Warren Buffett  3:08  

There’s nothing like the pain of being in a lousy business. You will appreciate a good one. 

Charlie Munger  3:14  

Well, *inaudible*, that’s a very pleasant experience and it’s a learning experience. I have a friend who says, “The first rule of fishing is to fish where the fish are. And the second rule of fishing is to never forget the first rule.” And we’ve gotten good at fishing where the fish are.

Warren Buffett  3:31  

Yeah, that’s only a metaphor but I went to fish with Charlie one time…

Charlie Munger  3:33  

There are too many other boats in the damn water, but the fish are still there.

Warren Buffett  3:39  

Yeah, we bought at a department store in Baltimore in 1966, and there’s really nothing like being in the experience of trying to decide whether you’re going to put a new store in an area that hasn’t really developed yet enough to support it, but your competitor may move there first. 

Then, you have the decision of whether to jump in and if you jump in that kind of spoils. And now, you got two stores, [which] weren’t even one store. [It] isn’t quite justified. 

How to play those games? Those business games. You learn a lot by trying and what you really learned is which ones to avoid and to just say out of a bunch of terrible businesses, you’re off to a very great start is right because we’ve tried them all.

Charlie Munger  4:18  

But you’ve already learned because experiences are a lot like eating Castle burgers. And it really gets your attention.

Warren Buffett  4:25  

But we won’t expand on that.

Preston Pysh  4:29  

All right, so I mean, I don’t know how you can’t smile listening to that. It’s funny because when Stig and I record the show, we have Skype up, so we can see each other as we’re recording because we’re in two different locations. 

It was funny because both of us just had the biggest grin on our faces. We were listening. Stig, I would open up… The key point for this is just the learn, learn, learn part. And for us, this is just the common thread, if there is one common thread.

And we get asked this question a lot on Twitter and other places like, “What’s the one thing you learned from studying all these billionaires?” I mean, that is it. There’s nothing more that stands out than learn, learn, learn. Learn as much as you possibly can at all times.

So, to hear those two say that it doesn’t really come as much of a surprise. But I think it’s really a very, very important thing. I’m glad we’re kind of starting off this entire two part episode series with that, because that’s the thing that you really need to take away from these two more than anything else is these guys are total learning machines to just an exponential level.

Stig Brodersen  5:32  

I really like what Charles said about See’s Candy and how they really learned from that experience.  I think the learning outcome that they have for that experience is that a product like See’s Candy has pricing power. So, think about what he talks about when he talks about chocolate and think about what you talked about in terms of retail. 

If you look at something like chocolate, you have something that’s really cheap in marginal cost, but you can put a high price on it and perceive it as high quality. [They’re] not expensive ingredients. I mean, clearly good chocolate has more expensive ingredients. But the markup on such products is really, really high. 

One example that Warren Buffett has come up with a few times, even though it was not in this response is that he talks about you can go home to your wife and say, “I bought sodas on sale.” Your wife would say, “That’s good. We got cheap sodas in the house now.” But you can’t come home and say, “I bought you discounted chocolate for Valentine’s Day.” You just don’t have the same type of pricing power, when it comes to that. 

And you can look at it in the sense that think about how much retail in the US right now that’s just hurt by Amazon. You can’t raise the price in the book because you could just buy the book another place online.

Preston Pysh  6:42  

Yeah, this was big for me. When you look at See’s Candy, this was their turning point where they really understood the power of a brand. And they understood that that’s a competitive advantage that is very difficult to erode once you do have it. 

So, you heard his comment there about Coca-Cola. He said, “We might not have even bought Coca Cola if we didn’t buy See’s first,” because they learned so much by buying See’s Candy through a branding standpoint, and how much that adds as a competitive advantage that then they went on to buy Coke. 

And they went on the buy [on] a lot of other companies that had a really strong brand, because they knew how powerful that is in the long run. It doesn’t erode, like many other competitive advantages that people think that they have. A brand really holds up over a long period of time. 

So, let’s go ahead and play the next question.

Audience 2  7:28  

Warren, for years, you stayed away from technology companies saying they were too hard to predict and didn’t have moats. Then you seemed to change your view about technology when you invested in IBM. And again, when you recently invested in Apple. 

But then on Friday, you said IBM had not met your expectations and sold a third of our stake. Do you view IBM and Apple differently? And what have you learned about investing in technology companies? 

Warren Buffett  7:55  

Well, I do them very differently but Apple, I really got them in being a quite different business. I think Apple was much more of a consumer products business in terms of sort of analyzing *inaudible* and consumer behavior, and all that sort of thing. Obviously, a product with all kinds of tech built into it. 

But in terms of laying out what their prospective customers will do in the future, as opposed to, say, an IBM customer, it’s a different sort of analysis. That doesn’t mean it’s correct. And we’ll find out over time, but they are two different types of decisions. 

I was wrong on the first one, and we’ll find out whether I’m right or wrong on the second, but I do not regard them as apples and apples and I don’t quite regard them as apples and oranges. But it’s somewhat in between on that. Charlie?

Charlie Munger  8:43  

Well, we avoided the tech stocks because we felt we had no advantage there and other people did. And I think that’s a good idea not to play where the other people are better. But if you asked me, in retrospect, what was our worst mistake in the tech field? I think we were smart enough to figure out Google. 

Those ads worked so much better in the early days than anything else. So, I would say that we failed you there and we were smart enough to do it and didn’t do it. We do that all the time.

Warren Buffett  9:12  

Yeah, we were their customer very early on with Geico, for example. And we saw these figures are way out of date. But I remember we were paying them $10 or $11 a click or something like that. And anytime you’re paying somebody 10 or 11 bucks every time, somebody just punches a little thing where you’ve got no cost at all. That’s a good business unless somebody is going to take it away from you. 

So, we were close up seeing the impact of that. And I know the guys, I mean, they actually designed their perspectives, they came to see me and they… A little bit after the original one, when they went public. A little bit after Berkshire, even Intel, I had plenty of ways to ask questions or anything of the sort to educate myself, but I blew it.

Charlie Munger  9:48  

We blew Walmart, too. It was a total *inaudible*. We were starting to figure it out, but we didn’t.

Warren Buffett  9:57  

Yeah, figuring out execution is what counts. So, anyway, I couldn’t be making two mistakes on IBM. I mean, it’s harder to predict. In my view, the winners and various items or how much price competition will enter into something like cloud services and all that. I made a statement the other day, which is really remarkable. 

And I asked Charlie, whether you can think of a situation like that, where one person has built an extraordinary economic machine and two really pretty different industries, almost simultaneously as has happened.

Charlie Munger  10:32  

From a standing, [it] started zero.

Warren Buffett  10:33  

From a standing start to zero with other competitors with lots of capital and everything else to do in retailing. And to do it with the Cloud like Jeff Bezos has done. I mean, people like the *inaudible* invested in a lot of different industries and all of that, but he has been, in effect, the CEO simultaneously of two businesses starting from scratch. 

If you know, Andy Grove at Intel, [he] used to say, “Think about the [situation:] if you had a silver bullet, and you could shoot it and get rid of one of your competitors, who would it be?” Well, I think that both in the Cloud and in retail, there are a lot of people that would aim that silver bullet at Jeff. 

He’s done a different sort of game. But he’s… the Washington Post. He’s played that hand as well as anybody, I think, possibly could. So it’s a remarkable business achievement, where he’s been involved in actually in the execution, [and] not just bankrolling of businesses that are probably as feared by their competitors. Almost as any you can find. Charlie?

Charlie Munger  11:34  

Well, we’re sort of like the *inaudible*, old fashioned people people who had done all right. And Jeff Bezos is a different species.

Warren Buffett  11:41  

And we missed it entirely on *inaudible*. We never owned a share of Amazon.

Preston Pysh  11:45  

All right, a couple various different things going on there. So they were originally talking about the IBM pick and how Buffett said that he blew it. They got it wrong. Now, we’re talking about the Apple pick that he just recently had done. And then, they tried to transition into just the enormous appreciation for Jeff Bezos’ Amazon and everything else. 

Also, they talked about how they missed the boat on Google. So they kind of hit the whole gamut of all these big tech companies. I think it was really interesting to see how I mean, he really does understand the Google model as far as he was talking about the click rates that Geico pays. 

He said something like $11 or $12, that they were paying for customer acquisition, that they’re paying off the Google to get somebody to click on one of their ads. So he understood it. 

Then he says it. He understood it, but just did not act on it. I found that whole exchange very interesting, and it was neat to see how they kind of regret some of their decision making. But it was also interesting to see how they basically the way that I interpreted it, at least was that they’ve made huge mistakes like this in the past. 

They call them mistakes of omission, where they just didn’t buy it. So, it seemed kind of typical to some other mistakes that they had made where they just hadn’t pulled the trigger on ideas that they knew were going to be huge. These were just some more to add to the list.

Stig Brodersen  13:05  

I basically think it’s not a question about whether or not they understand tech. I think that’s probably a wrong way of looking at it. It’s whether or not they understand the business model and how sustainable the business model is. 

And what he’s saying is Google has a very sustainable business model. You might pay $10 for a click, and if you do that 10 times, Google actually provides this information. So it might show that you actually acquired a customer for every 10 clicks. 

Okay, so basically, you’re saying it cost me $100 to get one customer. What is my profit on one customer? So you are actually willing to pay a lot of money for using Google services, even though Google might not have any marginal cost to do it? 

I mean, this is an even better business model than See’s Candy. And I think that what frustrated Warren Buffett is that he understood that. He understood what Walmart did, but he didn’t pull the trigger on it.

Preston Pysh  13:58  

Well, I think he brought up a good point today. I think the thing that he understood [was] the model. He understood the value, but he didn’t understand the long term sustainability of it at the time, whenever it was at a price it would be worth paying. So, I think that that’s kind of what they were getting at with a lot of that exchange. 

It’s really interesting the previous year, they had huge compliments for Jeff Bezos, as well, like both years. Last year and this year, I mean. They are just treating Jeff Bezos like he’s the God of business. I think there’s a lot of people out there that would probably say that he might be.

Stig Brodersen  14:30  

Yeah, and I also think it was interesting that he talked about IBM also, because this is definitely an investment that Charlie Munger hasn’t been too happy about. And Warren Buffett also openly said in an interview, it was his decision. He’s saying that I made a mistake. And so, he actually sold one third of IBM. He says he values it differently now. 

One might consider the reason why he didn’t sell his entire position, whether or not it’s because it’s more than $10 billion, so it’s not as easy to unload. I guess he was open about it. And I think it also builds upon the trust that he’s so open about that.

Preston Pysh  15:07  

For the Apple pick, back when they initially took a real small position, I want to say they only took about a billion dollars small relative to their market cap. They took a billion dollar position. And it wasn’t really big. 

I wrote an article in Forbes on the valuation of where that was at. And I want to say at the time, it was trading at maybe 100 and 105, somewhere around there. In the article, I did a discount cash flow model on it and it was based on that price point. 

I was expecting it to do like 11% annual return based on that price. This is all in the article that I wrote. I want to say I wrote this back in January, maybe of 2017. We’ll put this in the show notes if anyone wants to read the article that I wrote on Forbes for this. 

But since that time, this thing has exploded. I mean, it’s gone up. I know it’s in the 140 range now, and it’s gone up quite a bit from when I wrote that article justifying why I think Berkshire Hathaway made a smart decision. 

So now, it’s obviously not priced at 11% because it’s gone up so much, but it’s still priced definitely better than where the S&P 500 is. And that’s why I think you’re seeing Berkshire continue to increase their position on it. 

Let’s go ahead and play the next question.

Audience 3  16:17  

This question is from France of Austria. And it concerns intrinsic value, which is neither more and he may amend this my definition here, but which is neither a company’s accounting value nor its stock market value, but it’s rather its estimated real value. 

So the question is: At what rate has Berkshire compounded intrinsic value over the last 10 years? And at what rate, including your explanation for it, please? Do you think intrinsic value can be compounded over the next 10 years?

Warren Buffett  16:56  

Intrinsic value can only be calculated on gains in retrospect. But the intrinsic value, pure definition would be the cash to be generated between now and judgment day, discounted at an interest rate that seems appropriate at the time. And that’s varied enormously over a 30 or 40 year period. 

If you pick out 10 years, and you’re back to May of 2007, we have some unpleasant things coming up. But I would say that we’ve probably compounded at about 10%. I think that’s going to be tough to achieve. In fact, almost impossible to achieve, if we continued in this interest rate environment. That’s the number one. 

If you asked me to get the answer to the question, if I could only pick one statistic to ask you about the future, before I gave the answer, I would not ask you about GDP growth. I would not ask you about who was going to be president; a million things. 

I would ask you what the interest rate is going to be over the next 20 years on average, the 10 years, or whatever you wanted to do. And if you assume our present interest rate structure is likely to be the average over 10 or 20 years, then I would say it would be very difficult to get to 10%. 

On the other hand, if I were to pick with a whole range of probabilities on interest rates, I would say that that rate might be. It might be somewhat aspirational. And it might be doable. 

You would say, “Well, we can’t continue to use interest rates for a long time.” I would ask you to look at Japan, 25 years ago. We couldn’t see how their interest rates could be sustainable, and we’re still looking at the same thing. 

So, I do not think it’s easy to predict the course of interest rates at all. I would say the chances of getting a terrible result in Berkshire are probably as low as about anything you can find.The chances of getting a sensational result are also by the smallest anything you can find. My best guess would be in the 10% range. 

But that assumes somewhat higher interest rates. Not dramatically higher, but somewhat higher interest rates in the next 10 or 20 years. And we’ve experienced [that] in the last seven years. Charlie?

Charlie Munger  19:04  

Well, there’s no question about the fact that the future with our present size is, in terms of percentage rates of return, going to be less glorious than our past. And we keep saying that, and now we’re proving it.

Warren Buffett  19:19  

You want to end on that note, Charlie? Or would you…

Charlie Munger  19:23  

I bet Warren is right about one thing. I think we have a collection of businesses that on average has better investment values than say the S&P average. So, I don’t think you share with us our terrible, terrible problem.

Warren Buffett  19:38  

I would say we do have more of a shareholder orientation than the S&P 500 as a whole. I mean, this company has a culture where decisions are made as an owner, as a private owner would make them and frankly, that’s a luxury we have that many companies don’t have. I mean, they’re under pressure today. 

One of the questions I asked the CEO of every public company that I made is: What would you be doing differently if you owned it all yourself? And the answer is usually this, that and a couple of other things. If you would ask us, the answer is we’re doing exactly what we would do, if we own all the stocks ourselves.

Anything further, Charlie?

Charlie Munger  20:21  

I think we have one other advantage. A lot of other people are trying to be brilliant, and we’re just trying to stay rational. It’s a big advantage. For me, to be brilliant is dangerous.

Preston Pysh  20:33  

What an awesome exchange.

Stig Brodersen  20:35  

How funny is Charlie? Oh my God. He’s the best.

Preston Pysh  20:39  

He’s hilarious. So I was grinning so much, when I was listening to this response, because anyone who listens to our show, we talk about interest rates all the time, kind of non-stop. I’m sure that for some people, they might be wondering why we talk about interest rates so much. Right there, you can see why we talk about it so much because everything is based on this. All the valuations of the stock market, every asset on the planet is based off of interest rates. 

So when you hear him say [that], and I really got a very pessimistic vibe as to where he thinks interest rates are going to be over the next 20 years. You heard him throw out Japan, and for anybody who’s not familiar with interest rates in Japan, they’re basically pegged at zero. And they have been for two decades now, or they’ve been close to zero for the next two decades now. 

I don’t find that as a coincidence that he threw Japan’s name out there when he’s talking about where the interest rate environment in the US is going because, I mean, you’ve heard Stig and I say this numerous times on the show that that’s kind of where we think things are going, or those are the pressures that are revealing themselves through quantitative easing and everything else with the central banking policy. 

But that’s where interest rates are going to go. So, they didn’t come out and say that. You can interpret what they said any way you want. That’s how I’m kind of interpreting it. And maybe I’m very biased in the way that I’m interpreting their comments.

Stig Brodersen  22:02  

Yeah, I really think it was interesting to hear about what he thought that Berkshire could compound their intrinsic value with. And he talked about how in the past 10 years, it might be around 10%. Then, he actually started off being a bit pessimistic about being able to repeat that. 

He actually kind of after talking more said, “Yeah, we might do another 10% on average, if the interest rate doesn’t increase too much.” I couldn’t help but think if it is true that they can compound that with Coca-Cola. 10%. 

And now, without going too much into detail, I’d say that Berkshire has probably a reasonable price at the moment. I don’t see it as super overpriced, as you see some of the other companies out there. 

So, let’s just for the sake of argument say, we might not completely agree on the S&P, but let’s say it’s fairly valued. And you can compound with that, if not 10%, then 8%. Now, if you compare that to, call it, S&P 500 at a Shiller PE, justify, call it, 3% or whatnot, that’s interesting. 

Should we start to do like a $1 cost averaging approach into Berkshire instead of the market, if that’s the approach you’re following? Because what Charlie Munger is also saying is we have better quality companies on average than the S&P 500, and I agree with that. 

Almost all of their companies, they’re profitable. It’s not the same thing as for S&P 500. So, I think I was left with this idea about, is the value in Berkshire, also because they’re so well positioned, if the interest rates should go up? They’re sitting on $90 billion in cash right now.

Preston Pysh  23:40  

That’s what I think his last comment was really hitting at whenever he said, the advantage we have is we’re not trying to be brilliant. And I think what he’s really saying is our advantage here’s we’re sitting on $90 billion of cash, not trying to do something too fancy is what I think he was trying to say. Just in a more clever way to say it than the way I said.

Stig Brodersen  23:58  

Yeah, and they’ll definitely say that And if the market should crash tomorrow, whether or not it’s because of interest rate hikes or not, I have no idea what’s going to happen with purchase price in the short run. But I definitely know that the intrinsic value of that company won’t be affected almost at all, because they’re sitting on so much cash. 

Another thing is that if you look at the accounting, they have a $160 billion stock portfolio right now. But it’s still less than the subsidiaries, the operations. That’s actually the main business. It’s not the stock picks. Warren Buffett and Charlie Munger are business owners. They’re not stock pickers at all. 

Preston Pysh  24:32  

I’m laughing because I might have had that conversation three to five different times, whenever I was in Omaha. For me, this is the big irony. So you go out there, and everyone from the finance industries [is] there. You got everyone from Wall Street. You get all these people that come out that are stock pickers and hedge fund managers and everything else. 

And the irony is, Warren Buffett and Charlie Munger, [their] brilliance is in running an operational business. Like these dudes, if they have $1 to invest operationally, they’re going to put it there every single day of the week. 

Whenever they can’t find something good to do with it from an operational standpoint, then it flows into a marketable security of, call it, Apple at this point. That’s not where they start. This is what I find so funny is everyone… I think the reason so many people just look at Warren Buffett as this stock picker, which in my opinion, he is not, is because that’s what most people can replicate with a very small sum of money. But none of them really understand what his true brilliance is, and that’s being an operational manager and CEO of a real business and investing operationally.

Stig Brodersen  25:45  

Yeah, and this is not something that Preston and I are just interpreting. This is something he is putting in his owner’s manual and he talks very highly about it like, this is the first step. When we want to widen the mode of assisting businesses, then we want to buy new operating businesses like *inaudible* securities. I mean, that’s down the list just above repurchase their own stock.

Preston Pysh  26:06  

But I think this is a really important point that so many people miss. It’s that distinguishing factor between being an operational capital allocator versus doing it from a non-operational standpoint with marketable securities.

Okay, let’s go ahead and play the next question here.

Audience 4  26:25  

Hi, Warren and Charlie. My name is Vicki Wade. I’m an MBA student from the Wharton School of Business. This is my first time to be in any meeting. I’m really excited about it. 

My question is, where do you want to go fishing for the next three to five years? Which sectors are you most bullish on and which sectors are you most bearish on? Thank you.

Warren Buffett  26:49  

Yeah, Charlie, and I do not really discuss sectors much nor do we level, the macro environment, or thoughts about energy or decision. We’re really opportunistic and obviously loading in all kinds of businesses all the time I mention is a hobby with us, almost. Probably more with me than Charlie. 

But we’re hoping we got a call and we’ve got a bunch of fillers. And I would say this to both of us, we probably know when the first five minutes or less whether something is likely to or has a reasonable chance of happening as it’s just going to go through there. 

And the first question is, can we really ever know enough about this *inaudible* decision? And that knocks out a whole bunch of things and there’s a few and then if it makes it true there, there’s a pretty good reasonable chance we’re going to do something. But it’s not sector specific. 

We do love the companies, obviously with moats around the product where consumer behavior can be perhaps predicted further out, but I would say it’s getting harder to anticipate consumer behavior than we might have thought 20 or 30 years ago. I think that that’s just a tougher game now, but we’ll measure and we’ll look at it in terms of returns on present capital returns on perspective. 

A lot of people give you signals as to what kind of people they are even in talking in the first five minutes and whether you’re likely to actually have a satisfactory arrangement with them over time. So a lot of things go on fast, but we know those type of business we kind of like to end up in, but we don’t really say we’re going to go after companies in this field or that field. Charlie?

Charlie Munger  28:23  

Yeah, some of our subsidiaries do a little bold on acquisitions. That makes sense and that’s going on all the time. I would say the general field of buying hold companies, it’s gotten very competitive. 

There is a huge industry of doing these leveraged buyouts, that’s why I still call them, the people who do them. I think that’s a bad marker. They say they do private equity. So they may even as a janitor call themselves a chief of engineering or something. 

But anyway, they *inaudible* leveraged buyouts, they can finance practically anything in about a week or so, through shadow banking. And they can pay very high prices and get very good terms and so on. So it’s very, very hard to buy businesses. 

We’ve done well because there’s a certain small group of people that don’t want to sell the private equity. They love the business so much. They *inaudible*. They dress up for resale.

Warren Buffett  29:22  

We had a guy some years ago, came to see me and he was 61 at the time. He said, “Look, I’ve got five bedrooms, like all the money I could possibly need. There’s only one thing that worries me when I drive to work.” Actually, there’s more than one guy who told me that’s used the same term. 

“There’s only one thing that bothers me when I go to work, something happens to me today. My wife’s left. And I’ve seen these cases where executives in the company try to buy them out cheap or they sell to a competitor, all the people. I don’t want to leave her with a bit.  I want to decide where it goes, but I want to keep running it, and I love it.” 

And he said, “I thought about selling it to a competitor. If I sell it to a competitor, you know that their CFO is going to become the CFO of the new company, and they’re on down the line. And all these people who helped me build the business, a lot of [them] are going to get dumped. I’ll walk away with a ton of money, and some of them will lose their jobs. I don’t want to do that. 

I can sell a leveraged buyout firm would prefer to absorb private equity, but they’re going to leverage it to the hilt, and they’re going to resell it or they’re going to dress it up something but in the end, it’s not going to be in the same place. I don’t know where it’s going to go. I don’t want to do that.” So he said, “It isn’t because you’re so special. It’s just because there isn’t anyone else.”

If ever you are proposing to a potential spouse, don’t use that line. But that’s what he told me. I took it well, and we made a deal. So logically, unless somebody has that attitude, we shouldn’t lose in this market.

I mean, you can borrow so much money so cheap, and we’re looking at the money as pretty much all equity, capital. And we’re not competitive with somebody that’s going to have a very significant portion of the purchase price. Carrying the debt may be averaging 4% or something like that. 

Charlie Munger  31:21  

He won’t take the losses that goes down he gets part of the *inaudible*, it goes up. 

Warren Buffett  31:25  

The calculus is just so different than ours and he’s got the money to make the deal. So if all you care about is getting the highest price for your business, we’re not a good call, and we will get some calls in any event. And we can offer something that wouldn’t call it unique, but it’s unusual. 

The person that sold us that business and a couple of others that have actually, it’s almost word for word, the same thing they say. They are all happy with the sale. Very happy. They have lots and lots and lots of money. 

They’re doing what they love doing, which is still running the business. And they know that they made a decision that will leave their family and the people who work with them all their lives in the best possible position, and that’s in their equation. They have done what’s best. 

But that is not the equation of many people. It certainly isn’t the equation of somebody who buys and borrows every dime they can with the idea of reselling, and after, they maybe dress up the economy. They can do some other things. 

But the disparity gets so wide between what I believe that… but that finance purchase will bring us against an equity-type purchase. It gets to be tougher. There’s just no question about that. It will stay that way.

Charlie Munger  32:44  

But it’s been tough for a long time and we bought some good business. 

Preston Pysh  32:49  

This was a fun exchange to listen to because I mean, they are really beating up private equity firms, because they’re so leveraged when they’re doing their buyouts and they’re voicing their frustration because they’re going against a lot of these guys, when interest rates are at next to nothing so these guys can borrow… The private equity firms can borrow at just ridiculous levels. 

And where he said that the calculus is much different for them than it is for us, what he was getting at is because these private equity companies are so leveraged, they make a couple improvements, they dress it up, and then they try to resell it. 

Their return on the small amount that they’re actually putting up for some of the equity is astronomical, because they’re so leveraged at such a high level, and it’s such a low interest rate. That’s why it’s difficult for them to compete. 

Now, I may be reading into this too much that this was an ultimate sales pitch by both of them. This was Munger and Buffett at their best basically putting out to the world this is why you want to sell your business to us and why we want to buy it, if you’re a good person, and you want us to take care of your family if something happens to you. And I really think that was a very delicate and strategic and smart sales pitch, so that they can be more bold on operational businesses underneath the Berkshire veil.

Stig Brodersen  34:04  

I completely agree with you, Preston. And if you think about it, this is not a bad deal. I mean, even as a business owner, say that your company is worth $8 billion, and you have an offer from a private equity company, they’re willing to pay that price. Or you can go to Warren Buffett and get $7 billion. I’m sure that a lot of billionaires would take the extra billion. 

But if you also know that they will fire people you like, that they will destroy the culture that you built up your life work, could you live without that extra billion? I think a lot of people can and that’s really where he’s sitting at. That’s the people he’s trying to appeal to, who doesn’t want the leveraged buyout. 

And for me, it was a great sales pitch also, because I actually think it’s smart, but it’s also something that creates value. I like that too. So selling to Berkshire, if anything, could be seen as in insurance policy, if you’re a billionaire. I like the way that he kind of framed that without saying that. 

Preston Pysh  35:03  

Yeah, I totally agree. All right, so this is the last question we’re going to play from the morning session of the Berkshire meeting.

Audience 5  35:11  

I’m Shankar from Illinois. Thank you for doing everything you do for us. I have a question that two of you have largely avoided capital allocation mistakes by bouncing ideas off of one another. Will this continue long into Berkshires’s future? I’m interested in both headquarters and its subsidiaries.

Charlie Munger  35:31  

It can continue very long. 

Warren Buffett  35:34  

I don’t get defeated, Charlie. Any successor that’s put in a brochure, capital allocation, abilities and proven capital allocation abilities are shortened to be a promotion board’s mind. Or in the current case, in terms of my recommendation [and] Charlie’s recommendation for what happens after we’re not around. 

Capital allocation is incredibly important at Berkshire. Right now, we have 280 years, $90 billion, whatever it may be of shareholders equity. If you take the next decade alone, nobody can make accurate predictions on this. 

But in the next 10 years, if you just take appreciation, right now is another $7 billion a year, something on that order. The next manager in the decade is going to have to allocate maybe $400 billion or something like that, maybe more, and is more than [what] already has been put in. 

So 10 years from now, Berkshire will be an aggregation of businesses where more money has been put in in that decade than everything that took place ahead time. You need a very sensible capital allocator in the job of being CEO of Berkshire, and we will have one. It would be a terrible mistake to have someone in this job, where really capital allocation might even be their main talent. It probably should be very close to their main talent. 

Of course, we have an advantage at Berkshire and that we do know how important that is. There is a *inaudible*. In a great many companies, people get to the top through ability, sale. Sometimes they come to the legal sides and all different sides. They then have the capital allocation sort of in their hands. Now, they may not establish strategic thinking divisions, they may listen to investment bankers, everything. But they better be able to do it themselves. 

If they come from a different background, or have not done it, it is a little bit, as I put in one of my letters, I think it’s like getting to Carnegie Hall playing the violin, and then you walk out on the stage that hands you a piano. It is that it’s something that Berkshire would not do well, if somebody was put in, who had a lot of skills in other areas, but really did not have an ability [with] capital allocation.

 I’ve talked about it as being something I call a “money mind.” People are going to have 120 ideas or 140 ideas or whatever it may be. Very similar scoring abilities, in terms of intelligences, and some of them have minds that are good at one type of thing, and someone, another. 

I’ve known very bright people that do not have money minds, and they can make very unintelligent decisions. They can do all kinds of other things that most mortals can’t do, but it is not the way their wiring works. 

I’ve known other people that really would not do that brilliantly. They do fine, but on an SAT test or something like that, but they’ve never made a dumb money decision in their life. And Charlie, I’m sure is saying the same thing. So, we do want somebody, hopefully, they’ve got a lot of talents, but we certainly do not want somebody that lacks a money mind. Charlie?

Charlie Munger  39:00  

Well, there’s also the option of buying and stock, which, so it isn’t like it’s some hopeless problem one way or another. Something intelligent will be done.

Warren Buffett  39:11  

And a money mind will recognize when it makes sense to buy in stock and doesn’t. In fact, it’s a pretty good test or something, in terms of management’s how they think about something like buying stock, because it’s not a very complicated equation. 

If you sort of think straight about that sort of a subject, but some people think that way, and some don’t. They’re probably miles better at something else. But they say some very silly things, when you get to something that seems so clear [such as] whether saving and buying a stock makes sense.

Stig Brodersen  39:43  

The first thing I want to add is I really like how they talked about the person that should replace them, eventually. Their job would be great capital allocators. And basically what he’s saying is you should see more CEOs for that role. Very, very often you would see people rise to the top, not just in big companies, but all over the world. 

But what he’s saying is, that’s probably not what you need in this job. He’ll be allocating more money. He said, the next 10 years that they had been throughout history, it’s…he was talking about $400 billion. 

And I’m not saying it’s surprising, but it was very insightful. Also, when he talked about it is probably someone in the organization, or he almost definitely said that, because it’s so important [that] the culture, they understand that. So, he revealed a bit more about that.

Preston Pysh  40:36  

Yeah, I don’t really have too much more to add. I just, I guess the number it’s just amazing to me that the $400 million that this person is going to have it’s going to be buff. He’s going to be around for another 10 years. 

He has to allocate another $400 billion, and compared to what he’s already allocated, it’s almost double. That’s one and a half times what he’s already allocated. That’s totally crazy. And to do that with the interest rate environment and everything else he’s going to be up against, it’s going to be an interesting decade coming forward. 

So, alright guys. So that concludes our Q&A that we were going to play for the episode. We also want to just highlight how much fun we had with our community out there at the meeting because we had about 150 people from the TIP community come out to Omaha for the meeting this year, and we had just a blast. And for all those people that came that are listening to this, thank you guys so much.

For me, it was such an honor to meet you and to hang out Saturday night just so everyone who’s on Saturday night, we went out and did a pub crawl in the Old Market there in Omaha. We hit up four different bars and just had a blast. I mean, I don’t know how you can have more fun than we had when we were out there. 

If you’re wanting to do something like this next year, I guarantee you we’re going to go again. So, we’ll have that stuff up on our website, but if you’re listening to this and you think it’d be really interesting to go and listen to Warren Buffett, hang out with all the people from our community, have a blast, just keep that on your radar for next year. 

Around Christmas time is when you need to start preparing to go to this meeting, which happens at the first week of May, every year, because the planning and stuff, getting flights is sometimes a little bit tricky. 

But keep that on your radar if it’s something you want to do, because we make it a point to go to this every year. And it’s such a blast. So thank you to our community for coming out and spending the weekend with us.

Stig Brodersen  42:31  

So, we have quite a few things we like to talk about before we round off the show. The first thing is that we will make sure to have a link in our show notes for this episode, where you can go back and listen to last year’s annual meeting. And Preston and I played a Q&A and provided the comments just like we did on this episode. It was Episode 87, but we will also be linking to that in the show notes. 

But more importantly, we’re super stoked to launch a value investing song here on The Investor’s Podcast. And don’t worry, it won’t be me and Preston rapping like we did on episode 92. And that was actually a lot of fun for us. 

We do apologize because we know that it was probably very painful for you to listen to. So no, we’re not rapping. It’s a song by Brittany Collins. And she is the president of our local TIP chapter in Houston. And boy, can she sing. Her song is called “Mr. Market.” And it’s about Warren Buffett, PE ratios, and everything about value investing. So, here we go.

Britanny Collins  43:45  

Good morning, Mr. Market. 

Well, what do you say about the past two *inaudible*. *inaudible* 

That means it provides a high margin of safety to protect my principal. 

Things get crazy. 

Minimize risk to prepare for it. 

Identify the intrinsic value. 

When the markets overvalued and stocks are undervalued, 

it’s still a go, and it’s okay to buy with PE ratio. 

Of course, there’s no guarantee, 

But it works with my buy and hold strategy. 

So Mr. Market, 

I will give you this opportunity, but go lower. 

I’ll say no to you. 

I won’t buy your company just because of your quote. 

I must understand it, and it must have a moat. 

Let’s not forget about the trustworthy management team. 

If your price hasn’t decreased from yesterday, 

What makes you think I’m going to buy today?

I’m okay to wait for the perfect opportunity. 

You can identify the intrinsic value, 

When the markets overvalued and stocks are undervalued. 

It’s still *inaudible*. 

And Buffett says *inaudible* low PE ratio. 

Of course, there’s no guarantee.

But it works with my buy-and-hold strategy. 

So Mr. Market, 

I’ll give you this opportunity. But go lower. 

I’ll say no to you because you work for me, Mr. Market. 

When the markets overvalued and the stocks are undervalued, 

it’s still *inaudible*. 

And Buffett says *inaudible* low PE ratio. 

Stig Brodersen  47:05  

Wow, how amazing was that? Honestly, when Preston and I heard this song, we couldn’t wait to ask Brittany if she would allow us to include it in the Berkshire episode. Brittany even created a video for the song and exclusively for the listeners of The Investor’s Podcast. 

You can also download the song through our show notes. But guys, that was all the Preston and I had for this week’s episode on The Investor’s Podcast. We’ll see you for the second half of the Berkshire Hathaway annual meeting next week.

Outro  47:37  

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