16 September 2023

In this episode, William Green speaks with Chris Bloomstran, President & Chief Investment Officer of Semper Augustus. This conversation has been divided into two episodes. Here, in Part 2, Chris discusses what we can learn from studying Berkshire Hathaway & Warren Buffett; weighs the risks of Berkshire’s huge Apple stake; discusses Berkshire’s valuation; & explains why the stock should beat the S&P 500. He also talks about avoiding charlatans and living with integrity.

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  • Why Chris Bloomstran says it’s so valuable to study Berkshire Hathaway.
  • How Warren Buffett thinks about intelligent asset allocation.
  • How share buybacks are mishandled by many companies.
  • Why most investors shouldn’t pick stocks for themselves.
  • How Chris manages his time.
  • What his football coaches taught him about integrity & kindness.
  • How he’s risen above a painfully difficult childhood.
  • Why the key to investing success is a fierce work ethic.
  • How Chris uses social media to criticize what he calls “charlatan promotion.”
  • What he thinks of Berkshire’s huge stake in Apple.
  • How he values Berkshire, & why it should outperform the S&P 500.
  • What a legendary golfer taught him about how to live.


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.

[00:00:03] William Green: Hi there. This is part two of my conversation with Chris Bloomstran, a terrific investor who’s the President and Chief investment Officer of Semper Augustus Investments Group. Chris has an excellent long-term record over the last three decades, but he’s probably best known as one of the world’s leading experts on Berkshire Hathaway.

[00:00:23] William Green: Chris’s annual letter to clients has developed a cult following, not least because it includes an amazingly detailed analysis of Berkshire. In his most recent letter, he devoted 59 pages, by my count, to analyzing Berkshire’s many different businesses and valuing the company in four different ways. That attention to detail gives you a sense of how fiercely driven, obsessive, and intense Chris is when it comes to analyzing stocks.

[00:00:54] William Green: In this part of our conversation, we talk in some depth about why investors and CEOs should study Berkshire Hathaway and what they can learn from Warren Buffett, about things like how to allocate capital more intelligently, and how to think rationally about share buybacks, and also how to treat shareholders more nobly and honorably and fairly as partners.

[00:01:18] William Green: We also discussed the merits and risks of Buffett’s enormous investment in Apple and Chris explains why he expects Berkshire to outperform the S&P 500 over the next decade. Along the way, we also chat about why most investors shouldn’t pick individual stocks for themselves and why they should be extremely careful of the casino side of Wall Street, which is full of smooth talking promoters who are good at spinning stories and making themselves extremely rich, but are not necessarily looking out for the best interests of unsuspecting retail investors.

[00:01:55] William Green: As you’ll hear in this very candid conversation, Chris has some intensely personal reasons for caring so deeply about integrity and truthfulness and protecting regular folks from abusive behavior. I hope you enjoy part two of our conversation. Thanks so much for joining us.

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[00:02:18] Intro: You’re listening to the Richer, Wiser, Happier podcast, where your host William Green interviews the world’s greatest investors and explores how to win in markets and life.

[00:02:38] William Green: Berkshire obviously has been an enormous part of your portfolio going back to 2000. When, as you said before, it had halved, and I think you, you bought it in February 2000, initially at about 43, 700, and here we are [Crosstalk]

[00:02:54] Chris Bloomstran: 43, 707. There were $7 a commission.

[00:02:56] William Green: Yeah, it was 47. [Crosstalk] Yeah. And so, I mean, in a and this has grown at times to 20 or 30% of your client’s portfolio.

[00:03:04] William Green: So it’s a, it’s clearly a very important anchor position and your best known really publicly for your enormously detailed analysis of Berkshire, which you do each year in your shareholder letter. I wanted to talk a little bit about Berkshire because it’s so associated with you and you’re pretty much unrivaled in your understanding of the minutiae of the business.

[00:03:27] William Green: When you were writing about Berkshire in one of your annual reports, you said It’s run by the world’s most skilled and shareholder friendly management team, and that it embodies how capital should work, and it is probably the best business to study if you want to learn how to invest and how to run a company morally and ethically.

[00:03:46] William Green: And I wonder if you could just talk a little bit about Berkshire as a kind of model for others, what other CEOs and investors can learn from Berkshire about things like rational asset allocation and running a company in an ethical way and looking out for shareholders. These very fundamental things that I think so much of the casino side of the investing world forgets about.

[00:04:10] Chris Bloomstran: Well, I think Berkshire should be studied by managements. You know, rarely are companies led by great capital allocators. CEO comes out of operations in many cases. CEO comes out of finance in many cases. Managements are largely compensated with a nominal base salary. But then in most cases, some varying degree of bonus, but then largely stock options, restricted share units.

[00:04:40] Chris Bloomstran: And the hurdles that are put in place to be rewarded with your options, it’s not just time vesting, but they’re performance elements. And a lot of times there are things like revenue growth and there are things like EBITDA and they have nothing to do with any kind of return on asset return or equity return on capital.

[00:05:00] Chris Bloomstran: Well, from day one, Warren Buffett ran Berkshire to grow its book value per share and to not Put the business in harm’s way and when it was in harm’s way to pivot, when the first business they owned obviously was the textile business and famously ran it off and eventually closed it. In 1985, several of the first businesses they bought blue chip stamps, diversified retailing were wound up essentially being zeros and they pivoted away from those.

[00:05:27] Chris Bloomstran: And it’s been this capital allocation at Berkshire that’s a allowed to be so successful. It’s beyond that. It’s the treatment of the shareholder. And Warren is the largest shareholder. You know, he’s run it for this. I’m going to say this wrongly, but he’s run it for his benefit. Not so much to line his pockets at the expense of the other shareholders, but at the benefit of all of the shareholders.

[00:05:55] Chris Bloomstran: And so it’s the lack of abuse in accounting. It’s making rational acquisitions when you’re laying out capital, you don’t have a litany and a long history of write offs and write downs the 10 billion write down of precision cast parts, you know, he’s acknowledged was a mistake on price in particular, and the business got worse, part of it was already in bad shape, the turbine business was already in bad shape when they bought it, Who would have known with the pandemic that aircraft manufacturing would go through the lull that it did, but he paid.

[00:06:28] Chris Bloomstran: And I thought we own the stock. I thought he overpaid for it. I think he probably is backed away from the big elephant hunting with the lesson of having overpaid for business that did get harmed in various ways, but you’ve got so much alignment and it’s so easy to learn the lessons by simply going back and reading the chairman’s letters.

[00:06:50] William Green: Yeah, I thought it was striking that you, in one of the letters, you pointed out, for example, that Mark Zuckerberg, for example, had paid, I think, 330 in 2021 for shares that would later be worth less than 100. And you were just talking about the fact that, you know, not to, yeah, but not to gang up on, on Mark Zuckerberg, who’s obviously brilliant in his way, but the lack of discipline in a lot of companies about things like share buybacks, where instead of buying their stock back when it’s cheap, they’ll buy back any time, the sort of short termism, and it seems like, I mean, there was something very striking to me in a lot of your writing about, you know, return on capital and maybe Berkshire is kind of the best way to look at this.

[00:07:35] William Green: You, you said in one of your letters, we think at least 90 percent of publicly traded companies aren’t worthy of investment because they don’t earn their cost of capital. Companies that slowly lose capital have generally been able to raise new capital and mask what is really going on. In that way, many businesses operate on the order of a legitimate Ponzi scheme.

[00:07:56] William Green: So can you talk about how a company Berkshire, that’s very rational about cost of capital, return on capital, how it embodies this kind of just much more logical and intelligent way of thinking about it’s investments.

[00:08:12] Chris Bloomstran: Well, the levers of capital allocation are known and understood at least by the value investing world.

[00:08:19] Chris Bloomstran: There are only so many things you can do with money. And from a capital allocation standpoint, I had a chart in this year’s letter. which looked at the last five years of capital allocation at Berkshire and it started with cash flow from operations from the cash flow statement, netted out depreciation expense, which is a real charge and in Berkshire’s case, I think in a lot of companies cases, depreciation expense essentially matches what you’d call maintenance capex as opposed to growth CapEx.

[00:08:45] Chris Bloomstran: Berkshire has a lot of money being spent in the energy world where they’re growing the footprint Of their energy assets. But there you can do things with the share. You can issue shares in transactions. You can issue shares to management as compensation. You can buy back the stock and the price at which you buy it back becomes critically important and so little understood by most CEOs.

[00:09:10] Chris Bloomstran: You can use leverage in the capital structure. You can issue debt, you can retire debt. You can spend money on CapEx, on growth CapEx, you can spend money on growth R& D, you can make acquisitions using any of the combinations of capital available to you, internally generated capital, net new capital, either through the equity markets or the debt markets, and then I had a throw off one way line in my table this year, or you can buy jets, a jet or jets, or you can have birthday parties and you can have a birthday party with matriculating ice cherubs of vodka that’s a nod back to the Tycho Dennis Kozlowski days for, you know, Dave.

[00:09:53] Chris Bloomstran: The younguns that don’t remember the Tyco, the Tycho saga, and that’s all you can do. And, but I don’t think that’s what CEOs sit around thinking about. I think they look at, look, if I’m paid, if I’m incentivized to grow ebitda, they’re gonna go grow ebitda. If that’s what drives their comp package.

[00:10:11] Chris Bloomstran: Well, that’s above the line. And the components below the EBITDA line interest is a very real thing. Expense, but you become indifferent as to the capital structure of the business. If you’re paid to grow the top line and you’re paid to grow ebitda, you become a lot more tolerant of leverage in the capital structure because you’re measured before the interest expense.

[00:10:33] Chris Bloomstran: And in so many cases, you’ll put the business in harm’s way with excessive leverage. But you’re not paid to keep the business out of harm’s way. You’re not in the captain’s chair as CEO, as Warren has been since 1965. You’re in the captain’s chair for four and a half years on average. And when you’re given big option packages, and big RSU packages, and big PRSU packages, This is your chance to make money, and your motivation becomes, in so many cases, short term earnings, making Wall Street happy, driving the stock price up, and the share repurchase becomes front and center, perhaps your best use of capital.

[00:11:11] Chris Bloomstran: Now, I’d also argue that so many companies don’t have the opportunity set to go invest in growth. CapEx intelligently. They don’t have the opportunity to go invest in growth R& D. So what do you do with the money? Well, if you look at the, it’s fascinating to me, you’ve got this 38 trillion market cap for the S&P 500.

[00:11:31] Chris Bloomstran: The share count for the S& P 500 is exactly the same where it was 23, 24 years ago. If you look at the percentage of net income or the percentage of cash flow from operations that have been spent retiring shares and buying stock, last year it was a trillion dollars. Out of the 1. 6 trillion in aggregate profits for the S&P 500, you know, between dividends and sherry purchases, there’s nothing left for the S&P 500 for the last 20 years.

[00:12:01] Chris Bloomstran: And you’ve been buying shares back at 20 times earnings at a 5 percent earnings yield. Well, if you can go invest in a project, if you really have a business that earns 15 on equity, Do you really earn 15 on equity if you can’t go re invest at a 15 ROE, but your best use of capital is buying the stock back at a 5 percent return?

[00:12:21] Chris Bloomstran: This is not normal boardroom conversational strategy, thinking this is not what the CEO’s laying away and thinking about it at night. But if you’re Tom Linebarger at Cummins who is retiring, God love him. He’s one of the best CEOs and this best management team, the new CEO, I forget her name, she’s come up for operations.

[00:12:42] Chris Bloomstran: But the whole management team, they’ve all been there forever. I mean, they’ve been at Cummins for 20, 25 years and they have a culture of their compensation is driven by the performance of their business units. And when they get to the executive. level, and they start to be compensated with options and RSUs, it’s all very return on capital based driven.

[00:13:04] Chris Bloomstran: It’s very return on asset based driven. And you love to see that because in that setting, the decision making of how capital goes in and out the door becomes very aligned with the shareholder. And they’re just very good. And so getting that alignment right is so critically important.

[00:13:21] Chris Bloomstran: And if you take the time to read through everything that that Mr. Buffett, that Warren has written. about executive compensation and stock options and accounting and the treatment of the shareholder. It’s just, I don’t think the incentives aren’t there for the managers to go live that way and think that way.

[00:13:43] Chris Bloomstran: You know, they’ve come up through the system of seeing how their mentors got rich. And they’re going to emulate that behavior. They’re not going to emulate this old guy in Omaha, who’s really aligned himself with the shareholders. And I think he thinks deeply about treating all constituents.

[00:14:00] Chris Bloomstran: Well, it goes back to your note about Peter Kaufman and our conversation, and we will ultimately led to how Costco runs their business, but it’s taking care of your employees. It’s taking care of your customers. It’s taking care of your community. It’s taking care of your regulators and through all that, the last thing it’s taking care of is the shareholder.

[00:14:17] Chris Bloomstran: And there are great businesses that, that really are aligned in in, in differing degrees, but that’s really what you’re looking for. Now you have places where you think you have that alignment. You still have bad businesses. You know, most insurance operations are not good. I mean, the, especially underwriters or brokers are a totally different story, but insurance underwriting is brutal and it’s very difficult to approach underwriting from a conservative standpoint.

[00:14:43] Chris Bloomstran: Lending, banking is very brutal. You go back and look at the long term stock price charts of almost all of our leading banks over the last 25 years, and the stocks are below, or they’re not much above where they were 25 years ago. They’re cyclical. You lower lending standards at the peak of the cycle, and you wind up with write offs and losses.

[00:15:05] Chris Bloomstran: Then you wind up having to recapitalize your shares at the most inopportune time. Some of the reasons that the divisor on the S&P 500, the share counts where it was 25 years ago, is because every time you have a recession, You know, you’re right off so much of corporate assets and equity, and you’ve got to recapitalize and you’re winding up now capitalizing when the share price is the cheapest, when it’s the most attractive from an investment standpoint.

[00:15:28] Chris Bloomstran: You’re not buying it in, but you’re issuing it because you need the money. And so, You know, the [Inaudible] purchases tend to be a disaster at the wrong time. It’s when you should be buying the stock back, but Olin couldn’t buy the stock back in the pandemic because they had four plus billion dollars in net debt on the balance sheet.

[00:15:46] Chris Bloomstran: Today, they’ve got 2. 7 billion in net debt. It’s a better business and they can buy it back. The stock’s trading at five times earnings. It’ll be a private business in 20 years. That’s a great use of capital. This management team at Olin absolutely gets it, but those managements. To your point, and to your comment, there are fewer and far between, but that ought to be the quest of any investor, is finding where you’ve got the alignment of incentive.

[00:16:14] William Green: I’m also struck by just how difficult this stuff is for an investor. I mean, when I look at the kind of analysis that you do, You’re having to really drill down and get a sense from the company’s financial statements of the true profitability of a business. After all the write downs and the litigation expenses and funding defined benefit pension plans and stuff.

[00:16:36] William Green: And some of it just makes me think really to get a sense of the true earnings power of a company and really to get a sense of its true intrinsic value even at approximately, it’s just such a difficult game. And then it just seems to me that for most investors. They should just not be playing this game. It’s too difficult to buy individual stocks. What do you think?

[00:16:58] Chris Bloomstran: Well, I think it takes the proper wiring. One, I think it takes a little bit of the contrarianism, the skepticism. I’m very jaundiced. I mean, when I’m talking to management and I’m reading K’s and filings, I’m always looking for where I’m being lied to.

[00:17:15] Chris Bloomstran: And maybe that goes back to my upbringing and being in a household where there were, where you didn’t have the honesty and you didn’t have the behavior that you’d really want to see. But I also think it’s repetition. I think it’s I think it requires an awful lot of time and purpose.

[00:17:32] Chris Bloomstran: You really do have to have a thorough knowledge of accounting, but you have to know not just accounting. I mean, it’s not, you can’t just simply take some gap earnings number or even think you’re making some accounting adjustments and throw some multiple on it, or you do it via running a DCF. You can tweak your models to get the output to be anything you want.

[00:17:49] Chris Bloomstran: It’s really understanding over time how accounting is either judiciously applied or not. It’s what is the history of write offs and write downs? I mean, you know, if you do have a return or equity component to your compensation. And you’re in the business of making a lot of acquisitions. Maybe you do want to every cycle take a bunch of write offs, write downs.

[00:18:10] Chris Bloomstran: Deflate the equity number, which in turn in the next cycle, when your profitability comes through, it’s now against a lower equity base because you just take a bunch of accounting write downs and write offs. I mean, since the mid 1980s, on average, the S& P 500 has seen 15 percent of operating earnings written off and written down to charges.

[00:18:30] Chris Bloomstran: And it tends to be the most extreme at the highest during recessions, during times when times are bad, you don’t have as many write offs when times are good. What is book value? And book value can get distorted by repurchases of shares at a big premium of the book value, which may or may not make economic sense.

[00:18:51] Chris Bloomstran: You know, what is net income? I mean, is it understated? Is it overstated? If you’re doing a lot of deals and you’re writing off intangibles, what kind of intangibles are being written down? If you have a lot of patents and you’re in the drug world, patents really do lose value over time. If you’re buying businesses where economic is, where economic earnings are durable, the intangibles that are customer lists should not lose value over time unless you’ve overpaid.

[00:19:16] Chris Bloomstran: Then of course, you’re going to make charges to intangibles and goodwill because the, he overpaid for a business. It’s not as good of a business. It’s hard. It takes a lot of work. I’m on I’m fortunate to be, and I love this. I love being on college campuses a lot. And, you know, just kind of passing along some of the few things that I’ve learned.

[00:19:35] Chris Bloomstran: And I always say, look, you always get asked for, you know, what one book should I read that’ll teach me how to be a great investor? What podcast do you think are the best? And my point is, you know, get away from largely, you know, thinking you’re going to learn something vicariously through an author or through somebody talking.

[00:19:55] Chris Bloomstran: I mean, I love these podcasts. You had Ray Dalio on it. I mean, obviously he’s brilliant. He’s a genius, but. You know, given an hour given two hours, I want to figure out what’s going on and comments. And I wanna figure out what’s going on in the world of hydrogen. Because these are the things I worry and think about.

[00:20:13] William Green: Well, part of the lesson for me Chris has been the more time I spend with really superb investors, the more I realize how ill qualified I am to play the game on my own. And so it becomes. So it’s actually, it’s really helpful for me to study great investors because then I start to think, all right, well, I’m not wired that way and I’m just not as interested.

[00:20:34] William Green: And it struck me, I was thinking about this the other day, I was reading one of your annual reports and there was a moment where you got really excited in the annual report and you were saying, you know, the light went on when I was looking at like this footnote about the tax treatment of the Burlington Northern Railroad that Berkshire owns.

[00:20:53] William Green: And then I realized, oh no there’s the equivalent of float in there, you know, that, that’s not really understood. And I was just thinking, God, I just don’t give a damn in comparison. And so for me, like, I mean, look, I own Berkshire, right. And I and I love Berkshire, I’m totally biased, but literally part of what I do.

[00:21:10] William Green: Each year I’m embarrassed to say this, but I read your report and I’m like, okay, well, here’s how he’s valuing it four different ways. And I trust Chris to be really assiduous with this. And I’m like, I’m done. And I’m happy, you know, and I trust the values of Berkshire and Buffett and Munger.

[00:21:26] William Green: And I trust that they’re not out to screw me, but I’m really, I’m kind of almost like, Just outsourcing the really serious analytical work to you, because I am not interested enough or capable enough.

[00:21:40] Chris Bloomstran: Well, I’m, you know, I, there’s, I have no doubt in my mind you’re capable enough. But you said it. It’s, I think it’s the level of interest.

[00:21:46] Chris Bloomstran: Yeah. I mean, you know, Warren talks about tap dancing to work. I’ve I have never felt like I’ve worked in the business of money management. I mean, I’m just so intellectually curious about. Business and industries, the companies I own, the competition, finding new ideas, that, that’s all that interests me.

[00:22:06] Chris Bloomstran: I, you try to read books on behavioral economics and I get through a few pages and I can’t do it. Podcasts, love, I mean, Ray Dalio is a genius, but I, okay, you meditate. I guess my meditation is worrying about what’s going on in the displacement of the class aid. Diesel engine.

[00:22:26] William Green: You’re walking like 10 miles a day, right?

[00:22:28] William Green: So that’s presumably one of the habits that in some ways is your equivalent of meditation, where it’s enabling you to disconnect from the office, to disconnect from the noise, to quieten down a bit, to get some peace, to get some perspective, right? I mean, that’s a, that’s really so, I mean, I think you’ve just found a different kind of habit to keep your sanity, no?

[00:22:49] Chris Bloomstran: It is, and even here in the last three months of, I’m getting ready to have my hip replaced. And so it’s been very hard for me to walk. I’ve got a, with all the surgeries on the knee and the damage I did to the body playing football and in time in the weight room and all the sports I played, the body’s broken down.

[00:23:08] Chris Bloomstran: My left knee had been deferring a replacement for seven years. The hip got really bad two years ago. Stig Bordersen, Preston Pysh, William Green, Clay Finck, Patrick Donley, Robert Leonard, Kyle Grieve, And I really had to make myself walk more than my typical, you know, one mile a day. And so I’m up to trying to walk 20, 000 steps.

[00:23:34] Chris Bloomstran: And so, you know, here I am in all of July. I’ve, I’m now walking, I have an eight mile course. I change up the course a little bit, but you know, that it takes time. So I’m out there walking for two and a half on average hours per day. And You can either listen to music, which I like to do, and that gives me time to think.

[00:23:55] Chris Bloomstran: I mean, it’s the time where I’m not engaged in analysis, and I’m not on the phone, and I’m not emailing. It’s my time to think. I’m not really listening to the lyrics of the song I’m thinking, but I’m walking so much more now, and I’ve lost 30 pounds, which is great that I’ve lost 30 pounds. Knowing I’m coming on your podcast and listening to your podcast and they’re phenomenal.

[00:24:14] Chris Bloomstran: I mean, they’re genuinely wonderful. So I can take two hours listening to your podcast, and then I can go through what my form of meditation is. And that’s thinking about what’s going on in my life and the world and the portfolio and the competition that’s coming and all the things that matter to me.

[00:24:30] Chris Bloomstran: And it’s I guess everybody needs a channel to get out and get away and bring themselves to a calm.

[00:24:34] William Green: It’s also striking to me, Chris, that you have a, I mean, you were saying to me last week, look if you need more time to dig through some of my annual letters and interviews and the like, it’d be easy to.

[00:24:46] William Green: to postpone our conversation when you said, I have no travel in a very open calendar. And I was really struck by that, this idea of having a very open calendar. And likewise, I’ve seen you say that you have a kind of ADD approach to structuring your day. And while your business partner, who you’ve worked with forever is very structured and very orderly and very systematic.

[00:25:09] William Green: You kind of leave your day largely unstructured so that you can do your research and like, can you talk about that? Thank you. idea of how you structure your life so that you can think and work independently and peacefully and get some perspective on the investment world rather than being kind of sucked into the the mayhem, the, you know, the noise and confusion that most investors is subjected to.

[00:25:39] Chris Bloomstran: Well, I’m blessed to your point with a great business partner of 25 years, Chad Christensen. In the early days of the firm, you know, we all, we had to wear a lot of hats, you know, a lot of blocking and tackling. And so you find yourself spending a lot of the day involved in running the business, setting up the business.

[00:25:57] Chris Bloomstran: Mercifully, you know, he threw the team he’s built on our operation side and I’ve taken all the hats in the firm other than the investing hat. away from me, which is wonderful thing. And I’m blessed with a wife that I don’t deserve. And I’m blessed with two kids that I don’t deserve. I think if you observed my household life, you’d find it pathetic because I don’t do anything.

[00:26:25] Chris Bloomstran: I love to admit this, but I don’t cook. You know, I occasionally do some dishes. I don’t do the laundry, outsource, the lawn mowing, you know, I kind of grew up with a lawn mower in my hand and doing all the jobs and all the projects. And I did the laundry and I swept the floors and vacuumed the carpets.

[00:26:45] Chris Bloomstran: I, I’ve my life, it’s luxurious, but I have all the time to do what I’m interested in doing. And that’s doing what I do for a living, which doesn’t feel like I’m doing it for a living. It’s just something I enjoy. And all of my friends, my colleagues. Again, another lesson that I tell students is, look, if you’ve got bad people in your life, and I’ve been using this message for years, get the cancers out of your life.

[00:27:09] Chris Bloomstran: I said, and you’re going to look around the room, the classroom. Very few of these people are going to wind up being permanent friends, you know, unless you’re in a place like Columbia’s MBA program, where you’re gonna have a great social network. But I mean, how many high school friends do you still spend time with?

[00:27:23] Chris Bloomstran: How many of your college friends? You don’t. And I said, and when you have families, to the extent you have families. Your friend group is going to change based on your kids activities and where they go to school. If they’re playing sports teams, you’re going to spend time with the families of the sports teams and you’re going to spend time with the families at schools and whatever their interests and activities are.

[00:27:44] Chris Bloomstran: So, but from a professional standpoint, your friends and your profession, if you like your profession. So at first I say, if you don’t like what are you doing, you looking at the clock at 4 55 because you can’t wait till you go home. If you can find something else to do with your life, do it. Because if you find something you can get paid to do that you like doing, you know, that’s a great combination, but I said build your friend group carefully.

[00:28:06] Chris Bloomstran: And you know, I’ve been really blessed and lucky. Over the years to develop some wonderful friendships with like, like minded, not cookie cutter. We don’t look at stocks the same way, but I have a group of 25 or 30 really good friends, a handful in particular that I spent a lot of time talking to one who I talked to three, four times a week.

[00:28:28] Chris Bloomstran: Typically the two like that, spent a lot of time with one in person here in town and another on the phone with. But if you have bad people that enter your world, if you have immoral people, and maybe this is a lesson that I learned when I was a kid, which is interesting because I lived and I set out to live an exact opposite life of the, of what I had seen, a little bit of a boomerang effect there, I had another, one brother in the house who, you know, in the same setting, Seeing, observing the same sets of behavior co opted the behavior that I found so repugnant and has chosen to live his life that way, which is very interesting at minimum.

[00:29:08] Chris Bloomstran: But the message to students is, look, if you wind up with immoral, unethical people. If you wind up out with people that don’t make you feel comfortable because they’re abusive to servers, get ’em outta your life. So surround yourself with kind people, good people.

[00:29:23] William Green: So, Chris I sort of, I, I keep hesitating to ask you about this, but you’ve referred to it a few times and there is the journalist in me that can’t resist.

[00:29:32] William Green: So forgive me, but but you’ve mentioned a few times the growing up situation. I’m wondering, is this your father? Is it your stepfather? You know, what. What was going on? Cause it’s obviously had such a profound impact on you in terms of you defining yourself by not being that way and by gravitating towards people like Bob Smith or towards Munger and Buffett or also to your football coaches when you were growing up who’ve obviously had a really profound impact on you.

[00:30:01] William Green: as moral exemplars. And so I just wanted to get a sense, if you don’t mind me asking, of like, what is it you’re referring to? Cause you obviously had a very intense and kind of traumatic formative experience that.

[00:30:15] Chris Bloomstran: Well, I don’t want to get, I won’t get into too much detail, but I lost him. I lost my mother this year.

[00:30:21] Chris Bloomstran: She passed. She’d be the poster child of why you shouldn’t smoke. She smoked from the age of 12 on a couple packs a day and wound up ultimately passing of COPD. But she wound up in a relationship with somebody I really just didn’t like for a whole host of reasons from the get go. I found the behavior.

[00:30:39] Chris Bloomstran: Unsettling. I’d just observe a way to live a life that was not great. And throughout her life, there was just a lot of dishonesty about the way women are treated very much and with intent chose to live my life. 180 degrees. opposite. And I set out to be a different father. And so I’ve gone out of my way to raise my kids differently than the experience that I had when I was a kid.

[00:31:09] Chris Bloomstran: It was important to me to be involved in their lives and their activities, to be good to them, be fair with them. What a privilege to coach some of their youth teams and you mentioned my football coaches, I go through the roster of each of them and they all had a profound impact on my life and they were all genuinely good men.

[00:31:26] Chris Bloomstran: I’ve got to be very good friends with my high school football coach Brian McGregor in life and these were all men of integrity and they were men of honesty and a lot and most of them were hard. I mean, football coaches are hard. They’re hard on players. But at bottom, they were fair and so many lessons of life on how to behave and how to behave with modesty.

[00:31:47] Chris Bloomstran: So, no I, my mom, I just lost my mom four weeks ago. She was in hospice for four or five weeks and there were just a lot of horrible things at the end that maybe I’ll tell you over a beer sometime but.

[00:31:56] William Green: Yeah, I’m so sorry and I appreciate you sharing that. I’m sorry to put you through that. I was very struck in reading your annual report that at the end of the letter, I mean, you, you said she, she deserved more joy in a life filled with not enough of it, and she’d obviously had a very hard life, but then I was also really touched by a part where you were saying I I’m not sure dedicating an annual investment letter is a thing.

[00:32:20] William Green: I do want to say in the spirit of my mom, don’t let a day go by that you don’t work on relationships with those closest to you. Let them know as often as you can how much you love them. And then there was a really beautiful thing towards the end of the letter where you were talking about a friend of yours who you mentioned before, Jeff Goodall from the Marines, who, you know, is obviously a big 6 foot 4, 295 pound guy who’s said he’s beating the hell out of cancer at present.

[00:32:46] William Green: And you said he was someone who would always kind of stand by you and someone who could never be messed with. And you said but sorry, Jeffrey, you’re now number two. Nobody protected me like Barb, your mother. And you said her children were her universe piece. And so I thought it was a lovely tribute night in the same way that we talked about, Mr.

[00:33:04] William Green: Smith, before I wanted to you know, honor the memory of your mom, who clearly was remarkable in you know, being this sort of staunch defender of you in through thick and thin as a child, but also later in life.

[00:33:17] Chris Bloomstran: Yeah, as a kid, She did. I mean, her life was all about her children. And I think she tolerated a relationship she really shouldn’t have been in.

[00:33:26] Chris Bloomstran: And when the behavior, I got so bad as an adult, I really worked to try to convince her to not be in the relationship, but there was even a little bit of Stockholm syndrome to it. And if I have any regret about my relationship with my mother, it’s, and I haven’t thought this fully through, but it’ll be that maybe I didn’t do enough to get her out of that relationship.

[00:33:48] Chris Bloomstran: But, you know, she also ma you make your own decisions and family was important to her as misguided as and as un unconventional. has this relationship was, you know, perhaps I could have and should have done more, but [Crosstalk]

[00:34:02] William Green: If you say everyone’s responsible for their own decisions, and it’s hard with a mother to be the one who’s like, here’s how you should live your life.

[00:34:10] Chris Bloomstran: Yeah and I tell you, being in hospice in her last days, the people in that world are wonderful. And, you know, they saw that they understood what was going on. They knew of behavior. Her neighbors, in fact, knew of the behavior and they knew of a lot of what had gone on in her life and even to the end.

[00:34:27] Chris Bloomstran: They were very supportive of her, and so she had a little bit of a network, but there were so many good people in her life, especially at the end of her life, in her last five or six years, neighbors, and then in the last five months, certain members of her hospice team that managed to bring her a lot of joy, as I said, in a world that was devoid of enough joy so, and there was even strife at the end, and I won’t get into the details, it got pretty ugly in the last few months, but I’m so sorry.

[00:34:54] Chris Bloomstran: She endured a relationship that I wish she hadn’t gotten into, and I wish she had gotten out of earlier, but she, I think she did it in large part for her perception of trying to keep in her mind what was a family together, and I think she tolerated a lot of badness In the spirit of thinking it was the right thing for her two sons.

[00:35:17] William Green: So I think you and I are pretty much the same age. I think we were both born in 1968, if I remember rightly. And it’s kind of, I mean, I in many ways had an easier path than you because, you know, I had two very loving parents. Flawed at times. Not my mother, but who will be listening to this. But occasionally flawed.

[00:35:37] William Green: On my father’s side, and I’m wondering, like, how you were able to rise above this very difficult childhood, because you had an extraordinarily successful career, it seems like it’s, I mean, it seems like your dad was also a tough guy, I mean, I remember you, I think writing a story about how he would get you to work during the summer and work incredibly intensely, like, what was it that enabled you to do?

[00:36:01] William Green: Not to be messed up by this really difficult childhood, but actually to become a very successful and functional human being.

[00:36:13] Chris Bloomstran: I, there’s a lot to it, I suppose. I suppose it was, I it was probably a trust thing. You know, I always harbored a little bit of anger toward my mother for being in that relationship in the first place.

[00:36:29] Chris Bloomstran: But I think what evolved of that is, is the ability to Learn how to trust those that deserved it and not trust those that didn’t. And maybe that’s what led itself to the approach of the contrarian approach to investing and approaching the written word and the spoken word with a skeptical eye. I mean, it’s, you know, it makes you a very guarded person.

[00:36:51] Chris Bloomstran: And it made, it, it wound up making me very driven to succeed. I mean, I had to channel my energy somewhere so, in football, I was never gonna get out work in the weight room. are in preparation. I never got outworked in a practice, approached academics with similar rigor, although school was very easy for me.

[00:37:10] Chris Bloomstran: And I wished I’d, to your point, studied Greek and some of the classics, but I just did enough to get by. I was an academic minimalist, but then when I approached the academic side, my academic side of investing, I approached it with

[00:37:27] Chris Bloomstran: a vigor because I loved it, but it wasn’t what was the taught side from the Booth school, it was. How do you break down a business? And it was the cumulative learning and loving to read financial statements. And so I, I suppose some of that background always made me driven and very dependent upon myself, very willing to take very, I needed to take care of myself and make sure I was okay.

[00:37:49] Chris Bloomstran: But that then lent itself toward who I think I am and how I treat people. A whole combination of things. I haven’t, I’ve never really articulated it and gone through it all in conversation. I have clarity in my mind about how things all evolved and senior year of high school, I lived with friends in their basements off and on.

[00:38:14] Chris Bloomstran: I was ready to be on my own when I was eight years old, frankly.

[00:38:20] William Green: And so I mean, it’s clear that your work ethic was a huge part of getting you out of the mess. And I was very struck in your 2020 letter to clients that you said the best investors I know seem to come at investing with a chip on their shoulder.

[00:38:33] William Green: They will outwork you. They will outcompete you. And you talked about Mario Gabelli, his quip of wanting to hire PhDs, but that’s standing not for people with Doctorates, but who are poor, hungry and driven. And that was clearly the case with you that there was always this intensity to you and this kind of fire to you.

[00:38:54] William Green: And it seems to me that’s something that when you’re coaching kids. Football or you’re mentoring kids on campuses that comes up again and again just this idea of like having a really good work ethic which obviously got you to be an exceptional football player got you to be an exceptional investor is that fair to say that work ethic has just been absolutely central for you.

[00:39:16] Chris Bloomstran: Oh, it is. And when the football ended, sooner than I thought it was going to end for injury, I had to find something to rechannel my energy. I’d become so curious about investing already that it absorbed all of my focus. 100 percent of my focus.

[00:39:31] William Green: And were you really close? Like, could you have been a an NFL player? Like, were you that good and that serious when you were at college before you got injured and broke your foot?

[00:39:41] Chris Bloomstran: Well, hard, I mean, who knows? That was always the goal and the plan. You know, a good friend wound up, my backup at the, roommate, in fact wound up playing for the Steelers for three years.

[00:39:52] Chris Bloomstran: You have to, first you have to survive health wise long enough to get there. I think had I not been hurt and played and gotten the repetitions, you know, given the work ethic, given some of my just innate athleticism. That was the strongest player in the big eight just spent, just lived in the weight room, lived for working out and I was very quick and I, who knows but I do know had I played having watched the game now for a lifetime and even In those early years I played defensive line.

[00:40:24] Chris Bloomstran: I think I probably would have been a better offensive guard or a center than on the defensive side of the ball in retrospect, but when I saw guys like Warren Sapp play the game, Hall of Famers, there was no way was I ever going to play on that level. I mean, that just size mixed with athleticism mixed with raw meanness.

[00:40:45] Chris Bloomstran: I was very mean. I mean, I was a very, yeah, I think you have to be in the football world. You have to be, you have to be a little mean, but a guy like Warren Sapp was, he played at a different level. So, you know, I would have been one of those, if you know how pro football works, you hit free agency at three years, you don’t get paid anything.

[00:41:03] Chris Bloomstran: I think the league minimum, when I was a senior, we won the national championship my senior year. I didn’t get to play my senior year for the injuries, which took me out the broken foot and the knees, but.

[00:41:13] William Green: Well, you also, you, you once said that when you look back at your high school football coaches and your college football coaches, you said, everything I learned from those guys carries over to the investment arena.

[00:41:25] William Green: What are you thinking of when you think of the stuff that really applies from your football days that’s really helpful.

[00:41:32] Chris Bloomstran: I think it’s the dedication to the process. It’s the dedication to practice and the work that goes into it. But I, you know, the other takeaway is I think the interaction with people, I think it’s this cultivation of my friend network.

[00:41:48] Chris Bloomstran: I mean, I, you know, owe a lot of how I think and how I approach the world to being able to spend time with my good friends. We have a group that gets together once a year here in St. Louis, we spend three days and get through 10 or 12 ideas. These are all marvelous investors and analysts, but they’re all kind people.

[00:42:05] Chris Bloomstran: And I go back to my first high school, I remember my first football coach when I was eight and nine years old, a gentleman named Ken Acker. You know, he was. He was a, he was driven, he was probably my age and I thought he was really old because you know, I was eight and nine years old, but he wound up being so supportive.

[00:42:23] Chris Bloomstran: And as I evolved in my first two years of playing to be a very driven player in practice and my love for the game exploded. We had a game that we lost against Columbine, which is the Columbine with the high school the Jefferson County School. And we lost a game against some of those guys who became friends later in life, but we had a good football team.

[00:42:45] Chris Bloomstran: We had some really good football players. It turns out on that little league, our Vanta Midget football team, we lost a game and I played my heart out. You know, in retrospect, I think I blocked an extra point and a punt. And I’m thinking, why at that age has anybody kicking an extra point in a punt? Having coach little kids.

[00:43:02] Chris Bloomstran: Later in life, I mean, only bad things can happen when you kick the ball when you’re eight years old, nine years old, but I was pretty down after the game. And in a setting, he didn’t have to do this, but he saw that I was down and in a setting of all of my teammates and all of the pairs. And you’re having your Pepsi and your Coke, whatever it was after the game, which we got, he came over and put his arm around me and talked at length about my character and passion for the game and how I played the game.

[00:43:31] Chris Bloomstran: And that message, well, boy that, at that moment, I mean, that, that kindness from that man changed who I was. Really?

[00:43:40] William Green: How so?

[00:43:41] Chris Bloomstran: I just thought, you know. Yeah, well, he makes you feel that he just, it made you feel that important and that good. And I thought, you know, what a way to treat other people.

[00:43:50] Chris Bloomstran: And even at that early age, that lesson of how to treat other people I think became hardwired in my DNA.

[00:43:58] William Green: Yeah, I think that’s something really inspiring when I look at your career and I see, you know, this trajectory where you came out of a very difficult beginning. And, you know, you made a conscious decision about the type of person you wanted to be and, I don’t know, it’s interesting it’s also really nice to see the amount of pleasure you get from mentoring college kids and business school students and people through the CFA society that I know you played an important role in, but also, you know, kids football teams and the like, really giving back over the years.

[00:44:29] Chris Bloomstran: Yeah, I think, You know, I think about this image, I suppose, that’s developed by my being on Twitter and what I’ve done a little bit with that platform, rightly or wrongly, but, you know, I’ve chosen to take the abusers of the retail investors, the charlatans, you know, when somebody tells her Instagram, on TV that you’re going to make 40 percent then 50 percent a year.

[00:44:53] Chris Bloomstran: And if I call that behavior out, I think there are a lot of people that think I’m probably quite a bit of a jerk. I was just at the John Michalovich’s conference in Switzerland last month. And one of the guys who only knew me, I think from Twitter put out a picture of three of us and his comment was spend time with Chris and he’s remarkably a very nice guy.

[00:45:20] William Green: I think you have a sense of righteous indignation about people being abused, lied to, deceived, and it’s, I don’t know, I think it makes a lot of sense psychologically, given what you came through, and I think you’ve harnessed it in a really powerful way, because there is a lot of deception, and as you put it, charlatan promotion within the investment industry, And this is people’s life savings.

[00:45:47] William Green: I mean, it’s blood money for a lot of people. And so I, I mean, I tend not to call people out because. I don’t know, I’m sort of a repressed Englishman and also because I don’t want to be too judgmental of other people. So, because I think it would invite judgment of myself. And so I tend just not to interview people who I think don’t have great integrity.

[00:46:07] William Green: So I sort of, I try to shine a light on the people who I think are impressive and are good role models and are people we can learn from. But I applaud you for The fact that you take a stand and that you call out these inconsistencies, because you also, you have the actual granular knowledge to be able to point out the inconsistencies and I was very struck when, I mean, again, I don’t really want to be disrespectful of individuals, but, you know, I think of someone like Chamath Palihipatthaya, if I’m pronouncing it even vaguely correctly, who obviously is a brilliant guy.

[00:46:43] William Green: I mean, I remember once seeing him at a conference and being like, God, this guy’s smart, but at the same time, a brilliant promoter. And, you know, when he was starting to say that he, his returns were better than Warren’s, your takedown that actually kind of analyzed the distortion of the returns and the, you know, it was very powerful.

[00:47:04] Chris Bloomstran: Yeah. And I think it was necessary, you know, not that the Berkshire record needed. Defending, but it was the comparison was so maligned and so unethically done that, you know, I kind of reflexively, you know, I never would have even heard of the guy had he not made the comparison and I’d seen the comparison and wound up, he’d done it a few times in his most latest, in his most latest iteration.

[00:47:28] Chris Bloomstran: On Twitter, somebody brought up the, his comparison to Berkshire, which he claims to have never made, which is extraordinary.

[00:47:35] William Green: Yeah, so I don’t think it’s so much about, you know, maligning Chamath, who, you know, as I say, I was impressed at how smart he was when I was just listening to him talk, he’s a smart, charismatic guy, or Cathy Wood, who I’ve never met or interviewed, but I’d like to interview her one day, I think she’s an interesting phenomenon.

[00:47:54] William Green: It’s more about reminding our listeners that you’ve got to be really careful. This is an industry where there’s a lot of misalignment of interests and incentives, and you know, if you can align yourself with people who actually have good ethics and who aren’t overcharging you, I mean, even you think back to your first investment all those years ago, College.

[00:48:17] William Green: I think, you know, the commission was 10%. It was kind of a pretty good introduction to the casino aspect of Wall Street. And so I don’t know if there’s if there are messages for our listeners to take home One of them is you gotta be diligent about things like price and valuation, and you’ve gotta really assess whether the people you’re getting in bed with have integrity or you know, a record of not looking out for their shareholders and just being promoters. You, you can’t take this stuff on trust.

[00:48:48] Chris Bloomstran: No, you can’t. And, you know, and in the last, in the latest chairman’s letter outta Berkshire, and even the last several, I mean, Warren has said, Essentially, we have deserved trust over all these years, and, you know, we have owners who have trusted us for this long, and so, in essence, he was saying, you can trust us, but it’s such a hard thing trying to figure out, you know, who the charlatans are and who the promoters are from, you know, who’s legitimately doing it the right way is so difficult for the ordinary investor to ferret it all out.

[00:49:25] Chris Bloomstran: And with attention spans being short, I’d like to say most people spend more time analyzing what their next car purchase is going to be than they do who’s going to shepherd their capital for the next 30 years. But you’re not armed with the tools. to analyze either whether, you know, how to go about investing for yourself or how to allocate the allocation of that capital to somebody else, which is why I think Warren says the default of the S& P 500 for the typical investor that doesn’t know what they’re doing is such a suitable thing to do because you’re eliminating the frictional costs of fees.

[00:49:58] Chris Bloomstran: And you’ve got a diversified portfolio and Charlie wouldn’t beg to differ and Berkshire’s better. He might say there are active managers that are better and there are, but how do you go about finding them today? You’ve got, again, such a concentration at the top of the market, 30 percent and 7 names that group trading it at well north of 30 times earnings today, it becomes dangerous.

[00:50:20] Chris Bloomstran: And so, you know, if you’re the family, that’s just starting out on a, on a. Buy weekly saving plan through your 401k and you overpay for your first S& P 500 shares. That’s okay. If you have a determined, regimented, consistent saving plan over a lifetime, you’re gonna wind up eventually getting some shares that are reasonably priced, some shares that are undervalued.

[00:50:42] Chris Bloomstran: But if you have real money today and you’ve backed into these high price to sales businesses that are pricing almost too much perfection, pricing in the implausible outcome, especially now with some of these bigger business, even Apple, that’s now 50 percent of the Berkshire portfolio, you know, Berkshire’s forms kind of cornered himself into the box of what’s become a never sell.

[00:51:04] Chris Bloomstran: Well, it’s half and it’s 33 times earnings and you’ve got a big business. You know, doing sufficiently large number of sales revenue that the thing can’t grow much more than maybe a high single digit on a earnings per share basis after sharing purchases. And so, you know, he acknowledged later in the game that Coca Cola probably should have been sold when it traded at, say, 50 times starting.

[00:51:31] Chris Bloomstran: So, you know, I hope there’s a price at which an Apple position might be trimmed because the economics of what you can earn out of it, even on a net of 21 percent corporate tax rate basis, now you know, would justify a trimming of the position at least. He did trim the position a couple years ago and then regretted it because the stock did so well and the business did so well.

[00:51:51] Chris Bloomstran: But there’s a price at which anything ought to probably be trimmed or sold, including Berkshire. There are prices at which I would sell down my Berkshire position, especially from an opportunity cost standpoint, but I’m going to do it tax efficiently. I need to have as much after tax proceeds available to buy my best idea at the top of the opportunity cost stack to justify that shave to the government.

[00:52:15] Chris Bloomstran: And so there are nuances between taxable money and non taxable money, but you know, it’s a really hard game and it’s not easy, but it requires constant thought, constant worrying, risk management. And I think probably if he took some similarity to most of the great investors. They spend a lot more time thinking about what’s going to go wrong than what’s going to go right, and the non professional investor, and even I think the majority of professional investors, aren’t armed with either the psychological wiring that’s required to do that, or the temperament for approaching it that way.

[00:52:53] William Green: Yeah, all the technical knowledge. I mean, you think of, you know, in your annual letter the four different approaches you take to estimating the value of Berkshire. That’s an enormous amount of work to break that down. And at the end of, at the end of 2022, if I remember rightly, I think you’ve said, Your calculation was that it was basically at around 74 percent of fair value.

[00:53:15] William Green: It was trading at a pretty generous discount. And your view then was that over the next 10 years, it would outperform the S& P 500. And now that it’s had a pretty good run, but also the S& P has a lot of inflated stuff. I know that you update your intrinsic value estimates every quarter, I think for all of the stocks you own.

[00:53:35] William Green: I’m asking this very selfishly. Should I, over the next 10 years, still feel happy to own Berkshire?

[00:53:42] Chris Bloomstran: Oh, in Berkshire’s stock portfolio is up 20 percent this year. Apple’s grown back to where it’s now at a record 50 percent of the portfolio. But the stocks are a much smaller percentage of the portfolio than Coke was when Berkshire was much more of a pure insurance operation.

[00:54:00] Chris Bloomstran: that it is today. You take the moving parts of Berkshire, the profitability from the energy business where the inner visions has the ability to retain capital, they’re earning 5 billion, retaining all of it, augmenting it with a like amount of debt. You’ve got 5 billion there, you’ve got what’s pushing 8 billion from the railroad earning low teens returns on.

[00:54:20] Chris Bloomstran: essentially the capital of the business. You’ve got another 13 billion coming from the manufacturing service retail group that are earning adequate returns on unlevered capital. 3 billion let’s say on a regular basis from underwriting. A few billion from the less than, the more than 20, less than 100 percent held businesses.

[00:54:43] Chris Bloomstran: And then whatever you think the equity portfolio is, what’s now 300 and probably 70 billion, 360 billion in stocks. You know, that’s now a third of Berkshire’s assets, their assets are going to be over a trillion dollars. And so all those moving parts of the income streams, Berkshire’s less cheap today than it was a year in.

[00:55:02] Chris Bloomstran: The stock’s up, what, 11 or 12 percent for the year, and so you’ve basically earned in the first six months in a month, here we are in mid July, it’s probably earned what it should, and it’s trading at a reasonable price, I think it’s trading at a discount, but if it maintains this 140 percent a buck, and it’s a more expensive book.

[00:55:21] Chris Bloomstran: Today that it was because again, apple is so much more expensive. A year in 20 wide shaved the apple position in my appraisal by 50 billion. The stock got killed last year. I eliminated the shave. I’d be shaving it by 50 or 60 billion today. But all, and all you have the SMP trading at 21 or 22 margins have not recovered.

[00:55:43] Chris Bloomstran: I just did my SMP workup and the portfolio work up for quarter end. Earnings at 2 0 4 for the s and p 500 or four bucks below where they were at year end 21, sales are up probably 17%. So you’ve had margin compression from what was probably a peak, but you’re paying 22 times what’s probably kind of what’s still peaky type profit margins where they’re just, in all likelihood not gonna grow here.

[00:56:10] Chris Bloomstran: And if you get inflation rolling, it’s in decline at the moment, but you may have rolling inflation for the next decade or two. You’re more likely than not to get margin compression. I think the best case, the index at the moment is a five or 6 percent return. More likely than not, you’ll have periods where it’s substantially underwater in the next 10 or 15 years, and Berkshire’s a very conservative 10 to 12, if you hold the current, if you hold the current valuation constant and.

[00:56:41] Chris Bloomstran: It’s a very durable, predictable learning stream, and so I think Berkshire’s hands down an easy bet from a valuation climate like you have today. When everything gets washed out, you know, it’s crapshoot. My advantage prospectively in late oh eight, early oh nine, when I’m down 20 in the market’s, down 40, you know my advantage is less than it is in a period like today when I get a portfolio training at nine point a half times earnings, a get 10 point half percent earnings yield, which is half the multiple of the index.

[00:57:11] Chris Bloomstran: I think we’ve got a better roster of businesses and managers. Berkshire’s just a better manager and on a net essentially unlevered basis, you’re not going to blow yourself up. You’ll never wake up with the headline Berkshire Hathaway negotiating with creditors. I mean, they’re negotiating with creditors, but it’s the one where they’re buying businesses because Berkshire ever having to worry about the balance sheet.

[00:57:37] Chris Bloomstran: So I look at it as a bond. It’s a business that earns 10 to 12 on equity that trades at a pretty modest premium to equity. And, you know, it’s a place where you can make 10 to 12 in a world of low interest rates. And I think it’s got some inflation protections built into some of the big moving parts.

[00:57:54] Chris Bloomstran: that make it very attractive in the current setting. And we all know that it’s not going to do what it did in its first 35 years. But, you know, relative to what I think is, you know, maybe a half return on what Berkshire can earn, it’s a deserving, at least in our world, at present prices of a big position.

[00:58:12] William Green: Yeah and I don’t know, everyone always wants to kind of hit the ball out of the park. I kind of put a pretty high premium on survival. I want to get to the finish line, and I always feel like I’m more likely to get to the finish line with Berkshire than with many other things. Like, like, Buffett’s emphasis on survival resonates pretty deeply with me.

[00:58:33] Chris Bloomstran: I was on the phone with a guy yesterday. We were talking about that, you know, the notion of return of capital and return on capital and not so much yield, but return to par, you know, in the credit world. And you’ve got so much leverage on corporate balance sheets. You know, the total leverage in our system is still 350 percent of GDP.

[00:58:51] Chris Bloomstran: Corporate leverage is very high. If we have persistently high, albeit rolling interest rates, I mean, if we have a recession, that’ll be back at zero. They’ll be at the next iteration of QE. But we have so much leverage on the corporate balance sheet. And so much of it is short term and intermediate term. A lot of it coming due on 24 and 25 fuel rates at current levels.

[00:59:12] Chris Bloomstran: You have a massive hit to profit margins coming because the interest burden is going to grow from something that was. Almost not existent to something that’s very real. And so again, if you live below the EBITDA line and not above it, you know, leverage in a world of high and rising interest rates when you’ve got a refinance low coupon debt with higher yield, higher coupon debt will become very problematic in a world that’s allowed too much leverage to build up on the aggregate balance sheet.

[00:59:39] Chris Bloomstran: And so being on the unlevered or less levered side of things allows for the survival that you talk about.

[00:59:47] William Green: I want to ask you one final thing before I let you go, there’s a lovely story that I remember hearing you tell, maybe I read it in one of your annual reports, about a golfer, Ellen Port, and she had been teaching, I think your your daughter’s high school team, and she told a really wonderful story that of what we’ve been talking about in terms of choosing the path of integrity while also being competitive and successful.

[01:00:17] William Green: And I wonder if I could ask you just to tell the story, if you remember it of what happened to Ellen Port, because I know it’s a story you’ve often told to college students.

[01:00:26] Chris Bloomstran: I remember it well. Ellen was a great mentor to my daughter and she’s a great friend of mine. She and her husband are wonderful people very well known in the golf world but not known at all outside the golf world.

[01:00:38] Chris Bloomstran: Ellen took up the game of golf in her early twenties. She was a great athlete. She was a tennis player, but grew up with around the golf course, but never played golf competitively. And she took up the game in her adult life. And she was a teacher. But took up the game of golf and wound up over all these years.

[01:00:55] Chris Bloomstran: She’s now, you know, I won’t tell you how old, but she’s probably easy. I mean, she’s, I’ll take up the game at such a level with local instruction. She started winning some local tournaments and she went down and worked with Hank Haney. I didn’t have the money and Hank was very good to her and just saw the drive and at a point told the Oklahoma State men’s golf team that lady up on the hill.

[01:01:18] Chris Bloomstran: I mean, how many of you were here on the driving range at 6 o’clock this morning? Well, she took golf balls into her cottage because she wanted to get out before my lesson and get 2 hours of work in. He says, now, how many of you were out hitting balls? Before with Ellen in the morning, nobody, of course. So Ellen in the meantime has now won seven USGA championships as an amateur golfer, and she’s she’s like right there in the top four with Jack Nicklaus, Tiger Woods.

[01:01:45] Chris Bloomstran: She’s won, I think three USGA women’s mid ams and four senior rams, and she’s still playing golf at a highly competitive level. And she’s played on Curtis cups. They just introduced a couple of three years ago the women’s senior open, but she was honored to coach a Curtis cup. I’m going to say six or seven years ago.

[01:02:09] Chris Bloomstran: The Curtis Cup, for those that aren’t in the golf world, we have the Walker Cup and the Curtis Cup, and it’s the top amateur golfers. On the men’s side with the Walker Cup, and on the women’s side with the Curtis Cup, they play against the top players from Great Britain and Ireland. So it’s a Ryder Cup type format at the amateur level with the U.S. against GB and I. You know, golf is a game of integrity. You call penalties on yourself. It’s the rule book has sections on etiquette. Ellen takes that just to heart. It’s who she is as a human being. You know, you talk about Bob Smith being kind and wonderful and all the high level of morality and ethics.

[01:02:47] Chris Bloomstran: I put Ellen on a pedestal on the same level. So Lucy and I were invited to St. Louis Country Club to listen to her talk to the media and a gathering before the Curtis Cup. And she told a story about playing in one of the USGA championships. A hand. I guess she was in, so you play, when you’re playing amateur championships, you have two metal rounds.

[01:03:12] Chris Bloomstran: There’s a field of 128, I think, and you wind up with the top 64 that wind up in match play. And then it plays all the way down. So you’ve got to win six matches to eventually be champion. And it’s grueling. So she was in metal play and I think she was, you know, as she normally was, she was leading the field or not, but she said, You know, every night when she’s going to bed, she replays the round of golf in her head, in her mind, and try to figure out what I could have done here, what I could have done there, and I don’t remember where she was.

[01:03:44] Chris Bloomstran: I think it was, I think it was one of the championships and one of the courses, great courses in Michigan. I could be wrong, but wherever it was, she got to a par three and she said, Oh my god, Ellen, you did not par the hole, you made a bogey, and her playing partner didn’t, you know, engulfed in match play, and even in metal play, you keep the opposite player’s score in your group, and so you rotate that around.

[01:04:11] Chris Bloomstran: Well, you know, they all wrote down three, they thought Ellen had made a three. That metal round play wasn’t on TV. The Mar the scorekeepers that walk with the group, you know, everybody thought she’d made whatever she thought she had made. Maybe she said the score. And the next thing she said was the she said the drive home the next day was the longest drive of my life.

[01:04:32] Chris Bloomstran: And, you know, I had kids that don’t know golf or what happened when it will, she disqualified herself from the tournament, nobody know it would have been that easy to move on to the match play around and. But, you know, she recorded an improper scorecard, which is a disqualification from the turn order.

[01:04:52] Chris Bloomstran: It was at that time. And so she took herself out of the chance to win because I mean, she’s literally when she’s, if she wins the eighth, USGA championship. I think she’s tied for all time at either the professional or the amateur level. And, you know, out of that, at that high of a level of a game, I just ask the students all the time, look inward as to whether you can do something like that.

[01:05:15] Chris Bloomstran: I just, I think the world of Ellen and she’s so awesome. And what a proper way to construct your life to be able to do something like that.

[01:05:25] William Green: Yeah, I think that’s a great note on which to end. It reminds me of a lovely thing that Jason’s wife said to me on the podcast when I was interviewing him, where he said something like, well, more people should say, would I sell this to my mother?

[01:05:38] William Green: And I think that idea of looking inward and saying, yeah, I better not do that is, is pretty good. And so anyway, I’ve just really enjoyed chatting with you. And I’ve learned a lot from studying your writing, I think. Over the last week, and it’s I’m thrilled that we got a chance to talk in such depth, and I hope we’ll get a chance to actually meet in person before too long, maybe in Omaha this coming year.

[01:06:02] Chris Bloomstran: By all means or sooner. Or sooner.

[01:06:04] William Green: That’d be great.

[01:06:04] Chris Bloomstran: I’ll be in New York in October but [Crosstalk]

[01:06:06] William Green: Great. [Crosstalk]

[01:06:08] Chris Bloomstran: We’ll [Inaudible] but what a treat to be here and I thoroughly enjoyed this conversation, William.

[01:06:13] William Green: Thank you so much. It’s a real delight for me.

[01:06:16] Chris Bloomstran: Thank you. Cheers.

[01:06:17] William Green: Take care.

[01:06:19] William Green: All right, folks. I really hope you enjoyed this conversation with Chris Bloomstran. If you’d like to learn more from Chris, I’d highly recommend reading his terrific annual letters to clients. You can find more than a dozen of them archived on the website of his investment firm Semper Augustus, and I’ll include links to the website and his letters in the show notes to this episode.

[01:06:40] William Green: As you’ll see, his letters are enormous. They’re sometimes as long as 140 pages. So they’re not a quick and easy read, but he’s a very good writer and they’re full of really helpful insights about how to invest. more intelligently and how to think better. They’re also invaluable if you want to understand Berkshaw Hathaway as he analyzes the company in exhaustive detail and offers an array of different ways of valuing it.

[01:07:07] William Green: It’s really an extraordinary feat and amazing that this has publicly available for people who actually care to look. In any case, I’ll be back very soon with some more great guests, including a fascinating conversation with Peter Keefe, a brilliant investor and thinker who very rarely speaks in public.

[01:07:26] William Green: So that’s really a treat and an important conversation, I think, at least for me, I learned a tremendous amount. In the meantime, please feel free to follow me on Twitter @WilliamGreen72 and Do let me know how you’re liking the podcast. I’m always delighted to hear from you. Until next time. Thanks so much for listening. Take care.

[01:07:46] Outro: Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday, we teach you about Bitcoin, and every Saturday, we study billionaires and the financial markets. To access our show notes, transcripts, or courses, go to theinvestorspodcast. com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.


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