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The Investor's Podcast (We Study Billionaires) - The Investor’s Podcast Network
TIP717: Berkshire Hathaway 2025 w/ Chris Bloomstran
01:28:46
Stig has invited legend investor Chris Bloomstran from Semper Augustus to teach us how to value Berkshire Hathaway on today's show.
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- [00:01]
Stig Broderson
You're listening to tip.
- [00:03]
Chris Brumstrand
It's the most wonderful time of the year. Like Andy Williams is singing. And no, I'm not talking about Christmas. Well, perhaps I am. It's certainly happy holidays for us value investors. Berkshire Hathaway's annual shareholders meeting is coming up in the first week of May. Value investors across the globe are making the annual pilgrimage to Omaha to learn about investing alive from the Oracle himself and and to meet up with old and new friends. Now, how do you best prepare for the Berkshire weekend? Well, for years I've been reading Chris Broomstrand's thoughtful letter analyzing the company and the price is just right. Like this podcast, it's completely free. As tradition would have it, I've invited Chris to join us to do a deep dive on the current market conditions and Berkshire Hathaway. So sit back and join me in learning from one of the legends in Value Investing, Mr. Chris Brumstrand.
- [00:59]
Stig Broderson
Since 2014 and through more than 180 million downloads, we've studied the financial markets and read the books that influence self made billionaires the most. We keep you informed and prepared for the unexpected. Now for your host, Stig Broderson.
- [01:23]
Chris Brumstrand
Welcome to the Investors podcast. I'm your host, Dick Broderson. And the Berkshire Weekend is coming up. And what better way to celebrate that than to speak with Chris Broomstrand. Chris, welcome to the show.
- [01:36]
Warren Buffett
It's big. Love being here. We've made this an annual tradition and it's one of my favorite conversations every year. And heading into the weekend, that's the highlight for so many of us. So thanks for having me on again.
- [01:48]
Chris Brumstrand
You bet. You bet, Chris. And I would just start off by saying that Chris didn't pay me to say this, but I'm just going to say for the record that for someone like me who reads so many shareholder letters throughout the year that two of them stand out, and it's one's written by Mr. Buffett, no surprise, but the other one is written by you, Chris. And so it's such a wonderful letter. And I say that every year. I print it out and I sit there with my marker and there are so many nuggets there. But one thing, and I would like to jump right into your letter here, is that in your introduction, but also in your summary of the letter, you talk about this importance of being trusted. And then you also quote Buffett for talking about the importance of being trusted. Why is that so important to you, Stig?
- [02:35]
Warren Buffett
I think it's the most important thing. If you listen to the last Year's annual meeting, which was the first time we didn't have Charlie. It was a pretty emotional day. I've listened to the afternoon session. I'd direct everybody to the afternoon session, which you can listen to it on the podcast app. You can go to the CNBC and watch. But there was so much information and wisdom in that last hour and a half or whatever it was. And a lot of it was life advice and reflection, you know. And I think the second to last question Warren was asked, really kind of a question I didn't like, but it had to do with his. His early years when he had a family and young kids and he worked all the time. You know, I work 80, 90 hours a week, and I've done that for 34, 35 years and managed to do it when I had kids, and in my case, managed to coach a bunch of the sports teams and be involved. And you'll even see a gap of. In my annual letters where I didn't write super long letter each year I was coaching basketball, whatever, and still write a letter, but they weren't where they are. But that was my priority, was I didn't want to spend seven weeks of the year lock down every single night until 2, 3, 4 in the morning. And the question was, would you change anything about your life now, in retrospect? And he essentially said, no, I lived the life I have. I think it'd be a mistake to look back and think you should change anything. You kind of did what you did. And I think you look at the relationship Warren had with Susie after they separated, they maintained a fantastic relationship. The relationship with his kids is wonderful. They're close. But then he kind of pivoted on that and said, at a level, though, yeah, it wouldn't change anything. But at the end of the day, I like being trusted. I like managing money for people. I don't need to do it. Certainly financially, I do it because I like it. It's important. And then I think the first question, maybe it was the second question, or I take that back, there was a clip they showed. So it wasn't the big movie that's sadly not going to be part of the annual meeting this year. But there was a clip that showed Sandy Gottesman's wife Ruth, making a donation, charitable gift to the Einstein School of Medicine in the Bronx. I think it was a billion dollars and essentially would cover the tuition for all medical students from here to time immemorial. And he remarked on that and said it was so nice over all the Years where you've had companies like Walmart, where the Waltons got very rich, a family, Bill Gates and a couple founders at Microsoft got rich. But in Berkshire's case, you had a lot of the original partners and the Buffett partnerships and then the partnership, early Berkshire shareholders, who individuals and families. So not pension funds, not hedge funds, but individuals that he's known and has worked with over all the years that in a lot of cases Berkshire's represented all of their money or vast majority of their capital. And as their wealth amassed into the hundreds of millions and billions, he noted there'd be no history of corporations throughout all of time where so much charitable giving has taken place. And I think he pegged the number at gifts of over $100 million, which are more often than not given anonymously. And so it's meant a lot to him to be a steward of capital. Chad and I have always felt the same way at Semper, the core of our client base. Our first client, wealthy individual Mr. Smith, I've talked about him in my letter a couple times on a couple podcasts. But very successful investor, got out of the stock market in 1928, got back in in 1932, but amassed a huge fortune and wound up giving a lot of it away, but always did it anonymously. And Berkshire's shareholders have given a lot of money away anonymously. There was another question. I'll go off on a tangent if I may, but there was another question that was asked about whether it made sense to invest. So Warren has said of late, the last several years, and even when asked about whether you should own Berkshire or not, he'd always reflexively default and say, well, I think The S&P 500 is a pretty suitable option for people. But I think what he's really meant is if you're a family, you're starting out, you're uninitiated to investing. Owning a low cost index fund makes a lot of sense because you're going to eliminate a lot of the frictional costs of investing. You're not going to incur a huge amount of tax because you have low turnover. And if you dollar cost average, you're going to buy some shares when they're cheap, you're going to buy some shares when they're expensive, you're going to buy some shares when they're fairly priced, but you'll get a good return. So his Astrid, now his second wife, Warren has said when he passes, there'll be a trust established for her benefit which is going to own 90% s and P 510% short term governments. Well, when asked about the s and P500 in Berkshire over all the years, Warren would again reflexively suggest S and P makes a lot of sense for a lot of people. And Charlie would always say, well, yeah, Warren, sure, that may be right, but surely you agree that Berkshire will do better. And for the last 25, 26 years, Berkshire's been undervalued until very recently. But on that trust. So Warren elaborated on that and he said, look, there's. The trust is going to be a very small percentage of my net worth, but a huge amount of money and spending needs by my wife will be so insignificant compared to the assets in the trust that it doesn't matter whether she beats the S and P 500 or not, she doesn't care. But then he said something that was important and he essentially said, and there are little things like the trustee not getting sued. So this trust will be irrevocable. And under the Prudent Investor Rule, now, Prudent Investor act, adopted by all the states, you can't hold a single concentrated position in a single security. You've got to diversify it. And so there'll be a mandate to diversify that holding. And so you have to not own Berkshire. And so he finally got to that. Then he went off on a tangent. He never really answered the question about equal weighted versus cap weighted. But, well, he got into billionaires leaving money through inheritances and through their wills. And he said he occasionally changes his will around. He gets ideas here and there and said the biggest mistake you can make when you change your will is to use codicils to the will. And he used J. Paul Getty as an example. And I think Paul Getty had 25 codicils to the will and he invariably would use these to essentially punish various family members for the way they behaved. And he would, at the reading of the will, they'd say, well, this is why you're not getting X, Y and Z amount of money, because you did this in 1960, whatever. And Paul Getty was the richest person in the world for a long time. And he said, so if you're going to change your will, completely change it. So you kind of fast forward, then you get the question about whether you change anything about your life. And he got into trust and he got into kindness. And he said, I think kindness and trust go hand in hand. And so. But you get to the final question of the day and Becky asked the question and it was unrehearsed. But it couldn't have been a more fitting way to end the meeting. And it read something on the order of. It came from Devin Spurgeon, who's a friend of Warren's and Charlie's. And so when Becky said, this question comes from Devin, you could hear Warren kind of blanch at that. And so he knew something kind of heavy was coming and it was going to be a serious question. It was pretty amazing. Essentially said on whatever date, the final will and testament of Charles T. Munger was filed in LA county court and in it contained a codicil. So having just talked about codicils earlier in the day, Charlie had codicil in his will. And it essentially said, you know, typically in your will you have a transmission of assets and property, but I'm incorporating a different transmission here, and that's one of duty. So essentially one of charity, it's one of donation. It was pretty touching, moved Warren. And so Becky followed on with that and said, if you could leave one thing for the Berkshire shareholders in terms of wisdom, it would it be. And Warren said, well, I'd read Charlie, I listened to Charlie Beasley said it well, and emotional way to end the day and standing ovation. Anyhow, it goes to trust being paramount. You work with families, in our case, you work with these families, and in a lot of cases we manage all their capital. And when Chad and I, we were in our 20s, I was 29, not quite 30 when we started Semper Augustus. I've been managing money for six or seven years at a bank trust company running a mutual fund, but by then was managing family capital. And you've always had this sense of wanting to be trusted and you don't want to blow up capital. I think we work hard to do it right. We work hard to avoid leverage, to manage risk. And if you're charged with the financial well being of so many people that have entrusted you with all or most of their capital, trust becomes important. I grew up in a house where there was not a lot of trust. I won't get into it specifically, but I think seeing a person that was untrustworthy, probably boomerang affected in my world. And I said, I'm gonna live my life differently. And kind of adopted a notion that trust was one of the most important things you can have in life in relationships with others, be it your family or be it your investors and your clients. So I thought it was a really nice afternoon, probably my favorite session, despite the banner between Charlie and Warren being missing. But there was just an awful Lot of wisdom in it. So it was way more than you wanted. I think on question one, it was beautiful.
- [12:48]
Chris Brumstrand
You know better than anyone, Chris, that beautiful things come out of compounding. And of course we're not just talking about capital. Something like trust. You can't speed it up. It takes time. And whenever there is a breach of trust, we all have different trust accounts with different people. And the way the world works is that deposits are usually not as large as the withdrawals. And so seeing someone, a role model like Buffett and someone like Manga who have built that trust account with so many people is just such a beautiful thing to observe.
- [13:23]
Warren Buffett
Yeah, it attracts the right kind of people. There's just over all the years of owning Berkshire and observing Warren and Charlie, I think the folks that gravitate toward Berkshire, things like trust and things like kindness and integrity matter as much as anything. I mean the returns and the results speak for themselves. Ours have been terrific over time. Certainly not on par with Warren's record over 60 years now. I mean, just the degree of outperformance versus the market. But that's only one small aspect. I think people like the culture of integrity that they built over time and they've never gone near the line. It's black and white, there's no gray area. And that's very attractive to the majority of people that I've known within the Berkshire community.
- [14:17]
Chris Brumstrand
Yeah, he thinks that's such well put. And of course Buffett is such an outlier because he's the best capital allocator and also the most trusted. But whenever it comes to capital allocation in general, who, especially if they're not sophisticated investors, they don't sit and read Chris's 160 odd page letter even though they should, I should say. But who do they choose to invest with? They choose someone they trust. That's key. Number one, they don't, they don't look at 20 year track record. And how did the S&P 500 do compared to. No, it's like we trust Chris or we trust, that is because it's money. It represents so many things.
- [14:57]
Warren Buffett
I think there's a sin. I mean, we live in this investment world where so many treat what we do as a business asset gathering fees. You have a smaller set that treat it like a profession and bring a fiduciary obligation to bear in every situation. And that's what Warren has done for a lifetime, that's what Charlie did for a lifetime. And it resonates with a lot of people. And we do our best to emulate that.
- [15:28]
Chris Brumstrand
Chris, on page 163 in your wonderful letter, there's a brief, just a brief comment about the Big Guy. I have to ask you, could you please share the story behind that with us?
- [15:40]
Warren Buffett
So the story I think you want me to tell was I had a serial, I don't know, this is three years ago, I guess. And I had an exchange back and forth with Warren and we were talking about other stuff and Walter Scott had passed away. One of Warren. Warren's left all of his friends, Sandy Gottesman, with Ruth giving away the billion. Sandy was a lifelong friend. They did investment deals. Sandy was on the board forever. They would get together all the time, play golf. Well, Sandy owned a ton of Berkshire. And in any event, Walter Scott likewise ran Peter Kuett and was on the Berkshire board and close with Warren. Well, he passed away a few years ago and happened to own 8% of Berkshire Hathaway Energy. And if you follow Berkshire, you know that piece was just bought out. And that could be a whole separate conversation, the price that was paid there. But 8% amounted to 5 to 7 to $8 billion. And I had suggested to Mr. Buffett that if he was inclined to start selling or sell the BYD investment, the Chinese battery and car company which they invested, Berkshire invested 232 million, I think it was, which had grown to 7 billion over a fairly short period of time. Charlie had just started selling BYD for the Daily Journal. So I suggested if the Scott estate or ultimately Foundation, Walter's wife, had pre deceased him. And so a lot of the assets were going to wind up in a foundation in Omaha. If they were inclined to sell the 8% back to Berkshire, I think you'd be inclined to buy it. Perhaps you could pay for it by using BYD shares, which then were about $7 billion. Avoid taxes, the capital gains taxes that would come with selling the BYD at that big of a capital gain. We had a bunch of back and forth, but anyhow, I jokingly finished off one of the emails and said, oh, and by the way, this was February three years ago. It was kind of trending toward the end of my letter. And I said, I want you to know I'm committed to shrinking my letter by 2.6 pages per year so that when I'm 91 years old, Warren's now 94, but when I'm 91, we'll have matching length letters. And his reply, after we got through all the business and things we're getting through, he says, oh, and by the way, you know, you'll see when my letter's out a few days after yours, that it'll be the shortest that I've ever written. So you're gonna have to recalibrate on yours as well. And so sadly, and I put that in because I think my letter that year was 120something pages and hit a record this year, 160. Which was not my intent. My intent really is to shrink it, but I have fun with it. So I'm on the record now saying, though it is gonna shrink, I can't do the 160 plus again. I don't know what I'm gonna cut, but I'm going to start cutting it. I have to cut it.
- [18:21]
Chris Brumstrand
There was such a wonderful story, Chris, and I was printing it out and I was like, hey, Chris promised us it would be shorter. Luckily it's not shorter, but he did say that it would be shorter. What's going on here? So anyways, it was just nice tip of the hat to the big guy. So it was good fun.
- [18:38]
Warren Buffett
Yeah, I do, when I travel sometimes, if I don't have time to get to the gym, I try to walk every day. And I'm having a series of joints replaced. I had a hip done. I've got to do another hip, gotta do a knee, but I like to lift a couple times a week, three times, four times, only 20 minutes. But I'll do push ups and stretch a lot. And for the arms, I'll do briefcase curls. And I'm getting to where if I have three or four of my letters that I'm giving out to people in my briefcase, it's getting too heavy to be able to do a full set of curls. So if for no other reason, I need to start shrinking it so I can keep doing sets of 10.
- [19:13]
Chris Brumstrand
We have to hold you to your word then. It's all on the record now, Chris. So there's no way around it.
- [19:18]
Warren Buffett
Yeah, write it down.
- [19:22]
Chris Brumstrand
So, Chris, I should say again, I've said it already so many times, not just in this recording, but in previous years, that it's a wonderful letter. I always look forward to this wonderful analysis that you're doing at Berkshire Hathaway. But you also touched on the S&P 500. And I guess some would say that these days whenever you talk about the S&P 500, you have to talk about the Magnificent Seven. But in any case, I'm going to bake that into the question here because I want to give you an unreasonable premise here. You can only invest in two different things now you have to put all your money into one or two things. That is a cap weighted S&P 500 or a 10 year treasury and you have to hold it for the next decade. Which investment would you choose and why?
- [20:07]
Warren Buffett
To me, if that's the only options, I'd own the Treasury. So you're at 4 on the Treasury. You were at 430, I think roughly at year end. You kind of go through the scenarios of how you make money in stocks. And I've got my five factor analysis. I think best case for the S and P over the next decade is 4 to 5. And to get there, if you hold profit margins and multiples at high levels, and we've been at high levels, I think we were at a secular peak in 2021. Or you kind of got back to where you were from a valuation standpoint following 2022's decline, but trading at mid-20s multiple to a historically very high profit margin where if you have inflation, you get tariffs, margins are only going to come under attack. Yeah, I think more likely than not, you get multiple contraction. You may get margin contraction, you may not get margin contraction. A lot goes into that, but the market's pretty fully valued. And when you flip the PE on its head and you get the earnings yield, if you're a 25 multiple, your earnings yield is 4%. And that gets you to where the 10 year treasury is. And so I think much like the secular bull that ended in 2000, you wound up with a decade of nothing. You lost money for 10 years. And I think from 2021 or even from 2024, this coming decade is likely to look like that, where you spend a decent amount of time underwater. I mean, we're sitting here from the end of 2024 down 6 on the S&P. Nasdaq's down over 10. You're going to work off some excesses. And the MAG7, which 12, 13 years ago was 8%, those seven companies were 8% of the stock market in 2021 they were 24 or 25%. They ended 2024 over that three years at 35% of the S&P 500, nearly 35% invested in seven companies. And as a group, they're not cheap. So I think the notion that you'll spend a sizable period of time below this high watermark on the S and P in that set of two choices, the 10 year treasury kind of risk free, you may get rising interest rates, but if it's 10 here, it's going to mature at par and so you get four. So you wind up if you have very high levels of inflation, the 10 year treasury is a terrible investment. And so you point to a Venezuela where you get hyperinflation. Well, you can make 100% a year, but in the currency you get killed. So holding hyperinflation aside, the treasury makes a lot more sense than owning the cap weighted S and P. I'd rather own an equal weighted S and P if you introduced a third set to the equation. But given those two, why take the risk of declines from secular peak type valuations when you can bank four with no risk?
- [23:05]
Chris Brumstrand
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- [26:36]
Chris Brumstrand
All right, back to the show. Yeah, that's such a good point. And you see some fluffy valuations right now. Right. There was this famous study being done around the.com of what kind of return people expected to get from the, I don't know, it might either be The S&P 500, perhaps even the Nasdaq. And it was like, I don't know, 20% or 15%, something silly like that annually. And of course people have those expectations whenever it's trading near its all time high. And then you had the lost decade. And I'll imagine that if you looked at what people said going into 2025, what kind of expectation they had after having bull years for I don't know how long, I think this was 2023 and 2024 was the most. The last time you had two years with more than 20% annually was just before the dot com bubble bursting. And I don't know, it might be a spurious thing, I might put too much into it, but it does look fluffy right now. And it sounds like you're seeing the same thing in the market.
- [27:38]
Warren Buffett
Yeah, big declines will fix some of that. You take the 10 years ended 1999, the tech bubble, the dot com bubble, the S and P had compounded at 18% and change. In the 10 years through 2021, the S&P had compounded at 16 and change, I think 16.6. But you had a huge expansion in profit margins. You had really huge expansion in the multiple to earnings. When you start at high margins coupled with high multiples, that is not a recipe for making high returns. And you're exactly right. Surveys of investors at the time of the dot com bubble had people thinking they were going to make 15 to 20% a year. You don't make 15 from a secular peak. And so this last three years is pretty telling. So you had the big decline in 2022 S&P was down 18%. Then to your point, you had back to back up 20 plus percent. Last year was 25%. Well, cumulatively for the three years, the S and P had compounded at less than 9%. At the end of 2024, given the decline this year, you're back to 6% annually. We were at 6% annually. Now we're up to 9% annually because we were up 10% in the first quarter. The NASDAQ wasn't up as much as the s and P500 because it was down 35% or whatever it was in 2022, even though it had monster year last year. Now it's 4% annually from 2021. Small caps, oddly, even though they're as an asset class cheap, are down a bunch this year and they're negative for the three years and a quarter. International markets which had been up this year are still up modestly, but they've started to roll over here in the last few weeks. And so this is kind of how secular bears go. 2001, 2002, you had three down years in a row following those four years of back to back 20 plus percent returns which took you to that secular peak. So secular bears take a long time. And if it started at the end of 21, that 2022 decline perhaps is just the first inning. The secular bull that ended in the late 1960s took 16 and a half years to cleanse itself. And the Dow bounced around from 1000 down to 700 and change back up to 1000, down to 600 and change back up to 1000. Then you had 7374 down to 500 and change back up to 1000. And by 1982, it's 16 and a half years of sales growth. But the Dow was 778 at its low margins had gotten killed. You were down to 4%. We got up to 13.3% margins on the S&P in 2021, but nobody wanted to own stocks at the end of that. Now, reflexively you have the buy the dip mentality and there was a lot of dip buying when the market rolled over in 2000. By the way, happy anniversary to the stock market bubble from 2000. I forgot to tweet this out or whatever you call it now, but March 10 marked the secular peak of the NASDAQ, which proceeded to drop 80% and two weeks later in 2000, March 24 was the peak on the S&P.500 at 15:27 wound up dropping to 777, so down 49%. So those were good times for the value crowd because value had been killed in the late 1990s and the market healed itself and most value oriented investors really thrived, especially during 2000 and 2001.
- [31:20]
Chris Brumstrand
Yeah, I love the way that you're looking at this, Chris, and thinking back on those amazing times, it reminds me of this wonderful Mark Twain quote where he talks about that the problem with fiction is that it has to be believable. I don't know, I couldn't help but mention it here. So this is going to be a good primer here, I guess, for the next question. I might already have a bit of a bias asking this and I think the listeners can tell. But one thing I appreciate is that you always talk about what kind of future return, long term return can you expect from owning Berkshire Hathaway? And it's not like tomorrow or next week. That's not all we're talking about, but a long term return. And I know a lot of people who, and perhaps you do too, who talks about Berkshire is perhaps 10, perhaps a bit more in terms of future returns, but they are targeting a 15% CAGR. So Berkshire is not interesting to them. How do you think about a presumably higher certainty of 10 to 12%? And I also wanted to mention this, like the potential 15% return, but I wonder if you already responded to that before. But I sort of want to hear if you can tie a bow around that discussion.
- [32:31]
Warren Buffett
I'd be very leery of anybody that suggested they could earn 15 or more percent returns. You can make 15% in individual ideas, individual securities. I wrote about Dollar General in the letter, but I mean that stock had fallen from 260 into the 60s. And if you normalize where you think the profitability of the business winds up, you're not going to get back to where you were in Pre pandemic, so 2019 levels. But if you Kind of get to where you think it's going to be. You can make a bunch of money in an idea like that. But in a portfolio setting, especially in a secular peak, the surveys that suggest you're going to make high teens, you wind up making a negative return after 1999. But even though investors thought they were going to make 17 or 18%, Berkshire's an enigma because in the 26th year we bought it in February 2000, the A shares traded two years prior to that, in 1998 at over 80,000 per share, they were trading at nearly three times. Book value itself was very full in that 115% of Berkshire's book value was the common stock portfolio. Think about that. And Coke was a third 40% of the portfolio, trading at nearly 50 times earning. The stock portfolio was fully valued, meaning Berkshire's book value was very fully valued, overvalued, and the stock was trading at three times book. And so Warren bought general reinsurance using Berkshire as currency, diversified away from the stock market. I won't go into details. I've written about it at length. We've talked about it on your show. So we buy the thing, though, not at $80,000, but paid 43,707, $7 being the commission, and paid 105% a book. Book value's lost its relevance somewhat. But as we measure intrinsic value and one of the yardsticks we use, one of the metrics we use is simply priced book. And I think Today's book value, 175% would represent fair value. It was probably closer to 150% again because book value was so overstated, so fully valued 25 years ago before the stock got cut in half. But from today's equity base, if Berkshire earns 60 plus billion, that to me is a conservative number in that you strip out realized and unrealized gains and normalize what the stock portfolio is going to do. Well, the stock portfolio is no longer 115% of Berkshire's book value, but less than half that given the Apple sales last year. But the portfolio traded at 19 and change times earnings, meaning the earnings yield was a little over 5%. Well, if the stock portfolio only does 5%, that portion of Berkshire's assets, really, if stocks do better than 5, then 60, 61, 62 billion is understated. And so as I've long talked about, Berkshire's return on equity, approximating the return you're going to get from the stock. That's exactly right. And if stocks do better than 5, business will earn more than 60. And so you can get to 10 to 12. But with the stock having run up now to 800,000 per share, my appraisal of intrinsic value at year end was 783,000 on the A shares, $522 on the B shares. That's a little over $1.1 trillion. Well, here you are, Tom, with the stock trading slightly above my year end appraisal, it actually traded at and slightly above my year end appraisal last year, but it didn't happen until November and the business had grown by 10%. So by November, when it hit the 2024 high, it was still slightly undervalued. You know, here you are today, assuming on 10% growth, 10% ROE, you've got a little bit of upside to fair value today. Because if you look at fair value by this coming year end 2025, the intrinsic value would be north of the current stock price, but not by much. So if the stock relative to intrinsic declines to where it has traded on average 70 to $0.80 on the dollar of intrinsic value, not $0.100 on the dollar of intrinsic value, you'll make the 10 to 12 ROE, but less given the decline to the discount. And so Berkshire realistically is down to a 7 to 8% to 9% expected return over 10 years. That's still way north of the 10 year Treasury. That's way north of the S&P 500. And so here in the last year, we've not been buying it fully as a model weight for us. We've been with new capital coming in, we're not buying much of it and I'm buying very little of it at present because it's fully valued. We like buying things at a discount. It's not at the point in a taxable account where you'd sell it because you've got a big capital gain. If I'm going to pay 20% plus 3.8% plus whatever the state capital gains tax rate is depending on where you live. International investors, you know, often are not saddled with capital gains taxes. But regardless, you know, I'm buying the stock at 20% below where it is now. And so if you take the tax differential in a taxable world, I'm a buyer, but it's one of these where generally once I'm fully invested, I stay fully invested in. So when I buy something new, I'm buying some things. This morning on this big decline in the stock market, Berkshire's only down $1. General's up at least. Who knows by the time we finish recording. But I'm buying some things that are down a bunch this morning. And when I buy something, I've generally got to sell something. So if we happen to have a little cash, if I'm building a new portfolio or a client's made a deposit, I may have some cash around, but generally I don't have cash. And so I've got sell a stock to buy a stock, whether I'm adding to a position in the portfolio or whether I'm putting something new in the portfolio. So Berkshire has never been a source of capital for us because it's always been undervalued. And there are things in the portfolio, generally from time to time, certain positions will be fully valued, sometimes overvalued. And so I'm always going to harvest the most overvalued positions in the portfolio to finance the purchase of something new. Berkshire's never fit that bill. Berkshire has now risen to the point where even here in the last few weeks, I've used Berkshire as a source of capital to buy some new things. And that's an oddity in the 26 years I've owned the stock. But it doesn't mean you need to run out and sell it because your opportunity set, the opportunity cost of everything else being fully valued doesn't mean it's a screaming sell. It's not trading at three times book. It's not trading at a big premium to intrinsic value as it was in 1998. It's not as attractive. And so if I were writing my annual letter today, my expected return would not be 10 to 12, but it's still pretty attractive compared to the opportunity set.
- [39:36]
Chris Brumstrand
Do you have an emotional attachment in selling Berkshire? I hope it didn't come across like an acquisition by any means because you're saying that you're using it as a source of capital. But the reason why I mention is because we, we who have followed and invested in Berkshire Holloway for such a long time, it's almost like it's a part of our identity. And I guess in your case, if you allow me to say so, your public Persona to some extent is also very much tied to Berkshire Holloway. I've read Adam's book and Alex's book and there is wonderful quote here, from you, for example, I think on both of them. And so is it harder for you? I can say on my end, I've sold books out once in my life and it was the first, I want to say, zero stock I bought. And it felt wrong. I know it was ridiculous because I think it was financially the right decision, and there were some different tax implications and all that stuff quite made sense. But it felt weird, it felt wrong for me to sell Berkshire. Do you resonate with any of that, or are you way too rational to think like that?
- [40:38]
Warren Buffett
I hope I'm rational enough to be able to separate price from value. That's the name of the game, right? I've got an emotional attachment to Costco as a business for the way they run the operation. We shop there. I own it, but I only own it anymore in taxable accounts where I've got a giant gain. I paid $29 for it, and the stock's trading at 950 and change and bought it at 18 or 19 times earnings. And it's traded as high as 60 times earnings. You wouldn't have expected it to trade at 60 times earnings. And sales in the last 20 years have grown at 8 or 9% a year. And at a point in my mind, the stock was beyond fully valued and so have sold it down. And don't regret it from an emotional standpoint, regret any sale that I made because I didn't see it going to 60 times earnings. And so Berkshire is not broken at all. It will earn, based on the size of its asset base and its capital base, good returns going forward. But price matters with anything. And it's a big position for us. It's grown. They don't pay a dividend. And so you think about portfolios and clients that have a need for portions of their capital per year, a foundation that donates 5% per year to charity. Well, if you've got 20% in Berkshire and it's not paying a dividend, and it's been compounding at 10 to 12 and even at times, because now you've grown from 105% a book to 180% a book, you've gotten that accretion to fair value. So you've made more than the roe, because the stock trading at intrinsic value, the position size grows. And so we have clients that really need to limit position size by rule, by kind of the way they're set up. You've got max position sizes in certain accounts. And so we've. We've sold Berkshire at times, and we always try to do it when it's closer to fully valued than not. It's. Again, it's not been at intrinsic for a long time. It was way over intrinsic in 98. But we've sold it when we've needed to. We've sold it where We've been kind of forced to or had to. And you know, if the stock traded today, Stig, at let's say, double where it is today, I would own very few shares. I mean, we would own it in taxable accounts where you're expecting a cost basis, step up at death, things like that. But we'd largely be out. And that's a function of price. I mean, Warren got attached to Apple, and when they had a billion shares of Apple, having bought it in 2016, 17 for 35 billion, it became if had they not sold a share, it would have been $250 billion last year. Well, remember a few years ago, they sold 100 million shares. The stock kept going up and both Warren and Charlie said this was a mistake to sell the stock and even intimated that Apple was going to be a permanent grove, a store of value. They admired the way the business was running, the durability of it being consumer brand. But then price kind of trumps emotion. And even having suggested that they wouldn't sell it, Warren sold another 600 million shares over the last year and a half and took it down to 300 million share position. It was half of Berkshire's stock portfolio. It was more than half of Berkshire stock portfolio. And that was on price. I mean, that was 35 times earnings for a business that's going to grow its top line at 6 to 7 and probably can't grow its profit margin much. It was beyond fully valued. And the rational thing to do was to trim an overvalued position down. And we would do the same thing with Berkshire. Doesn't mean we don't love the business and we don't cotton to the integrity and the morality and the way the place is operated. That's not going to change. From a capital management standpoint. There are times where you've got to trim positions when they become so fully valued that there are better things to do with your capital, and that's opportunity cost.
- [44:23]
Chris Brumstrand
Now that you brought up Apple, and we also just briefly talked about this before we hit record and we talked about that we were happy about Buffett selling Apple, and perhaps we weren't too happy about not selling all of Apple. Do you have any reflections on that?
- [44:38]
Warren Buffett
From a fundamental standpoint? Apple was too expensive, Costco is too expensive. I go through examples of both and why you're just not apt to make a lot of money in the next 10 years with businesses like that when they're priced at such full valuations. And so I've suggested for a couple of years now that I'd wished Berkshire would sell Apple down. I expected them to sell it down last year before they did and did cartwheels when I saw the sales and the materiality of the sales trimmed down at 35 times earnings again for a business that's going to grow on a huge sales base of north of $500 billion with a seeming inability to improve the profit margin much beyond mid-high twenties where it is now. It had to be sold and it would have been terrific to sell the whole thing. Berkshire's going to pay a huge, paid a huge tax bill and Warren's never been keen on sending more taxes than absolutely necessary and so has done a pretty good job swapping assets in past years when he sold what was the Washington Post, swapped it for a TV station and even some Berkshire shares and has found ways to offset realizing gains creatively. But there was nothing to do with Apple. It was either sell it and pay a whole bunch of tax, literally cash going out the door in tax, or sit with a stock that's beyond fully valued. I mean very overvalued. And so at 300 million shares and not a billion shares, a lot of risk was taken out of the position and out of the stock portfolio. Now you've got a giant cash position, 200 plus billion of the 300 plus billion, which is deployable into other things. And so you welcome what's happening in the stock market. You welcome stock market declines, you welcome recessions, you welcome financial crises. Not for the pain they inflict on everybody, but for the opportunity that comes with price and price relative to value. You'll see if this decline continues in the pool of very large cap blue chip stocks, companies with durable earning power that were largely very expensive. A lot of the market has been cheap, despite the market being so expensive. But again, back to the earlier conversation about cap weighted versus equal weighted. You've had 50 or 60 or 70 companies that were just beyond viable. They were too fully valued. But you get a severe decline. And with our cash reserves, ours being Berkshire's cash reserves, that money is going to get put to work opportunistically, either in securities or in whole businesses or both. So you live for volatility and take advantage of it. So I'm really happy they sold Apple.
- [47:25]
Chris Brumstrand
And I know you are as well, very much so. Chris, I want you to shift gears here a bit. Well, still talking about Berkshire. How can we not? But from a different angle here, luckily not a year go by without hearing book recommendations from you. And I already highlighted Ellisik's book, Unscripted. It's just a fabulous book. And it's with all the transcripts from the Berkshire Hathaway's annual shareholders meeting. And I swear that even though I've gone through them so many times, that every time I go through them, there's something new. They can't have said this before, of course they have, but there's just something about it. You go through it again and you see things in a slightly different way. But anyways, I think whenever I read them this year, what stood out to me was the 2014 meeting, and it was about Buffett's response to abstaining from the management compensation proposal for Coca Cola. I would say it's a fascinating case study in itself. But I think my broader question first is how much do you think, as a shareholder of Berkshire Hathaway, that Berkshire should take an activist role on boards and how public should they be about their opinion?
- [48:43]
Warren Buffett
As you know, Warren's always said, praise by name, criticized generally. And so with Coke having bought Coca Cola after the stock market crash in 87, so put $1.3 billion to work accumulating what was 200 million shares. The stock then split, so 400 million shares, but put 1.3 billion to work by 98, again, having talked about where Coca Cola was at north of 50, closing in on 50 times earnings, it was 40%, let's say, of the stock portfolio. So you took 1.3 billion to 18 billion. Today, the Koch position, they haven't sold any, is kind of mid-20s billions. So it's been a really kind of a lousy stock since 98, but partly due to the fact that it was so overvalued, but partly due to the fact that Coke is just a very mature, slow growing business. But on compensation, and I love Alex's book, I mean, it's on par and even as much or even more of a joy than Larry Cunningham's the Essays of Warren Buffett. For me, it's a huge resource. I'm so familiar with these annual meetings. I walk around and listen to earnings calls when I'm walking two hours a day, three hours a day, listen to earnings calls and podcasts like yours. But my advice is listening to the old Berkshire meetings and I've kind of got a sense of what was said during the morning session of whatever year's meeting. But that Coke thing was big deal in that Warren had been on the board. I mean, he joined the Coca Cola board shortly after putting the $1.3 billion in. So he got on the board in 1989 or 1997, but he was on that board for 15 or 16 years. But by 14 he was off. And Coke had been buying back a lot of stock, but they'd been giving away a lot of stock. And so over all the years of all the lessons in the chairman's letters and in the Warren and Charlie's commentary, fielding questions at the annual meetings, they talk about compensation and stock options. And there was a time when options were not an expense on the P and L and there was an argument they should be. And Silicon Valley pushed back against it. And Berkshire was pretty outspoken suggesting, yeah, if it's not an expense, what is it? And you had huge dilution in the S&P 500, massive dilution even at companies like Microsoft that were giving away 4, 5, 6, 7% of the company per year and hadn't figured out how to offset the dilution by buying the stock back. The Coke was giving away a bunch of the stock and by the 2012, 13, 14, they were buying back a lot. They were spending a quarter to 40% of cash flow from operations repurchasing shares and they were barely shrinking the share count. I think as Warren put it, they had several hundred million dollars that were going to be given away over a four or five year period of time. The dilution was, as I recall, something like 3% of outstanding shares that were being given away in stock options. So Warren was very publicly critical of the compensation package of the option grant that was being given and awarded, but he only became publicly critical after it was approved, after it was voted on. So he wasn't critical prior to the proxy vote, did not take an activist role and campaign against it, but talked to Mutar Kent, I believe, who was the CEO at the time, and said, look, here's why I think it's a bad deal, because this is a giant amount of dilution. You're going to give away 3% a year, you're going to buy the shares back, you're not diluting it. And he went through the math and to show what the dilution factor was, companies would get a tax benefit when stock options were exercised. So if you give the stock away it 40 and it grows to 60 or 70, the insiders benefit. What's interesting about that is that was Berkshire being very publicly active beyond what they would normally do. And it was a message not just to Coca Cola, but broadly about the way stock options had become abusive. And what's interesting in the last 10 years, if you look at Coke And I follow Coke and you read the quarterlies and listen to the earnings calls. Business hasn't grown a lot, it's mature. Their cash flow from operations hasn't changed a lot in the last decade since that 2014, admonishing the business about the egregiousness of the grants. I think Coke is, if you add up their cash flow from operations, when I looked at this, probably add sums to 100 billion over the last decade or so and they've bought back something like $15 billion worth of the stock. So spending 15% of catchment operations, guess what, the share count's done. And this is the exact same for the stock market. No change, zero change. So you've spent $15 billion, 15% of cash from operations and you have not dented the share count. So I think what's happened is here in the last five, six years they're not spending as many dollars buying the share back. But that's because a lot of companies have morphed from stock options. Once companies had to expense their options and once tech companies realized that in 2001 and 02 stocks could go down. And again the NASDAQ dropped 80% options being kind of a one way street, they have leaned more on restricted shares, RSUs and performance restricted shares. So you're not giving away as big of a percentage, but it's a guaranteed grant of compensation based on the simple vesting of time and in some cases with performance. But S&P 500 for the last quarter century, companies have spent 50% in aggregate for the S and P of cash flow from operations buying shares back and you have not dented the share count in the last decade you've declined it by a little bit. But over 25 years you have not declined the share count by a single share despite 50% of cash earned from the operations of the aggregate of the S and P being used in repurchases. Well, so that is a been a massive conveyance of wealth from the shareholders to the managements of the companies. And that's what Warren was trying to say in 2014. And to do it publicly by name was unusual for Berkshire, but sent a message and it seemed like it fell on deaf ears.
- [55:11]
Chris Brumstrand
Let's take a quick break and hear from today's sponsors.
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- [58:15]
Chris Brumstrand
Chris I wanted to, if you allow me, make another comparison between your and Buffett's letters. And so I wanted to quote here from Buffett's most recent letter. So thank you, Uncle Sam. Someday your nieces and nephews at Berkshire hope to send you an even larger payment than we did in 2020. Spend it wisely. Take care of the many who for no fault of their own, get the short straw in life. They deserve better. And never forget that we need you to maintain a stable currency. And that results requires both wisdom and vigilance on your part. End quote. After reading that letter, read your letter and you have this wonderful Note on page 116. Just in case anyone is sitting there taking notes out there and just going to say 116, there is a very interesting discussion where you talk about depreciation maintenance capex, and then if we can link that back to this stable currency component. Could I kindly ask you to elaborate on this?
- [59:11]
Warren Buffett
There's a sense that generally your depreciation expense is going to match your capital expenditures per year. So maintenance capex, replacing your roof, replacing a boiler, setting aside reserves to finance your ongoing maintaining your property, plant and equipment in an inflationary environment. And Berkshire's spending, I don't know, 19 billion, pushing $20 billion a year on capex. And their depreciation charges have grown from 10 to 12 billion. So there's a lot of growth capex, and a big chunk of that growth capex is in the energy operation, where with tax credit financing, where you've got a negative tax rate in that subsidiary, you're building vast renewable energy capacity in the electric utilities, increasing wind, increasing solar, the grid that goes with it, even the railroad. After Berkshire bought The railroad in, oh, nine, closed in 10 for the first four or five years, Berkshire was their capex at the rail was twice the depreciation charge. Now, Warren's always said, and rightfully, that maintenance capex is larger than depreciation by some modest factor, but it's not twice. And so there was a lot that Berkshire did with the railroad, that BNSF did with the rail increasing capacity. They didn't increase track miles, but they increased the number of track running into the west coast ports, for example, so you could increase the number of trains that would run in and out. When we had introduced intermodal, the double stacking, you had to expand your asset base in the west, so all the tunnels that went through mountains, you had to blow them out and increase the size. So there was CAPEX dollars that needed to be spent that improved the capacity of the railroad. And that took a few years to do. But then those capex dollars have come back down to where now you're spending 140 cents on the dollar of capex versus every dollar of depreciation expense. Broadly, though, and I think there's a 1 to 2 billion dollars kind of hidden charge when you have inflation. But the cost of replacing your fixed assets relative to the rate at which they're being depreciated from an accounting standpoint, gets out of line. And so if you're writing down an asset over 20 years on historical cost from 10 years ago or 15 years ago, by the time you get around to replacing that asset in an inflationary world, the maintenance capex, the dollars required to replace the asset, are higher and higher and higher. And so in Berkshire's case, not an insignificant chunk of their $20 billion in capex is higher in all likelihood than the dollar spent on depreciation. I've never asked a question at the annual meeting and last year for the first time, I sent that question to Becky in hopes that she would ask it and she didn't do it. And I'll do it again this year because I think it'd be worth hearing from Warren, his comments on inflation. But this is broad now and you've got the hyperscalers, you've got certain of the Mag 7, everything that's going on with AI and the cloud businesses that were very cap light are no longer cap light. And the billions of dollars being spent, you're elongating depreciation schedules. But broadly maintenance capex across the broad spectrum of industry has gotten more expensive and for that now share repurchases are down. I think growth capex dollars are down. Profit margins kind of back to how the market gets valued. Profit margins have declined from 13.3% in 2021 to 11.8% at year end. With what's going on today, margins may actually decline again this year. So you've had very little profit growth in the last three plus years, but the cost of replacing your assets is higher. And that is little understood and little talked about. And it's happening at Berkshire as a microcosm. What's happening more broadly in the economy? And I'm glad you brought it up because I mentioned it briefly in the letter but probably should have expanded on it more at length. But it's a hugely important concept and hugely important cost that's unrecognized until a lot of time has passed.
- [63:35]
Chris Brumstrand
Buffett said this last November, father time always wins. But he can be fickle, indeed unfair and even cruel, sometimes ending life at birth or soon thereafter, while at other times waiting a century or so before paying a visit, end quote. And I mean there's just something about reading that. And of course we know that there's a number to everything in life, a number of sunsets and sunrises to see and a number of times whenever Buffett is going to head the shareholders meeting. And I'm sure that many hardcore value investors will still go to Omaha after Buffett is no longer with us. But perhaps there will be fewer going to Omaha for the pilgrimage in May. Of course, no one can replace Buffett. What do you think will happen with the wider value investing community whenever, well, Father Time finally wins?
- [64:29]
Warren Buffett
Well, I think you're right that fewer will go to Omaha. I'll go for as long as a group's going. And the weekends become as much about catching up with friends and colleagues and the community that is Berkshire. It's not just this conglomerate, but it's a community of like minded people that got into the things we talked about, trust and kindness and integrity, everything that goes with it. There are so many side events now. I'm speaking at Mario Gabelli's thing again this year on his panel on Friday morning. Guy Spears asked me to speak at his event on Friday afternoon. Buffett is unreplaceable. Charlie is unreplaceable. We'll never. You can't replace that. Greg and Ajit can't replace it. Whoever succeeds, Greg and Ajit can't replace it. You'll not replace the wit and the humor and the banner and everything we loved about it. We're not going to have the movie this year, which is too bad. But the numbers will decline over time. But there's a reason to gather. There's a reason for the value investing community to gather because we all value a lot of the same the characteristics that I just mentioned. And so I'll go for as long as possible. Importantly, from a teaching standpoint, you think about Ben Graham who died, I don't know, 1980s. He wrote security analysis in 1934, second edition in 1940 was involved. He wrote the next, I guess the first four. Cottle came in for the fourth edition. But you know, then Cottle and two other guys did the the next edition. But then Seth Klarman does edition six and seven and essentially went back and pulled the second edition, the 1940, which is my favorite, it's by far the best updated. It pulled out a little bit, pulled out some of the examples. And Ben was such a great teacher of using individual companies as examples. But some of the accounting principles change in some cases, and some businesses or industries become irrelevant as teaching tools. But then Seth brings in eight or nine people to write the introductions to each of the sections. And just those introductions alone are gold. And so then you think about Ben's Intelligent Investor. Warren talks about chapters eight and 20. But if you're in the investing game and you've not read the Intelligent Investor, you're missing out, whether you're a professional investor or not. Anybody that's Investing in a 401k ought to read that book multiple times. But here we are, decades after Ben passed, and he's still a role model for a lot of us and a teacher for a lot of us. And I'm 100% certain that 50 years from now and 100 years from now, the lessons that Warren and Charlie have given us over time will still be taught. They're being taught in business schools. Good friend Harvey Eisen, who lot some of your listeners will know. I mean, Harvey is a legendary investor in New York. He'd gone to Missouri, University of Missouri, where my son's going to school. A fixture on Lou Rukeyser's Wall Street Week. For those that remember that kind of given. Terrific show. Odd. Too many. But Harvey puts up a bunch of money and essentially endows this class at Mizzou. That's for years has been the best, most loved class called the Investment Principles of Warren Buffett. Well, those things didn't exist outside of Columbia and a handful of other places, Notre Dame, when I was in school when you were growing up. But value investing is being more and more incorporated into finance curriculum. Buffett's being studied. My letters are sometimes read in an academic setting, which is very gratifying for me. And so you won't get another Warren. You can't. But what he's given us through the chairman's letters now with the archive of the annual meetings which he donated to cnbc, the videos you've got, the podcasts, these lessons that are timeless will be important for anybody trying to get their arms around how capital should be allocated and how money works for time immemorial. So I don't know if that answered your question, but I dread the day because it's coming very soon, I fear. Yeah, already lost Charlie and Warren at 94 kind of points to the IRS mortality tables being stacked against him. And every day and every year we get him is a blessing.
- [69:12]
Chris Brumstrand
That's well said. And I'M sure you also noticed in, in the letter that the Q and A session was cut down. And, you know, there's some. I don't know, I might read too much into it, but I was thinking about the Father Time comment. Why else would you cut down the Q and A session? I don't think anyone enjoys them as much as Buffett himself. And so, yeah, sad, but in a beautiful way. I have to ask, because you're so much a part of the ecosystem, I wanted to ask you about Buffett's letters. Do you have any favorite letters? And I don't want to put you on the spot and say it has to be this specific year, but there are different niches within our niche. Chris, about people saying the 70s are so much better than the 80s or the 90s is so much better than. I know it's always a mixture of different things because he talks about so many different things in the letters. But do you have a favorite niche of the letters?
- [70:08]
Warren Buffett
I really don't. When asked how to attack them and what to read, if students or young investors, if they ask me what they ought to learn or what they ought to know, I've always said, look, go take the 1977 letter and start reading them consecutively. They're on the Berkshire website. Used to be able to mail, used to be able to send a mail in request. And Berkshire would actually send you three bound copies of the 1977, I don't know, seven or eight years. And then another seven or eight years. Seven, eight years. And that they were here. I mean, they were that thick and. But they would, they would give you the printed out copies that were bound and it was really nice thing. But they're available. You learn so much by starting at the beginning. And for whatever reason. 77. And so the letters prior to 77, some of us, they're available, but they were very business specific. Warren hadn't yet taken upon himself to be a teacher. Starting with the 77 letter, he was teaching about things like executive compensation. Kind of getting to your 2014 question and our discussion about Coca Cola and what he did with management there. Like anything, knowledge is cumulative. Your success as an investor is cumulative. Your circle of competence, I think gets narrow. But you learn more and more and you're always learning. So I would start at the beginning. No, I think the best thing to do for those that are curious about it is to start at the beginning and go from there. But then augment that with Alex's book. I mean, he did a brilliant job calling out from all of the meetings from 70, from 1994, which is when Warren made the videos available. I mean, when I would. I first went in 2000 when we bought the stock and wondered for years why all the fancy cameras and recording equipment if you're not. If these are not public, but they have the archive. And at the point several years ago where Warren gave that archive to cnbc, they've done a really nice job with it. So I would read every letter in sequence, and I've read every letter multiple times, but I can't necessarily remember what happened in the afternoon session in 1998. But I know I want to talk about stock options or whatever. So you can go to Alex's book, and the way he's got it organized is brilliant by subject matter. Larry's book, the essays of Warren Buffet, similarly with the letters. So you've got the archive of the meetings from Alex, you've got the archive of letters from Larry, and those are gold. But there's no replacement for reading from the source itself. And so if you've not read the history of the Chairman's letters from 77Forward and you're dealing with capital, your own or for others, you're making a big mistake.
- [72:56]
Chris Brumstrand
There's just some wonderful small nuggets. And my apologies for completely nerding out whenever you read the third letter and you're like, wait, wait, wait, wait, was there a dime of dividend? 1967, what's going on? And there was all of this quip about Buffett going to the bathroom or there was a break or whatever kind of thing he referenced. There are all of these small, wonderful things, and you sort of get drawn into this Berkshire myth. I don't know. Myth is probably not the right word, but you start to see things in a very holistic way. Way. And I think, I don't know about you, Chris, I often get asked where to start. There's so much information about investing and so many people saying so many different things and what I tell people, and no one's going to do this, but what I tell people is go through all the letters and go through all the meetings and then do it all again. Especially whenever you do start investing and you're sort of like, you read it in a different light. It's okay to disagree with Buffett from time to time, but knowing what Buffett or Munger are going to say to the problem that you have, which you're going to learn after having gone through the content so many times, you're almost like you know what they would say about this specific company. It's just so helpful. And then you have to put in your own fingerprints and it's your portfolio. But that is how I would start. And of course, no one listens to me because it's too much work, but that is what I would do.
- [74:18]
Warren Buffett
As you're talking, you're 100% right. And I'm thinking about my favorites, and by that, the ones I've gone back to more than the others. And I think Warren, the genius of Warren Buffett has been pivoting when he's made a mistake, or pivoting at the moments of secular peaks and secular troughs. It was buying the textile business in 1965, quickly realizing it was a mistake, and then fixing the problem by diverting capital away from textiles, not buying the next loom, but by buying common stocks. But then by buying National Indemnity in 1967, the pivoting away from stocks with the general reinsurance purchase in 1998, shrinking Berkshire's exposure from 115% of book value in the common stocks down to 69% through that transaction. The lack of ownership of tech stocks in the late 90s. If you listen to or you read the transcripts of those meetings around 98, 99, 2000, when you read what Warren was writing, when you read the Fortune article that was a amalgamation of four speeches that Warren had given in 1999, he was saying, we're at a secular peak and expectations are too high and essentially be prepared to lose a whole bunch of money. But he never said it directly, but when you listen to those things again and again and again, they were telegraphing exactly what was going to happen. They knew exactly how it was going to play out. They simply didn't want to terrify the world and say, you're at a secular peak and be prepared to see a 49% decline on the S&P 500, even though that's what you got. Warren talked about profit margins mean reverting in 99 in that letter. And he wound up ultimately being wrong, but historically correct. Because when you do this combination of margins and multiples, multiples were very high. By the dot com bubble peak, S and P was trading at 33 times and the profit margin had gotten up to almost 8. Well, excluding 1929, when the margin was 8.9%, you were range bound. And he pointed out the profit margin range for the decades leading up to the tech bubble peak was 4 to 6.5% and you were pushing 8. Well, you wound up being right. And what Contributed to that 49% decline in the S and P was the multiple coming in from 33 down to 18 or 19. But the margin dropped from high sevens down to 5.7 or 5.8%. Now you had some sales growth, but the combination of the shrinking margin and multiple is what drove the market down 50%. He was right. What he missed was what evolved and that was the margin growing to 13.3% by what I think was the 2021 secular peak. But he's been adaptive and he's a proven ability to pivot at times. He missed the cap light profitability of Microsoft and Google and Meta were the profit margins that have been on average in the mid-20s. Amazon can't have a margin that high because of the retail side of its business, but in Tesla because it's capital based and is a car manufacturer. But the others of the seven can be wildly profitable on a margin base. He didn't see that coming. But you also wouldn't have seen interest rates at zero. And so despite a lot of corporate debt, until this recent inflationary bout where interest rates rose, you had a lot of debt but at very low interest rates. So the interest burden, the interest expense was not very high. You wouldn't have seen the tax code change from corporate taxes being 35% when Warren gave those speeches and wrote that letter for Fortune. 35% down to 21%. So put it all together and the margin got higher, but his ability to pivot. So the combination of the letters and the annual meetings during that tech bubble are pretty informative and I think from an educational standpoint to belabor the point and kick a horse, even though it's thoroughly dead, as Charlie would say the later letters in the last four or five years, Warren's taught everything there is to teach and there was no point repeating. And so he's really kind of gone to praising those in the Berkshire world as opposed to teaching more about accounting, depreciation, inflation. He said it all. And so again, that's why I'd go back to the earlier of those. But my favorites, for what it's worth, are the letters that had to do with what was going on at moments where he changed his mind or he realized you were at an extreme both on the high side and the low side. And so the late 90s or early 2000, the 2000 was three or four of my favorites.
- [79:20]
Chris Brumstrand
Chris, thank you so much for sharing all your wisdom. I want to make sure that I give a handoff to where people can learn more about you some Augustus and your wonderful letters.
- [79:29]
Warren Buffett
Yeah, so we've put really since I wrote up Berkshire for the first time in my ongoing analysis, we have the archive of letters on our website simperaugustus.com under client letter tab. And then we put these type interviews, these podcasts and various other interviews that we've done are also on the website. And so this, when you publish it here in a few weeks, will drop it immediately the website. But for those interested in, in our letters, for what it's worth, you can find them on the website semperaugustus.com and.
- [80:03]
Chris Brumstrand
That'S like I've said so many times now, make sure to, to do that. Chris, I, I kind of like feel like I'm sneaking in a tough question here at the end, but it's something I've been thinking about here throughout the episode, especially now that we talked about, you know, the, the mortality of, of Buffett, of Munger. And I know you're in your prime of your life, so I hope I'm not hinting at anything wrong here, Chris, for you to create such a monumental piece of work and covers. Yes, you talk about Berkshire Hathaway, but you talk about Berkshire Hathaway a certain way and then you talk about a ton of other really important stuff. Some of them are timely and some of them are more evergreen, if you allow me to say that. How have you thought about doing this work for the value investing community? Are you thinking about legacy by any means? Is it even rude of me to ask you that question?
- [81:00]
Warren Buffett
Yeah, I don't think about legacy at all. I'm so fortunate and blessed to get to do what I do for a living. I mean, finding something you really love doing that you're intellectually curious about, the competitiveness of it, the analytical search, the ever changing evolution of businesses and how they operate. It really cottons to what I like. And so at a point I chose, I thought it was important to give back. We don't have to make our letters. In fact, I really, for a long time didn't want to make our letters public and thought we work for our clients and we're not going to share our thoughts outside of our client base. And Joe Coster, our mutual friend, encouraged me to when I wrote up Berkshire for the first time to put the letter on the website. And I've always tried to teach with the letters. Even if you go back to my 992001020304 letters, there was a lot of teaching there and I thought it was important that our clients understood how we looked at the world. But we would only send our letters to our clients and 30 or 40 of my goofy friends that similarly would are just intellectually curious about stocks and love what we do. And so I'd be on the phone with them. So it's been really gratifying to see the acceptance of the letter and to see it now incorporated on an awful lot of college finance settings, student run funds, to have young investors reach out to me or even track me down at times when I'm out walking, certainly in Omaha, and let me know how much they appreciate the time and the effort that goes into the letter and how much they've learned. That means a lot. I mean, Warren, again, didn't have to. Didn't have to do what he did with the letters. He could have just stuck with writing about the operations of the companies. But at a point, having learned under Ben Graham, who was such a great teacher, Warren decided he was going to be a teacher and on a much smaller scale, I felt the obligation to do the same. And so I'm very happy. It has nothing to do with legacy. I mean, I simply hope that I win the genetic lottery the way Charlie did and that my mental faculties are sharp and my body stays healthy and I'm doing what those guys are doing into my 90s. I have no intention of ever stopping. And why would you? When you love what you do and you love the people that you do it for, it goes back to the individual investors and the families we work with that are such extraordinary people. We've got this obligation to take care of their capital and be stewards of capital and trust and integrity and kindness is also important and, you know, knock wood. At 56 years old, you know, I pray that I'm doing this for several more decades, that my time can be as longer than the IRS suggest it should be.
- [83:52]
Chris Brumstrand
Well, from your lips, Chris, thank you so much for being so generous with your time, Chris. It's always a highlight of my year whenever we're doing this interview here before the Berkshire Weekend, so just thank you.
- [84:05]
Warren Buffett
Thanks, Doug. I love doing this with you and look forward to seeing you soon.
- [84:08]
Stig Broderson
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