6 November 2015

Charlie Munger is by most people considered to be Warren Buffett’s sidekick. Although some might view Munger with less admiration and understanding than Buffett, Bill Gates says Munger is “truly the broadest thinker he has ever encountered”.

In this episode Preston and Stig are accompanied by author Tren Griffin. Tren recently released the complete guide to Charlie Munger’s life and investment philosophy.

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  • The top three things Charlie Munger has contributed to Warren Buffett’s evolution?
  • Why Charlie Munger doesn’t look at macroeconomics when he invest in stocks, and whether or not it’s a blind spot
  • Tren Griffin’s most memorable story about Charlie Munger
  • The secrets behind the moat of Charlie Munger’s recent stock purchases
  • What “lollapalooza” is, and why Charlie Munger thinks the concept is vital for understanding the stock market…and Tupperware parties!
  • Ask the Investors: Why has Warren Buffett invested in IBM?


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Disclaimer: The transcript that follows has been generated using artificial intelligence. We strive to be as accurate as possible, but minor errors and slightly off timestamps may be present due to platform differences.

Preston Pysh  01:03

Hey, how’s everybody doing out there? This is Preston Pysh. I’m your host for The Investor’s Podcast. as usual, I’m accompanied by my co-host Stig Brodersen out in Denmark.

On today’s show, we have a really fantastic guest that’s going to be talking to us about Warren Buffett’s billionaire Vice Chairman, Charlie Munger. for many value investors, Charlie Munger is one of the most intriguing personalities because he’s truly Warren Buffett’s right-hand man. He’s just full of generous amounts of humor.


One of the leading experts on Charlie Munger is our guest today and his name is Tren Griffin. Tren is the founder of the awesome value investing website called 25iq. He is also an executive at Microsoft. But in his free time, he loves blogging and talking about everything value investors treasure and that’s information about people like Warren Buffett and Charlie Munger.

So Tren just recently wrote a book and the book is titled “Charlie Munger: The Complete Investor.” I’ve read this book, Stig. I know you’ve read this book. I thoroughly enjoyed it, Tren. It was a really great read, and I think our audience is going to love this because there are not many books about Charlie that are out there. There’s a couple, but there’s not really a lot. You can tell in your book, you did a lot of comprehensive research, you pulled some amazing quotes. I know you went back and you read a lot of the books that Charlie loves because I caught some of the hints of those in your book. I know you referenced them at different points. So, we know you did a lot of research. It was really quite a fun read and we’re really excited to be talking to you about this today and asking you some questions about the book. So, great to have you on the show, and thank you for joining us.

Tren Griffin  02:43

Great to be here.

Preston Pysh  02:45

All right, Tren. So, I got the first question. We recently finished reading your book about Charlie Munger and it was a lot of fun. When a person goes to the Berkshire Hathaway Shareholders Meeting for the first time, I think one of the most obvious things that surprised a lot of people is the intellect of Charlie Munger. I had heard of Charlie but I know when I went to that first meeting, and I heard him start… Some of his responses are so quick-witted, so brilliant and so concise. I think that’s the other thing is he’s so concise and poignant in some of his responses.

What is the reason you chose to write a book about Charlie, though? I know, I was intrigued after I saw that. But why did you write this book about Charlie? And what was the one thing that you admire most about his personality?

Tren Griffin  03:26

Well, the reason I decided to write a book about Charlie was, first of all, it was a tribute to Charlie because he’s helped me with some major life decisions. The other reason is I think he has so much to teach. When I was troubled during the internet bubble, I was searching for a rock to grab onto and say, “What’s going on here? This doesn’t seem real.” And he was a rock for me in terms of the way he thought.

But the thing that bothered me was there really wasn’t much out there other than the scrapbook of material that I’d collected over the years. The things he said here and there. I felt like there was a need to synthesize it a bit and create a framework so you could understand his ideas. But the key thing with Charlie is he has a rational approach to life, a curious approach to life, and then also is completely unrestrained, in saying the truth.

Preston Pysh  04:22

So Tren, the thing I like about Charlie, and you’re bringing it up right here is it’s almost like he says the stuff that you know Warren Buffett would never say. It’s almost like it’s a Warren Buffett’s alternate ego coming out at times, where you know he and Buffett have almost the exact same opinion about everything. They’ve pretty much matched at this point. But Charlie’s the one that actually comes out and says it. Would you agree with that?

Tren Griffin  04:45

Yeah. He’s completely unrestrained about the truth. Do you know what he said earlier this year about Valeant? Very few people are willing to go out and say what he said. It’s simplified, I think by the rise of comedians in political discourse today. Comedians are out there telling the truth, and people are hungry for the truth. In an investing environment, Munger is out there saying things out loud that most people would only think about in their heads. Like, I can’t possibly say that. It’s so refreshing. I think people are hungry for that, not only in business, but in politics. Authentic people are interesting and funny.

Stig Brodersen  05:28

Yeah, I definitely think that Charlie doesn’t have the same urge to be liked as Warren Buffett. So, I definitely agree with you, Preston. Sometimes you might be looking at Warren Buffett, when he’s replying to a question thinking, yeah, he probably thinks that this is really some bad stuff happening. With Charlie, he’s like, I’m just telling the truth. I don’t care what you’re thinking about me. I think that’s really what people like about Charlie.

Tren Griffin  05:52

One of the things that Charlie has said… They say, “Well, Charlie should serve as a role model for people.” And Charlie says “No. I’m too cantankerous, and I’m to basically in your face. I don’t think I’m a good career model for anybody.”

He also said that he doesn’t particularly admire the fact that he’s made so much money as an investor because he’s not the person out there creating things. So he’d rather people actually go out there and be doers. But learn from him because what Charlie teaches about investing is applicable to life, generally.

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Preston Pysh  06:26

I really enjoy watching Warren’s face and just whenever Charlie comes out and says something you can tell, Warren just gets total bliss out of listening to what’s going to come out of Charlie’s mouth next. It’s amazing. If you’ve never seen the exchange between these two, look it up on YouTube if you can’t go out to the shareholders meeting or whatever. Go on YouTube and look this up because some of their interactions are just downright hilarious in the way that they correspond with their audiences. It is pretty awesome.

Stig Brodersen  06:56

So Tren, I think you said this before, but I’m also of the opinion that the main reason for Charlie Munger’s financial success is his really 110% rational approach to everything. So, he has multiple times warned people about the psychology of human judgment in stock investing, and especially the misperception of risk. I know from your book that you also have a personal story, where you really, as you said before, had rocked in Charlie Munger. Can you tell that story?

Tren Griffin  07:28

Well, when the kids were growing up, my kids, I was always trying to tell them that basically, when you make a decision, don’t just focus on probability, focus on magnitude. In other words, it is the magnitude of correctness that matters both in a loss situation or gain situation. I was in bed one night and my biceps started to get hot. I said, “That’s not normal tightening on both sides.” And so I jumped in the car, probably not a great move, and I drive into the hospital. I said to myself, “Well, the pain is going away, maybe I’ll just go home. I got a busy week next week.”

But you know, I was starting to rationalize not going to the hospital. But basically, at that moment, Charlie popped into my head and I basically said, “Look, what we have is a situation here where we have a potentially massive magnitude of the loss, I could die. Even if the probability was only minuscule, I got to go to the hospital.”

I went to the hospital, they did the test, and I’d had a tiny amount of heart damage. Well, the good news is it’s only tiny. The bad news is it wasn’t zero. So I had the test. Turns out I was in a dangerous situation. I would not want to leave the hospital and I had a triple bypass. But the key point to my kids, think about magnitude. Don’t just try and rationalize, “Well, there’s such a small chance I’ll drive into a tree, there’s such a small chance I’ll have a heart attack.”

And so you need to think about that way. Then on the upside, reverse of that. The magnitude of correctness, what you want is the situation with optionality that’s positive when a low investment can only lose 100% of your money when I do venture. But I potentially need 100x or 50x to make the whole thing makes sense. So, magnitude really matters. But thinking probabilistically is a Charlie must-do.

Preston Pysh  09:16

Love that response. That is awesome. One of the things that I’m often asking myself is where are my blind spots? And how can I improve on them? When I look at Charlie and Warren, it appears they often ignore this macroeconomic piece of investing. I’ll be honest with you, for years, I was the exact same way because that’s how these two gentlemen were and I literally modeled every investing decision I made off of Warren Buffett, and subsequently Charlie Munger.

But in the last few years, really the last year, I’ve really started to pay a lot of attention to macroeconomics just because of the situation we’re currently experiencing, with these federal banks printing through the nose. I know there’s a really good Charlie Munger quote that I’m going to mess this up. But it went something like “You got every central bank in the world printing at ungodly levels, and they can’t get any type of inflation. In fact, it’s deflation. You asked me what’s going to happen, I have no idea what’s going to happen. I just find it all going to end really badly.”

That’s the gist of what the Charlie Munger quote was, but I’m sure I messed up a little bit of it. I have been paying a lot of attention to macroeconomics. I know that Warren and Charlie really, don’t they really stick to their macro piece. They’re looking at individual companies, and they’re doing their discount cash flow models and finding great management. All that stuff that we typically talk about on the show and any other value investor talks about, but is this maybe their blind spot, Tren?

I’m just curious whether you agree with that. Or is this going to be maybe one of their fatal mistakes because they’ve been ignoring it for 50 years and the economy just allowed it because of where we’re at this larger debt cycle?

Tren Griffin  11:02

I don’t think so. I think the key insight that they and people, like Klaram and Howard Marks, have is the best way to be prepared for the macro environment is to focus on the micro. In other words, if you’re going through and doing a bottoms-up analysis on all your companies, on all your opportunities, you’re basically able to tell the state of the macroeconomy by whether you’re able to buy these companies at an attractive price. The natural cycle is as the economy gets overheated, you can’t find any bargains.

And so what happens is if you focus on the micro and bottoms up, the macro takes care of itself. Now, it may be in a situation where there’s a crazy bubble going on, you still get a bargain, and you’re able to buy $1 for 70 cents. But the important thing is you, as a trend, you’re likely to start accumulating cash when things get silly. So the way to think about it is being positioned in a macro sense is the residual of being a disciplined buyer. So naturally, your cash levels creep up when bargains start to disappear. That happens to be times when there’s a macro bubble or something like that. So, it’s a residual.

Preston Pysh  12:22

So Tren, one of the things that when we look at today’s market, I know we’re getting off the beaten path here with where we were going with these questions. But I want to seize this opportunity because you’re here, you’re such a smart guy on this stuff, and I want to hear your opinion.

Whenever I look at the current market conditions, and I see how the Fed is buying back bonds. They’re creating this enormous supply and demand out of balance in the bond market because of all this quantitative easing. It’s not just in the US. It’s worldwide. I mean, look at Japan. They’re even saying that they’re going to be buying up ETFs at this point. That’s not a free and open market. That’s where I’m really starting to get concerned, as they are manipulating… We’re not just talking some billions of dollars her. We’re talking trillions upon trillions of dollars at a magnitude that’s unprecedented and something that we’ve never seen in the last hundred years. The bond markets being completely manipulated.

Tren Griffin  13:16

I would agree. go a little bit further. I would say, we’ve never seen this before. The Charlie quote you refer to, he actually says, “We’ve never ever seen this before.” And so Charlie has this concept of a “too hard pile.” And in the “too hard pile,” you take certain questions in life and say, “I don’t know.” And you don’t go there. The macro, he doesn’t know and he doesn’t think anybody knows. So stay away from it. Don’t expose yourself to macro risk.

Preston Pysh  13:46

Great response.

Stig Brodersen  13:47

Yeah, just before we go on to the next question. I love that you say the “too hard pile,” Tren. I often feel that when you’re talking about macroeconomics. Sometimes Preston has some great insights. Just like… I don’t know it’s hard.

Preston Pysh  13:58

Everything I’m talking about needs to be in the “too hard pile.” Yeah. just for people out there that might not know. So, on Warren Buffett’s desk, I’m assuming Charlie has one similar on his desk as well. He has a bin and it’s labeled the “too hard pile.” And this is a joke and a really fun conversation.

Stig Brodersen  14:16

So the next question I have for you, Tren. That is that it’s hard to say Charlie Munger without saying Lollapalooza. Wow, that’s the first time I said that on the podcast. This is the concept he used to describe everything from the rise and fall of the internet and to the effectiveness of Tupperware parties. Could you please explain the concept of Lollapalooza and why it’s relevant for me to know as a stock investor?

Tren Griffin  14:42

So Charlie has a view of the world which is consistent with work that’s being done to Santa Fe Institute and other places. He thinks the world is a complex adaptive system. Economy and companies are not a machine. They’re more biological. They’re more organic and you get situations where the hole is more than the sum of the parts.

And in a Lollapalooza, what you have is a situation where you have many inputs, and they sum up to more than what they truly are. When you have a complex adaptive system from going back to the previous question, you get results that you just can’t predict. You just can’t expect this is the butterfly wings and a flap in Brazil impacts the weather in Seattle where I live.

The important thing to understand is situations like Tupperware parties, the way like somebody like the *moonies our program, there is a whole range of things where there is a confluence of things that go together. There’s lots of feedback. There’s what George Soros calls reflexivity, a result that just emerges out of no place. Crazy things happen, that are completely unpredictable. So once you accept that it should make you humble about your ability to make predictions.

Stig Brodersen  15:55

Yeah, so for instance, if we talk about Tupperware parties, in particular, you will have the concept of reciprocity and liking and social proof. Then you have all of these plastics mixed in together and suddenly you find yourself paying double price for a piece of plastic, right?

Tren Griffin  16:12

That’s right.

Stig Brodersen  16:13

People might be sitting out there and thinking, Okay, these guys are talking about Tupperware at The Investor’s Podcast. But this Lollapalooza effect, that’s also something that you’ve seen in the stock market. So, if we revert to the thing about the dot-com bubble, how all these factors combined creating this Lollapalooza effect when you saw the dot-com bubble?

Tren Griffin  16:33

So in a Tupperware party, you’ve got, for example, as you said, social proof operating. In the internet bubble, you had social proof operating in the internet bubble, the biggest driver was fear of missing out. People were just deathly afraid of their brother-in-law, having all this money and they didn’t. So there was this cascade, and in a Tupperware party, people are afraid of what people think. You’ve got a whole soup of behavioral economics, heuristics which are driving you to buy these pots and pans. But the internet bubble really illustrates better than anything in business ever really, the power of feedback.

And the other thing in March, I think it was 10th, 2000. It just stopped. you can’t predict the timing. But the feedback, the social factors, all of the human factors are similar between the Tupperware party that Buffett and Munger have talked about and a stock market bubble or a range of phenomena.

Preston Pysh  17:34

So I got a comment that I want to piggyback on this whenever I’m looking at how high can the market cap really go? That’s a question that a lot of people ask themselves. If they look right now and they’re looking at the Shiller PE, I’d call it a 25 or 26 or whatever it is today. When you look at the Shiller PE back in 2000, it was as high as what was it, Stig? 35 or 37 or something, which was really high and which was significantly more than where it’s at today. Just showing you how far this psychological piece can really take things when you go back to the reflexivity George Soros type stuff working. It can work in a positive direction, or it can work in the negative direction.

Whenever I go back, and I look at that 1990s timeframe that drove those prices to such epic levels, I really like to attribute that enormous growth in valuations and multiples to the fact that we saw such a quantum leap in the way business was going to be viewed in the coming decades with an online business. How you could now reach a world market that was truly a quantum leap in business and we hadn’t seen that in centuries.

And I really think that that led to one of the reasons why you saw the multiples get so far out of control. They, as you said, they ultimately burst there in 2000. I don’t see that today. So, whenever people were saying like, “How much higher can these multiples go?” I really think that if you were going to throw something out that it’s synonymous with where we were at in 2000. I would call that person crazy. But again, as you said, Tren, this is not something that is predictable. You don’t know when that house of cards is ultimately going to fall. But I definitely think that 35 is we’re not seeing the quantum leap in business as we saw back in that timeframe.

Tren Griffin  19:20

I think values right now are on the high side of fair. It’s substantially different from 2000. I lived through 2000. 2000 was literally nuts. I took a week off and did nothing but read and think just because things were so unhinged, and I was searching for what I should do with my own portfolio. I read and I thought and I read and what I eventually decided was I’m going to sell half. This is before it popped.

And then it was really based on not math but regret. It was enough so everybody in my family was going to be taken care of. I was not going to burden anybody with my retirement. It was basically taking enough so the rest that I left in the game was house money. It was based on humility, which is I didn’t know. I think even today, I don’t know. for people making decisions, I think what you should do is really think about things in a two-part analysis which is trying to be rational, first and foremost.


And secondly, try and look for bias. Are you concerned with things that are basically not rational? And for me, the game is completely different. Once you have enough money put aside, you can take care of the people you love. There’s nothing worse than that.

And then playing the game on house money. Like if you look at Buffett and the billionaires you focus on in this series, people are playing with house money. you can take risks, you can do things that someone who’s got the rent money on the line can’t take. So one of the things you can have as an approach to life and this is where Munger comes in. His idol is Benjamin Franklin and Benjamin Franklin, probably the most amazing American ever was the first American. But he made a lot of money as a printer. That financial security allowed him to be a statesman, the first postmaster, a diplomat. Charlie knew early on that that he wanted that freedom. So, money for Charlie is really about being your own person and being independent.

Preston Pysh  21:22

I don’t know if I read this in your book or where I think this quote comes from, but I think there’s a Charlie Munger quote that says something like that “the first hundred thousand is a real bitch.” Is that right?

Tren Griffin  21:33

That is exactly what he said. What he’s saying is when you’re struggling and when you’re just trying to put together a little bankroll, it’s hard because you got to pay rents. You don’t have compounding working on your back. but once you do, then you can start relying on the magic of compounding and start taking risks that you couldn’t do so otherwise.

Stig Brodersen  21:54

Yeah, I love this episode, guys. We said bitch and Lollapalooza within the same episode. Okay, I have the next question, Tren. Charlie Munger and Warren Buffett have recently, and recently, that’s a few years ago, bought into railroads, energy, and utilities. In the beginning, that was very surprising to a lot of investors because they have very high capital expenditures. Investors really thought that Warren Buffett was still buying or Charlie Munger was still buying See’s candy, as you also talked about before.

Now, Charlie Munger explained the purchase as a method to employ the last amount of capital, still an above-average return, though it’s not really the same superior returns, as you’ve seen Berkshire Hathaway do in the past. But one of the less-discussed topics in the media is the types of mode that you have for these companies. one of the things that I find really interesting is to talk about the supply side advantages of these businesses. Tren, could you explain the concept of supply-side advantages and also, how have Buffett and Charlie Munger used that in their investment philosophy recently?

Tren Griffin  23:06

So the key thing about railroads is actually they got the idea of Bill Gates, who was in a railroad stock first. But Munger and Buffett have this problem that the three of us don’t have, which is they have to put billions of dollars to work. Huge amounts of money. a lot of that cash is generated in places like Dairy Queen and See’s, where they can’t put it to work in their own business.

What they’re doing is they’re looking for opportunities to invest in internally, within the company, that have a strong capital return but to also take advantage of the fact that it’s very tax-efficient, to move money from See’s and Dairy Queen into the railroad. So, they basically get a tax deferral. So, between the tax deferral and the returns they can get, they go out and do the capex required to double-decker railroad. They get a very high return, and they’ve got a loan, essentially a loan from the tax deferral. The key thing about economies of scale, according to Munger is it’s really hard to replicate. In other words, creating another transcontinental railroad is fundamentally impossible.

Stig Brodersen  24:14

Yeah. To follow up about the things we talked about macroeconomics and the “too hard pile.” So one of the things that we’re talking about is that you can’t outsource the railroad. I mean, it is where it is you cannot put that in India because Americans need goods transported in America. There are more and more Americans, so they will transport more and more goods. There’s a higher demand for goods.

So this is really a micro play, but at the same time, really betting on America. I really think this is very classic Warren Buffett and Charlie Munger play because as you said, I think you paid 26 billion for Burlington Northern back then. It’s really hard to find good deals now for Warren Buffett and Charlie Munger because they have so much money.

Tren Griffin  24:57

One of the things that they both said is that size works against performance. In other words, if you’re managing 100 million dollars, there’s a lot of little companies you can buy, there are investments you can get into and get out of. But once you’re trying to put billions of dollars to work, you really have to think in terms of a Precision Castparts. Whereas they have to buy a giant company, and they have to buy all of it. That means they’ve admitted that returns may not be what they were in the past.

Preston Pysh  25:24

And what’s really amazing, Tren, when you’re talking about that specific piece of it, where they’re saying that it’s harder for them to get the returns that they were able to get at a different point in time. you look at how interest rates have changed. So, you go back 20 years back into the 1980s, when interest rates were going bananas. You know, in double digits, that puts a whole different price dynamic across asset classes. now that rates are getting polarized to zero literally to zero. In Europe, we can even say negative rates. How can you continue to get those yield because everything’s being priced off of those risk-free if you want to call it that investments?

Tren Griffin  26:07

You’re making an important point. The way Munger and Buffett react to this is to say, “We don’t have a cost of capital, we have an opportunity cost of capital. our opportunity cost is our next best alternative.”

And so when they look at interest rates today, they’re not trying to compete for their cost of capital, as they would in a business school. They’re just saying, “What’s our next best alternative?” And so what they have to do is basically think I still need to think long term. What should my hurdle be? And when Charlie’s been asked this question, he said our traditional hurdle is been around 10% or 12%.

And the question is how much do you drop it? And the answer is you just really have to think if your next best opportunity is 1% or 2%, you take it or you just sit on the cash? And that’s the $64,000 question, right? What do you do? How much cash do you keep on the sidelines? You see what Klarman’s doing and you see what Marks is doing. You see what Buffett’s doing and you realize that they’re in the middle.

Stig Brodersen  27:09

It really reminds me of something that Jim Rickards has said about Warren Buffett and Charlie Munger because as you might notice, *inaudible is just really bear on… I would like to say everything, but like he is really not an optimist about the economy and their macro situation right now. So, he’s saying, “Well, what are they doing at Berkshire Hathaway? They really don’t have that many great alternatives.” Well, they are buying into commodities, they are buying into utilities.

Tren Griffin  27:34

So the way I look at it is really more in terms of a circle of competence. They have both been interviewed, and they said if they were young today, they will both go into technology. But the point is they don’t understand technology. In terms of pure-play, all of their companies use technology. They understand technology, but they’re not going to make your play bet. It’s a circle of competence issues for them. Google, Apple, Microsoft, and Facebook can all be value stocks, in my view. Charlie said all investing is value investing if you can buy it at a bargain. If you understand the stock, you can apply the same principles to technology investing. It’s harder. It’s more nonlinear. It requires a different circle of competence. The key thing about commodities and brands and chewing gum and things like that is they understand it. And risk comes from not knowing what you’re doing.

Preston Pysh  28:28

Yeah, I love that Tren. You wrote this book about Charlie. I know you probably uncovered so many different stories about him. Could you tell our audience and it could be from your book or not from your book, but could you tell our audience one of your favorite stories that you learned about Charlie Munger that you really just couldn’t let go of in this podcast? You just got to tell the world.

Tren Griffin  28:49

The best Charlie Munger story is really about the acquisition and there was a deal and company that retained some investment bankers, and they were going to get a 2.5 million dollar commission, no matter what happens. Then investment bankers are going to get paid no matter what. What happened was after the fact, Buffett learned that the business was for sale. He bought it. He and Charlie did their own work. They did the analysis and they bought the company and the investment bankers were completely useless, but they were going to still get their fee.

When the deal was close to complete, they all got together probably for the closing or whatever. There was a card game going on. The investment banker walks up and said, “Oh, Charlie, we prepared a book for this deal. You know, we did all this research, we’d like to give it to you.” And he reached out with this book to hand it to Charlie and Charlie looked up from his cards and said to the investment banker, “I paid 2.5 million dollars not to read that book.”

And the reason why that this story is funny is that, for me, it’s hysterical, but it’s meaningful for me because what Charlie is saying is you need to do your own work. That if you ask your barber whether you need a haircut, you’re going to get what’s in that book. So as an investor, there’s no excuse for not doing your own work. If you’re not willing to do your own work, you should be buying a diversified portfolio of low fee index funds. You’re a no something investor or you’re a no nothing investor. You’d rather play golf, play golf, and buy index funds. You’re willing to do the work and work hard and you can be rational, and you have a better than average IQ, and you’re humble. Maybe you can do what an active investor can do. It’s a hard road. But for me, and obviously, for the two of you, this is fun. This is what I like to do on weekends and nights. This is really fun for me. Most people it’s like watching paint dry.

Preston Pysh  30:44

You’re exactly right about that. I know whenever I talk about this stuff around my wife or you know, just friends and family, they absolutely look at me like I’m a goblin because this stuff is so dry and so boring. I’ll turn on Bloomberg on the news or watch whatever financial news on TV and for me, it’s like watching an action movie, watching them talk about interest rates. I think for people that aren’t dialed in and do not find that to be amusing and fun, they are really going to struggle to be successful because I know how hard it is for me and I feel like I know a little bit. But for a person who’s just going out there and buying stocks and thinking that they’re going to be able to beat the market without really any understanding at all, man, they got another thing coming but love the story. That was great.

Stig Brodersen  31:31

So, Tren, the final question for me from this episode is really simple. If you can recommend one book to our audience, aside from your own, what would it be?

Tren Griffin  31:43

That’s a really hard question. I think it somewhat depends on who the person is for the experienced investor, I think it’s a tie, I think “Margin of Safety” by Seth Klarman and “The Most Important Thing” by Howard Marks Those are really solid books. If you’re a beginner and you’re just getting started, I would recommend an older book but a great book, “The Warren Buffet Way” by Hagstrom. You know, it’s a book that is a perennial bestseller. It’s approachable, it’s understandable. Hagstrom really wrote a great book that can lead you by the nose into it but not overwhelm you. That’s a long answer to a short question.

Preston Pysh  32:24

Okay, so this question this week comes from Ashraf Hauri, and here’s the question that he has.

Ashraf  32:31

Hi, Preston and Stig. My name is Ashraf mentor. Thank you, guys, for having such an awesome podcast and website. I think they’re really key for new investors like myself. So, I want to thank you. I also just finished reading Benjamin Graham’s “Intelligent Investor.” My question relates to the margin of safety. I took a look at a couple of Warren Buffett’s current holdings, one of them being Walmart. So the price to book ratio was around 2.7. I realize it’s higher than the 1.5 that’s recommended for margin of safety. But then maybe he purchased this a long time ago. So, I looked at IBM which is a more recent purchase inside of the price to book ratio was 10. While the PE ratio was also 10, I thought that the margin of safety was not there in this case. So, my question to you guys is how do you think Warren Buffett justifies purchasing IBM shares with a price to book ratio that’s so high? Thanks, guys. Keep up the good work.

Preston Pysh  33:18

All right. All right, so we love this question because this one’s a fun one. It gets to really the root of value investing. What else this gets at is how you take the Graham approach, where you were talking about having a lot of tangible assets to basically protect your margin of safety and how that approach has really evolved to where Warren Buffett is now and how he basically pivoted and transitioned away from that margin of safety of having tangible assets and going more towards earnings power.

And that really justify earnings power combined with having a long term, competitive advantage really being your margin of safety. So that’s really why Buffett is looking at this IBM pick as being a good pick. I owned IBM about a year ago. I don’t own IBM anymore. I was lucky to sell that well before it got into the price point that it’s at right now. I think it’s around $140 a share. I was lucky to get out way above that, fortunately.

But Tren, I’m throwing this over to Tren because I really want to hear his opinion, really talk about the book value piece of this and that transition point because you’re really an expert on this because that transition occurred from Charlie Munger. So, Tren is the perfect guy to have on the show to answer this.

Tren Griffin  34:38

Once you move to a quality-based approach, it’s not just math anymore, you’re looking for a bargain that has pricing power and earnings power that isn’t appreciated. So, I think in this case, well, if he has talked to the Chief Information Officers of his portfolio companies, what he’s found is a lot of people who use IBM. I think the mistake that’s been made is that that’s not a representative sample of users of information technology. Insurance companies and railroads and people like that are still using mainframes. They still have programs that are legacy that is based on things like COBOL. I think when he talks to them, he’s getting an unrepresentative picture of what’s happening. I think the cloud and the move to the cloud are on an exponential curve. When you’re on an exponential curve, you really can’t see it. So for me, IBM is going to experience from the cloud competition that’s going to eat at its core markets in a way that people really haven’t appreciated.

So I’m short IBM as a company because I’m long the cloud. There’s so much power in moving to an architecture where you have much higher utilization in the data centers, where you have these shared APIs where they’re all these web services. I think the good news about Buffett’s portfolio is this relatively stable and these are conservative companies, but they’re going to be the last ones to go the cloud. When they do, it’s going to be apparent. So I think IBM is a mistake.

Stig Brodersen  36:07

If you look at how the assets are composed at the balance sheet of IBM, you’ll also see that they have a lot of intangible assets. Correct me if I’m the wrong term, but I think IBM is the company in the world, at least in the US. It has the most patents,

Tren Griffin  36:21

and has the most patents in terms of the number of patents that have filed. But the key thing that people have realized about their balance sheet is they can’t borrow any more to buy back shares without going and losing their investment-grade rating. So, they basically had to throw the brakes on buybacks. When that happens, then you basically have to operate yourself into an appreciating share price. I think that’s the financial side of it. I think the more important thing is the cloud. So

Preston Pysh  36:51

I just want to talk to people why I ended up making the decision to sell and it really came down to a couple of different things really. The first one is I think that they have poor managers. I think that when you look at how IBM needs to grow, it needs to be grown by creating assets. That’s what they’re good at. Well, at least that’s what they were good at in the past. They need to create more assets. That’s why I transitioned away from IBM is because I didn’t really feel like they were doing what has made them great and got them to the position where they are at today. These share buybacks from an accounting standpoint will make the book value of the company and the equity of the company look a little bit weird because whenever they do these buybacks, they’re listed on to the equity line of the balance sheet, and it’s listed as a negative, which then makes your equity looks lower than what it is.

But if you want to go look at what that would be, assuming that they kept all those shares listed on their books, in their Treasury account is what it’s referred to like the shares listed as Treasury and that wouldn’t be actually removed from the open market. You could see what that number would be. That’s really some hardcore accounting jargon that I’m sure a lot of people, their eyes glaze over as we talked about that but.

Stig Brodersen  38:01

Watching the paint dry, Preston.

Preston Pysh  38:03

Yeah, exactly. Tren and Stig were wide-eyed though, let me tell you. But I really think that IBM is really having some fundamental issues. I think that they’re having issues with retaining talent. I think a lot of the talent that was over there at IBM is leaving for Silicon Valley, chasing this idea of creating assets instead of buying assets, and instead of buying your own shares back, which they’ve been doing forever.

I really think that Warren had made a very bad pick. I find it ironic. just so everyone knows, this is a very different opinion than what I had a year ago. But it has definitely morphed. I think that it’s very ironic that Warren says you have to stay in your area of competence. He’s always said that he doesn’t understand technology companies and this and that and this could potentially end up being one of his worst picks. I find it really ironic that he basically told himself in advance that this isn’t something that I would want to get involved in. I think that I personally think he got involved because of the numbers upfront. But then four years later, as they’re still exercising the same growth strategy, which was buying back their own equity.

Stig Brodersen  39:11

Yeah. Warren Buffett was asked specifically about IBM at CNBC and back in September, and he was saying, “Well, I don’t know how things look in 10 days in 10 months,” which is a very classical Warren Buffett answer. But he says that he knew that IBM would be better off in 10 years. He might be right. I don’t know. But I think what I’m lacking from Warren Buffett because I’ve been looking into IBM as well when it got really cheap, and I thought now was the time to buy.

But I couldn’t find any really great arguments from Warren Buffett. He has to. The first one he said was stickiness that it’s very hard to change whenever using IBM. That might be very well true. Tren. probably knows a lot more about that than me.

The second thing he said was great management. When I’m looking at not only on the track records, but also what they’re doing. Even a year ago when I was looking for the first time because I remember Preston and I discussing it back then, I was not impressed by the management. Not only because they’re issuing a ton of shares to their own employees and then buying it back in the market. But because whenever they had guidance, they seem to not meet their own guidance.

Tren Griffin  40:17

And they really came up with a bad excuse, to be honest.

Preston Pysh  40:21

Here’s the thing I don’t understand. This is probably because I’m not really tech-savvy. But they got this thing called Watson. Probably one of the best search engines out there on the planet. Why not go toe-to-toe with Google? I mean, how much money does Google make an advertising by just running their search algorithm? Why are they going after this big data, trying to put somebody on the hook and then they overpay and overextend themselves, like the health industry?

I just think that model is so broke. All right. I’ve learned that typically when I have the opposite opinion of Warren Buffett, I’m usually wrong. So, we’ll see what happens. So, a fantastic question. We’re going to go ahead and send a free signed copy of our book, the Warren Buffett Accounting Book off to Mr. Huari for his question. We really appreciate our audience submitting questions.

If you want to ask a question and get it played on our show, go to asktheinvestors.com, you can record your question there. If we play it, you get a free sign book in the mail. So, we really appreciate Tren. Tren, thank you so much for coming on the show. This was really a fun conversation. As you can tell Stig and I are big Warren Buffett fans, you’re obviously a huge Warren Buffett fan and a Charlie Munger fan. So, this was really a lot of fun to talk to somebody that has the same interest as us.

Tren Griffin  41:37

It’s great to be here.

Preston Pysh  41:38

So, Trent, I want you to tell our audience if they want to know more about you or they want to grab a copy of your book, where can they learn more about you and just give them a handoff to all your information because your 25iq website is phenomenal. But go ahead and give them the handoff turn.

Tren Griffin  41:54

I have like over 140 posts on 25iq. It’s easy to remember usually put one up every weekend. I’ve done it about 100 weekends in a row. Then you can follow me on Twitter. I’m @trengriffin. I’m relatively active there. Of course, the Charlie Munger book, “Complete Charlie Munger” is available on your usual Amazon, Barnes, and Noble all sorts of places.

Preston Pysh  42:22

Tren, I just want to throw it out there. The first time that I virtually met you was on Twitter. I was reading different I subscribed to different value investing type people. I started reading these posts from this Tren Griffin. I was like, Man, these are some really good articles. I sent a message via Twitter to Tren, probably, I don’t know… Tren probably doesn’t even remember this but probably six to nine months ago, and I said, we have a podcast. I really want you to come on and he said, “I’ll come on in about six months.” And so we followed back up with him and sure enough, he accepted the invitation to come to the show. So, we’re so thrilled to have you on Tren and really appreciate everything that you’re doing out there.

Tren Griffin  43:01

That’s great. Been fun to talk to you. I wish more people were interested in this stuff. You do service because I do think we have a bit of a crisis around investor education. So you do a service and I appreciate that.

Preston Pysh  43:15

Well, thanks, man.

Stig Brodersen  43:17

Thanks. Very nice used to say so, Tren.

Preston Pysh  43:20

All right guys. So, that completes our episode this week. We really appreciate everyone joining us. It’s always so much fun to bring guests on the show and just interact. If you guys got any questions, go to asktheinvestors.com and send them off to Stig and me and we’ll get that on the show, or we’ll try to get back with you. So, thanks for joining us, and we’ll see you guys next week.

Outro  45:29

Thanks for listening to The Investor’s Podcast. To listen to more shows or access to the tools discussed on the show. Be sure to visit www.theinvestorspodcast com. Submit your questions for a requested guest appearance to the investors podcast by going to www.hp ask the investors calm. If your question is answered. During the show, you will receive a free autographed copy of the Warren Buffett accounting book. This podcast is for entertainment purposes only. This material is copyrighted by the TIP network, and must have written approval before commercial application.


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