warren. And Warren immediately asks Bill what Bill thinks of IBM and whether they're gonna do well in the future. I cannot believe We're gonna get to this much later in the episode, but Warren is already

12:20 Obsessed with IBM. Like my God, Warren. Don't buy IBM. Previewing that. Like don't do it. Don't do it. Gates, of course, agrees with me here and is like no, you should absolutely not buy IBM You should buy Two stocks and two stocks only, Microsoft and Intel.

12:37 And you should buy nothing else and you should just hold them. This is nineteen ninety one. So Microsoft at this point has about a ten billion dollar market cap and Intel has a three billion dollar market cap. Gates is so deep in it, so obviously he's right here, but it is incredible that IBM, even though they made the computers the value in the value chain did not accrue to them in any way, shape, or form. They became completely, you know. dumb terminals and all of the value is captured by the chipmaker and by the operating system maker, which blindsided everyone. Just a brilliant business strategy. Totally brilliant business strategy.

13:13 So Gates then. He's probably like pretty annoyed by this first question, given that he doesn't care about stocks. He's like, look, there's two. You buy these. Don't do anything else. Probably just listen to Bill Gates here. Gates turns around.

13:25 And asked Buffett about newspapers. Because Gates is probably already starting to think about Coming after newspapers. I think I don't know if like Incarta existed already at this point, but Microsoft's spinning up all sorts of

13:41 stuff. On Cartoon's Encyclopedia. But then they would launch live and with the coming of the internet and All sorts of stuff. They were launching these things, interestingly enough, in like the ninety three to ninety-six time frame, and there's this unbelievable interview that Bill Gates does with Wired. I'll look it up and see if I can link it in the show notes, where he's basically combatively arguing that Content clubs could never be Microsoft's next business.

14:06 That they're just not big enough. Like you don't understand how big Windows is. These are multi billion dollar businesses, and unless we become Disney or something, content clubs are just never gonna cut it. And it's fascinating. looking at that aggressive reaction by Gates and how he feels versus the market cap of, say, a Netflix today, or how important it is to Amazon Prime's strategy to have a content club, as we talked about with Brad on the last episode. So Gates is uh at this point thinking, oh, we got a tiger by the tail with this Windows thing. There are few other businesses as big as this one. Let's just go for the 10 plus billion dollar opportunities.

14:43 Yeah. So here's where Buffett sort of surprises. Gates. You know, Buffett is like American newspaper man number one. Like started as the paperboy, thinks it's the canonical franchise business. He owns

14:58 Yeah, based on the board of the Washington Post. On the Buffalo Evening News, all this stuff. He's like looking Today. Newspapers are the best business out there. I'm thrilled to own them.

15:10 But I gotta be honest with you, I am starting to worry. About their future. He doesn't know anything about the internet. He's he's actually not worried from that front. But he says, You know, I'm worried about the encroachment of T V and in particular cable television. And people's news habits shifting to television.

15:28 Encouraging on newspapers. And Bill's like, Hmm, okay, well interesting. That's not Quite the answer I expected from uh Mr. Buffett. So they start. Talking and they sort of fall into conversation and knowing the two of them a little bit, not personally, but through the show.

15:43 You can imagine that they just sort of spend all day talking and like other people are there, Kay's there, Bill's parents are there. A bunch of other, you know, Seattle area sort of dignitaries stop by Two of the future founders of Madrona stop by Bill Ruckels House, who was uh An amazing man. part of the Saturday Massacre and the Nixon administration, the first head of the EPA.

16:06 Jerry Grinstein, who is CEO of Burlington Northern? I have no idea. Oh wow. Drops he just drops by, lives in Seattle. Didn't he go on to become the CEO of Delta Airlines? He would. He would. Another Erstwell later in life warrant investment. Yep. We'll get there.

16:24 But Warren and Bill just totally ignore them. They're like super engrossed with one another. So At dinner. They're all there, I guess they're forced to like sit down and join the group for dinner. Bill Gates senior asked this August group assembled there. What factor, he asked a question at the table. He says, What factor does everybody think has been most important in achieving, you know, where you've gotten in life and there are people at this table who've gotten.

16:49 Very far in life. And Bill and Warren both Immediately reply with one word, which is Focus. So these guys are like they are two Ps in a pod.

17:00 After dinner, the sun goes down, the helicopter leaves. Bill Gates. The third stays. Yeah. Warren has drawn him away from his work.

17:10 Amazing. Uh so they become Fast friends. Buffett goes back to Omaha after the holiday. And on the first day I don't know when the fourth and the fifth fell, but on Monday or whatever the first trading day is after that.

17:25 He makes another of his Fateful immediate Split second. Gut. Stock.

17:33 purchases. Tell us he bought Microsoft, David. He did buy Microsoft just like he did with Geiko. Oh, I actually didn't realize he did. He bought one hundred shares of Microsoft for his personal account. So that he could keep up with his friend. Bill Gates.

17:52 Oh isn't that ridiculous? And he buys zero Intel shares. Again, even th giving his history with Intel and noise. Which is in retrospect, that feels like such a fraught strategy because not only are you Losing out on the benefit of all the upside of actually being a shareholder in your vehicle, Berkshire Hathaway. You now want to spend a lot of time and dive deep with this person. And

18:16 He's an insider and now you personally own shares in his company and you're So you can't actually get a lot of the information that you want to talk about with them because it's too sensitive because you're a shareholder in a super meaningless way. And it this decision is confounding to me. Completely confounding. But he does invite Bill to join. The Graham group, uh which is, you know, by now the Buffett group, his group of cronies.

18:40 And at the next meeting, which I Think is in Vancouver. one of the sessions, they're all kicking around, you know, their favorite stock ideas. And Bill Ruin from the Square Fund. Throws out.

18:52 Kodak has a name he's thinking about and barely Gates immediately responds, Kodak is toast. I love it. So great. So great. And of course Tom Murphy Murph is there, uh and Kay's there as well. Uh both television, you know, media Magnets and uh They ask Bill whether he thinks television is toast too.

19:16 And Bill responds. This is a quote from the Snowball. No, it's not that simple. The way networks create and expose shows is different than camera film, like Kodak. And nothing is gonna come in and fundamentally change that.

19:29 You'll see some fall off as people move toward variety, but But the networks own the content and they can repurpose it. The networks face an interesting challenge as we move from the transport of T V Onto the internet. But it's not like photography where you get rid of film, so knowing how to make film becomes absolutely irrelevant.

19:47 This is crazy. This is nineteen ninety two depression. And Gates just described like the next thirty years of media in the internet, like right there. Wow. Isn't that unbelievable? Yeah. I think it's actually a buffet quote.

20:02 Predicting rain doesn't count. Building the ark does. I love this one so much because there are so many of these Look at Steve Jobs describing the cloud in nineteen ninety five or whatever it is, or look at Bill Gates predicting how the media landscape would evolve based on technology.

20:20 And yet Neither of those actually came to fruition where they became the market leader in that given thing that they clearly articulated in that, you know, captured and quoted video. Yeah, it's interesting. Personal life aside. I'll give Gates the uh benefit of the doubt here. I bet Microsoft would have Made plays here.

20:40 If not for the antitrust case. Mm. DH. They weren't gonna extend their advantage to media. Yeah, exactly. They weren't gonna embrace and extend their Okay. So we're gonna come back to Bill in a minute and there's a very Very important reason why

20:54 A it's just like he has such an impact on Warren's life in so many ways, as we'll see throughout this episode, but I think this is also a really great lens to view. This part three of like Let's contrast Bill Gates and Warren Buffett as we go along here. So

21:10 There is One more than one, but one in particular other very famous Warren Buffett, Berkshire classic investment. That we have not yet covered in our two parts thus far. Yeah, you talked about it on the Cold Opener the last episode, but we actually haven't touched it in the real story. I know, I know. Of course we are talking about

21:29 Coke. And Warren's investment in it, which is just classic Classic Buffett in so many ways. It's just unbelievable.

21:38 So Back when Warren was starting up his partnerships, way back, we're going back to part one of the episodes in the late fifties. He got to know one of his neighbors in Omaha. I I can't believe that like all of his great investments come from his neighbors in Omaha. And their kids played together. Add it. This neighbor is named Don Keo.

21:59 And they both live on Farnum Street. Yeah. Omaha Side note, which is why Farnum Street is uh an a knowledge project and Shane and uh everything he does over there is called It's an amazing name. Farnum Street.

22:11 So Keo was a salesman for the Butternut Coffee Company at the time, and he had six kids. And the story goes that as Warren is uh starting up his partnerships, he asked Don how he's planning to save for College for all of his kids. It's thinking like, hey, I'm gonna get down, you know, get on this partnership thing, get some money out of him. Don is pretty sharp though. He asks his kids

22:36 What they think of Mr. Buffett. And his kids are like, Oh, we love Mr. Puffy. He's great, he's always at home. Whenever we're playing with little Susie and Howie and Peter You know, he's there and he doesn't like bother us, but uh, but he's at home. So Don is like, Well, this guy clearly doesn't work very hard. Like he's always at home during the day. I'm not giving him my money. Soon after that, though, in nineteen sixty one, Butternut gets acquired by the Duncan Coffee Company. Don moves to Houston, leaves Omaha with that.

23:04 And then shortly after in sixty four Duncan gets acquired by Coca Cola and Don moves to Atlanta. So fast forward to the mid eighties. By this point in time, Don is president and COO of Coke. He is the Dan Burke, one might say. to the Tom Murphy of the legendary

23:24 Coke CEO at the time. Roberto Guizetta. Who is Oh, incredible CEO, Cuban immigrant, Rand Coke through All of the great ascendancy of uh of the company.

23:35 At this point now, Warren is a man about Washington, thanks to the post in K And one night he gets invited to dinner at the White House and I assume either thanks to Kay or as her date there or something. And lo and behold, who shows up at the White House?

23:50 But done. His neighbor from that's crazy. Yeah. They reconnect. At the White House. His neighbor from Farnham Street. And Don's like, Oh yeah, like I'm COO at Coke now. And I take it that Warren has fully switched from Pepsi to drinking Coca Cola at this point. No, not yet. Oh Don converts him. Warren is like hey, you know, really great to reconnect. I remember you didn't give me the money back in the day. How you feeling about that now? I don't know that he said that.

24:18 Orren says, No, you know, hey, like that's great, Don, I'm happy for you. I'm kind of a Pepsi guy, though. And uh really what I you know, I like to do I have Pepsi all day, every day. I put cherry syrup in it, it's great. Don't like Warren. We just launched a new product. We've got the product.

24:33 For you. You don't have to put the syrup in your Pepsi anymore. We've got Cherry Coke. Oh, that's a launched this is I think they launched it in like eighty Three, I wanna say, maybe. Sometime around then. Also, I didn't realize the the fact that the coffee company got rolled up into Coke in I presume the seventies, they were conglomerating earlier than I thought. I mean I I knew obviously Coca-Cola is a multi hundred year old brand, but they were single product for the majority of their life.

25:00 I assumed it was like the nineties and two thousands when they started becoming this big portfolio of beverage brands, but sounds like it was much earlier. It was, yeah, no, they were buying other stuff. Um I don't know how big it was versus the cola business. But anyway, uh with Cherry Coke. Don convinces Warren to switch and that of course causes

25:19 Warren to start thinking, like, Oh well, maybe I should take a look at Investing in Coke. And uh he becomes intrigued. And as he digs in, Uh I think this was like eighty five or so, and maybe and it was in eighty three, I think.

25:33 A couple years earlier, they had launched Diet Coke. And Diet Coke was like A monster. You know, Coca-Cola. Now classic, as we will get into in a second. Uh it's great, but like

25:45 Diacokas. huge, well maybe the most successful Beverage. product launch of all time. It's a blockbuster.

25:54 So Warren's intrigued, but he thinks, you know, hey, you know, stock price is kinda high. But I'll I'll just keep an eye on it. And then New Coke happens. Which you know, I knew about and I'd read about, but uh Do you remember this, Ben? How do you mess this up?

26:10 Like if you're a company like Coca Cola And you got all these big brains around the table and you basically have like a thing that's a trade secret. You don't have any IP protection around it. But you have the magic formula. And you have the brand, the not yet world renowned, but sort of nation renowned brand.

26:29 That is synonymous with like your sense of patriotism and it's associated with one particular very odd Very well balanced flavor. How on earth Do you replace that?

26:42 What are you thinking? I think we will it's a preview of minute here. You know, Warren would always say that the uh This will get everybody in trouble in a minute. thing he liked about Coke is that it the business could be run by a ham sandwich. Like, you know, literally just like you don't do it. Evidently not. I think they were probably just so bored that they at least the ham sandwich wouldn't mess with the golden goose. Totally.

27:06 You know, to be fair, the s of the story is they ran all these blind taste tests and Pepsi had been, you know, making headway and with market share. That delicious lemony, weird sweet thing they had going on. They try new flavors and one of them tests really well. People like it better than the old Coke recipe. So they literally pulled the old Coke Raspberry off the shelves. and introduce new Coke and it is a Unmitigated disaster. Pepsi's like, oh my God, this is the greatest unforced error in history. They start a price war, Coke gets into a huge fight with its bottlers.

27:41 The stock plunges. And the rumor starts going around that Ron Perlman Same dude from Solomon. Is circling.

27:50 The Revlon gone activist investor shareholder guy. How could we have forgotten about this in the last episode? He was the villain in Marvel. That's right. Remember way back in the day our Marvel episode? I forget that he like owned it for a while and ran it into the ground and Yeah.

28:09 Pearlman, what a guy. So Rumors are going around that he's targeting Coke now in the wake of the the new Coke disaster. Enter. White night.

28:19 Warren. To save. The day as always. He rides in. He buys one point two billion.

28:26 worth of stock on the open market in nineteen eighty seven. Which equates to six percent of the company. And then just like good friend and Solomon, Goizetta and Kyo ask him to join the board, which of course he does. Side note. The Coca-Cola board is where Warren meets

28:44 Herb Allen from Allen and Company. And starts going to Sun Valley every year. So this is really everything is coming up roses for Warren here. Man, to like a company and be sort of prospecting it and just to watch them go through the new Coke thing and just just be sitting there grinning like an idiot, like this is my chance. The trick is knowing how to feel those in the moment. You know, when you're not catching

29:09 uh that is falling, but rather buying the dip, as they say. Uh Warren Buffett, the OG buy the dip investor. And to add a little more nuance to that, I mean He does have this great strategy of an identify an opportunity where a company has its back against a wall.

29:29 because there are activist shareholders. Or there's a deal that was on the table that's fallen through and suddenly they need cash f fast and he like Very much uses this. lack of necessary approval by committees and red tape to just come in with cash.

29:47 make an offer he feels good about. It's sort of that better to be approximately right than precisely wrong. Kinda that approximately right. I eyeballed it, it looked good, I came in, I bought it, and now I'm a big shareholder and it was a pretty good price. Yeah. Man, I hope at some point that

30:04 Warren and and Charlie sent a case of wine over to to Ron Perlman'cause like man, they got some deals'cause of that guy. Uh so in the nineteen eighty eight Berkshire letter to shareholders. Buffett announces the Coke investment. saying of it, we expect to hold these securities the Securities and Coke for a long time. In fact, when we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.

30:31 And By the mid nineties, a few years later, Coke, of course, has recovered from the new Coke disaster. They have massively expanded internationally. the late eighties, you know, and then through the nineties where When Coke went from being still associated with Americana, but like everybody in America drank it to

30:50 Like everybody in the world drank Coke. And this was part of the investment thesis too, that there was s the sort of this like unexplored massive opportunity to bring Coca-Cola to the rest of the world, particularly through this brilliant innovative strategy that they have of just selling the syrup, whether they're selling it to the restaurants that are putting it in the fountains, or whether they're selling it to the bottlers who have to figure out water and carbonation and everything locally. They just are shipping the concentrate around the world. So it's reasonably cost effective to have, you know, just a few places that need to know the secret formula and make this stuff. It really can be a globally addressable market. It's good work if you can get it.

31:27 For a ham sandwich. So Coke is printing money. Within a decade, Berkshire is up over ten X on Coke. And since then, so that was from like mid eighties to mid nineties.

31:42 Since then Berkshire is only up less than four X. On Coke from That point in time over the next year. Yeah, what is that? thirty, you know, twenty five plus years.

31:53 Oh, that's wild. Yeah. So ten X returns in the first decade and three and a half X in the next twenty five. Which would sort of. Presage things to come. Man, compounding large numbers, David, sure is hard. It turns out it is.

32:07 Well, while we're on this Coke thing, before we we sort of leave it, I do think this is a good moment to address the value of brand. We haven't we've sort of alluded to motes, especially in the seven powers discussion in our previous episode, but we haven't actually described how Warren thinks about motes and and sort of brand as a moat. in the ninety five annual meeting, he has this great quote where he just lays it out for investors. And it's one of these rare moments where he he describes the investment strategy, I think, more than he necessarily intended to, but he's off the cuff. He's answering a question and he says What we're trying to find is a business that for one reason or another

32:43 It can be because it's the low cost producer in some area, it can be because it has a natural franchise because of surface capabilities. It could be because of its position in the consumer's mind. It could be because of a technological advantage. Or any kind of reason at all. Then it has this moat around it. And I just always thought this is like the clearest articulation of his view of, you know, sustainable competitive advantage. What makes a a business durable and able to

33:08 generate outsized profits over time. And boy did they nail it with Coke. I mean, this is just one of these classic examples of The brand moat is really real and it's a global brand moat. Yeah. Totally. Like

33:21 The mode exists, clear how it works. It's straight over tackle, you're taking this international, running the same playbook. Yeah. Great timing. Coming in in the new Coke disaster right before

33:32 International expansion. Well done, Warren. Okay, David, you did mention that Coca-Cola is only up another three and a half X after that initial ten X. When we look at you know, that sort of late two thousands time. Looking at maybe two thousand nine

33:46 Coca-Cola did represent close to 20%. of Berkshire's equity portfolio construction. So like that, what, thirty five X on their initial investment. of the stuff that they own uh that are public markets before they wait into Apple, which we'll talk about later. Coca-Cola is their biggest single holding of stock that they don't wholly own in a business. Yeah.

34:08 It of course no longer is, but Yeah, it's I mean it this is huge. I mean this is one of the Key legs of the Berkshire stool is Coke. And also just speaks to how different the company is now. Like You can barely see the Coke equity value in there.

34:24 Yeah. Okay. So Back to the meeting of these two businesses here. So

34:31 In nineteen ninety seven. There is this. Amazingly perfect moment. I think this moment kinda marks um A major transition point in

34:42 Business and industry in the world and it's the you know the rise of tech and the rise of the internet and how much the world is gonna change. And it reminds me of uh There's the famous quote in history. I think it's about Germany in the like eighteen fifties. Where the quote is that German history reached its turning point and Germany failed to turn. This applies to Warren here. Investing in corporate history reached its turning point.

35:07 And Warren fails to turn. So summer nineteen ninety seven. We are at, of course. The Allen and Company Sun Valley Conference. And there is a panel discussion

35:18 Hosted. By Don Keo. with the participants three participants being one, Warren. Two. Roberto Guisetetta, the CEO of Coke.

35:29 And three. Bill Gates. And so here it is. Old school like the consumer brand Coke. And

35:38 Bill Gates and Microsoft and Warren on the same stage. Everybody thinks this is gonna be like a backpatting affair, you know, maybe sort of a you know Genteel changing of the guard or you know, maybe something like that. But Bill kinda goes off script here. So Bill would later say that he meant this as a compliment. But he trots out Warren's ham sandwich phrase.

35:59 Uh when talking about Roberto and Don on stage. Oh wow. Wait, so you have the the moderator of the panel is the president of Coke and you've got the CEO of Coke as one of the participants. Yeah, and then the other participant is like the largest, you know, shareholder in Coke. Right. And Gates' friend. And so Gates says that like Oh, you guys got it easy. You you a ham sandwich can run your business. And he compares that to Microsoft, he contrasts that with Microsoft where he says Running Microsoft is such a high wire act.

36:29 That he suspects he's gonna have to retire. before he gets too old. Like indeed, he says well before he gets to age sixty, because you need a young person in charge who can adapt and navigate the constant change in the Technology business. So the other panelist, Roberto is sixty five and tragically later that year would die Unexpectedly and very quickly of lung cancer.

36:51 Don is seventy one and Warren is sixty seven. So Gates is literally just slapping them all in the face here. And uh Roberto uh sort of has the sort of stereotypical, like fiery Cuban temper here. He is hugely offended by this. And I don't think he walks off stage, but he never talks to Gates again for the rest of his life. After this episode. I don't know how how Don reacted to it. Warren kind of shrugs it off. Like he does like hey, like Bill's my friend. Like I it's you know, he's Bill. He's kinda like uh he's like a wild animal. You can't like bring him in public too much.

37:23 But the thing is, like, you know This is a a major social faux pas on Gates' part, but like He's totally freaking right. Well, I mean he's right and It is clearly

37:35 This seminal moment for Warren where he's sort of like looking left and he's seeing the past, he's seeing the things he already owns. He's seeing these cash flowing, profitable, durable businesses. And he looks right and he's seeing something he doesn't understand with Microsoft. And it's outside his circle of confidence. So it's in Charlie's uh too hard pile To use a uh A Charlieism there.

37:56 And so He's team Coke he's team durable, understandable old world businesses. In this era, there's so many opportunities for him to run toward the fire uh in technology and he just chooses not to. He just runs away. Alice has uh this great quote in the snowball. She says.

38:13 Buffett avoided technology stocks. Partly because these fast moving businesses could never be run by a ham sandwich. He thought it no shame. to have a business that could be run by a ham sandwich. He wanted to get Berkshire Hathaway to the point where it could be run by a ham sandwich too. And like I get it, right? Like he thinks you know I used to think this too, actually. I was like, oh man, I really want to find businesses that like a monkey could run'em. The thing is though, those businesses don't exist anymore. Uh you know, they exist. Like Coke still exists and it's fine and plenty of these other businesses, but Gates is so right here.

38:50 The future is change and the most valuable companies of the future and the most value that's going to be created is are gonna be created by companies and by Leaders and entrepreneurs who are able to navigate change. Like you mentioned we we just had Brad on in our last episode, uh, Brad's Done to talk about Amazon Unbound. Like you read that book and you like

39:11 You're just k kinda like in awe. Like Bezos is The world's richest person, and he is still bringing such intensity. We cannot rest on our laurels. We have to change. We have to innovate every single day. This is not Coke.

39:26 Yeah, well, okay, let's take this as the moment to dive a little bit deeper into why Buffett doesn't like tech stocks,'cause it's so memey in our culture today that that he sort of is not a tech investor that It's worth unpacking it a little bit. And he did have this interesting observation. I think it was in the the late nineties that um we're gonna talk about the dot com bubble here, but that there aren't any internet companies that have ever hit a hundred million in a year in profits. And so I have no proof that it could possibly exist. And so

39:56 Warren is investing, not speculating. And a lot of people will take offense to me saying that a lot of technology investing, especially in the early stages. is speculating. But the fact is very early on there's no revenue and there's certainly no profit. So you can't possibly do investing in the classic sense of valuing the business today at a discount to its future cash flows.

40:18 It's speculating in a risk managed way. by putting your money in great people. Going after markets with promising futures, the sort of secular tailwind argument. In fact, Buffett has a very particular way that he thinks about valuation and that is highly sensitive to how certain the future is.

40:35 he's willing to pay up for very certain futures. Which is why he values brands so much. And if you think about this as like an expected value equation where you have two components. the value of something if it happens, and then the probability that it will happen. Buffett is happy to pay for things with a modest value, but a high probability of it happening. But it's not his style at all to make bets on low probability, very high potential.

41:00 value plays like would the it be an Amazon or something that you're sort of talking about David, when you reference this incredibly nimble, rapidly adapting world where the chessboard's constantly rearranging and you sort of need to You know, make a bunch of high beta bets. Yeah, totally. I think the problem is that

41:18 Now we'll get to now later in the episode, but the world has just evolved to the point where like That's just the way the world works. Like there's so much change and it's such constant that even Amazon, even Apple, even Microsoft. Need to be a

41:34 Right, you can be Coke, but like Coke's value has only three point five X in twenty five years. Those are the businesses you're gonna get. So our our friend um Andrew Marks, uh who's a great VC at TQ Ventures.

41:48 He's actually known Warren and studied him for basically his whole life. He told me that I think the best way to put this about Warren that that I've ever heard. Which is that Warren was the world's greatest

42:02 Status quo investor. Like as long as the future was mostly gonna look like the present Warren. Is A savant.

42:11 at it that type of investing. Like The future for Coke is mostly gonna look like the present for Coke. He knows how to value that. He knows that they're gonna recover from new Coke. He knows that there's an opportunity internationally. He can invest in that. He can see that. Hm. Right. So you're saying that of course the business will change and evolve and grow.

42:30 But the chessboard The world is the chessboard. The world is reasonably static. And that makes sense, like for most of his life, that's The case. Right. You hear comments like people are always gonna love candy. People are always gonna like Coke. Like

42:46 It's not a bet on the world changing, it's a bet on someone operating a business really well in the world. Yeah, he used to say, um That he was absolutely certain as long as cola doesn't cause cancer that More people are gonna swallow Coke tomorrow than they did today. Well, it turns out, you know, sugar is kinda linked to cancer and like that's kinda not a good thing. Like The world changes, you know.

43:09 And I think this is the thing where now this is what this moment to me represents, this panel at Sun Valley in ninety seven. It's like This is the transition to a world Where? More change is happening than not. Yeah, it's like that um

43:23 There's a great wait but why graphic where the little stick figure is standing on the inflection point of an exponential curve. And It's not that the world wasn't changing quickly between, you know, the mid fifties and the early nineties. It was that the rate of change hadn't compounded to the point where it was suddenly like the whole world is changing all at once. You have the arrival of the internet, the cycles of innovation are getting wildly compressed. I mean We live in this world today where

43:50 there's huge changes on the sentiment of the future, like multiple news cycles per day in a super high fidelity, high frequency way. That was just not. I didn't want to say it, you said it. Not at all the world that he invested in for the first thirty plus years of his career. Totally. So

44:10 Warren definitely doesn't. See this yet, if ever. But for the moment Gates gets this. Certainly some other people in tech and in Silicon Valley and in Seattle like get this that this is the world that we're moving into.

44:23 But most of the world. Does it. So For Warren, he's just like okay. Back to business as usual.

44:29 He is though. Concerned about Yeah. tech bubble that is forming that he and so many others see. And

44:37 by the this time by sort of in the late nineties. The Berkshire share price. has gone to from about ten thousand dollars a share to thirty four thousand dollars a share. Over how many years from ninety two to this is probably like ninety eight or so.

44:54 Six years, three and a half X, not bad. Yeah, not bad. forty billion dollar market cap for Berkshire. But they've never split the stock. So people in this sort of, you know Part of the tech bubble craze was like day trading and people are now

45:09 Internet trading and like e shares. I don't know if it's eShares. E Trade. Yeah. is happening. People are setting up. Publicly traded investment trusts. That like mirror Berkshire's equity portfolio. Like have like a shadow

45:24 Berkeley. This is so brutal. I mean this is like for the person that wanted to carefully control investment in the company, someone says Oh well, if you can't buy an actual share of Berkshire You can buy a fraction off share from me and I'll own a bunch of Berkshire underneath and I'll be like you own it. And that's like Warren's absolute worst. I think both these things are happening. So I think

45:46 Obviously there's demand from all this new retail investing to own Breakshire shares, but most people can't afford a Thirty four thousand dollars share. Then or now. I think two things are happening. One is what you're saying, which is People are buying.

45:59 Burger shares, putting them in a trust, and then selling shares in that trust. The other thing people are doing is they're just like reading every every, you know, thirteen F that comes out and Ten Q and ten K. Oh, and buying the same thing. What a ham fisted way to do it, too. And and the lag, it's gonna be this thing where people feel like they're buying Berkshire or Berkshire Associated, but they're actually buying well after Berkshire's already moved the price of that stock. Way less. So Warren finally comes around. He he really He thinks like okay, people are getting swindled, like we

46:36 Uh I gotta find some way to put a stop to this. I don't wanna split the stock. And this was a meme at the annual meeting, every single year. Someone had asked the question, Are you going to split the stock so that more people can invest? And he would always respond something like, No, I love our current investor base. Why would I do anything that would change the great set of people that we already have as shareholders in this wonderful company? Yep. So he comes up with a Brilliant idea. He decides that he is going to do

47:00 Mm. Stock. Offering. for a new class of shares. What he's gonna call the baby bee.

47:09 class of shares versus the newly rechristened Berkshire A shares. And these are gonna be tracking shares. That are gonna track One thirtieth. One.

47:20 Divided by three zero. Of the A shares in terms of value. Massively diminished voting rights. And he's gonna sell this in a new offering.

47:29 That is actually open ended. So there's no fixed amount. It's not like I'm offering X number of shares. He doesn't want a supply demand thing to happen. He doesn't want basically like microeconomic forces to happen. And drive up the price of the bee share. So he's like

47:45 Here's the price and we're gonna make as many of'em as we need to at that price. As people wanna buy. Even if you hoard'em, it won't benefit you at all. Totally. Which also means However much demand there is Because it's an offering. Berkshire's gonna get the cash. This is like even better than Float. You never have to give the cash back. They're raising their series C. Yeah.

48:08 I bet Buffett would go to the mat with you on it's even better than float. He probably would. I mean it i he is diluting the value. Yeah. As a quick aside, I think this um B Share is offering is a really good place To talk about

48:20 when they are buying things with cash versus shares, sort of how they think about the two currencies they have at their disposal, the balance sheet cash and the the shares they could issue and and dilute the company. So um Buffett notoriously likes using cash versus shares since he thinks the, you know, existing portfolio of Berkshire businesses are w far better than pretty much every other business he could buy. So given that, why would he trade shares of these amazing businesses for something. That who knows what it is. It may may be good, but it's not as good as my treasure trove that I already have here. So they use cash, obviously, whatever they can except. when their shares have been richly valued by the market.

48:58 and thus are a phenomenal currency to use. after it crosses a certain point. So in ninety six when he does the B Shares offering Normally Berkshire shares trade, the the A shares trade somewhere between like one to one point five X book value of uh of all of Berkshire's holdings. Well in this case.

49:16 The moment they decided, okay, it's worth it for us to dilute our shareholders and do this new financing event and do the B shares thing. It was trading at almost twice book value. It was like nearly an all time high. And so he gets all the credit. It's almost like the Ben Thompson strategy credit thing. Like he gets all the credit for doing this, but it was a huge windfall for Berkshire to to do it. at the moment that they did. And they they are wonderfully transparent about this as well, because they know there's going to be crazy demand for the B shares.

49:45 Kind of no matter what. So they write all these hilarious disclaimers. I'll just read my favorite one. Mr Buffett and Mr Munger believe that Berkshire's Class A common stock is not undervalued at the market price stated above. Neither Mr. Buffett nor Mr. Munger would currently buy Berkshire shares at that price. nor would they recommend that their friends or families do so. Yes.

50:08 So Eric Yuan going on uh Bloomberg and saying, It's too high price is too high. Price is too high. Oh my gosh. Well, this is great. And Of course you know what we're gonna transition to next.

50:20 Let's see, out of ninety six, uh, I think we're talking about or down ninety eight. Ninety eight. Are you keying off my uh buying something with shares? Yes I am. Are we going insurance? We're going insurance. Tell me about Jen Ree, David. Let's talk Jen Ree. So

50:38 Yeah, w Warren hated. Issuing stock, but he's like stock is so Overpriced. I said it, not him. Note that he didn't say it's overpriced. He said it is not underpriced. Exactly. Exactly. So in nineteen ninety eight, it makes another shocking announcement. Berkshire is gonna buy

50:55 Jenry, one of the world's largest reinsurers, is For twenty Two Billion. Dollars.

51:03 Remember just a few years ago it was like Huge news when Buffett would put one point two billion dollars into Coke or You know, I think buying the rest of Geiko for two billion dollars. That was huge. That was I think that was the biggest deal they'd done before. Yeah, so this general reinsurance purchase by far their largest acquisition ever.

51:20 Yep. It is the elephant gun hunting phase of Oren's acquisition career. So yeah, it's literally the largest deal breakers ever done by a factor of ten. And he does it with Uh

51:33 Stock. Not a dollar of cash goes out the door. He trades twenty percent of Berkshire's Market cap. For

51:44 Jen R Wow. Uh spoiler alert does not go well. Famously. What Charlie is asked about. The deal when it gets announced.

51:53 Charlie is like the bluntest. character as we have seen and as we will see at the end of this episode. Charlie's response on the deal when asked about it is That Warren only called him quote. very late in the game on this one.

52:07 So he's just kinda like, I'm washing my hands of this. And I think if there's one lesson. in this series among many It is that if Charlie Munger is your business partner, you should probably always call Charlie early in the game, not late in the game. Uh C, Salomon Brothers. And so what what was the really alluring thing about

52:26 buying Gen R because it massively multiplied the amount of float at their disposal by buying. Yeah. They got a bunch of float. To be honest, the alluring thing about buying Jen Re was that Warren thought that Berkshire stock was overvalued. And he wanted to take advantage of this moment in time and use it to do a big acquisition. And he also This is Cordon Alice in the Snowball.

52:48 Most if not like all of Jenry's investments because we Talked about insurance companies. Yeah, with their float they invest. The float insecurities and Warren and Berkshire prefer to do that in equities.

53:01 Most of Jen Re's investments were in debt. And relatively conservative bonds and the like. And so Warren's worried about a equities crash. coming along here because of the tech bubble. He wants to essentially Dilute.

53:15 Berkshire's security holdings. security because that would be a signal to the market. Like Warren Buffett is selling stocks. That might tip. Everything over into the crash. He's like, How can I change the mix of securities that we have at Berkshire?

53:30 without me doing something like that, I can do this all stock equity deal, buy Jen Rie and essentially get a portfolio of twenty ish billion dollars of bonds. Daddar. Gonna be insulated from Equity prices. Boy, that is some financial jujutsu engineering right there.

53:48 He definitely overthought this one'cause Jen Re sucked. Uh, to be blunt. I will say that it's funny, you you said that I just pulled up the um historical uh price to book ratio of Berkshire. I think the only two times that it was meaningfully above

54:04 two X that the stock was trading above twice book. was uh right around ninety six. when they did the B shares and then right around ninety eight. So I I think he definitely felt like those were great times to be using Berkshire stock for currency. Yep. Yep. So uh yeah, Jen Re.

54:23 So we didn't cover this uh last time'cause it didn't fit with the story, but Back in. Nineteen eighty five, Warren made Almost undoubtedly the best higher. that he ever made in his career.

54:34 Uh and he makes very few hires, as we should see. He hired a Jeet Jane. to run Berkshire's insurance businesses. A Jeet is like This dude is a monster. You have no idea how Unbelievably great Ajit is.

54:50 He's an underwriting savant. Like this guy can like hear a crazy story that you tell'em like, what if I'm gonna strap this guy to this rocket and then we're gonna shoot it at a hurricane. And you know, I want insurance that Bypasses the force measure and that kinda he'll give you a price for it. He's like I know exactly how to price this piece. He is Jet Jack Ringrol reincarnate. So a G he grew up in India. He went to IT in India and then he worked for IBM.

55:19 Maybe this explains Buffett's fascination with IBM. He's like a Jeet came out of there, it's gotta be good. Then he goes to Harvard Business School and then he goes to McKinsey. And then he joins. For sure. You were talking about him.

55:31 Like he's an insurance pricing savant. That is true. There's probably never been anybody Better than a Jeet at pricing insurance. He is also like hyper aggressive. Like if if Ajit had decided to be a venture capitalist, he would have been like Bill Gurley times ten.

55:48 Like hyper smart. Hyper aggressive. For basically his whole career. I d I doubt this is still going on. Probably at Warren's request, not a Jeet's. But for like decades.

55:58 Every Night. I don't know if it's every weeknight or every night of the week. They would do a call a nightly call at ten PM To

56:07 Go over the insurance portfolio and all the deals that Ajit was doing. Like he is just a monster. So when he joins He takes over all of Berkshire's other insurance businesses besides Geiko to start. And

56:20 Then He starts a new reinsurance business within Berkshire, like himself. Like this is the great entrepreneurial story within Burkshire. And famously he takes out an ad in business insurance magazine. The full page ad when he starts this saying

56:37 We are looking for more, more casualty risks where the premium exceeds one million dollars. Like nobody does this is the insurance business. Like this is crazy. Nobody does this. So he's basically saying like I will insure things that other people won't insure because I'm more confident in my ability to price these weird, crazy expensive policies. Yes, and the value of the premium for the policy. I want Everything. I want the craziest highest value premiums in the world that other insurers like a Gen Re and Swiss re and the lake would never do. Would never do. They're just like that's just way too much money. At risk.

57:13 Right. They're they're factories. They're looking to f identify the same thing over and over and over again and and ensure it. These actually have a very fun name too. These are called supercats. Yeah. Super catastrophic insurance policies. Supercat is a really cool name for a pretty boring thing. Totally. I mean, this is stuff like I think the story goes that After nine eleven Where Jen Re would Take huge losses in nine eleven and

57:36 Bricks are in a Jeep would be fine. But after nine eleven, a Jeet starts going around the world and like Writing Terrorism insurance policies. left and right,'cause like everybody wants'em now. Everybody's scared.

57:48 And he's like, Oh great, like this is actually not that risky. I'm gonna make a killing on these super high premium Tens of millions of dollar policies. Yeah, the crazy thing is like that Gen R was basically mismanaged and they had these policies written in nine eleven that had holes in them that they shouldn't have where they took on risk that they basically weren't being paid for and then just got destroyed Yeah. So here's what happens. The obvious thing to do.

58:13 In ninety eight when Say bye. Jenri would be to just give Jenry to Ajeet. Like Ajeet is the greatest of all time. Give him more. Instead of

58:24 Buffett runs the you know the White Knight Acquirer playbook, even though he has no reason to now. You keep running your own business. Tells management, even though they're not the founders of the company, he's like, We love you. You keep running your own business, you do what you do, you know, I'm gonna be This is a quote from Warren, strictly hands off. Yikes. So immediately after Berkshire buys Jen R news hits that Jenry is a counterparty on a massive insurance fraud scheme called Unicover. that I believe it was residential insurance.

58:56 They immediately take a three hundred million dollar underwriting loss. This is like within the first week after Berkshire buys the company. Remember Buffett's rule number one, which is never lose money. Never lose money. Rule number two, see rule number one. Yeah. First week on the job, you lost three hundred million dollars. Great. Then they do a bunch of bad deals insuring Hollywood box office receipts for movies. That loses them, I think, about another billion dollars. It's rough. Then nine eleven happens. They lose all told close to another two billion dollars in nine eleven.

59:28 And then finally, and probably the worst offense given the Solomon history. In the early two thousands, so a couple of years after Yeah. Jenry gets involved in a major accounting scandal with A. I. G. Propping up AID's balance sheet.

59:44 Nobody ended up going to jail on this one, but like Basically like massively Hurt Henry's reputation. And brought the regulators all over them. I think.

59:56 This is The one thing Warren wants. Less than anything. Eventually Warren would oust the old management, fire them. And bring in Joe Brandon and Tad Montrose to fix it.

1:00:08 They do a good job and then eventually um Warren does hand the whole thing over to a Jeep in twenty sixteen. So Ag is now running Gen R in addition to everything else. Wild saga here. What a mess. What a mess.

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1:02:15 So before the tech bubble pops, he does one more Surprising to Outside watchers move. Which is in nineteen ninety nine. He buys a utility company.

1:02:28 Burkshire buying a utility company. This is what Warren has come to. It's like the light company that, you know, provides your electricity. He buys mid American energy holdings. And people want to know why is why is Warren buying a utility? Alice writes in the snowball. Warren was already being ridiculed for his refusal to buy technology stocks. Now he had bought the light company. How dull. The energy business I think ends up being, you know, fine for Berkshire. Like it's another Fine if he doesn't lose money, they're fine.

1:02:57 It does come though with two managers that Warren seems to greatly admire. By the way. We talked about this in the pre show, but we haven't yet talked about it on the episodes. You know how you see Berkshire Hathaway real estate agents all over the place. Oh yeah.

1:03:14 That Came with Mid American Energy Holdings. They also had a real estate brokerage. So weird. How does that work? Like I my understanding of the electric company is that it's like a public utility. It's market by market then that where some of them must be private companies. Yeah. I don't know exactly. I mean, there are lots obviously lots of utilities, separate utilities in different geographies all all across the country.

1:03:38 But yeah, somehow they had a real estate brokerage in there as well. So There is CEO. of the company one David Sokol. And

1:03:47 The number two. Remember that name. Remember that name. His number two. Guy named Greg Abel. T.

1:03:56 Just announce that name. Future CEO of Berkshire Hathaway. Yeah, that's how they come into The company. We're gonna hear much more about them later. So okay, finally. All this tech bubble stuff comes to a head in the

1:04:12 Two thousand annual meeting. Where Warren and Charlie are just getting pummeled. by questions from shareholders on stage in the arena. Asking what on earth they are doing. Why do they not own technology stocks? Everyone else is getting these five X's in a year. What are you doing here trying to make me fifteen percent? You're making me poor. Uh Warren says, quote, I don't want to speculate about high tech.

1:04:38 And then of course he goes on to speculate and he compares the whole thing to a Ponzi scheme. And then Charlie. Jumps in. This is my favorite. This might be my favorite Charlie moment of all time. He jumps in, and he says. The reason we use the phrase wretched excess

1:04:53 Is because it produces wretched consequences. It's irrational. If you mix raisins with turds, they're still turds. Yeah. The all time great mover quote. I I I don't know if there is a video of this. If there is, I haven't seen it, but I can just imagine like the entire arena just being like

1:05:12 Shocks like did Charlie Munger just say turds? Like what? I think Alice actually says that line in the in the snowball. But if you think about what each of them is saying It's telling and it's actually quite different. Warren is saying I don't understand this stuff. I refuse to engage. No, it's a Ponzi scheme.

1:05:32 Charlie is saying something different here. He gets that there are raisins. In the deck stocks. Like Microsoft and the like, and you know, they're they're real companies in there. But there are also turds. And Microsoft may be doing great, but

1:05:46 If and when this whole tech bubble thing pops and it will. You know, the splatter from the turds is gonna get all over your raisins too and and drag it down. And when Warren says that, you know, I don't understand this thing, it's a Ponti scheme, he's referring to like the crazy multiples that people are paying on top of revenue because of course profits don't exist. much like today. But like let's even w walk it a few more levels. Often revenues don't exist for companies that are going public, which like that you only see in like

1:06:14 space or like, you know, battery technologies or something now. But then even further, like some of these companies are selling products, but they have upside down unit economics. And so they're not even like gross profit. Positive. So there there is all sorts of you could sort of understand why you would look over to Charlie and have him saying there's turds in here because

1:06:36 Truly there were. I mean it's crazy some of the stuff going public. Then you look over to Warren and he understands all the financial infrastructure around it, that the banks are incentivized to do it, that the earlier shareholders are incentivized to get marked up and get it public and then sell to get it off their books. You know, there there was Ponti scheme like things going on. Because there was so much rampant speculation about Raisins and turds. Yep. And so actually I was curious about this. So I I did some analysis.

1:07:03 This is flash forwarding maybe too much, but Yes, at the absolute height of the tech bubble when this Shareholder meeting is happening. If you were to put a dollar into Berkshire Hathaway stock DA If you could buy a fractional share of DA for a dollar.

1:07:20 That dollar Even today in May twenty twenty one, so twenty one years later, Invested in Berkshire would outperform the Nasdaq. It would. Definitely outperformed the S P.

1:07:33 And it would very slightly outperform Microsoft. So if you had invested a dollar in Microsoft in you know call it the first half of two thousand. And held it to today and you'd invested a dollar in Berkshire. Uh you would be doing better in Berkshire than

1:07:48 Microsoft. So like Charlie's right here, like the splatter from The turds is gonna get over the raisins. Uh all over the raisins, including Microsoft. But if you had invested a dollar in Microsoft versus Berkshire. At almost literally any other point in time.

1:08:03 Either, you know, before back in like ninety seven when the the famous you know Sun Valley panel happened with with Coke and the ham sandwich and and Bill Gates. Microsoft would. be crushing Berkshire if you had to put dollars in at that point in time. Fascinating if you were to invest a dollar in each Just a year later, in two thousand one. Uh you would still be doing better on Microsoft and then of course

1:08:25 The farther you go along. Obviously any time since. Anytime be doing much better. Did this dynamic play out earlier too? Where like what did it IPO in like eighty to eighty three somewhere in there? Yeah, somewhere. I mean there, obviously, like if you put a dollar into Microsoft early. In the early days. Right. Yeah, it's funny that the dynamic exists twice, where if you're super early at Microsoft, then of course it's gonna multiply an insane number of times to now, but the run up in the last five years has also been so crazy that if you invest it any time after the the dot com recovery, which only really was like a year. Yeah. then yeah it's gonna outperform Berkshire.

1:09:00 Charlie is right here that like Yes. In that exact moment. The bubble popping is going to drag everything that is good down with it. But we're almost really at the point where like it doesn't even matter anymore if you had invested at the top of the market in The Tech bubble you'd still be doing better.

1:09:17 Than Berkshire, except for like a very narrow window of time. Yeah, another point that they're both making here is That there's a lot of innovation going on, for sure. You look around, there's for sure all these incredible things going on with the internet, but the underlying stuff that's going on with Microsoft and, you know, the the hardware makers, the OS like all the whole ecosystem

1:09:39 There's a dramatic amount of innovation. The reason that they don't invest, and this comes out in a nineteen ninety nine Fortune article. that Warren writes sort of warning about the the dot com bubble. Of course he doesn't say the bubble's gonna burst. He doesn't say he's calling it top, but he sort of beats around it a little bit and says He's not interested in buying right now, I think is sort of the way he positions it. He talks about how

1:10:01 in the early days of making cars. There were hundreds and hundreds and hundreds of car manufacturers, lots and lots of innovation going on. And today, you know, there are only a few. And so just because this analogy at the annual meeting this year too, I think, right? Yep. Just because There is innovation.

1:10:20 Sure, that's great for the innovator in the short term, but for the investor, for the shareholder, that doesn't mean you're going to be able to capture value. You have to be able to create a moat. You have to be able to figure out what about the business creates that durable competitive advantage. So all the profits don't get arbitraged away. And

1:10:40 I think he actually finishes the article citing the the most perfect example of arbitraging profits away by over a hundred year period going from pure innovation to sheer commodity, which is the airline industry. And he highlights I don't think this is exactly true anymore, but it was true at the point in ninety nine when he wrote it. that the sum total if you add up all the profits and subtract all the losses from the whole airline industry since the inception of airlines. It was a loss. Yeah. And then he says this is sort of gruesome, but uh

1:11:11 I think he ends the article right with saying uh That he'd like to think. That if he could go back in time to was it nineteen oh three at Kitty Hawk when the Wright brothers flew. That he would do capitalists a favor and shoot them down. Yep.

1:11:27 Which is a w insane way to put it. But the point that he's making is just so Stark. And I'm sure it's it's not something I had really thought about, and it's certainly not something that was on people's minds in ninety nine, which is the proliferation of innovation does not necessarily implying. That there is

1:11:46 value to be captured in a durable way by a single firm. Yeah. Not necessarily. It also doesn't necessarily imply that it won't be. And of course, Warren is hugely wrong about technology and the internet on this front. But and also everybody's Remember what Warren says here about the airlines and

1:12:05 What must be going on in his mind later in life when he buys Every airline stock in the industry. Twice. Twice. Yeah. Yeah.

1:12:14 Okay. For the moment though, tech bubble bursts, as we all know. Warren, man, he's still top of his game. Oh Oracle Omaha. Everybody's raining praise on him. He saw it all come in. All true. The early two thousands are, you know.

1:12:31 More greatness for Warren. But then. In July two thousand four Susie passes away. And

1:12:40 This is Devastating. To Warren. even though they haven't actually lived together for like twenty five years at this point.

1:12:48 He still Loves her. Hugely and and depends on her. And they're they're technically married, right? Even though they live. They're still technically married, even though they don't live. She lives in San Francisco. He lives in Omaha. Uh Like we said last time, we're we're not gonna cover it on on acquired here.

1:13:03 But uh his personal life is complicated. Let's just say he um I do not think at all that Warren. Is or was ever like a womanizer. But it is true that he had many.

1:13:15 Women in his life. And I think it was all above board anyway. It's all in the snowball, you can go read about it. But he's devastated when Susie passes away.

1:13:25 Outside of his o Personal grief though, which is Acute. The most pressing issue is Wha w what's gonna happen to the Buffett fortune and to Berkshire?

1:13:35 Because in typical war and fashion. Until this point in his life, he never thought about it. He always assumed that Susie was gonna outlive him. And the plan for the now forty plus billion dollars of net worth that The Buffett family has.

1:13:52 The plan was always that After Warren would die, Susie would set up a foundation. There she already had the Susan Buffett foundation and Give it all away. That was the plan. But well

1:14:04 Obviously that's not gonna happen. Yeah, I mean Warren has been thinking about the conundrum of what to do with his wealth since long before he was wealthy. I mean, in his teenage years, he was already thinking about well, when I'm really rich, what do I do with it all? And he is like immensely frustrated by any attempt that he has at philanthropy, which has to be why he basically says, That's a Susie problem. She'll figure it out and set it up when I'm done. His frustrations largely come from the fact that He does have things that he really cares about.

1:14:34 And that he cares about promoting. I think he's very worried about an impending human societal problem of overpopulation, which interestingly enough didn't uh end up happening. That the world has sort of slowed and I believe maybe even stopped the global population growth. He was very worried about not only are we going to use up all the energy on earth, but are we going to use up all the food and will famine be an issue? And so he had tried to give to various charities over the years. But he was so obsessed with performance and metrics and that kind of money was a scoreboard that when he would give it

1:15:07 And he couldn't sort of understand the investment return. He wasn't privy to the investment return. He couldn't sort of choose the investment manager. that it really wasn't used to compound in the way that he was used to his investments compounding in a way that you could sort of see a dollar return on that it was just uh immensely frustrating. And and he'd really thrown his hands up in the air and and kind of just Donated here and there, but had a big fortune. Yep. And I think as we chronicled in part one, like there is this element of his psychology where like He just kinda cares about the scoreboard. He just wants the money to have as big a number as possible. He doesn't want to buy stuff.

1:15:41 Giving it away, like sure, like eventually he'll do that. But like He just wants to get the number as high as possible by the day he dies. That's what he cares about. Which is c of course competing with the fact that he wants people to like him. Not only does he want to be very wealthy, he wants the world's adoration. I mean he through a festival once a year for everyone to fly in and visit. Like nowhere in securities law does it say that your shareholder meeting must be like this. That is not

1:16:07 This is a Warren Buffett creation to bring this upon himself. He wants to be a beloved sort of figure and teacher on top of being the wealthiest person on earth. And You know, you could see how those things could come to a head. Yep. So You could accuse him of not being innovative in his investment philosophies. Never accuse him of not being innovative in finding ways to get what he wants. So

1:16:31 After Susie dies, The wheels start turning. He invites Bill Gates. to join the Berkshire board.

1:16:39 Which up until this point. The board was basically a hundred percent His family and close business associates that he actually worked with, like Charlie Tom Murphy, Ron Olson from MTO.

1:16:52 Don Keo's on the board, David Gottesman from New York back in the days. Even though Gates is a close friend, I think he's the first real like outsider who Warren's never done actual business with. Purchase a business with that. Joins the board.

1:17:08 So it's like there's something something is afoot here. And then We all find out. Probably the reason why this was happening. In two thousand six

1:17:19 Warren makes What was almost Certainly the biggest Decision and perhaps the most impactful decision in philanthropic history.

1:17:28 And I totally remember when this happened. He calls press conference. And he announces that he is going to give away eighty five percent of his Berkshire stock, which is worth Thirty seven billion dollars at the time. And five sixths of it.

1:17:45 It's going to go to the Bill and Melinda Gates. Found. For them. To manage. And the other one sixth.

1:17:52 Is gonna go to his Children's foundations and uh Susan Buffett Foundation. So this is crazy. There's no Warren Buffett Foundation. He's not gonna give the money away. He's not gonna have to make any of these decisions. He offloads

1:18:04 All of it to the Gates Foundation. Which really is remarkable. It's like he he's like, Boy, it's really hard to give money away. I don't know the first thing about it. I d I don't There's a lot of infrastructure required to do this. Actually, that guy's already built the infrastructure and I very much trust him. And this is what's so amazing. Everybody is like This is like win win win for Warren. Everybody is like

1:18:25 Warren, you are the most amazing, most generous person to give this is the biggest gift in history. You have done such an amazing thing for humanity. This, of course, leads to the giving pledge that uh the Gates is in and and Warren. create in twenty ten and it becomes like the coolest thing in the world for billionaires to give their money away. Like Warren is like setting like a a status symbol here. And meanwhile, Warren is getting exactly what he wants. He never has to deal with any of this. Yeah, the one drawback for him has to be the fact that

1:18:58 The Gates Foundation legacy will long outlive Microsoft's legacy in terms of the way that people remember Bill and Melinda. Microsoft will still be a successful company fifty years from now. But I don't think people will remember it as Bill Gates' legacy.

1:19:17 The foundation, absolutely. And so with Warren, you know, it has to be for someone who is very concerned with his ego. It had to be a big trade off to not have a gigantic endowment with his name on it. Yep. I I get it. Who knows how much he planned this out, but like Him doing this and then creating the giving pledge and And driving all of the philanthropy that that does by making it like the

1:19:43 Ultimate status symbol. To give your money away. Should have called it the Buffett Giving Plood. Totally like That's, you know, gonna go down in history as like the Number of billions.

1:19:55 Tens, hundreds, I d God knows how many billions are gonna be given away because of this, like Yeah, it's pretty cool. It's pretty cool. It is pretty cool. I mean, it's amazing. It's wonderful. It's great for society. It's also like Warren must just be so pleased with himself with this. Hm. So

1:20:13 That all happens in the mid to late Two thousands. Which is an interesting turning point for Berkshire Hathaway's strategy. I mean, if you think about this period of like nineteen ninety to two thousand five, maybe extended to two thousand ten. You know, they're they're going after buying these good businesses. where the operators still care about the businesses after they sell it. That's sort of like the secret to success.

1:20:37 Leave the management in place except for Jenry, that was a bad decision. And maybe even uh Mid America energy. Well, Sokol was a good manager. He just was a little too good, as we'll see. You know, they they could do this thing where they would like underpay versus private equity. They were the better option for these companies that were, you know, anywhere from the hundreds of millions to low billions in in value. But it does get to the point pretty quickly with just the cash on hand. that the amount of money they needed to deploy just got too large and there's not enough furniture stores and family owned jewelry chains in America. To go by. Yep. And this is real. I mean, like

1:21:11 One thing that becomes clear in that is, you know, Warren keeps harping on We're so big, it's hard to move the needle. And like that's really true. Right. He has been forecasting this for twenty five years. Yeah. That's really true at this point. Like The law of gravity tying Berkshire to the S P five hundred is like There's a lot of gravity. Yeah.

1:21:31 So The giving pledge, of course, you know, it's like two thousand six when Warren makes his major gift to the Gates Foundation, but it's not until 2010 that they all launch the giving pledge. Why did it take so long?

1:21:47 I assume it took so long because not too many people wanted to give away a lot of money. in the intervening years between two thousand six And two thousand ten. Has a little thing called The financial crisis happened.

1:22:01 Dun dun dun. As discussed so many times on this show, beginnings of Airbnb and Uber and Cryptocurrency and on and on and on. What's that um Article embedded into the uh Genesis block of Bitcoin. Uh yes, it was Chancellor on brink of second bailout for banks, which allegedly is mocking the fractional reserve banking system.

1:22:27 But yes, it is a a very deep reference, uh, in the midst of the financial crisis. Indeed. Indeed. So Here's Warren. And and Charlie too. He's freshly unencumbered by

1:22:41 the weight of having to deal with his wealth. He's back in the saddle. He's Not literally unretired, but like figuratively unretired again for the third time, ready to go to work. And he entirely have seen this movie before. They were there. They were leading players in the dress rehearsal. Solomon in the early nineties. So they're like all right.

1:23:01 Well, I think we know what to do here. The whole Thing kicks off. I remember this so well. And

1:23:07 March of two thousand eight, when Bear Stearns, the storied investment bank Failed. Just like Solomon, the Problem. at Bear was, you know, nominally it failed because they had two in house hedge funds that were

1:23:21 Mortgage back security hedge funds and those, you know, had huge losses. That wasn't why it failed. It failed because Bears counterparties stopped. trusting their paper and stop being willing to trade with them and Like we saw with Solomon. you know, a huge amount of their capital base turns over

1:23:37 overnight because you're settling trades and you have counterparties on those trades, and if your counterparties no longer trust that you're good for the money, they're gonna stop trading for with you and then it all Vicious cycle comes to a Screeching. Halt. That's what happened with Bear. So

1:23:51 During the course of one week in March from March tenth through uh which was Monday through the end of the week, which would have been What I guess the Fourteenth, the Friday. So

1:24:02 Bearstern stock had started the week. Trading at Sixty three dollars a share. And By Friday.

1:24:10 Their toast. You're bankrupt. And over the weekend. The Fed engineers an asset sale. To JP Morgan for two dollars a share. So

1:24:21 The old Bear Stern's entity is completely bankrupt. the good assets, the non toxic assets. Get put into an LLC that the Government creeks. And JP Morgan buys it for two dollars a share.

1:24:34 backstoped by government money. So like if anything goes wrong, JP Morgan's not on the hook. It's it's like it's bad. Never seen anything like that. Berkshire, of course, I don't know if they got a call, if I assume Warren probably got a call from somebody about Bear Sarns that week. Decided not to save them or bail them out. But Berkshire has thirty seven billion dollars of cash.

1:24:55 sitting on its books at this point, which Today seems kinda quaint compared to Apple and Microsoft and the like, but You know, back then nobody else had that kind of cash anywhere. The only people who had that were governments. Right, I have to assume the most valuable company in the world at that point probably was an oil company when probably was in the neighborhood of two to three hundred billion dollars. Yeah, but probably didn't keep a lot of cash on their books'cause you know, you're an oilcape and operating company, you got all Yeah, tied up in capital. Oh, for sure. But just making the point that like things are

1:25:24 Almost an order of magnitude smaller at the largest company of the world level. Totally. Both things. Like the companies are smaller. And nobody's piling up cash like internet companies are today, except for Berkshire. So They have all this cash. It's a great climate to invest. But

1:25:42 One of the lessons that I think Warren entirely took away from the Solomonic debacle. was you don't necessarily wanna be like uh the major primary equity holder during a crisis in case things really go wrong. You don't want to be that guy that's called up in front of Congress. You know, you really don't. So instead of making a lot of equity investments at this time. They decide instead to pursue a different strategy. They're gonna make

1:26:10 debt and preferred equity fixed income investments in companies that need capital. Can you simplify that for us? Is it like Hey, we're gonna loan you money and if we want to, then we might exercise some warrants. Exactly. And we're gonna only loan you money at a at a very high interest rate. And Yeah, we maybe we won't make equity type returns, but we're gonna have

1:26:30 Whole bunch of downside protection. Whole bunch of downside protection and and some more and Upside. And we don't have governance over the company. Yeah, and you're not gonna call us in front of Congress. So The first one of these that they do. is in April of two thousand eight, right after the bear blow up. Mars the

1:26:49 Candy company diversified. conglomerate, one of the largest private companies in the world. announces that it is acquiring Wrigley. the chewing gum other candy manufacturer. It's like the C's candy coming back to roost here. For twenty three billion dollars

1:27:06 But it's kinda hard to get financing from banks right now. That's a lot of gum. That's a lot of gum. I don't know what else Rickley had. I think they own the Cubs and I was gonna say there's no way there's even two billion dollars of gum a year purchased. So Well you know, hey Warren started by selling gum, right? You know, buying in bulk and breaking up the packs. So Mars is gonna put up eleven billion dollars of equity for the deal. Goldman and T P Morgan.

1:27:34 are gonna do a little over five and a half billion dollars of debt. But they still got a six and a half billion dollar hole they need to fill. Well In steps, Warren and Berkshire. So they invest six and a half billion dollars

1:27:48 to fund this deal of Mars, not Burnture. Buying Wrigley. And They do it with Four point four billion dollars of

1:27:58 Debt. that Mars buys from Berkshire with an eleven point four five percent Interest rate. on the deck. That's unreal. Like Mars is a great Very stable company.

1:28:11 This must really be their only option. I remember seeing in the last couple of months that Amazon or Apple or you know, somebody priced a debt offering recently at like a Something absurd, like a zero point three percent interest rate, or something like that. Yeah, times are very different and um lots of options available for corporations. Lots of options available for capital.

1:28:35 eleven and a half percent interest rate. That is Unreal. the other two billion Berkshire invests as preferred equity. Uh with a five percent interest rate, they get some warrant coverage on it. All in they end up.

1:28:47 Realizing a fourteen percent IRR on This deal which is Pretty good,'cause there's not a lot of risk here. No. And as Warren would say, you know, people chew a lot of gum in the past, we're gonna chew a lot of gum in the future. Oh, Warren. And it uh David, it really is pretty much all gum. Like this is crazy, or at least the majority. So in two thousand seven they did over five billion in revenue. And they own, you know, juicy fruit, spear mint, double mint, big red, extra, orbit. There's some other candies. So they own like all the gum bread. They do, yeah. Exactly. There's some candies too. There's uh and but this may have been

1:29:22 after the combination with Mars, but now under the this subsidiary, under the uh Wrigley subsidiaries, there's Skittles, starburst, outoids. Gummy savers, life savers, that sort of stuff too. I'm having a heart attack just hearing all these names. But yeah, so like there's you know, as I was saying, there's a huge Arbitrage here,'cause I think this is also what um

1:29:45 The government Is bringing the bazooka out. They're slashing interest rates, they're throwing money into the sys everything that we just saw them do during Covid. They first did during the financial crisis. Is this the start of quantitative easing? This is like the bazooka of quantitative easing. So

1:30:05 You've got this crazy situation where government is making capital available for free, basically. And Berkshire can come into these situations And make capital available in fixed income, you know, guaranteed return.

1:30:21 With ten to fifteen percent yields. So why is that? Is it just that like th there's no way to get the fear of the Mars Corporation, there's no way to get your hands on that free money? I think in this case, yes. I think there's also a reputational element to this too, right? Like if people are worried, especially in the financial sector, which we'll get to in a minute, people are worried about counterparty risk and Trust and you know the effective, you know, runs on the bank in the investment bank sense. Well, bringing Brickshire and Warren in is gonna Do a lot to shore up trust here.

1:30:53 And I guess another way of saying to g get your hands on the money from cheap government. you know, cheap money from the government. That's a bailout. Yeah, that's a bailout. You don't want to be the the company that got a government bailout when others didn't. And probably doesn't help with Trust too much.

1:31:08 Yeah. So that's in April. And then Burch's fairly quiet for the next few months, and I remembered these few months in between March and September Oh like the eye of the hurricane. You know, everybody's like, Oh, it's got everything gonna be okay here Like you know, it's it's a weird moment.

1:31:24 But then of course September Rolls around. And Two thousand eight then. It's funny'cause you you have this memory of the spring.

1:31:32 This was after my freshman year of college. that spring or it was like the spring quarter, I was completely oblivious. I was getting ready to go do my first internship at Cisco. And I just remember like preparing for it and going. And there was not like a concern in my mind that like maybe my internship will get canceled or maybe these companies will go under. I do, however, remember what you're about to tell you. Like last few weeks my internship just watch it like being glued to the news and refreshing every day come September. Yeah.

1:31:59 Wow. That's so funny. Yeah, we had even though like we're so close in age, we had such different experiences just like Me being out of college and in the workforce. Yep. And sector. Like I'm just not that convinced that, you know, if you were outside of finance or if you were in tech at that point that you would have seen it that early. You would have heard the news about Bear Stearns, but it wouldn't be this sort of daily obsession. All right, whatever. You know. Yeah. Interesting. Until the fall. Until the fall. Yeah. I mean the fall was just like the nuclear bomb goes off.

1:32:26 And uh September two thousand eight, of course we're talking about Lehman. So here's a fun story. This story's great. So The Lehman Weekend. Warren is

1:32:37 Of course. On vacation. I think he's in Canada with Astrid. His by then wife. I think they were married at that point. Certainly partner they lived together in in in Omaha. Yep. So he gets The call.

1:32:50 About Lehman. And rumors have been circling that Lehman was in trouble and counterparties were starting to m not trust them and and like Warren's about to go see uh a show. Like some sort of performance in a theater. And he says.

1:33:03 Yeah. All right. Well, I gotta go see this show. Send me a fax. To the hotel.

1:33:11 That I'm staying at. With the details of exactly what's going on and exactly what you want me to do. Ha ha. Send me a fact. So great. He doesn't even have Blackberry. And he says this to Lehman Brothers? I don't know if it was a banker who was calling about I assume it was probably

1:33:27 helping out Lehman Brothers. Yeah, he knows Dick Fold, who is the CEO of Lehman. Uh it's about bailing out Lehman. Because Lehman's getting worried that like The Fed might not. They're out of here. Like This might be the end.

1:33:40 So after the show, Warren gets back to the hotel. There's no facts. So he's like, All right, well I guess they didn't Must be good. A year later, in summer two thousand nine. He's at

1:33:53 Sun Valley, of course. with little Susie. And He looks at his phone. He has like a flip phone. And uh she says, Dad, there's a text message on your phone.

1:34:04 No way. Yes. Yes. And he's like, what's a text message? Ha ha ha. Ha ha. And it's from Lehman and apparently like wires got crossed and it was asking for

1:34:18 Maybe like the fax number for the hotel or something like what hotel are you staying at or Something. Oh my God. Isn't that amazing? Uh how Warren Buffett could have saved Lehman Brothers if he was a little more tech savvy. Totally. And it's a funny story. Uh of course though, there's more to it. Like Warren could have gotten a hold of them and Leon could if everybody really wanted. But yeah. Turns out.

1:34:42 The actual story is I think that did really happen. Warren tells it in a video I think it might be a Wall Street Journal video. kind of a retrospective about the crisis. In March. Right after the Bear collapse, Dick Fold had called

1:34:55 Warren. About a capital injection then. And Warren had studied it then. It is in a Wall Street i journal video because There's this great moment he goes in his office, he brings out

1:35:07 The printed out Lehman Brothers ten K from two thousand seven that he had studied in March with all of his handwritten notes. All over it. Amazing. So he was thinking about it. He was thinking about it. He went Solomon Brothers once, he could have done it again. He was thinking about it, but he decided there was too much risk. And maybe he's probably a little gun shy from Solomon Brothers, so

1:35:26 He didn't invest in Martin. Like he he wasn't. And I think he says he w he wasn't gonna do it again anyway in September. So On September fifteenth, of course, famously. Lehman Brothers declares bankruptcy, goes under.

1:35:38 Of course everybody remembers Lehman and talks about Lehman. People forget that AIG also had a crisis that weekend. The Fed ultimately did bail out AIG and not Lehman. Warren got a call about AID too he He passed on.

1:35:53 A I G so He did not invest. Yeah. Those financial firms in September two thousand eight.

1:36:00 However, he did get two other calls. That he was slightly more Receptive to the Specifically. Goldman Sachs.

1:36:08 And G E You wouldn't think of GE as a financial firm, but they had GE capital. Which is a large. very active financial player and they were in

1:36:19 Trouble. Did you know that GE's Consumer facing savings bank. was sold to Goldman Sachs. This is like Maybe seven, eight years ago.

1:36:29 And Goldman Sachs rebranded it in a sloppy rebrand, just kind of a quick one, uh G S bank. And it sat as GS bank for like two or three years, and then that became the underpinnings of Marcus. Oh, no way. I did not know that. That was originally a GE financial product. No way. And they're both Warren Buffett bailouts. Two thousand eight swoop ups. The

1:36:54 Very next week after the Lehman bankruptcy, Goldman must have called. Probably during that weekend too or sh or shortly thereafter. Berkshire invests. five billion dollars for preferred equity in Goldman.

1:37:08 with a ten percent annual dividend. So essentially this is you know, it's like It's like dead. It's not preferred equity, like preferred equity that you would get investing in a startup. It's um A more debt like instrument.

1:37:21 So ten percent coupon. The Solomon. Mm-hmm. Coupon I think was only nine percent. So Man, this is worse in Goldman.

1:37:31 With a call option for Goldman to call the preferred equity back. for five and a half billion dollars. Plus Berkshire got another five billion dollars of common stock warrants at A strike price of one hundred and fifteen.

1:37:46 Dollars a share. Those warrants end up becoming Uh they got renegotiated I think once with Goldman, but become quite Of course they did. It's Goldman. All told.

1:37:56 On that deal. Berkshire ends up making about three billion dollars. So they get about eight billion dollars. back on the five billion dollars that they invested in Goldman. Pretty good for fixed income. That happens within like two years.

1:38:12 And how long did that last? Did they end up completely out of Goldman shortly thereafter? Equity that they exercised from the warrants for a while. But they don't end up making too much more than the eight billion dollars. So still good deal. Uh G E Went slightly less well the week after Goldman on October first.

1:38:33 Berkshire invests three billion dollars in GE for basically the same deal. Ten percent coupon warrants to buy three billion dollars of common stock at twenty two dollars a share. Unfortunately, unlike Goldman who's stock as of today is trading at three hundred and sixty four dollars a share.

1:38:52 versus the one fifteen strike price that For sure. Got. GE the strike price was twenty two dollars and Twenty five cents.

1:39:00 Gee, it did briefly, very, very briefly trade above that mark in twenty sixteen. But it's share price today. It's thirteen dollars. Oof. Yeah, not so good.

1:39:13 That was not the last deal that Berkshire would do with GE. Do you know about the twenty fifteen thing? Oh no, I don't. They bought some rail cars from GE, which uh I I think is now viewed as sort of a mistake in retrospect. Interesting. Like actual rail cars or a rail car manufacturing business? I think actual rail cars. It was like a fleet like uh uh managed by GE so there's like a business umbrella associated with it.

1:39:39 Huh. But I it was uh let's see, yeah, the the subsidiary of Berkshire was Marmon Holdings Inc. And they acquired these these assets. You know, it's all the GE Railcar Services Fleet. Boom. Wow. Yeah, I think for a billion dollars.

1:39:55 Wow. Small world. So all told in Two thousand eight, during the crisis.

1:40:03 Berkshire would deploy about eighteen billion dollars of the thirty seven billion dollars of cash that it had on hand. The six and a half into Wrigley. Five into Goldman, three into GE.

1:40:17 Two point seven billion into Swiss re Jenry's major Competitor which was Interesting. Hey, Warren will make money. That was at a twelve percent coupon rate. Not bad.

1:40:29 This is my personal favorite. three hundred million dollar loan to Harley Davidson. A fifteen percent interest rate. Wow. Dang. Two hundred and fifty million to Tiffany's at ten percent.

1:40:43 And a hundred and fifty million into sealed air at twelve percent. I don't know what that was. That was like a Airline or like air manufacturing? I don't know. Something. Well, so this is I mean, honestly, since like ninety five

1:40:57 when they bought the second half of Geiko. This is probably one of the top two moves. All the shopping spree that they do in the fall out of two thousand eight and buying Apple. Which we'll I'm sure we'll talk about next. Oh well, we will get to that. But I mean truly, like what else has been this sort of like big win in the last twenty five years. Nothing.

1:41:19 And and just in terms of capital deployment, this is the most Capital that Berkshire has deployed since you know if you could call The Gen R Deal capital deployment even though it was all with

1:41:30 With stock. But this is legitimately like this is a very impressive move. I mean, this is your classic buffet. Like I'm gonna wait until prices are rational again and I'm gonna do all my research and then I'm gonna be so prepared that when the moment presents itself, I can act in mere minutes. And that he did. No. Here's some interesting stuff about this.

1:41:51 So All of these deals, the eighteen billion dollars deployed in two thousand eight Actually the net returns at the end of the day That Berkshire gets back from that capital. Turns out to be about twenty five billion dollars.

1:42:06 So You you are right, Ben. But From the actual two thousand eight investing. It's like that's good. And it's and he you d he didn't lose money on any of this stuff during two thousand eight. So like rule number one, don't lose money. This is all fixed income. Right. If this were a venture fund, you'd say, Boy, for the vintage, he's top one percent. Right, right, right. Exactly. Exactly.

1:42:25 So good, but this is not like Amazing. But There's a coda to this. And would you say sixteen deployed to get twenty five back? Eighteen deployed to get twenty five back.

1:42:37 Over what time period? Uh probably all told five years, maybe less. It's like yeah, pr pretty good. Pretty good. Yeah. But Warren. Gets one.

1:42:49 Last bite at the apple. Not not that apple. Different. At the financial crisis apple. in twenty eleven. Which dwarfs all of this. Which is

1:43:02 Amazingly, I thought that this happened in two thousand eight, but no, it was in twenty eleven. Bank of America. Well yeah, how have we not talked about them yet? It was not two thousand eight, it was twenty eleven. Bank of America gets caught up in that, uh, remember the Euro debt crisis?

1:43:18 That happened in twenty eleven and everybody's like, Oh no, financial crisis again and at least in the US it it ended up not being a big thing. I don't know how Bank of America got caught up in this. But they did. Berkshire stepped in.

1:43:30 Did the playbook. Five billion dollars of preferred equity with a five percent. You ban on it. So Not as much as the ten percent that they got from Goldman.

1:43:39 But they got warrant coverage. To buy five billion dollars of common stock in Bank of America. at a seven dollar and fourteen cent. Strike price.

1:43:50 Today Bank of America is trading at a forty two. Dollar. Stuck. Praise. It's a cool six X.

1:43:55 Cool six. X. Are they still B of A shareholders? Still B of A shareholders. They All in to date.

1:44:04 Berkshire has made About twenty six billion Dollars in profits. On the B of A deal. Way more than

1:44:13 Wow. The seven billion dollars that they made from everything else. During the financial crisis combined. And I think More than

1:44:22 Significantly more. than any other investment that Warren made in his entire career up to that Point. Ah has to be. I mean they're playing with so many bigger dollars at this point that

1:44:36 Okay, so let's call this three great moves then. You're you're Pretty good ones from the financial crisis. You're buying of Apple and of course then the B of A one, which There's no way he's done anything more uh better than this on a absolute dollar magnitude to this point. I'm I'm sure on you know r return on inf invested capital for sure. But this B of A deal is a grand slam.

1:44:57 And a very important Grand Slam because we mentioned Wells Fargo. Right around this time. Well Spargo is literally driving into the ditch with All of their scandals. Break just started buying Wells Fargo in nineteen eighty nine, so I don't think they ultimately lost money on it, but like

1:45:14 They had big gains and then those gains evaporated. Right. It's like buying uh yeah, you start buying Bitcoin around like fifteen K. Then uh and and you keep buying all the way up through sixty, then you're probably about break even. Like your your Kinda feels like that. Yeah. Interesting, you know, Warren is now in his eighties at this point. And uh

1:45:36 Yeah, fifteen years ago he got the question, When are you gonna retire? To which he always responds what, like about five years after I'm dead. Five years after I die. Yep, that's his line. So To be frank though, like this is his last hurrah. Like uh

1:45:51 If you include B of A. Yeah, which was a grand slam great investment. This is it. He's done after this. In practice, although he doesn't know it. Starting in two thousand nine, right after the financial crisis.

1:46:04 That's when they changed the format of the annual meetings where it's no longer people approaching the microphone. It's Becky Quick and Andrew Rossarkin, you know, a asking the journalists, asking the questions and moderating. He starts getting hammered, he and Charlie, on just like what is the succession plan? What are you doing? Like you are eighty years old. How many more of these wild rives can you? Go on. And you know, he gives his trademark sort of like evasive answers. He says that uh the most important qualification for his successor as CEO is running a large operating business experience doing that.

1:46:40 Right,'cause Warren has so much experience running a large operating business. But The one part of the plan that does make a ton of sense is that He says he's gonna split up. his job into the

1:46:53 CEO. business side, that's gonna be handled separately from the investing side. Which will be run by one or more. chief investment officers after he is no longer in charge. And to put a finer point on that, there's someone who, you know, is going to manage the equities portfolio, the stocks that they own where they don't own the business, and then the stuff that they actually do own a hundred percent. Yep.

1:47:15 And this is something that they'd actually been laying the groundwork for for a long time. I I vaguely knew remembered this, but going back and studying this This is amazing. So all the way back in two thousand six in the annual report. Warren and Charlie had been talking about this.

1:47:29 And They come up with this idea. Like, well. What if we just put an open call for candidates? In the annual report. No way. So in

1:47:40 Thousand six A No Report. He introduced this idea. Warren writes. Quote. I int to hire a younger man or a woman.

1:47:48 with the potential to manage a very large portfolio. who we hope will succeed me as Berkshire's chief investment officer. when the need for someone to do that arises. So this is for the equities portfolio. This is for the equities portfolio. As part of the selection process, we may in fact take on several candidates. So this is going on. And uh I think shareholders knew this, but people had forgotten by 2009, that was three years ago, the financial crisis happened, there's no progress, nobody's been hired.

1:48:19 Finally then. In twenty ten. They make a hire. A surprising Higher.

1:48:27 Thirty nine year old. Todd Coombs. Yeah. Completely and totally unknown manager Of a small hedge fund based in Connecticut.

1:48:38 called Castle Point Capital. And Todd had started his career working for the state of Florida's Bank regulator. And then gone on to work at

1:48:49 Progressive insurance, Geico's big competitor before becoming a hedge fund manager. And here's the thing, like, you know Like uh uh this was a good hire. But he ran Castle Point, his hedge fund, for five years. During which time?

1:49:06 He asked. Cumulative returns. Of thirty four percent. Not annual. Not IRR.

1:49:13 Whoa. Thirty four percent total. This is not like uh how long have you been investing? Five years. Huh. This is not like a uh incredibly distinguished track record here. Buffett did Almost that well every year for twelve years in the Buffett partnerships. Yes.

1:49:29 So everybody's a little puzzled. And the plot. Thickens a little more. So The Wall Street Journal

1:49:38 I think Todd's hiring was announced in like August or September, I wanna say. Sometime towards the Later part of the year. In July.

1:49:47 The Wall Street Journal ran a front. Page. Peace. Saying that the search for Warren Buffett's

1:49:55 Successor. Was almost done. And They had the candidate. They knew who it was.

1:50:02 David, when you sent me this article, I've out lost it. This is crazy. I had never heard of this. Me neither. I can't believe I didn't see this when it happened. Unbelievably. The candidate the chosen candidate that the Wall Street Journal reported on Was Li Lu.

1:50:19 Who has an amazing story himself. Grew up in China was part of the Tanyman Square protests. Emigrated to the US

1:50:29 And Eventually gets into investing. had an incredible track record, has an incredible track record, founded Himalaya Capital. Mostly invested in China. And became close friends with Charlie Munger. He introduced Charlie to the BYD investment, which is how that happened.

1:50:46 For sure. And if you're wondering, hey, this name doesn't sound super familiar, I I didn't know he he worked at Berkshire. That's because he never did. He never. Did and this is unbelievable. Even at the beginning of the article, front page Wall Street Journal. They get the money quote.

1:51:02 From Charlie. Charlie is quoted as saying it is a quote forgone conclusion. That Lee would join. For sure.

1:51:12 And they even have a picture with him. Like there's a picture of Buffett with Yeah, it's crazy. Totally. Totally. Crazy.

1:51:21 So what happened? Like how did this blow up? The world may never know exactly. But the Scuttle butt is That

1:51:30 It all came down to comp to compensation. And the thing is, you know, Lee was And is incredibly successful on his own, running his own fund. Where He's keeping two and twenty, you know, two percent management fees and twenty percent of the profits. And

1:51:45 Yes, it would be like this amazing honor to go work at Berkshire to be Buffett's successor, but kinda like Warren back in the day with the Graham Newman partnership. Where they offered him the keys. And he was like Wait.

1:52:00 Why would I run your firm where you're keeping A piece of it I'll just go do my own thing and I'll keep all the profits. I think that's what happened with Lee. So

1:52:10 He didn't join, he still runs him al I it's been incredibly successful. By all accounts still has a warm relationship with Charlie and and Warren. But yeah, that threw a wretch in the process, I think. I'll bet.

1:52:21 And I did read about what the investment managers and we'll get to the second one here in a minute. how they're compensated. And Warren does kind of let it slip in an interview that they basically are compensated for their performance above the S P every year. And there's some kind of like three year characteristic to it where they're they're paid on a three year basis and there's an opportunity for Basically Burkshire to have a clawback if they underperform in in the sort of latter years of the three year rolling basis. Yeah.

1:52:49 So you can see for somebody like Lee or This is total speculation and rumors that is online. It's never been confirmed one way or the other, but Supposedly the other Canada. According to rumors was David Einhorn.

1:53:02 From uh is it Greenlight Capital, I think. The famous hedge fund manager. But for folks like that, like It's not a attractive value proposition, really, to go work at Berkshire. But for Todd, who's running a small like a hundred million dollar

1:53:18 Edge fund. Right. This is The chance of a lifetime. When this interview came out, I don't know, a few years ago, maybe more the capital pool for each investment manager is thirteen billion dollars. So like Even on its own. It's a very large hedge fund. Uh even your little sliver that you're managing. Yep.

1:53:35 So huge opportunity for Todd. He joins at the end of twenty ten. It turns out though that Warren and Charlie didn't know it at the time, but they weren't actually done hiring. They were going to bring on as they referenced in two thousand six. They were going to bring on several.

1:53:51 Candidates. You know how we talked about on the uh we haven't talked about on this series yet, but we talked about this on the Pin Duo Duo episode that Warren does these annual charity lunches that he auctions off. Yeah. Uh and they actually the auctions actually happen on eBay, which is amazing. That's awesome. And I didn't realize uh the charity is the Glide Memorial Church here in San Francisco. Great. Great organization. Been involved in. many great things over the years.

1:54:15 In twenty ten, the same year where this is all going down. An anonymous bidder pays a record Two point six million dollars. For lunch. With

1:54:25 Warren. And The next year, in twenty eleven It turns out it's announced that the same bidder Paid two point six million dollars.

1:54:35 Again. So One person is paid five point two million dollars for two lunches with warrant. Ted gets the job because he Paid for

1:54:46 lunches with him twice. Yes. Millions of dollars. Yes. Five point two million dollars. For a job in God. Uh yes, listeners, of course we are talking about Ted. Ted Wetzler. The other investment manager at Berkshire today.

1:55:04 Was Before Berkshire running a Fairly large, a two billion dollar hedge fund called Peninsula Capital Advisors. Uh that he'd been running for twelve years. He'd been immensely successful.

1:55:15 Over those twelve He had over twelve X to The capital. In the fun. So Done very, very well.

1:55:24 Ran a Concentrated portfolio. His top holdings were like Davida and Direct TV. And he for two years in a row buys to lunch with Warren and he impresses Warren so much in these lunches that they agree to deal. To bring Ted on.

1:55:40 That's crazy. Isn't that crazy? And so the wheels have to start turning at this point for listeners out there, like Okay, so Ben, you said they're each running thirteen billion dollars. Do they get to run their own hedge funds? This is something that I don't think we totally know what the decision making process is. You know, how how much are they there to execute the

1:56:00 sort of Buffett and Munger style versus how much are they there to say Look, we we have a risk profile that we're comfortable with. Here's how we've been doing it. Go to town. Yeah. I think the answer is it's somewhere in between in terms of how much autonomy Todd and Ted have versus

1:56:19 Warren and Charlie. So It turns out. In twenty eleven, the same year as Ted Joins.

1:56:28 There's a little bit of a scandal. Remember we told you to remember the name David Sokel. Well, in twenty eleven, Berkshire acquires, fully acquires, a chemical company named Lubrazol. For nine billion dollars. It turns out that the person that first got interested in acquiring said Librasal.

1:56:52 Company was David Soko. Ten running. The energy business within Berkshire Hathaway. And everybody widely assumed, and Buffett had basically implied that

1:57:03 The name on the envelope to be. The CEO of The business of that side when Warren stepped down. Was David.

1:57:11 Like it was his job. To lose. Well, it turns out that for some Literally unfathomable reason,'cause it's not like he needed the money. I would assume.

1:57:23 David front ran the trade. With the acquisition of Lubersall. So it was a publicly traded company before? It was a publicly traded company before Berks required it. He personally bought in the company. And then

1:57:36 suggested to Warren that Warren look into buying The company as a whole. Okay, that in and of itself isn't that bad. It's like oh hey, like I'm personally investing in this company, I think it's great. The problem was that after They started negotiating.

1:57:51 To buy the company. And David, I think, was involved in the negotiations. He kept buying knowing that this was going on. Definitely. Oh no no. Yeah, he he didn't end up being prosecuted or going to jail or anything, but

1:58:05 Once all this comes out, Buffett fires him. Or he leaves Berkshire and you know, Buffett makes statements that he can't believe that this happened and he Can't understand why David did it. So that leaves The new

1:58:18 name in the envelope, so to speak, as David's former number two, now number one in the energy business. Craig Abel. Who also came over in the Mid America energy acquisition. And as we now know, Greg is indeed going to be the next. CO Breaksha Hathaway.

1:58:34 So we've got the chess pieces here. We now know Ajeet's name for insurance. We know Greg's name. uh as sort of the non insurance businesses. He's gonna be the CEO. And we've got Ted and Todd each managing their pool of money, probably close to twenty billion dollars now each. Yep. On the public equity side. Warren has said I think when they started It was about one billion each that they were managing. And then kinda as they proved themselves, he gave them More rope.

1:59:00 But in the early days here. Warren is still managing. We know with t we're talking to Charlie, but really Warren is still managing Most of the Investing for Berkshire. And uh to be honest, he should have just given it to Ted and Todd right away.'Cause he does a

1:59:14 Pretty. Terrible job. Like we can't. Mint words here. In retrospect these years between twenty eleven and twenty sixteen.

1:59:24 I think we're probably Some of the worst decisions that Buffett ever made. And worst terrors of his career. He has admitted publicly, I mean not not necessarily

1:59:35 the way that you just phrased it, but he definitely has admitted publicly that Ted and Todd outperformed him. Yeah. That they did. I think he made that comment.

1:59:45 in twenty nineteen. He said, Yeah, they they both beat the S P by a little bit. But They've smoked me. They definitely smoked him. So in November twenty eleven twenty eleven was a weird year for Warren. Z lubrazals purchase. Yeah.

2:00:01 You know, hiring Ted, which is great, but because of the charity launches, like it's just weird. So In November twenty eleven. For some God knows why I reason.

2:00:12 Warren finally pulls the trigger on the trade that he has been itching to make for thirty years. He puts Ten point seven billion dollars into IBM. In twenty eleven. Let's just take a quick refresher here. Twenty eleven. Four years after the app store. He's launched.

2:00:32 Yeah. Seven years after Facebook is launched. Yep. Like the this is not like way back in time when it might have made sense. Three years after the famous Jeff Bezos. Talk at start up school.

2:00:47 About AWS. AWS is already a thing. That is the default for startups. It has been for years to go and be the cloud provider. So What on earth? What kind of thesis does he have on IBM? Well, here's his thesis. He said this is what he says publicly. He says he has been, quote, hit between the eyes. by how great IBM is and how strong and defensible its client relationships are. Mm. Brutal.

2:01:15 Okay, Boomer. If this is the first technology investment that Warren Buffett is gonna make, maybe it's a good thing he didn't make any technology investments. Maybe it's half a century too late. Yeah, seriously. He holds this thing until twenty eighteen when he finally sells it. All told he loses two billion dollars uh in total, sells it for Like a

2:01:36 A little over eight billion dollars. Oh, but just like the the opportunity cost of ten billion dollars of capital in twenty eleven, you put that into IBM, my God. I mean think about if you bought any other big tech company. Any just pick one. Don't even end just pick one. You would have done great. Warren, go back to the monkey throwing the darts. Then in twenty thirteen, he partners with the private equity firm 3G Capital to take craft private.

2:02:03 And then merge it with Heinz. Warren, you're partnering with a private equity firm? Like they're your enemy. You d you know what they do, right? Like Uh anyway. Brickshire puts ten billion dollars into

2:02:18 That Yeah. their equity stake in Kraft Heinz today is worth about eleven billion dollars. So you know, they haven't lost money, but like again, opportunity cost of capital here. That was twenty thirteen.

2:02:31 Anyway. Twenty fifteen. Berkshire acquires the aircraft parts manufacturer precision cast parts for thirty seven billion dollars. in Berkshire's largest deal.

2:02:45 Every yeah. Bigger even oh, we skipped over the railroad in two thousand nine they bought they finally they bought the railroad. Good for it. That was a good deal. That was Yep. That has done well for Berkshire. The Warren Buffett from two thousand eight to twenty eleven.

2:02:59 He was good. He was good in those years. But precision cast parts, man. Bought it for thirty seven billion dollars. Last year they took a ten billion dollar write down on that deal. So that's a dog.

2:03:14 Oh my God, in twenty sixteen. He starts investing in the airlines. This is the man who said that he was gonna shoot down. Orville and Wilbur. Uh, what was he thinking?

2:03:26 Well the interesting thing is so he sold the airlines in a panic sale right when the pandemic dip started. And we all know, of course, there was about five days where you could actually buy the dip before it came skyrocketing back. And somehow we didn't endure a a real market crash in this global pandemic'cause uh monetary policy. Anyway, Jerome Powell. Yeah. Buffet basically sells at the bottom. with these airlines. And it's interesting because I don't fault him for the sale. It is a very reasonable thing to sell the airlines then because if the government didn't bail them out,

2:04:00 They could have all gone to zero. I mean the government was paying some airlines payroll. to sort of make it through that period. So I don't even though he sold it, I think right around the worst the the the bottom. I blame the bye. Yeah, if he knew that he even had a comment years before that He had sort of like a

2:04:20 Is it like a romantic fascination or like a dirty habit about the about owning airlines or something like that? Like he knew and he still did it. It's like the he can't have newspapers anymore, so he wants the airlines. Now, okay, to be fair to Warren Again the scuttle butt here is and there's some comments to this effect. That it actually was, I think, Ted who first got interested in the airlines and they talked about it. You know, and then Warren So, okay, you know, it's just kinda funny to me. You can't not make fun of Warren for this one, like

2:04:51 Right. It's it's bad. You can chalk this up to you should have known better. IBM precision cast bars like dude, those were those are bad. Those are bad. Well and honestly, in this same time period, like J and J wasn't great. The two thousand eight investment he did there. Yep. The rail cars that I mentioned was around twenty fifteen, not that great. Not great. Well, and those are all the sins of commission, not to mention the sins of omission of

2:05:15 Google, woj, Facebook, Wh, Amazon, Wh. And on top of all this, like You own Amex. You understand Amex. You understand the brilliance behind what became the credit card interchange business. And you let A two thousand and six IPO by MasterCard and a two thousand and eight IPO by Visa.

2:05:36 Go right by you. These are crazy old companies that have been locked up inside the bank, you know. federations or w however they were owned before, they're finally available for the public to buy. These stocks have gone cr like these were cr criminally undervalued uh uh initial issuances and Buffett just watches him go right by, knowing the MX business. It's crazy. That's such a good point. I hadn't thought about that, but like Yes, you're right to be allocating all this capital to these just dog businesses.

2:06:05 When Visa and MasterCard, put the tech companies aside are just sitting there. Oh. Brutal. Okay, so we're we're we're hammering on Warren here, rightly so. But

2:06:15 There is one Shining, saving. All since Absolving. Addition.

2:06:24 Divirture portfolio. During this time. That's right. We are talking about the very same company that was Sequoia Capital's worst mistake ever by selling before the IPO. Berkeshire.

2:06:38 And Warren uh redeems Everything. By buying. Apple. Think.

2:06:45 Amazing. Amazing. The the story Okay, so here's the story. In May of twenty sixteen, as Warren puts it in the quote. Quote one of the fellows who manage money. A K eight. Ted. Yep. It it's never been said whether it was Todd or Ted, but I

2:07:00 I think it was Ted here,'cause Todd really focuses on financial stocks and Ted does. Everything else. As Warren puts it. had uh put some money into Apple and indeed

2:07:12 had put about a billion dollars, let's assume it was Ted. Into the Apple shares in May of twenty sixteen. That goes well. And

2:07:22 Amazingly. Ted, Todd, whomever. Manages to convince Warren that this is a good idea. I guess, you know, he's broken the seal with investing in IBM in technology stocks. And he convinces Warren that they should

2:07:36 Really back up the truck here. in Apple. So over The next two years. Burkshire Hathaway would ultimately put thirty six

2:07:46 Billion dollars to work. buying Apple stock just under the total price that they paid for Precision cast parts. Which was the largest acquisition in Berkshire's. History. To say it goes phenomenally well.

2:07:59 That is the understatement of the century. Yeah. This Is Unreal. And I'm sure there's lots of people out there who have been Apple shareholders from twenty sixteen and to twenty twenty one. So, you know, your brokerage accounts know what we're talking about here. And yeah, lots of people doing this. Not a lot of people doing this with thirty six billion dollars in initial principle. As of the annual report.

2:08:24 Of last year. See Market value of Berkshire shares in Apple is worth one hundred and twenty billion dollars. That is eighty nine billion dollars of gains in five. Years.

2:08:40 So I think I think. I can't figure this out exactly, but I think That is either more or close to more. absolute dollar returns than the entire rest of Warren Buffett's career. Investing.

2:08:55 Even including the partnerships. Whoa Let's just say that again. More or close to more dollar returns than the entire rest of Warren Buffett's career. That has come in the last

2:09:09 Five years. With one stock. I mean There's two angles to this. One, the irony is just dripping. Dripping. We're in no tech stocks buffet.

2:09:20 an Apple is approximately fifty percent of the dollars ever returned. Yep. The other side of it. is interesting. 'Cause it basically is just a math problem. Yeah. Like of course the last five years of something that's been compounding four Seventy years.

2:09:38 Fifty uh sixty five years. Of course the uh dramatic amount of the value is gonna show up in the last five, whatever you're investing in, assuming that you're continuing to find a reasonable rate of return, because that's how compounding works. But Holy Crap. Yeah.

2:09:55 The position was initiated when the man was eighty six years old. And from some conversations I had when Ted brought it up and sold Warren on the idea. The angle was not that it was a technology company, but more in spite of the fact that it was a technology company. We we gotta talk about this. Yeah, the biggest piece of uh positioning from what I've heard is that it's a consumer product with a powerful brand name. very low propensity for people to switch. There's sort of high lock-in. There's a strong moat there.

2:10:27 And in fact, it may even be the most valuable brand in the world. Now that we've planted that seed, I would like to go and Once again, read the quote from the nineteen ninety five annual meeting. What we're trying to find is a business that for one reason or another It can be because of the low cost producer in some area. It can be because it has a natural franchise because of

2:10:51 Surface capabilities. It could be because of its position in the consumer's mind. It can be because of a technological advantage. Oh, he's it at all. Interesting. Then it has this mode around it. I don't think that there is any better description of why you would want to buy and hold Apple than that exact quote from him.

2:11:12 Twenty one years before. So great. Here's the thing. This is all nitpicking because like at the end of the day, like investing, it doesn't matter. You know, I played baseball growing up and my dad used to say to me, If you're listening, hi dad.

2:11:26 When I'm learning, you know, who was learning mechanics of how to swing properly. I love this quote. He used to say, look If you could hit three hundred in the big leagues Nobody would care if you stood on your head when you swung. All that matters is you hit three hundred. But until you learn how to hit three hundred, you know, you should probably do it the right way. In investing, it's the same way. Like nobody cares what your thesis is, nobody cares if you're a right or wrong. Nobody cares why you bought the stock. At the end of the day, you just want to be in a position to be right.

2:11:52 And Warren got himself in a position to be right. That said, I don't think he understands anything about how Apple works or what it does or like why all of this works. You know, he he says he has a quote at the two thousand eighteen annual meeting. He says I didn't go into Apple Because it was a tech stock.

2:12:11 I don't think that it required me to take apart an iPhone or something and figure out what all the components were or anything. I think it's much more the nature of consumer behavior. Oh yeah, he's in it for the M1. He's really impressed by the uh the architecture. He feels that this sort of uh strategy is the right one. Oh how funny is that. Uh yeah. At the end of the day though, like it doesn't matter. It doesn't matter, that it was Ted's idea.

2:12:42 It doesn't matter that Warren hated technology stocks. All that matters is that he was in a position to be right. And eighty nine billion dollars of gains later, here we are. Yeah, that has to be up there with the single greatest investment return in history in in terms of absolute dollars. I think it is. I think the

2:13:01 Let's see, Nasper's Nasper's Tencent and the South Bank Alibaba investments I think are still better. But like we're splitting hairs here. Well, they they bought those companies in the first five years of their life. remarkably Warren and Ted achieved this performance by buying Apple Thirty five years into its life?

2:13:23 Yeah. Ha ha. That just says a lot about how uh No, forty five years into its life. The fang stocks in the last few years. Wow.

2:13:32 It does. Okay, so that is the big beat that we're gonna end on, but let's bring it all home. January of twenty eighteen, Berkshire officially appoints Greg and a G two vice chairman roles in the company. Greg for

2:13:47 Vice Chairman of non insurance businesses at G four. Insurance businesses The pandemic of course happens in March of twenty twenty. Warren, you know, preaches his faith in America, but he dumps the airlines at the bottom. Which, you know, I I agree with you, I th that's fine. Berkshire mostly misses out on the enormous bull run that

2:14:05 Happens when Jerome Powell and the Fed and Janet Yellen and Jacked. Literally more money than God into the economy. Warren and Charlie continue to say that they think that crypto is rat poison squared. But as far as I can tell.

2:14:20 At least I don't think they've made any attempt to actually study or understand what Bitcoin or Ethereum or any of crypto actually is And then The Kicker the big moment that we all

2:14:34 If not Saw. heard about the day after. Hilarious slip. Hilarious slip at the twenty twenty one annual meeting where Charlie. Let's it slip that shocker Gregel is the name in the envelope.

2:14:48 This clip is so funny for we'll we'll link to it in the show notes, but it's Warren and Charlie are like on stage sort of bickering about Berkshire's culture and about uh preserving the culture, and Charlie just goes Uh Greg will preserve the culture. Yep. And then the look on Warren's face is priceless. Damn it, Charlie. Hopefully we've point it out in the now like

2:15:17 God, what ten hours we've been doing this series. Nine, David. Don't get ridiculous. The um So we say dichotomy between how Warren is perceived and wants to be perceived and how He actually is.

2:15:31 And you know he's got that line about Charlie and I have never had an argument You know, it's like Yeah Bullshit, you've never had an argument. I bet you had one after that. Uh but uh But yeah, of course they still love each other and Greg will be the CEO. Of Breakshire Hathaway. We should say too that a thing that's been happening quietly, sort of in the background, well two things. You know, Ted and Todd have been running their portfolios in a very different way than Warren has over the years.

2:15:57 So I think Todd and I don't know this for sure, but Was really buying Amazon, Snowflake, I mean some of these these tech stocks. Um other than Apple.

2:16:10 So you sort of have a non warrant approved strategy going on there. Especially, you know, the Snowflake deal buying those sort of pre IPO shares and you know benefiting from that pop is very interesting. And then also stock buybacks. It's very clear that what's happening is that they don't see a better opportunity out there in the market to deploy capital.

2:16:29 than the businesses they already own. And so they'd rather just take everybody's shares and concentrate their positions in the existing Berkshire portfolio. And I thought Blumstrom m had a great quote in uh in the Semper Augustus investments group letter that he writes that is Epic. It is a full analysis of the accounting practices and valuation model for Berkshire. And he has this great quote. As long as capital markets remain overvalued and private investors flush with cash persist in investing at low yields.

2:17:01 Share repurchases are a magnificent capital. And it really is such a good point that like uh y you pick your head up, you look around, everything's got a sky high multiple on it. And you know Berkshire shares at least the way that Warren sees it.

2:17:15 Don't yeah. They don't. Now It's a little bit tricky to sort of think about it this way because the quote unquote intrinsic value of their equities holdings

2:17:26 are marked to market. So, you know, whatever if if you say, Oh gosh, Berkshire is not trading at a A crazy valuation. Well I mean a big portion of

2:17:36 What they hold is publicly traded equities that are at a higher than ever multiple, however you want to mention it. So i there is sort of this interesting thing where by doing stock buybacks, sure, they're not buying into any new companies that have crazy valuations, but they are buying more of the companies they already own at market prices.

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2:19:33 Who's managing them all? So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely, at scale. Go check out service now dot com slash acquired and tell'em that Ben and David sent you. Alright, David, I wrote up a little like barren bull case. So the as as we start to translate a little bit to like There is a playbook that we should enter here, but like Now that we're sitting in present day, why don't we reflect a little bit on on sort of present day and and in the future.

2:20:00 Well one bull case that I don't think we've really talked about is a a lot of people sort of think, oh, Berkshire's toast when when you know Buffett retires and I don't think he's gonna retire, so passes away. And the stock's gonna plummet and the performance is gonna go away. I think if you've been listening to our episode

2:20:19 You probably don't think that you might think the opposite. Right. So the bull case is like They actually could do better under Greg. Like they might be less conservative. they could run the business by keeping less cash on hand, which is of course a drag on returns. And frankly, like

2:20:36 There's an argument that Warren has gotten really gun shy. in buying stuff after a lot of the sort of sins of omission and commission that we mentioned above that It's not clear that he sort of trusts his instinct in this environment. R uh the only thing that he clearly trusts is to just do the stuff that has worked in the past. And

2:20:54 I'm not sure that's well suited for this environment. No. So And not to mention Tot and tetter Pretty good. No matter what else they've done, they did Apple. So like that everything else are rounding error. And and especially when they're only managing forty billion between'em. I mean

2:21:09 That what did she say, eighty five billion dollar gain or something like that? Eighty nine. Unbelievable. So There's certainly that element. J like

2:21:21 One more. Piece of context on that. That's a whole zoom of games. Like literally. Created a Zoom.

2:21:30 Market cap worth of Games. It's totally wild. Now the flip side, uh the the sort of bear case is Look, Warren has been successful in a lot of environments.

2:21:41 And the the thing you kinda should cheerlead about Warren Buffett is that He's reasonably consistent. Someone will always be outperforming him, but he has created this incredible rate of compounding for Over half a century. So

2:21:57 Well, I think the case that David and I have been making to you here for this whole episode is that the internet changed things so fundamentally that his style doesn't really work anymore, and that you do have to make bets based on the earth changing underneath you rather than just the earth staying the same and businesses being well run. the bear case on Berkshire would be it actually is the opposite. At some point the buffet way of investing, world changing or not. will actually be great. And we're just in sort of a season right now.

2:22:29 That is is just making him look foolish. And yeah, maybe it's been 10 or 15 years. of largely largely foolish decisions, but but may you know so I'm not sure this is where I come down, but that would be sort of the future bear case on um if Berkshire changes too much from the long time tested Buffett strategy.

2:22:50 I would also add another part to the bear case, which is um Warranted or not. Right or not, or whatever. Like There is no question that

2:23:02 Berkshire Hathaway and Berkshire Hathaway shareholders. benefit from the Warren Buffett halo effect. Absolutely. And there are some real tangible benefits to that like during the financial crisis where like

2:23:16 My God, those deals he was getting on. debt and preferred equity coupons. Nobody was getting that. And the call he was getting, like that that is real tangible benefits. And there's some intangible benefit. Like I definitely Lots of people. I think ourselves, myself at least included now, having done all this work, is like all right, Warren, you're you're kinda past the hill on investing.

2:23:38 But Lots of people give'em a pass and people still show up to the shareholders meeting and people still hold Brookshire Hathaway shares. Because they believe in Warren. And if Warren's no longer there. Then what?

2:23:50 Yeah, Berkshire Hathaway. is a religion and an investment. And the bare case is that at some point it just becomes an investment. Yep. A little bit more bear case stuff. If you think about Capital allocation. If you think about maybe the way Jeff Bezos does it, ideally there are lots of potential growth engines inside your company.

2:24:11 to invest in to allocate your capital to. Otherwise you have to go and fight it out with every other investor for every publicly available investment vehicle. The only growth engine that Berkshire really has, like meaningful growth engine. Is Gyico?

2:24:25 And that's not a real growth engine. So it's really hard for them to consume capital internally in a way that would meet any hurdle rate that would be exciting. Like they kinda have to keep going shopping. to deploy capital at this point. there's an element there that's a little bit scary if you're thinking about investing in a tech company versus Berkshire, which of course you you never really should be thinking about one or the other. They're completely different buckets. But

2:24:49 They don't have an internal growth engine inside that company. The last one is a little bit more nuanced angle on the thing that I mentioned before about If you do a sort of a sum of parts analysis on Berkshire. Then

2:25:02 you have to look at everything that's currently marked to market, which is eye popping. You know There's definitely a lot of people out there that think that the stock is trading to a discount of the intrinsic book value of the holdings. And that of course would be the case if you fully valued the cash that's on their balance sheet. But

2:25:19 If you think about the multiples. of the stocks that they own. I mean, Apple has gone from being valued at something like seven X earnings to now like thirty X earnings. And to believe the like Berkshire is underpriced argument, it's fundamentally based on agreeing that Apple is worth what it's trading for. Which Maybe is true with Apple.

2:25:39 But you're also agreeing that like BNSF is sort of worth industry multiples for railroads, which if you look around are also meaningfully expanded recently. I just think asset prices are really high. So there there's definitely this element of like

2:25:55 If you believe Berkshire is undervalued, then I think you're being pretty generous with how you value the sum of all the parts. Yeah. I think that's true. But there's the capital allocation question of like well All assets are overvalued right now. So

2:26:11 If you're gonna take capital out of Berkshire, where are you gonna put it? Right. Yeah. Everything is only Worth talking about when you compare it to its next best option. Yeah. If anybody has any really good options for uh really uh solid assets that are underpriced right now.

2:26:26 The acquired Slack, you know, acquire.fm slash Slack. Go go go let let folks know. Love it. Yeah. Hang out in the digital assets channel. That is where it's

2:26:38 Stuff is going on. Playbook? Playbook. Let's do it. You wanna kick it off? Yeah, I mean the biggest one that's just so clear to me is that

2:26:48 You need different strategies at different scales. And the same playbook clearly didn't work as they gained more capital. You know, there there was that great thing that they were doing forever of hiring great managers that were family owned businesses that you know they bought for hundreds of millions of dollars and let them run and those things compound and you could be management light. It just doesn't work anymore. And so you need a completely, completely different playbook And

2:27:13 The interesting sort of Point that I wanna make on that. Stopped working and they had to go to Exactly. The point that I want to make on that is that They have set themselves up well where they have a remarkably flexible structure.

2:27:29 To do that. So It's not a fund. It's an operating. They have an infinite time horizon.

2:27:36 The goal is to never sell. And there's no drag of These. And there's no drag of fees. As a shareholder You can feel pretty.

2:27:45 Good about The sticker performance is actually the performance you're gonna get. You're not getting that less twenty percent. And incentives are aligned. If they are not investing, they're not just sitting there collecting fees, you know, they're itching too, because they think that the best option for that capital right now is to sit in cash. So even though we were knocking Warren for like oh he's out of touch and his You know, he doesn't understand the internet and he doesn't understand internet businesses and the the world change from underneath him and we spilled a lot of uh words on that.

2:28:13 What he did get right is this operating company flexible structure and probably set it up for success. I say probably because we're we have an open question on culture and politics. But leaving enough flexibility inside the company then to make sure that they can react to whatever's coming, even if it's not in the Warren style.

2:28:36 So that was a big one that I had. Say more about Politics, unless you're saving it for later. No, I'm not. So this is something that concerns me. So You went from having

2:28:46 one person making all decisions. Where If capital was best used on acquisitions that we could use there. If capital was best used plowing it into an internal growth engine when they had meaningful internal growth engines, you know, you can use it there. Like a Jeets business. Yep. Yep. If they wanted to go buy Stocking companies they could go do that.

2:29:07 Now each of those are independent fiefdoms. And so I'm sure there's ways they can sort of do horse trading, but people's comp largely is tied directly to their own portfolio. And so

2:29:20 Who kinda gets to say At the end of the day No, this is what we're doing. I guess it's Greg. I guess it's the CEO. But

2:29:30 You really have to nail the incentives. To make that all work. And when you have a non founder who doesn't quite have the same sort of influence and purview all over all of those things, I think decision making Especially when you need to be able to do it in like an hour.

2:29:48 Yeah. For a really big deal. Could get really thorny. Not to mention a CEO who Doesn't have the investing mind that Warren does.

2:29:58 Greg is like great. Like he's a great operating executive, but Is he gonna be able to Think in the same way as Warren and Todd and Ted about

2:30:09 Investments. And act with the same speed and conviction. Right. I mean, would the right thing to do here have been

2:30:19 to go try like crazy. It might be it might be very hard, if not impossible, to go find a Warren Buffett. And just give it all to them. And sure they have these other guys as employees, but like you need a one headed monster. This is the funny thing about the Number one criteria for The next CEO being operating experience at a large company. Well, that's not

2:30:41 Warren. Right. So yeah, so I'll be very I mean, we may never know. It may be twenty years before a book comes out, but I'll be very curious to see how contentious decisions get made between that new group of four that is sort of coming in. And if just Warren or just Charlie is left at some point with the four, what does that look like? That'll be weird for a little bit. I I imagine if one of them leaves, they both leave at the same time. I would imagine too.

2:31:08 The other thing I I'll say on culture, and this is borrowed from some great research that some listeners sent us. Their culture They sort of talk about it like it's this virtuous thing. And if it's truly this like virtuous thing, then it's something that you can sort of codify and protect.

2:31:25 I think the cultures are really sort of like independent inside each of these operating companies. Like I don't think If you're an employee at Borsheimes, like I don't really think you think about Lou Brazal's culture or like i they're completely they they have nailed it on the decentralization thing. So I think the only real

2:31:46 Sort of like shared. cultural elements inside the hundreds of thousands of people that work inside or or for Berkshire Hathaway are one, don't put Berkshire's reputation at risk. Two bend over backwards to avoid paying tax, which takes money out of the business. Like just don't take money out of the business, leave it all in, keep compounding it, defer it however you can. And three, funnel all cash back to Berkshire for reallocation. And

2:32:11 I mean that that's the culture. Like those are the things that are really important to the head office for manages to follow. Yep. Well, should we go to grading? Yeah. Let's Do this.

2:32:25 I know you have a whole slate of ways that uh we could grade this one, so so kick us off. Yeah, this is it. Yeah. The whole story. Nine. Ten hours in.

2:32:37 Okay, so I was thinking Before we recorded. About how to grade this. I don't usually write down any thoughts on grading before episodes, but I thought this is so

2:32:50 Momentus. You guys know David Rosenthal, he just wings it. He isn't really prep. Well, I do in grading. Uh Okay. So I think there are Four topics.

2:33:02 Discussing greeting here. First. We've been through this whole thing. I think we got a grade. Warren's entire career.

2:33:11 Like Hopefully there's still a little bit more time I don't know, maybe not. Probably I hope not. That there's not more time I hope there's more time in his life, but not in his Investment decision making career. I think we're basically at the end here. One way or another. The man is ninety one years old. Either way, dude, we're shipping this episode, so like create the cutoff. Yeah.

2:33:32 Okay. We created the career. I think we grade performance since we left off the last episode, which was in nineteen ninety two.

2:33:42 So like I did an IRR calc of January ninety three through today. Great. Love it. Then I think we should grade. recent years performance. And then the final question. I am a Berkshire Hatherwrig shareholder. Have been for a long time.

2:33:58 I don't know if you are, but whether you are or not, you could pretend you are. If you are. What are you doing with your stock? Are you holding? Are you selling or are you buying more?

2:34:09 Interesting. David, do you have a rate of return calculation on that? The entire Buff it. Career. Uh.

2:34:19 Matter of fact I do. Did some analysis on this. The entire Buffett career, so if you amalgamate thirteen years In the partnership years. Uh

2:34:30 A twenty nine point five percent. I R R During those years. And you amalgamate that with Then fifty.

2:34:39 Years. since the partnership through twenty twenty five zero years. Incredible. In the Berkshire. Time frame. Berkshire over that time period has had a twenty percent IRR.

2:34:50 You get a blended IRR of twenty two point three percent across. sixty three years of active money management for Warren. Guys consistent.

2:35:01 Quite consistent. The more incredible number Do you know what one hundred dollars? Invested. In the Warren Buffett partnerships.

2:35:11 In nineteen fifty nine. And held through Berkshire today would be worth today. One hundred dollars. Take a guess. Millions but the compounding math. Breaks my brain. I don't I don't know. Twenty six point two million.

2:35:26 Dogs. Not bad for a for a Hundy. Wow. Take a hundred dollar flyer.

2:35:35 In What'd you say sixty five? Uh, fifty nine. Fifty nine. I mean that's a long time.

2:35:42 And that was a lot more money then. But inflation hasn't moved this fast. Yeah. That's a great stat. A hundred dollars at the beginning of Warren Buffett's career following him all the way through is over twenty six million dollars. Yeah. Remarkable. And that's a twenty two point something percent IRR. So it's not over his whole career, you know, he he flagged. Like it's not the same as the BPL, the Buffett Partnership Limited days.

2:36:09 But That is mighty good. Yeah. Mighty Mighty good indeed.

2:36:14 Alright, so uh A A plus? What do you have you Has anyone else been investing over this period of time? Like I don't even know how to compare it to anything similar. No, I don't think he outlasted everyone. Yeah, he outlasted everybody. I think Hm.

2:36:29 So okay, I wrote down A Maybe do an A Okay, here's my here is my rationale for an A, and we can debate if this holds. My rationale for an Hey. Versus an A plus

2:36:42 Was that I Think we will probably see better investors in our lifetime. than Warren in the past. And I think that's just a natural consequence. Of

2:36:56 the numbers getting bigger over time and The world moving faster and there being more change. It depends what you mean better investors, because I actually don't think so, depending on how you think about this. So I'm not sure that you could do what Warren did over his career with a career starting today without taking on

2:37:17 A lot more risk. Or a lot more leverage. Mm-hmm. Like it's just so competitive to be an investor now. Yeah. Yeah. So I suspect if someone if we go set A million people free over the next seventy years, there will be someone who outperforms Warren.

2:37:35 But they will have done it with a lot more risk involved. And so there's a lot more sort of luck in being the one of those million that does better than him. Okay, so here was my thinking on the I I I tried to think of like I did not run the numbers, so I may just be w way off. We can debate. I tried to think of a tangible example. And the tangible example I thought of is Sequoia Capital.

2:37:59 As a whole. So when was it? Seventy two? They're coming up on fifty. Years. Next year. Yep. And we don't have their aggregate returns across all their funds.

2:38:10 But I suspect they might be as good or better than Fruction. Interesting. Now not a single person. Right.

2:38:20 But it's an institutionalized culture. If and if you can do can do something consistently, you sort of deserve to be in the same conversation. And here was my thought process on it. Why you know. Apple aside. Which uh we can't really put apple aside. Like Warren deserves credit for that. A hundred percent. But absolutely he's lost a step in recent years.

2:38:41 Whereas I feel like Sequoia has only gotten Better or stayed at the top of its game. Yeah, I mean it feels like they adjust to the climate that they're in a year before the climate changes. Yeah. And it feels like Buffett adjusts Thirty to forty years after.

2:38:58 No, j just on IBM. Yeah. Maybe maybe ten to fifteen years afterwards. Yep. Yeah. That's a good question, though. It's interesting, but remember that thing I mentioned earlier with the expected value calculation of the probability something could happen and the outcome it happened. Sequoia is doing the exact opposite of the Buffett thing. It's a shots on goal uh where each shot could be absolutely huge. So it's a obviously an extremely different asset class. Yep.

2:39:22 But it is it is a approach that is, I think, more suit to If you believe the hypothesis that The world today. is more about change than Buffett's world when he was in his prime.

2:39:35 The Sequoia approach is is the better. approach in today's world, I think. Fascinating. I mean we're gonna like rile up all the growth versus value people out there, but Yeah.

2:39:48 Yeah. Oh it's an A. I mean if he had finished strong it would be an A plus. And you could argue Apple is finishing strong, but it's just The numbers that I ran for This last period. nineteen ninety three through today is a thirteen point five percent IRR.

2:40:08 And like that's twenty eight and a half years. It's not like this is like a quick cycle. This is like two or three cycles. And so it's not like Oh, well you can't just say his thirteen and a half percent IR you know, was during a down cycle for Buffett's style. Like no, it's been We've been through some stuff and like it's just not been a remarkable last thirty years. And that number, by the way, is just based on their stock price. It's the coming in at eleven thousand eight hundred January first, ninety three.

2:40:38 Their stock just closed at four hundred and thirty five thousand dollars in a share. Oh, so great. Okay, so this is this is good. This is the next Set of grading criteria. Maybe we can jump back to then an overall view at the end. And let's compare that thirteen point five percent. Remember the Buffett Partnership Limited. That was twenty nine point five percent. And then the last episode.

2:40:59 Where we talked about the heyday. of Berkshire Hathaway uh ending in the Solomon. I mean that was a twenty seven percent IRR in the the eighties and the the late seventies through the The uh mid nineties. So It is diminished considerably, which they told us it would because of the amount of capital they're managing, but still.

2:41:18 Yep. So what do we think? Is this a It's a B? For this period. Yep. Yeah, we still definitely beat the S P like beating the market. For sure.

2:41:27 But just not Yeah. His previous standards. Yeah. Okay, so then

2:41:35 Recent years. So I did a slightly different w what does recent years mean? Uh let's take the last five years. Starting from the Apple investment. Which is almost exactly five years ago.

2:41:47 What's your analysis? So This I think was interesting and telling to me. Like Like we've been saying, the Apple investment. So amazing. In the running for one of the best single investments of all time.

2:42:00 Yet. Berkshire is so big and this law of gravity around the capital is so Meaningful. And Warren's other investments were so bad.

2:42:11 That In Aggregate. Berkshire's Stock price performance over the last five years.

2:42:19 on a multiple basis is almost exactly the same as the S P. Even including Apple. It has tracked The market. And not outperformed at all.

2:42:30 For the last five years. Now if you take out Apple It's underperformed by about half a turn on a multiple from the market. So Ted and Todd are making money, but Warren's not getting paid out any any of his carry. Warren is literally doing worse than the market in the last five years. Right. Oh, that's so interesting to think about. Yeah, because he's necessarily underperforming the S P'cause he said Ted and Todd were overperforming it. Yep. Yeah.

2:42:54 And Berkshire as a whole is just simply Even tracking. That's pretty bad. I mean that's a C to me. And it's not it's not worse than a C because it's not like it's a headphone where they're taking two and twenty, like You're just

2:43:06 It's the exact same thing as being in it. Index fund? Yeah. I think that's right. C. Yeah.

2:43:14 Okay. So Now The money question, literally the money. What are you doing with the money? A are we keeping it in Berkshire?

2:43:23 Are we buying, are we selling, are we holding? So this is the moment I reveal for everyone ten hours in that I actually have never held Berkshire Hathaway. No way. We've done all of this work. Yeah. This is not investment advice. This is especially this part is not investment advice, and we really do urge you to talk to someone who knows about this stuff when considering making a purchase. But no, I've never owned I I've thought about it a lot, and especially in this research, I considered buying it many times and the place I basically arrived is It's very conservatively managed. As uh

2:43:51 Berkshire expert quoted to me, it's a good widows and orphans stock. Mm-hmm. And frankly, I think it's a good way for someone who's rich to stay rich because of the way that they manage capital. I mean they they they don't dividend out. So if you w make a bunch of money every year, then you don't have the high taxes on the dividends. You know, y it it will continue to compound you can sort of sell shares when you want to sell shares to free up some cash. it's not gonna have a really big down year. Uh maybe if there's a extreme hurricane event, but you know, it's not gonna have five really big down years. So

2:44:24 I think that question comes down to like where are you in your investing cycle in your life? And I'm not sure that it makes sense for young people to buy Berkshire or at least people that are young in their wealth. Yeah. I differ from you in answer, but A hundred percent agree with you in spirit and rationale. Uh so my answer I am

2:44:44 Yeah. Break your shareholder, as I said at the top of the series, have been for many years. So I'm gonna continue to hold partially due to nostalgia for that and the Wait award halo effect and I get my free tickets to the shareholder meetings should they ever resume in in person. Uh but no the real reason I'm gonna continue to hold is actually just a

2:45:04 portfolio management strategy. It's not a large allocation of my portfolio. Almost all of the rest of my portfolio is Literally the rest of my portfolio is heavy growth, tech stocks. Digital assets. Et cetera.

2:45:18 Uh San Francisco real estate. So this is like in your safety. This is in my uh I call it my quote unquote safety portfolio. The and the way I think about it is just like This is Should I need emergency liquidity for Something.

2:45:36 In the near term, you know. I don't know what that would be. That's what My Berkshire. It's exactly what you were saying. It's my Bad term, but the equivalent of a widows and orphan's fund of like terrible term. But the

2:45:49 Capital. that I can feel good about. I I actually thought a lot about this over the past year. I used to keep An allocation in just like a Fairly sizable allocation in cash.

2:46:01 For this purpose. Well, that's just stupid today. Like, you know, to keep cash is is just dumb. Again, not investment advice. Not investment advice. But when you know, when yields on tenure treasuries are like Basically negative. Right. Just sitting there getting devalued in my bank exactly. Yeah, exit literally every day that goes by, you're getting poorer and poorer. You know holding cash. Again, not investment advice.

2:46:27 That's when I decided, you know what, I'm gonna rework this and I'm gonna have my allocate my liquidity. Allocation B to Berkshire. Because I can feel pretty confident it's not gonna lose money. And I'll at least get

2:46:40 Some Return on the capital. So I don't know, that's kinda sad, I think, for Berkshire that I think of it as like An alternative to cash. But I kinda think that's where

2:46:50 The stock is out at this point. Fascinating. Ten hours in and this is where we arrive. Uh not with a bang, but a whimper. I will say it, the journey is the reward, and uh I do want to sort of sum up This Greating This

2:47:07 series. You know, of course we we'll get to car routes here in a second, but The completion of this with possibly the best take on Warren Buffett of anyone. Honom. From Altos.

2:47:19 Which is a investment firm that we very much respect. recently tweeted. that uh he is the only investor to build a company worth over half a trillion dollars. And as Ho puts it, A few amazing founders have done it.

2:47:34 But no investor comes close. Absolutely. A great way to leave it. However I If you will indulge me, I uh I will spoil it with a a less eloquent uh

2:47:47 Parting thought that I wanted to add too after Yeah. You're gosh, we've spent. hundreds of hours of research on this. This is we read six books. I know this is the most like quixotic thing that we've ever done. Hopefully. You all have enjoyed this as much as we have'cause it has been an

2:48:05 Absolute freaking blast. It's changed the way I think too. Yeah. I mean, truly. We have learned so much. From doing this. And I was trying to really reflect on like, okay, what have I Learn from this, what can I take away? What are my feelings?

2:48:21 There's what I'm doing about My stock, you know. Th that's one thing. But like The real value is in the learning. And

2:48:30 Here's my take. It's related to this Warren was the greatest status quo investor of all time, idea for Manger Marks and And that the world we live in is different today. But I think Warren was right about another concept. All throughout his career he's preached.

2:48:46 Believe in America. America Is Undefeated, you know, in terms of Capital growth and a place to invest your money.

2:48:56 And I think that, you know, may may or may not be true. To some extent today. But I think that concept is Absolutely true. For the internet.

2:49:08 And Mm. the future ahead for the the internet today to me is like Los Angeles in Nineteen you know, fifty or whatever it was that when Charlie was looking for. A city w what was it that was uh

2:49:24 large enough to have an impact, but still Small and growing enough that he could become somebody there. Yeah. That's the internet. And

2:49:33 If there's one thing I've taken from this, it's that uh you know, that may change someday. But for the period that we're in and going forward and despite all the ups and downs and you know, like Oh yeah, you know. Bitcoin and Ethereum, you know, and DeFi all crashed like, you know, fifty percent this past weekend.

2:49:52 It's all noise. Like the internet is still The future. Some listener out there and please drop this in the Slack or tweet at us if you do this. We need a meme of uh with Warren and his slides saying never bet against America, we need David Rosenthal, never bet against the internet. That's right. Never bet against the internet. That's my takeaway. I love it.

2:50:15 All right listeners. Now is a great time to talk about one of our favorite companies, StatSig. Yes, there is a reason why the best product teams rely on StatSig, whether they are iterating on their core product features or shipping AI powered experiences at scale. Yeah. In the crazy speed of today's AI world. Shipping fast is just table stakes now.

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2:51:16 Cove. Alex. Let's do it. Uh I've got two. One.

2:51:22 Very related. And The other very unrelated, except to my joke at the beginning of the episode. The Related. Episode is

2:51:32 A book. Phil Fisher's Common stocks and uncommon profits. A classic. Really the Counterpoint.

2:51:42 To the buffet. Philosophy. Investing. Tribe.

2:51:48 Phil is the father of growth investing. And um This book was published in nineteen fifty eight. And Phil lived in the Bay Area here in San Francisco. And I I I will confess I haven't finished the book yet. I'm still in the middle of it, but I'm riveted. The only reason I haven't finished is because we had to finish this episode. It's amazing, Phil, like Basically saw

2:52:11 The future of what tech company like Dynamics were gonna be way back in the day and he really he writes about like the value of corporate R and D

2:52:21 And This sort of paradox that like you can't measure the value on a balance sheet of like Corporate R D. And the cost of it may be high and you don't know.

2:52:32 But the cost of not Doing corporate R and D is even higher. Really a great book. Highly, highly recommend it. Also, I believe recommended to me originally by

2:52:42 Honam, who you were just talking about. Oh my gosh. He's everywhere. He's everywhere. And then my second carve out. is the Xbox Series S.

2:52:52 I finally. Sweet. So the and I was specifically looking for the yes,'cause like I don't need Yeah. Um thirty six years old. I don't need the X. I don't need like I can't my eyes can't even see well enough for the the uh great graphics.

2:53:06 But the S is awesome. This thing is like Pretty cheap. I think it was two ninety nine. Which is not that cheap, but Yeah. S and game pass.

2:53:15 It works out to like I don't know, what is it, like four hundred Dollars or something like that. All in for a year. And you get access to hundreds of games and all the best ones that I've been playing Halo, Master Chief Collection.

2:53:28 And it's like Netflix. Ah, that's where the Halo reference. That's where the Halo reference came in from. I see. It literally is like Netflix for gaming and it's so great. I haven't touched my switch. Since I got it. highly recommend if you can find A series X or a Series S. Game Pass just rocks.

2:53:44 And I think it's on the Xbox One too, if you you can use it on the previous generation. Hardware. Sweet. Alright, I have two because you have two, but they're the most connected my two carvats have ever been. The first is I somehow never saw Good Fellas until this week. And that movie is just

2:54:02 So choice on so many levels. I mean it probably came just'cause I listeners will know I just finished the Sopranos and that was my previous carve out and wanted more and the cast has like twenty five overlapping people. It's the same freaking people. It's amazing. But it's it's a freaking work of art for anyone who has uh who hasn't seen it. I mean it's like Scorsese at his best, it's amazing direction, it's amazing cinematography. The dialogue is exceptional. It's just a Just a tremendous story of this person's life.

2:54:31 I've never been like a gangster movie person and or I never thought I was, but this is so good. Then the the OG. That's I I have not seen it. I have to watch it. It's great. It's great. And it's not like you know like obviously there's the Godfather and they've got a long rabbit hole to go down of like truly OG. Just watch one and two. Don't do that.

2:54:50 And then my second one is uh the good fellas soundtrack. It is like hit after hit after hit. I mean George Harrison, Eric Clapton, and Aretha Franklin And uh the the film sort of finishes with Layla by Derek and the Dominoes, and that is just like the the best way to wrap up any epic Epic story. I think if we had the right? Although the acoustic is

2:55:16 Also great. It's great. I'm an electric fan, though. They're both great. Yeah. The the Electra creates more of a the sort of like Epic conclusion mood. That is sort of appropriate for that. We'll write Eric Clapton and see if we can get the rights to use that on the fade out of this episode and

2:55:33 Great. Great. Actually, we probably won't. I'm sure he's listening. Yeah. For sure. But whether or not you're a fan of the of the movie or have seen it, go listen to the soundtrack on Spotify. So great. When uh do you know when Goodfellows came out?

2:55:46 Mm, early nineties, I wanna say like ninety one, something like that. Shortly before the Solomon Brothers. Uh Yeah. While while Warren was still in his his real head. Exactly. Exactly. All right, listeners, we are gonna leave it there.

2:56:01 With that, thank you so much to our sponsors. They've been wonderful. You have a slack, you know this. Come hang out with us. You'll like it. We have an LP program for people who want to be closer to the show. You get to hang out on the Zooms live with us or with people like Brad Stone when we're recording a book club episode with them.

2:56:20 It's super fun. And frankly I don't you know. All that stuff is great and if you want to engage more deeply in the show with y you know, you should. But You know, there's nothing like sharing an episode with a um a friend or social media if you want to, but just pass this along if you liked it.

2:56:35 David and I love getting to share these stories with new people, so And thank you for joining us on this journey. We're so lucky that we get to do this and it's so much fun, but like this has been a whole new level of fun, at least for me. Like eleven PM, like uh trapped in this room for four hours. It has been awesome.

2:56:57 All right, listeners. Thank you so much. See you next time. We'll see you next time.

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