Trey Lockerbie (00:04:21):
What I like about that method that he uses is, first of all, it’s very simple. But the second of all is it’s sensitive to market fluctuations. So, the nuance is that multiple. So, at the bottom of the recession, maybe it’s not 11 multiple, it’s more like an eight. And that’s because it emulates what would happen in the private markets. So what would those operating businesses actually sell for on the private market? What multiple would they get on their earnings? And that obviously changes with the macro environment. Right now you could argue it’s a little bit frothy. So an 11X multiple might even be conservative, to be honest with you.

Trey Lockerbie (00:04:58):
But I thought that that was really interesting, and it reminded me of my discussion with Larry Cunningham on the show because I touched on this valuation method that he wrote in his book Margin of Trust, which I was also rereading over the weekend. And he had another very similar but simple valuation method that was again producing $400 stock prices. So no one has a crystal ball. But it’s just interesting that these two parties have been publicly advocating that the stock is undervalued. And then we saw a good amount of share buybacks from Buffett as well.

Trey Lockerbie (00:05:32):
Buffett’s keynote speech this year was, I’m not sure I’m getting the point. So, I wanted to get your opinion on his keynote speech this year, Stig, because he was highlighting essentially that in 1989 your five of the six top companies in the world were Japanese. And of course in 1989, this is peak of the Japanese bubble, which was, I mean, unfathomable. The Imperial Palace of Tokyo was worth more than the entire state of California at that time. So, we’re talking about just irrational exuberance through the roof. And then, obviously, they’ve underperformed and this is saying it politely for 30 years.

Trey Lockerbie (00:06:07):
And then he shows this slide of today where you’ve got most of the top companies are US. And we’ve gone from the biggest company in 1989 being worth $100 billion to now over $2 trillion. So, this is just, you have to be involved. No one I think in 1989 would imagine 100 billion companies rising to two trillion over the next 30 plus years, and yet it has. And so we today probably can’t fathom a $2 trillion company going to 34 trillion in the same amount of time. But that’s almost mathematically what would happen. And my takeaway was either be in the market, probably the US has a huge advantage for a lot of reasons. But there was also a little bit of an ominous foreshadowing that I took away from it too, which was a lot can change, and maybe in that amount of time, it’s not US companies. So, what do you think his ultimate point was with all that?

Stig Brodersen (00:07:01):
I think his point was create a disruption, and how important that is because one of the things you mentioned was that there were no companies on the 1989 list. There was also on the 2021 list, none of them. So, it’s just things just change. And so if you look at the 1989 list you have well-known companies like Exxon Mobil. Back then it was just called Exxon, by the way. You have GE. You have IBM. You have Philip Morris as well. You still had companies that like well-known brands, but all of them have just been facing credible headwinds for different reasons and reasons that you probably didn’t expect there to be in 1989. He also mentioned, perhaps you should be investing in index funds. He said most investors probably can pick individual stocks. Something he’s been drumming on for a long time. I think this is living proof.

Stig Brodersen (00:07:51):
The reason why he chose the 1989 that he showed before was probably also because that was really whenever Japan was booming. I think that if you just went 30 years back, which might seem like a more logical thing. Perhaps the list looks different, perhaps there are more US companies, but one of the things that he also talked about was that there probably won’t be 13 US companies in the top 20 30 years from now or 32 years from now. And so, that was also what I took away from there, and perhaps that’s… He always talked about the S&P 500. That’s an index fund you should own. He even mentioned that during this meeting. I have to give my two cents on that because I’m smarter than Warren Buffett in a way. Why not buy a global equities fund?

Stig Brodersen (00:08:31):
Just thinking about everything that’s happened and how well the US has performed. And you’re right, Trey, there are so many good reasons why US will continue to perform. There are also different reasons why the 21st century might not be the US center in terms of demographics growth. Just look at something like that, that has really been a tailwind in the 20th century. We had the two Second World Wars and what happened then and what that did to the industries in the US. And there’s just so many things we’re like, “We just don’t know.” And so, I think that was a very interesting thing where he went into the Q&A session with.

Trey Lockerbie (00:09:01):
Yeah, you’re right. And I think that geography is probably less important. My opinion is moving forward the geography of any company is probably somewhat more relevant than it’s ever been. Because most of the top companies, you’d say, “Yeah, they’re US-based,” but most of them are doing business globally, and that just wasn’t the case probably in 1989.

Stig Brodersen (00:09:22):
Yeah, like Apple have more sales international than they do in the States. So, you’re absolutely right.

Trey Lockerbie (00:09:27):
I did find it interesting that Munger recently took a position in Alibaba. I don’t know if you saw that.

Stig Brodersen (00:09:33):
I saw that too, and I was like, “Was that a Li Lu play solely?” Or did Munger truly like, “Yeah, I read up on Alibaba. That’s the company I want to invest in.” What do you think?

Trey Lockerbie (00:09:43):
Who’s to say? I don’t know. But can we just also point out Munger’s Freudian slip while we’re talking about him? [crosstalk 00:09:50].

Stig Brodersen (00:09:49):
Let’s do it.

Trey Lockerbie (00:09:52):
I mean, we should probably play the clip, but this was comical. Munger essentially, unintentionally revealed that Greg Abel will be the successor to Warren Buffett by saying that he will keep the culture as Berkshire continues in its decentralized manner. I don’t think that was an expected ad-lib on his part.

Stig Brodersen (00:10:10):
So, yeah, they were asked about succession. And Greg Abel who was sitting there and was the CEO of non-insurance businesses. And I guess that ever since the promotion of Ajit Jain who is the CEO of the insurance business, and Greg Abel. Ever since they’re promoted to Vice Chairman it’s like, I think everyone expected to be one of the two. And no, I don’t think that was on purpose either because he was looking at Warren Buffett’s face when he was saying that you were like, “What now?” And Munger is like, “Yeah, Greg will keep the culture.” He was just… It looked odd.

Trey Lockerbie (00:10:42):
Warren took a beat. He sat there for a minute I think mulling how do I… That was pretty funny. Yeah, it was interesting, because Larry Cunningham talking about his book, again, Margin of Trust highlighted that his opinion was more or less that just like Berkshire itself has been decentralized. Buffett’s role in the company will be decentralized. So, he’s one Superman as Warren Buffett, but his responsibilities have basically been divvied up to Greg, to Ajit, to Ted, and Todd, and then having Howard as the chairman moving forward. That would basically maintain the integrity of the culture. That’s how he highlighted it. So, someone had to succeed Buffett, but it seemed a little bit… I don’t know, I guess, I was under the impression that it would ease into this more decentralized leadership, but it’s very much like, “No, Greg’s our guy,” which I thought was a little surprising.

Stig Brodersen (00:11:32):
You mentioned there Howard before so just for those of you who don’t know who Howard is. I know this is like, you have this small club and everyone would know who Ajit is, or Greg is, or Howard. So, Howard Buffett, you can probably tell about his last name. That’s Warren Buffett’s oldest son. He will be non-executive chairman. So he’s there to make sure that the culture is still intact, and he is there to ensure that he can remove Greg Abel should something unforeseen happens, which I don’t think anyone expects to happen. But that’s his role. He won’t be a part of operations in any kind of way. Going to the next section here of the episode. So, Trey pick the first question. We both going to play the question that Becky Quick did, the news anchor from CNBC, and then afterwards what Warren Buffett and Charlie Munger said.

Trey Lockerbie (00:12:17):
The first question I wanted to cover was literally the first question Becky Quick asked Warren Buffett. And I just love that she came out of the gates with this question because it was about being greedy when others are fearful, so let’s listen.

Becky Quick (00:12:29):
This first question that came in, came in from Andy Seas. He says he’s the owner of not nearly enough B shares. He says, “Mr. Buffett, you’re well known for saying to be fearful when others are greedy and be greedy when others are fearful. But by all appearances, Berkshire was fearful when others were most fearful in the early months of COVID. Dumping airline stocks at or near the low, not taking advantage of the fear of gripping the market to buy shares of public companies at exceptional discounts and being hesitant to buy back significant amounts of Berkshire stock at very attractive prices. I’d appreciate hearing your thoughts surrounding this time and how Berkshire approached its decision-making specifically after it was assured through the CARES Act that the government would provide a robust backstop to the financial markets.”

Warren Buffett (00:13:13):
Well, of course, until both monetary and fiscal policy kicked in, we knew we had an incredible problem and I am… Just as Charlie is the chief culture officer. I’m the chief risk officer of Berkshire. That’s my job. We hope we do well, but we want to be sure we don’t do terribly. But we didn’t sell a substantial amount. I mean, we’re a company with probably $700 billion worth of businesses. Some we own in their entirety, and some we own a piece of. I don’t know whether we were sellers of maybe 1% of the value of all the businesses we had at that period. But the airlines, just interesting with the airline businesses in particular, and then I’ll get to what was done at fiscal monetary policy.

Warren Buffett (00:13:57):
But we had a few people, various subsidiaries of Berkshire that wanted to go in for help from the government and some cases they had minority shareholders who owned a few percent and they said, “Well, we’re going to get killed by what’s happening with the regulations that are being put out and with stopping the economy.” And they said everybody’s going in for them and why don’t we go in? And I said, “Berkshire can handle it. This is for people that can’t handle what’s happening.” And so, we’re not applying. But the airlines were the most prominent beneficiaries of what took place. Immediately, they got 25 billion initially, most of which went to the big four airlines and some of which went in as grants, not loans.

Warren Buffett (00:14:45):
I think that was fine public policy. I was wishing it could go to every restaurant and dry cleaner and every small business that really was out of business and had no one. They were made toast off basically. But the airlines, clearly what happened was not their fault in any way shape or form. It wasn’t like 2008 and nine when people blamed the banks and hated to see them helped. So, it was now airlines operate in bankruptcy. So, it isn’t like that the three of the four big ones went through bankruptcy within the previous. So, the airlines were used to operating in bankruptcy, they would have kept operating, but it was perfectly proper for the airlines to be helped.

Warren Buffett (00:15:26):
The entire airline business. You look at these figures of two trillion for Apple. The entire big four airlines, they sold for about $100 billion, almost. I mean, it’s a very, very small and combined they wouldn’t come close to making the cut. I mean, they wouldn’t be in the top 50. So anyway, they went into the government, they needed the government help, or they needed it, or they would go bankrupt some of them. And really the Congress but Steven Mnuchin, too, they decided they deserve the help, which I do not quarrel with it all. But imagine if Berkshire was the 10% holder which they had been, and everyone in the airlines had said, “To get them Berkshire.” They might’ve very well had a very, very, very different result if they’d had a very, very, very rich shareholder that owned eight or nine percent, and they didn’t have that.

Warren Buffett (00:16:21):
You might not have gotten the same result. In fact, I would think you probably wouldn’t. I mean, I can just see the headlines now. I mean, because you’ve seen the headlines on some companies that took 100 million or two, and really didn’t need it. And some of them gave it back then most of them gave it back, but you’re actually looking at probably at a different result than if we’d kept our stock. But in any event, an industry that was really selling for less than $100 billion lost a significant amount of money. They lost respective earning power. Right now, international travel’s not a comeback, but I would say overall to them, the economic recovery has gone far better than you could say with any assurance.

Warren Buffett (00:17:06):
We didn’t like having as much money as we had in banks at that time. So, I cut back some of the bank investment, but basically our net sales were about 1%, or one and a half percent. And looking back now, a little bit better be buying, but I did not consider it. I do not consider it a great moment in Berkshire’s history, but also we’ve got more net worth than any company in the United States under accounting principles. We’ve got six or 700 billion of generally good businesses. I think the airline business has done better because we’ve sold, and I wish them well, but I still wouldn’t want to buy the airline business.

Warren Buffett (00:17:46):
International, people really want to travel for personal reasons, and business travel is another thing. And we’ve got a big exposure to business travel, of course, through the fact that we own 19% of American Express, and we own Precision Castparts, which services the air business very well. So we’ve still got a big investment in air travel, a big commitment to it, but we wish the big four the best, and I think their managements have done a very good job during this period.

Trey Lockerbie (00:18:21):
So, I just love this question because I think it was on the top of everyone’s mind, going into this meeting. A lot of us probably had expectations of Buffett. I personally did. I mean, at the trough of the 2020 recession, I thought this is Warren Buffett’s magnum opus. This is where he rides off into the sunset. This is where he deploys 10s of billions of dollars and gobbles up all these companies and creates this legacy. And it was almost anything of the sort. I mean, he basically sold his airline positions, and ultimately bought back some shares, which we definitely will cover, but it was just not the performance I think anyone expected.

Trey Lockerbie (00:18:59):
So, I was really eager to hear Buffett’s answer to this. And I thought he did an incredible job of reminding people how to think like an investor. And what he basically highlighted is that his role is the chief risk officer. And I love this quote, he says, “We hope we do well, but we want to make sure we don’t do terribly.” And so, I think that this came up a number of times in the meeting, and I just thought it was really important to press the point because it’s not just the nominal numbers of tens of billions being put to work. it’s tens of billions being put to work under the circumstances with the risks on the table, with the known knowledge. Charlie pointed out later in the meeting that no one can call the trough, especially when you’re putting billions of dollars to work. No one’s going to buy the… No one can call the bottom, and Buffett’s no different.

Trey Lockerbie (00:19:49):
He was looking at it basically like, look, the risks on the table during that time were immense. And ultimately, their net sales were pretty small, one and one and a half percent. So they didn’t do a ton of selling. But the airlines I think was a particular one that was interesting because he mentioned their exposure to American Express and Precision Castparts and considers that exposure to air travel already as part of the portfolio risk, which I thought was really interesting as well. So, as far as we were all wondering why he didn’t deploy more cash. He just did a great job, I thought, highlighting the risks on the table at the time.

Trey Lockerbie (00:20:29):
I think it highlighted one other interesting point, which was that they could have deployed 50 to 75 billion, he said, basically, dropping their cash position from about 16% of the overall portfolio of assets down to about 8%. So, that gave you insight, I think, as to how much cash he’s comfortable holding, but they just couldn’t do it. And I think a lot of it had to do with March 23rd, when Powell announced that basically, they would backstop corporate bonds. And all of a sudden, all these companies that would have sold to Buffett, I think he got two phone calls, he says, but they didn’t have to sell anymore. So he got front-run, which we all expected. But I just thought this was an interesting point highlighting that it’s risk-reward. I think a lot of us think about the reward, but just bringing up the risk was an important point.

Stig Brodersen (00:21:14):
You’re right, hindsight 2020. You look at what the S&P 500 did at that point in time, and you’re like, “Oh, my God, he should just have bought at the March slow.” That’s the way it looks, and you could give him some flack for that. But to your point, it was a very scary time. I’d say it’s still a pretty scary time depending on where you live and what you do, but it was so weird. And you saw this coming in. We all have heard about something in Asia or something with a pandemic or something, and I don’t know. I think that a lot of people took it seriously. And suddenly the stock market just dived. And whenever we realized that this was a big deal. I would just have expected the stock market to slide.

Stig Brodersen (00:21:54):
I already felt to some extent the stock was a bit pricier. I know a lot of value investors felt it was very pricey. And so, you saw that correction, you saw the catalyst coming in. There was a pandemic. So, I’m not saying it was like 1929. But just using that as your yardstick, you took 25 years before you had the same valuation. So, I don’t think anyone expected, “Oh, it’ll just be later that year, and then you will just go much higher.”

Stig Brodersen (00:22:20):
So, I think it’s probably too easy to fault Buffett or anything that was happening because what the media is looking at is the latest report said he had $145 billion in cash. And it sounds like it’s a lot of cash. But that was also not the cash he was referring to, to your point, Trey, is he was talking 50 to 75. A lot of people who follow Buffett remember he talked about like, “Yeah, we need to stash away 20 billion in insurance claims.” That number is probably close to being double now. It’s a long time ago since he said that. And the insurance business is just much bigger now. And so, that’s one part. The other part of this that we didn’t know what’s going to happen, so he needed cash on hand to support the existing businesses.

Stig Brodersen (00:23:00):
The next question, perhaps I should then again say you already mentioned that Becky Quick did an amazing job. I absolutely agree. Having gone to the meeting several times, there’s so many bad questions. I love the idea that everyone can just go up there and just ask him a question. But a lot of the questions are just really, really bad and just a waste of everyone’s time. And someone go up there and be like, “Could you give me your equation for value in stocks?” He just hates that question. Or like, “Oh, Warren, what did you invest in past week?” There’s so many bad questions. So, having Becky Quick curate the best questions. There were some brilliant questions there. It was just such a huge win-win because you only have the, I don’t know, three and a half hours when Warren and Charlie are responding to questions. So, why won’t you just have the best questions? But one of the many great questions that Becky Quick chose was a question about Apple. So, let’s hear the question, and Warren and Charlie’s response.

Becky Quick (00:23:54):
This question comes from Vitoro Aguicci from Switzerland who writes in, “Why in the recent past did Berkshire sell some of the common stocks owned on Apple? If the company is considered Berkshire’s fourth jewel, why didn’t Berkshire buy more of Apple stocks in 2020? This seems to be counterintuitive.”

Warren Buffett (00:24:12):
Well, we have 5.3% or something like that now. It’s gone up in the first quarter because we bought in our shares, which helps our own shareholders expand their interest in Apple indirectly without laying out a penny, and then Apple’s repurchased its shares, and just announced another repurchase program. Let’s say, we look at Apple as a business that we own 5.3%. Now we’ve go… It’s a marketable security, so it shows up as a way greater than any other marketable security we have. But, of course, if you look at our railroad, as we mentioned, well, the Union Pacific is selling for about 150 billion in the market. We own one that’s larger than the Union Pacific and making a little less money, but not much less.

Warren Buffett (00:24:58):
It’s an extraordinarily… Apple, it’s got a fantastic manager. Tim Cook was under appreciated for a while. He’s one of the best managers in the world, and I’ve seen a lot of managers. And he’s got a product that people absolutely love. And there’s an installed base of people and they get satisfaction rates of 99%. And I get the figures from the furniture market as to what’s being sold. And if people come in and they want an Android phone, they want an Android phone. If they want an Apple phone, you can’t sell them the other way. The brand and the product, it’s an incredible product. It’s a huge, huge bargain to people.

Warren Buffett (00:25:43):
I mean, the part it plays in their lives is huge. I use it as a phone, but I’m probably the only guy in the country. Maybe some descendant of Alexander Graham Bell is doing the same thing, but it is indispensable to people, and it costs… A car costs $35,000, and I’m sure with some people, if we asked them whether they had to give up their Apple or give up their car, and really make the choice for the next five years, who knows what they’d do? We got a chance to buy it, and I sold some stock last year although our shareholders still had their percentage interest go up because we repurchase shares. But that was probably a mistake. Charlie in his usual low key way let me know that… You thought it was a mistake too, didn’t you Charlie?

Charlie Munger (00:26:30):
Yes.

Warren Buffett (00:26:31):
Yeah. I could only do so many things that I can get away with Charlie, and I used them up between Costco and Apple. He very likely was right in both circumstances. It’s an extraordinary business, but I do want to emphasize that in his own way, it’s a different way, but Tim Cook is… We see a lot of managers of a lot of businesses, and you’re looking at two great ones on both ends here. He’s handled that business so well. He couldn’t do what Steve Jobs, obviously, could do in terms of creation, but Steve Jobs couldn’t really, I don’t think do what Tim Cook has done in many respects.

Charlie Munger (00:27:15):
Well, I also think it’s clear that, that list you showed of the leading American companies, it’s been very important for America that we’ve done so well in this new tech field. I personally would not like to see our present giants brought down to some low level by some anti-competitive reasonings. I don’t think they’re doing a lot of harm anti-competitively. I think they’re… Credit to the Americans, credit to our civilization.

Warren Buffett (00:27:45):
And they’re huge.

Charlie Munger (00:27:46):
And they’re huge, and that’s good for us.

Stig Brodersen (00:27:49):
I wanted to talk about the Apple position. And originally it was either Todd or Tedd, we actually don’t know that made the first purchase. And then later, Buffett himself doubled down. The cost basis of that investment was $31 billion. And here at the time recording it’s around $117 billion. And that is after $11 billion was sold off, which by the way seemed to be something Munger didn’t agree with which was interesting in itself.

Stig Brodersen (00:28:15):
So, if we look at some of the numbers behind the purchase, it was originally bought around 12 times earnings. And that was at a time when Apple had a net income of $45 billion. Today, the earnings multiples are closer to 30. And now Apple have $76 billion in net income, and Apple have been buying back stocks in the meantime. So now there are 22 fewer shares outstanding. So, it’s a very interesting deal. We’re talking about 100 billion-ish profit so far. And it’s it’s by far, the biggest equity position.

Stig Brodersen (00:28:47):
And so, I think this is just such an interesting deal for so many reasons. It was a company for all of us to see. But not everyone, including me pulled the trigger on the Apple purchase. And again, hindsight to 2020, you have a company that sells the products at premium luxury prices. But in contrast to how you typically do sales in luxury goods, you’re selling it to the masses. I mean, think about how amazing that is. And so, whenever you think about the price of Apple, it really wasn’t expensive, 12 times earnings. If you compare that to the rest of the stock market and the interest rate levels. I’m so far looking at that today and like, “What did I miss?” I was looking at Buffett make that huge investment. I read the news. I went into Apple’s filings. I read what they did, and I was like, “No, they’re just going to be disrupted.” It was incredible. I even have Apple products like I guess every other human on this planet. I’m still puzzled about that.

Stig Brodersen (00:29:46):
But another thing I’ve just found interesting about this purchase is that it really shows that Buffett is right whenever it comes to his biggest bets. He has said himself that if we removed the 15 best investments in marketable securities his track record is really mediocre. Measured in dollars, Apple is the most profitable investment that Buffett ever made. And I expect that to be a long term holding. Buffett in his latest letter calls it one of his four jewels. So, that’s together with GEICO, BNSF, and BHE.

Stig Brodersen (00:30:15):
That was a lot of abbreviation. So, if I can just unpack that a bit. So, GEICO, as I’m sure a lot of listeners know an insurance company, which is probably close to half of the value, probably less that of Berkshire. Then you have the railroad BNSF, which is, Buffett said that it was more or less the same value like the Apple position and the railroad. And then you have Berkshire Hathaway Energy, which is probably worth around 60 to $70 billion. I’m quoting here numbers that we had Chris Bloomstran coming on the show and talking about.

Stig Brodersen (00:30:51):
And so, those are the four major ones, the four jewels as Buffett calls it. He talks about how he doesn’t see Apple as just having a stock. The whole thing about Buffett’s like, you should see it as a company and not just as a stock, a ticker on the screen. He just looked at this as one of his four core businesses, which I found interesting.

Trey Lockerbie (00:31:12):
I think that’s a great point because you wouldn’t think Apple fits into that portfolio with insurance, railroads, energy, and then Apple being the fourth jewel. It’s the others feel more like entire industries wrapped up in maybe one one company. But what does Apple really represent as an industry? It’s definitely a consumer product. It’s a tech company, but which industry does it really represent if it’s holding that part of the portfolio? It’s hard to say. And you’re right, Munger definitely… I don’t know why they sold to be honest. It’s hard. I mean, taking a little money off the table. I don’t think is ever a bad thing, but Buffett is the guy who’s supposed to hold forever. So, it was just an interesting move that they sold even a little bit. And obviously Munger called it a mistake, which I have to agree with.

Trey Lockerbie (00:31:56):
It certainly was a mistake for me. I actually did buy Apple when Buffett announced that they had taken a position many years ago. And I actually sold it in March because I made something like 200% on it at that point and didn’t know where the market was going, thought it was overvalued, got out of it, and it was a huge mistake. So definitely one of my errors that I can relate to him with. But it’s just interesting. If he considers it to be the fourth jewel, why take money off the table?

Stig Brodersen (00:32:23):
Yeah, I don’t get that either. You would buy if if the price is wonderful, or whatever Buffett would call it or at least fair for a wonderful company. And then perhaps if it reads some excessive valuation you would sell but at 30 times earnings I wouldn’t say that Apple is… It’s definitely not cheap. That’s for sure. But given the growth of the company, and the prospects is probably to the expensive side, but it’s not like it’s crazy expensive you just have to liquidate, which also for Berkshire would be quite difficult given how much they own of the company. To me, it’s also a bit puzzling. Plus, they have to pay a lot of capital gains tax. Plus it wasn’t like they needed that cash to invest in something else. I don’t know. But hey, Buffett himself said that was a mistake. So, perhaps we just agreed with him that it was.

Trey Lockerbie (00:33:07):
It’s easy to play Monday morning quarterback, and call it a mistake. So we can look smart now.

Stig Brodersen (00:33:14):
Yeah. We are talking about it’s easier now that we know the track record. We also talked about before how in March we felt that, oh, the market already tanked close to 4%, and probably continuing. And we also talked about a deal where Buffett already made called 100 billion-ish, and we’re criticizing him for not making 100 in losses. It’s hard to be Warren Buffett sometimes. People can be very opinionated, I guess, and including ourselves, Trey.

Trey Lockerbie (00:33:38):
Do better, Buffett.

Stig Brodersen (00:33:40):
Right. Exactly.

Trey Lockerbie (00:33:43):
All right. So, let’s go to our next question. Becky ultimately asked a question that is around MMT or modern monetary theory, which is essentially this idea that the US deficit doesn’t matter. It’s basically alluding to this idea that some economists have been throwing around that we can essentially print our way out of any problem where the world reserve currency, the fiat is by definition, by decree. So, it basically means our dollars are backed by our US military. And as long as our military is strong, and we command the global reserve currency, we can basically take on as much debt as we want, and that the debt doesn’t matter. That’s paraphrasing, but boiling it all down, that appears to be the theory behind MMT.

Trey Lockerbie (00:34:26):
Not to talk politics. But if you look at the fact that Biden has already in his first 100 days come out, basically projecting a $6 trillion plan. If you add it all up together, that just shows you the kind of environment we’re in. Back in 2008 when 800 billion seemed like astronomical, now we’re talking about $6 trillion going to work in the US. And so, this is MMT to some degree at work. Ultimately, I think what this question was getting at is, where’s the limit of MMT? Because obviously, at a certain limit, the expectation is that inflation will run rampant. And Buffett touches on this, but also just highlighting the general low interest rate environment that we’re currently in and what ramifications that might have long term. So, let’s take a listen.

Becky Quick (00:35:11):
What’s your opinion about the economic theory MMT, especially the United States, because it’s the reserve currency for the world?

Charlie Munger (00:35:18):
The modern monetary theorists are more confident than they ought to be, too. I don’t think any of us know what’s going to happen with this stuff. I do think there’s a good chance that this extreme conduct is more feasible than everybody thought. But I do know if you keep just doing it without any limit, it will end in disaster.

Becky Quick (00:35:39):
On a related question, Elle Kandel wrote in on this, too, and said, “If you can borrow money at a guaranteed lower even zero interest rate, is it still worthy of borrowing money for not that guaranteed cost from the insurance operation?”

Warren Buffett (00:35:51):
It reduces the value of float by a substantial amount. And we have a flexibility with our float that virtually no one has, and I’ve written about this in the annual letter. But the value of float has gone down dramatically because everything is off of interest rates. And when you get to negative interest rates, if a country can borrow at negative interest rates, you get into something that’s kind of akin to the St. Petersburg Paradox. And those of you who want to go to search you can find some interesting things on it, but it becomes infinite. It’s a crazy consequence of a bunch of abstract mathematics where you get there.

Warren Buffett (00:36:28):
But you lose gravity entirely, and if you tell me that I’m going to have to lend money to the government at minus 2% a year, and I’m talking nominal figures, not… You’re just telling me how I’ll go broke over time if I do that. So, it pushes you to do other things, and of course we’ve seen it. Well, we saw the rest of the world do it in even more extreme fashion, but nobody… Paul Samuelson, brilliant man, nobody thought he could do this, and we don’t really know what the consequences are, but we know there are consequences, obviously.

Trey Lockerbie (00:37:02):
All right, so getting back to this idea that Buffett is teaching you how to think, which I think is a big takeaway here. What I wanted to highlight from Buffett’s response here is that people have been lambasting low and negative interest rates around the world. And there’s a lot of good arguments for why. But in Buffett’s words, he’s basically reminding you here that they’re doing all of this to push you to do something else. And I think it’s just important to remember that. It’s not like they’re just lowering interest rates in this malicious way. There’s a reason for it, and it’s supposed to push you to do other things and drive the economy.

Trey Lockerbie (00:37:34):
Their intentions, there are probably they say the path to ruin is laid with good intentions. Maybe that’s our case here. But the idea is the money is supposed to go elsewhere. And I think, obviously, we’ve been seeing that the money is basically nesting itself into asset prices, and not necessarily helping the “real economy.” But I just thought it was a good reminder that there is a reason why we are where we are. And to some degree, it’s worked. We don’t know the long lasting effects. And as Munger really clearly points out it will end in disaster in his opinion. He didn’t mince words there. But we don’t know where, we don’t know how long this will go on.

Trey Lockerbie (00:38:12):
I mean, if you remember, back in 2017 Buffett was more or less calling a shot that we were… There was a big storm coming. It’s 2021, and we had a pandemic, that’s a storm, but we recovered already. And stock prices have recovered and gone up, then some. I mean, you just really can’t know how this is all going to end. But likely there will be adaption along the way. And one other point that I think he’s made before that it was a good reminder. I thought it was also interesting that Buffett came right out of the gate saying he didn’t think that the stock valuations were crazy. And he’s alluding to the point that when interest rates are at zero or very low it’s like Monopoly money. I mean, there’s really no ceiling to these valuations.

Trey Lockerbie (00:38:55):
I think that was slightly a different tone than he’s had in the past. He’s obviously made the comparison with interest rates to gravity before. But I just think he really took a position like, it’s not crazy right now, which I just don’t think I heard him say as transparently as he did this time around. I think the bottom line here is that all of this will have an impact. But it’s impossible to know. It was reminding me of this quote from economist Hyman Minsky where he basically said that stability leads to instability. So all of this money going into the system will have an impact. And it’s kind of like when things are going well, we just keep raising the ante. We keep saying that could be what the politicians are doing now. Hey, we printed all this money, we haven’t seen any negative effects. So let’s go ahead and print more. And that amount of stability leads to instability. And at a certain point, you take on enough risks, and those risks realize as losses, and that’s where the trouble begins.

Stig Brodersen (00:39:50):
One thing that I took away from this, this was actually not this specific question, but something else that Buffett and Munger talked about in the Q&A session was that Buffett said that him and Charlie constantly talking about whether they should deploy capital now, to your point about it perhaps being fairly valued or at least not extremely expensive, generally in the stock market, or just sit and wait for better valuation. And that’s just constantly worth thinking about. And he said, well, he’s not happy with the specifics… He mentioned 70 billion. He’s not happy with how those 70 billion are employed. This is in cash right now, but he’s happy about the other 700 billion, which is the company and how they’re employed.

Stig Brodersen (00:40:26):
So he was just like, “Yeah, you can’t. Sometimes it’s just hard to have your cake and eat it, too.” To me that was interesting. And now with the stock market at an all-time high, which I know just by inflation in itself it will always go to all-time highs, but it was just interesting to hear him talking about to your point Trey that yeah, it’s probably fair/ it’s not that crazy right now. I didn’t expect he would say that either. So, that was interesting.

Stig Brodersen (00:40:52):
The other thing I also wanted to mention here just going through the 10Q and 10Qs are the quarterly filings, and then the 10K is the annual filing. So if you go to page 15 in your 10Q for those of you who would be so inclined. And so, it’s interesting because that breaks down the different debt obligations that Berkshire are doing. And Berkshire has actually been issuing debt, which has probably surprised some people by they’ll be doing that. But it’s just so the rates in the beginning, especially in other currencies, not just in the US, which is also attractive, but also in other countries. It’s just one of those where if you have a long maturity, which Berkshire have in this case, sometimes the right time to borrow money is not always the right time to employ that money.

Stig Brodersen (00:41:37):
I find that interesting that they’re taking these loans and sitting on the sidelines and trying to figure that out. And perhaps that was also one of the reasons why Buffett sold Apple having those $11 billion in ammunition. Whenever something would come along, it’s just more attractive. It just hasn’t happened yet. But that was something I just thought about. And then the last point I had was about modern monetary theory. Now, we had someone from the audience sent me a message here the other day, his name is Jason Dealer. And he talked about that it was important that I should read the Deficit Myth by Stephanie Keller, and it’s all about modern monetary theory.

Stig Brodersen (00:42:16):
We actually tried to reach out to us to Stephanie Keller a few times to get her on the show. And we haven’t been successful so far. But it was very interesting reading that book because genuinely, I couldn’t disagree more because that book was a proponent of why modern monetary theory work, but I also couldn’t help but be humble and be like, “What if I’m wrong?” This like the book went against everything I’ve ever been told, I ever thought. Trey was talking about before. Now you can just print out, print away as long as we don’t have crazy inflation, you can just print away. And there are so many points where I’m just like, “This just makes no sense.”

Stig Brodersen (00:42:54):
And so, I just can’t help but just be humble and be like, as frustrated as I was reading through the book, just reflecting on some people also thought the earth was flat. It’s like, have I gotten something completely wrong here because it definitely seems like this whole modern monetary theory is catching on. Perhaps it is catching on the political system because people are typically elected for years at a time. And you can just print and give it to the next person. I don’t know. I don’t want this to be political. I’m not aiming at specifically a politician when I’m saying this. I’m just saying that to me it still doesn’t make any sense. I’m just curious what’s going to play out here more than anything.

Trey Lockerbie (00:43:30):
Yeah, I think the key takeaway here, actually came from Munger which was just that these people are all too confident in their ideas on both sides of the spectrum. I mean, it seems like both parties either on the MMT side, or on the opposite side, they’re very confident in their position. And perhaps we could be a little bit more open minded. And the truth is probably somewhere in the middle. I don’t know if it’s as much of that Copernicus idea of the earth revolving around the sun, but different as far as what we believe in now. But it could be and so it’s just time will tell, and we’ll know the truth. But people who are claiming to know the answer now, I think you should be wary of.

Stig Brodersen (00:44:11):
I love how Munger can talk about not being too confident. And then that was only five seconds or something of the meeting, he was saying that. And the rest he was just, he just had the truth the rest of the meeting, which is one of the reasons why you love Charlie Munger, the guts, he always has the truth. So, I like this whole thing, which I’m also struggling with, and I guess so many others, like, you have to truth and you’re preaching it and at the same time you talk about how you’re being humble and not knowing the answer, and then jump back to, “Oh, by the way, I also have the truth.” It’s an interesting dynamic.

Trey Lockerbie (00:44:41):
That is such a good point. There are a lot of moments like that where you feel like they were talking about both sides a little bit. And that’s been a struggle as of late because it ties back to the idea that these guys, look there’s a reason we spent our Saturdays listening to some nonagenarians. These 90 year olds proselytizing, and it’s because they have so much wisdom, and they’re so incredibly smart. But I liked that they even highlighted Larry Summers and how smart he is. And the idea is that you can be incredibly smart, but we’re just humans at the end of the day, and no one has all the answers. I think there is just a dose of that sort of humble, I think that is where ultimate wisdom is, is just recognizing that you don’t have the answer. To their credit, at least they throw that in. But you’re so right that so much of the meeting they definitely have the answer.

Stig Brodersen (00:45:31):
The next question was about share repurchase. And so, one of the reasons why I wanted to play this question was because Buffett has found the elephant gun, at least in my opinion. He’d been talking a lot about how he wants to make a big acquisition, and it hasn’t happened. And people have been giving him a lot of flack for not doing it, but I would say he’s he spent $25 billion in 2020 on share repurchases, and he kept on repurchasing shares in the first quarter of 2021. So, if that’s not the big gun, I don’t know what it is. Perhaps people were expecting something bigger, but let’s hear the question from Becky and Warren and Charlie’s response.

Becky Quick (00:46:07):
All right. This question comes from Danny Poland, a shareholder from Pittsburgh. A prominent senator recently categorized share buybacks as a form of market manipulation. You’ve often said that repurchasing shares at prices below intrinsic value benefits continuing shareholders. Could you and Charlie, please elaborate on the higher order effect that these share repurchases have on society?

Warren Buffett (00:46:27):
They’re a way, essentially, of distributing cash to the people that want the cash when other co-owners mostly want you to re-invest, and it’s a savings vehicle. If the four of us sitting at this table decided we’d buy a few Dairy Queen franchises, we form a little company, and we all put in a million dollars or something like that, and we buy the Dairy Queen franchises and they’re doing well. And three of the four of us want to keep buying more Dairy Queen franchises, and we’re not done building and saving for the future. We’re in the wealth creation business. And the fourth one says, “Listen, I’ve gotten rich enough. I’d rather take some money out.”

Warren Buffett (00:47:04):
Well, there’s only two ways to do it. We can pay dividends, all four of us, three of us of whom don’t want it, and we can repurchase the shares at a fair price. It was just the four of us. We’d pick out a fair price and the fourth one gets bought out of his interest. I find it almost impossible to believe some of the arguments that are made that it’s terrible to repurchase shares from a partner if they want to get out of something and you’re able to do it at a price that’s advantageous to the people that are staying, and it helps slightly the person that wants out.

Warren Buffett (00:47:36):
A majority of the Berkshire shareholders, a great majority we had to vote on dividends one time, we’ve got savers. Now, that’s partly because we’ve advertised ourselves as being that sort of a vehicle. We’ve created that something. We’ve stuck with it for 57 years in, and people, individuals, huge number, look at Berkshire as something they’re going to own till they die. Now, their circumstances may change, their needs may change, but the savers generally keep saving.

Warren Buffett (00:48:02):
We’ve just recently had somebody that [inaudible 00:48:06] came with us 60 years ago and billions of dollars. They weren’t saving exactly for their old age. It’s just was built into them that they liked to do it. Now, philanthropies will get got a lot of money and so on. It’s the most… What could be more logical if a very small minority of your holders want to get out and most of them want to stay in and the person who wants to get out wants the money. You don’t give the money to everybody, you give it to the one who wants it. And you do it at a price that is beneficial to most parties. On a private deal, you’d work out the fair value. The market tells you the value in the case of a publicly traded company. Charlie, you got anything?

Charlie Munger (00:48:45):
If you’re repurchasing stock, just a bullet higher it’s deeply immoral, but if you’re repurchasing stock because it’s a fair thing to do in the interest of your existing shareholders, it’s a highly moral act, and the people who were criticizing it are bonkers.

Stig Brodersen (00:49:03):
I absolutely loved Buffett and Munger’s response to this, very educational. I wanted to paint some color around that just to get more into depth with the whole thing about share repurchase. The point about is it immoral or not? So, share buyback seems like it’s tax minimizing because you don’t pay taxes on unrealized gains. It seems like whenever you compare it to dividends, perhaps from the government perspective, dividends seem to be more fair because you as an investor will then pay the dividend tax whenever he or she receives that. But you have to remember that share repurchase can only be made with tax fronts from that company. So, that’s one part.

Stig Brodersen (00:49:39):
And think about whenever the company is buying back shares someone else is always on the other side of that trade. You can’t buy something unless someone is selling and the person who is selling will have to pay capital gains tax on that. So, I would like to throw something in, a third part in that. This was something we talked two minutes about an episode 246 that even better than dividends and even better than share repurchase from a tax perspective is if you as an investor can find companies that continue to reinvest in the business with a profitable outcome. That’s really where you’re going to save on taxes.

Stig Brodersen (00:50:13):
Amazon would be a good example of that. Amazon was not profitable for a long time. If you look at the taxable income, what they did was they reinvested money that they could have shown as taxable income. They reinvested that in the business. So they have just recently started paying taxes. I don’t think anyone, perhaps not even that senator they were talking about here in the question would say that Amazon has done a disservice to America in terms of reinvesting in their business and creating employment. And so, when you think about that reinvestment is just another way of not paying taxes. But as any business owner would say, it’s you’re doing a service not just to your own business, but also to society if you reinvest and create a better company. I like how they hit that point home.

Trey Lockerbie (00:50:58):
Yeah, to be honest with you, Stig, this is my entire bull case for Berkshire Hathaway, the share repurchasing. I mean, if you extrapolate out their earnings and do the future free cash flows, and just look at the growth rates, this company throws off cash almost like anything else. And you mentioned they’re sitting around $145 billion of cash right now, and having a hard time putting it to work. They have sized themselves out of the game, to some degree. They’re now in the 50 billion range for acquisitions. There’s just not that many companies that are on the menu.

Trey Lockerbie (00:51:30):
This is, I think, just a trend that will continue for a long time. And it’s one of the biggest reasons I’m bullish on Berkshire Hathaway long term is because especially in the era of beyond Buffett and Charlie you got to think of the new management that comes in. They’re not the allocators like Charlie and Buffett are, and they probably won’t be expected to be. And I think they might be expected to do even more share buybacks. I’m just projecting. But that’s my bull case on Berkshire. And one of the biggest reasons I hold the position.

Stig Brodersen (00:51:58):
Speaking about bull, Munger had this wonderful quote, he said something about you build higher. I haven’t heard that before. It was a fun thing to say. I like what you said because generally I do not like most companies buyback policies. I really like what Berkshire is doing. So, please don’t get me wrong. But generally, I don’t like what you see S&P 500 companies doing. You see so many of these companies. You can say Apple since 2009. You can say Walmart since 2006. There’s just so many companies that buy back shares every single year, every single quarter.

Stig Brodersen (00:52:29):
And so, without being an expert in Apple and Walmart I would say I don’t think those two companies have been undervalued every single quarter since then. And even if there were let’s another 100 companies who weren’t. So, that’s one of the things that frustrates me whenever we talk about share repurchase and how that’s in Berkshire case, it is good for the current shareholders. It’s not always in the other companies.

Stig Brodersen (00:52:52):
This is what’s even more frustrating. We have something we call shareholder yield, and shareholder yield is dividends combined with share repurchases. So, if there’s a 3% dividend yield, and 4% buyback it’s 7%. But what frustrates me is that you have all of these managements who are issuing shares to themselves because they’re saying, “Well, we have to be aligned with the shareholders. And we do that. And by the way, should we issue some stocks to our ourselves.” And then they call it the shareholder yield.

Stig Brodersen (00:53:20):
Let’s just take an extreme example. Let’s just say that they’re issuing 1% to themselves in that given year, and then their buyback 1%. They don’t pay out any dividend, they don’t repurchase the shares. And then they would still call it 1% shareholder yield. I’m like, “For who?” So, that’s one thing that frustrates me. And what they do at Berkshire, which I really like is that all the directors, they are buying in the open market, and they all have big holdings in Berkshire. So, I really like that.

Stig Brodersen (00:53:46):
And on a somewhat rare note, if we talk about Berkshire’s own share repurchase. So, like you mentioned that before, in 2020, Berkshire bought back for $25 billion. And it seems like it’s continuing. So, if you look at the latest filing, Berkshire in Q1 bought back for $6.6 billion. So, it’s a small slowdown from $9 billion in Q4 2020. I probably wouldn’t put too much into that. The price has gone up. But I don’t necessarily know if that’s why they bought slightly less. Buffett also talks about how Berkshire is just cheaper than the market right now. But it’s also because Berkshire has a very thinly traded stock, whenever you compare the size. Obviously, it’s not thinly traded whenever you compare it to a small cap or anything like that. But if you look at the market cap, it’s a somewhat small trading volumes.

Stig Brodersen (00:54:32):
Generally, and it probably shouldn’t surprise you whenever you’re thinking about it. Berkshire shareholders, for the most parts are people who are there to buy and hold. There are a lot of trading around obviously as with any other company, but that’s also why it’s thinner traded. So, you can’t always go in and just buy back shares at a given price. There was just one point I wanted to bring home.

Stig Brodersen (00:54:54):
Trey, let’s talk a bit about devaluation. Back on episode 346, we had Chris Bloomstran on and I can’t speak for Trey, but I can speak for myself and Chris is way smarter than me whenever it comes to analyzing Berkshire. I’ve been reading up on Berkshire since 2014 whenever I took my first position, and I’ve read through the filings, I’ve read about the company, and everything I can about the company. And then you meet someone like Chris, and you’re like, “Yeah, let me just clone his analysis.” We’ll make sure to link to that in the show notes. But I want to mention what his valuation were.

Stig Brodersen (00:55:25):
So, his valuation was $365 for one B share. Whitney Tilson, super smart investor that Trey referred to in the beginning said 316. But what I like is that Buffett has stated multiple times and also states that in the filing that he would only buy back shares at a discount to a very conservative estimate of intrinsic value of Berkshire. And as much as I would like to say that Whitney Tilson and Chris Bloomstran are the smartest people, and perhaps Warren is even smarter, who knows?

Stig Brodersen (00:55:55):
But the three of them are definitely in agreement that Berkshire is undervalued, which I find interesting. And Buffett has said multiple times that he has no intention of buying one dollar of estimated value for a very real 95 cents. And so, he definitely feels that Berkshire is undervalued. And so, if we look at some of the prices that he’s been buying in for. January, he bought the B shares for $231 on average. February, 237, and in March 251. So who knows? Who knows what the actual intrinsic value is? But I wanted to mention that, and just to full disclosure, Berkshire is my biggest holding. So, perhaps I’m biased. I don’t know. But what are your thoughts on the intrinsic value of Berkshire, Trey?

Trey Lockerbie (00:56:43):
Yeah, I think that the Whitney Tilson approach is a very good one. I would estimate that the stock is probably as much as 20% discounted at the moment and goes back to the balance sheet because at the time of this recording the market cap of Berkshire is around 643 billion. These guys are sitting on $884 billion worth of assets. Obviously, there’s liabilities. But if you just look at the market cap to the assets they own, there’s a big 20% discount just there. And I think that I probably would estimate… When I talked to Larry Cunningham, and went over the more general approach that he took in his book, it was putting the stock price over $400 a share. And so, I think at the time of the book, there was a different number of shares outstanding. So, I want to say that, but the point is, I think, probably in the mid 300 is how I’m looking at the stock at the moment.

Trey Lockerbie (00:57:35):
Now, it does raise another question, though, because this is what I think the holy grail is to some degree with Buffett is the position sizing. So, what I’m always so interested in is when you read about, yeah, they put $5.5 billion of share repurchases, or it’s a 6% deduction. It’s what I’m trying to gain out of that is, okay, how is he looking at it overall at the portfolio? Why is he deciding to put $1.23 billion to work on share buybacks? I mean, Buffett isn’t often referred to as a quant-style investor. But some of the numbers put to work are down two decimal points or down to very specific dollar amounts and not like he’s like, “I’m going to put 1.5 billion into share buybacks.” It’s a very specific number, and I’m always curious about how that relates back to his position sizing.

Stig Brodersen (00:58:23):
Whenever I see that I always thought that he had been telling his trader because I don’t think he’s placing them himself but saying, “We can buy in this range.” And then they’re just buying that range. I don’t know. I think that’s why you have those odd numbers.

Trey Lockerbie (00:58:37):
Yeah, but is that how you run your own portfolio? I’m curious. If you’re like, “I’m going to take a position.” I understand easing into the position. And they have to do that just to not give away their position. To some degree, they’re easing into it, and maybe we’re just catching a snapshot of the progress being made into a certain positions, there’s that consideration as well.

Stig Brodersen (00:58:56):
I don’t think it moved the market as much as Warren Buffett. As much as I want-

Trey Lockerbie (00:59:00):
Not yet.

Stig Brodersen (00:59:01):
Not yet, right. So for me, it’s more like, “Hey, I’m going to put in an order for 1,000 shares or 5,000 shares or whatever it is. So, for him, he would have to spend months. Whenever he has to make those filings to the SEC he can ask for permission not to disclose what he’s buying if he’s still building a position. Sometimes they can just take quarters simply because there was so much that needs to be done. So, I would imagine for something like Apple he might have said, “In this range, please go ahead and buy.”

Stig Brodersen (00:59:29):
He previously talked about that he won’t be buying more than 20% of the volume because otherwise you’ve been moving the price too much. But then perhaps he just asked his trader, “Well, can we just in this range?” Whatever that range is from 100, $250, whatever that might be, just buy as much as you can. Not more than 20% of the daily volume. And then let’s see how many shares that is? I don’t know. Am I think about this too simplistically? I always thought that was how it went down. But I never had that problem of putting billions and billions of dollars to work so I’m not sure how I would go about that.

Trey Lockerbie (01:00:02):
Okay, so I think that sums up our viewpoints of the Berkshire Hathaway annual shareholder meeting. I thought ultimately it was refreshing to have Charlie Munger back in his seat. And I just am cherishing each year that we have that because it’s not going to last forever. And just want to acknowledge that that was a very special occasion. I think that there was a little bit more just energy, even though he didn’t have the whole arena full of people at his disposal. The energy of these two guys in their 90s taking on questions for four or five hours nonstop is just impressive in and of itself. So, I want to recognize that as well. But ultimately, I still felt like I learned a lot from this meeting. And it just made me that much more excited to see everyone again in Omaha, in 2022.

Trey Lockerbie (01:00:46):
All right, so now we’re going to take a question from the audience. This question comes from Alvin, which is about the scuttlebutt method, which is something Buffett has talked a lot about, and we felt was very timely given the meeting and this approach that I think a lot of people are considering at the moment.

Alvin (01:01:02):
My name is Alvin, and I’m from Perth, Western Australia. I feel like I’m asking you guys a question from the past as I only just started listening to your podcast, and the current episode is only in the year 2015. I’m sure I’ll get up to date in no time though. My question today relates to what’s known as the scuttlebutt method. I believe that investing and learning overall is a lifelong process. I’ve been investing for a few years now. And in order to take myself to the next level of investing, I want to apply the scuttlebutt method first brought about by Phil Fisher and widely talked about by Warren Buffett. My difficulty isn’t so much in wanting to apply the scuttlebutt method. But it’s more that I find it extremely difficult to get the opportunity to speak to key management in companies.

Alvin (01:01:48):
Do you have any recommendations on how to get access to key management personnel aside from the typical networking that you would do day to day? Is it necessary for me to start a hugely successful podcast like yourself in order to get access to these key management people? I’m also aware that Phil Fisher, in his book, he says something that you should know about 50% about the company prior to approaching them. And also remember that Warren Buffett in one of his annual stockholder meetings saying that he can base his entire investing decision purely on a company’s annual report. So, appreciate all the work that you and the rest of the podcast team do for us. And it’s really great that there are people like you in this world. Thanks very much, and looking forward to your reply.

Stig Brodersen (01:02:36):
Alvin, I love that question, and thank you for the kind words. To the listeners who are not familiar with the scuttlebutt method. So, it refers to a method of figuring everything out you can about the company, and its investing merits by really talking to everyone that you can who has knowledge one way or the other about the company. So it could be customers, vendors, competitors, former employees, existing employees, just people who have extensive knowledge about it. So you refer to what Buffett said about should you be speaking to the management? And though it’s… You might say, “Well, it’s easy for Buffett, because he’s Warren Buffett. He can just call up people and they will answer the phone.” But generally, I agree with his statement that you don’t need to speak to the management to get a full picture of the company.

Stig Brodersen (01:03:19):
Generally, you don’t want the management to speak to too many investors, and perhaps not any investors at all. Think about if we can just call up Warren and Charlie and talk to me about X, Y, Z about your company. If we did it, 100,000 other people would probably also do it and they wouldn’t have time to do their job. So, whenever you refer to Buffett there going back to that. Yes, 10Qs, 10Ks, they are immensely helpful. I would like to do a bit more than just reading 10Qs, 10Ks. And so, I practice the scuttlebutt method, too.

Stig Brodersen (01:03:48):
If I can just take a personal example, something that I’m looking to right now, it’s Seritage Growth Properties. Some of you might remember I spoke to Mohnish Pabrai about that back in episode 247. I’m just using this as general example. So please don’t take it for more than what it is, and then I’ll try to hit your point about speaking with the management if it’s helpful or not. So if you’re looking at a company like Seritage Growth Properties. I’ve been aware of this company since 2015 when Warren Buffett took a position in it because this was a personal holding of Warren Buffett. It wasn’t through Berkshire. It was a personal holding. Then Berkshire also became the prime lender afterwards, which was just interested in itself.

Stig Brodersen (01:04:25):
We even have Hari Ramachandra on the mastermind group talking about this specific pick. [inaudible 01:04:29] the company because what we do as value investors is that we are looking through the discounted cash flow model and trying to discount that back to today and figure out how much that’s worth. And whenever you look at their financial statements, it’s all negative numbers. They’re losing money every single year. And so, you’re looking at it and you’re like, “That makes no sense.” So, I just speak to Mohnish about it the other day and yeah, I should probably take another look.

Stig Brodersen (01:04:54):
So, still not an expert at all in commercial real estate, which is what this company is doing. But the first thing that I did in this case was to read the 10Ks, to read the 10Qs, and then use that to figure out two or three key variables that you really need to pay attention to and track how they progress. But also, as you read through the reports, you’ll likely find more questions than answers. And so, for instance, for Seritage in this case, part of my analysis was that I wanted to figure out what’s the cost structure of the company. You always want to know the cost structure of any company, and not just today, but also how that developed.

Stig Brodersen (01:05:30):
And so again, knowing very little about commercial real estate I wanted to speak to people who knew as much as possible about the topic. So, there weren’t necessarily people who were experts in this specific stock of this specific company, but they were in the real estate space. So some of them were relatively close friends, so you can just call them up. But you could also just perhaps, communicate with people who are not close friends. And I’ll get back to that later and just to figure out, yeah, they might not see it as an investment. But could they give you some insights into how that business works in general?

Stig Brodersen (01:05:59):
And so, if you take this specific company, you could be getting understanding of how does it work whenever you rent commercial real estate? Well, it’s typically what’s called a triple net lease, which means that they’re going to pay for the maintenance, and they’re going to pay for the property taxes. There were different things where like, “Oh, okay.” When I know that and I know the square foot price that they’re going to rent it out for, I can come up with a projection of the cost structure, which is something you need to know to value on that.

Stig Brodersen (01:06:26):
I guess my point of saying that is that you don’t necessarily need to speak to management, but you also don’t need to speak to other fellow investors in this specific stock. It’s great if you can, please don’t get me wrong. But you need to speak to people who do not look at it as a stock, but can just more tell you about oh, this is just how the business works more than anything else. And so, I don’t want to talk too much about Seritage. I think I’m going to pitch it at our future mastermind meeting. I think I need to whenever I’ve done a bit more research. But what I would suggest to do if you’re interested in the scuttlebutt method is something as simple as just googling. Google who did an analysis of the stock. There are a lot of private investors out there.

Stig Brodersen (01:07:05):
Go to a website like Corner of Berkshire and Fairfax, and speak to knowledgeable people. Figure out who will be doing analysis. You might be a bit timid and be like, “Will these people even speak to me?” Typically, people will like to speak to other people who are passionate about the same thing. And so, to your point, Alvin, yes, you probably need to know call it 50%. I think that was the number you referenced before, before you speak to people who actually done analysis. You don’t want just to call them up and be like, “Oh, could you give me your investment thesis, and I can record you and I can just hold on that.” You want to have good questions. You want to do your own analysis first so you know what you’re talking about. You don’t want to waste other people’s time. But in this world, you can hook people up on Twitter, or send them an email, they typically have a blog or something like that, and just be like, “Hey, I’m really interested in this. This is part of my analysis. What do you think?”

Stig Brodersen (01:07:52):
Specifically, this was something I did. I watch Brad from Stock Compunder a few times on YouTube. He’s done some great work on this specific stock. I’m not telling anyone that you just call up Brad and he’ll probably hate me for saying so. But yeah, I just asked him over Twitter, just sent him a private message and be like, “Do you want to talk? These are some of my thoughts. I’m curious to hear some of your thoughts. Can we help each other out?” Obviously, whenever you do that, there are a ton of biases. You’re typically speaking with people who have a bull case, too. So, there is a fear that you end up just patting each other on the back. It’s like, “Oh, you’re right. This is a great company.”

Stig Brodersen (01:08:26):
Trey and I could fall into the same trap. We both long Berkshire. We’re so passionate about it. We spent an entire weekend just listening to Buffett and Munger, and so if you can you want someone who’s holding the stock, or at least someone who’s very critical about it. But going back to your point about should you then speak to the management? Well, based on those points, I would say, I’m not sure if it’s truly an advantage. If I have to say 100% of a stock analysis, that’s all of it. I’d probably say less than 5%, perhaps significantly less would be speaking to the management. It might even have a negative impact on your analysis.

Stig Brodersen (01:09:01):
Most CEOs are good salespeople. That’s how they became CEOs in the first place. Even if you have access to the management, and they’re bull on the company, too. That’s why they’re part of the management. Even if they’re not, the probably will tell you that they are. You might go away from that meeting with an even greater bias to begin with because you’ve been influenced by these charismatic people. And so, I guess what I would say is, you don’t have to speak to the management.

Stig Brodersen (01:09:25):
What I do personally both on and off the podcast is I speak to people who have knowledge about stocks for my mastermind group, and really have this open dialogue where you’re not afraid to tell someone that they’re wrong, and they shouldn’t be afraid to tell you that they’re wrong. But also make sure that people have really done the work. So you have to make a commitment to people that they want to give you good feedback, but they also need to really study the stock. You need to match those expectations. Once you start reading into 10Qs and 10Ks and if you expect to get that kind of feedback, and people haven’t looked into that, it’s okay. They can still give you valuable insights. Please don’t get me wrong. But you need to adjust your level of expectations whenever you do that. Sorry, I feel I went all over the place on my response to that, Alvin. I hope that was useful, but I wanted to throw it over to you, Trey.

Trey Lockerbie (01:10:12):
Yeah, I don’t know if I have a whole lot to add to that, Stig, except I do just want to highlight something that came to mind when I was talking to Tom Gayner, who’s the co-CEO of Markel Corporation because Markel closely follows the Berkshire model, and Tom himself is very much a Berkshire or Buffett style investor, I would say. So, Alvin, if you’re looking to learn a little bit about the management company, let’s take a page out of our discussion with Tom Gayner who is the CO CEO of Markel Corporation because Markel really follows that Berkshire model very closely. And Tom himself is very much a Buffett-style investor.

Trey Lockerbie (01:10:49):
What he told me in our episode together is that the first place you should look to quantify the integrity of the management, if you will, is the amount of debt that they’re using. In this day and age, we typically look at the interest coverage ratio, and obviously, the number the higher the better. So, we typically like to look for something like five to 10. Berkshire is sitting a little bit over 14 at the moment. So they’re definitely practicing what they preach. And obviously, with a low interest rate environment like we’re in, it’s a little bit easier to cover the costs. So, if interest rates go up, you might see that ratio change.

Trey Lockerbie (01:11:22):
But ultimately, I think that’s a good place to start if you’re trying to glean a little bit of insight as to how the company is managing their money. And it varies across industries. But somewhere in the five to 10 range is probably where you want to sit. And it can vary with the interest rate environments that we’re in, of course, as well. So, I think that’s the first place to look, if you want to get a good insight as to how the management team is handling the money of the company.

Trey Lockerbie (01:11:46):
One other point I just wanted to highlight that came from Tom as well. Stig touched on this, but it’s an idea that I’ve actually adopted very recently, which is taking that small position in a company in effort to learn more about it. I found it really fascinating that Tom does this with hundreds of stocks. And he actually mentioned that Buffett does this in his personal portfolio as well. So, I think that that just helps get you some buy in and take a very small position. Also, helps alleviate some FOMO. I don’t know if you have that problem, but it’s a good starting point.

Trey Lockerbie (01:12:16):
Lastly, I’ll just say about the mastermind, I can’t emphasize how important this really is. I have a text thread going with some friends. And it could be as easy as that for someone like you. Joel Greenblatt had the Value Investors Club. That’s probably the most elite example of something like this. But it just shows you that the people at the top of their game follow this exact model as well. And it’s just so important to obviously take in counter arguments, of course, but ultimately, training yourself to be an independent thinker and coming up with your own conclusions.

Stig Brodersen (01:12:46):
Just one quick thing to what you mentioned there, Trey, about taking a position then. Original Buffett did that buying in his own portfolio because at the time you couldn’t go online because online didn’t exist at the time. So, you needed to be a shareholder to receive the annual reports. That’s one part of it. But the other thing is that you just learn differently whenever you have skin in the game, and it doesn’t need to be a lot of money. It doesn’t need to be 10% of your portfolio or something like that. Just knowing that you have a bit of skin in the game, you just start to learn differently about the stock. The other thing is also whenever you communicate with different stakeholders of the company, it just gives you a bit more clout when you’re like, “Yeah, I actually own a part of the company.” And just for you to have that. I think that’s so important.

Stig Brodersen (01:13:29):
The other thing is that a lot of people, whenever they start looking at a stock, they spend a lot of time, they buy it, and then they don’t ever think about it again. Think about this like Tom Gayner that you’re referring to here, Trey, and some of the other investors that we have on the show. And they’re like, they’re building a small position just to get their feet wet, stand to learn more about it, reading the next filings, next quarter filing that are probably going to read slightly different then start building that position. It’s not like, you don’t need to go to full position within a week. That’s whatever your criteria is for a full position. That’s not what you need to do. You just need to get started and learning. And yes, as soon as you buy that first stock, it’s just, you just do it 10X on how much you learn, how fast learn about that company.

Trey Lockerbie (01:14:11):
So, Alvin, for asking such a wonderful question, we’re going to give you free access to our TIP Finance Tool, and our Intrinsic Value Course. And if you’re out there listening and you want to invest like Warren Buffett, there’s no better place to start the Intrinsic Value Course and by using The TIP Finance Tool. So if you’re interested, just google TIP Finance. And if you want to ask a question like Alvin just did go to asktheinvestors.com. We’d love to hear from you.

Stig Brodersen (01:14:36):
Guys, the last thing I just wanted to mention here before we round off this show is make sure to follow us on Apple Podcasts, Spotify, wherever you listen to a podcast. All right guys, that was all that Trey and I had for this week’s episode of The Investor’s Podcast. We’ll be back again next week.

Outro (01:14:51):
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