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Motley Fool Hidden Gems Investing
Looking Back on Berkshire’s Outperformance
00:27:52
Over the past five years, Warren Buffett’s returns have beaten the S&P 500 and the NASDAQ, even as Berkshire keeps hundreds of billions in cash and treasuries.
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- [00:00]
Jim Gillies
Foreign.
- [00:05]
Ricky Mulvey
Warren Buffett still got it. You're listening to Motley Fool Money. I'm Ricky Mulby, joined today by Jim Gillies. Jim, how you doing? Good to see you.
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Jim Gillies
Oh, it's good to be seen, Ricky. Thanks.
- [00:28]
Ricky Mulvey
We're five years away from the COVID time and it's time to check in on some of the cycles of long term investments. And I think Berkshire Hathaway is a good one to talk about. You were talking about it yesterday or a couple of days ago on the morning show because there is something kind of surprising for this business that is keeping about one third of its market cap in cash. Nasdaq up about 170% S&P up a little less than 140%. Berkshire Hathaway 200%. A three bagger over this five year time, outperforming the tech stocks, outperforming the broad index. Any reflections on that and maybe why the cash isn't a drag here? You always hear about that cash is a drag on your investments. Not the case at Berkshire Hathaway.
- [01:19]
Jim Gillies
Sure. And yeah, I found this little factoid as well yesterday when I was going through the Globe Mail over breakfast and Berkshire tripled over the past five years. What? And I went and looked and like, huh, it has. Which is interesting because it's both my longest held stock as well as my largest personal holding. So it works really well when you just kind of ignore your largest personal holding and let the magic continue happening. Now, I think a lot of the cash, while significant, a lot of the performance I think you can probably chalk up to how well the Apple investment worked out for Berkshire. A lot of that cash has been raised in the last year as Buffett has dramatically scaled down the amount of money invested in Apple, though he's still got a fairly significant piece there as well. I think you want to look at a few of the things that Buffett has been invested into that have not worked out because he's done what I consider to be the holy grail. And being perfectly blunt, it's something I continue to work on myself is when you've made a mistake or an investment that's not working out, blow it out the door, just be done with it. We saw that with the airlines during the COVID shutdowns. That may or may not have been a mistake, frankly. But I understand why Buffett got out of them. And as well, it would be very, very, it would be a bad look for them to have gotten bailout money when Buffett said all of them. So I Think he got himself out of the way of that. The IBM thing, that wasn't a great deal. But I think that overall you've got Buffet just saying, look, in this brave new world, we have tech stocks, growth stocks, AI, all this wonderful stuff. Buffett has just provided a really good example of I'm going to stay within my circle of competence. I'm going to stay with reasonable valuation. What we've seen most recently is the Japanese trading houses, the five large Japanese trading houses that he's been very enthusiastic about as well as upped the ante there. He's always been very. The famous column or letter to investors, buy American. I am, we're reflecting that the American market is still, and I say this as a Canadian, the place to make money. He stuck to his long term principles. He has avoided the noise of the world with which I would advocate everyone should do, especially right now. Seems like there's a lot of noise going on. I think that Berkshire has done an admirable job of just sticking to what Berkshire's been doing since the 1960s and the investing that Buffett's been doing since the 1940s, arguably, or at least the 50s with the Buffett partnership. And it speaks, I think, well to what can happen when you buy even a large, slightly boring company at a reasonable price, which it was in 2020, I would argue is still reasonably priced today, and just get out of the way and let people cook. You know, I think it's been an excellent, an excellent case study in a world where we are and, you know, I'm as guilty as the next guy where we're looking for signs every day and, you know, we have to talk about investing every day. I mean, we are on an investing podcast right this very moment, you know, but just kind of, you know, stepping back, let the, you know, buy good companies run by good people, let them work their magic and just kind of step back and let it happen and pay a reasonable price, of course. So gotta throw that in.
- [04:52]
Ricky Mulvey
To be clear, Buffett engages with investing every day and you can engage with investing in news every day. It's that you don't have to make a decision every day, which is what separates long term investors from traders. Buffett spends a lot of time reading annual reports, doing that kind of thing, taking information in and allowing cold strikes to come. One of the things I'm seeing on the Internet right now, speaking of people making decisions, is, is there's this take of looking at the Berkshire cash hoard. And right now Uncle Warren has about tripled his position in cash and short term investments in the past few years. And the take is, is that Warren Buffett must see a crash coming. He's getting ahead of it so he can buy stocks on the cheap when it inevitably comes. Therefore, as an individual investor, I should start selling a lot of my stocks and follow in the footsteps of this investing. Great. What do you think of that?
- [05:42]
Jim Gillies
I think that's wrong. I think it's silly. I think it's misinterpreting what Buffett is doing again. And I'm now going to tell you the correct interpretation of what Buffett is doing. Right. How arrogant is that? I think what Buffett has been doing is number one, he has raised cash and it's been invested at the best interest rates we've seen in 15 years. So treasuries and whatever, look, that's not going to set the world on fire, but it's better than just sitting in cash with nothing. You know, you got a bunch of 5 and 6%. The second thing though is let us not lose, lose sight of the fact that, that uncle Warren is 94 years old. He will be 95 in August. You know, we're talking about the last five year period. I hope I'm wrong. I hope I'm wrong. But I think over the next five year period, I think we'll see the departure of Warren Buffett from the stage. Okay. I think Buffett is setting up Berkshire for the next leg of Berkshire's growth and Berkshire's history without Buffett at the helm. And I think the giant cash balance, yes, if a market crash comes and yeah, he's supremely positioned, but I don't think that's why he's done it. I think he's doing it to set up for his successors. And I tend to revert to the Peter lynch, which I'm going to mangle the quote, but hopefully you'll bear with me. It's more money has been lost preparing for the next crash than is actually lost in the next crash. And I think Warren E. Buffett is probably supremely aware of the futility of that comment. And I think people who are predicting it are kind of, they're adding two and two and getting six, if you catch my meaning. You know, I think they're going a little bit too far. I think it's fine just to say he's loading the elephant gun in case maybe. But really he's setting up because, you know, and again, like I've, I have, it's my longest position I've owned it since the late 90s. 97 or 98. I was trying to remember when I first bought my first shares. I've never sold a share. I was hearing then, Buffett's too old. Oh, why are you buying Berkshire now? The best days are behind it. Buffett's too old. He's gonna die soon. 28 years later, here we are. I don't think we're getting another 28 years out of Uncle Warren. Again, I hope I'm wrong. I think it's Buffett looking out, as he's always done, for his legacy and for the investors who have trusted him and now their families who have trusted him with their money. And I think he's setting it up for when he departs the stage. And Greg Abel and Ajit Jain have taken over and the Ted and Todd on the investment side, that's what I think's going on. But I spend almost zero percent of my time worrying about what Buffett does. He's bought this or sold this. I own Berkshire because I'm going to let him do that and I'm going to go do something else with my time.
- [08:45]
Ricky Mulvey
So expectations for the next five years. Not worrying about it too much. This is a sleeper stock, a bedrock of one's portfolio to keep moving. It's one that I have threatened to buy the B shares. Don't get any ideas, Jim. I need to just do it at some point and when I'm allowed to. I'm talking about it now. So I can't do it in the next few days. It's pretty hard to convince me not to buy Berkshire stock in increments to hold for decades long periods. Let's talk about another American institution that has not done a whole lot for its investors over the past five years and that is Disney. If you look at the five year chart, it has returned 5% to investors over the past five years. If you want to be nice, we'll give them that dividend payment that started last year, 1%. So maybe a 6% total return for your money for sitting on your hands for five years. When you look back at this American institution, Disney and its underperformance over over five years, which is long enough to test a thesis. What do you think?
- [09:45]
Jim Gillies
I'm going to go you one better.
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Ricky Mulvey
Yeah.
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Jim Gillies
Since Bob Iger became CEO, which is October 2005, don't tell me he was out of the way during COVID because that he just set up his underling to get shot and then he came back to save the company. People can't see me doing the giant air quotes when I say save. And of course he threatens to leave every three weeks or whatever it is since he became CEO. The total return of the S&P 500 is about 610%, 620%. It's about a 20 year period. October 2005, almost 20 years. Disney's total return is 430%. So it's underperformed the market by almost 200 percentage points. I think Disney is a really, they're in a really tough spot because what more worlds are there to conquer? They own childhood between the princesses and Pixar and the Muppets and Marvel and Star wars and you know, insert other names here, but, and I don't put all of this down, I'm not the world's biggest Bob Iger fan, as you probably have already gleaned, but I think Disney's a great investment for Bob Iger, but it's not been a great investment for other people as you've laid out and as I kind of up the ante on. But it's not Iger's fault. Incomplete because the world has changed. The Internet, I was saying beforehand, the Internet has ruined entertainment because you can get everything for free if you know how. Number one, I'm not advocating piracy, but you know, the piracy rate's not zero and it's easy if you are so inclined. But you've also got. Movies have, it's almost like they've kind of taken a page from the music industry. And the music industry kind of held on desperately when CD sales were driving everything in the late 90s and you know, streaming took off and piracy took off and basically, you know, now you've got the Spotify's or the Apple music's of the world. But like artists have made, you know, artists make almost nothing now unless you're a megastar. And that's kind of what's happened to entertainment as well. And so you know, you're, you're kind of, you're scared to go out and do something new and you're, you know, and take, take risks on unproven stories because movies are expensive, they maybe don't have to be. Studio A24 could maybe give you some lessons on that. But, but what's happened is now like movie studios, by and large, to make their money, they're relying on sequels, spinoffs and remakes. And the problem becomes, is that in order to do these, inevitably they have these giant budgets. I'll give you a couple Snow White is currently out there. You know, there are some problems with that movie. The other one I always like to talk about is Indiana Jones and the Dial of Destiny, which was the fifth Indiana Jones movie. And I know, I know for the people out there listening and saying there are only three Indiana Jones movies, yes, you're correct. But there apparently was a fifth Indiana Jones movie called Dial of Destiny. And you know, the production budgets run super long and super. And they get super bloated. Then you have your advertising budget, which is only about 50% of the production budget, maybe a little bit more, maybe a little bit less. Then you don't get the full box office. You only get about 60%. Disney would get about 60% of the domestic box office, maybe 20 to 40% of rest of the world box office. So in a case like Indiana Jones and Dial of Destiny, because that's a movie that's largely done, you know, their production budget was somewhere between 300 and $380 million. That infers an advertising budget in the 170 million range. So your profitability hurdles like about 5, 10, $500 million. The box office was 384 million, which means that Disney's rake from that was under 200 million. They made about $11 million in domestic Blu Ray sales because Blu Rays are gone, essentially. Physical media sales are basically gone. And so Disney took a bath on that. What does that matter with we talk about Snow White. Well, Snow White is now, you know, it's the live action remake of a beloved film. Just like Indiana Jones, the Dial of Destiny is a live action or it's a new take on a beloved action hero. I would argue they shouldn't have done, but you know, the production budget for this iteration of Snow whites in the 240 to 270 million range. By the way, Disney has a habit of underreporting their costs. See the acolyte for which they did for their streaming service, Disney plus advertising budget, you know, 240 to 270 million. Let's say they did about 20 $130 million. Your profitability hurdles somewhere in the 360 to $400 million range, which means you need about 750 to 770 million to break even. First weekend they did $86 million around the entire world. And box office typically falls 40 to 50% the second week. So the chances of Snow White breaking even, frankly, I think are probably low. And you now don't have the kicker of getting the, you know, you don't get the kicker of DVD sales or you could. You could, could run a, you can have a business or you could have a movie that was. That lost money, but you'd make it up on DVD sales. You don't have that anymore. Sorry. Disney streaming doesn't cut it. And this is just Disney's problem. This is all of the streamers. And I've been saying for years, streaming is a race to the bottom in the entertainment industry. I think there's one company that's figured it out and that's Netflix. But frankly, the quality of what Netflix puts out, frankly, isn't that great. But then you go look at another company. So Apple. I will argue vehemently that Apple TV plus is producing some of the best content in the world right now. Okay. We've all heard about Ted Lasso. It was a fun show. Severance is excellent. Slow Horses is excellent. For all Mankind is very good. But it came out last week that Apple has lost a billion dollars on this. Right. And they've got a bunch of got shrinking with Harrison Ford and Jason Siegel. They've got Mythic Quest, which is one of the guys from Always Study in Philadelphia. It's his other show. Like they've done a really good job of presenting a lot of show, but they're blowing a billion dollars a year now. The only reason they can do that is because they're Apple and they, you know. A billion dollars is what you'd find in Tim Cook's couch. How long can you do it?
- [16:01]
Ricky Mulvey
You like following a lot of weird companies, companies that people don't talk about? No, that's. That's where you often find value as an individual investor is the small caps that other people aren't talking.
- [16:11]
Jim Gillies
I'm mildly insulted, but okay.
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Ricky Mulvey
Are there any surprising out performers, underperformers over the past five years that you want to highlight as we close out the show here?
- [16:20]
Jim Gillies
Sure. I'll give you one that I really like. I own it and I've recommended it. So, you know, I'm not without bias here. We've talked about it before. Contour Brands, the parent company of Lee and Wrangler jeans and in the process of buying the Helly Hansen outdoor wear brand from Canadian Tire. That company has roughly since IT bottomed in 2020 when they cut their dividend to zero temporarily and management went up on the mountaintop and basically proclaimed, it's coming back, it' coming back. We're bringing the dividend back. Don't you worry. Didn't matter. Stock went from $45 to, I think it bottomed to 12 today. It's a, I think it's a $65 company. The interesting thing about that is about a month or so ago it was a $90 company. Why is it $65 now? And it actually dipped below $60? And it was very interesting to me because one of the things that happened was they Pre announced their Q4 numbers and the market said yay. And then a couple weeks later they were doing an investor conference. They had to do it. They had to pre announce some stuff. And then when the actual numbers came out a couple weeks later, the market said, boo. Same numbers, completely different reaction as well. They are making that acquisition of Helly Hansen, which some people are, I guess, a little worried about. I think it's a great move. It's a great brand. And the current owner, Canadian Tire, which owns a bunch of retail stores in Canada, they've signed a deal with K and Tire to continue offering it. So you're not going to lose Canadian sales. You know, it's reasonably priced. This is a company that can very easily do 300 to $400 million in free cash flow a year without breaking a sweat. They've generally been very good at allocating their capital. There's a lot to like there and it's 1/3 cheaper than it was a month ago. And to me, oh, and again, again, it's the parent company of Lee and Wrangler jeans. And over five years it's a five bagger before dividends, which are large. If you bought back at 12 or 15 at the bottom when the dividend come back, I think you're making now, and the dividend came back In December of 2020, management followed through on their promise to bring it back as fast as possible. If you bought back when everything looked terrible and you know everyone's upset, not only have you made five times your money, but you, you're now getting a yield on your cost basis, I think 12% range, which, you know, sounds good to me.
- [18:39]
Ricky Mulvey
We literally have to end it there. Jim Gillies, appreciate you being here. Thank you for your time at Greensight.
- [18:43]
Jim Gillies
Thank you. Spring starts with savings at the Home Depot. So if you're working on getting your yard spring ready, you'll need the right tools to get it done. Like the Ryobi one 18 volt cordless string trimmer now only $129. Or the Ryobi one 18 volt cordess blower also for only $129. Save on cordless power during spring starts Event at the Home Depot now through April 2nd.
- [19:22]
Ricky Mulvey
Have you ever taken a financial health day? Robert Brokamp and Allison Southwick discuss how it works and why it could be worth your time.
- [19:37]
Robert Brokamp
Ah, spring is here. It's the perfect time to throw open the windows, both figurative and literal, and emerge from the funk of winter. The light starts to shine brightly on the things we've perhaps neglected, like, oh, say, wiping down your baseboards mentally. It's also a great time to clear some cobwebs because there are probably some dusty corners of your financial life that you've managed to avoid. But not any longer, because you, dear listener, are going to get stuff done with a financial health day.
- [20:08]
Allison Southwick
Yeah, we at the Motley fool believe so much in having a financial health day that we've been doing it in our office and then virtually for 15 years. And it all began back in 2010 when the fool was having what I guess you would call a regular, like, physical health day. Had classes, we did workouts together, nurses would come and take vitals and give flu shots, things like that. And the idea of having a financial health day sprang from two events. One was that a visiting CEO gave a talk to a gathering of fools and said that every employee at his company gets a financial plan based on the belief that a financially secure workforce is a more productive and dedicated workforce. And around the same time, Ron Lieber of the New York Times wrote about having his own financial health day. And this was on the heels of the Great Recession. The New York Times had temporarily furloughed some employees. Ron was one. So he decided to make the most of that time by doing things like writing his will, opening a higher yielding savings account, submitting flexible spending receipts, stuff like that. And he figured that his financial health day saved his family $2,000. And that was back in $2010. So, you know, today there'd be almost $3,000. So we at the fool began holding our own financial help days that featured classes from internal and external experts, opportunities to meet one on one with experts and the Fool's HR team. And we threw in some, like, goofy little contests and raffles to add in some fun. But the main benefit was that employees were encouraged to use company time to tackle personal financial tasks. And, you know, while you may not have an employer like the Motley fool, you can do what Ron Lieber did. Clear your calendar and focus on getting financial stuff done.
- [21:38]
Robert Brokamp
You might be thinking, why would I blow a whole day on doing pesky financial stuff? Well, because as with most smart money decisions, future you. Well, thank you.
- [21:49]
Allison Southwick
Yeah, for our financial health Events. At the fool, we give employees a checklist of more than 40 things to consider getting done, broken into various categories such as investments, retirement, cash management, insurance, estate planning, employee benefits, other things like that. And I can assure you anyone who accomplished 5 to 7 to 10 of those tasks is going to be a much wealthier person in the future. So to illustrate the possibilities, I'm going to highlight some of the things that actual Fools have accomplished during any of our financial health events. And I'm just going to sort of estimate how much that could pay off over a year and over 10 years. So let's say someone had $25,000 emergency fund, they were just holding it in their 0% checking account and they move it to a 4% high yield savings account. Well, after one year they've increased their net worth by $1,000. After 10 years, it's more than $12,000. What if someone analyzed their budget, found ways to save $100 per month, and they use that $100 instead to invest it and earn 8% a year? Well, after a year you're going to have more than $1,200. After 10 years, you're going to have more than $18,000. What if you found a way to look at your budget and say, you know what, I can boost my 401k contribution rate by 1%. If your household income is $150,000, you get 3% annual raises and those investments also earn 8%. After a year you're going to have more than $1,500. After 10 years, almost $26,000. And then finally, what if you have an old 401k from an old employer sitting in that 401. Maybe it has some fees associated maybe with sort of mediocre investments. You instead roll that over to an IRA and you reduce your expenses and or increase your returns by just 0.5% annually. After a year you have more than $1,000. After 10 years it's almost $20,000. So you could see how just making a few changes on your financial health day could boost your net worth by literally tens of thousands of dollars.
- [23:46]
Robert Brokamp
But the benefits aren't just financial, they're also mental.
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Allison Southwick
In his article about financial health day, Ron Lieber wrote, quote, to be a modern American consumer is to be plagued by a never ending guilt inducing stream of undone tasks. Knocking these things off can get rid of that low grade anxiety that results from the under optimization of your financial life. End of quote. And I think most of us can relate, right? Right now, I suspect There is some undone financial task that is just nagging at you, eating at you, something that you know you should take care of, but you just haven't had the time. Your financial health day is your time to finally get it done, along with maybe a few other things, and I can guarantee that you're going to feel much better at the end of the day.
- [24:27]
Robert Brokamp
All right, hopefully everyone listening is convinced like, yes, I am now going to have my own financial health day. Bro, you convinced me. But now how? Like what? What are the Some of the best practices for making the most of your financial health day.
- [24:41]
Allison Southwick
But I think it would certainly help to have some pre planning and prioritization beforehand so that you could hit the ground running. So maybe spend an hour or so before your actual financial health day creating a ranked to do list so that the entire day can be spent getting stuff done. And you can just start by asking yourself, what few things can I do that will boost my net worth the most over the next one to 10 to 20 years? That said, not everything you need to accomplish can be assigned a dollar figure, right? Some of the most important things are more, I guess you'd say, defensive in nature. Such things like freezing your credit, getting enough life insurance, getting or updating your estate plan, and encouraging your relatives to do the same. So keep that in mind as you consider what to accomplish. Doing this during a weekday, I think can be important because many of these tasks require interacting with people who work nine to five jobs. You know, such as insurance agents, financial planners, attorneys, maybe the HR team at your office. But even doing it on a Saturday or Sunday is going to really pay off. If you're married, it will be helpful to do this together so that you can each get each other's input and you'll reduce the number of times you can't cross something off your to do list because you need something from your spouse. And then finally, just do everything you can to remove any distractions. Clear your calendar, silence your phone, turn off social media, drop the kids off with friends or relatives, and spend the day maximizing your money.
- [26:02]
Robert Brokamp
Ro, you've been touting the benefits of a financial health day for over a decade now. Has anything changed in your advice to people?
- [26:09]
Allison Southwick
I'll start by saying that what began as Financial Health Day at the fool is now Financial Health Week, which we did just a month ago. We just realized, frankly, that we're trying to do too much in a single day with all our classes and our events and our 40 plus item checklist. And if you do your own financial health Day. You may feel the same way, right? You'll feel very good about everything that you accomplished, but you may as well feel like there's plenty more to get done. So the best practice for many people might be to have a financial health day once a month, at least for a while, and then maybe once a quarter as sort of a maintenance financial health day. As the saying goes, every journey starts with a single step. So start with a single financial health day and I guarantee it'll make you richer and make you feel better.
- [26:57]
Ricky Mulvey
As always, people on the program may have interest in the stocks they talk about, and the Motley fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley fool editorial standards and are not approved by advertisers. The Motley fool only picks products that it would personally recommend to friends like you. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.