23 June 2018

On this two-part episode, Preston and Stig talk about their amazing experience from meeting up with the TIP community in Omaha for the Berkshire Hathaway annual shareholder meeting. In this episode, you’ll also hear Warren Buffett’s answer to the best questions asked by the shareholders for the 2018 meeting. After hearing each response by Buffett and Munger, Preston and Stig’s provide their analysis of the discussion.

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  • If Elon Musk is right about Warren Buffett’s being wrong about competitive advantage?
  • Why Warren Buffett won’t invest in cryptocurrencies.
  • Why many Berkshire Hathaway’s employees can’t invest accordingly to Buffett’s principles in their 401K.
  • Why Warren Buffett would rather hire a person who applies chapter 8 of The Intelligent Investor than a top student from a top business school.
  • What Charlie Munger and Warren Buffett think about Machine Intelligence and stock investing in the future.


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  0:02  

Hey, how’s everyone doing out there? On today’s show, we continue our recap of the 2018 Berkshire Hathaway Shareholders’ Meeting by playing the top questions we heard this year. If you missed last week’s episode, I would recommend that you go back and start there. Without further delay, here’s the second set of Q&A that we found that worthy.

Intro  0:25  

You are listening to The Investor’s Podcast, where we study the financial markets and read the books that influenced self-made billionaires the most. We keep you informed and prepared for the unexpected.  

Preston Pysh  0:45  

All right, welcome to the show. We’re excited to have you guys back here for round two, where we’re gonna be talking about some of the top 10 questions that we heard at the Berkshire Hathaway Shareholders’ Meeting this past year. Stig and I are just going to go ahead and kick this off the first question for you. 

Emcee  1:01  

This question comes from Keeley and actually is directly about the issue of moats. He notes that Elon Musk this week on his Tesla earnings call said the following, “I think moats are lame. They are like niceness sort of quaint vestige away. If your only defense against invading armies is a moat, you will not last long. What matters is the pace of innovation. That is the fundamental determinant of competitiveness.”

So Warren, it seems the world has changed. Businesses are getting more competitive and the pace of innovation technology is impacting everything. Is Elon right? 

Charlie Munger  1:42  

Elon says a conventional moat is quaint. That’s true of a puddle of water. He says that the best moat would be to have a big competitive position. That is also right. It’s just ridiculous.

Warren does not intend to build an actual moat, even though they’re quaint. 

Warren Buffett  2:16  

That has always been true, but it does seem like the paces have accelerated and so on in recent years. There’s been more moats that have become susceptible to invasion. That seemed to be the case earlier, but there’s always been the attempt to do it. They’re here and there. There are probably places where the moat is as strong as ever, but you certainly should be working at improving your own moat and defending them all the time. Then Elon may turn things upside down in some areas. I don’t think he’d want to take us on in candy, but…

You can look at something like Garanimals out there in the other room. It won’t be technology that takes away the business of Garanimals. It may be something else that catches young kids’ fantasy or something, but there are some pretty good moats around. 

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Being a low cost producer, for example, is a terribly important moat and something like Geico… Technology has really not brought down the cost that much and I think our position as… There are a couple of companies that have costs as low as ours, but among big companies, we are a low cost producer. That is not bad when you’re selling an essential item.

Preston Pysh  4:15  

I think that this is just a fundamental difference between approaches, right? Everyone has their own investing approach. There are people out there that have made a billion dollars by value investing. Then, there are people that have made a billion dollars by creating a brand new product, call it an electric car. There are just all these different approaches. 

Elon’s approach has always been “move way faster than everybody else, disrupt technology, and create something that has never been done before.” 

Buffett and Munger’s approach is literally to find the most boring company you can possibly find that has these built in indoctrinated habits that people have, call it Disney or Candy Company, that people just go back to. Coca Cola is another great example. He views that as a moat. So it’s just a difference in investing. Neither one of them are wrong. I think you just got to look at it as a difference in approach.

Stig Brodersen  5:15  

Yeah. It’s interesting what you’re saying in terms of their approach. I mean, Buffett said See’s Candy, basically what he was hinting at. He takes cheap products like sugar, water, cocoa beans, probably something else Then he refines it and he makes expensive chocolate. That’s great. He is spending less money on his product than he’s charging for them. That is how the conventional way is of making money, or at least what Buffett has been doing. 

Then you have a guy like Elon Musk. I don’t know if Elon Musk ever made money in the conventional way. I’m not saying this to insult him in any way. If anything, I just really admire the person. 

For instance, he started with PayPal. I don’t know if PayPal ever made money while it was partly owned by Elon Musk. They boosted the top line. It was super important in terms of eventually selling it. Basically, they gave people $10 for free, which cost them a lot of money, as long as they would spend that $10 sent to someone else. 

He took that money and invested in SpaceX that has never made any money. Tesla has never made any money. Now, his net worth is really high but his own stocks don’t make any money. That’s how he’s been growing his company.

Of course, the plan is that eventually those assets will make money at some point in time, but that’s just not his approach. He’s successful because he’s disrupting all the time. I don’t think Buffett disrupted anything. I don’t think he will claim that he has disrupted anything. That’s not his goal. He just has a very different approach to this. 

I don’t know if moats are lame. They might be lame, but they’re still very profitable. I don’t think that game has changed at all.

Preston Pysh  6:55  

Alright, so let’s go ahead and hop on the next question here.

Emcee  6:59  

This question comes from Vlad Kovtov in Ukraine. He says, “Capitalization of cryptocurrencies approached that of Berkshire and Apple last year. Clearly the idea behind crypto will affect conventional banking groups where Berkshire is a shareholder. You always say you didn’t go into too much detail to obtain an understanding on cryptocurrencies. What factors caused you to say that it’s a bubble?”

Warren Buffett  7:25  

If you bought gold at the time of Christ and you figured the compound rate on it, it may be a couple of tenths of 1%.

It essentially is not going to deliver anything other than I suppose scarcity, because you can only mine so many, but so what? What does it produce itself? 

The cheque is a wonderful idea. Just imagine how the world will be without being able to write cheques or have wire transfer funds, but it doesn’t make the cheque *inaudible* itself with a lot of money.

If you said you can use something called a cheque with a little piece of paper to do something else to transfer money…. I think that any time you buy a non-productive asset, you are counting on somebody else later on to buy a non-productive asset because they think they can sell it to somebody for more money. It’s been tried with tulips and it’s been tried with various things over time. It does come to a bad ending. 

You can think of *inaudible*. I mean, Louisiana Purchase was say $15 million for 800,000 or so square miles of land. In fact, you’re sitting on land that came with the Louisiana Purchase. What we paid was 20 bucks for a square mile and 640 acres in a square mile. You’re down to three cents or something. So that was a pretty good purchase of what was then a non-productive property, but it depends. 

It’s very hard. You can buy stamps. Bill Gross collected a wonderful stamp collection. It sold for more money in the end, but it’s dependent on somebody else wanting to buy and hoping they will sell it for more money and so on. In the end, you make your money on productive assets. 

If you buy a farm, you try to estimate what the crops are and what amount per acre of soybeans or corn, and how much you have to pay the farmer that farms it for you. [Consider also] what your taxes will be in various things. You’ll make a conclusion based on what the asset itself will produce over time. That’s an investment.

When you buy something because you’re hoping tomorrow morning, you’re going to wake up and the price will be higher, you need more people coming into it than are leaving. You can get that and it will feed off itself for a while. Sometimes for a long while and sometimes to extraordinary numbers, but they come to bad endings.

Cryptocurrencies will come to bad endings and along with the fact that they’re nothing being produced in the way of value from the asset that you also have the problem. It draws in a lot of charlatans who are trying to create various sorts of exchanges or whatever it may be. 

It is something where people who are less than stellar characters see an opportunity to clip people who are trying to get rich because their neighbors are getting rich. They are buying stuff, but neither one of them understands. It will come to a bad ending. 


Charlie Munger  11:03  

Well, I like cryptocurrency currencies a lot less than you do. To me, it’s just dementia. I think that people are professional traders that go into trading cryptocurrencies, it’s just disgusting. It’s like somebody else is trading turds and you decide I can’t be left out.

Warren Buffett  11:37  

To the extent that we’re being webcast around the world, I hope some of our stuff doesn’t translate very well.

Preston Pysh  11:46  

Oh my god. This is interesting. I agree with a lot of the things he was saying there with respect to having to have somebody else come into the asset class in order for the value to go up. I completely agree with it.

The part where he says it’s going to have a bad ending, that’s where I don’t know that I necessarily agree with him. I think that the crypto space has a ton of utility, that you go out there and you read any of these top ranked books. Ones written by New York Times’ bestselling authors and people that have put a lot of time and effort into understanding what this is and what value it creates to society, which is you have a fixed monetary baseline, you don’t have central banks manipulating things. All that stuff. You basically have a global currency. I think there’s value in that. 

I then fundamentally disagree with Buffett and Munger on the long term utility of crypto, but I do agree with what he was saying there, where, let’s just say Bitcoin, for example. People have to continue to come into this currency and stake out a claim to some of these coins and that population of people has to continue to grow for this thing to go on value.

If that doesn’t happen, and it just stays where it’s at. Let’s also just say some people leave and step out of the currency, you will lose money. He’s just not in the business. He and Charlie Munger are not in the business of trading currencies. They’re not in the business of trading commodities. I know they have some futures contracts, but mostly that’s for insurance purposes for the types of businesses that they deal in. It’s a hedge to protect themselves so they can manage the finances in the business. 

These guys are not currency and commodity traders and so they don’t dabble in this stuff. I think that’s some context that people have to understand with this.

In my personal opinion, I would not be the least bit surprised if something like Bitcoin or any other crypto coin that takes a large significant market cap is doing quite well in five years from now. That wouldn’t surprise me. 

Could these things go down? And have a terrible demise like he was saying, absolutely they can. For anybody to say that they can’t, I think they’re living in a fantasy land and they’ve never seen how things can shake out sometimes in financial markets. 

I think that they had interesting comments. I think Charlie Munger there was definitely going through the crowd appeal and trying to make everybody laugh at the end, which was kind of funny. I kind of enjoyed his comment.

Stig Brodersen  14:26  

The first part they had was him talking about buying productive assets, which is just such a Warren Buffett kind of thing to say. I think it is a good learning objective for anyone going into investing that perhaps you don’t want to buy gold, which is always his storage sample of… He needs to produce something before he can return a cash flow to you. 

When he made his investment in Coca Cola, the reason that went up in price was because the company made more and more money per share and also in aggregate. This investment became more and more valuable. That’s just how it goes. The more money a company makes, the more value becomes. There’s no exception to this. 

This is just a cheap shot of Tesla. You can almost draw a line that the more money that they’re losing, the higher the valuation is. I know that there’s a lot to be said about that and you can always say, “Well, what about the top line?” We can talk about that. But the general rule of thumb is, the more money a company is making, the higher the price would be. So sorry for the cheap shot of Elon Musk. 

I’m just amazed you can lose $2 billion every year yet people think you’re a rock star, including me and still pay $50 billion for losing that $2 billion every year. 

Anyway, guys, going back to the discussion about cryptocurrency, in a way I think that Buffett doesn’t understand it. I think Buffett would probably agree with that in the sense that he does not want to understand that. That is not his circle of competence and he doesn’t want it to be his circle of competence. 

However, I think he’s right in the sense that If you hold a productive asset over time, it will be a lot more profitable for you than owning an unproductive asset, call it Bitcoin or gold. 

But that’s not the same as saying that an unproductive asset has no value. I mean, again, if we talk about gold, gold has utility. Even your dentist will tell you that gold has utility, even if you don’t see it as a store of value, which is typically why people would buy gold in the first place. It still has value because you can use it for something.

I kind of feel that Buffett was almost arguing against himself when he was talking about the cheque. I know if it was just like me, misinterpreting what he was saying, but he’s talking about the value of having access to a cheque because it’s a more smooth way of paying. 

I think it would be crazy to think that we won’t continue to see disruptions in the way that we make payments. Then we got credit cards, then we can pay online. 

We have all these different tools and all these different methods that makes it easier for us to spend money and to live in a society. Not saying that it has utility, which is not to say that that is what he’s saying. He’s saying it’s not productive. I want to say it has utility and when it has utility, it has value. 

Now, the market cap for cryptocurrencies might be $200 billion or something like that. I’m not the one to say if it’s $2 million or $2 trillion, or whatever that is. That would be a different discussion, but I think it’s important to understand that this new method has utility one way or the other, whether you see it as a store of value, or if you just see it as a simple way of paying. 

As inefficient as it is, it has some kind of value. That’s really what a lot of investors are trying to figure out and not the one who are only speculating into cryptocurrencies.

Preston Pysh  17:56  

Alright, so let’s go ahead and jump into the next question here.

Emcee  18:00  

Okay, this question comes from someone who says, “I am a Berkshire employee and shareholder. I read an investigative article from ProPublica on the Washington Post that many of Berkshire’s various units only offer 401k plans with high fees. They’re actively managed rather than the low cost indexes you have advocated as the best path for savings for retirement. 

The articles’ author said he contacted the company and nobody would comment. Will you do something to improve our 401k offerings to match your investment philosophy? From an operational perspective, how did this happen, given your strong views on the topic?”

Warren Buffett  18:37  

Well, I’ve absolutely said many times through annual reports… Our managers know what I think about the attractiveness of having an index fund option but they all have different plans, different histories, and they run their businesses. Who knows which particular…

If you go back to the older businesses, they have defined a benefit pension fund, generally. Nobody puts them in anymore then the question is do you transition to something else?

In the end, we overwhelmingly… that our managers make those kinds of decisions and others. My guess is that a very high significant percentage of people who have worked at a company that has a 401k plan will have an index fund option, but they may not in some cases.

The only thing… I think we have asked the companies to have a limit on the percentage I think that they might put in Berkshire’s stock through the 401k. 

However, we don’t we don’t want people whose jobs are tied to Berkshire. We certainly know I’m in a position of encouraging 100% or something of their, their savings and in Berkshire itself. I don’t want to be in that position. 

Though I don’t think even there, we’ve insisted on a company doing that. I think we’ve probably made that one that we have been asked about it once or twice. I think we’ve gotten that suggestion. 

The manager who runs the companies and the employees, if they feel some more companies have human relations departments and if they feel that they’d like different options or something like that, then they should make those views known to the managers. 

In some cases, the managers will pay attention to him and others probably won’t. We’ve got a wide variety of managers that run our businesses and we’re not going to start trying to run them from Omaha. 


Charlie Munger  20:47  

Well, you’re right. That has happened, that business of the hyphy choices, because we’ve delegated the whole subject to the managers of subsidiaries so no attention at all is being given to the employee choices at headquarters. 

What you’re pointing out is that a lot of the employees in the subsidiaries would do better if they indexed instead of choosing what they didn’t choose. My guess is you’re absolutely right about that. If there are any managers in the business today, I hope they do a little better at encouraging better choices.

Warren Buffett  21:24  

Although we wouldn’t want them to interfere too much and direct what they know. We can’t take over human relations.

Charlie Munger  21:35  

It’s up to the managers, but we wouldn’t object to a little different viewpoint.

Warren Buffett  21:41  

We have made it very clear what we think. I mean some of them don’t listen to us.

Preston Pysh  21:50  

I really liked this question and this exchange because it says so much about how Berkshire is run. I think there’s just a lot people can learn from the way these two responded to this. 

So just a little context for people that might not understand where the question was coming from. Buffett is always telling people that the best way for them to get a return is just to take your money and invest every month into an index fund. That’s a low cost ETF. That’s his advice for people. 

So one of the employees at one of the operational subsidiaries that falls under Berkshire doesn’t have the option to invest in a low cost ETF. They were basically saying, “Hey, you preach all this stuff, and I work for your company and I don’t have this as an option.”

These guys, if anything, that their response shows you, it shows you how decentralized this business is. It truly shows you that Buffett is sitting there in Omaha with his staff of call it 30 people and what they’re basically doing is looking at all the accounting of all these businesses that he’s bought through the years. That’s it. 

He’s giving little to no guidance to these people. I think his guidance is that if he doesn’t like the manager, he gets rid of the manager and puts somebody else in. That’s his leadership style. 

It goes along the lines of, “Hey, run with it. I don’t know how to do your business, just do it. If I have some questions that might assist me in my next stock pick or operational subsidiary that I’m going to buy, I’ll give you a call so you can help me out.” 

They are hands off. I mean, this is crazy how hands off they are. How many businesses that are this size would be sitting in a shareholders meeting with 30,000 to 40,000 people that are listening and him basically saying, “Yeah, you know, you’re right, we should offer something like this at your level but if the middle manager doesn’t want to offer it, then we’re not going to do it. You’re just not going to have that available.”

That’s crazy but I think if you pull back why these two have been so successful, I think that this is one of the main reasons why they’ve been so successful is because they haven’t dictated their culture. They haven’t dictated what it is that they want to do to all these operational subsidiaries because it would just be too complex. 

Although, there’s problems at certain levels, and this is a great example of one of those problems, because when you look at this, their culture… They’re trying to manage this across, I don’t know how many operational subsidiaries they have, but I’d guess it’s around 70. If they’re trying to manage this across 70 different companies, there’s just no way. 

When you look at why so many mergers fail, it almost always comes down to the clashing of cultures between two different companies and one trying to dominate the other. Then just shifting people around and shifting brands around all of that. They don’t deal with this. They just buy the company and they say right in their shareholders notes that the management has to come supplied because they can’t supply it. 

That’s the way they do things. They have a method and they stick to that method. They don’t deviate from it. They just continue to do it over and over again. I think that their response to this was just really surprising, but I think it also is part of their secret sauce.

Stig Brodersen  25:18  

Yeah, I think it is a great point, Preston, because how do you grow a company to like one of the 5 or 10 largest listed companies on the planet in one generation. You do that because you don’t micromanage. Say he had 70 companies. He could only be putting out fires like 24 hours a day, if that was his approach. He probably wouldn’t have gotten to that point in the first place if he wanted to go in and talk about, “This is how the 401k plan should be across the businesses that I own.” 

I mean, think about if you took up a problem like that, how many other problems the Buffett needs to fix soon? He would never have time to sit down and allocate his time to what he does best, which is just allocating capital. He’s really, really good at that. 

Perhaps allocating capital is not what he’s even best at. It is being the best business owner. What he figured out when he was allocating resources as a business owner was that his time is just not well-spent. He’s putting out fires in setting up pension plans for various companies. 

But I do think that it’s a legitimate concern to have, and I understand the person asking the question. It is a legitimate and relevant question to ask. I also think that the response really speaks to the shareholder saying, “Yes, I know why this might seem unreasonable, but I can only do one thing and that is leading by example.” 

He’s been very vocal about his view on low cost ETFs as the best way to save up for retirement for the vast majority of people. Then let the companies do what they do best. Despite all the mistakes they make, they probably would do a better job than he would. Then, he can do what he does best. 

Preston Pysh  27:02  

All right, let’s just hop into the next question here.

Bradie Richie  27:06  

Hi, I’m Brady Richie from St. Louis, Missouri. I’ve been in Shareholders since 1996 Warren, you and Charlie have been critical of business schools in the past and what they teach. With respect to value investing and super investors of Graham and Doddsville, you feature the returns of many great investors with different backgrounds, work and education, with the lesson being that following the philosophy is the key. 

To be successful today, this still just falls back to chapter eight of “The Intelligent Investor.” What do you think of programs in designation such as CFA, CFP, etc, which purport high standards yet rooted heavily into academia?

Warren Buffet  27:51  

I went to three business schools and at each I found a teacher or two… I found a teacher that everybody got a lot of… So we’re not at business school there at all. We do think that the priesthood, 30 or  40 years ago in terms of an efficient market, they strayed pretty far in our view from the reality of investing. I would rather have a person… 

If I have to hire somebody among the top five graduates of number one, two or three of the business schools, and my choice was somebody that was bright, but had read chapter eight of “The Intelligent Investor,” absolutely. It just was natural to them. They had it in their bones basically. I take the person from chapter eight.

What we do is not a complicated business. It’s got to be a disciplined business. It does not require that super high IQ or anything of the sort. There are a few fundamentals that are incredibly important and you do have to understand accounting. It helps to get out, talk to consumers and start thinking like a consumer in many ways, in certain industries and all of that. But it just doesn’t require advanced learning. 

I didn’t want to go to college so I don’t know whether I would have done better or worse if I just quit after high school and read the books I read. I think that if you run into a few great teachers, and they really change the way you see the world to some degree, you’re lucky. You can find them in academia and you can find them in ordinary life. 

I’ve been extraordinarily lucky and having great teachers, including Charlie. Charlie’s been a wonderful teacher. 

Any place you can find somebody that gives you insights into things you didn’t understand before, maybe makes you a better person than you would have been before. That’s very lucky and you want to make the most of it, if you can find it. Good to make the most of it and if you can find it in the rest of your life, make the most of it.

Charlie Munger  30:51  

When you found Ben Graham, he was unconventional and he was very smart. Of course, that was very attractive to you. You found out at work that you can make a lot of money while you are sitting, of course, you were an instant convert. 

Warren Buffett  31:11  

It appeals to me actually.

Charlie Munger  31:15  

But the world changed before he died, Ben Graham. He recognized that the exact way he sought undervalued companies wouldn’t necessarily work for all times under all conditions. That’s certainly the way it worked for us. We gradually morphed into trying to buy the better companies when they were underpriced instead of the lousy companies when they were underpriced.

Of course, that worked pretty well for us. Ben Graham outlived the game that he played personally most of the time. He lived to see most of it fade away. Just to find some company that’s selling for one-third of its working capital, and figure out it could easily be liquidated and distributed $3 for every dollar of market price. Lots of luck if you can find those in the present markets. If you can find them, they’re so small that Berkshire wouldn’t find them of any use anyway. 

We’ve had to learn at every game. That’s a lesson for all young people in the room. If you’re going to live a long time, you have to keep learning. What you formerly knew is never enough. If you don’t learn to constantly revise your earlier conclusions and get better ones, I always use the same metaphor, you’re like a one-legged man in an ass-kicking contest.

Warren Buffet  32:44  

If anybody has suggestions for another metaphor, send them to me. 

Graham, incidentally, an important point, Graham was not scalable. I mean, you could not do it with really big money. When I worked for Graham Newman Corp, here he was the dean of all analysts. He was an intellect above all others around that time. 

The investment fund was $6 million and the partnership they worked in tandem with the investment company also had about $6 million. We had $12 million we were working with. Now you can make adjustments for inflation, but it was just a tiny amount. It wasn’t really scalable. 

The truth is Graham didn’t care because he really wasn’t interested in making a lot of money for himself. So he had no reason to want to find something that could go on and on become larger and larger. The utility of chapter eight in terms of looking at stocks as a business is of enormous value. The utility of chapter 20 about margin of safety is of enormous value, but that’s not complicated stuff.

Charlie Munger  34:09  

I finally figured out why the teachers of corporate finance often teach a lot of stuff that’s wrong. When I had some eye troubles very early in life, I consulted a very famous eye doctor. I realized that his place of business was doing a totally obsolete cataract operation. They were still cutting with a knife after better procedures. I said, “Why are you in the great medical school performing absolute obsolete operations?” 

He said, “Charlie, it’s such a wonderful operation to teach.”

Well, that’s what happens in corporate finance. They get these formulas to find teaching experience. You give them a formula, you present the problem, they use formula. It’s got a real feeling of a worthwhile activity. There’s only one problem: it’s all balderdash.

Warren Buffett  35:11  

Yeah, whenever you hear a theory described as elegant, watch out.

Preston Pysh  35:18  

Personally, I absolutely loved the last part here where they’re talking about business school and how teachers make things more complex than they need to be. I can’t stand CAPM. I think CAPM is so worthless. I kind of think that’s what they were talking about there at the very end is these CAPM calculations on basically determining what the value of businesses is based off of the volatility and everything else, it’s just so crazy, in my opinion.

The thing that I think sets people apart, you talk to anybody with a lot of experience in valuation, and they almost immediately want to talk about multiples. One of the things that I found interesting when I had a conversation with Ray Dalio personally, I was with a friend. Ray asked my friend, he said, “You know, so what’s the multiple of that?”

He just cut straight to the chase. It wasn’t anything that was a very… They were talking about certain purchases on the private equity side, smaller purchases, like under $100 million dollars. Ray just said, “So what’s the multiple look like on that?”

That’s where his immediate conversation went. These guys that really understand this stuff, they’re not doing things that are crazy. They’re doing things that are simplified. They’re getting straight down to the basics, and then they’re really trying to understand the competitive landscape of the underlying assets of the business and how that won’t be impaired moving forward. 

Business schools just have a tendency to make things way, way harder than they need to be. The drills that you’re learning in business school is valuable. However, in application, you’re just not doing it that way, right. Am I crazy? I mean, it’s just fun to hear them talk about this stuff. 

Stig, I want to hear your thoughts. 

Stig Brodersen  37:03  

This was my absolute favorite question of all of them. Definitely my favorite response. Not just having been a business student myself but also being teaching, there are so many inherent flaws in the system. I find it really insightful what he said about he would rather hire a person who read and understood chapter eight of “The Intelligent Investor,” rather than being a graduate from a top five business school. 

Chapter eight of “The Intelligent Investor” that’s about Mr. Market and how stock prices are irrational and how to act in a rational market. I completely agree. I really, really like what he said about that. He even talks about chapter 20 later in his response, which is the margin of safety, which is basically you need to estimate what the intrinsic value is, and then buy it at a much lower price, so you have a margin of safety if you’re wrong. 

There are some fundamental things about stock investing that you simply don’t learn in business schools. If you haven’t gone to business school, you might say, “That doesn’t make any sense. Why would I pay thousands of dollars for someone who is just telling me that stocks are always priced perfectly?” 

Yes, that’s absolutely a horrible experience. There was this other question that was asked during the meeting, that we didn’t have a chance to play in his episode or the previous one, where there are business students going up there and asking Buffett and Munger, “Please give me your equation and your inputs for valuing in business. Please also give me a stock ticker so I can go back home and mimic everything you just said and have the magic formula.”

Munger just said, “If you want a formula, you need to go back to business school.” 

That was just such a spot on response to that, because there’s no magic formula. It’s incredible going to these meetings and there was definitely normalcy the first time but having gone through quite a few of them, there’s always this guy who’s saying, “Give me the equation so I can go home and replicate the entire universe of stocks and buy the best one.”

Buffett and Munger always have the same response that we can’t give that to you because it doesn’t exist. You have to estimate your own cash flows first. Before you can do that, you need to learn about businesses, you need to learn about life, you need to learn about accounting. 

When you feel that now you can estimate the value of a business, guess what? You have to keep learning so you can keep readjusting that value of the business because it’s always changing, because the world is changing. You need to improve your skill set, which was also what Munger was getting at. You need to keep learning. That’s really the key advice. 

I do want to say in defense of business schools, if you’re a college professor, the way that you’re compensating is that the less time you can spend on a ton of different activities, the more productive *inaudible* time. Say you can spend it on research, you can spend it on playing golf, whatever you want to do. There’s a lot of incentive in terms of not doing your job well. 

One of the things that this comes into effect is grading papers. So if you’re teaching a finance course, you have all the incentive in the world when you do exams and tests, and all that to give people a test. There is no multiple choice, where students don’t have to think for themselves at all. They just look up a formula to calculate something so you can say it’s right or wrong, but that’s not how to think about stock investing. 

I could give you an example. When I taught, I had assignments with students saying, “Here are the financial statements of this company for the past 10 years. Come up with intrinsic value.” 

The students were so frustrated by that type of exercise because they’ve never tried anything like that. They will say, “Is it $53 per stock?”

 I mean, that was the questions I was getting and I will say that doesn’t matter. I will grade you based on the arguments and based on which kind of mode you chose and why you chose it, not because you’re using the right formula. That’s just not the way that we incentivize teachers and academics in this country. 

We incentivize them to give really, really bad assignments that are  fast to grade because it’s cheaper for everyone. Now, the students might suffer because they don’t get the required skill set in school, but the academic system prospers from doing that. 

Just like the last point here about incentivizing people, say that we incentivize teachers on teaching investing courses, not on the amount of hours they put into the teaching. Say that we compensate them so if they lost money on their portfolios five years after graduation, it will be reflected negatively in the teacher salary. What would happen? 

Well, the teachers would probably start saying, “Only invest in treasury bonds.” There would be this new discipline in academia where they would only invest in treasuries. You would learn how to get an A plus and calculate the yield of whatever that you can just look online, because you can incentivize teachers to do that. 

But if you incentivize teachers and professors to say only upside and the downside was just always paid by the investor himself or the asset management company, then you would probably have a new course called VC investing, venture capital: how can you turn $1 into a gazillion dollars? Because that’s what you will incentivize. 

I know this probably also comes from a place of frustration, having taught three years of investing courses, finance courses, and accounting classes, but I think you get what you pay for. This is just an inherent problem that we have in the system.

When Preston talks about CAPM, which is a horrible, horrible theory that no one should use. It’s easy to grade papers and it’s easy to cheat. It gives this great learning experience. It is useless. But you have all the other factors that you are centralized in the system. So I think we really need to look there before we talk about magic formulas. They’re not there, by the way, in the first place.

Preston Pysh  43:23  

All right, so let’s go ahead and play the last question we had from the meeting.

Emcee  43:29  

Facing the fast growing machine intelligence, how would you see the new competition impact the capital allocation productivity in the future? For Charlie, what is the first principle of capital allocation from a general economic interest point of view?

Charlie Munger  43:47  

Well, two questions, machine intelligence. I’m afraid the only intelligence I have is being provided by something that’s not a machine. I don’t think I’m going to learn machine intelligence. 

If you’re asking me how to beat the game of Go with my own intelligence, I couldn’t do it. I think it’s too old for me to learn computer science. 

Generally, I think that machine intelligence has worked. After all, the machine now can beat the best human player of Go. But I think there’s more hype in that field and there is probable achievement. I don’t think the world is going to be changed that much by machine intelligence. Some but not not hugely. 

What was the other question? Well, one was machine intelligence.

Warren Buffett  44:51  

I think it was getting capital allocation.

Charlie Munger  44:52  

Oh, yeah. That’s such a general question. Generally speaking, we’re always trying to get the best to get something that’s worth buying. The human mind rejects that if you’re in academia, because you could come in and make one declarative sentence at the opening of the semester. Then you have nothing to do for the rest of your time, so people want to find some formula. It’s what I call physics envy. 

These people want the world to be like physics, but the world isn’t like physics, outside of physics. That false precision just does nothing but get you in trouble. I would say you’ve got to master the general ideas and you’ve got to work to improve your judgment. Slowly like all the rest of us had. I don’t think most individuals have much hope of individual gain from machine intelligence.

Warren Buffett  46:02  

I don’t think that I’m impressed with machines being a goal or something of the shorter or even *inaudible*. I don’t really think they’d bring much to the table in terms of capital allocation or investing. I may be missing something entirely. Maybe I’m just blind to what’s out there. 

Charlie Munger  46:23  

You’re missing a lot of remunerative fear and twaddle.

Warren Buffett  46:30  

Well, that takes care of that. So we’ll go on to station eight.

Preston Pysh  46:35  

I really liked this question because I think it really highlights how skeptical they are of new technology in general. I’m not saying that their comments are accurate by any shape of the imagination. They might be very inaccurate, but I think it shows you how skeptical they are to invest in anything or to buy into anything that just has no proven track record. This is just how they operate.

I’m a big believer in AI and kind of where this is all going, with all these deep neural network stuff. I think that it’s going to change cars, it’s going to change medicine in a major way. There are just so many things that are going to impact the world in a very dramatic way in 10 to 15 years. 

It doesn’t seem like they see it that way at all. They obviously know about this. That’s why they keep bringing up the game of Go because they understand that DeepMind Google’s AI arm is playing the game of Go and proving that it can beat humans. They’re very aware of what’s happening but they’re skeptical.

I just find that interesting. I find it very interesting. I don’t share the same opinion as them but I think that the question in their response is worth highlighting to the audience so people can form their own opinion. 

Stig Brodersen  47:55  

Honestly, Preston, like when I heard them and this question, I was like, “Yes. I want to hear from Buffett and Munger, what do they think about? How is this going to change things?” 

They said, “We don’t know, probably not a lot.” I said, “Ah, meh.” That was kind of like the feeling that I had. I don’t have a great opinion on that either. I think it’s clear to see in some of the other disciplines, whether it’s cars or medicine. 

I think there’s lots of game there, and just like a handoff, we read Martin Ford’s book, “Rise of the Robots” with a lot of applicability for AI. That was an amazing book but it didn’t touch on investing. I think that at least so far, I haven’t seen a lot of good literature about the impacts on AI. It’s probably not reasonably fair if I say this, because I’m not the one to validate it. 

So what would it take for me to say it’s good? I mean, I have no clue what’s going on. Even Buffett has no clue what’s going on with AI. It makes sense in trading and the thing that the results that you have seen so far is that they trade really well. 

The AI algorithms, we haven’t really seen them identify moats and like long-term investments just yet, but that’s not the same as saying they can’t do it. It’s just because it’s so new that we don’t have any valid track records to really see that. 

What is your personal opinion, Preston? How do you think that AI will change the investing landscape over the next decade, if ever?

Preston Pysh  49:30  

I don’t know. But I do think that it is going to have an impact. I think that it’s going to take a lot of jobs out of Wall Street and a lot of big banks. That’s my personal opinion. We were talking about the stock pick AIEQ, which is one of the first deep learning ETFs out there where no human is making any decision. It’s just the robot and some of the picks that it had in its portfolio. 

Last time I checked it was actually outperforming the market since inception and it had a very rough start. The first month was very bad and now it’s actually outperforming the market. So I’m watching that very closely. I’m kind of seeing what’s happening. 

As it gets a track record, I think any professional trader would tell you, it has to beat the market for three to five years before they would even entertain it as being something that’s proving that it’s doing better. 

I know I’ve got my eye on it and to be honest with you, I kind of feel like it’s going to outperform. That’s just based on gut. How could I back that up with anything other than just saying that it’s my gut? 

All right, guys. So that concludes our second part episode of The Berkshire Hathaway Shareholders’ Meeting. We had so much fun with our audience. You guys are just amazing. Thank you so much for the people that did come out. We had so much fun with you. 

We really look forward to all those opportunities that we have to sync up and meet people face-to-face and this was just an incredible opportunity. We really enjoyed covering these questions. As you can see, some of them are not what you would expect and some are exactly what you’d expect. But hopefully you guys will learn some interesting things by the 10 questions that we covered over these two episodes.

Stig Brodersen  51:12  

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

Outro  51:21  

Thanks for listening to TIP. To access the show notes, courses or forums, go to theinvestorspodcast.com. To get your questions played on the show, go to asktheinvestors.com and win a free subscription to any of our courses on TIP Academy. 

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