(upbeat music) - Hey everybody, this is Phil Town. - And this is Daniel Town. We're back. - We're back. - Hello my daughter. - Welcome back dad. - How are you? Yeah, thank you very much. Glad to be here. - Me too. - Yeah, we've been sort of goofing off a little bit. - Oh yeah, we have a little bit. - Here comes a wave of wonderful podcasts about how we do really good long-term investing. I keep-- - For a change. - Yeah, I tell you, one of the things I've really enjoyed doing a lot is learning Instagram. This is a new app that you may not have heard of yet, but I find it really interesting because it is now feeding me everybody's quotes from Buffett, from Buffett videos. It's sort of like Buffett videos, you know? - Oh, funny. - Little short ones. And I'm really enjoying them. And it just reminds me that Buffett said that, look, you know, when he was an 11-year-old, he started investing and he went along for about six years, trying to figure out all kinds of technical trading and this and that. And then when he was 17, he read Ben Graham's book, The Intelligent Investor, and it changed his life. And he realized he wanted to go study under Graham at Columbia, if it could make that happen. And in that book, Graham basically says, you know, you've got to do three things. You got to treat stocks not like pieces of paper that are trading, but as businesses that are real, number one. Number two, you have to recognize that the stock market is almost like a human being with emotions and it's going to get over exuberant and price things too high. It's going to get really depressed, price things too low and you want to use that to your advantage. And three, you need a margin of safety. When you buy a company, you want to have a very large margin of safety, he projected 50%. Those three things have been foundational to Buffett's investing ever since. There's certainly foundational to rule one investing. We've talked about them endlessly here, but I'm just reminded that Warren, every time somebody asks him about investing, it essentially comes back to these things. They're the essence of good investing. - It's such a good intro because we left off talking about Greg Abel last time at the Berkshire meeting 100 years ago. And that's exactly what Buffett said about why he wants Greg Abel to be doing the investing for Berkshire in the future. He said, "Nobody knows businesses like Greg "and when you invest in the stock market, "you're buying businesses, full stop." That was a new piece of information. He's never said that before. He's never talked about having any of his business people be his investors or be an investor for Berkshire. And it really just came out of nowhere. I don't know. I don't know what to think about it. What do you think about it? - I think Warren brought in Ted Weschler and Todd Combs a bunch of years ago who had done a very, very good job of creating a lot of value for their investors at the time. And he gave them each $10 billion on what is currently about a $550 billion portfolio. So he gave them a rounding error amount of money to work with. And I think if you've followed this at all, like looking at the kinds of trades going on at Berkshire, the kind of buys that happen, you start to realize over the years, we haven't really talked about this much at all, but we start to realize that there were two, because everything's listed under the Berkshire portfolio in places like Deidor Roma and our Guru focus and all that. You really don't know whether it's Ted or Todd or Warren who is doing the purchases, but you start to realize after a while that when it's little relative to the whole portfolio, it's probably Ted and Todd. When it's big, it's almost certainly Warren, recognizing these guys are working with a limit on what they can spend. And over these many years, those guys, I mean, seriously facing a really difficult market and everything, they haven't beaten the market over this long period of time. - From your conjecture, right? Just to confirm. - Yeah, from our analysis of this thing is that they haven't beaten the market. - Okay. - And so it wasn't a giant surprise to us when essentially Warren at the meeting didn't really discuss them at all. He basically said, - That's a good point. Yep. - We're just gonna go here with this idea that really what this is all about is just buying businesses. And that's what we do. That's what we do here at Berkshire. We do that as an operation of the allocation of Berkshire capital. We don't need investors for this. We need operations people for this. So they can look at what's going on in this company and see it as a business, not as a stock and buy it. And by the way, a very large proportion of that $550 billion is invested in private businesses that were purchased 100% by Berkshire. They were never a public business. - Yep, totally. - Well, and I'm looking at my notes here and I misspoke. He actually didn't talk about how Greg would do the investing. What I wrote down is he said, "I would leave the capital allocation to Greg." - There you go. - He didn't say I would leave the invest. And that's a subtle difference that is everything. It's saying Greg is such a good manager that he will allocate the capital of Berkshire appropriately. And I think that includes, as you just said, all the businesses that they own privately as well. He then said, "Greg understands business very well." And I put this in quotes, if, though I know I got it right, if you understand businesses, you understand common stocks. And then he said that his thinking about who should manage the investing has changed and he thinks the responsibility should lie with the CEO of Berkshire. And if you think about it, the main job of a CEO, in my humble opinion, is the allocation of capital. That's what a CEO has to do in a business where there's free cash coming out, right? You don't just spend money to just keep it alive. You've got a very good business. And in that very good business, you're producing free cash. And that free cash can be used, well, initially, operating cash flow can be used to grow the business. But additionally, you have a choice. You can put money into more capital expenditures. You can allocate it to buyback stock. If you think it's on sale, you can just pass it through the shareholders as dividends. You know, it's the allocation of capital into the future. That is what really matters for the talents of a CEO. And he's basically saying, Greg is really good at that. And if you'll look at what Warren Buffett has bought, Warren and Charlie, over the last few years, what have they bought? They bought Oxy, right? They're busily still buying Occidental Petroleum. They just bought a bunch of it last week. They bought Apple. - Yeah, I was gonna say they bought more Apple. - Famously, loaded up the portfolio with Apple stock. - I'm sure they're smaller stuff that I'm not thinking of. - But when you look at Berkshire, back to my point about looking at Berkshire and seeing all of these small investments, those are all investments and effectively, they're almost trades by Todd and Ted. And they did a lot of them. As opposed to looking at what Buffett did. - Oh yeah, that's true. - You see the difference? - Yeah, yeah, yeah. - They had a massive difference. Okay, maybe there were a couple more that Warren bought. But hey, compared to what Todd and Ted did every quarter, there's no comparison. I think what Warren did is look at this and say, well, the results were not spectacular of what Ted and Todd were doing. And they don't really do what I think we should do as an allocator of capital. I don't think investing, I'm speaking as Warren Buffett here, which is rather humble of me. I don't think investing is buying and selling companies. I think investing is finding a wonderful business and buying it with the intention to hold it 20 years. - Right. - And if that's the case, then Greg would be perfect. - It's, I think it's a shift. It's a big shift in maybe as investors in, maybe it's not a shift for Buffett. But the way that I think about investing is the, what do I buy? What do I sell? Like, what's the price happen? Like, you know what I'm saying? Like, you go on the brokerage and you like find out the info and that's investing. And what he's saying here is that somebody who never does that, never goes, let's assume, never goes on the brokerage, never looks at the stock prices, he's focused on where does the money that they have go would be better at it than the people who look at the brokerages. And to me, that's like such a giant ringing reminder to stay off that like investing hamster wheel. - Yes, well said. - And like read, you know, don't read books about stock investing, sorry, 'cause we wrote one, but like read books about how to make a great business. - Right. - Yeah. - Right, exactly. And when you're looking at an investment, and I think this is really important, when you're looking at an investment, you have to look at it like you're gonna own the company. And it's the only company you're gonna own for the rest of your life. It's a very major decision to put money into a specific company with the intention to hold it for a long, long period of time, and not constantly beyond that investor hamster wheel you just talked about. So for example, we're really big fans of a specific bank. It's a regional bank, really like it. It's rated one of the best banks in the world. But that wasn't enough. We needed to go look at what their capital allocation is. We wanted to see where they're putting their money. And so we went to the Northeast, and we went to the West. And we went, I mean, we've gone all over the country looking at the actual things these guys are putting money into before feeling comfortable that we know what's going on and that they're really good capital allocators. We've done that on most of the investments we own in one way or another. So you'll go way back. But that you mean physically going to things they own, to stores or to headquarters or-- I mean, I'll never forget one of the investments you introduced me to as a kid. It was urban outfitters. And you did it by walking into this new store in the Beverly Center in LA. I love how you like have-- You introduced me. I was like, hello, dad. Let us now walk into the store. Because you may find it an excellent investment. I think I was like, I would really like to have a tank top right now. Yeah. And then I'm going to go stand in line down the aisles waiting to pay for this. And I'm like, what-- By the way, I don't remember this at all. We went to the Beverly Center and-- It's not the Beverly Center. It's Farmer's Market. It's the shopping center at Farmer's Market. And urban outfitters was right next to, I think, Nordstroms. I think it was Nordstroms. Whatever the anchor coins. In LA. This is in LA, yes. Yeah, in Beverly Hills. OK. And you were like, look at this. And I was like, look at this. It's really what it was all about. And started kicking those tires. And ultimately, went into that investment. And then got out of it later when those lines disappeared. Right? Same thing with Chipotle. Oh, when the lines in the store disappeared. Yeah, and the lines in the store. Same thing with Chipotle, right? What scared the heck out of Chipotle investors when it got E. coli was that all the lines disappeared. And I was very comfortable that those lines would come back. And so I was really gratified to see that they did. And yet the stock still was in the dumps for a good year after the lines were back. And so it's just-- anyway, it's just you've got to go-- I remember this story. I maybe have told it already here on the podcast. But Li Lu is one of the greatest investors in the planet. And he was looking at Timberline, the shoe company. And was very concerned that the analysts were dissing this shoe company, big time, by saying that the CEO was an unethical person. They were hammering him for personal traits of a lack of integrity. And Li Lu just didn't see it anywhere. I know, isn't it? What it was was the CEO was telling the analysts to go piss off. He was refusing to give them information. And they didn't like it a bit. So they really started a little bit of a whisper campaign against him on the street. And Li Lu had his ear down to the ground, heard the whisper campaign, and wanted to find out. He went to this guy's Midwest town, and the only way he could get a grip on whether this guy had integrity. I mean, this is a Chinese national guy. Speaks English pretty good. Goes to the guy's church on Sunday. And just asks people coming out of the church if they know him and if they trust him. I like the idea, but it's a little stalker-y. It's a little bit much. I mean, that's pretty stalker. And then he went to the country club after they told him what country club the guy was part of. And he went there and just wandered around asking people if they knew the guy. Of course, he was well known. And if he indeed has integrity. And what he learned there was everybody loved this guy. They believed he was one of the important members of their community. They totally trusted him. And he realized that this was a hit job by the analysts. And he bought that stock and it was a 500% return on it within a couple of years. Wow. Because ultimately, you guys, ultimately, a wonderful business will be priced properly by the stock market, regardless of rumors, regardless of hit jobs, regardless of anything. A wonderful business ultimately will be priced properly by the market. That's just a fact. I think that's true. And ultimately can also be a long time. And ultimately can be a long time. And I would also add that it can be mispriced the opposite way for a very long time, as in way overpriced for a very long time. Absolutely, 100%. I will say that I have seen exceptions to this if we call a long time-- if we're saying you can wait and the long time might be five or six years of waiting. That's a long, long time, right? But what I've seen is wonderful businesses will allocate capital. If their stock price is super cheap, a well-run business will either-- they'll start buying back their stock is what'll happen. It may not make the stock price go up. What it will do is cause you to have a bigger and bigger ownership of that company. And if it were to get to a point of extremity where you were the final owner of that stock-- and it won't, but let's say it did-- the management just kept buying back stock until the only person left owning any public stock was you-- then the next thing that happens is they start distributing the capital that they were spending on the stock to you. And that would be a dividend. And I actually own a piece of a company that is doing that. They bought the company at $40 a share and they have paid out in the last three years, I think, $20 a share in dividends. Wow. Yeah. Well done, nice. In other words, it's going to happen whether the market likes it or not, you're going to benefit from owning a wonderful business if you get it right. And so-- Get it right. Just to bring it back to Berkshire, a wonderful business, which has this consistent concern about it of what happens after Buffett goes. What do you think-- what do you think? I feel like somehow it's right. Like, I feel confident. And I wouldn't have said that before I watched what Buffett had to say. Well, here's-- first up, I agree with you totally. I'm very confident-- we're talking about Berkshire in the long run here. I'm talking about Greg, Abel, Bean in charge of Berkshire and its investing. And doing well with it. And I agree. I think that Greg will do a really, really good job. I think he's running a gigantic business. And I think that its growth rate would probably necessarily be what Warren and Charlie have been saying for years. We just can't keep growing like this. We can't keep growing like this. I think probably that will become true under Greg. They can't keep growing. It's a good point. Insanely fast, but they will keep growing. And therefore, you want to buy Berkshire as a wonderful, diversified, almost an index business with index with a brain, if you will, that will grow at index with a brain rates. And ultimately, we'll probably start producing some dividends or stock buybacks in a big way. But at the end of the day, you just want to buy it on sale. You want to buy it with that in mind. You don't want to pay too much for this business. And I think if Buffett passes away, as he said-- Buffett's basically saying he wouldn't bet on him being alive four years. Did you see that, by the way? I mean, what are you going to do? He was sort of making a joke about it. I wouldn't want to sign a four-year employment contract at my-- Yeah, that's perfect. I didn't take that as any sort of like negatives. He has a no. And he's 92%-- I mean, I think anybody where in their age starts with a nine or a one, OK, a 10, a nine or a 10. They're starting to say stuff like that. Yeah. I mean, when I get there, I mean, he's 93 right now. He's coming up on 94. So you're looking at four more years. You're looking at 98. Well, your grandmother managed to be 96, you know? I was just going to say, like, she died in her sleep. Didn't have really much health. I mean, she had some health issues, but nothing that killed her. You know, that happens when you're old. Frankly, it's what we all should-- that's like the best death you can have. I know, that's pretty good. Yeah, it's really good. But assuming Buffett makes it, you know, to 98 or something, that's a stretch. I mean, shoot, everybody knows that's a stretch. So he's basically saying, look, prepare yourself for it emotionally. Berkshire shareholders. And I've got a great guy, and he's going to run the company, you shouldn't be afraid. Yeah. And I think that is true. I think the company will continue to be a fabulous investment for a long, long time. But you can't just go out and pay whatever for it. Like any other good investment. True, true. I just also think that it's the kind of company that is so huge and enormous and diversified that it is easily run into the ground. Like, with non-expert management, I think that company could putter along for a good amount of time, and then they'd have to start selling off the pieces. And I think that kind of thing can happen when you have such a gigantic organization, faster than you think. And I think really what would contribute enormously to that happening is Greg Abel retires in five years. Well, so that's where I thought you were ending our last episode on was like, what happens after Greg? Because I think that's even more interesting. Because exactly, like, what happens if Greg gets hit by a bus, God forbid? So what they said, or what he said, was that the board would decide. And he talked in detail about some people on the board and who he had chosen for the board and how important the board was in running Birkster and that we should all know who's on the board. Which I loved because my research before I got sick was super focused on board members. Because they are the people who actually run the company in theory. They often don't. But in theory, they're the people we should be knowing more about than sometimes the CEO. And yet, usually, they're these sort of shadowy people who nobody knows much about. Maybe they're not even listed on the website. So I thought that was cool and confirmation of how important that is. And I think that that's the bet. Like, if you buy Birkster, you're betting that the board's going to choose somebody who's expert. And the point for it. Warren Buffett is insulated from the disease of-- what shall we call it-- this institutional imperative to do well now. And Buffett is insulated from that. And Abel is insulated from that as well. I think so too. The next guy will not be insulated from that. That's a really, really good point. The next person, man or woman, is going to have to deal with that institutional imperative that they're going to feel to do better as well as or better than Greg, at least. And to take action to do something. You can't just sit there, which often is the best decision to something like a Birkster, like a giant conglomerate that is-- Just leave it alone. All its little businesses are doing well. Leave it alone, exactly. Except for the fact that you've got $30 billion in new cash flow coming out to the top of Birkcher. You just put that in bonds for so long before somebody's going to start saying, what are you doing? You're just sitting there. So you start to succumb to this need to perform for your important audience, in this case, the board of directors, and the shareholders. And that need to perform is the institutional imperative. And it gets almost everybody at some point. And what I fear then is that they will take action to break up the company, which would be the obvious way to look good for the next five years. Because you will sell off these assets. Oh, you think that would look good? I think Birkcher shareholders would go insane. Oh, I think they might emotionally hate it. I think they emotionally hate it. But the returns for Birkcher shareholders would start going up. So let's say Greg runs this thing, and he's making 10% a year for people in the stock price. Then somebody comes in and starts selling off the stock that's worth 20 a share, minimum, and they get it. And boom, all of a sudden, all the shareholders have doubled their money. Overnight, there's not going to be a clamoring for this person's head. There'll be a lot of people out there saying, yeah, it was about time. So you don't think the culture of Birkcher is stronger than that? No, I do. I think the majority of people there will ultimately be looking at the overall return. They know Buffett's not running it anymore. They're going to be gone. How are you doing it for me lately? I really think that'll overwhelm it. But I think that's years in the future. I also think the board are people who truly respect the culture of Birkcher. Again, that could change down the line, of course. But with the people that Buffett has supported being on there now, I don't see them being OK with selling off for the sake of getting a return. I think that's a long way away if that happens. Really? Yeah. You think? Yeah. Well, I don't know much about everybody that's on the board. I think there's one guy in particular I know a little bit about. And I think that he's a very, very good executive. He's just come on the board a few years ago. And that's Ken Shinoh, who is a former CEO and chairman of American Express, which, of course, is one of the companies that Buffett most admired in the world and is being run by Ken. But he also has to listen to the drumbeat of public opinion. And I know this personally, because although it might not have been from Ken, somebody at American Express contacted the old Get Motivated organization back in about 2009 or 10, something like that, where I was on stage a couple times a month. And I was using American Express as an example of insiders selling off the stock as an indication that you better look out below. And Ken Shinoh. Oh, OK, so let me just make this. So these are speeches that you were giving around 2009, 2010. Showing the insider information. And the organization that was paying for the venue and the speeches and stuff was Get Motivated. OK, got it. So I was up there showing that you can get this data on what the insiders at American Express were doing with their own shares. And I was showing that they were dumping it like crazy back a few years earlier, and then the stock price cratered. And I got notified by the Get Motivated people that American Express was unhappy with that. OK. So somebody was paying attention enough in that organization to say, you're kind of dissing our CEO, and there's an implied criticism about integrity. Cut it out. And so I have to say, I folded that tent up in a big hurry, because I don't want to have a fight with American Express. And it was just one of many, many, many companies I could point to that was doing that. So I just charged it to a different company. But point being, you know-- Now you've brought it up again. You're going to get a nasty phone call from the person who's been following you around since 2009. I'm hoping we're under their radar at this point. I imagine we are. But it does say that even the people on the board have had to experience this sort of pressure to pay attention to what the public wants. You've got to be doing it every day out there. We don't want to see you doing anything that would change our investment to make it a negative investment. And selling off stock is something that makes it a negative investment, so don't do that. Or don't publicize it. I guess it's the point. So I just don't know how many of these people on the board are above the arena, the one that says, hey, you have to swing you, bum. And I suspect that if they've run a large corporation, a large public corporation in this country, that they have felt that swing you, bum pressure, and they're probably going to bring it. Humans, that is human. Absolutely. That's human. Don't disagree on that. I just think that an additional layer is that this board, essentially, is kind of the executor of Buffett's corporate will. And I think that they take that to heart. I think it's more than a board position. I think it's a lot more than a board position. And I think he spoke several times in the meeting about how important Berkshire's culture is and how the culture he hopes desperately will continue after him. And I think I'm sure if he's saying that out loud to the world, he said that to the board a lot of times, probably, already. So I think there's that additional sort of personal factor on these people. But that's going to change over time. And yeah, in the future, it might become more of a typical type of incentive-based company. Well, if you're trying to summarize what we're doing here, I would probably say today we were talking about how seriously Warren is eating his own cooking by making Greg Abel the head of all capital allocation of Berkshire, or saying that the allocation of capital includes the allocation of capital into public companies. And I think that that follows right down the line with rule of one investing strategy. And it makes total sense to me. Yeah, me too. Anything else on the meeting? I think we should wrap up the meeting from months ago. I think that's it. I think that's it. Yeah. It was good. That was a big deal, that particular a little bit. I would say keep looking at Berkshire if you can get it on sale. I don't think it's a problem. And it might not be on sale for the next two or three years. But when Buffett passes away, I think it will go on sale. And I would-- I think it's going to go up, because I think everyone's going to have that exact thought. I've been told that by people at like garden parties, by like old ladies. Like, oh, when Buffett passes, I have a plan. Have you heard about it? My plan is to buy when he passes away. Don't tell-- nobody else has thought of them. I'm like, oh my god. Every person has thought of it. Like, everyone tells me this. Well, I'm going to quote, or paraphrase, Mike Tyson, is everybody's got a plan to get hit in the face. And when your plan is to buy this, when it's going down like a brick, there is so much punching in your face going on by those who are adamantly opposed to owning this company and defending their reasoning with lots of examples for why this would be the stupidest thing you could ever do. And what these people at these garden parties don't know is what it feels like when you're getting punched in the face and going against massive opinion the other direction. Oh, no, I find my little lady at the garden party example what I mean is somebody who, like, in no way focuses on investing and just, you know, is like, oh, Berkshire. They're going to find that the emotional moment is substantially different than the one they're experiencing. An excellent point. Maybe that's going to happen. Maybe I'm probably wrong and it'll totally drop. Anyway, I hope we don't find out for a long time. And you know what, what all of this podcast is about and all the books we've written and the work we've done over all these years is really about getting comfortable, getting you guys comfortable with being punched in the face. That's really, really kind of what it's about is you've got to be able to operate independent of emotion. You cannot get caught up in the fear and trembling that happens when real world things are going on out there. You have to have built yourself a fortress against that. And the fortress against that is understanding that business, knowing it's got the moat to protect you from all this and then making sure you really think the management team is not going to screw you over and then you bought it on sale. That's what protects you when it's time to get punched in the face. I mostly agree, except for the part about the fortress and avoiding your emotions, but yay integration of emotions and yay four steps of finding the company. All right, we're going to be back with some new stuff soon and give you excellent, excellent car road trip. Plane, board, summer, pool, time, content. Thank goodness. God, can I come up with words? I've been listening to our own podcast. Not really. Not really. Not pretty bad. Okay. Real bad. Onward. Time to go play. Thanks, everybody. Bye. See you guys. Bye. Hi, guys. Thanks for listening to Invested. If you enjoyed this episode and you want more information or to listen to additional episodes, visit our website at InvestedPodcasts.com and sign up for my virtual workshop right there. Spots are definitely limited for this event. I'm not kidding. They really are. They sell out very quickly. So everything discussed on this podcast, by the way, is either my opinion or it's Danielle's opinion. And I'm really important. It's not to be taken as investing advice because I am not your financial advisor, nor have I considered you a personal situation as your fiduciary. So remember that. You're on your own here. This podcast is for your entertainment and education only, and I really hope you enjoyed it. (upbeat music) [BLANK_AUDIO]
