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The Investor's Podcast (We Study Billionaires) - The Investor’s Podcast Network
RWH057: Celebrating Warren Buffett w/ Joel Greenblatt, Nick Sleep, Tom Russo, Christopher Bloomstran & Chris Davis
01:52:33
In this special celebratory episode, William Green spotlights some of the most important lessons from the greatest investor of all time: Warren Buffett.
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- [00:01]
William Green
You're listening to tip.
- [00:03]
Warren Buffett
Hi, folks. Welcome back to the Richer, Wiser, Happier podcast. I'm thrilled to be here with you again today for a special celebratory episode that I hadn't planned at all, but that I decided to record because something really, truly historic has happened, as I'm sure you know by now. A few days ago, on May 3rd, Warren Buffett made a massive announcement at the end of his annual shareholder meeting in Omaha. After six decades as CEO of Berkshire Hathaway, he declared that the time has arrived for Greg Abell to become the CEO of Berkshire at the end of this year. It's hard to overstate the importance of this milestone because it marks the end of an era in the spectacular story of this legendary investor, business leader and role model. The scale of Buffett's achievements is astounding. Over the last 60 years, he's built Berkshire Hathaway into a behemoth with a market value of about $1.2 trillion, with almost 400,000 employees, with huge stakes in companies like Apple and American Express and Coca Cola, not to mention insurance operations, energy, railroads, and consumer businesses like Dairy Queen and Duracell and Benjamin Moore and Fruit of the Loom. Oh, yeah, he's also sitting on almost $350 billion in cash. Since Buffett took control of Berkshire Hathaway back in 1965, he's racked up an average return of 19.9% a year versus 10.4% a year for the S&P 500. According to Berkshire Hathaway's latest annual report, Berkshire's stock price has risen by 5,502,284% since 1965. That means Berkshire's stock has outperformed the S and P by more than 5.46 million percentage points. So much for markets being so efficient that it's impossible to outperform them. The scale of Buffett's outperformance has been staggering. But as we'll discuss, it's not just the enormity of his victory that matters. It's the manner in which he's done it with so much honor and integrity and decency. Buffett has been obsessed with the stock market, really, since 1942, when he bought his first stock at the age of 11. So the fact that he's now passing the torch to Greg Abel is really kind of epochal. I was in Omaha for the shareholder meeting and wanted to take the opportunity to share some thoughts and insights of my own in this episode celebrating Buffett and highlighting what makes him such a gift to all of us who are passionate about investing? I'll also be drawing very heavily on interviews that I've done over the years with an array of legendary investors who know Buffett well, have studied him deeply and have been profoundly influenced by him. That includes Joel Greenblatt, Christopher Bloomstran, Chris Davis, Nick Sleep and Chuck Akrayo. I'll play you various clips from some previous episodes of the podcast in which we've discussed Buffett in depth, and I'll add a few comments of my own. The goal here isn't just to honour Buffett and to celebrate him. It's actually to spotlight some very powerful lessons about investing, business and life that I think we need to try to learn from him and truly internalize, because they have the potential to deeply enrich and possibly even change your life. Because in the end, Buffett isn't just the greatest investor of all time. Along with Charlie Munger, he's also the greatest teacher that the investment world has ever seen. So here goes. You're listening to the Richer, Wiser, Happier podcast where your host William Green interviews the world's greatest investors and explores how to win in markets and life. I wanted to start by sharing a few personal observations and impressions about the actual experience of being at Berkshire's annual shareholder meeting. I've gone a slew of times over the last decade or so and it's always an amazing experience, but I have to say this one was the most joyful and the best one I've ever been to, and I don't think I'm alone. I got a message from Guy Spier this morning. My old friend sent me a video message and he mentioned that it was probably his best one that he's ever been to, and he's been coming for well over 20 years. It's hard to explain why it's such a special experience and why tens of thousands of us make this pilgrimage each year from around the world to hear Warren speak, especially when we could just live stream it online from the comfort of our homes. And there's something kind of crazy about the whole experience. I lined up, I think at 5:30 in the morning on Saturday to get into this enormous kind of sports auditorium so that I could get a good seat. I still ended up with a pretty mediocre seat way back in the auditorium, but it's very joyful. Even the lining up is really joyful. You're surrounded by all these friends and strangers who are kind of high, who've come from around the world to see him. And it's also, it's not just the annual meeting on the Saturday. There's this whole array of events around that main event. So I think I was in Omaha for three and a half days, something like that. And there are tons of dinners and breakfasts and the like with friends and strangers and the ritualizer happier masterclass group that I set up a few months back, about 18 of them came from something like six different countries. So you're just surrounded by friends and new friends, old friends and the like. And part of the joy of it is actually the walking around and just stumbling into people unexpectedly and having these amazing conversations. So, for example, there was one amazing moment where I'm just going back to my room and I run into Chris Davis, a legendary investor who's on the board of Berkshire, in the hallway, and we end up stopping and chatting for 10, 15 minutes, and Chris is literally on his way an hour or so later to the Berkshire Hathaway board meeting, where they're going to ratify Warren's decision to anoint Greg Abel as his successor. And similarly, you'll just sort of wander down to breakfast and you'll be like, oh, there's my friend Francois Rochon, and there's Chuck Acre sitting with him and Peter Keefe, these amazing investors. And so you go sit and have breakfast with them and with my friend Saurabh Madan, for example. Or you run into Bob Roboti, another great investor who's been a guest on the podcast just at the Markel brunch on the Sunday. And so you end up getting to chat to him about what he thinks of the new era Berkshire. So some of it is just this sense that you're in this amazing ecosystem where you're running into old friends and new who are all kind of cut from the same cloth and have similar values. And then there are these extraordinary kind of random sightings of remarkable people that you've never met before. So it's a little bit like being at a kind of rock concert, but it's the capitalist equivalent and seeing all these celebrities near and far. So there was one moment, for example, where I was in the elevator with my son Henry, and this kind of slightly sweaty guy in his gym clothes gets in, and he's wearing headphones and he says hi. And he seems very nice, very pleasant guy. And afterwards I realized, oh, that was Ken Chenault, who was chairman and CEO of American Express for something like 17 years, and who replaced Bill Gates, I think, on the board of Berkshire about five years ago. Another time, I was coming out of the elevator in the lobby of my hotel, and a guy gets in and says sort of quietly, hey, how are you doing? And he had a couple of guys with him who I assume, in retrospect, were bodyguards. And I realized as I got out, I was like, wait a second, that was Greg Abel. And it all kind of felt like a bit of a dream. It's kind of like a hallucination. And you're like, I'm 99% sure that was Greg Abel, but he was so kind of understated and quiet that you almost sort of questioned yourself. And so it's just like this three or four day, I would say, celebration of all that's best and healthiest about capitalism. And it's just an amazing experience to be in this ecosystem. But then I would say, beyond that, there's this aspect of it that's an incredible learning experience. And so I wanted to highlight a couple of the most important takeaways that really stuck out for me. And I just sit there in the meeting during the Q and A session, just taking these very copious notes on my phone, in the notes section on my phone. They're not 100% reliable, but they're pretty close. And I haven't checked them against the transcript. But I think there are a couple of things that are really, that, for me at least, were really important takeaways. And hopefully we'll get to more of them later. The first one related to the announcement itself by Warren that Greg was going to take over as CEO. And he said, Greg didn't know anything about this until he was hearing about it right now. And I asked Chris Davis about this later. I said, was it a surprise, the rest of you? And he's like, yeah, yeah, we didn't know, and Greg didn't know. I mean, obviously the two people on the board who are Warren's children knew, as Warren said, but it was a surprise to everyone else. I mean, not. Not a total surprise. There were enough clues about Warren's age and health and the like that made people think, well, yeah, maybe it's coming to. To the end. But he was sharing the news with us as shareholders in the firm. And I've been a shareholder for quite a while, but not nearly as long as I wish I'd been. He was sharing the news with us in a way where he treated us as partners. He told us at the same time as everybody else, there isn't a sense that there are these insiders who get special access to information and Then there are the outsiders who get kind of screwed and left in the dark. And he said something very similar at some point when he revealed during the Q and A session the earnings, the latest earnings release for the company. He said, we like to release it on a Saturday so nobody gets a jump on anyone else. So there's this wonderful sense of alignment, I think, of his interests and the shareholders interests. And it was very striking to me as well, when he was making the announcement about Greg, that he said, I have no intention of selling one share of Berkshire Hathaway. And then he said it's an economic decision to keep every share. He said the company will do better under Greg. And so there's this sense that Buffett is all in, that he has all of his assets, that his interests are totally aligned with yours. And then he said that he's going to hang around. We now know that he's going to remain as chairman and it seems very likely that he'll be on the stage next year along with Greg at the annual meeting. And he said I would hang around and conceivably be helpful in a few cases. And so you mentioned that he's basically there to be helpful if we run into periods of great opportunity. And what's kind of remarkable is there's a sense that it's a great relief that this 94 year old guy could step in decisively in moments of crisis if, say, the market gets crushed. And I think it's a measure of the brilliance of this guy and of his colossal stature that we actually welcome him being there on tap to come in. It's a reassurance rather than, oh my God, you better humor this, this old guy who doesn't realize he's in his dotage. And partly, I guess it reflects the fact that this is a guy who made over $100 billion profit on Apple in the last few years. I mean, it's clear that his voice is much raspier in the past. Like he doesn't have the physical strength that he had in the past. And I suspect that he's not quite as sharp as he's been in the past, but he's so much sharper than the rest of us that, you know, it's still reassuring to have him around. The other thing that was really striking to me throughout the Q and A session was the quality of his character. And he just exudes goodwill and generosity of spirit. And you saw it throughout. You see it at the very start when he's thanking people like Ron Olson, who's A old friend of his has been on the board or praising Apple CEO Tim Cook, or talking about a woman none of us have heard of, who's written a 50th anniversary book about Berkshire Hathaway. And he repeats it a couple of times, saying, I couldn't get her to take a penny for it. And you see it also in the way that he answers questions, particularly from young people. I think I counted three different occasions where a young person answered a question and he just immediately said, that's a good question. And there's a kindness and a care to it, a desire to nurture the young and to lift people up. That's really lovely. But then you see it also actually with people who are in real positions of power. So Ajit Jain, for example, who he's always lauded massively, who's been in charge of the insurance operations at Berkshire for many, many years. There was a moment when someone asked a question about AI and Warren asked Ajit to answer. And he said, look, ajit's got about 100 points of IQ on me, so I'll let him answer. And then after Ajit answered, he said, I wouldn't trade everything that develops in AI in the next 10 years for Ajit. And he said, I'm not kidding about that. So there's really this desire to lift people up, to give them his blessing, to be generous, spirited, to be kind. He's quite often critical and caustic, but always by category. And he always praises by name individually. And this is something he's done for many years, very consciously. It's also really striking, the kind of humility and the self deprecating humor that you hear throughout. There was a wonderful moment where he was talking about how lucky he was that he found a passion that really suited him very early in life. And he said, if my ambition had been to become a ventriloquist, it wouldn't have worked. And he said, I could have spent 10,000 hours at Tap dancing and you'd throw up when you watched me. I loved a moment where he dispensed some advice to one of the young people in the audience. And then he said, I've already told you more than I know, so we'll move on. So always this kind of self deprecating humor. No arrogance about him. Then there's another takeaway that I really wanted to emphasize, which is a really important investing lesson, which is the importance of focusing on our best ideas. And Warren said at one point during the Q and A that Charlie and he would often talk about the fact that as he put it, we made most of our money off eight or nine ideas over 50 years. And he said every now and then you get extraordinary ideas and most of the time you don't have an edge. And this gets at a really important point that I think has been key to the success of Warren and Charlie, which is this combination of extreme selectivity, extreme patience, and this willingness to grab opportunities with what Charlie would always call gumption when they come along. And as Warren made very clear, he said things don't come along in an orderly fashion and they never will. And so he talked about how over the course of 80 years as an investor, that's probably 16,000 trading days. He said, so he said it'd be nice if you got four equally attractive opportunities a day, but we're running a business that's very, very opportunistic. And he said that Charlie always thought that he, Warren, did too many things. And he said the key was five things in a lifetime and to be more concentrated. So in other words, the goal is not to be super diversified or to do lots of different things. The goal is actually to be incredibly patient and wait for unbelievable opportunities. And he said, look, we have roughly $40 billion coming in a year. And we have, I think he said it was 335 billion in cash. And so he said things get extraordinarily attractive very occasionally. And so he's waiting for those opportunities. And he said that's part of what makes it fun, basically, that it's this combination of patience and then this willingness to act in an afternoon when you get that occasional call where something happens and you can take advantage of a huge opportunity. And I had a very interesting dinner that my friend Christopher Tsai, who's been a great guest on the podcast before host, did, where I was lucky enough to be sitting next to Peter Keefe and Chuck Akray. And Chuck, who I wrote about in my book Richer, Wiser, Happier, is an extraordinary investor, one of the great long term investors. And as we were leaving the restaurant, I said to Chuck, how many decisions in the course of your 54 or I think 55 year investment career really made all of the difference? And he said four, maybe five. And he listed them and they were things like Berkshire and American Tower and International Speedway and Markel, these stocks that he made a fortune on. I think, as he told it to me, he had first bought Berkshire in the 1970s, back when it was less than $200 a share. So it's really interesting, this idea that in a world where most of us are getting a lot of dopamine hits and doing a lot of things all the time quickly, and our energy and our attention is very scattered. You see these great investors like Buffett, like Munger, like Chuck Acre, being much more slow moving, much more selective, and much more decisive in the rare moments where something extraordinary comes up. And Mohnish Pabrai made a very similar point when he talked at the Valuex BRK conference that Guy Spier hosted. And Mohnish talked about how every three months or so, he would go for a meal at Charlie's house, and Charlie would always talk about the four buckets in which he had invested. So he would always talk for 20 or 30 minutes about Costco, and he'd say, look, we have Berkshire Hathaway, we have Costco, we have a portfolio of Chinese companies that Li Lu has picked, and then we have apartment houses because he had a big investment in property. So Mohnish made the point that basically what Charlie was doing was running through this inventory of the four buckets that he had that were tried and true and very resilient. And Mohnish said, we won't find too many great things in life, so we should hold onto them when we find them. And one of the things that was kind of a revelation to me, maybe just part of the slow learners club, was that this doesn't just apply to investing, it applies in many other areas of life. And so during the Q and A session, Buffett was talking about relationships, and he talked about how he'd been associated with someone like Sandy Gottesman, who is a great friend of his and a great investor and was on the board since, I think, 1963, and that he'd been friends for decades with great businessmen like Tom Murphy, and that he'd. Obviously, he kept quoting Charlie Munger, who, if I remember rightly, Warren met when he was 28 and Charlie was 34. So this was an incredible friendship that endured for nearly seven decades. And Warren said, you get a few breaks in life with people you meet. When you get them, you treasure them. And he talked about how we've held onto the human assets. And he kept repeating things like this throughout the meeting. He said at one point, he said, make the most of the people you meet that are going to make you a better person and probably discard the rest. And so there's this idea of when you find people who are really special, just keep them in your life. Keep investing in those relationships. And I just thought there was an interesting parallel between this habit that Warren and Charlie have had for decades of finding something special in the business world or the investment world and grabbing it and then holding onto it for decades. But also that it really applies to friendships, to relationships, to the relationships with the people you work with who are fantastically high quality and with the people who you are close to in your personal life. And I think this is one of the reasons why we go to Omaha year after year is that we run into old friends and new who are really precious. And for me, part of the great joy was running into people like Guy Spier and Saurabh Madan and Chris Versailles and Chris Begg, who I interviewed at Valuex brk and members of the Rich, wiser, Happier Masterclass. But also, above all, I think what made it really joyful was taking my son Henry with me. And it sounds kind of crazy because I was sharing a room in my beautiful hotel with my 27 year old son, but I think it's a real reminder that it's the relationships that count. And it was funny, there was a moment where I asked Christopher Tsai what had been the highlight for him of the weekend, and he said it was showing his daughter around his teenage daughter. And I feel the same way. I think it all ultimately comes down to relationships. And so much as the whole Berkshire weekend is an incredible investment experience and you're learning about business and investing, the real secret of it is, is the relationships you're forming, the relationships you're nurturing, the fact that you're learning, the fact that you are reaffirming your vows to the kind of wisdom and the way of investing that Warren and Charlie have espoused for all of these years and to the values, the sense of goodwill and the kindness that Warren embodies. And I have to say I think that that kindness and goodwill is contagious. And it felt to me like people were kind of high. It was a really interesting experience. When I went to the brunch, the Markel brunch on the Sunday that Tom Gaynor hosts, people were so joyful. And I think that's a direct result of having been in the orbit of Warren, when he's just full of goodwill and full of kindness and full of generosity, of spirit, and it sort of makes you want to be a better person and you see it in everyone's behavior. So it sounds sentimental, but I think it's actually true. Now that I've shared some random personal thoughts, I want to switch focus and turn to a few interviews that I've done in the past with some great investors who are brilliant observers of Warren Buffett. The first clip I'm going to play you is an excerpt from an interview that I did with with Joel Greenblatt on this podcast three years ago. As you probably know, Joel is one of the most successful hedge fund managers in history. He founded an investment firm called Gotham capital back in 1989 and then proceeded to generate a return of 40% a year over the next two decades. So it's remarkable to hear about the profound influence that Buffett had on him. Let's listen. We talked a bit about your first great mousetrap, this idea of having a concentrated portfolio of special situations, unfair bets, things that were one foot hurdles that other people weren't looking at. And it struck me in some ways that the second great mousetrap, if I'm thinking about this correctly, was when you started to shift towards better businesses, at least as part of your portfolio, which I think that evolution happened around 2000 when you reverse engineered what Buffett had done with Coca Cola and said, well, wait a second, maybe I can do the same thing with Moody's. And I wondered if you could talk a bit about that evolution and what you learned from Buffett about what makes a company great. What made you start to think, maybe actually, instead of just buying these ultra cheap companies, maybe there's another way to play this game that is also really effective? Right?
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Joel Greenblatt
So just to change that, even reading enough Buffet and following everything he does, really, even before 1990, I would say I wanted to buy good businesses. I was just cheap, but I wanted everything. And one of the reasons that I downsized my business after five years and then gave back all the outside capital is because I wanted to own both cheap and good. And it's too bad if I can't find that much of this. I'm just going to give back money and just stay in cheap and good. I didn't understand good. And I think you properly bring up, well, when could I pay? What in my mind was a lot of money or fair value for something in a good business, and that's what you're bringing up. Moody's was one of the first that I was willing to pay over 20 times earnings for at that time was a lot because interest rates were much, much higher. It was one of the best businesses out there because it took no capital and they had a brand and a franchise and there were only a few people in the. There were a lot of good things about Moody's. I actually love the business, went back and reverse engineered, as you suggested, Buffett's purchase of Coca Cola, I believe that was in 1990 or so, or whatever it was, went back to look at what he paid and made adjustments for the differences in the businesses. For instance, Coke had to reinvest some of its money to grow, and Moody's really didn't. So you got to keep more of your earnings in Moody's. So I was willing to pay a little more and made an adjustment for that. Just sort of went to see, what am I actually paying for Moody's today relative to what Buffett paid for Coke, where he kind of quadrupled his money in the next five or eight years, whatever it was. And I thought any percentage of that would be pretty good for me, especially if I thought this was that kind of business. It turned out that if you want to put apples to apples, he paid $10 for Coke. When I made all the adjustments, we were paying $13 for Moody's on this equivalent basis. But if the $10 was going to quadruple, 13 going to 40 was also pretty good, as opposed to 10 going to 40, and thought that that was a reasonable premium quality businesses that you can buy anywhere close to what you think they might be worth buying. And so just comparing things, it was such a great model to use to get me into paying up for great, great businesses.
- [27:03]
Warren Buffett
So in a sense, it's a beautiful example of cloning at work. The strategy I talk about in my book from Mohnish Pabrai, where you really reverse engineer what someone who's smarter, wiser, or more experienced has figured out, and you say, ah, I don't need to reinvent the wheel. That's what they were thinking.
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Joel Greenblatt
Yeah, I think sometimes original thinking is overrated. I'd rather think one of the smartest guys in the world who's been the most successful at my area, and if I can copy, that seems like a reasonable thing to do. And so I agree with you.
- [27:32]
Warren Buffett
You were in some sense studying Buffett from afar for many years. But I think I'm right in saying that you didn't meet him until much later, when you went to visit him with a class that you were teaching at Columbia. And I was wondering if you could talk a little bit about that experience and what you learned from actually being in the presence of the master that you couldn't necessarily learn just from reading books about him or reading his annual shareholder letter.
- [27:56]
Joel Greenblatt
Well, I'll tell you, I learned about myself that I'm incredibly shy because I had been looking forward to this For a long time. And so I was a little more reserved than I wanted to be at that time. Meeting my idol in my business and in many ways the way he leads his life and what I took away from meeting with him. And he took us all out to lunch and we had a great question and answer session. And I think plenty of people have seen him do this on film in some way, but actually having it done in person, just with my class just taking us all out. He handed me his fat wallet and I got a good picture with him. And I would just say that I was stunned at how gracious he was, someone this successful, how much time and kindness and graciousness he had with the whole class that he had with me, that he really enjoyed it. And that's most of what I. I don't know if there's a lesson in there, but I guess the lesson I got was, wow, this is one of the most successful, admired people in the world. And he's still so humble and gracious. That's incredible. And more than most people you meet who have nowhere near his level of accomplishment and contributing back to society and everything else. And yet he was able to be so humble, gracious and sharing the word role model is what comes to mind. Wow, it was great to see it in real life and that I wasn't an amazing person. And if you just do ordinary things like be humble and gracious, it goes a long way. And that's what I walked away with, just he incredible human being. And I admired him even more after I left, which was hard to do.
- [29:33]
Warren Buffett
And do you think seeing that up close has had an enduring effect on you? Has it made you want to be more like that? Because I think there's something about seeing the behavior model that's hugely powerful. I remember having a similar experience where I went to interview Charlie Munger in Los Angeles and I went to the Daily Journal meeting. And I remember afterwards I'd interviewed him before the meeting. And then he does something like two hours of question and answers. And then these groupies, these disciples kind of hang out for another couple hours and he just keeps answering questions. And I look at the kindness of this 90 something year old guy who just keeps answering questions. And he always had this reputation for being very gruff and brusque and not suffering fools. I thought, God, actually there's a deep kindness here in treating these weirdos like me who've come 3,000 miles to see him. And that actually I remember that more than anything that he said. I think at that meeting it was actually seeing this kind of physically ailing old man treating his disciples with. I was embarrassed to say this in the book and so I didn't actually say it was love, but it actually was. There was a real kind of generosity of spirit and kindness and love to it.
- [30:42]
Joel Greenblatt
I walked away feeling the same way about Warren Buffett. Obviously they've been together for a long time and there's a reason for it. I guess it's also more unique. I mean, like I said, I know many people less accomplished, pretty much anyone I know other than those I truly love in my family. But if we're just talking about the outside world, I know many people who are less accomplished, very accomplished, but less accomplished who don't have those qualities. I think about it a lot. I would hope that I at times remember to what an impact it had on me and to the extent that I can emulate any piece of that, of course it's something that I would aspire to do. But I think these are two extraordinary men and thank God for that. What role models for me and so many of other people they've been. And that's a nice thing to say about somebody.
- [31:31]
Warren Buffett
I remember Nick Sleep once saying to me in the middle of an interview, he's like, yeah, we're just lucky to be in the same generation as them, to be alive at the same time. It is, it's remarkable the role model. Let's take a quick break and hear from today's sponsors.
- [31:44]
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- [34:49]
Warren Buffett
IRA all right, back to the show. This excerpt from my interview with Joel Greenblatt, I think, gets at the essence of Warren Buffet in that his teachings are not just about how to invest intelligently, but also about how to treat people decently. It's interesting to me that Joel himself is an extremely good natured, decent and generous person. So it's not surprising, maybe that he was struck by Buffett's kindness and graciousness and by how humble and sharing he was. I was also really interested by Joel's comment that original thinking is overrated. As some of you may recall, the very first chapter of Richer, Wiser, Happier is all about the power of cloning or basically replicating what a great investor like Buffett has already figured out. In that chapter, I write at some length about Mohnish Pabrai's efforts to reverse engineer what he describes as Warren Buffett's Laws of investing, which he regarded as really about as foundational as the laws of physics. And it was astounding to Mohnish that these laws were really sitting there in plain sight, and yet so few investors bothered to understand them or to live by them. I think part of Joel Greenblatt's genius is that he had this ability to reverse engineer people like Buffett and distill their teachings to their very essence. In one of my conversations with Joel, he basically said to me that Buffett had taken what Ben Graham had figured out about buying undervalued stocks. And then he said that Buffett added one little simple twist which made him one of the richest people in the world, and that is buying cheap is great, and if I can buy good businesses cheap, that's even better. So Joel then basically boiled it all down to what I would describe as the purified essence of Graham and Buffett, which is to buy good businesses at bargain prices. And later in his career, Joel came up with a systematic approach that he called the magic formula, in which he bought these cheap and good business businesses based really on two very simple crude metrics, one of which is high earnings yield, so in other words, lots of earnings relative to the price of the stock, and secondly, a high return on tangible capital, which he regarded as a good indication of quality. In any case, I think what's striking is that Buffett has had this extraordinary influence as an investor on so many of these great investors. And I've seen this again and again in my interviews with them. I remember, for example, when I interviewed Chuck Acre, how he read me this letter that he had written to Buffett back in 2005. And I dug it out the other day. I went through my old interview notes and saw this letter that Chuck had written to Warren, basically recalling how he bought his first Berkshire shares back in 1977, when he was a young stockbroker, and that he'd been to enormous number of annual meetings, then starts investing money professionally for other people in 1986. And he says in the letter, it is a fact of my life and my family and the lives of my partners, my clients as well, that our success as investors over many years is directly attributable to your willingness to talk and write about the investment process. I'm profoundly grateful. Our portfolios today are characterized by businesses which, and this is a beautiful summary of what he learned from Buffett. Our portfolios today are characterized by businesses which one, earn significantly above average returns on the owner's capital two, run by managers who are smart, honest and world class at operating their businesses and who have a history of treating public shareholders as partners, though they rarely know them and three, where opportunity exists because of the nature of the business and the skill of the manager to reinvest the excess profits to also achieve well above average rates of return on capital. And he adds that all of these stocks have been bought at either reasonable or bargain prices. So then Chuck adds in the letter, your willingness to talk about the investment process, your observations and experiences about human behavior have been invaluable in my life and I remain indebted to you. So it's a lovely summary, I think, of how this great career, Chuck Acre's one of the great investment careers, was really built in a similar way to Joel Greenblatt's on Lessons from Buffett and before him, Graham. And then one of the things that I really like is that Chuck then read me the reply from Buffett and he was so joyful reading this letter that still sort of chuffed him many years later. And so the letter said, Dear Mr. Acray, what a terrific letter to receive. It made my day. I hope you picked up a copy of poor Charlie's Almanac at the meeting. I'm glad you have learned something from me, but there is a lot more to learn from Charlie. Keep coming to the annual meetings. The next one should be the best ever. And I think that's just lovely. The fact that Chuck really saw that his whole career was built on teachings of Buffett, and Buffett sends him back this kind, thoughtful, but also self deprecating letter saying there's more to learn from Charlie. It's really lovely. And I think one of the things that's so striking to me, that occurred to me after looking through my notes from my interview with Chuck is that the lessons from Buffett are just sitting there in plain sight. If you do want to clone them, and it's not necessarily easy to clone them, you need the right talents and skills and temperament and discipline and all of those things and more. But the actual principles are laid out so generously and so clearly. You can see it in Buffett's letters, which are available for free on Berkshi Hathaway's website. You can see it in books like the Warren Buffett Way by Robert Hagstrom. And I wrote in the Notes on Sources and Additional Resources section of Richer, Wiser, Happier. This comment that I still believe is basically true. I wrote, if you truly immerse yourself in Buffett's writings on business and investing, I'm not sure you'd need to read anything else on these subjects for the rest of your life. It's all there, everything you need to know, sitting in plain view and a whole lot cheaper than an mba. And then as I was looking through my notes from Chuck Acre, I saw that he basically recommended you should just go back and read the collected letters of Warren Buffett. And he said, if you want a graduate course in investing, just take 30 years of his annual reports, for Christ's sake. You don't need anything else. So I think that's a really important lesson. This stuff isn't obscure. It's there. It's sitting in plain view. And it's up to us to do what people like Chuck Akray and Joe Greenblatt have done, which is actually to take advantage. Our next clip is from an interview that I did on this podcast with Thomas Russo, who's one of the great long term investors in global stocks. Back in 1982, when Tom was doing a joint law degree and MBA degree at Stanford, Buffett came to speak to his class. That encounter totally changed Tom's life. And his investment approach over the last four decades or so has been built on the principles that he learned from Buffett. Over the years, Tom's investment firm has made so much money in Berkshire that its stake grew to more than a billion dollars. Here's an excerpt from our conversation. A couple of really foundational principles that I think came up in that first meeting with him back around 40 years ago. I remember you describing to me, and when we talked about this a few years ago, I think when I first interviewed you, probably about seven, eight years ago, one of them is related to what you just said, that he's kind of looking out for your best interests as a shareholder, treating you as a partner. And you quoted to him saying at the time, you can't make a good deal with a bad person. And I wondered if you could talk about that because you said that I was reading one of your recent shareholder letters and you said, it's my belief that Berkshire has the least amount of agency cost of any company. I follow. And this is such an important idea and it's a piece of jargon that it's easy for us not to understand. Can you talk about that sense of treating people decently, not taking advantage of partners and reducing agency cost, which turns out to be one of the greatest risks facing all investors?
- [43:31]
Christopher Bloomstran
Yes, I completely agree on the final point there. It really is the tendency of someone to try to make another person's assets to which they're hired, to supervise and to maintain and to develop and grow. But rather than hold those truths to be fully self evident as the proper objective, they let slip in along the way. A few here for me, a few here for me. And I was thinking about it one day not that long ago, I was looking out to the neighbor's house with the outline was planted with raspberries. And this lady who was in her late 80s didn't get around very much anymore. And I stopped by and I see her and she said, I miss a lot. She said, but what I really miss are those fresh raspberries. We used to get a lot of them. And I was looking out one afternoon and her lawn crew who were charged with the task of maintaining a decent looking lawn, they came around the corner, it was out of anyone's view, and they just dropped everything and ran to that raspberry bush and just ate it clean. And therein lay her problem, which was they were still producing, but her agents decided to take them for themselves rather than to allow her to enjoy them as she once did. And it's not a corporate story, but I think conveys the principle, which is that in business you have structures where you have options plans that are based on certain criteria. And Mr. Buffett will say this is that one of the most critical jobs that they have at Berkshire is calculating appropriate compensation systems. And I recall him saying years back that he had something north of 140 different executive comp packages with his senior most teams, each one separately struck and each one commanding about three pages. Now, if you ever looked at a comp book for the public market counterpart of the book that Warren drafted in three pages, you realize it's several hundred pages long and it doesn't necessarily incent what you really want to incentivize, but it's more protective than it is collaborative. And we deal with that reality. And mostly the compensation that's used today has a substantial component that's equity linked. And so that equity link invites into the operations and the expectations and the deliberations of a company, it invites in the presence of Wall street, because if it's going to be equity linked, they will have all sorts of reasons to explain to you why if you do the following seven things, you'll hit the target, they'll make their numbers. If they make the numbers, the shares will trade up and you'll have an overweight for that particular thing. And you go from being underweight to overweight. I think I just read a quarterly results that came in last week, and it had to do with a brewer. And the brewer was committing to making some substantial investments. And in the process of doing it, it disrupted their reported profit schedule. And the Wall street voice was unanimous. They missed their numbers. You probably want to look somewhere else to play those cash because they miss their numbers. And of course, we celebrate that. Because if they miss their numbers because they're expanding and developing in a thoughtful way in the first place, we'd like to have them miss their numbers by an even broader margin. If it meant that if they're investing upfront with more vigor, and that's really the trade off, I'd say we're on the other side. On Wall street, there's a very standard parlance called cash flow conversion ratio, which is a common language and a common expectation that is often commanded. And basically it wants you to give back almost all the cash that you earn and give it back to the investors. And 100% cash flow conversion ratio is you're giving it all back. And our goal is to have it stay put in the company. We chose the company to invest in because they had the prospects with the capacity to reinvest. And not all companies do. And so the last thing we want to do with the businesses that we most esteem would be to take them out of that reinvestment model. And that's where the mischief takes place as it relates to agency costs, is that your compensation will be set largely by the stock market recognition of what Wall street allows them to think is the level which they're optimizing their responsibilities of the company. And our view of that is that they're taking a very long view and they're pouring substantial money in to building out the infrastructure that will reward people 10 years from now, but they'll do so as a result of the successful deployment of the capital into expansion. And unfortunately, when you embark upon a plan like that, it's going to weigh adversely on near term results because you will be funneling your investment spending and it will mean that you're operating at less than full capacity and there's disruption in general of trying to keep workplaces in order and all the rest of the. So when you're investing for the future, you're burdening the present. And we're perfectly comfortable with that trade off because we're interested in more gain, pain today for more gain tomorrow.
- [48:28]
Warren Buffett
So it's a totally different mindset with Warren and Charlie, right? They're paying themselves, I think $100,000 a year each. And so probably in that stack of compensation documents, they're the ones who get paid the least. And so they're making money with you, not off you, and then at the.
- [48:44]
Christopher Bloomstran
Same, and we have the right to participate.
- [48:47]
Warren Buffett
Tom Russo highlights something hugely important here, which is Buffett's refusal to operate in the standard self defeating kind of way that Wall street typically pressures businesses to adopt. For example, he's not interested in the sort of games that a company like GE notoriously played where it would manipulate its earnings to give a false impression that it was on some kind of glorious, perfectly consistent upward trajectory of growth. He was never interested either in incentivizing Berkshire's employees to do anything that would look good in the near term, but would damage the company's health in the distant future. Instead, he's been single mindedly focused on building long term value by expanding the competitive advantage, the moat of the various businesses that Berkshire owns. During the Q and A session in Omaha, Buffett was very explicit about his disdain for those sort of practices like manipulating earnings so they'll look better in the next quarter or the next year. Just to satisfy Wall street, as he put it at the agm, we don't do anything based on quarterly or annual earnings. The number will be what it is. What counts, he said, is five or 10 or 20 years from now, this kind of insistence on operating in a rational, long term manner that actually serves shareholders well is surprisingly rare. And it's clearly been an enormous competitive advantage for Berkshire. One person who's thought very deeply about this countercultural approach that Berkshire has taken over all these years is a fantastic investor named Nick Sleep. As some of you will recall, I wrote at some length in my book Richer, Wiser, Happier about Nick and his partner, Zach Case, Zach Zakaria, describing how they created this stunningly successful and very unconventional investment partnership called Nomad, which was profoundly influenced by Buffett. And there's a lot of material from my old interviews with Nick and Zach that I've actually never shared before. I didn't use it in the book because I just had so much material. So I thought that what I do now as part of this celebration of Warren, is actually read you a short unpublished section from One of my conversations with Nick, in which we talked about his admiration for Berkshire and for Buffett and for this very countercultural focus on building enduring value. Basically, Nick and Zach ended up closing their fund and returning $3.5 billion to their shareholders. And they then had virtually all of their own personal fortune, which was considerable, in three stocks which were Berkshire, Costco and Amazon, which they've held ever since. And there's something very distinctive about those three companies because they all operate in this extremely unconventional, long term way that's not designed to please Wall Street. So when I asked Nick why he still had a huge stake in Berkshire, this is what he told me. And he said, and his accent is pretty similar to mine, he said, the thing that I love about Berkshire is that I think it's a different form of capitalism. When Buffett acquires companies, he keeps the existing management and he asks the guys to run it as if they were running it for 100 years. So you behave completely differently if you're being charged with running the company for 100 years than running it for the next three years before you move on to another career choice. Everything changes when you take that orientation. And it strikes us that companies that are self electing to be part of that ecosystem are the ones that are opting out from Wall street and Citi Capitalism. So it strikes me that those companies, the Berkshire companies, will do much better over the long run compared to the average index type business. And so I love that ecosystem stance that's right up my street. So that's why we own Berkshire. Then Nick Sleep added, if you go to the Berkshire meetings, Buffett speaks endlessly about culture and the legacy and Berkshire being a museum and all these things are helping to reinforce this idea that Berkshire isn't part of everybody else's capitalism or Wall street capitalism rather. So I love the iconoclastic nature of it and I love it being a simple, down to earth approach that you and I could explain to our parents and they'll get because they know it's true. And I mean, everybody knows. You talk to anybody on the street and they all know that Wall street and the City are rubbish and a bit stupid, but they still dominate capitalism. And all that Zach and I were doing was taking a bit of common wisdom and applying it to Wall Street's opportunity set. And Buffett gave us the confidence to do what we knew was right all along. I think that's what he did. That's why he's really, really important. It was just telling you what you knew was right. And you just had to follow it through. But it's very difficult for people to do that. So I then said to Nick that it seemed to me from the start, when they first founded Nomad back and I think about 2001, that Nomad was this sort of eccentric, iconoclastic experiment to see whether what Buffett was doing was true or real, and whether it could work for him and Zach if they did this sort of anti Wall street experiment. And Nick replied, yeah, you've got it. That's exactly what it was. All the time we were trying to get as close to Buffett as we could. So if you see yourself on this continuum and you've got the worst agents you can possibly think of in fund management in one corner with big sales teams, and they couldn't give a toss about clients, and you've got Buffett being as principled as you possibly can be in the far corner. Most people are in the middle by definition, right? And what Nomad did was give us a little ship that we could sail as close to Buffett as we dared. And that's what we did. We just kept going and kept going and kept going and tried to remove all those principal agent conflicts. We could think of getting it smaller and simpler and more and more honest and then more and more transparent. And it's only looking back that you go, well, you know, who gave us the confidence to do that? Buffett. We both thought that we should be getting as close to Buffett as we possibly could, investing for the very long term and getting to the deep heart of these companies and doing it in a non Wall street type way, basically thumbing our nose at what we understood the industry was doing, and running an investment fund as if it was the only investment fund that had ever been thought of. How would you do it if you didn't know how everybody else had tackled the same problem. We were on a mission to get as close to Buffett as we possibly could. So I love this long, extended section from my notes with Nick. And you can imagine when I was writing the chapter, one of the problems I had with my book, Richer, Wiser, Happier, was that I'd done such extensive interviews with so many people, it's really hard actually to synthesize and distill and decide what to use. And so when I was going back the other day and looking at my notes from people like Nick Sleep and Chuck Acray, there's just amazing volumes of material that I haven't even begun to touch in book form. So I like giving you this little taste of what Nick said about Warren and about Berkshire, and just this sense that Warren was a huge inspiration, that Nick and Zach were not trying to optimize for assets under management. They just wanted to have great performance and they wanted to do it in an honorable way. And when they went to Berkshire Hathaway meeting for the very first time, they had this kind of epiphany where they were like, oh, this is what we want to do. So this, I think, gets at something really quite important about Warren, which is the degree to which he's inspired these extraordinary models like a Joel Greenblatt, a Thomas Russo, a Nick Sleep let's take a quick break and hear from today's sponsors.
- [56:41]
Thomas Russo
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- [60:18]
Warren Buffett
All right, back to the show. Our next clip is from Christopher Bloomstran, who runs an investment firm called Semper Augustus. Chris is famous in part for his extraordinary shareholder letters which analyze Berkshire in incredible detail. He's undoubtedly one of the most informed and perceptive observers of what makes the company so successful. Chris incidentally gave a really interesting speech@valuex brk the day before Berkshire's annual meeting and he described Buffett as a great embodiment of virtues like kindness and trustworthiness and good ethics. And Chris pointed out that you don't see these kinds of qualities that often in the world of capitalism. And as he put it, that's why we come to the shareholder meeting here at Omaha. So I couldn't agree more. In any case, I interviewed Christopher on the podcast back in 2023 and we talked in some depth about Berkshire as a model worthy of study for any investor or corporate executive for that matter, who really wants to understand how to be more disciplined and rational and intelligent about the all important art of intelligent asset allocation. So let's listen. Berkshire obviously has been an enormous part of your portfolio going back to 2000 when as you said before it had halved. And I think you bought it in February 2000, initially at about 43, 700. And here, here we, here we are, 43, 707.
- [61:50]
Greg Abel
There was $7 of commissions.
- [61:52]
Warren Buffett
Yeah, 707. Yeah. And so, I mean, you know, and, and this has grown at times to 20 or 30% of, of your client's portfolio. So it's, it's a, it's clearly a very important anchor position. And you're best known really publicly for your enormously detailed analysis of Berkshire, which you do each year in your shareholder letter. So I wanted to talk a little bit about Berkshire because it's such a, so, so associated with you and you're pretty much unrivaled in your understanding of the minutiae of the business. When you were writing about Berkshire in one of your annual reports, you said it's run by the world's most skilled and shareholder friendly management team and that it embodies how capital should work. And it is probably the best business to study if you want to learn how to invest and how to run a company morally and ethically. And I wonder if you could just talk a little bit about Berkshire as a kind of model for others. What other CEOs and investors can learn from Berkshire about things like rational asset allocation and running a company in an ethical way and looking out for shareholders, these very fundamental things that I think so much of the casino side of the investing world forgets about?
- [63:08]
Greg Abel
Well, I think Berkshire should be studied by managements. You know, rarely, rarely are companies led by great capital allocators. CEO comes out of operations in many cases, CEO comes out of finance in many cases. Managements are largely compensated with a nominal base salary, but then in most cases, some varying degree of bonus, but then largely stock options, restricted share units, and the hurdles that are put in place to be rewarded with your options. It's not just time vesting, but their performance elements. And a lot of times they're things like revenue growth and they're things like ebitda and they have nothing to do with any kind of return on asset, return on equity, return on capital. Well, from day one, Warren Buffett ran Berkshire to grow its book value per share and to not put the business in harm's way. And when it was in harm's way, to pivot. When the first business they owned obviously was the textile business and famously ran it off and eventually closed it in 1985, several of the first businesses they bought, blue chip stamps, diversified retailing, were wound up essentially being zeros and they pivoted away from those. And it's been this capital allocation at Berkshire that's allotted to be so successful. But it's beyond that. It's the treatment of the shareholder. And with Warren is the largest shareholder. He's run it for, I'm going to say this wrongly, but he's run it for his benefit. Not so much to line his pockets at the expense of the other shareholders, but at the benefit of all of the shareholders. And so it's the lack of abuse in accounting. It's making rational acquisitions. When you're laying out capital, you don't have a litany and a long history of write offs and write downs. The $10 billion write down of precision cast parts he's acknowledged was a mistake on price in particular. The business got worse. Part of it was already in bad shape. The turbine business was already in bad shape when they bought it. Who would have known with the pandemic that aircraft manufacturing would go through the lull that it did? But he paid. And I thought we own the stock. I thought he overpaid for it. And I think he probably has backed away from the big elephant hunting with the lesson of having overpaid for business that did get harmed in various ways. But you've got so much alignment and it's so easy to learn the lessons by simply going back and reading the chairman's letters.
- [65:54]
Warren Buffett
Yeah, I thought it was striking that you, in one of the letters you pointed out, for example, that Mark Zuckerberg, for example, had paid, I think $330 in 2021 for shares that would later be worth less than 100. And you were just talking about the fact that, you know, not 331 again. Yeah, but not to gang up on, on Mark Zuckerberg who's obviously brilliant in his way, but the lack of discipline in a lot of companies about things like share buybacks where instead of buying their stock back when it's cheap, they'll buy back kind of any, any time. The sort of short termism. And it seems like, I mean, there was something very, very striking to me in a lot of your writing about return on capital. And maybe Berkshire is kind of the best way to look at this. You said in one of your letters we think at least 90% of publicly traded companies aren't worthy of investment because they don't earn their cost of capital. Companies that slowly lose capital have generally been able to raise new capital and mask what is really going on in that way. Many businesses operate on the order of a legitimate Ponzi scheme. So can you talk about how a company like Berkshire that's very rational about cost of capital return on capital, how it embodies this kind of just much more logical and intelligent way of thinking about its investments?
- [67:20]
Greg Abel
Well, the levers of capital allocation are known and understood at least by the value investing world. There are only so many things you can do with, with money. And from a capital allocation standpoint, I had a chart in this year's letter which looked at the last five years of capital allocation at Berkshire and it started with cash flow from operations. From the cash flow statement netted out depreciation expense which is a real charge. And in Berkshire's case, I think in a lot of companies cases depreciation expense essentially matches what you'd call maintenance capex as opposed to growth capex. Berkshire has a lot of money being spent in the energy world where they're growing the footprint of their, of their energy assets. But there you can, you can do things with the share, you can issue shares in transactions, you can issue shares to management as compensation. You can buy back the stock and the price at which you buy it back becomes critically important and so little understood by most CEOs. You can use leverage in the capital structure. You can issue debt, you can retire debt, you can spend money on capex, on growth capex, you can spend money on growth R and D. You can make acquisitions using any of the combinations of capital available to you, internally generated capital, net new capital either through the equity markets or the debt markets. And then I had a throw off one way line in my table this year. Or you can buy jets, a jet or jets. Or you can have birthday parties and you can have a birthday party with matriculating ice, cherubs of vodka. That's a nod back to the, the Tycho Dennis Kozlowski days for you know, the, the youngins that don't remember the Tyco, the Taiko saga and that's all you can do. And, but I don't think that's what CEOs sit around thinking about. I think they look at, look if I'm, if I'm paid, if I'm incentivized to grow ebitda, they're going to go grow EBITDA if that's what drives their comp package. Well, that's above the line. The, the, the components below the EBITDA line. Interest is a very real thing first expense but you become indifferent as to the capital structure of the business. If you're paid to grow the top line and you're paid to grow ebitda. You become a lot more tolerant of leverage in the capital structure because you're measured before the interest expense. And in so many cases you'll put the business in harm's way with excessive leverage. But you're not paid to keep the business out of harm's way. You're not in the Captain's chair as CEO as Warren has been since 1965. You're in the Captain's chair for four and a half years on average. And when you're given big option packages and big RSU packages and big PRSU packages, this is your chance to make money. And your motivation becomes, in so many cases, short term earnings, making Wall street happy, driving the stock price up and the share repurchase becomes front and center, perhaps your best use of capital. Now I'd also argue that so many companies don't have the opportunity set to go invest in growth capex intelligently. They don't have the opportunity to go invest in growth R and D. So what do you do with the money? Well, if you look at the the it's fascinating to me. You've got this $38 trillion market cap for the S&P 500. The share count for the S P 500 is exactly the same where it was 23, 24 years ago. If you look at the percentage of net income or the percentage of cash flow from operations that have been spent retiring shares and buying stock back last year it was a trillion dollars out of the $1.6 trillion in aggregate profits for the S&P 500. You know, between dividends and share repurchases, there's nothing left for the S&P 500 for the last 20 years. And you've been buying shares back at 20 times earnings at a 5% earnings yield. Well, if you can go invest in a project, if you really have a business that earns 15 on equity, do you really earn 15 on equity if you can't go reinvested a 15 ROE but your best use of capital is buying the stock back at a 5% return. This is not normal boardroom conversational strategy thinking. This is not what the CEOs laying away thinking about at night.
- [71:45]
Warren Buffett
That was the great Christopher Bloomstrand talking about Buffett's remarkable record as a capital allocator over the last 60 years. And I think this raises one of the most obvious questions that's on the minds of all Berkshire Hathaway investors at the moment, which is simply, how will Greg Abel manage to follow this incredibly difficult act. And during the Q and A session at the annual meeting, someone asked Greg about his views on capital allocation and particularly about how he would allocate capital into new businesses. And I thought Greg gave an excellent, very clear headed, very lucid answer about this. And it was interesting that the kind of language he was using where he talked about the critical importance of maintaining Berkshire Hathaway's reputation, the critical importance of managing risk, the priority of making sure that the company always has a fortress of a balance sheet that allows us to weather difficult times and not be dependent on anybody. And he said, we'll never be dependent on a bank or some other party for Berkshire to be successful. And so he really made it clear that, in his words, we'll continue to move forward with a very similar philosophy. It's an identical philosophy to what we've had currently and for the past 60 years. And he said that basically he'll focus first on investing in Berkshire's existing businesses and allowing them to operate in an autonomous way. And then he'll look at acquiring other businesses in their totality and will exercise patience in waiting for those assets to be available at a decent price. So the, the value relative to the risk has to be right and otherwise he's going to pass. And then he said we'll also buy stakes in public companies, but not as just pieces of paper, but actually as stakes in these companies, that he would have the intention of owning them for the long term. So I think he's made very clear that he has the same philosophy to the allocation of capital that Warren has had. Who knows whether he can live up to this unbelievable record that Warren has established. I think it's hard to expect him to be as gifted with stock picking. It's hard to expect him to be. You would assume that he's going to leave some of that to Ted Weschler and Todd Combs. But on the other hand, he does have a record of having made lots of acquisitions during his time within the company. So who knows? One person I spoke to during the Berkshire Hathaway weekend was Bob Roboti, who's been a guest on the podcast, who's a remarkable investor and a long term observer of Berkshire. And I asked Bob what he thought about Greg and the future of the company. And he said, look, Buffett was very focused on deals, on deal making and not on operations. And he said, we know there have been problems at some of the subsidiaries, like Geico and some at the railroad, for example. And so he said it makes sense to have someone like Greg, who's really an operations guy, who has industrial experience. And I heard this a bunch of times. I talked also to my friend Chris Beck, who mentioned the point that Geico had kind of got out of control a little bit, that the fact that Todd Combs could come in and reduce the workforce at Geico from 50,000 to 20,000 gives you a sense that some of the components of Berkshire were not run that rigorously. I suspect there's a downside here to Warren's somewhat hands off approach of really trusting the managers of the various businesses, that there's something incredible about that, that it engenders a great deal of loyalty and you get these extraordinary managers doing an incredible job. But on the other hand, I suspect it's allowed some serious inefficiencies to develop. And so there's a sense that Greg Abel's going to be more dynamic, more active because he's younger and more hands on. He has a different style. So much more hands on in terms of operating those businesses. But how this will work out we just don't know. But I think it's clear that there's been a shift in the direction of the company. And we'll hear more about this later, this emphasis on operations and operational efficiency rather than deal making. Finally, I'm going to play you two wonderful excerpts from an interview that I did on this podcast with Chris Davis back in 2023. Chris is a renowned investor in his own right who's had the great good fortune to be personally mentored by Warren Buffett and Charlie Munger. He also serves on Berkshire Hathaway's board of directors. So he has a very rare insider's perspective that comes from actually being present in board meetings, watching Warren operate behind closed doors. Let's listen. In many ways, Berkshire is, is a kind of iconic, emblematic teaching institution, right? It's there to. To show us capitalism done right in many ways. I mean, not that it's flawless necessarily, and, you know, sometimes there are controversies, but it's an extraordinary. It's an extraordinary culture. And you're in this unique position of having been named by Warren as a director of workshop back in, I think, 2021. And just to give our listeners some context, the other directors are Warren himself and Charlie and Greg Abel, the likely successor to Warren. Ajit Jain, who runs the insurance operations. Buffett's son and daughter, Howard and Susan. Ron Olson, I think, who co founded Charlie's old law firm, Ken Chenault, who was CEO of American Express. So in some ways it's kind of the ultimate club. And it's given you this insider's view of capitalism done well. And what makes Warren and Charlie extraordinary, what makes the culture extraordinary. And I, I wondered if we could get a sense from you of, of what the experience has been like so far, what you've learned about the, the culture. And one thing I would mention, I remember talking to a mutual friend, Brian Lawrence, about this and he was pointing out that there are some really great money managers who would never dream of going on the board of Berkshire because the requirements are really difficult. Like, whether formally or informally, I think one of them is that you, you have to own a significant amount of the stock. And I was looking at the ownership statements. I think you own something like $20 million worth of the stock personally and you don't get any stock options. And I looked at the compensation structure and was stunned to see that you received the princely sum of $7,000 a year to serve on the board. And I think Brian told me that there's no insurance protection either for the director. So, so you're sort of personally exposed, not enriched, and you have to put up your own money. So can you, can you talk about that unique culture and what you've seen about it and why, why you would even want to do it and what you've learned from it. And apologies for that long winded question.
- [79:12]
William Green
Oh, no, it's a great question. That's a. Some reason 7,000 sounds high. I think it's $700ameeting. But I could be wrong on that.
- [79:21]
Warren Buffett
You're the highest paid, I think, I think Most people get 3,000. And unless I misread it, which is eminently possible, I think you get 7,000.
- [79:28]
William Green
To review that, to figure out. But yeah, I believe Berkshire is incredibly important as well as an exemplar, but as a icon of how capitalism should work. Right. In other words, a company that hasn't taken shortcuts that in almost every dimension, tries in every industry, in every subsidiary, has this goal of, as Charlie would say, getting what you deserve, trying to earn success, no shortcuts. They want to have the reputation with the regulators, with customers for fair dealing. And you know, you, you mentioned Tom Gaynor, of course, Markel aspires and has delivered in the same way. And, and by the way, there are other companies that do, but Berkshire is absolutely, in a sense, the LeBron James of that. Right. There is the sheer scale of the success, the time horizon over which it's been done in every manner. And so I think Berkshire, for The good of the entire system, Berkshire is worth cherishing and protecting. It is this virtually sort of unsullied example. And of course the maintenance of that is something that is very easy so long as Warren and Charlie are there. But the laws of inertia in business and are, you know, are such that the, there are few records of that persisting. And one of the extraordinary characteristics of Warren and Charlie is how much every year, every decision they do with the goal of having it persist, making their successors jobs easier, trying to lay out a framework. So I think the responsibility of the directors will never be to be in any way involved in the business. It will be in a sense protecting this, this culture that really is.
- [81:55]
Warren Buffett
A.
- [81:55]
William Green
Culture that is, stands out for its independence, its rejection of all of the conventional ways that people begin to take shortcuts or begin to fall prey to all of the institutional biases that can cause something that's so excellent in its, in its virtue. In its virtue. So little things like not paying the directors or paying them very little, that, that is a symbol that is trying to reinforce a culture. And so if you have a criteria that says directors have to own a lot of stock personally and they have to be willing to serve for no compensation, well, why are they doing it? They're doing it because they care about the place. That's an incredible alignment. There is no other company that has that sort of criteria. So I think Berkshire is important for the reminder that it is of how things ought to be. And it's a great sort of benchmark against which other companies, you know, can get something that they can look towards. So anyway, I, I think the reason to do it is because it is so precious as an example and I think it's good for the system as a reminder that when there's a, an ethos that says, you know, corporate greed, CEOs, bad capitalism, bad companies get rich, shareholders get rich at the expense of other constituencies. It's a zero sum game. So if shareholders grow, they must have somehow profited at the expense of another constituency. Employees, communities, the environment, customers. And Berkshire and other companies, they aren't alone in this. But they, as I say, are the most extreme. You know, they, they, they, they achieved not at the expense of any other constituency. They, they, they, they built themselves by, by creating value in the world and then doing so in a transparent way. So it wasn't just the business, it was also the governance, it was also the communication, the education. So I think it is really worth fighting for and I think it'll be Much, much, much harder when Warren and Charlie aren't here. And so that's my one thing that I don't like about it. I think you and I have talked about this, but, you know, I'm from a family of, you know, work before play. That was my expression of my father's that it's in our family. It's just we say it all the time, and, you know, it's Granny's rule. Eat your broccoli. Then you get dessert, and Berkshire is. Is serving. Berkshire right now is the opposite. You get your dessert first, you get the play first. You get to listen to Warren and Charlie. You get to go to each board meeting absolutely secure in the conviction that anything that is being done that they know about is being done in absolutely the highest, to the highest ethical standards and with deep transparency and advocacy for shareholders.
- [85:12]
Warren Buffett
What's it like actually being at a board meeting? I mean, for those of us who will never have this experience of being on the inside and actually watching up close, like, what's actually. I mean, not in terms of state secrets, but in terms of actually the dynamic and the energy of it. What's actually. What's that experience like?
- [85:32]
William Green
It is, you know, if you are a longtime shareholder and you've attended annual meetings, as you have, in one way, I would say, not that different, because the tone is completely candid. The only difference is at the annual meeting, I think the mindset that I experienced as a shareholder going to 30 years worth of annual meetings was more Warren saying, what's on your mind? You're the shareholders. I'll answer your questions. And I think in the boardroom, the orientation is, I want you to know what I think is important. If our seats were reversed. Now, I think Warren does that through the annual report for shareholders. And I think the only difference is within the boardroom. I think he has a view that he needs to make sure if there's, you know, an issue and, you know, subsidiary abc, that he is surfacing it and communicating what he's thinking is going on in the world. You know, so. But. But the direction is exactly the same. I would say the depth and the fact that, to me, the great gift is twofold. One, Warren tells you what he is focused on, and he thinks in this moment, at this meeting, these are the issues that he thinks are very important for Berkshire. He obviously takes questions as long as anybody has them. But I think the second thing that I would say is different. Not different, but is just. Was an incredible surprise. Is too strong a word. But you would know from the outside that there is no CEO in America that thinks about risk in a more profoundly broad way than Warren and Charlie. I mean, Warren thinks about the capital market shutting down. He thinks about nuclear weapons and bioterrorism. And in annual meetings, there are glimpses of that. I think the one thing I would say I've seen sitting there listening is how profoundly he structures and wants the enterprise structured to make sure it's resilient. In scenarios that are so far outside of the thinking of a normal CEO or a normal investor, he is really building something that he wants to last through almost any conceivable scenario. And it is an incredible privilege to just see that mine at work in that way. So everything is directionally laid out. Just sitting in a. Reading the annual port and sitting in a shareholders meeting. Everything is the same. It's just more of it. And as I say, the risk part in particular is something that I've just been incredibly struck by, that sense of profound stewardship for this enterprise.
- [88:37]
Warren Buffett
It was very striking in the annual meeting. I always take a lot of notes in my phone. I'm sort of sitting there madly taking notes. And one of the things I wrote down was when he said, we'll never make a decision that kills us. And he said, we keep ourselves in better shape than anybody else. So I think that sense of the obsession with resilience is hugely valuable for all of us. We can't clone his brilliance. But that focus on resilience, on surviving anything, seems to me hugely important for any regular investor. And then the other thing that came across massively for me when he was talking about the culture of the company at the agm, he said, we feel no pressure from Wall Street. We don't do investor calls. We are working for the people in this room, not people who care about quarterly estimates. And then he was talking about how if the company does good for America, I don't see any reason why it can't survive and do fine. And there was a moment, I think, where. Where he said, we'll. We'll.
- [89:40]
William Green
We.
- [89:41]
Warren Buffett
We will look at our shareholders as partners, not seeking an edge on them. And Charlie said something along the lines of he. He started treating everyone else the way he treated his relatives.
- [89:52]
William Green
Yeah.
- [89:53]
Warren Buffett
And that, to me, was such a profound idea. Just. Just that culture of not wanting to get an edge over your shareholders. Can you talk about that? Because that seems to me to be the absolute essence of the thing, like running it with not even trying to optimize, because you know that a lot of your Shareholders have so much of their net worth in the stock, for example.
- [90:16]
William Green
Well, I think you're. You're absolutely right that they run it assuming that Berkshire is the only asset of the shareholders, because in many ways it really was. And so that partnership ethos of the family and the doctors and the people that had faith, obviously a significant amount of the stock is owned by indexes now, when it was added to the s and P 500 and so on. I think there have been times when Warren and Charlie have said, we would not buy the stock at these levels. And by the way, you could argue in hindsight they were wrong. You should always have bought the stock.
- [91:00]
Warren Buffett
And.
- [91:03]
William Green
There are times when they say we are buying stock at this level. So I think that they want shareholders to have the information to make their own decisions. So I think that remains true. I think that, you know, I think that the, the. That culture, I think of viewing it as the only asset of the end owners, I think that will persist for a long time.
- [91:32]
Warren Buffett
That's Chris Davis talking about the enormity of the challenge of preserving and maintaining and protecting this very precious culture that Warren and Charlie have created over the last half century or so. Is it shareholder of Berkshire? I have to say, I take some comfort in the knowledge that people like Chris are on the board and are so determined to preserve this way of doing things in an honorable, upright way and never taking advantage of shareholders. He's truly a remarkable human. Chris. One of my favorite moments, actually, during this latest visit to Omaha was when I ran into Chris while I was heading to my room in the hotel where both of us were staying. And it was actually on the Sunday morning. So it was right as Chris was heading to the Markel brunch to put in a kind of cameo performance. Very quickly before then, he went off to the Berkshire Hathaway board meeting that was really historic, where he and the other directors of the company were going to approve the announcement by Buffett that Greg Abel should become CEO of the company. And I, of course, took the opportunity to ask various impertinent questions and try to figure out what had been going on. And so I asked Chris whether they had had any idea before the announcement that Warren was actually going to make this announcement that he was retiring. And Chris, as I recall, basically said, yeah, I knew that something was up from the way that he communicated, but it wasn't explicit. But he. He said that he'd always had this worry about what's the plan, what's going to happen when Warren's leaving And he said it was all so masterful, that when he actually saw what would happen and how masterful the plan was, he said, I felt like it was just being orchestrated by God. It was this extraordinary thing to see that Warren had sort of planned this all along and handled it just so masterfully. The other thing that I think was really significant in my discussion with Chris was that he was saying, you really can't get too locked into the origin story of Berkshi Hathaway with all these tales about See's Candy. And he said, it's a totally different business now. He said, now it's really an industrial giant. And he said, it's all about execution now. And one of the things that Chris mentioned was the fact that really, the model, in some ways for Berkshire is the way that Walmart evolved when it went from the early meetings, where, as he put it, you'd have these huge meetings that were like a kind of bonanza where everyone would cheer who's number one and people would all cheer the customer. And he said, then it kind of shifted to the next generation after the family handed on control. And he said it just became a great execution machine after it passed from the Walton family. I thought it was a really interesting phrase, a great execution machine. And so what Chris was saying is that in many ways, that's the challenge for Berkshire is just to be a great execution machine. And he was saying, look, businesses like electricity and railroads aren't sexy. Lubrizol, as he pointed out, it's not sexy. He said, it's about execution. And so I think it gives you a sense that now, as Berkshire morphs into being this industrial giant rather than an investment firm, it may well be that Greg Abel is the ideal person, that he's someone with an industrial background and who's an operations guy. And so really, this next stage is less about investing in great stocks and the like, more about turning the company into a great execution machine. Our final clip also comes from my interview with Chris Davis. And I'm happy to end with this because it gives a really nice, charming view of Warren's personality in all of its glory and idiosyncrasy, and also a little sense of the personality of the great Charlie Munger, who, together with Warren, built this unbelievable company. So here we go. Let's listen.
- [95:58]
William Green
So it's. You know, what I would say is that all of the people have in common a Tiger woods trick, which I really love, which is whenever I talk about sports, you have to footnote that I don't know anything about almost any sports, but I like sports because I find it metaphorically rich. And so Tiger Woods, I think it was his first British Open. As I understand it, the weakest part of Tiger woods game at that point was his coming out of the sand trap. He was not very good at that relative to the people that were the best at it. And they were playing the British Open at a course that was renowned for these bunkers that looked like, you know, they were created by a piece of artillery and, you know, the deep, nasty bunkers. And. And so the press was really pushing Tiger on, you know, have you been working on your sand game? And they were watching him in the practice rounds and he said, no, I'm working on my drives and my low irons. And they said, why? And he said, because I don't want to go in the sands. And he played the entire British Open and didn't go into a bunker once. Which is an incredible sort of mental model to have, which is. And, you know, if you can identify your weaknesses, yes, trying to reduce how severe they are, you don't want weaknesses that are going to take you down, but then trying to architect your life so you avoid them is the best of all. And I would say something that Warren and Charlie and many of the people you mentioned have done well is they've structured their lives so whatever their weaknesses are, it hasn't been taken them down. And so you mentioned Charlie's bluntness. I don't think that would have served Charlie as the CEO of a Fortune 500 company. It wouldn't have served him as a manager of a lot of people. It wouldn't serve him to have to. You know, when you go from a platoon to a company to a brigade, you know, all those Roman, there's a. There's a turning point where all of a sudden you can no longer communicate directly. You have to begin to communicate with stories, and you have to allow yourself to become a. Some sort of, you know, some sort of cut out of who you are. And that, I think would have been. I mean, I'm speculating, but I think it would have been very difficult for Charlie. And so Charlie structured his life in a way where that those personality traits of his didn't set him back. Warren is an incredible communicator and exudes this sort of warmth and people can feel. But he has a very hard time, as he says describes, you know, making those really hard decisions to fire somebody or to replace them. So he structured. Here he is as a CEO of a Fortune 500 company where over time he's had to make very, very, very, very few of those decisions. So he's structured his life to minimize those weaknesses and so on. So I think there's, I think a very powerful lesson for people to carry out is not to necessarily obsess on your weaknesses but to do your best to structure your life so that you can avoid a lot of them.
- [99:13]
Warren Buffett
You made a fascinating observation about the difference between Charlie and Warren's approach to human interactions back when we were talking in May in Omaha Web. I, I was pointing out someone, I'll try not to be too specific but someone asked a really stupid question and I was mentioning that Charlie just dismissed it instantly like he didn't pretend that it was anything but a stupid question. And Warren replied in such an incredibly deft way where he didn't insult the person who'd answered, who'd asked this stupid question. He turned it into a useful teaching lesson about something else so that people in the audience got something out of it. And it was so emollient, it was so charming and so deft. And I mentioned this to you like his, his brilliant diplomacy. And you were saying the funny thing is actually in some ways Charlie is the soft hearted guy, even though it doesn't seem it. Warren is this sort of brilliant machine who studied Dale Carnegie and how to win friends and influence people. And he has, as you put it, super high processing speed. So he's able to tick all of these boxes and know how to behave in a way that's going to be kind and thoughtful. And I just thought it was such a fascinating observation. Can you talk a little bit more about that? I don't know if I'm, if I'm doing justice to your observation.
- [100:39]
William Green
Well I, you know, what I'd say is Warren shows any visitor that comes to see him, you know, his Dale Carnegie certificate hanging in his office and, and he talks about how important that was and, and people don't read much Dale Carnegie anymore. It's really worth reading. It's enormously useful and it is a very practical guide. You know, it's, the subtitle is how to Make Friends and Influence People. And we hear that in our modern ear now. And that sounds very disingenuous or manipulative or somehow lacking integrity. I actually totally disagree. I, I think it was, it, it is a way, you know, as, as John Wooden famously said you, you haven't taught unless they've learned. You know, I think it is a way to, to do your best to make sure that somehow you aren't communicating something you don't wish to communicate or don't intend to communicate. And so I think Warren was an incredible student of that mindset. And so you're absolutely right. And by the way, Ben Franklin was, too. I have written down. I should have brought it in a book of things that I've jotted down, mostly quotes from books or poems since I was in college. And one of them is about Ben Franklin talking about how he knew people that were very effective at winning arguments, but they never won influence or goodwill, and that would have served them better. And the reason they didn't is they, on the course of their winning the argument, they tended to humiliate the other person. And in so doing, they impressed people with their intelligence, but they also gained an enemy. And ultimately that set them back. So, And, And Charlie would hold up Ben Franklin as his Dale Carnegie. So, I mean, both of them have enormous, you know, have learned ways. Charlie once told me he wears suits in part because he said, I. I'm so unconventional in other ways that if I at least wear a suit, people immediately assume I'm conventional in some ways. And that that's probably helpful, but, you know, that it was purely a practical matter. But I do think that. I think Warren is. Is so, you know, his father, of course, was a congressman. So I think he grew up with this sort of understanding, this sort of political sensibility in the best sense of the word. You know, in other words, how to create goodwill, how to have people rooting for your success. Imagine the record that he's achieved with almost no enemies. Can you name another fortune that was built where there wasn't a significant consensus or a significant view in the, in the world that somehow that person gets vilified. I mean, you know, I think about watching the changing narratives around Jeff Bezos or Bill Gates or Sam Walton and Walmart, and, you know, there are very few you can point to, you know, certainly John D. Rockefeller and Carnegie and all of them, but. But there tends to be Howard Schultz. You know, there's a cottage industry vilifying Howard Schultz. I don't get it. It seems, you know, crazy, but it just seems. It sort of goes with the territory. So it's an amazing thing for Warren to have built this fortune and still have so much of the world viewing him as this sort of kind, gentle presence and patient and. But I think you're right. I think in, in. In many ways it is a. Well, we don't have to speculate whether it's good. It's like honesty. Whether it's good policy or whether it's ethically right, you could do it for either reason. The effect is the same. Tom Gaynor loves to talk about the Quakers, came to do good and did well. It's the same idea that it ends up. That approach both serves him enormously well and is a very ethical way to treat people, even when they ask asinine questions. But you know, Charlie dismissing somebody and saying that's an asinine question. Warren, as you say, he invests dignity into the question, even if it wasn't there or if it wasn't intended by the asker.
- [105:05]
Warren Buffett
I love the point that Chris Davis makes here, that part of what's so extraordinary about what Warren Buffett has achieved in his career is that he's done it without gaining enemies, that he's created so much goodwill along the way that people actually root for his success. And I think that's an extraordinary model at a time when we're a very divided society. Here's a guy who shows what can be done by having tremendous integrity, but by also having kindness, gentleness, decency, a sense of honor. And I found that when I was in this meeting, the annual meeting in Omaha, I found it hugely moving, I think, when he made the announcement that he was moving on, because you had this sense of not just the enormity of the achievement, but the enormity of the quality of the human being. And I'm always wary of lionizing great investors because I tend to feel like most of them are pretty defective humans, because I think to achieve extraordinary things, often you have to be maniacally focused and you end up neglecting all sorts of things. And I'm not in any way trying to claim that Warren is perfect, but I think he's become better and better and better. And all of us, there maybe 40,000 of us in that room, I think we had this sense of. That we were in the presence of this truly remarkable human being. And the last time I had this, when I was writing about an investor, was actually when I went to the Daily Journal meeting back, I think, in 2017, and I saw Charlie Munger. And I wrote at the end of the chapter in my book about Charlie, that as he walked away, I was just filled with this sense of awe. And the final sentence in that chapter was, today I've been in the presence of greatness. And at this annual meeting of Berkshire Hathaway, it was the second time in my career when I had been with a great investor. And I truly felt oh, today I've been in the presence of greatness, and it's not just about him as an investor or a business leader. It's about him as a human being. And I don't feel like I've really done justice to him in this episode. It's impossible to do justice really to the scale of the achievement over 94 years. But I hope that it gives some flavor that these interviews from various people who've studied him, known him, admired him, learned from him, that it gives a flavor of what makes him so unique. And so, anyway, I hope you've enjoyed this and I appreciate you sticking with me and listening to this epic episode. Thanks so much.
- [108:11]
William Green
Thank you for listening to tip.
- [108:14]
Warren Buffett
Make sure to follow richer, wiser, happier on your favorite podcast app and never miss out on episodes. To access our show notes, transcripts or courses, go to theinvestorspodcast.com this show is for entertainment purposes only.
- [108:29]
William Green
Before making any decision, consult a professional.
- [108:32]
Warren Buffett
This show is copyrighted by the Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting.