Trey Lockerbie (00:02:57):
It was a very busy event. We had multiple meetups. I was really great to see so many people that I’ve just known virtually for a number of years now and get to see them finally in person. People from other podcasts, people from other media outlets, people who listen to the show. It was just a overall really, really great opportunity to see everyone and meet them in person for the first time.

Stig Brodersen (00:03:20):
I’m so sad that I couldn’t be there. Long time ago I had a kidney transplant and so I have a compromised immune system, unfortunately. So whenever I had this conversation with my doctor and I was telling her that I wanted to travel 24 hours half across the globe to sit in a dome with 40,000 other people who had also traveled from all over the world, she was like, “No, don’t go.” So that was really the reason why. I would have loved to go back. Luckily, Charlie and Warren, they seemed like they were good health. I mean, they didn’t look 16 based on the recordings that I saw but I think there is a reasonable probability that we can still go many years. I don’t know. How was it to be in the room, that energy? And how did they look, Trey?

Trey Lockerbie (00:04:03):
Well, first of all, Stig, I mean, completely understandable that you wouldn’t be there and I think you made the right decision. But they did actually come across very healthy. That was one thing that I took away from it. I do think Munger fell asleep at one point during the discussion, but he’s 98 and that’s kind of to be expected. And I will also say that one thing that’s just always, always amazes me is just how much they inhale the peanut brittle on stage. I mean, they are eating candy for six straight hours so they’re getting a little bit of that sugar high and a little bit of energy from that. But overall, they seemed really healthy and really energized. Again, to do that kind of marathon discussion for over six hours at that age is just always impressive to me.

Stig Brodersen (00:04:47):
So the way that these meetings go if you haven’t watched it on YouTube or you haven’t been there is that there’s a bunch of questions. Actually not. I should say, not too many questions this year. I don’t know if you felt the same way, Trey. It seemed like… I wouldn’t say that Buffett was… Because it’s Buffett more than Munger who was responding to these questions. I wouldn’t say he was rambling but he definitely talked more longer than he used to. There weren’t too many questions. I don’t know. Am I right about that?

Trey Lockerbie (00:05:13):
You’re spot on there, Stig, because he even touched on this when they came back from lunch, but essentially I guess the historical average for the first half of the discussion is somewhere around 14 or 15 questions that they answer, this year it was only seven. And I think that’s because… I think Buffett had prepared quite a bit that he wanted to talk about. And I got the sense that it didn’t even really matter what the question was, each response was averaging 10 to 15 minutes long just for one question, which obviously was just as enjoyable for me because you’re getting to see the kind of inner workings of how his brain thinks and what he spends all year thinking about. What he’s kind of prioritized to touch on and create as talking points is always interesting to me.

Trey Lockerbie (00:05:54):
But it probably would’ve been nice to have a little bit more diversity as far as the questions, because at these meetings as you and I know really well now, you get a lot of the same questions very often, and it’s kind of almost rare these days that you get something that really challenges him or something that provides a response you haven’t heard before. And I think with more questions in the mix there might have been more of a probability of that happening.

Stig Brodersen (00:06:19):
Yeah, I think it’s a good point that you raise. So the way it goes is that you had Becky Quick from CNBC, and so she’s the one like representing all the shareholders who couldn’t be there so people having a chance to email her. I think she was like every other time. And then there were different podiums for the people actually sitting there, going out there.

Stig Brodersen (00:06:38):
I have to say, and I don’t want to sound disrespectful to people actually going there asking these questions, I really like whenever Becky is curating them. For the virtual events in some ways they were actually better just because she’s really good interview and she picks really good questions, whereas you have a lot of people coming up there and basically what they are asking, you had the same thing this year was, “Tell me, please, Warren Buffett, which stock should I invest in today?” And anyone who’s been following these meetings would just know Buffett doesn’t like those questions so he doesn’t give a good response. He does a song and a dance instead of like a really high quality question from Becky. So I just wanted to mention that. No disrespect to the people, because there were quite a few really, really good questions, but just overall, Becky just does such a wonderful job.

Trey Lockerbie (00:07:23):
I completely agree. And while there were many other people there or analysts asking questions, there were a number of other standout guests. Obviously Bill Gates was there, as he usually is, but he’s no longer on the board if you’re a member of Berkshire. And Tim Cook from Apple was there, which is probably also not surprising given that Buffett is now the largest independent stake in that company. But then you had people like Jamie Dimon from JPMorgan Chase. And I even saw Charlie Rose, a number of other kind of A-list celebrities that were there. And I think that just added to this sense of this being sort of the annual Mecca for economics events of the entire year where people came from far and wide all over the world. Even people like Jamie Dimon, Tim Cook, they spent the day there to listen to Buffett, even if he was rambling. Everyone paid their respect to be there and participate in sort of this annual gathering to kind of distill as much as we can from the Oracle of Omaha.

Trey Lockerbie (00:08:27):
And when I speak about rambling I kind of really mean it in a way because when he first came out he spent 36 minutes talking before we ever took a question, so that just kind of shows you how much… And that was only Buffett, no one else on stage. That was just Buffett. It was almost a Dai tribe.

Trey Lockerbie (00:08:44):
And it touched on a number of different things but I was really actually taken by how much time he spent talking about kind of the question, which is, what is money. He put up a photo of a $20 bill on stage and displayed it for everybody. Look, I think he’s very aware that the topic du jour is inflation, and it’s crypto, and it’s all these things that everyone is kind of flocking to in the midst of all this rampant either asset price inflation or even CPI inflation. That was very top of mind apparently for Buffett, but he made it a very distinct point to come out and say, look, everybody, this is a $20 bill and it’s always going to be a dollar in the eyes of the IRS. So yes, you can go gamble with your crypto, you can go do X, Y, Z, but at the end of the day when you have to pay your taxes, this is what the IRS and the government are going to accept. And he really made that a point.

Trey Lockerbie (00:09:41):
And what was kind of also interesting is he definitely acknowledged, he said, “This dollar might be worth “dramatically” less over time.” So he wasn’t trying to say, look, hey, this thing’s going to be a dollar as a dollar as a dollar, but he’s saying this could be a dollar that’s one penny 10 years from now but it’s still what the IRS is going to accept. The fact that he spent that much time on that topic, even though I think we can argue it’s misguided in a number of different ways, I think that it was an interesting point that he took a lot of time to get across to the audience. It’s something very important to him that he wanted everyone to hear and acknowledge, and I thought that was just something that was kind of remarkable.

Trey Lockerbie (00:10:22):
Can I also just say that he was hilarious? He was almost a standup comic this year, especially in those first 36 minutes, he was just knocking it out of the park. There was one point where he was talking about how the subsidiaries of Berkshire shouldn’t use banks, they should just go to him because he’s better than a bank, and some guy in the audience yelled out something that you couldn’t hear, and Buffett goes, “Was that a banker at the back of the room?” It was an anchor. He was so witty and quick. And again, for being 91, just impressive to not only hold the microphone for that long but also to make jokes along the way, it’s remarkable.

Stig Brodersen (00:10:59):
It surely was. And I couldn’t tell the difference. Like even before COVID when we had the last event, Buffett seemed like himself. I hate to say it but the last event I went to just before COVID, Munger also fell asleep during that meeting so no change there.

Stig Brodersen (00:11:17):
So let’s go to the first question. Like we said there in the introduction, we’re going to play the question, going to hear what Buffett and Munger has to say afterwards, and then Trey and I will go in and provide some additional comments to that. So here we go.

Rajeev Aggarwal (00:11:30):
Hello, Warren and Charlie. It is great to see you both and the wonderful Berkshire managers. Our thanks for everything that you do. My name is Rajeev Aggarwal, and I am from New Jersey. My question is on market timing. You have always said that it is impossible to time the markets, yet if you look at your track record, you have had amazing timings with some of your key decisions. You got out of the stock markets in 1969, ’70, you got back in ’72, ’72, ’74, when the markets were really cheap. You did the same thing in ’87, ’99, 2000. And today we are sitting on a significant amount of cash when the markets are going down. My question is, how do you time the big market moves so well?

Warren Buffet (00:12:20):
We’d like to offer you a job first.

Rajeev Aggarwal (00:12:22):
I will take it.

Warren Buffet (00:12:28):
The interesting thing is… Obviously we haven’t the faintest idea what the stock market’s going to do when it opens on Monday. We never have had. Charlie and I, I don’t think, in all the time we’ve worked together, I’ll tell you something later on maybe about how learning takes place, but we have never… I don’t think we’ve ever made a decision where either one of us either said or been thinking we should buy or sell based on what the market’s going to do.

Charlie Munger (00:12:58):
No.

Warren Buffet (00:13:01):
Or for that matter on what the economy is going to do. We don’t know. The interesting thing is, sometimes I get some credit someplace for the fact that how wonderful it was that we were optimistic in 2008 when everybody was down on stocks and all that sort of thing. We spent a big percentage of our net worth at a very dumb time. I shouldn’t say we, it’s I. We spent about $15 or 16 billion which was a lot bigger to us then than it is now. We spent it over a period of three or four weeks between Wrigley and Goldman Sachs. Generally at a terrible time as it turned out. I didn’t know whether it was going to be a good time or a bad time but it was a really dumb time.

Warren Buffet (00:13:51):
And I wrote an article for The New York Times in Buy American and all these things. Well, if I had any sense of timing and waited six months until… I mean, the low was in March, and I think I was on CNBC maybe that day or something, but I totally missed that opportunity. I totally missed in March of 2020. We have not been good at timing, we’ve been reasonably good at figuring out when we were getting enough for our money. And we had no idea when we bought anything. Well, we always hoped it would go down for a while so we could buy more, and we hoped even after we were done buying and ran out of money that if it was cheap the company would keep buying and in fact taking our interest up. That stuff you could learn it in fourth grade, but it’s not what’s taught in school. So, never give us any credit. Well, actually give us all the credit. Go out and tell everybody how smart we are, but we aren’t. We haven’t ever timed anything. We’ve never figured out insights into the economy.

Warren Buffet (00:15:02):
When I was 11 years old, March 11th, I guess, 1942, I bought stock when the Dow was 90… Well, it was 101 in the morning, it was 99 at the end of the day, I think, and now it’s 34,000, or maybe it’s a thousand less than it was on Thursday. It’s one decision. It’s a good thing doing American business. And Hubbard and [inaudible 00:15:29] had come to see me, this 11-year-old… General Motors Pension Fund or something, and I said, well, no, but we have to have a balance and we have to maybe have 60%, and then we have to sit around every three months and listen to a bunch of manager, and it’d just done better if they’d just taken some darts and thrown them and just said, we’re going to be in America 50 years from now and a 100 years from now and we’ll do better in stocks than we will in bonds.

Warren Buffet (00:15:55):
It’s amazing how hard people make… What a simple game it is, but of course if they told everybody what a simple game it was then 90% of the income or more of the people that were speaking would disappear, so it was really a little too much of us to expect of human nature that people will explain why they really aren’t adding any value to what you can do by yourself or actually you’re… I hate to use the example, but you can’t have monkeys throwing darts at the page and take away the management fees and everything, I’ll bet on the monkeys. I don’t consider them a superior species and I don’t want them to move next door instead of my next door neighbor or anything but it’s just the way it has to be.

Stig Brodersen (00:16:40):
You can really see the power of being a bottoms-up investor and not focusing on the oil stock market. And whenever I see bottom-up, it really means that you are looking at the individual company, and if you like the valuation and you get an adequate margin of safety, you buy it. It’s not so much a question of, what is the oil stock monitoring at? Having said that, of course whenever you have low valuations generally, you just have a better probability for finding something you like. You can equate this to you fish where the fish are but that doesn’t mean that you necessarily catch anything.

Stig Brodersen (00:17:13):
Actually one thing that Buffett specifically pointed to in his response to this question was how they did not hit the bottom of the market in March of 2009. They spent all the dry powder they had in 2008. If they had a crystal ball, they could have waited and bought at better prices, but the future is always unknown, and as it turns out, the investment that they did make in 2008, even though they could have made more money, it still worked out for market real well. Some of the listeners to this podcast might know the deal that he made with Goldman Sachs. I think that’s the most known one from that period.

Stig Brodersen (00:17:51):
And it takes me to another point, which at least to me was the most exciting thing for the event, and also because Berkshire Hathaway is our largest equity holding at least, Berkshire has really put a lot of cash to work in Q1 2022. We have to keep in mind that before this recent buying spree, there’ve been a net seller of stocks for the past five quarters. In Q1, Berkshire spent $51 billion. And Buffett mentioned multiple times he didn’t invest $51 billion. It was Berkshire, so him, and Ted, and Todd. And over three weeks on Q1 they spent $40 billion. It was crazy in itself.

Stig Brodersen (00:18:34):
Let’s talk about some of the things that they bought. Chevron was one that was disclosed before. This was at the end of 2021, the fair value of Berkshire’s holdings were $4.5 billion, at the end of March it was valued at $25.9 billion. So even though that there was also help by a soaring stock price, clearly he’s been doubling down on buying shares, and we’re going to see in the findings here really soon how many shares that actually was.

Stig Brodersen (00:19:02):
What was already known going into this meeting was the investment in Occidental Petroleum. He spent $7 billion. And the reason why that was known and the thing with Chevron wasn’t was that Berkshire owns 14%, and because Berkshire owns more than 10%, it would have to be filed and it’d have to be disclosed immediately. If you have more than 10% you’re considered insider, whereas if it’s less 10%, you regulate differently and you just have to disclose it in the next 13F filing, which comes out 45 days after the end of the quarter. Sorry for being a bit technical there but that’s… To someone like a total geek like me, it’s very interesting to see what comes out of a meeting like this, and some things we knew and some things we didn’t.

Trey Lockerbie (00:19:43):
Yeah, and just on that point really quick, Stig. That’s an important point because I think a lot of people speculate, at least myself… I mean, you can get caught up in trying to understand Buffett’s position sizing, and we can analyze that to death and say, how much money is he putting to work and why? And sometimes the answer is just as simple as he doesn’t want to go over 10% of the company. He might be even more bullish on that pick than the dollars would suggest but it just comes down to that technicality that you spoke of that would limit his investment in something.

Trey Lockerbie (00:20:14):
One note about Buffett’s investment in Alleghany, there was a question that was asked about, “Hey, on the date that you released your annual shareholder letter, you said, ‘Basically, hey, we didn’t find any opportunities,’ and then now you’ve invested almost $12 billion in Alleghany.” And it happened within like a week of the actual letter, or maybe in a few days, of the letter coming out to him investing this large amount. So you would ask yourself, I mean, how are you moving from zero to 12 billion within a number of days? And he highlighted the fact that the new CEO of Alleghany is actually an old colleague of his, he was very familiar with him, but also had been studying Alleghany for 40 years. He said he had four file cabinets full of data on the company over time. So when he had this opportunity to meet the new CEO in New York City, he kind of already had in the back of his mind saying, “Okay, well, I’m going to meet with this guy, I’ve got a number in my head, perhaps they’ll move on it,” and they end up doing so.

Trey Lockerbie (00:21:11):
And so to me, that also ties into the fact of what you were talking about, Stig, about bottom-up investing, because this day and age when you see the market going down, it’s really tempting for all of us to start thinking a little bit more macro. We can find ourselves being seduced by the market and saying, “Should I buy in? Is this the bottom? Where’s the trend line it’s going to bounce off of?” All these things. And this kind of investment in Alleghany for me was another testament of how Buffett is not speculating. He’s not worried about the market and what it’s doing at all. He had a number in his head on a company he had done decades of due diligence on and was able to make a quick decision. Irregardless of what the market was doing I believe at the time he would’ve made that number offer and they would’ve accepted it or not. But I just think that it’s a difference between his style and a more amateur approach, I would say, where you get caught up thinking a little bit more about what is the market going to do tomorrow.

Stig Brodersen (00:22:07):
That’s a really interesting point you have there. If you want to learn more about the Alleghany deal, I actually talk with Chris Bloomstran about that on episode 438. And another thing I wanted to take away from that specific episode with Chris was that he talked about how Berkshire doesn’t have as much cash as it appears that they do.

Stig Brodersen (00:22:28):
So what Buffett did there in the first 36 minutes when he was just talking was he put up a slide with how much cash they had at year end and how much cash they have now. At year end they had something along the lines of $156 billion. It might be slightly incorrect, but I do remember on that slide that it said that they had $102.6 now. And just to be completely geek, I also have to say that that does not include the cash that they have on the balance sheet at Burlington and also Berkshire Energy, so if we add that it’d be around like 106. The Delta has around $40 billion, that’s what they have. And so they have $106 billion right now in cash equivalence.

Stig Brodersen (00:23:12):
And it seems like it’s a lot of money, obviously it is, but according to Chris, he said that Buffett would probably not go below 72-ish in cash, and the reason why he said that was that $30 billion, that was the cushion, and $42 billion was matching the claims they would have for a year worth of losses on the insurance business.

Trey Lockerbie (00:23:34):
They’ve put more money in in Q1 of 2022 than they did in all of 2008. I know the dollars and the cash balances were different maybe then but it just is such a testament to how he is not fazed by what the market is doing today.

Stig Brodersen (00:23:47):
Yeah. And I think if you make the ratio on cash to how many assets they have on the balance sheet, it’s quite low historically right now. So yeah, he’s still like swinging for the fences, so you got to like that.

Trey Lockerbie (00:24:01):
And lastly, I think it’s important to note that he actually bought more Apple, even though his position has almost quadrupled since he bought it. This is called watering your flowers. Watering your flowers instead of cutting your weeds. He’s seeing a winner happening and he’s putting in almost $600 million more into that position.

Trey Lockerbie (00:24:19):
And just talking about the financials a little bit more, Q1 year over year, the operating earnings grew 3%. And if you look back to Buffett’s shareholder letter from 1986, he defines what operating earnings really is, in his opinion. He actually calls it owner’s earnings in that letter. But I thought it’d be interesting to kind of touch on what owner’s earnings are and why Buffett focuses on this as opposed to something like EBITDA or adjusted EBITDA like the rest of the market actually focuses on. We actually have a course on this on our website. You can check out TIP Academy to learn more about this. But essentially owner’s earnings is net income, plus depreciation, amortization, non-cash items, deferred taxes, minus capital expenditures. Stig, you are more of the accountant than me, but maybe you want to touch a little bit on why he focuses on operating earnings and why he makes it such a point to focus on that as opposed to adjusted EBITDA or regular earnings that other companies focus on.

Stig Brodersen (00:25:21):
Trey, that’s a really good question, and that’s because accounting tells you one story, it doesn’t give you the full picture. It actually reminds me… Before I… Actually I don’t want to sidestep your question, but there was actually one person who asked Buffett during the meeting, “If you were like writing the GAAP rules, what would you change?” And he was like, “Well, I’ll probably resign.” Because it is tough. It’s very easy to bash the accounting rules, but it is what it is.

Stig Brodersen (00:25:47):
And so there are many, many reasons why he focuses on owner’s earnings. And the reason why he calls it owner’s earnings… And I just want to say also for the record that the course that Trey talked about before, it’s completely free. You can find it on the website. But the reason for that is we are trying to figure out how much… What are the cashflows that we can expect as owners to receive if we own this company. And that’s what you’re trying to figure out. And so if you have something like EBITDA… EBITDA is a number that Wall Street came up with and it’s used because you want it to be able to compare different type of businesses across a lot of different industries. But it’s not a very useful number for most businesses because EBITDA is earnings before interests, and tax, depreciation, and amortization. Those are real expenses. So why would you not include that in your analysis of what you actually get if you are the owner?

Stig Brodersen (00:26:40):
And so he has this equation for how do you calculate what your true earnings are, and that is centered around the operating earnings. He does have one variable that’s always tricky. And that’s just how it is. Whenever you try to predict the future it’s always tricky. And that is, what is your maintenance CapEx? If Trey and I were looking at a company like Berkshire Hathaway, we’ll come up with two different types of maintenance CapEx. It’s simply a question of companies spends a lot of money reinvesting back into their assets. Some of that is growth CapEx, so expenses to grow the company, and some of that is expenses just to maintain the level you’re at. And there is no easy way of saying, oh, it’s like $22,300,000.22. It doesn’t work like that. It has to be an approximate number. Plus of course you have all the other things in the formula like, well, what are the operating earnings going to be?

Stig Brodersen (00:27:37):
And so the point of saying this and what I’m trying to answer Trey’s question is really that there is no finite number you can use whenever you’re figuring out the owner’s earnings. It’s more like a ballpark number. That number would probably be different for me than it would for Trey but would probably be somewhat in the same range one way or the other. And that’s just how you do valuation. And so the best stock investors can estimate what the future owner’s earnings would be and then come discount it back to today and see how that relates to the stock price.

Trey Lockerbie (00:28:14):
I think it’s really important. He’s touched on this in a number of different letters and he touched on it again at this meeting. It’s very much a point he wants to get across. He scolds Wall Street and the accountants and analysts over this kind of thing, so it’s just kind of something to keep note of.

Stig Brodersen (00:28:31):
And Trey, another thing that he touched on before is that the best way to look at the financial statements for Berkshire is to look at the operating earnings. The net earnings are all over the place for a company like Berkshire Hathaway because they both have operating businesses but they also have their portfolio investments. Operating earnings for the first quarter of 2022, that was $7 billion, and the operating earnings for the first quarter in 2021, and this is after taxes, that was also $7 billion. The two numbers are more or less identical. It’s like $22 million difference.

Stig Brodersen (00:29:04):
But in the first quarter of 2021, Berkshire had a $4.7 billion investment gain, and the first quarter of 2022 it was a $1.6 billion loss, and so that really messes up what you look at whenever you look at net earnings. That’s not how you should value a company like Berkshire Hathaway. You should first discount the operating earnings. What do you think that they will be? That’s somewhat easy to do. They are quite stable. And you shall probably have an idea. If you understand Berkshire’s businesses, you can probably make a reasonable estimation on how that’s going to grow in the future. And then you have to make an assessment of the stock portfolio and what you expect that to be. Also you can assign a value to the cash. So that’s sort of like the three-step approach that I would use to valuing Berkshire Hathaway. But I want to throw it back over to you, Trey.

Trey Lockerbie (00:29:51):
One other important piece about the Berkshire financials that came out that’s worth noting is the fact that they have bought back $60 billion worth of stock over the past two years, but there’s been no buybacks as of April. And in April, if you recall, the stock price, at least for the A shares, got over half a million dollars per share. So people are always speculating around what is the intrinsic value of Berkshire, and you can kind of gauge that by when Buffett is either buying back shares or not. Now I know maybe it’s correlated to the fact that he was putting money to work elsewhere, which he hasn’t been doing over the past two years very much, you could say that as well, but it’s just always interesting to know at what prices he is willing to buy up Berkshire shares and when he kind of backs off of that.

Trey Lockerbie (00:30:33):
And then to another point, I talked about this on an episode with Michael Mauboussin about why buybacks are sometimes controversial. Buffett made a big point here about why he thinks it’s kind of asinine to think they are controversial because… He compared it to, say, owning a farm, or say, you have 10 acres of farmland and you’re collecting the money that comes off the farm and your neighbor has 10 acres of farmland as well, and then over the years you just gradually take over his farmland without having to come up with any more capital. And that’s kind of what happens when a corporation decides to buyback its own shares. It increases your position in the overall company because it’s essentially taking those outstanding shares off the market.

Trey Lockerbie (00:31:12):
And yeah, that can sound like a great thing, and Buffett definitely positioned it as such, but one thing he didn’t really touch on here, which is why it’s controversial, is because a lot of these CEOs have very short-term incentive structures in their compensation. So they come in and they are very focused on increasing earnings, and one of the quickest ways to do that is to eat up the shares outstanding to kind of artificially boost their earnings per share. And this is only problematic really when they stop investing in capital expenditures, for example.

Trey Lockerbie (00:31:41):
And I thought it was so interesting to see his investments in Chevron and Occidental in this space because I feel like the oil space is a great example of this, where a lot of CEOs took all the stimulus, bought back shares, and didn’t invest in capital expenditures to grow, bore drills or plants. And now we have this kind of lack of supply in oil, which is increasing the price, and it seems to be a very long-term problem. So yeah, I think Chevron and Occidental they are going to benefit in a way from this. It’s just kind of interesting how the two go together.

Trey Lockerbie (00:32:15):
One other example I have here about the share buybacks just to provide the significance of it is Berkshire’s stake in American Express has increased from 11.2% in 1998 to now 20% solely just based on the fact that American Express has been buying back shares. I guess I’m just interested that he spent a lot of time on this and also made it a point to say, hey, this isn’t controversial so long as you’re doing it with integrity, buying it as something undervalued. But, Stig, I mean, this is not a topic I think to just kind of dismiss but what’s your opinion.

Stig Brodersen (00:32:50):
It has been interesting that he didn’t pick up any shares in April given everything that’s happened last month, but again, the opportunity costs have also changed. I wouldn’t be surprised at all if he made more investments because even though that he now have less cash, the price is just more attractive. So one thing is to buy more of Berkshire. Like the question is, what could he have done with that cash instead?

Trey Lockerbie (00:33:15):
And then one last take, I guess, if we’re speaking of Chevron and Occidental is just the fact that he did say the play there is not so much because of the price of oil but that a fast transition to clean energy is highly unlikely. And I have to agree with that because that is kind of what we’ve been seeing with these supply chain disruptions. We are seeing that we can’t just flip the switch over to clean energy as easily as we might have hoped, and I think that that’s just made it more apparent for everybody that that’s probably a longer term solution problem that we’re working on but is not as easy as a lot of people think.

Trey Lockerbie (00:33:50):
All right. So with that, we’re going to go to the next question which was from actually Dr. David Kass. And if you remember, I interviewed Dr. David Kass on episode 443. So Becky chose this question from Dr. David Kass about unrealized tax gains. So here it is.

Becky Quick (00:34:07):
A question from David Kass. He writes, “President Biden’s fiscal 2023 budget request would impose a 20% minimum tax on the unrealized capital gains for households worth at least a $100 million. What are your views on this issue?” And if you don’t want to answer maybe Charlie does.

Warren Buffet (00:34:23):
Well, we’ll find out. And if we’re all honest, we should both say that we would be affected by it. If it’s a $100 million we’d both be affected, so our point of view is… And I have no point of view. Charlie? I have no point of view that I would want attribute it to.

Charlie Munger (00:34:42):
I tend to stay out of the income tax things. I guess my policy is I pay whatever taxes they pass, and I don’t want to engage in lobbying about taxes.

Trey Lockerbie (00:34:54):
Okay. I just thought this was an interesting take, because as you can see, Warren and Charlie kind of kicked the can on this question as they did with a number of questions here basically because of its political nature. They don’t tend to like that, but it’s one of those things that’s interesting because Buffett has gone on record to say, “Tax me more.” He’s made different arguments for why wealthy people should be taxed more, and he’s even proposed different ways that people could do it. I’m not agreeing either way with this plan, or if it’s right or wrong, I just thought it was kind of interesting that he decided to kick the can on it. Personally, it’s hard to justify… Well, I don’t want to touch on it. It’s hard to not be political.

Trey Lockerbie (00:35:31):
I just thought it was important to touch on this because we’re coming up to elections pretty soon. With inflation where it is and asset prices going as high as they have, this is becoming more and more of a topic in the US and the populace… The wealth gap is the surest thing to create dislocations in a society. And this “solution” is just one of many but I thought… I just wanted to acknowledge that this question came up and Becky chose to ask it I think because of the overall macro environment of where we’re going with prices where they are.

Stig Brodersen (00:36:13):
I don’t have a lot to this question. Like you, I found it interesting that Becky asked the question. Buffett has seemed to be protecting his legacy more, or the recent annual shareholders meetings. I’m not just going to say like three, four, or five, but like I went through the CNBC archive some time ago and went through all of them, at least to me it seemed like he was more open, that he was… I wouldn’t say more honest because I don’t find Buffett to be dishonest at all, but he probably wasn’t as careful choosing his words because he wasn’t Warren Buffett at the time, he was a very successful asset manager, whereas today he is like the icon Warren Buffett and every time he says something it’s all over the news the next day. So I kind of felt that was probably why he was kicking the can. He just didn’t want people to get mad at him.

Stig Brodersen (00:37:01):
All right. So the next question we’re going to play is a question about inflation. That’s something that’s really, really hard. I think everyone knew that someone would ask about inflation. Becky did it in this case, and here’s the question.

Becky Quick (00:37:15):
This question comes from Andrew Kissel from Minneapolis, Minnesota. He says, “Last year, Warren mentioned that inflation had noticeably impacted the prices that Berkshire’s businesses were paying and charging. Given those inflationary trends have continued and in some cases accelerated since last year’s meeting, could you comment on how this particular inflationary period ranks among previous such periods in the United States like the 1970s and 1980s, and what can American businesses and citizens do to reduce the negative impacts that inflation brings about?”

Warren Buffet (00:37:49):
Well, we’ve sort of attacked them, what you do yourself. You develop the skills that people are willing to pay for in the future regardless of what the unit of exchange is. But in terms of inflation in our own businesses, it’s extraordinary how much we’ve seen. I think you interviewed Irv Blumkin at the Furniture Mart, and two years the prices have just kept coming in higher for these things. We sell them for higher prices. People have more money than they’ve had before and they like to buy. And there’s certain things they can’t buy. It’s like during World War II. You had a lot of money created and people couldn’t buy cars, and they couldn’t buy refrigerators. They couldn’t even buy as much sugar or coffee or things as they wanted, they had little stamps, and gasoline and all kinds of things. Eventually, you get a lot of money in people’s hands and you don’t have very many goods, prices go up. And do all kinds of things to talk it down.

Warren Buffet (00:38:44):
And of course, inflation is never the same. Nothing in economics is the same. The second time after it happens in the first because the first it affects people’s attitudes and the second… Their attitudes always influence the activity itself. It is an interesting phenomenon. People write a textbook and they write about it based on the last, whereas people read the textbook so they behave differently next time, then they wonder why they get a different result than they got the time before.

Warren Buffet (00:39:12):
Anyway, we have sent out lots and lots and lots… When I say we, I mean the United States government. The government has sent out lots of money to people, and at some point the money can’t be worth as much as it was when there was less money out. Here’s an interesting figure that I think probably will astound you, astounds me anyway. The Federal Reserve every Thursday puts out a balance sheet. The Federal Reserve, they are complicated institutions, but they do put out this kind of consolidated statement of all the various Federal Reserve banks, all these things that have entered in the legislation over the years, and there’s a balance sheet. And 15 years ago roughly, if you look… The Federal Reserve issues those notes I talked about a while back. There’s the current one. They print these pieces of paper. And one way or another, they got it in the hands of people. Well, the interesting thing is people said cash is dead and all that sort of thing, cashless society, well, go back 10 or 15 years, there was about 800 billion of currency in circulation.

Warren Buffet (00:40:24):
And if you look at last Thursday’s report, you’ll see there’s something like now $2.2 trillion of currency in circulation. $2.2 trillion. Now there’s 330 million people in the United States, let’s look at it that way. With 330 million people and you have almost 2.3 trillion of currency in circulation, that’s $7,000 per person. Every man, woman, and child, in theory, has $7,000 worth of currency. Well, you know that isn’t right but you do know that the Federal Reserve’s bookkeeping is essentially right. They’ve got that much… It’s out there. I don’t know where it is. I don’t know whether it’s in Russia. I don’t know whether it’s in South America. I don’t know where. I don’t know whether if Charlie’s got it all. It’s a staggering sum. Cash is dead and yet we on average have $7,000 for every person in the United States.

Warren Buffet (00:41:27):
Now, while you’re absorbing that, think for a moment, what would happen if the US government said… Well, they’d work it out in private, and they decide that they are going to send Federal Reserve… I’m not going to blame the Federal Reserve for this, somebody back in Washington decides that they are going to send out a million dollars to every household in the United States. There are 130 million households in the United States or something like that, and they’re going to mail them a million dollars in cash and there were a couple provisions attached to it. One is, if you talked about it in the next 30 days, the money disappeared. So it was like in one of those old TV shows or something, and poof, disappears. And after 30 days you could spend it.

Warren Buffet (00:42:14):
Well, all of a sudden, the household wealth of the United States, the Federal Reserve puts out an estimate, is 130 trillion or something like that. So basically you’ve doubled the household wealth. All you’ve done is mailed out people but you don’t tell them you’re doing it with everybody, you just say they won the lottery or whatever it may be. And now you’ve got an amount equal to household wealth that on average these people would double…

Warren Buffet (00:42:38):
They’ve got this extra 100 million of wealth and in a month they can spend it. Well, what’s going to happen? Well, prices are going to go up. But are they going to go up immediately? Well, you don’t know the other guy got it, you just know you’ve got it, so you don’t really feel like you got to rush out, buy things. But as soon as word gets around… Well, we’ve mailed out. If you look at the amount we’ve distributed, the federal government, I’m just talking about the distribution of resources, we are talking numbers like that, and it affects prices. It has to affect prices. If you went home you found out 10 times the net worth you had yesterday but everybody else has the same thing, it doesn’t increase the amount of bread in the economy or the number of cars, it just means that the value of this is going to go down, and its purchasing power it can’t buy more than exists.

Warren Buffet (00:43:31):
So it’s a very strange period where we have lots of money sent out to people. One way or another we’re getting that they didn’t find as many things to buy as before and we had supply chains disrupted. We have all these things happen. But the end of it is they go out to the Nebraska Furniture Mart, they start buying things, and they do it with our other companies, and they do it in very peculiar ways. And now they are buying… I mean, one thing… Jewelry stores, generally speaking, not a very good business. Two years ago every landlord that had a jewelry store or multiple jewelry stores in their mall was wondering how they were going to get their rent, and now every jewelry store virtually is doing incredibly better than they ever dreamt with way less inventory because people just come in and buy. They don’t wait for sales. When they walk in the store, they are going to walk out and they would have bought something. They paid for it, they got the money.

Warren Buffet (00:44:35):
So we are seeing an unleashing of the fact that we’ve just mailed a lot of money to people. One way or another it’s very indirect and all gets complicated, we’re talking about a big system, but this is what’s happened. And I will guarantee you that if we just mailed out a million dollars to every household in the United States, and you don’t know that it’s happened, you don’t really expect much to happen in behavior tomorrow, but somehow at some point… And then if you start doing it every month, we’ll say, and people really know you’re doing it, then they start anticipating and buying at a time and forward. I mean, there’s a million things that happen in economics, but the answer is, we’ve had a lot of inflation and it was almost impossible not to have if you could have mailed out the kind of money we mailed out. It’s probably a good thing we did it.

Warren Buffet (00:45:24):
There was one point when the Federal Reserve in fact creates the money. If they hadn’t done it, your lives would be a lot worse, a whole lot worse now. And that was an important decision. And that’s why you’ve had inflation. And heaven knows… I mean, it could end. You can throw the country into recession. You can do all kinds of things. Country’s going to have recessions incidentally and it’s going to have depressions periodically Things will happen differently. And you’ll read a newspaper today and you’ll wonder a year from now, “Why was I reading the newspaper a year ago?” It’s just the way it works. That’s everything I know about economics and more, and Charlie can probably improve on it.

Charlie Munger (00:46:05):
Well, it happened on a scale we’d never seen before. Those checks they were just mailed out to everybody who claimed to have a business and claimed to have employees. They probably drowned the country and money for a while. As you say, they probably had to do it, but it was something that had never been done on that scale before.

Warren Buffet (00:46:25):
But we had a problem we hadn’t had before.

Charlie Munger (00:46:29):
Yes. No, I’m not saying it wasn’t a good idea.

Warren Buffet (00:46:32):
I mean, in my book, Jay Powell is a hero. Very simple. He did what he had to do. If he had done nothing, it’d be very easy to engage in what you would call thumb sucking then. And plenty of, I shouldn’t say plenty, but there are other Fed chairmen that would’ve been sucking their thumbs and the world would have fallen around them, and nobody would have exactly blamed them, they would’ve blamed the virus and the Chinese and all kinds of things.

Charlie Munger (00:47:00):
Well, the really interesting company is Japan where first they buy back [inaudible 00:47:04] then they start buying back all the common stocks. Now that’s really weird. And what did they get? 25 years of stasis. Who would have predicted that?

Stig Brodersen (00:47:15):
Inflation. Trey and I probably talked about inflation on, I don’t know, every other show for the past, I don’t know, how many years. It’s crazy and it’s such a hot topic right now.

Stig Brodersen (00:47:25):
One thing from the most recent letter that Buffett talked about was how Berkshire owns and operates more US based infrastructure assets than anyone else. That is classified on the balance sheet as property plant equipment, if you want to look it up. The reason why I wanted to say that is that it’s not a superior tower asset to hold in times of inflation. It’s not like it’s necessarily unprofitable at all. The way that these utility deals are made and all that, there’s sort of like a guaranteed profit provided into it, but the inflation piece is very, very tricky. The way to think about it is more like a hierarchy of inflation. Of course, as you mentioned, owning the assets are good because they come with earning power but they also comes with a lot of issues. So if you have tangible assets, and Berkshire has mentioned it has a lot of them, they are the worst to have in time of inflation. Think railroads, heavy machinery, any kind of power grid, whatever, you are paid in old dollars and you have to replace those assets in new dollars.

Stig Brodersen (00:48:28):
Intangibles are in comparison better. You can think of Google service algorithm. Buffett has this example of See’s Candy that he’s provided quite a few times in his annual letter, and you can look up the 1983 one, that’s probably one of the better examples of that, but basically what it says is that you don’t have to replace intangible assets, it could be a brand name, and you have to do that for tangible assets. So you would prefer those intangible assets instead, everything else equal.

Stig Brodersen (00:48:53):
And then Buffett has this… I can’t remember the last time he didn’t provide this example during one of the meetings, but he talks about how you should invest in your own skillset, and that is the best inflation hacks. And he typically provides the example of being the best doctor in town or being the best lawyer in town, because you have pricing power if you invest in yourself and no one can take that away from you.

Stig Brodersen (00:49:14):
And then finally, I couldn’t help but point to the comment that Buffett had about Fed Chair, Jay Powell, being a hero. Today, everyone is bashing the Fed. Some of it I’d say is fair enough but you also have to remember that hardly no one is working in a vacuum, definitely not Jay Powell in the Fed. For example, there’s no doubt that what Powell has done during the pandemic has increased inflation, and Buffett also acknowledged that, and he also said, well, you have to weigh pros and cons, one thing is that if he hadn’t eased as much as what happened, the employment would have been worse off.

Stig Brodersen (00:49:52):
The Fed has a dual mandate set by Congress in 1977, and that is to “promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.” And so what that means is that Jay Powell has a really, really tough job. He has a very tough job because if you ease, generally you lower employment but you also increase inflation, and if you do it the other way around, it’s not bad for employment, but it’s better for inflation if inflation is running hard.

Stig Brodersen (00:50:28):
That being said, this is not me saying that Powell is a hero, definitely mistakes have been made, but the point of me saying this, and I also think that’s one of the reasons why Buffett wanted to bring this up was that in economics you always have to say, and then what? Nothing is easier than lowering inflation. A lot of people are saying, “Well, why don’t the Fed just hike rates twice as fast? It would lower inflation and low inflation is what we need.” And yes, then we’ll go back to… Nothing would be easier in this world than to lower inflation. It’s not like Powell hasn’t thought about hiking rates faster, but what is the alternative?

Stig Brodersen (00:51:04):
And so right now the Fed is sitting there trying to figure out the least bad situation. There are most likely no smooth landing right now. I’ve seen some research, I want to say this is since World War II, but there only been three “soft landings” where inflation has been lowered without employment being hurt, but that was at inflation that was much lower than what we have today. So we are looking for the least bad situation. Trey, I want to throw it back over to you.

Trey Lockerbie (00:51:35):
Yeah, so I have a few thoughts on this. I think it’s interesting to even highlight Jay Powell as a hero, and there’s a lot of different ways to look at this. Sometimes you hear this idea that people are upset because the Fed is manipulating the economy. And you have to go back and understand that in 1913 they were developed specifically to do that. That is their job. So yes, he’s manipulating the economy by the actions that he took, but to your point, Stig, what’s the best outcome for the world, for America, it’s really hard to say. And we can do armchair quarterbacking here and go back and say, “He should have done X, Y, and Z,” but these guys are operating with speed, as quickly as possible with the information they had at the time. And I think Buffett was acknowledging that as well.

Trey Lockerbie (00:52:17):
I was disappointed with his response though about, just be the best you can be and inflation will take care of itself. I have a big problem with that. I think it’s certainly the most polished, scripted, PR-approved response. And from his position, speaking to 3 million plus people, you can easily understand why his questions would be as generic as that. But you don’t have to look too far to see why that doesn’t make sense. For example, what’s happened in Argentina, Venezuela, Lebanon, Turkey. These are places where hyperinflation has taken hold, and it doesn’t matter if you’re the best doctor, your purchasing power is going down. And that’s what we’re seeing here in America, not only with asset prices, but now with general goods. We’re getting it the worst from both ends right now. And I feel like that deserves a little bit more nuance that he could have given given his position, even though he doesn’t love making huge macro statements, but that in particular was a little bit disappointing, but also expected from him.

Trey Lockerbie (00:53:21):
So, yeah, inflation has been a hot topic. The Fed has been a hot topic. He’s obviously taken side with the Fed. He had a big hand in the Fed’s decisions. He is one of the guys that they call on to get advice so he has some kind of inside experience on the decisions, so he might even be biased that they did the right thing because he had a big hand in it. So you have to understand that as well.

Trey Lockerbie (00:53:43):
My last point though is regards to purchasing power, and actually Preston Pysh put up a great chart of this just today, which basically shows that… Let’s just take the US stock market. From 2008 to today, if you adjust it for the M2 money supply, it’s essentially flat. So that is highlighting the fact that people have this wealth appreciation experience but in reality the purchasing power has gone down. So for example, say your home’s gone from half a million dollars to a million and a half dollars, great, but you have to sell that house and go live somewhere, and you’re probably going to pay a million and a half or more for the exact same house. So that just shows that everyone is in this together and the purchasing power has gone down.

Trey Lockerbie (00:54:23):
So I would have liked a little bit more nuance around this discussion in particular. It has been such a hot topic. I think it was a little bit of a cop out with the, hey, just go out there and be the best you can be at your job and it’ll take care of itself. That was just something that I felt the audience especially, it just didn’t go over very well in the room. You could actually feel some uncomfortability in the room from that response. It just felt a little bit tone-deaf.

Stig Brodersen (00:54:47):
Yeah. And to my point earlier about him providing a bit more, I think you refer to as poet answers, I want to say it was back in the early ’70s he wrote this fantastic piece for Fortune Magazine about inflation and how it hurts investors. I would really like for him to go through some of that and be like, this is actually really, really bad and here how you can combat it, instead of being like the nice Uncle Warren, which I guess you were also referring to.

Trey Lockerbie (00:55:15):
So that was a little bit of a disappointing point of the show, but it didn’t over overshadow the rest of the show. For example, there was a lot of talking points that really stood out to me that I’m going to hang on to for a very long time. One of which was this idea of how optical illusions illustrate how your mind can shift from one thing to the other in a split second and how it can be applied to so many different things in life. So let’s take a listen to this clip from Buffett.

Warren Buffet (00:55:40):
I started buying stocks when I was 11. I’d been reading every book in the library on it. I loved it. My dad… It was his business and I got to go down to his office and I’d read the books down there. And I’d save the money and finally by the time I was 11 I could buy a stock. And I could tell you at that time… I went to New York Stock Exchange when I was nine. My dad took each kid to New York once. And he took me, and I went to New York Stock Exchange, and I was in awe of it. I could tell you how the specialist system worked in the odd lot arrangements. I could tell you history of finance and all of these things. I got very interested in technical analysis and charted stocks. Did all kinds of crazy things hours and hours and hours, and saved money to buy other stocks, and tried shorting. I just did everything.

Warren Buffet (00:56:41):
And then when I was either 19 or 20, and I can’t remember exactly where I did it or something, I picked up a book someplace. It wasn’t a textbook at school but it was in Lincoln in Nebraska. I looked at this book and I saw one paragraph and it told me I’d been doing everything wrong. I just had the whole approach wrong. I was in the business of trying to pick stocks that would go up and in one paragraph I saw that that was totally foolish, and I left. I brought something that it’s really interesting. Let’s put up illusion one. Yeah, there we have it.

Warren Buffet (00:57:24):
Now if you look at that, some people will see two faces, some people will see a vase, and some they will look a long time and only see two faces. The mind flips from one side to another. I know there’s some name for it, they call it ambiguous illusions or something of the sort. There’s other things that talk about aha moments, or in the old comic strips with Popeye Wimpy would have a little balloon over his head and the light bulb would go on. There’s this point where all of a sudden you see something you haven’t seen. Well, it took me… I had an illusion that I was looking at… We’ll say at that one, two faces… Let’s go to the one labeled two. If you’re looking at it from one side, it looks like a rabbit and if you look the other way it looks like you’re looking at a duck.

Warren Buffet (00:58:25):
The mind is a very funny place. I think people call it an apperceptive mass, when you have all kinds of things going on in your mind, and they’re gone for years and you sit there and get lost, and then all of a sudden you see something different than what you were seeing before. Now, and it took me in stocks, which I was intensely interested, and I had a decent IQ, and I was reading and thinking, and it was important to me to make some money on it. Every motivation in the world.

Warren Buffet (00:59:04):
And then I read a paragraph actually in chapter eight, I think it was of The Intelligent Investor, and it told me that I wasn’t looking at the duck, I was looking… Now it was the rabbit, whatever it may be. And whether you call it a light bulb, whether you call it a moment of truth, whatever it may be. And that’s happened. That happened to me in Lincoln. It changed my life. If I hadn’t read that book, I don’t know how long I would have gone on looking for head and shoulders formations, and 200-day moving averages in the odd lot ratios, a zillion things. And I love that kind of stuff, except it was the wrong stuff I was looking at.

Warren Buffet (00:59:43):
I’ve had that happen, and Charlie’s had it happen I’m sure. It happens some few times in your life. All of a sudden you see something important, “Why in the hell didn’t I see this in the first place?” Maybe it’s a week ago, maybe it’s a year ago, maybe it’s five years ago. Maybe it’s learning how to get along with people, whether actually it’s better to be kind or not. Just learning how… If you want the world to love you, what you have to do. You know it when you see it but you didn’t see it for 10 years before. I don’t know whether Charlie’s got some thoughts on that or not but that’s happened in a few situations in business where I’ve looked at a company for a decade and then there’s something that just all gets rearranged in your mind and you can say, “Well, why didn’t I see this five years ago?”

Warren Buffet (01:00:48):
I’ve had it happen a few times obviously, and everybody here has, just in different areas of their lives, and you think, “How could I have been so stupid?” Well, that’s what Charlie is… When he was in the law practice, he had a partner [inaudible 01:01:05], every smart guy that would get in trouble, there was guys and usually it was with women, they’d come into the office and they’d look him down faced and they’d say, “It seemed like a good idea at the time.” Their lives unraveled in many…

Warren Buffet (01:01:26):
So there is that apperceptive mass that’s sitting in there inside somehow and every now and then it produces some insight. It’s better actually if it produces insight into your behavior than whether it produces insight to make money. And some people never get it and they wonder whether their kids hate them or whether there’s nobody in the world that would give a damn whether they lived or die. In fact, they’d prefer they die because then courting them for their art collection or whatever it may be. Charlie would say, “Just write your obituary and reverse engineer it.” Not a crazy idea. Charlie, I don’t know. What do you know about apperceptive masses, which are optical illusions?

Charlie Munger (01:02:19):
Well, I know that that’s the way the brain works and that it’s easy to get it wrong. And part of the trick is to get you to correct your own mistakes. And we’ve done a lot of that, frequently way too late.

Warren Buffet (01:02:36):
We’ve done better with the mistakes than we have with the reasonably good ideas.

Charlie Munger (01:02:41):
Well, it’s so easy to overdo a good idea. That’s what’s going on now. You have a lot of good ideas that are being grossly overdone.

Warren Buffet (01:02:51):
Tell me about one that hasn’t been but tell me later when the crowd isn’t listening. Well, but that’s why-

Charlie Munger (01:03:00):
But look what happened to Robinhood, from its peak to its drop. Wasn’t that pretty obvious that something like that was going to happen?

Warren Buffet (01:03:05):
Tell me again what [inaudible 01:03:06]-

Charlie Munger (01:03:05):
Robinhood when it came out and it went public and it got a little [inaudible 01:03:10], everybody in all the short-term gambling, and big commissions, and hidden kickbacks, and so on and so on, it was disgusting.

Warren Buffet (01:03:18):
Yeah. And it says the last year and they got mad at you and they sold a bunch of their stock and now they’ve got the money.

Charlie Munger (01:03:25):
Yeah, but now it’s unraveling. God is getting just.

Warren Buffet (01:03:31):
But a lot of the insiders have… Right. No, but they’ve gotten a lot of money from. They were big sellers as I remember.

Charlie Munger (01:03:36):
That may be, but there’s been some justice.

Warren Buffet (01:03:41):
I have to agree with that.

Trey Lockerbie (01:03:48):
I think this soundbite is so powerful because I think so many people in the audience can relate to Buffett’s experience. And this is one of the few times I’ve really heard him even talk or touch on the fact that he was in the early days doing things like charting out stocks and buying derivatives and just really speculating. And it’s that optical illusion idea of your brain flipping and seeing something it didn’t before when he picked up the Graham book and realized that he’d been doing everything wrong. As he said there, “I loved that stuff but it’s the wrong stuff.” And I think so many people when they get started in investing, they follow that exact same path. And again and again, over time, he proves out the idea that buying businesses through inflation, through all these issues that we’re dealing with today, over time proves out to be the actual best approach.

Trey Lockerbie (01:04:38):
I like that he also tied this back to Alleghany where he had been looking at a company for decades, and then all of a sudden it flipped in his mind and said, “Oh, you know what? This is actually a buy.” Then he goes on to touch on Robinhood. And this is maybe an interesting other example where people might be changing their minds a little bit, because Robinhood was just I think the biggest story of 2020, even leading into 2021. It’s garnered a lot of attention, it’s brought a lot of people into the market, but it has some questionable structures in place as to how it makes money and actually how it advertises that to the people that are using the platform.

Trey Lockerbie (01:05:15):
Charlie’s obviously not a big fan and said, “God is getting just,” given that the stock price has gone down, I think, 75% in Q1. So the speculation bubble has burst in this position exactly. I love this clip with Buffett where he’s saying, is it, why does it criticize anyone at all? Charlie, “Probably not but I can’t help it.” I just thought that was just a classic Charlie clip that is so emblematic of their dynamic as a duo and what makes everyone fly out to the show.

Stig Brodersen (01:05:44):
Yeah, I love the banter that they have between the two of them. This is also something that I thought a lot about, and I probably come off as like a, I don’t know, want to change the world millennial or something like that, so that’s going to be my disclaimer as I’m saying this. I had Guy Spier on the show not too long ago, and he talked about how whenever he was younger he was willing to invest in anything. I don’t think, so please don’t hold this against, Guy, I’m kind of paraphrasing here, but his point was that today whenever he looks at investments, he’s always thinking, is this good for society?

Stig Brodersen (01:06:22):
And he has this thesis that eventually we don’t know when this is going to happen but if this is not good for society, something bad is going to happen. And he mentioned Philip Morris as one example and saying, “I would not invest in that today. They have this big budget set aside for different lawsuits. It’s not healthy.” So he had this idea that it was just in the too hot pile. It was not something he wanted to do because karma happens and eventually it would have to go wrong one way or the other.

Stig Brodersen (01:06:50):
And it seems to me that Charlie might feel the same way about Robinhood. They were actually approaching us as an advertiser on the show, and the first thing I thought of was this is absolutely amazing. The product’s amazing, like commission free. To me that was sort of like what stood out, especially, as some of the listeners might know, I live in Denmark so it’s not uncommon for me to spend $50 on a trade or $80 on a trade or whatnot. And that’s one, ladies and gentlemen. So if you had to sell it again, you also have to pay the same fee.

Stig Brodersen (01:07:16):
I was looking at brokers and estates. I think E-Trade at the time was like $10 which to me seemed like free more or less, and then this app comes along and it’s entirely free. It really catches your attention, and then as you start to research more like, “Huh, how can you have a business model of being free?” Facebook is free. Well, if something is free, you are the product. And that’s the case of Robinhood. That’s how they make money, that’s because you are the product. You might agree with that or you might disagree, but I just think it’s very important for you to make up that mind with yourself, like is this good for society or not, and perhaps invest in quarterly.

Stig Brodersen (01:07:56):
And I’m not saying that if everything is black and white. I think a lot of people would look at Buffett and say, “Well, you invest into all companies, that is not good for the world.” And so I definitely think there are some things that can be debated there, that’s not my point at all, but I just wanted to mention because Robinhood was brought up. I know Charlie’s always been asked about Robinhood. Every time I see an interview with Charlie, someone always… I kind of feel like they are trying to see if they can get a quote for a newspaper or something like that because they sort of like want him to talk about Bitcoin or for him to talk about Robinhood just because they know they will get a quote they can sort of put it up there, and I kind of feel like Charlie knows that too.

Stig Brodersen (01:08:33):
All right. So let’s go to the next question. Well, I probably shouldn’t say question because I don’t even remember the question, and I don’t think Buffett did either, but Buffett had a really, really long response, and then he said like, I don’t know, 10 minutes in like, “Oh, by the way, we also bought something in Activision Blizzard.” So here’s the audio clip.

Warren Buffet (01:08:52):
One of the things I bought, it was bought for a different purpose by a different manager of months earlier, he bought roughly 15 million shares of Activision. I knew about the company but I would just see it at the monthly report. But then on January, I don’t know, 17th or 18th, something like that, Microsoft announced they were going to buy Activision for $95 a share. Now when they announced that, at that point Activision becomes a different kind of security. It becomes what Charlie and I used to call… Well, everybody did. 50 years ago we’d call them workouts or something like that and they’d become known as arbitrage. Well, they are not really arbitrage but they are securities, or those days are common stock, whose value depends not on what the market price does but whether an announced corporate event occurs.

Warren Buffet (01:09:55):
Well, Microsoft wants to buy Activision, we’ll say, well, they said at $95 a share, and they’ve got the money, and obviously big mergers, tech companies, all kinds of things have got all kinds of problems with the world generally in terms of opinion, so you don’t know what the Justice Department will do, you don’t know what the EU will do, and all kinds of things, but at that point it becomes a different security. And Charlie and I, 50 years ago we used to do a lot of that sort of thing. And we [inaudible 01:10:37] Goldman Sachs. We even went back one time, I think, on British Columbia Power, didn’t we, Charlie?

Charlie Munger (01:10:42):
Yeah, we certainly did.

Warren Buffet (01:10:44):
A guy named Bennett was up there and we were trying to figure out whether some takeover of the power business. We spent a lot of time analyzing the probabilities of announced deals going through, and we called them workouts. Now the term became [inaudible 01:11:03]. And it hasn’t worked overall too well in recent years.

Warren Buffet (01:11:07):
Now every now and then I see something that I want to do in that field, but very seldom because they got to be big the profit is limited. If they say you’re going to get 95, you’re not going to get 96, the deal blows up you may have a stock that’s at 40 or something. We did it with Monsanto five or six years ago when Bayer was buying it and we got very lucky because it turned out to be a terrible acquisition for Bayer, but it did go through because Bayer had the money and they went through with the deal even though Monsanto came with a problem that nobody really understand to the extent of… And we did it with Red Hat when IBM bought it.

Warren Buffet (01:11:53):
So in any event, on January, whatever it was, 17th, 18th, 19th, Microsoft announces it, and the stock which had been 60… Let’s see what it… I may have a slide here which I’ll find. But anyway, the stock which had been in the 60s went up to the 81 or 82, and that looked like not a big enough spread to me for a few days, then it settled back a little. So anyway, we now own something like 9.5% of Activision. If we went over 10%, we would file a report. In order that the news people don’t feel that there’s no new here, I can tell you that as of yesterday we own about 9.5%. If we go past 10%, there’ll be a foreign file with the SCC and so on. But it is my purchases not the manager, who bought it some months ago, and if the deal goes through we make some money and if the deal doesn’t go through, who knows what happens.

Warren Buffet (01:12:58):
I just want to be sure that if we do file that report, people better understand very clearly because there’s been some very mixed up stories on that in the past. We want to be very clear that it was Warren Buffett’s decision in that particular case, and he doesn’t know what the Justice Department’s going to do. He doesn’t know what the EU is going to do. He never talked to anybody in mergers about anything. He just read a document, he made his own assessment, and it can change. One time, I think we sold a few shares even, when I thought it was a little higher than it should be, it turned out those sales were not a bad sale. So I just want to create a little news for you.

Warren Buffet (01:13:39):
And I want to, if possible, head off story which have been incorrect in the past, which get them to get picked up by other media and corrections never get written that all the corrections were written by one inaccurate story and they apologized even to me. Both the reporter and the editor sent me a personal note of apology. They didn’t expect to make a mistake but when the other publications picked up the story, they didn’t bother to pick up the correction, and millions of people were misinformed literally by the time it gets spread around. And this one I will attempt to head off by telling you exactly what the facts are right now, and we’ll see whether it go beyond 10%. It could easily be that they’ve gone up a few dollars. It’s still a $95 deal. We don’t know what the Justice Department will do. We don’t know what the EU will do. We don’t know what 30 other jurisdictions we will do. One thing we do know is Microsoft has the money so that takes that one risk out of it.

Stig Brodersen (01:14:40):
I really like the way that Buffett talks through this because it really shows the complexity of investing and also the concept of resulting, which I think is absolutely crucial for all investors to know. So let’s go into a bit more detail about this type of investing. It’s often referred to as merger arbitrage or merger arbitrage betting. Even though Buffett calls that out and says it’s not really arbitrage. By definition, arbitrage should be risk-free. This is not risk-free.

Stig Brodersen (01:15:10):
So here are the things we know. We know that Microsoft has offered to buy Activision Blizzard for $95 a share, and this is a deal that’s going to close in fiscal 2023. So the question is now, what should we buy these shares for? And if this was truly arbitrage, if there were no risk, risk comes from the Italian word, [foreign language 01:15:32], which means to dare, it’s not risk-free at all. So if that was the case, you could make the argument you should buy the shares up to $94.99, assuming no time value of money, because you’ll always get $95 back. But no, there are risks.

Stig Brodersen (01:15:48):
There are hundreds of reasons why a deal won’t go through. It could be financial problems. That’s very often what happens. If you noticed what Buffett said there before, he said, “We know that Microsoft has the money.” That comment he has is actually very important. One of the common things that happens in these type of things is they cannot get the finance in place. It might be financed with debt. They thought they had to deal with the bank but they didn’t or the bank something happened to it, whatnot. So financing problems, that’s probably the most common reason why this doesn’t work.

Stig Brodersen (01:16:18):
Another one is due diligence outcomes. It could simply be something as simple as personality clashes like, “Oh, we don’t want to work with Microsoft anymore. We don’t like the boss. We don’t like the way they treat us. They didn’t give us much as promised,” not related to financial compensation but related to something else. Or it might be something due to regulation. The government might come in and say, “No, can’t do that,” all of a sudden. It’s probably not the case for this specific example but it could be, “You have too big of a market share in this specific field so you cannot do that. It’s not allowed.” And so if any of this happens and the deal does not fall through, shares would trade significantly lower. I think right now as we’re recording this here, May 3rd, the share price is around $75, but if this happened, the share price would follow back. And then all of a sudden it becomes about the fundamentals of the business and not whether the company will be bought or not, because that’s more like the event driven thing here.

Stig Brodersen (01:17:11):
So my point of saying all of this is that, as an investor whether or not we think that, let’s call it, $75 is a good price to pay for a share of this company is that it comes down to understanding probabilities and the expected returns. As investors we have to assign a probability to a given event. How likely do we think it is for the merger or acquisition to happen? And if we think it’s, say, 8%, we can reverse engineer that to what stock price that would equate to. Trey might think it’s 90% likely to happen, so he would be willing to pay a higher price than I would if I would only think it would be 80% as likely.

Stig Brodersen (01:17:50):
We also have to keep in mind if we take the other side that nothing is a 100% certain. So that also implies that a price can be too high. I would say that if I could sell Activision Blizzard right now for $94, I probably would, because I do not expect the probability of the event happening to be high enough to justify a price of $94. Even though I do think it’s going to happen, it’s just not high enough. That’s even ignoring like the time value of money. You also have to consider that. If it doesn’t happen before, I don’t know, 12 months, you also have to consider the opportunity cost of having tied up your money in that investment.

Stig Brodersen (01:18:25):
And it’s really important to understand the difference between probabilities and the results. Let’s say that the event didn’t occur, let’s say that this event falls through like this acquisition for whatever reason, you would read on all headlines that Buffett has been wrong. It would say something along those lines. However, if you do that, you will be susceptible to what is called assaulting. Investing is not that simple. You have to factor in which price did Buffett buy the [inaudible 01:18:52], he certainly bought it cheaper than $75, and what was the probability of the event occurring at that time. Because even though you are right that the probabilities are, say, 80%, well, 20% of that time the deal falling through will also occur. And I know I make it sound simple, but if something is 20% likely to happen, it does not mean that it won’t happen, it just means that it happens 20% of the time.

Stig Brodersen (01:19:18):
And the thing that’s very important to understand whenever you talk about investing, because you don’t have perfect information, you can only do estimations. Let’s say I play chess with Magnus Carlsen. He’s the world champion in chess. I haven’t tried but I’m 100% sure I would lose every single time. This is the game with perfect information. That doesn’t mean that the best player would always best the weaker player, even though you have perfect information, but it’s most likely to happen. Investing is not so in the short-term. And so even if you have the odds on your side, you would have to size your position accordingly to fight another day. I know that was a very long, long explanation to that but I just think it’s very important to know this because it really encapsulates what we as investors should know about investing and some of the frameworks that we should evaluate both our successes but also our failures.

Trey Lockerbie (01:20:09):
I like to say that I came to Warren Buffett and Charlie Munger for investing but stayed for the philosophy. And I think a lot of people can relate to this because one of the reasons we all trek it out to Omaha is not just to learn about investing but it’s also to learn about how to live a great life.

Trey Lockerbie (01:20:24):
And one of the best sound bites for me that came out of this entire discussion, it was actually Buffett who referenced a quote that Charlie has apparently said in the past, and that was essentially, “Write your obituary and then reverse engineer it.” And what he’s talking about there is your obituary is essentially this phrase that kind of sums up your entire life, and hopefully it says something to the effect of, “Trey was a very beloved person by all his friends and family and a very successful person in both business and life,” or whatever. That could just be a good example of it. So you say, okay, if that’s where I’m going to be 60 years from now, how do I reverse engineer that to ensure that that’s kind of the narrative for me as a human being once I kind of live on? That’s my legacy.

Trey Lockerbie (01:21:06):
And to your point, Stig, these guys are trying to solidify their legacy. It explains a lot of the answers they gave to a lot of these questions as you put it before. And this is just one of the best like bite-sized pieces I took away from this discussion and a great rule of thumb that I’m going to try and live by and kind of implement in my own life.

Stig Brodersen (01:21:25):
That’s why you meet some of the best people in Omaha. It seems like you have these values in common. We met each other at Berkshire. Well, not at Berkshire the meeting but like through a Warren Buffett forum. You just meet wonderful, wonderful people who, yes, they are interested in money, and that might be the first attraction, but it’s about so much more. I would highly encourage everyone to go there and meet up with the TIP community and Trey and me the next year.

Stig Brodersen (01:21:56):
It’s difficult to describe. I hope we’ve done a reasonable job on this podcast but I feel like we haven’t because you sort of have to be there, you have to like feel the buzz. Like people are standing outside at like 4:45 or whatnot in the morning, and you’re like, “Isn’t it just a Q&A session about investing stuff? I can watch it on Yahoo Finance or stream it.” It is and it’s not. I don’t know how to best describe it, but you definitely watch sports in so many ways better home in the couch but it’s not the same as experiencing Super Bowl Live. It’s just not the same. And yeah, you get better angles, you get better slow motion photo, yes, but whenever you’re there, it’s just magical.

Trey Lockerbie (01:22:40):
I think you nailed it, Stig. I mean, this is the Super Bowl of capitalism. This is the Woodstock of capitalism as they call it, and so you’re exactly right. You kind of have to be there in the room. It’s a certain breed of people that show up. If you’re there, you’re around your tribe and you really feel that. The people who are there are there for the long-term. They are putting a large stake of their retirement probably in this company. We feel like partners of this company, and Buffett has done a great job over decades curating that mindset in letting us become what Larry Cunningham would call quality shareholders. That’s the feeling you get. You get the feeling like you’re part of a tribe. You’re around the people that you resonate with and understand. And there’s nothing like it.

Trey Lockerbie (01:23:22):
And to be quite honest, I don’t know how many more years of this we have. They are getting up there in age and I would highly encourage… I mean, I do like to say this sometimes, it’s kind of like seeing Bob Dylan in concert. It’s probably not as good as it was 30 years ago but he’s still live out there doing it. You better go see him if you get the opportunity. And this is no different. These guys are legends. They are at the top of their game even in their 90s, and so it’s a privilege to go see them, and I highly encourage it if you get the opportunity next year.

Trey Lockerbie (01:23:52):
So that sums up our Berkshire Annual Shareholder Meeting episode. I hope you guys enjoyed it. Be sure to reach out to us and meet up with us next year. And with that, we’ll see you again next time.

Outro (01:24:02):
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