John Huber  5:59  

Yeah. Amazon is the obvious threat to this one. Preston, as you mentioned, I think one of the things that I have thought about with brick and mortar retailers, and this is something on the contrary, I’ve thought about this with some of the stock markets all time great winners is that the market, in some cases, in very rare cases, has actually undervalued some of these great all-time companies like Walmart in the 80s or Starbucks in the 90s. 

These are stocks that traded at 50 times earnings in some cases, and were still undervalued because the market was directionally right. They knew these companies were great, but they actually discounted how good they actually were. 

I think in some regards, the same thing is happening in reverse when it comes to brick and mortar. I think the market in some cases, not necessarily with Target, but in brick and mortar in general, I think it’s actually discounting how bad things could be. 

If you think about Amazon, let’s say they’re doing around $100 billion in revenue right now in their retail business. If you think about that, it took them maybe 20 years to get to that level, but their growth rate is maybe 20% to 25% right now. 

So, sometime in the next four years, they’re going to essentially extract the same amount of pain, meaning they’re going to add another hundred billion dollars of revenue, which is the same amount of revenue that it took them the first 20 years to get. In other words, they could potentially do as much damage to brick and mortar in the next five years as they did in the last 20 years. 

To Hari’s point, when you think about the earning power of the company, it is facing this headwind, they’re still doing a lot of business. I think they’re going to do close to $70 billion in revenue or so or $65 or $70 billion somewhere in that neck of the woods. So that is still a lot of business. 

The problem Amazon causes for a lot of these brick and mortar retailers that I think doesn’t get as much press as it should is they really attack these companies at the margin. So companies like Target or Bed Bath and Beyond are companies that have big brick and mortar footprints. 

If you reduce the traffic, even if you have a retailer that’s doing $50 billion or $75 billion in revenue, if you reduce enough, even a small amount of foot traffic, you take away these incremental impulse purchases that you will make when you’re in the store. 

That person that walks into the Starbucks, that gets their coffee, and then walks through Target probably is going to walk out with $5, $10 or $15 worth of merchandise that they didn’t plan on buying when they were there. 

So when you take that away, you take away some of the highest margin items that these retailers have. I think that’s the biggest risk that some of these retailers face is that they have to cut prices to maintain market share, when the $30 box of diapers goes to $29, and you have 8% margins, and you lose 3% off your top line. You just lost a third of your operating profit, so they’re getting squeezed and even though they’re still going to do a lot of business, I think that’s a headwind they’ll face.

Preston Pysh  9:03  

Yeah, I definitely agree with you guys on the headwind piece of this. When I’m looking at the top line of the revenue, which I think is a great indicator of showing what this trend in this headwind really looks like… Target’s revenue peaked in 2013 at $73 billion. 

The next year, it was $71 billion. The year after that it was $72. So they had a little bit of jump, that a billion dollar jump back up. The year after that they hit $73 again, so they were able to sustain this through all this Amazon growth. They’ve been close to $70 billion for five years. 

Now, 2017 it dropped down to $69 billion. When you look at this, I guess this is the question that I’d asked you guys. You feel like if you shop, and Stig obviously can’t be included, because he’s over in South Korea, so he can’t answer this. Plus, I was way too hard on him, so he’s going to be hard on me no matter what. So, you’re not allowed to answer, Stig. 

Hari and John, if you go to Target, do you feel like you’re paying a higher premium than what you’d pay for things than you would on Amazon?

John Huber  10:05  

In fact, I’ve done some price comparisons and I think Target has gotten competitive with a lot of the stuff there. I think for me, if I look at my shopping habits, or my household shopping habits and the way my wife shops, we are starting more and more of our purchases on Amazon’s app. I open up my app, and I order whatever I need. 

It’s getting so easy and so convenient that Target is losing. You just make fewer trips to the store. So even if you shop on target.com, like we were buying… I think their prices are pretty competitive, at least for some of the household goods that we were purchasing. We still do some of our buying on target.com.

But again, I think as more money shifts toward target.com, even even if it stays in Target, you lose those incremental high margin impulse purchases, and that’s a problem. You look at Target’s gross margins, which have gone from 32% to 29%. 

Again, that doesn’t sound like much, but any retail business has enormous operating leverage and if you have a 32% gross margin and an 8% operating margin, you lose 3 points, you’re going to lose a third of your profit. So, it’s a difficult balance that they’re facing.

Preston Pysh  11:21  

I completely agree with what you just said and I see it the same way, John. For me, the question then becomes, because I agree with all of that. I see it happening the same way that you do and just so you know, when I go to Target, I see the prices being the same as Amazon. In fact, I stopped looking at what the price is on Amazon, because I’m just assuming I’m getting a pretty similar price. I think most people probably would feel the same way. 

Though the question then becomes, how much is Amazon able to get away from the typical Target customer through these purchases that you’re describing because I’m going through the exact same thing? I mean, Amazon is so intelligent with their platform that it’s like, “Hey, it’s time to buy more coconut water.” It’s okay you knew exactly when I needed to purchase that. 

So then, I have it delivered two days and on right on time. How many of those types of purchases are going to continue to suck away from the top line and the margin specifically that you’re talking about? And when does it come to an equilibrium point? Is it another five years? Is it another 10 years? Because at the end of the day, people still have a demand to go to a brick and mortar store and buy something today. I know I still have that demand in my life. I’m pretty sure everybody else that’s listening to this still has that demand in their life. 

The question is when will that become an equilibrium where the revenue kind of flattens out and it’s not being attributed anymore by this Amazon factor? I think that that’s in the cards within 5 to 10 years. I think that the top line is going to stop degrading like that. I think you’re going to hit a steady point. 

Based on how much it’s eaten away over the last 5 years, it’s about 3% to 4% off the top line every year is how much it’s eating away right now. So, when I’m looking at the numbers, if that’s true, and it last for just another five years, and then it hits a balance, and they only eat away at about 3%, 4% or 5% each year, the numbers on this are huge compared to everything else that’s being traded on the market. 

With so much stability in the numbers, at least, I think you’re literally seeing two to three times the return that you’d get by buying the S&P 500 index today at the current price. Though that’s a really important consideration when you’re developing the model is what John’s talking about, because if I’m wrong, and it’s much deeper than what I’m expecting, well, then the numbers start getting closer to what you’re going to get out of the S&P 500, which is 3% or 4%.

Hari Ramachandra  13:46  

I completely agree and to answer your question about my shopping habits, I see Target as my savior when I have forgotten to buy a gift for a birthday party on my way, I just go to Target and buy it and I think also clothing for example. Many of us are still not comfortable ordering online. 

So, clothing might be another area where people might still want to go to a store nearby. There are certain aspects where brick and mortar still is relevant and that’s one of the things I think, even Amazon has realized that an omni-channel approach in retailing might not work in the long run. 

They need to have multiple channels like both e-commerce as well as a storefront. Probably wholefoods is a good example where they are realizing it and getting into the grocery business through Whole Foods. 

So my question is, I agree with all you’re saying, but I’m not sure whether to bet on Target that they will be able to capture all this physical foot traffic. What if Amazon also competes with them in that area, and so is Walmart and so is other retail?

Preston Pysh  14:55  

These are all good points. The one other thing that I wanted to throw out there when you look up the numbers on Walmart and everyone’s gung ho that Amazon is just crushing every retailer… When you look at the top line on Walmart, the top line is still growing. It’s still getting bigger and bigger each year, which I find fascinating. 

Now, with that said, I’m going to kind of counter myself just so everyone has full knowledge of the different things that are popping around in my head, as I’m thinking through this. Why did Warren Buffett and Charlie Munger sell their position in Walmart? That happened just recently, within the year. 

They got out of this space, and they got out of this space, I would argue, because of Jeff Bezos. They kind of see it as being very disruptive in having a headwind. So just some thoughts, I’m throwing it out because from a financial standpoint, it makes a lot of sense by the numbers. Maybe I’m not being hard enough on some of the numbers. Maybe it should be like a negative 15% annual growth rate for the free cash flow. I don’t know, but the numbers that I’m saying and that I’m using, those are the returns that I’m kind of expecting based on the current price.

Stig Brodersen  16:02  

So this is the second time we are doing this format of the show and the last time I was pitching Bed, Bath and Beyond, and I thought that was the ugliest pick, and then Preston trumped me and came up with the GameStop. When I saw this pick, I said, “Preston did it again.” I thought I found the ugliest stock on the market and still Preston, trust me, because whenever I’m looking at Target… Actually, I mean this in the best possible way. 

It’s definitely not the sexy company, it’s probably the least sexy company or close to that you can find out there. I mean, it’s just this old giant you see that even though the top line is somewhat stable, you see that the gross margin is slightly slipping, and you see the same thing with the operating margin. 

There’s a lot of good stories to tell about why Target shouldn’t be performing well in the future. However, I think if you go through the earnings statements, you’ll hear the management talk about retail has been going up by 32%, so that’s on top of a 16% growth. It is still almost nothing. Then, they’re really not making money. It’s around 4% of total revenue anyway. That’s not where the future is for them. 

They’re talking about this transformation about the new small format stores, which will really take a toll on the CAPEX in the next year. That’s not a catalyst either. I don’t think that’s what people need to look for. 

I think that it really boils down to value. Can people see the value in this? Can people see the value from the future cash flows? Really to give you an argument, for instance, what you said, John, before about using the Amazon app, because it’s simpler and more convenient. I think, yes, there will be some kind of creative destruction. 

I mean, we can look at something like it’s more efficient with driverless cars than driving your own car. Yes, that’s more efficient. We can say the same thing about online shopping. But that doesn’t mean that the old thing will go away. It just means that will co-exist.

For at least a few decades, if we can even predict that long, I see a lot of value in retail, especially right now when it is so beaten up. So yes, I don’t expect any growth at all from Target but if you look at the valuation, that’s also what Preston looked at before, if you look at the valuation, you don’t need that to justify purchase. You just need to make sure that the Target is not performing horribly. I don’t really see that coming. It’s probably slightly worse but that’s still okay, if you look at the market conditions right now.

John Huber  18:25  

I was just going to chime in with one other thought on this. A lot of people look at Amazon versus all of brick and mortar retail, as if it’s like a winner-takes-all-type of a contest, and that’s not necessarily the case. So, I completely agree that brick and mortar is not going away. 

I do think that the US in particular has probably far too much per capita retail square footage than it needs and I think that’s a headwind for any company that owns or leases real estate to do business. I think there’s headwinds, but there’s going to be brick and mortar. 

Retail is a $5 trillion industry in the US and Amazon has 2% to 3% of that maybe, but it’s not going to all go to Amazon. The problem that I see is, again, back to my original point on this was Amazon is attacking the margins. Whole Foods is another example and people say, “Well, Whole Foods is brick and mortar and so you need brick and mortar.” 

But what they’re going to do is they’re going to lower avocado prices by 43% today, I saw, and they’re going to begin to attack the margins at the grocery store, the Krogers of the world and the Costcos of the world… Certainly Target and Walmart do an enormous amount of grocery business as well. 

I think my concern with brick and mortar retailers, and especially companies like Target that a lot of people I think can replace some of that purchasing on Amazon is that those margins are going to be heard. I think it was Kroger CEO who said just this weekend that we have to sell a can of corn for 40 cents, we’re going to sell a can of corn for 40 cents. 

So these guys are cutting prices defending market share and all of that is at the expense of profits. Target’s doing it, Walmart’s doing it. So you kind of have to look at it and say, “Where is the puck going over the next 5 years?,” and try to visualize what you think it’s going to look like.

I think Target will still be here and I think they’ll probably still be doing a lot of business. Though I think it’s going to be a very difficult business for them and it’s just going to be a very tough slog to compete as Amazon continues to grow. That’s kind of my thought. 

It’s not an all or nothing. There’s going to be brick and mortar, and Target will still be probably doing an enormous amount of business, but what is that cash flow going to look like? That’s my question.

Preston Pysh  20:50  

All right, guys. Let’s go ahead and hear Hari’s pick.

Hari Ramachandra  20:53  

Thank you, guys. My pick today is STORE Capital. It is a real estate investment trust and I’m really happy that John is with us today because in his previous life, many of you might not know that John was a very successful real estate investor before he started managing his own funds. So I’ll be eager to know his thoughts on this particular investment. 

To give you all a background on this company, STORE Capital is a relatively young company. It went public three or four years back, it came into the news because Berkshire Hathaway took a meaningful stake, 9.8% of the entire market cap in total capital. In REITs, there are different type of rates based on the properties they invest in. This is Equity REIT, and they focused on single tenant or freestanding properties. 

What it means is you might have seen these properties where you have an Applebee restaurant or a health club or a movie theater. They’re not attached to a mall or they’re not part of a strip mall. They’re just single properties and STORE Capital specializes in it. 

They have published numbers since 2013. They have been growing steadily at a good rate. They started with a total net assets of $1.7 billion, now they are around $4.9 billion and 30% growth. They have been growing their revenue as well at the same rate, and net income as well. 

Of course, like any other REIT, STORE Capital also relies on two main sources of funding. One is external, by one type of capital there is through issuing equities, which is always diluting for the existing shareholders, as well as they take on mortgage or issue bonds.

Of course, they have their own organic funds that they generate over a period of time. They have a very healthy dividend payout ratio of 67% and their management especially the CEO has more than 30 years of experience and is well known in the industry. 

One of the interesting things about STORE Capital is the kind of lease they employ and that basically is a triple net lease. What it means is that in this kind of lease, the tenant is responsible for paying operational expenses, property taxes, etc. So, all the landlord would do in this case is just collect the rents. That relieves them of a lot of variable costs, so their revenues are more predictable. 

The other thing that STORE Capital has in its favor is that they explicitly mentioned that they focus on businesses that are profitable and are Amazon-proof in a way or are not prone to disruption from e-commerce. 

In fact, what they do is they require their tenants to disclose unit level, financial statements, and in fact, 97% of their properties, they actually have access to a unit level, financial statement, as well as the credit quality of the customer in terms of diversification or their tenant pays. 

One of the main industries they serve is the restaurant industry where almost 20% of their tenants are in the restaurant industry. So, they are exposed to that industry very much. Apart from that they have education institutions. Recently, they signed up with Casper, which is a very popular education institution in California, as well as health clubs, movie theater, colleges, furniture stores, and stuff like that. 

The other thing is *inaudible* of their customer constitutes more than 10%. In fact, much less. The highest percentage of rent coming from a single tenant is less than 4%. Geographically, they’re spread across the United States. Their highest presence is in Texas at 12.9%, but they’re in other states as well. 

Finally, one other thing that works to their advantage is their lease duration or lease terms. Most of their tenants, their leases don’t expire, or they probably expire after 2026. So the leases are usually 10 years or more, which protects them from business cycles. 

However, the downside is, especially when the lease terms are long, the stock tends to behave like a barn because their revenue unlike a reit that focuses on cell storage or hotels cannot adjust to interest rates. If the interest rates start going up, the leases cannot be changed to reflect the interest rate environment. However, their leases have [been] built in escalation, rent escalation, so that will protect them to some extent, but at the same time, it might not be enough. 

In terms of their growth potential, according to their annual report, the overall market size for single tenant operations is $2 trillion in the United States. Well, I haven’t verified from an independent source. So, I cannot really low short it, but I did look at other publicly traded REITs in this area. 

If I look at the net total assets from all those rates, it comes to around $36 billion. So there’s a huge gap between the $2 trillion number they’re projecting and the current assets that are held by radius, at least in this domain. So that’s STORE capital. I would like to know your feedback and your thoughts on it.

Preston Pysh  26:27  

Just so everyone knows the ticker, it is STOR.

John Huber  26:31  

Yeah. So I’ll chime in. Thanks for sharing those thoughts, Hari. Just to clarify the record, I appreciate the nice words. I was a real estate investor in a previous career before I started Saber. I’ve always loved investing in general and always love the stock market, but I did do some real estate investing. 

One of the headwinds, I guess, or just the not headwind necessarily but the nature of the businesses that real estate is inherently low return on capital business and the way you get attractive or adequate returns on equity is through leverage. So, obviously any REIT out there has to take on a lot of debt to get a decent return on equity for shareholders. 

The $2 trillion comment is interesting because I was reading through, I think, their investor presentation and I saw that. What’s funny about that is that obviously, the single tenant market is a massive market. I don’t know if it’s 2 trillion or what it is, but it’s huge. 

However, to think of real estate investment trust as a growth company is probably not the best way to think about it because the returns on incremental capital that a company like store is going to produce going forward is probably going to be rather low. So growth is not always a good thing when it comes to real estate companies. 

One thing to note about real estate companies is if you pull up their cash flow statement, so you’re going to see the three different sections of the cash flow statement. You are going to see positive cash flow in the operating section, and then you’re going to see huge negative cash flow in the investment section. 

That’s just simply because they’re growing and most REIT CEOs are not content just to own the properties that they have in their current portfolio and spin off cash flow they want to grow, because more often than not, they’re incentivized to grow. 

Basically, all rates are attempting to grow, and you grow through other people’s capital. Then, if you look at the third part of that cash flow statement, you’re going to see a huge positive cash flow from new equity and new debt. So, you have companies that can’t finance their growth with internally generated cash flow and therefore you have the need to take on more and more capital. 

The question then that you have to ask as an owner or as an investor in these companies is what is the return on that capital. It’s okay if you raise a lot of debt or raise a lot of equity. The problem I see with single tenants is these guys are taking their newly injected equity capital or debt capital and investing in new single tenant properties with cap rates at near all time lows, which cap rate is just the cash flow yield essentially on a property, so like a bond. 

As interest rates rise, bond prices fall as cap rates rise, which they tend to do with interest rates, property values tend to fall. So my fear long story short is that they’re getting this new capital that they’re growing, but they’re reinvesting the capital at mediocre rates of return.  

I think Buffett or Berkshire, whoever made the decision, Wechsler-Combs is probably looking at this $400 million investment almost like a bond. Also, you mentioned that, Hari, single tenant real estate is essentially like a bond and it’s very high quality. 

I think you’re right, that these assets are very high quality, very safe. They’re structured in a way that mitigates a lot of risks at store level, but I would view it more like a bond. I think they’re going to pay their 5% dividend.

Stig Brodersen  29:47  

I’m actually curious, Hari. Why did you decide to take this pick? I mean, it looks like a really good income stock if that is the intention. We all have different life situations. So what might sound like an interesting stock bond person, say that you are about to retire, you might be looking for a more steady income more than not necessarily capital gains. 

Obviously, it would be nice to have capital gains, but also with a downside risk that might follow. Is this then a part of your strategy to have this stable collect the dividend payment? Or are you seeing something that we’re not seeing in terms of the growth prospects?

Hari Ramachandra  30:20  

I think I agree with John. My assessment of Berkshire’s stake in STORE Capital is that this is a bond equivalent or as Munger would say a placeholder for cash. My motivation for looking into it is the recent memo by Howard Marks where he cautions us against the prevailing risks where a lot of stocks which are considered safe or the growth stock like the FANGs. He doesn’t think that we are in a bubble but he says proceed with caution. 

One of the reasons why I was looking into STORE Capital was to understand, first of all, to reverse engineer what was the thinking of Berkshire, whether it’s *inaudible* or Buffet? What were they thinking here? 

The second thing was to see if this is one of those investments where the downside is relatively very limited. Even the upside, I know, is not very high, but it is a safe place compared to my bank account to park, where I don’t get anything if I park my cash. Is this a safe place to park my cash?

Preston Pysh  31:32  

So when I hear that Buffett took a position in this, and he took a position back when they first went public. Is that right, Hari?

Hari Ramachandra  31:40  

Oh, no. I think he took the position recently. They went public in 2013 or 2012.

John Huber  31:47  

Yeah, it was a private placement. I think it was earlier this year…Berkshire bought roughly 10%, maybe 9.8% of the company for, I think, $377 million.

Hari Ramachandra  31:56  

Berkishire’s price was $20.25. In fact, this was an unusual transaction because STORE Capital issued new equities, so they diluted actually. It was not that Berkshire bought it on the market. This was a specific deal where STORE Capital board decided to issue new shares to Berkshire, which basically took a hit for around four cents per share in terms of their earnings for the current shareholders.

Preston Pysh  32:29  

So with our expectation of where interest rates might go, as John pointed out, if interest rates do go up, that means the value of real estate and everything else goes down. So when you see Buffett and Munger take a position in a company like this with interest rates already ridiculously low. That tells me, and we kind of got a hint at this at the meeting, when we were out there in May, that their expectation is interest rates are just going to keep on going lower moving into the next 10 years, or else they wouldn’t buy something like this. [If] they thought interest rates were going to go up, they would never buy something like this. Right, John?

John Huber  33:04  

I mean, I would agree with that general assessment in it. I did scratch my head when they made this investment. I do think that the assets are safe. Single tenant, this is a diversified group of tenants that they have so I don’t think any tenant makes up more than a couple percent of their overall rent. 

However, I think it’s a safe collection of assets, but the prices of these assets do, in many ways, trade like bonds and with interest rates. So yes, I would think that if you had a view that interest rates are going to rise, which I don’t really have that view necessarily. Although, I’d certainly say they’re probably likely to go up rather than down. 

I do get the sense that Buffett has talked about for instance, S&P 500 multiples being reasonable, simply because interest rates are so low, and the implication there, I don’t necessarily know if I agree with that or not, but the implication there is that you wouldn’t call the S&P 500 reasonable at 22 times earnings or whatever it is, if you thought interest rates were going to rise. So, that does seem to be the case that he would expect rates to stay low enough for an investment like this to work out.

Preston Pysh  34:15  

Hari, I was looking at the cash flow statement, right as John said you got to look at the cash flow statement, and it really tells you a lot. I would completely agree with that whenever I’m looking at the cash from the operations of the business, and then you compare that number to the dividends that are being paid, a huge chunk of what’s being paid out as a dividend is coming straight from the operations. 

So, that tells you if they’re expanding their business, they’re getting bigger. It’s almost all from diluting shareholder value per share, or they’re raising money through debt markets in order to do it. When I’m looking at this, I’m trying to place a value or expected return on it. I would expect the return to pretty much be the dividend, and that’s about it at this point, based on how I’m looking at the cash flow statement.

Stig Brodersen  35:03  

Just a quick comment to that. So, the management has said that after a capital injection from Berkshire, they’re not really looking to raise more capital, at least not in the near future. They are very conservatively funded for the type of company they are. Right now they *inaudible* at 4.5%. It’s going to be really interesting to see what will happen to the credit rating. 

Just as an example, so you need also to compare the 4.5% with how much the average leases and if you just took a second quarter, you’re looking at a lease of 7.8%, on average. So the adjusted funds from operations was around I think, was 68, which is kind of like the key metric you look at real estate which is not that high, especially because it’s a REIT and you are trading around a multiple of 15. 

It looks like a stable bond to me. I don’t necessarily think that the valuation is as attractive, but again, you might be in a different situation, where you would need that cash flow and need to collect that dividend.

Hari Ramachandra  35:57  

So one of the things I was thinking about is like I guess Preston mentioned earlier, when you’re talking about Pabrai, Buffett or Berkshire, the reasons they invest are different than what an individual investor like us would be considering. 

However, [I] was also thinking that not only can it be a cash parking space for Berkshire, but it can also be a potential place where Berkshire can deploy its excess capital in terms of credit loan or some other ways in which they can provide capital to STORE Capital where STORE gets capital from Berkshire, so it stays within the family, if you will. At the same time, STORE has less pressure in terms of raising capital in the future. There are such examples already. 

For example, there are private equity firms who also have funded off REITs. They fund those REITs by taking stake in the REIT as well as by providing capital in terms of loans or whatnot. So, I’m not saying this is necessarily the case, but I just wanted to know your thoughts about it.

John Huber  37:07  

I think it’s tough to know exactly what the rationale was behind the scenes, obviously. It is always fun to speculate on what Warren thinks or what Ted and Todd are thinking. I look at it and as I analyze it, as I say, I look at it like a pretty safe collection of real estate assets that will provide a nice steady dividend, and it appears to me that the dividend is probably safe and well-covered by the current cash flow. However, I don’t know what the long term game plan would be for Berkshire. 

I will say it’s interesting if you look back at some of Buffett’s personal investments and you can kind of piece this together through research and there have been references to this in some of the books out there on Buffett. But he has a history of investing in REITs, and he’s said a few things publicly, which would contradict that. 

He said it’s always better to own real estate directly because you have slippage costs. When you buy an REIT, you have management fees, and in his view, it’s better to own the real estate directly, but he has invested in REITs in his personal account, which is kind of interesting.

15 or 20 years ago REITs went through a period where the tax laws change to where you could convert from a C Corp to a REIT structure and pass your cash flow on tax free to the owners, as long as, I think, 90% or 95% of the cash flow came from passive real estate investments. So there were a lot of real estate companies that made this transition. 

Buffett made a lot of investments in REITs back then, and they were relatively short term investments. He would buy them, stock would rise 30%-50%, then sell them. I think with this investment, it’s a very small investment. 

Number one, $400 million is…he’s got $100 billion in the bank that probably will earn somewhere around $1 billion just on interest this year alone. So, the investment is very, very small when you put it in the context of that balance sheet. It’s less than 1%, less than half of 1% of the cash. 

So I wouldn’t read a whole lot into it. But I think it’s probably one of those investments that he’ll clip the coupon for a little while and my guess is he would sell it at a certain point, if it does appreciate, but he may hold on to it for a long time and just continue to collect the dividend on that. 

The nice thing about the private placement is he does inject the capital. He did this with Home Capital Group, the Canadian subprime lender too. That was a different situation, obviously, but by virtue of his reputation, he basically saved that company. 

This is much different. This is a stable company, but he provides them with capital, he gets stock by virtue of his reputation. The stock has already risen, so he’s already in the money by 20% or something. So it’s tough to lose in a situation like this, if you’re Buffett and that could be what they’re thinking there. I don’t think it’s because of the size of the investment. I wouldn’t read too much into it.

Preston Pysh  39:54  

Just so everyone knows we planned on making this about a one hour episode where we’d go through four picks, but we were having so much fun talk and that this actually turned into two episodes. We really want to thank Hari Ramachandra for coming from Bits Business. He’s an executive over at LinkedIn. He’s been with us since day one. 

I also want to thank John Huber for coming out. John runs the website Base Hit Investing, fantastic blog. I highly recommend you guys go there. He has a subscription where you guys can sign up and get all of his tips that he’s putting out about the investing world. Fantastic articles there as well. So John, thank you so much for joining us.

Stig Brodersen  40:31  

All right, guys. That was all that Preston and I had on this week’s episode of The Investor’s Podcast. We will see each other again next week.

Outro  40:38  

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