Stig Brodersen  05:14

Pres, I don’t know if those scanner work because it seemed like everyone that went through them like everything was just beeping and people just kept going because they wanted the good seats.

Preston Pysh  05:23

So no, you’re right and so it didn’t help that… So we tell the community like, “Hey, if you want a good seat, this is the time we’re going.” It’s a little bit embarrassing to even say the time but we got there. What time do we get there, Stig? 4:50 in the morning?

Stig Brodersen  05:38

Yeah, to be honest we came in a bit late. That was even more embarrassing.

Preston Pysh  05:42

So let’s put it this way. Our community got there 4:50 and then we were lost in the road. It’s probably more my fault than it was Jim’s fault because we had a group of people that were riding with us. Jim Harden, who listens to the show, he’s a good friend. He came out the first time we went out there. Jim was driving and I was kind of navigating we had about, you know, five GPS as it were taking us to a CenturyLink, but not the one where the meeting was at. So we got lost.

One good thing was is when we were lost, they had a Walmart that just happened to show up and it was pouring rain outside. So we’re like let’s just stop and get an umbrella because none of us had umbrellas. So we run in, we get our umbrellas, and we go on our way. And we show up. We showed up probably like 5:10 in the morning. So our poor community was there. You know, we probably had the 50 people plus standing in the rain out there before we arrived. So we apologize to everyone for being so late. But we got there and we somehow were able to kind of finagle ourselves into the line. And Dave Fox’s wife helped us out tremendously to get everyone corralled into the same spot in line.

So we’re there in line and everyone’s you know, we had enough people that had umbrellas we kind of made like our triple canopy umbrella layer. So everyone could kind of like walk from umbrella to umbrella, like underneath of this canopy that we kind of made of our 50 or 60 people that were there in the morning. And it was great because although they didn’t open the doors, I think what time did they open the door? Seven o’clock, Stig?

Stig Brodersen  07:15

Yeah, I think they have did it somewhere earlier this year, like half past six or something like that, which is good because it was pouring rain.

Preston Pysh  07:22

Yeah, they opened them a little early. I think they felt bad. I mean, it was like a torrential downpour outside. So everyone’s there kind of networking again, even though it’s like five in the morning and it’s pouring down rain and we’re all out there and we’re just having a good time. And I know it doesn’t sound like a good time, but we were dry and having a good time chat. And then we were there. We got in, the doors open. We were just running down these halls and you know, Stig and I had mapped out the route to go to sit in a certain section that we wanted to sit in from a previous meeting. So we went in and just kind of ran up these steps. went down another aisle. And then we were right in the section we want to be. And for the most part, everyone kind of got to sit together because we were so early in the line and kind of got into the building. We had great seats. It was phenomenal.

So now for the part that probably everyone’s interested in. And that’s the meeting itself. And what Stig and I did instead of giving our opinions on different points, or whatever, we recorded five of the best questions that we kind of took away from the meeting. And what we’re going to do is we’re going to play those questions. These are questions from the audience to Warren Buffett and we’re going to listen to the question and then we’re going to listen to Warren’s response, and then we’re going to stop the recording and then Stig and I are going to kind of talk about what it is that he said and our thoughts on it.

08:47

So one of the things that I want to tell you is, before we play these questions, there’s a lot of echo in this CenturyLink Center. So although I wish we had a better quality sound that we can play for you, this is what it is just because of the environment in which we recorded this. But I think that the content that you’re going to hear is important. So that’s why we’re going to continue to play this. Okay, so without further delay, here’s the first question.

John Gory  09:18

Mr. Buffett and Mr. Munger, I’m John Gory from Iowa City, Iowa. When interest rates go from zero to negative in a country, how does that change the way that you value a company? Do you choose a high valuation because the discount rate is not as low or on the other hand you choose a low valuation because the cash flow is likely to be *inaudible?

Warren Buffet  09:41

Well, going from zero to minus a half. There’s no different than going from four to three and a half. I mean that that’s a different field, obviously. If you have to pay *inaudible there’s somebody but if you have your yield or your bench rate reduced by half a point, it’s of some significance, but it is not dramatic. What’s dramatic is interest rates being where they are now. I mean, whether it’s zero plus or minus *inaudible was about to happen. We are dealing with a situation essentially, very close to zero interest rates, and we have been for a long time and longer than I would have anticipated.

The nature of it is that you’ll pay more for a business when interest rates are zero, or like 15% of when Volcker was around, and then you can take that up and down the line. I mean, we don’t get too exact about it because it isn’t exactly science, but very cheap money makes me pay a little bit more for businesses than what money was what we previously thought was normal rates and very tight money would cause me to behave somewhat less.

I mean, we had a rule for 2600 years. But he softened around 600 BC, but he didn’t happen to know what was B but you can’t know everything. And it was a burden, the hand is worth two in the bush, but a burden and now is worth about nine tenths of a burden of the bush. In Europe spends on *inaudible, but keeps getting more or less as you go along. So these are very unusual times that way. And if you ask me whether I paid a little more for Precision Castparts because interest rates around zero than 6%, the answer is yes. I try not to pay too much more. But it has an effect. If interest rates continue, at this rate for a long time, if they will ever leave, you start thinking something closer, this is normal, that will have an enormous effect on asset values. It already has some effect.

Charlie Munger  11:56

I don’t think anybody knows much about negative interest rates. We’ve never had. We never had periods of stasis, except the Great Depression. We didn’t have things like having to battle the great modern nation playing monetary tricks, Keynesian tricks… Those tricks mired in stasis for 25 years. And *no one ever studied this to our children understand that either. We just do the best we can. And we still don’t understand. It’s interesting though, we are moving.

Warren Buffet  12:46

And it does modestly affect what we pay for businesses.

Preston Pysh  12:53

The question I think is such a profound question, and it’s to the heart of asset valuation. Whenever you’re talking about interest rates, and when interest rates continue to push lower and lower, and now they’re at zero, you heard Warren say that he paid a higher premium to own Castaway parts because of the fact that interest rates are so low. And he said that he paid a higher premium today than he would have if it was, you know, back when Paul volcker had rates at 15%.

This goes back to an idea when Stig and I had Cullen Roche on the show. And one of the things that Cullen and I were kind of debating back and forth, I said, you go back to 1980. The reason that you had asset prices at such a lower multiple on the stock market was because interest rates were so high and then as interest rates went down, that’s why you’re seeing a higher premium on asset values. That gets to exactly what Warren Buffett just explained there in that response that he provided.

13:49

The other part of this that I think is interesting is their opinion that negative interest rates have never happened before. And if you don’t understand it, you’re thinking about it correctly, that’s their exact quote. And I find that interesting. And I think it’s their way of saying, “Hey, we have no idea how this is going to end. We have literally no idea how this is going to end because this is something we’ve never seen before. So, you know, your guess is as good as ours.”

And I think if you’re trying to come up with a model or say that you’re going to invest a certain way, because you know what’s going to happen, they think that approach is very concerning. And you need to maybe be a little bit more open-minded as to how this might all play out. Stig, I’m curious to hear your thoughts on all this.

Stig Brodersen  14:35

Yeah, I liked the question too. And also, because it’s something that we discussed on the podcast before and now you’re referring to Cullen Roche. I think he was open to the same idea as Jeremy Siegel out there and they are talking about that this might be a new normal: heavy interest rates are low, at least something that we’ll have for a long time.

And perhaps that was along the same lines as what Warren Buffett was talking about, because what will happen when interest rates go up again? Well, clearly asset prices will drop. And Buffett knows that so when he’s saying that he’s paying more for Precision Castparts. He otherwise would. I think that’s a interesting indicator of how he’s looking at macroeconomics, perhaps a simple field that’s his opportunity cost of holding too much cash was getting too expensive. We talked about this many times before, do you want to chase 4% returns right now?

And you just have to relate yourself to Warren Buffett. I can see why he’s doing what he’s doing. He has so much cash and he has another understanding of this. But if you’re new to investing, I would say perhaps you should just hold on to money and learn a lot more about the current environment before you simply start to inves because my main concern is that with negative interest rates, this will change the behavior of banks and Warren Buffett is saying, “Well, going from 4 to 3.5, it’s not that different than going from zero to negative .5.”

I’m not so sure about that. I would be sad if banks would start to lend out money to people that are not credit worthy because they feel obligated to do so. And that is part of the mechanism why the rates are so low. This is because they want banks to start lending out money so we can have more growth. And I’m just thinking, so did we ever have a situation where we were lending out money to people that couldn’t afford the assets that they were acquiring?

Preston Pysh  16:29

Yes, that just happened for the great financial crisis. Right? So you have people having mortgages that they have no chance paying and and they were barely hanging on. And the hope was they remortgage in high real estate prices. Is the bubble like that? We’re going to have over the next five or 10 years, is that what we’re hoping for? We’re keeping interest rates so low or even negative. I think that’s my main concern. I would love if Warren Buffett could address some of those concerns as well.

So one of the things that I’ve noticed with Buffett is he does not even like to broach the subject of what he thinks could potentially happen with all this. He just stays way away from it. Now Charlie Munger, on the other hand, has recently and I mean, in the last couple months, kind of come out and been a little bit more vocal than Buffett on what he thinks might go down here. And it was, I think, Monday morning, after all of this, Munger was being interviewed, and he compared what’s happening now in America to Japan in 1990.

And Stig, we’ve been saying this for more than a year that that’s kind of where we saw all the timing and everything. And so when Munger came out and said that on the following Monday that he sees that where the United States is right now as almost being in parallel to where Japan was at 1990. I was like, “Wow, that’s awesome to kind of hear that from a guy of his stature and his knowledge.” Any opinion that Munger has is probably closely tied to what Buffett’s thingking as well.

So then Munger said, “You know, I wouldn’t be the least bit surprised if we kind of go into a bear market for the next 30 years, it could be difficult.” And so when you think about a 30 year bear market, that idea sounds crazy to a lot of people because all they know is that the market always goes up in the long term.

18:00

But here’s something that I’ll tell you. If you were a bond investor from 1940 to 1981, you were in a 40 year bear market. If you owned a bond, it was a long term bond called a 50 year or whatever, from that timeframe, or if you invested in bonds at all during that timeframe, you lost money because interest rates were going up for 40 years.

Then if you were a bond investor, like Ray Dalio, for example, you know, 60% of his portfolio was in bonds from 1981 until now. If you were in that market for the last 30 years or whatever, you were in a bull market for that entire period because interest rates have gone from was it 16% 1981 on the 10 year Treasury to almost nothing now? That whole period, you’re making money in the bond market.

So now, you got to understand in the stock market it… In Japan, perfect example, Japan stock market from 1990 until kind of now, they were in a bear market, it went down for nearly 25 years, 30 years. And that’s something that could happen. People need to open their aperture to the idea of different arrays of possibilities here. And I think that they need to be open minded as to how all this could play out. I don’t want to necessarily spin this, that it’s all going to be negative and whatnot. But I think that that possibility needs to be in people’s mindset as they’re thinking through some of this stuff.

Stig Brodersen  19:49

Yeah. I love that you refer to Charlie Munger because what’s deliberating about Charlie Munger compared to Warren Buffett, my opinion at least is that he’s just so honest. It’s clear that Warren Buffett, and I love Warren Buffett, it’s not like that. He’s just very clear that he’s very cautious about what he’s saying. He doesn’t want it to be misunderstood. Charlie Munger doesn’t care. And the interesting thing is that you would think that all these people, say 40,000 people come to Omaha. They’re all Warren Buffett’s fans, and they are. But I think they’re even more Charlie Munger fans, because they’re so hardcore into value investing. And he’s the one saying things as they are. And I found that is very significant over there.

Preston Pysh  20:32

I completely agree with you 100%. Charlie is the one that kind of makes the meeting worth going to, in my opinion, because he’s the one who’s hilarious. I mean, just hilarious with some of his comments. If Charlie wasn’t there, you would not have the same experience guaranteed, you would not have the same experience.

So enough about that one. Let’s go to the next question. And we got some, I think we pulled some of the best questions of the weekend. There was some some good ones and there were some bad ones. There was a guy who stood up and he was talking about some parallel between Harry Potter and Berkshire, it was kind of funny. It was more entertaining than anything but kay, so let’s go to the next question here.

Emcee  21:13

Yeah, the question is from Larry Woods from Boston. *inaudible manufacturing service and retailing operation shows total current assets of $28.6 billion of which would share a *inaudible for one service. 6.8 billion. Meanwhile, for current liabilities are *12.7 billion in network, in 18.9 billion. It has become increasingly common for companies like Apple and Dell to financne their business via their suppliers, in some cases without any work for capital. Why is it necessary for these Berkshire businesses to have so much working capital, particularly so much cash? More generally, how do you think about efficiently managing the working capital of a business segment *inaudible?

Warren Buffet  22:04

Yeah, well, we have excess cash surplus in Berkshire. So we don’t at present, it doesn’t make any difference whether we have a certain subsidiary or other subsidiary, so we do not… We asked a *inaudible, as I pointed out the best, we will never go below 20 million in cash and watch and say comfortably above it, but allowing for the *inaudible five times will be over 60 billion consolidate cash, we don’t worry too much about what pocket it’s in. It’s not  making anything anyway at these levels now.

If rates move higher, we’ve got the mechanics and processes to do sweep accounts. So I would pay no attention to the particular cash that’s being held in that category there. The cash in Berkshire Hathaway Energy, the cash number *inaudible, we have independent levels that we don’t guarantee their depth. They run with ample cash, we would not look at sweeping that minimum. But if you’re talking about 40 or 50 of our miscellaneous subsidiaries, we will go to a sweep account when you’re getting zero *inaudible much difference where again zero. So I think the fellow is overanalyzing it a little bit, but I understand why.

Charlie Munger  23:39

Don’t we *inaudible take some of these other people and pay our suppliers?

Warren Buffet  23:44

That’s a big thing in business now. And last year, Walmart for example, went up almost all other suppliers as I understand and certainly the companies that we spoke and they basically have a list of half a dozen things that they want to present suppliers to agree to. And one of those things was more extended terms. And each of our companies made their own decisions. But my guess is they got more extended terms from most of our suppliers, they get very high percentage of their suppliers. And they may have gone from, I don’t remember the exact request, whether they went from 30 to 60 days or what it was, but they got a meaningful extension.

So you will, you know, in a couple years you’re here, takes time to implement, you’ll see higher levels relative to sales at Walmart that you saw here a year or two ago and you know, they are under a lot of pressure, competing with Amazon and others and that’s one of the ways that they tried and I’ve seen it gone other places, and it’s conceivable that one of our subsidiaries might be wise to do it, but I don’t think they will. I mean, I think that the pressure went *inaudible for sure. Not that and I think that the pressure for or the desire for, like relations with suppliers is would probably overcome most of our managers’ minds in a desire to *inaudible extending terms.

Charlie Munger  25:32

I think it’s hard to do that. *inaudible So, there’s something to be said for leaning over backwards to have a *inaudible relationship with both suppliers and customers.

Preston Pysh  25:58

Okay, so for this one here the thing that we were trying to get at was just their discussion on what are they doing with their cash, and kind of they’ve got all these competitors and they kind of got into the Walmart-Amazon thing with talking about how much cash do they have on hand to kind of run their business. And the person was saying that they have a small if not negative working capital. And that’s kind of getting to the cash flow that’s flowing through their company.

And the person was saying, “Hey, Berkshire, you’re sitting on literally like $70 billion of cash. Why are you sitting on all that money?” And they didn’t answer that question as far as I’m concerned. But I think that was an interesting point that he was making was, it’s zero percent. I can’t get yield anywhere. So why would I go doing anything fancy. I think that just basically having the liquidity is more powerful and more value, if you will, than doing anything else.

And it’s not necessarily just from that response, because he kind of hit on that on some of the other responses through the Q&A that morning. But that was my takeaway from the way he responded. And I think it might be in another question. So I don’t want to jump the gun too much.

But Charlie Munger makes a comment in one of the questions and when he says, “You know, back in 2009, it was nice having all that liquidity, wasn’t it?” And that’s, I think, what they’re getting at with their the fact that they’re sitting on so much cash and getting literally no yield.

And this is something I think that’s important for people to think about. If you’re sitting on $70 billion, and let’s just say, well, why doesn’t he just go buy, you know, a 30 year bond, at whatever percent yield, call it a 2.5 to 3% yield on a 30 year federal bond?

27:48

Well, think about it this way. Let’s say interest rates do go up in the future and we’re just kind of dead wrong at the direction that all this is going. If he’s sitting on call it a $50 billion position in a 30 year Treasury, he is going to get taken to the schoolhouse, and he’s going to lose a lot of money in that position.

So both Charlie and Warren are saying we don’t know what’s going on with interest rates, we have no idea what’s going to happen in the next five years with interest rates. So we’re just more comfortable sitting on all this liquidity, and waiting to see what happens and seeing what kind of cards are dealt. It’s early. It’s like a card game. It’s early in the draw. They don’t know what kind of cards are going to be coming their way. But they do have a big stack of chips sitting on the table that they’re ready to play with, if they do get dealt some good hands. So that’s how I read it. And I’m curious to hear Stig’s opinion on this one.

Stig Brodersen  28:42

Yeah, I think it was interesting to hear his discussion about cash as well. And he was talking about a sweep account, if you’re not completely familiar with that term. It’s basically a combination of two or more accounts at a bank where it’s useful of managing a steady cash flow between a cash account and to make scheduled payments. But it is also an investment account where the cash is able to accrue a higher return. But as Warren Buffett is saying, it’s not that important, because the returns you can get from having that is basically the same as just having cash. And he just wants flexibility.

I think one takeaway, especially if you’re starting in analyzing companies that understanding what a negative net working capital is. So basically, you are looking at the cash flows coming in within the next 12 months, which is the current assets and the cash flow going out the next 12 months, which is the current liabilities. And he’s talking about how you can run a business with a negative net working capital. And it might not make any sense because how can you run a company when you have more cash going out, than more money coming in?

And basically what a company like Walmart is doing is that since they get cash right away from the customers, and they can have the suppliers finance that whole system. Basically, they have money coming in but it will take say 30 or 60 days before money coming out. To say that they will take the hundred dollars and buy a fixed SSA-1  and use it to open a new store, then suddenly you will have a negative net working capital, but you will have supplies financing the growth of the company and that was what this whole discussion was about.

So if you’re starting out analyzing companies and you heard about well, you want a positive net working capital or a higher current ratio and one as often referred to, you know, generally that’s a sign of health but you have companies like Walmart, I think Apple as well. Exxon Mobil is another example where it makes sense to have someone else finance your growth. So I think for that it was an interesting discussion as well.

Preston Pysh  30:42

You know, it’s funny, Sti.  I remember, oh, man, what was it two or three years ago? You and I having discussions way before the forum is probably maybe even existed three years ago. You and I are having discussions about negative working capital with Walmart and the current ratio being below one on our forum like three or four years ago. I remember that.

So let’s go to the next one here. What do we got for the third question that Stig and I kind of picked out of the meeting?

Audience 1  31:14

*inaudible negative interest rates is something that’s discussed a few times today. You mentioned its implications for return on low. How should shareholders value the 25% of low that’s been created by retrocession reinsurance, where the business is booked at an underwriting loss and at times as adversely developed?

Warren Buffet  31:35

Brings up some of our business. In the insurance business, we take with either the probability of some underwriting loss to get to use the money for a very long period of time, and it would look under today’s interest rates. Like we can’t do much with that.

There’s two answers to that. We don’t think… with the duration of the kind of contracts we have, we don’t expect these rates, but we could be wrong. But the second one also is that we do think that occasionally, we will get chances, even in periods of low interest rates, to do things that are, will produce quite a bit, very reasonable returns. And we’re measuring it in the potential entirety to us with our pretty unusual flexibility, in respect to that appointment of funds and this long period are on we’ll have an opportunity, perhaps to come up with one or two things that we can deploy money at a rate that may be quite a bit higher than other people assume now that money can be.

Charlie Munger  32:57

A little money now certainly, having a lot of money available in case something attractive comes up.

Warren Buffet  33:08

It’s an option cost. It’s an option. And that option came in handy in 2008 and 2009.

Preston Pysh  33:18

I love Charlie Munger. Did it ever. So that what they’re getting at here is again, what we were talking about with their float. They’ve got all this cash that they’re sitting on with their insurance company. And t the guy’s question, I think is a good question because he’s saying, you’re booking your insurance contracts at a loss. And he said, when you’re sitting there and you’re looking at this large pile of cash, and you’re not able to get any type of yield anywhere on the market, and you’re just getting zero percent, if you will. And maybe worse than that out and it is worse than that after you account for inflation. You know, aren’t you guys concerned and Buffet and Munger were kind of like no, we’re not concerned at all because we’re sitting on so much of it.

And I think that whole discussion was a discussion of liquidity. And it goes back to we were saying in an earlier response, they value liquidity. And I think that that’s something that’s so many investors miss is the power of having that war chest stacked with cash for when things do go bad. And Buffett said, he started off as response saying, we can make a very substantial and he says, then he kind of like rephrase, he says, we can make a good return. And he was confident that he’s going to have that opportunity soon. So that’s how I read that I think that there is a total discussion about liquidity.

34:45

I think that one of the more interesting points with this is just how difficult it’s going to be for some insurance companies to be profitable in the future just because they’re so dependent on going into some type of fixed income asset that will give some yield on that float and all that cash that they’re sitting on for the day that they have to pay out their potential claims. And this is a huge issue, negative interest rates. And this is where I think a lot of academics come off the rails, then they don’t think about the third and fourth order effects.

When you take a deep dive into the insurance industry, and you think about what negative interest rates and the implications that it will have for insurance companies, it is insane. It’s horrible for insurance companies, because they can’t do anything with all that money to reinvest and keep the rates affordable and turn a profit. So this is a huge issue for them.

Stig Brodersen  35:35

Yeah, I think it was interesting discussion, especially because it was about insurance, and was also about reinsurance. But basically, Warren Buffet talks about reinsurance, it’s him insuring other insurance companies. So it’s basically the same procedure. And they were talking about the float. And basically, I think Warren Buffett is the person that made float like a public chairman investing basically that’s when people pay up for their insurance, when they pay the premiums, he has a chance to invest that money. And that was also how he grew the company.

But one must also understand that he can’t just collect, say 100 billion in cash and then go in and buy stocks of IBM, or whatever Warren Buffett will fancy, that’s just not how it works. Float is composed of two things. It’s the claim reserves and the premium reserves. And if you look at the claim reserves, that’s the assets, the set aside to satisfy all the claims that they’re likely to incur the current date. So there must be some kind of… the claims has to be matched with reserves that are set aside so they can’t just go out and buy stocks because stocks can drop in price and in value.

So usually, they are obligated one way or the other to hold the bonds. And that comes back to the thing that Preston was talking about before. So what do you do when you can’t make any kind of return? So that’s a problem for insurance companies.

Say on the other hand that you could get at 10% risk free return in the market and that has been the case. In that situation, it might make sense to take a loss. So basically, you wouldn’t short people even though you know, it would cost you money, because then you can go in and reinvest at a higher risk free rate. So a lot of great things to dig into and this question, I think was interesting, and hearing Warren Buffett’s answer.

36:53

So basically, what I found was interesting is that he’s talking about those two pillars or that was the person asking the question, you have underwriting, which is basically you coming up with the insurance and then based on those premium, you can go in and reinvest it. So think about the current environment, think about that you can only get, say a 2% return. In that case, you need to have a nice profit on your underwriting.

I have one quick follow up question for you, Preston. Given your background and how much you started Warren Buffett, have you ever personally considered going into insurance stocks?

Preston Pysh  37:56

Yeah, I’ve owned some in the past. Absolutely.

Stig Brodersen  37:59

Did you know how to read the balance sheets? Because I’ve got to be completely honest, I look, several times insurance companies also owned one at one point of time, I found it so hard to read the balance sheet of insurance companies.

Preston Pysh  38:09

Yep, I totally agree with you. So yeah, I think that whenever I was invested in them, I knew a whole lot less than when I I feel like I know now. I think whenever I look at an insurance company, right now, it comes down more to real rates, real interest rates. So when you look at real interest rates today, they’re literally slightly below zero. They’re kind of in the negative territory here in the United States, because inflation when you account for inflation, and the nominal interest rate, when you combine those two together that gives you the real rate.

And I think that’s what’s important when you’re talking about whether underwriters and an insurance company are underwriting at a profit or a loss. And I think that it’s so incredibly important for the CEO of the company who’s running it, to be able to kind of anticipate when that real rate becomes like right now, it just recently turned negative. They’ve got to be underwriting these things at a profit. They can’t be underwriting these things at a loss because they literally can’t take the money anywhere to invest it with any kind of yield.

So that’s where I think if you have a great manager like Geico, I mean, the best in the business running Geico. So they understand that they are making very informed decisions. I mean, the only way to invest in Geico and Berkshire Hathaway because it’s a fully operational subsidiary, but some of these other insurance companies, I didn’t necessarily think about things that way, call it three or four years ago. I just didn’t have the knowledge at that point in time to to understand it in that light, but if I was going to do it today, that would be one of the main things that I would be looking at. Are they underwriting at a profit or loss based off of real interest rates would probably be one of my main drivers.

Stig Brodersen  39:52

Yeah, I just find interesting you just say what back when I didn’t know as much. Yes, I would own insurance companie. Now that know what’s happening. No way.

Preston Pysh  40:01

Well, and I wouldn’t even say that right now I know what’s happenin. That’s, that’s a bold statement in itself. But now I mean, I think you just got to be honest with yourself. I think when you look at things, there’s absolutely there’s so many companies that I’ve owned that, looking at it back in hindsight, the deals worked out well for me, but it probably wasn’t necessarily all due to my astute knowledge of the business. It was probably, or my luck on.

Stig Brodersen  40:27

Yeah, there was one of those bull market spreads, you were just making a profit and everyone else was making profit because it was just going one way and you might be thinking that you are smart at reading balance sheets of insurance companies and whatnot.

Preston Pysh  40:38

Yeah. It goes back to my my buddy, Brian Rutherford, who’s the professor up at West Point, just making a statement. You know, he had the cadet and, you know, the cadet says, “Oh, in the last year, I did a 10% return.” And then Brian’s immediate question was, “Well, what did the S&P 500 do?” “Oh, it did a 12% return.” “Okay, well, you lost.”

All right, let’s play another question here. We got two more. And this is question number four.

Audience 2  41:06

I work for a large real estate investing social network online called BiggerPockets.Com We’re seeing investors starting to get concerned that the real estate market is a bit rocky, similar to 2005-2007 that led to the crash. In 2012, you *inaudible had a way to easily damage them. You’d buy 100,000 houses and rent them out. How do you feel about the real estate market today?

Warren Buffet  41:35

Not as attractive as it was in 2012. They, you know, we’re not particularly better at predicting real estate markets and our stock markets or interest rate markets, but it’s driven to some extent by these low interest rates, but there are certainly properties that are being sold at very, very low cap rates that strike me as having more potential for loss than gain.

But again, you can borrow money for very, very little. And you think you’re getting into some very safe assets 100 basis points or 50 basis points higher. There’s a great temptation to do it. I think it’s a mistake to do that. But I could be wrong. I don’t see a nationwide bubble in residential real estate at all. Most of the country if you’re not paying the bubble prices for residential real estate, but it’s quite different than it was in 2012. And I don’t think next time around the problem is going to be a real estate bubble. It certainly was because in a very large part of what happened in 2008-2009 but I don’t from *inaudible.

Preston Pysh  43:04

Okay, so that was I thought that was a interesting question. And huge shout out to our good friend, Josh Dorkin because the person asking the question was from BiggerPockets and his podcast. So, Josh, I don’t know if you listen to our show, but you know, it was great to hear one of your folks from your audience. They’re asking the question at the meeting.

Well, I wanted to play this one because there’s so many people out there that either own a house or in some form of real estate investment, and I just want people to be able to hear Buffett’s response to the real estate question and what he thinks that’s at right now. So I don’t think he had too much of an opinion other than do I think real estate’s way overpriced? Like it was back in 2008 and his answer is no, I don’t think so.

I think that one of the things that gets into like a interesting discussion, just like stocks and just like any other financial asset, is interest rates, Federal Interest rates change. That’s going to change the way the market use any asset price, whether it’s real estate or stocks.

44:05

So when you look at what form of interest rates impact the real estate market, you’re talking about longer term interest rates. So it’d be like the 30 year bond. And when we look at where that’s at, it’s still has a little bit of room to go low, or if the federal government would want to push it lower, whenever they did Operation Twist. This is the US Fed, doing monetary policy, quantitative easing with what they called Operation Twist. The whole point of this was to drive down the long term interest rates of like the 30 year bond. I think that during the next credit contraction, they’re going to have to do something similar to keep long duration long term bonds, the 30 year Treasury in check and it’s going to have to stay down if that would start to come up and then that would start to go up. I think that’s going to be very detrimental to real estate prices. That’s my opinion. I’m not an expert in real estate, but that’s what I think that they’re going to have to do.

And I think that the Fed is going to do everything they can to keep that rate where it’s at, if not drop it lower to keep, you know, asset prices in check. But I mean, you get into real estate’s very local, you know, from one city to the next, it changes tremendously. So, we are not experts in real estate, but those are some of my thoughts on top of what Warren had said.

Stig, I’m curious to see if you have any further comments. Are you going to pull up Charlie Munger here?

Stig Brodersen  45:31

Yeah, I love when Charlie said nothing to add. He didn’t want us to just be about nothing. I think all his points were concise. And whenever he started talking, I was paying much more attention what he was saying  compared to Warren Buffett, perhaps because Warren Buffett was speaking like 95% of the time.

But I agree with you, I’m definitely not an expert in real estate either. I am concerned I think real estate could be one of the asset classes where you might see a bubble if the central bank still behave responsible. That’d be my take. But I don’t think we’re in that territory yet. But clearly, if they need to hike rates, you’ll probably see the real estate market just as the as the stock market taking a big dive. But no, Munger said nothing to add, mainly because I don’t know.

Preston Pysh  46:19

I do think that the critical variable moving forward with real estate is kind of that long term bond yield. If you do see that go up, I think that you could potentially see issues in real estate, but for the most part, I don’t see the Fed allowing that to happen.

So let’s go ahead and go to question number five. And here it comes.

Audience 1  46:38

I just have a simple question for you. How would you explain IBMs?

Warren Buffet  46:45

Sure, that’s a simple question. Well, it has certain strengths and certain weaknesses and I don’t think we want to get into giving an investment analysis of any of the portfolio companies that we own. I think I probably bette leave it there. Charlie?

Charlie Munger  47:12

Yeah, he’s coping with considerable change in the computing world. It’s somebody that *inaudible.

Warren Buffet  47:28

Why would it shrink *inaudible?

Charlie Munger  47:30

But I think people *inaudible brains get bigger.

Preston Pysh  47:38

How bad was that response, Stig? How bad was that?

Stig Brodersen  47:42

Yeah, it was. It was horrible. It was like, well, it has some good sides and some bad.

Preston Pysh  47:53

Oh my gosh, when I heard this, I was like, they’re not even serious. These two are not even serious with this response. I think they are licking their wounds on this IBM thing. And I think they’re they’re a little baffled at how this has been playing out. And, you know, this is my takeaway with IBM. And I learned a lot through this as well, because I lost a little bit of money on IBM. I definitely did not come out on top in that position I had it for, I don’t know, maybe a year?

And then when they just continued, when their revenues just kept missing and missing. I was like, I’m getting out of this thing, like they do not have this under control. And when I was looking at their strategy, you know, their business model, I hate the fact that they’re a service driven kind of model with a big premium on expertise. And then all of their competitors are just knocking the socks off of them by low margin type business. I just got out I was like this was not a good idea. I I misread this and I got out so these two continue to plug away and IBM continues to miss their revenues. How many years now? Five years?

Stig Brodersen  49:05

Yeah, almost since Buffett bought into them.

Preston Pysh  49:08

Yes, they need to come up with a response. Now, Buffett kind of pivoted, he said, I don’t want to talk anything about the portfolio positions. What he meant by that is any company that we own, that’s a nonoperational subsidiary, meaning we don’t have a controlling vote. That’s what he was referring to, like, I don’t want to make a comment on it, because I might buy more I might sell the position was kind of what he was hinting out there.

But having been the meetings in the past, they have talked about IBM a whole lot more than that. That was the weakest response I think I’ve ever seen. The person’s questions was a great question, what’s their moat? And they’ve got tons of IP, but I think that their model is what’s broke and that they’re not going after Amazon and Google in the right direction. As far as you know, these guys are going to tear them apart because they’re trying to destroy the margin where IBM is trying to build their margin and I think they’ve got the wrong approach.

Stig Brodersen  50:05

Yeah. And Charlie Munger, he he was asked the same question I think was last year or the year before. And back then he was talking about that IBM might be a company with many resources. But they had mixed performance and had difficulty growing revenue. And then he had this remark about it was important that Berkshire Hathaway paid a reasonable price to establish ownership in the position in the stock. Well, it wasn’t a good as it was definitely a better answer. But I think it was clear to me at least how I read them that IBM is not Charlie Munger’s pick. At least that’s how I read it.

Charlie Munger, he can see how IBM can succeed. Clearly, I am  not even a fraction of the same level as Charlie Munger. But I remember, Preston, we discussed IBM. Actually, I had a chance to pull up an old email you sent to me back at October 2014. The subject was IBM at 168. That’s the only thing.

No, but I remember around that time we discussed it. And we’re like, we can’t see how they can grow the revenue. I mean, it might just be asked that we’re not tech savvy enough. But they had this, this idea that they want to expand to South America. And then no one wants to do something in the cloud. And to me,  it didn’t make a lot of sense. So a lot of good reasons why I didn’t invest in IBM back then. But I just couldn’t see how they could not just grow, but how they could just sustain the earnings that they were having. And I think if Warren Buffett asked Charlie Munger, he would probably be saying the same thing,

Preston Pysh  51:40

Yeah, I agree. They’re hanging in there. So it’ll be interesting to see how this one plays out. And for a guy who says he doesn’t invest in anything that he doesn’t fully understand and kind of stays away from technology stocks, man, it’ll be interesting to see what they say next year.

But so those are the five questions that we pulled out of the meeting. There was obviously tons more. They asked questions just so you kind of understand. These questions go from what time do they start nine or 10 o’clock? And then they wrap it up probably around three o’clock with an hour break for lunch. So the questions just go on and on. And I mean, if you’re a person who enjoyed listening to some of those responses, you would love the Berkshire meeting. If you were listening to those and you were like glazing over and falling asleep in your car, you probably might want to skip the Berkshire meeting, because that’s pretty much what the whole meeting is abou,t those kind of questions.

We did this and after we were done, we went to the Nebraska Furniture Mart. So if you’ve read any of Warren Buffett’s biographies, there’s this awesome story about Warren Buffett buying a furniture company from a lady named Rose Blumkin. And so that’s just like, right down the street. How many miles away, Stig? Maybe 5 to 10 miles from where we were at at the CenturyLink?

Stig Brodersen  52:52

Yeah, that was pretty, pretty close.

Preston Pysh  52:54

So we go there, they had, like a couple different options for food. You could get some pizza, you could get barbecue again. And so the the food was real cheap. I mean, we just went in there and kind of had some meals we walked around that Nebraska Furniture Mart for people that had read the story about Rose Blumkin, they could see it. It’s just huge. If you’ve never been to a Nebraska Furniture Mart, they’re just massive. So we walked around the store a little bit, kind of, you know, just the whole community just hanging out. It was so much fun.

So after that, we had our premier event. Everyone in Omaha is going to these fancy swanky steak dinners and having these big guest speakers come in. So Stig and I were like, you know what, let’s invert, baby. Let’s do this completely opposite of everyone else and let’s do something that is not classy. Let’s do something that just gets down to the raw heart of interaction and getting to know people. And so we had our pub crawl. So we go to the Old Market in Omaha, which is this awesome area, a bunch of kind of bars and social settings.

I’d say we had 60, people, again, probably come out, a couple different new faces a couple old faces kind of left from Friday to Saturday. But in total, we probably had 60 to 70 people that came out Saturday night. And, you know, we just started off at the first bar, everyone kind of got one drink and started socializing, just having a good time. And we had it planned so that there was a specific time that we would move to the next bar. So the story that this originated from, so I got this idea for these pub crawls when I was a attack helicopter pilots stationed in South Korea. And what we did is, we would stay at one bar for 45 minutes to an hour. Just so you know, we’re not going to be talking about investing for the rest of the show. It’s more social and like, funny story. So if you don’t want to hear the funny stories, and you know, you guys can kind of turn it off and maybe go to another episode, but we’re going to be talking about our fun times that we had out in Omaha for the rest of the episode.

54:59

So I learned this trick when I was in Korea where we got on a pub crawl. And I think we had our time down to like an hour at each bar. And then literally GPS time, like the time was very important, because in the last minute at the bar, what we would do is we’d start this slow clap, and we’d just slowly build it. And you know, if there was 30, or 40 people or whatever, we just slowly start clapping and clap and clap and get louder and louder. And then we’d start chanting something, and then everyone would just walk out the bar. Like, right on the minute of whenever we our time slot was done for that particular bar, and we go to the next location. We’re there in Omaha, and everyone knew the slow clap was coming. So everyone’s like checking their phone for what the GPS time was. It’s like 5:59. And everyone’s like looking, “Preston, it’s 5:59. We’ve got to start to slow clap.” And so we’d start the slow clap. We’d build it up, and then everyone and we had like, 60-70 people all in this bar, slow clapping and then the people that were like eating that were there, that weren’t part of our group, they’re like looking like what is happening? Are these people going to like break out into a dance or something like what is this?

Stig Brodersen  56:06

I think they thought it was like a flash mob or something that was going to put on YouTube.

Preston Pysh  56:10

They probably thought we were going to do a flash mob. So we’re they’re clapping and building up, then everyone starts chanting TIP for The Investor’s Podcast. foAnd then we like, just left. And so what we’re trying to do is just build this crowd of people through the night that would join our group and come out, but man, did we have fun? So we walk out the first bar and we walked on the street and I kind of coordinated it. So all the bars were within, you know, a couple, like 100 feet of each other. It wasn’t a long walk to the next location. And we did this from I think we did maybe six bars, maybe even seven? I can’t remember. But as people kind of got tired and worn out, they either stayed with us or left and I think at the end of the night, it was you know, one o’clock in the morning and we still had a good 20 people probably in our group. I mean, we had a lot of people that were still hanging around there at the end. But what a fun night. I mean, we had so much fun.

And you know, what was great was everyone kind of let their hair down, they really, they started talking with each other. When we change from one bar to the next, people kind of got dislocated from the group that they were talking to before, and they kind of assembled themselves with maybe even a new group as we move to the next bar. So it was a great setting for people to get to know everyone that was there. And I mean, we just we carried on and had a blast. I think people in Omaha when they saw, you know, 70 people walking down the street, going into and twhen we walked into the next bar, 70 people just come through the door all at one time and the bartenders were like, “What in the world is happening?” We’re coming in and we all know each other. I mean, it was just hilarious. That was our Saturday night. It was definitely so much fun.

57:54

Sunday we had another brunch, great setting the bunch of pool tables and They had a buffet the food there was phenomenal. And just had a great time. And we got pictures for all this stuff. And so what we’re going to do, in the show notes of this episode, we’re going to have the pictures of the event. So you guys can kind of go in there and you can look at some of the different places that we went to. And you can see us partying and carrying on and then pictures of us at the shareholders meeting. I’ll tell you folks, if you want to go to this event, we are going next year, we are going to do this again. And to be honest with you, we were so inspired by our community and had so much fun with our community that Stig and I have decided to stand up a Live Events tab on our website. And we want to do more events and more outreach with our community.

So what we did is if you go to The Investor’s Podcast, you go to the top level page, you know, we have this kind of our mission statement at the top where we say number one, we like to have fun. Number two, we study billionaires and read all the books that they read. And then now it says number three, if you want to connect with us with live events, check out when we might be in your hometown. And if you click on that link for the hometown, you can see Stig is going to be holding some events over in Europe. I’m holding some events here in the US. In fact, I’m holding an event in Seoul, South Korea, in June, having an event down in Huntsville, Alabama in July. And then in September, I’m having an event in Baltimore. And then Stig, you were saying that you were going to hold an event over in Denmark?

Stig Brodersen  59:26

Yeah, I’m excited about that. And the first event that will be the first weekend of July, so the second the third of July, perhaps we will do that in my apartment, depending on how many people who show up. Other than that we might just go out and let’s see what will happen. And then the first weekend of October, so that would be the first of the second of October, and I’m going to host that in Seoul, South Korea. I’m going to relocate there in late July. So I think it would be a great opportunity to meet up and is not just to network with me. Definitely to network with the community. At least that was I found to be the main contributor to the trip going to Omaha this year. So I hope I’ll see a lot of you guys who were there.

Preston Pysh  60:10

Yeah, I totally agree with you, Stig. I think that if you are going to come out for one of these events, what a networking opportunity for us, I mean, I’m sitting there on Friday night, having dinner with our community. And I’m sitting next to a good friend now his name is Moss. He was the economic adviser to Nelson Mandela. I mean, those are the types of people that are listening to the show and that we’re getting to hang out with. I mean, what an honor. It was amazing and the conversation was just phenomenal. So you never know who’s going to come out to one of these these networking events. So that’s the thing that I’ll tell you is come out for this thing. So you can talk to other people and man, there’s some successful people in this community. And they come out to these events. So even if you’re if you’re a college student, come out, get to meet some people, and learn some stuff. It’s just a phenomenal event.

And Stig and I just took so much away from this. And we have just one person to thank for this. And that’s you, our community. Thank you so much for everything that you guys do to make this possible to come out. We enjoyed your company far more than you could ever realize, and enjoy this event because of people like you that are listening to the show. And that came out.

So lots of exciting things happening within our community. And we just highly encourage you check out that tab. We might be in your hometown like next week, you never know. So keep looking at that. Please come out for these events because the more the merrier. It’ll be a lot of fun and we’ll get dinner just kind of go to a social setting and kind of have a good time to interact with each other.

61:43

Alright, so kind of a long episode. Hopefully you guys enjoyed the questions. Hopefully you guys enjoyed the stories. If there’s anything we can do for you guys, hit us up on email. If you attended this Omaha meeting and you have some pictures that you would like to have put up on the site, please send those off to me and we’ll get them added into the site. But really, that’s all we have for you guys this week, and we’ll see you guys next week.

Outro  62:05

Thanks for listening to The Investor’s Podcast. To listen to more shows or access to the tools discussed on the show, be sure to visit stage.theinvestorspodcast.com. Submit your questions or request a guest appearance to The Investor’s Podcast by going to www.asktheinvestors.com. If your question is answered during the show, you will receive a free autographed copy of The Warren Buffett Accounting Book. This podcast is for entertainment purposes only. This material is copyrighted by the TIP Network and must have written approval before commercial application.