Berkshire Hathaway Part III
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Go with just water as my beverage this time. And no peanut tal.

well, do a little hard attack last time after a sugar.

I think you could hear IT in my voice. I think I was a little manic.

I I am going with A A vital water zero because we are going to need the electrolier ts for this marathon.

Is vital water owned by coca cola.

baby coke?

That's right.

I was on my run this morning and I was listening to the a adam meat book that I referenced. And I ran by uh burker healthy properties uh like house for sale. And I was just like it's pretty hard to go through your day without using a burker product or service.

I'm so excited. I literally like woke up in the middle night last night like I can convert sleep.

So excited, really. yeah. I love IT.

Welcome to season eight, episode seven of acquired the podcast about great technology companies and the stories and playbooks behind them. I am an gilbert and I am the cofounder and managing director of seattle based pioneer square labs s in our venture fund, P. S. ventures.

And i'm David recently, and I am an Angel investor based in a simple co.

and we are your hosts. Well, David, here we are, the final episode in our birth chercher logy.

I feel like we are texting about this. I feel like we're like bungee developing the halo franchise. You know, halo two with bus, we're going to finish the fight.

You know, last time was supposed to be the end. We're back for number three. And hell three was so good.

That was the best, the scenario lot to live up to. Well, listeners, we told you about Warren literally perfect record with the buffet partnerships in the sixties, where he generated a positive return and eat the stock market every single year for twelve years. We then wandered the path with warrant of consolidating his investments into burker half away, joining forces with charly swing through regulators and coming out unsaved question mark.

yeah.

When we last left off, warn in teri were, in one thousand nine hundred eighty two, finishing up an absolutely monster run of returning over twenty seven percent per year for twenty two years.

Woo spoil, not going to be the case this time.

No, those were no doubt burch's glory days. So today we will tell quite a different story, a story of what happens when a time tested investment philosophy gets confronted with systemic changes in the world like the P. C.

And the internet, and concurrently, while the world was changing, so was burchill by virtue of their own success. So when you now need to write billion dollar checks to move the middle, there's only so many places you can go knocking, and all those places are quite visible to other investors, too. So today, on part three, we will tell the story of the large and mature bircher half way and examine what the future may hold with the next generation.

Well, listeners, are you on acquired slack member? If not, come join us. The most recent thing that I want to highlight is the digital assets channel.

IT is one of the best entry points i've seen on the web for people to discuss everything going on in the cypher landscape. Yes, I just said crypto on the bert che episode in a very thoughtful and new once way. Just great discussion going on.

There is also great for beginners. So as always, come join us, acquire data, m, slash, slack. okay? Listeners, now is a great time to tell you about long time friend of the show service now.

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Well, David, before you take us in listeners, as always, the show is not investment advice. David and I may, and I think everybody told you, some of us do have investments in the companies we discuss in the show is for informational and entertainment purposes only. David rose at all tell us a story.

Are right. Well, as you said at the top, the show last we left Warren and chari in one thousand nine hundred eighty two. They, in particular Warren, are heroes. Times have never been Better, means great.

Warn is a legend like he literally single handily reversed a federal government decision and saved salomon brothers is crazy about his stature is unparalleled, like nothing that the finance world or the corporate world or the investing world or the business world has ever seen. He's the oracle of omaha. People are flocking to the annual meetings, literally the annual shareholder meetings course.

What's talk for capitalism?

Stock for capitalists are attracting thousands of people.

And I grew a, of course, there was like a handful of people that would gather in a baseman and then was at a hotel, and then IT was at a larger venue. By this point, he's entering arena territory.

He's literally feeling arena is like a rock star and worker stock the act as they're only, well, it's not the age. There is no a and b yet. Just bircher stuck passes.

Ten thousand dollars a share, far and away, the highest surprised single share of stock in history. Buffer t himself is worth over five billion dollars. He's rocking up the forbes list. But there is one person out there in amErica and the world who is moving up that list faster than Warren. And fate is about to bring these two gentlemen together.

How many we left on the Solomon 的 saga and were right .

in with the gates， bill gates, man, who has been in the news a lot lately.

Yeah.

well, that's another topic for another day. So back in the previous summer of one thousand nine hundred ninety one, before salomon, which would start going down in the fall of one thousand eighty one and wrap up in nineteen eighty two, but before everything really kind of hits the fan, k. Gram arranges for a fourth of july weekend bash on bambridge island in way, what a wonderful place. Pain, just like one of the best places in the world.

had a mere ferry ride from seattle. And then you feel like your millions miles away from civilization totally.

you know, advice, warn along. Of course, part of the festivities that are planned is that on the fifth of july of one thousand nine hundred ninety one, they're gonna go over to the hood canal and spend all day with a very prominent seattle area family, mary and bill gates the second, Better known as senior. And potentially their son, bill gates the third might drop out at some point during the day.

And this is where bill gates the third. I mean, this is like, famously, his sort of family home growing up. He learns to swim out there. His father is a very prominent lawyer and Angel investor and would have galvanized of the seattle start up .

community from the early days, his mom's under the united way.

Yep, yep, oh no. This is long before microsoft that already sort of a prominent family in the area.

Warrant is a little reluctant to go on this trip to. This is not sort of his thing, but as he puts IT quote anything for key so he goes out, he joins K A few others at this weekend. Similarly, they will gets the third, does not have a lot of interest in going out on the fifth for this all the event he's super busy.

He's from microsoft public company. He wants to stay in redmen and workweek work, but mary, his mom, forces him to come out. Bill would say later, as I told my mom, I don't know.

Well, meeting a guy who just invest in money and pick stocks course, talking about meeting and continues. I don't have many good questions for him. That's not my thing. I love how gates judges the um quality of his social time by questions that he can have for somebody quick .

side of watching these old videos of gates. We were so used to his polish image now, but when you go and you watch videos of him from this time frame, especially in the early nineties, he's obviously so brilliant.

But he's he's mad.

awkward yeah he's vigorous ous in the way that he sort of attacks lines of questioning and engages with chAllenges. And it's assuming you are not the subject of his ire. He is a really fascinating thing to watch and totally different than the gates are sort of familiar with now.

Yeah, that's a good fight. yes. So mary, the force is going to come out. She's still as mom, but what he's going to do is going to come later in the day he's going to fly in on a helicopter so that he can, you know get a good like half three quarters of a day work in this is joy fit microsoft. You've talked about this on the show, but like microsoft in one thousand nine hundred ninety one, all three hundred and ninety until the D O J case, IT was intense like they were killers there yeah, you should .

think about IT like uber in twenty sixteen.

totally. So bills plan is he's going flying on the helicopter and then he's going to make the helicopter wait their hilly dinner and then he's gona fly out, escape, go back to talk. So he's introduced to warrant and warrant immediately asked bill what bill thinks of IBM and whether they're going to do well in the future.

I cannot believe we're going to get to this much latter in the episode, but Warren is already obsessed with IBM like, my god, Warren, don't buy IBM preview that like, don't do IT, don't do IT gates, of course, agrees with me here. And it's like, no, you should absolutely not buy IBM. You should buy two stacks and two stacks only microsoft and intel, and you should buy nothing else and you should just hold them. This is nineteen nineteen, anyone? So microsoft at this point has about a ten billion ali market cap, and until has a three billion light market cap.

get is so deepen its so obviously he's right here. But IT is incredible that IBM even though they made the computers the value and the value chain did not accrued to them in any way they perform. They became completely, you know dumb terminals and all of the value is captured by the chipmaker and by the Operating system maker, which blind sided everyone. Just a brilliant business strategy.

holy brilliant business strategy. So gates, then he's probably like pretty annoyed by this parts question given that he doesn't care about this night is like like this too. You buy these, don't do anything else private. Just listen to bill gates here.

Gates turns around and asks buffet about newspapers because gates is probably really starting to think about coming after newspapers as part of I think I don't know if like in carta, existed already at this point, but microsoft spinning up all sorts stuff, and Carter was in silence. Dia, but then they had once live in the coming of the internet. Yes, I all heard the stuff.

They were launching, these things, interestingly enough, in like the ninety three and ninety six time frame. And there's this unbelievable interview that bill gates does with wired. I'll look IT up and see I can link IT in the show notes where he's basically combatted vely arguing that content clubs could never be microsoft s next business and they're just not big enough like you don't understand how big windows is.

These are multibillion dollar businesses and unless we become disney or something, content clubs are is never going to cut IT. And it's fascinating looking at that aggressive reaction by gates and how he feels versus the market cap of saying netflix today or how important is to amazon prime strategy to have a content club, as we talked about with bread on the last episode. So gates is, uh, at this point thinking, or we ve got a tiger by the tail with this windows thing. There are few other businesses as big as this one. Let's just go for the ten plus billion dollar opportunities.

yep. So here's where buffets or the surprises gates you buffet is like american newspaper may. A number one I started as the paper boy takes is the comical franchise business he earns based on the board, the washroom post.

So on buffalo evening news, all the stuff he's like, look, today, newspapers are the best business out there. I'm thrilled to on them, but I got got to be honest with you, I am starting to worry about their future. He does not know anything about the internet.

He's actually not worried from that front, but he said he not. I'm worried about the encouragement of T, V, and in particular, cable television and people's news habits shifting television, increasing on newspapers and bills like, okay, well, interesting. That's not quite that s are expected from mr. buffett. So they start talking and they start to fall into conversation and knowing the two of them a little bit not personally, but do the show, you can imagine that they just sort of spend all day talking. And like other people, are there kids there, parent there, a bunch of other, you know, seattle area sort of digital stop by two of the future founders of madrona stopped by bill rock's house, who was an amazing man, part of the saturday night masker in the mix of administration, the first head of the E P. A jy Greentown, who is C E O of burning to northern at the time.

No idea. Wow.

just by lives.

See a didn't he go on to become the C E O of delt airlines?

He would. He would another, while later in life were an investment. Yeah, will get there but wanted to build is totally ignore them.

They are like super and growth with one another. So at dinner, they're all there. I guess their force to like sit down, enjoy the group for dinner.

The gates senior ask this August group assembled LED there. What factor? Ask a question in the table.

He says, what factor does everybody think has been most important in achieving, you know, where you've gotten life, and their people at the table gotten very far in life. And Dylan Warren both immediately reply with one word, which is focus. So these guys are like, they are two peas in a pod.

After dinner, the sun goes down, the helicopter leaves bill gates, the third stays, spends the night. Yep, warn has drawn him away from his work. Amazing, uh, as they become fast friends. But that goes back to omaha after the holiday. And on the first day, I don't know when the forth, the fifth fell, but on monday, whatever the first trading day is, after that, he makes another of his faithful, immediate split. Second, got stock purchases.

Tell you about microsoft.

David. He did by microsoft, just like he did with geo.

Oh, I actually didn't realize he did.

He bought one hundred shares of microsoft for his personal account so that he could keep up with his friend. The gates isn't that ridiculous any by zero till chairs again, even giving his history with entire and noise, which is.

in retrospect, CT. That feels like such a fraught strategy because not only are you losing out on the benefit of all the upside of actually being a shareholder in your vehicle, hathaway. You now want to spend a lot of time and dive deep with this person and he's an insider. And now you personally own shares in this company in your so you can't actually get a lot of the information that you want to talk about with them because it's too sensitive because you are a shareholder, a super meaningless way. This decision is .

confounding completely. But he does invite bill to join the gram group, uh, which is by now the buffet group, his group cronies and at the next meeting, which I think is in vancouver, a one of the sessions, they're all kicking around, you know, their favorite stack ideas. And bill ruin from the scope fund throws out codec as a name he's taking about barely gates immediately respond, code is toast.

I ve IT so great, so great. And of course, tom Murphy marth is is there in place. There is, well, television, media magnets and h they ask bill whether he thinks television is toasts too.

And bill response of this equal from the snob. No, it's not that simple. The way networks create and expose shows is different than camera film like kotex, and nothing is going to come in and fundamentally change that.

You'll see some fall off as people move toward variety, but the network's own the content and they can repurpose. The networks face an interesting chAllenge as we move from the transport of T, V onto the internet. But it's not like photography where you get rid of film.

So knowing how to make film becomes absolutely irrelevant. This crazy this is. And gates just described, like the next thirty years of media and the internet, like all right there, wow, is not unbelievable.

Yeah, I think it's actually a buffet quote predicting rain doesn't count building the arc does.

I love this .

one so much because there are so many of these. Look at Steve jobs describing the cloud in one thousand and ninety five or whatever IT is, or look at bill gates predicting how the media landscape would have love based on technology and yet neither of those actually came to fruition where they became the market leader in that given thing that they clearly articulated in that you captured and quoted video yes.

I just say personal life. I said i'll gave gates the um benefit. The doubt here. I bet microsoft would have made place here, if not for the antitrust case. D, O, J, they were .

going to extend their advantage to media.

Yeah, exactly. They aren't to embrace them there. okay. So we're going to come back to bill in a minute and there is a very, very important reason why a is just like such an impact on Warren s life in so many ways that will see throughout this episode.

I think this is also a really good lens to view this part three of like, let's contrast bill gates at warn buffet as we go along here. So there is one more than one, but one in particular other very famous warn buffs burger classic investment that we have not yet covered in our two parts thus far. Yeah you talked about out .

in the cold open or the last episode you actually been touched IT in the .

real story I do I know. Of course, we are talking about coke and Warren's investment in IT, which is just classic, classic buffer in so many ways. It's just unbeliever.

So back when warn was starting up his partnerships way back, we're going back to part one of the officers in the late fifties. He got to know one of his neighbors in omaha. I can't believe that like all of his great investments come from his neighbors in oma. And their kids played together. This neighbor or is named don kio and they both live on pharma street oma I know which is why foreign street is uh and the knowledge product and shame and everything he does over there is called .

amazing name grame street.

So KO was a salesman for the butternut coffee company at the time, and he had six. And the story goes that as warn is, uh, starting number partnerships. He asked on how he's planning to save for college for all of his kids.

Thicking, like, I want to get done, you know, on this partnership thing, gets some money out of them down is pretty sharp though. He asks his kids what they think of mr. buffett.

These kids like h, we'd love mr. bob. He's great. He's always at home whenever were playing with little susie, how he in Peter, you know, he's there and he doesn't like bother us, but he's at home.

So down is like, well, this guy clearly doesn't work very hard like he's always at home there the day i'm not giving in my money suit after that though in one thousand nine hundred sixty one butter that gets acquired by the dunk coffee company, don moves to houston, leave some a hat that. And then shortly after, in sixty four, duncan gets acquired by coca cola and down moves to atlanta. So fast for amid dates by this points done, is president and C.

O. O. Of coke. He is the danmark, one might say, to the therapy of the legendary coke CEO at the time.

Roberto goy eta, who is incredible C E, O, cubit immigrant, ran coke through all of the great ascendency of of the company at this point. Now, Warren is a man about washington, thanks to the posting. K, and one night he gets invited to dinner at the White house. I seem that thinks OK, or as her deep pair, something and lone behold, who shows up the White house.

but done his neighbor from great.

That's crazy. Yeah, they reconnect at the White house, his neighbor from farm on the street and down, like, I, I, I C O O A coke now.

And I take IT, that warn has fully switched .

from pepi to drinking coca a at this point done converted warn is like, hey, you know, really great to reconnect.

I remember you can giving the money back in the day, how you feel about that now I don't know that he said that orn says, no, you know hey, like, that's great that i'm happy before yeah, i'm kind of a pepsi guy though and uh really what I you know like to do that I have pepsy all day, every day I put cherie syrup an and it's great tonsillitis. We just launched a new product. We've got the product for you.

You don't have to put the therapy in your papers anymore. We've got Cherry cod. This is, I think they understand, like eighty three, I wants to say, maybe sometime around then also.

I didn't realize that the fact that the coffee company got rolled up into a coin, I presume the they were conglomerate lier than I thought. I mean, I knew obviously coca colas, a multi hundred year old brand, but they were single product for the majority of their life. I assumed IT was like the nineties and two thousands when they started becoming this big portfolio of beverage brands. But sound that was much earlier IT was.

yeah no, they were by another stuff um I don't know how they IT was as versus the cola business but anyway with Cherry coke done convinces were into switch and that of course causes were in the start thinking like, well, maybe I should take a look at investing and coke and he becomes intreat and as he digs in um I think this was like eighty five or so and maybe and IT was in eighty three I think a couple years earlier they had launched diet coke and diet coke was like a monster you know cocoa now classic as we will get into in a second, you know, is great, but like diet coke is huge.

But maybe the most successful beverage product launch of all time is a black best, so warm and treat. But he thinks, you know, hey, you know, stack Prices kind of have was keeping eye on IT and then new coke happens, which did I know about, i'd read of. But do you remember this then?

How do you mess this up? Like if you're a company like coca cola and you get all these big brains around the table and you basically have like a thing that's a trade secret, you don't have any I P protection around IT, but you have the magic formula and you have the brand, the not yet world renowned but sort of nation renowned brand that is synonymous with, like your sense of patriotism and its associated with one particular very odd, very well baLanced flavor, how on earth do you replace that? What are you thinking?

I think to preview you IT here, warrant would always say that the get everybody in trouble in a minute, but the thing you'd like to go, go is that the business could be run by a ham sandwich. Look like you literally, just like you don't do IT evidently not. I think they were probably just so bored.

At least the sandwich wouldn't mess with what the .

golden goose totally. You know, to be fair, this of the story is they ran all these blind taste test, and pepi had been, you know, making headway with market chair.

Delicious, lemony, weird, sweet thing they had gone on.

They try new flavors. And one of them test really well. People like IT Better than the old code svy.

So they literally pulled the coca sy of the shells and introduced ed newton ke. And IT is a unmitigated disaster. Type c is like, oh my god, this is the greatest on forever in history.

Please start a Price war. Coke gets into a huge fight with its bottles. The stock plunges, and the rumor starts going around that iran parlement, same dude from Solomon is circling the .

revlon gone activist investor guy.

How could we forgotten about this in the last episode? He was the villa in marvel that's .

river wave .

back in the day. Are marvel episode? I forget the heat like owned IT for a while and ran IT into the ground and yeah, permanent.

What a guy. So rumors ago around and he's targeting coke now in the wake of the new coke disaster. Enter White night Warren to save the day.

As always, he rides in. He buys one point two billion worth of stock on the open market in one thousand and eighty seven, which equates to six percent of the company. And then, just like good friend and salomon guys, eta and KO asked him to join the board, which of course he does. Side note, the coca cola board is where Warren meets herb Allen from Allen and company and starts go in the sun valley every year. This is really everything is coming up as as for warm here, man.

to like a company and be sort of prospecting IT and just to watch them go through the new coke thing and just be be sitting their Green like idio like this is my jeans. The trick is knowing how to feel those in the moment, you know, when you're not catching a knife, uh, that is falling, but rather buying the dip as they .

say a warn about IT the og by the dep investor and to add .

a little more nuances to that. I mean he does have this great strategy of an identifying an opportunity where a company has its back against the wall. Because there are activist shareholders or there is a deal that was on the table that's fAllen through and suddenly they need cash fast.

And he, like very much uses this lack of necessary approval by committees and red tape to just cubin with cash, make an offer he feels good about. IT sort of that Better to be approximate right than precisely wrong kind of that approximate right? I I bought IT.

IT looked good. I came in. I bought IT and now on a big shareholder. And IT was a pretty good Price.

man. I hope at some point that were an entirely send a case of wine over to to run parliament because like they got some deals because that I um so in the one thousand hundred and eighty eight berkshires letter to shareholders, buffet announced the cover story saying of IT, we expect to hold these securities, the security and coke for a long time.

In fact, when we on portions of outstanding businesses with outstanding management, our favorite holding period is forever. And by the mid nineties, a few years later, coke courses recovered from the new coke disaster. They have massively expanded internationally, deleted these seto. And then through the nineties were when coke went from being still socially with america, but like everybody in amErica drank to, like everybody in the world drank coke.

And this was part of the investment thesis too, that there was the sort of this like unexplored massive opportunity to bring coca cola to the rest of the world, particularly through this brilliant, innovative strategy that they have of just selling the syrup, whether they're selling yet to the restaurants that are putting IT in the fountains, or whether they're selling IT to the bottlers who have to figure out water and combination everything locally. They just start shipping the concentrated around the world. So it's reasonably cost effective to have, you know, just a few places that need to know the secret formula and make this stuff IT really can be a globally addressable market.

Good work if you can get IT for ham and wich. So coke is printing money within a decade. Burger is up over ten ex on coke.

And since then, so that was from like minutes to midnight ties. Since then, burker is only up less than four x on coke from that point in time over the next. Yeah, what is that? Thirty here? Twenty five plus years.

H that's wild. yeah. So ten x returns in the first decade, in three and half x in the next twenty five, which would sort of passage things to come mean.

compounding large numbers.

David sure is hard. Turns out that is.

well, what we're on this coke thing before we we sort of leave in. I do think this is a good moment to address the value of brand. We haven't we've sort of eluded to motes, especially in the seven power's discussion on our previous episode, but we haven't actually described how Warren thinks about motes and in sort of brand as a mote in the ninety five annual meeting.

He is this great quote where he just lays IT out for investors. And as one of these rare moments where he he describes the investment strategy, I think more than he necessarily intended two, but he's off the cuff. He's answering a question and he says what we're trying to find is a business that for one reason or another, IT can be because it's the low cost producer in some area.

IT can be because IT has a natural franchise because of surface capabilities, IT could be because of its position in the consumers mind, IT could be because of a technological advantage or any kind of reason at all that IT has this moat around IT. And I just always thought this is like the clearest articulation of his view of you, sustainable competitive advantage, what makes a business durable and able to generate outsize profits over time. And boy did they nail IT with coke. I mean, this is just one of these classic examples of the brand mode is really real and it's a global brand mode.

Yep, totally like the what exists clear hot works. It's straight over tackle. You're taken this international run in the same playbook.

Yeah great timing coming in in the new cope disaster right before international expansion. Well done. More in.

Okay, David, you did mention that coca co. Is only up another three and a half x after that initial. When we look at you know that sort of late two thousands time looking at maybe two thousand nine, cola cola did represent close to twenty percent of s equity portfolio construction. So like that, what thirty five acts on their initial investment of the stuff that they own that are public markets before they wait in apple, which will talk about later. Coca is their biggest single whole day of stock that they don't holly own the business.

Yeah IT of course no longer is but yeah, it's an is this is huge and this is one of the key legs of the berkus tall is coke. And also just speaks to how different the company is now like you can barely see the code quality value in there. yeah.

okay. So back to the meeting of these two businesses here. So in one hundred and ninety seven, there is this amazingly perfect moment. I think this moment kind of mark of a major transition point in business, in the industry, in the world, and that start the rise of tech and the rise of the internet, and how much the world is gna change at IT. Reminds me of there's a famous quote in history.

I think it's about germany, like eighteen fifties, where the quote is the german history reached its turning point and germany failed to turn. This applies the Warren here, investing in corporate history reached its turning point, and Warren fails to turn. So summer one thousand nine hundred and ninety seven, we are at, of course, the island and companies on valley conference.

And there is a panel discussion hosted by donk yo with the participle, three participants being one warn, two Roberto was up the C. E. O of coke and three bill gates.

And so here IT is old school, like the consumer brand coke and bill gates of microsoft. And warn on the same stage, everybody thinks this is gonna like a book patting affair. You know, maybe sort of A U gentile changing of the guard.

You IT is something like that. But bill kind of goes off script here. So bill would later say that he meant this as a compliment, but he treats out, warned him sandwich frees, uh, when talking about Roberta had done on stage.

Oh, wow. why? So you have the moderator of the panel is the president of coking.

You've got the CEO coke, one of participants. And coke.

right? And gates is friend.

Gates say, is that like ah you got IT easy you have saying which could run your business and he gave fears that to microsoft, he can trust that with microsoft car.

He says running microsoft is such a highly react that he suspects he's gone to have to retire before he gets too old, like indeed, he says well before he gets age sixty, because you need a Young person in charge who can adapt and navigate the constant change in the technology business. The other panel is Roberto is sixty five, and tragically, later that year would die unexpectedly and very quick of lung cancer done is seventy one, and Warren is sixty seven. So gates is literally to slaughter them all in the face here.

And, uh, Roberto, a sort of has the sort of stereotypes ult like fire cuban temper here. He is hugely offended by this. I don't think he walks off stage, but he never talks to gates again for the rest of his life.

After this episode, I don't know how have done reacted to IT were in kind of shrugs and off like he is like, like, is my friend like that? He's deis kind of like, he's like a wild animal. You can't like brain in public too much but the thing is like, you know, this is A A major social photo al gates, his part but like, he's totally freaking rate.

Well, I mean, he's right. And IT is clearly this seminal moment for warm, where he sort of like looking left and he's seeing the past, he's seeing the things you are the owns these, seeing these cash flowing, profitable, durable businesses. And he looks right and he seems something he doesn't understand of microsoft and in is outside the circle of confidence so it's in charlies h too hard pile to use A A charisma and so he's team coke, his team durable, understandable old world businesses in this era. There are so many opportunities for him to run toward the fire uh in technology and he .

just choose us not to. He just run away. Alice has a great quote. Snowballs says buffer avoided technology.

Starks, partly because these fast moving businesses could never be run by a ham sandwich, he thought IT no shame to have a business that could be run by hams in which he wanted to get picture head way to the point where could be run by which. I'd like, I get IT right like he thinks you. I used to think this too.

Actually I like I I really to find businesses that like a monkey could run them. The thing is that those businesses don't exist anymore ah you know they exist like coke still exist and it's fine and planning these other business is but gates is so right here. The future is change.

And the most valuable companies of the future and the most value that's gonna created are gone to be created by companies and by leaders and entrepreneurs who are able to navigate change like you want. We do just said brad on in our last episode brads down to talk about amazon and bound like you read that book and you like you just kicking like an odd like basis, the world's richest st. person.

And he is still bringing such intensity. We cannot rest on our loyals. We have to change. We have to innovate every single day. This is not coke.

Yeah, what? okay. Let let's take this as the moment to die a little bit deeper into y buffett doesn't like text stocks because it's so mei in our culture today that that he sort of is not a tech investor that it's worth unpacking IT a little bit and he did of this interesting observation.

I think IT was in the the late nineties that um we're going to talk about the dot com bubble here, but that there aren't any internet companies that i've ever hit a hundred million in a year in profits. And so I have no proof that I could possibly exist. And so warn is investing, not speculating.

And a lot of people will take offense to me saying that a lot of technology investing, especially in the early stages, is speculating. But the fact is very early on, there's no revenue. They're certainly profit. So you can possibly do investing in the classic sense of valuing the business today, add a discount to its future cash flows. It's speculating in a risk managed way by putting your money in great people going after markets with promising futures, the sort of secular tailwind argument.

In fact, buffett has a very particular way that he thinks about valuation that is highly sensitive to how certain the future is he's willing to pay up for very certain futures, which is why he values brain so much. And if you think about this as like an expected value equation, where you have two components, the value of something, if that happens, and then the probability that IT will happen. But IT is happy to pay for things with a modest value but a high probability of that happening. But it's not his style at all to make bets on low probability, very high potential value place. Like would you be an amazon or something that you're sort of talking about, David, when you reference this incredibly num, rapidly adapting world where the test port is consent arranging and you sort of need to, you know, make a bunch of high beta bets?

Yep, totally. I think the problem is that now who will get to now later in the episode, the world is just evolved to the point where, like, this is the way the world works, like they're so much change and it's such constant that even amazon, even apple, even microsoft need to be thinking that way. And if you don't think that way, right, you can be coke.

But like cokes, value has only three point five x in twenty five years. Those of the businesses you're gna get. So our friend um Andrew Marks, uh he is a great V C A T Q ventures. He's actually known warn, studied them for basically whole life.

He told me that I think the best way to put this about one and that I ve ever heard, which is that Warren was the world's greatest status quo investor, like as long as the future was mostly gonna look like the present warn is a seven at that type of investing like the future for coke. He's mostly gonna look like the present for coke. He knows how to value that. He knows that they are going na recover from new coke. He knows that there's an opportunity internationally he can invest in that.

He can see that a bright you're saying that, of course, the business will change and evolve and grow. But the chess board.

the world is the .

chess world is reasonably static.

is reasonably static. yeah. And that makes sense. Like for most of his life that's been the case.

right? You hear comments like people are always onna love Candy. People are always going to like coke like it's not a bed on the world changing. It's a bed on someone Operating a business really well in the world.

Yeah he is to say um that he was absolutely certain as long as cola doesn't cause cancer, that more people are gna swallow coke tomorrow than they did today. Well IT turns out, you know sugar is kind of link to cancer. And like that's kind of not a good like the world changes the city of I don't think this is the thing we're now this is what this moment to me represents. This panel at sun valley in ninety seven is like this is the transition to a world where more change is happening than not. Yeah.

it's like that there is a great weight. But why graphic where the little stick figure is standing on the inflection point of an expense title curve? And it's not that the world wasn't changing quickly between, you know, the mid fifties and the early nineties IT was that the rate of change hadn't compounded to the point where IT IT was suddenly like the whole world is changing.

All that wants you have the arrival of the internet. The cycles of innovation are getting wildly compressed. I mean, we live in this world today. There is huge changes on the sentiment of the future, like multiple new cycles per day in a super high finality, high frequency way. Not I didn't want to say you said that that was not the not at all the world that he invested in for the first thirty plus years of his career.

totally. So more and definitely doesn't see this yet, if ever. But for the moment, gates gets this, certainly some other people intact and silk value.

And in seattle, I get this, that this is the world that we're moving into, but most of the world doesn't. So for one, and he is like, okay, back to business is usual. He is though, concerned about the tech bubble that is forming, that he had somebody other sea. And by the this time, by in the late nineties, the berkshire has gone to from about ten thousand dollars share to thirty four thousand dollars a share.

Over how many years from ninety .

two to this is probably like ninety eight or .

so six years, three and half x not bad.

Yeah, not bad. Forty billion dollar market cap for burger. But theyve never split the stock.

So people in the sort of, you know, part of the tech bubble craze was like day trading. And people are now internet trading. And like e shares and e shares, e is happening. People are setting up publicly traded investment trust that like mirror pictures equity portfolio, like have like a shadow perche.

This is so brutal. I mean, this is like for the person that wanted to carefully control investment in the company. Someone says, oh, well, if you can't buy an actual share of burger, you can buy a fraction of share for me and all own a bunching of burger under east and i'll be like you own IT. It's like warns absolutely were totally.

I think both these things are happening. So I think obviously, is demand from all this new retail investing to own shares. People can afford to thirty five thousand dollars share.

Then or now. I think two things are happening. One is what you're saying, which is people are buying partial shares, putting in a trust and then selling shares in that trust. The other thing people are doing is they're like reading every every, you know thirteen that comes out in.

thank you and k.

buying the the same securities that version is buying and doing .

the same thing. What a ham fisted way to do IT enfer of the insurance for and the leg, it's gonna this thing where people feel like they are buying burger, burger associated, but they are actually buying well after away less.

So Warren finally comes around. He he really he thinks like about people like getting swind doled, like, I gotta find some way to put a stop to this. I don't want to put the stock.

And this was a mean at the annual beating every single year, someone to asked the question, or are you going to put the stocks so that more people can invest in? He would always respond to something like, no, I love our current investor base. Why would I do anything that would change the great set of people that we already have the shareholders .

in this one derful company? you. So he comes up with the brilliant idea. He decides that he is going to do a stock offering for a new class of shares.

What he's going to call the baby b class of shares versus the nearly represent pressure a shares. And these are gonna tracking shares that are gonna track one thirty pth, one divided by three zero of the a shares in terms of value. Massively diminished voting rights.

And he's going to sell this in a new offering that is actually open ended. So there's no fixed amount. It's not like i'm offering x number of shares.

He doesn't want to supply demand thing to happen. He doesn't want basically like micro economic forces to happen and drive up the Price of the beshir. So he's like, here's the Price and we're going to make as many of them as we need to at that Price as people wanted buy.

Even if you heard more benefit you totally, which also means how very much demand there is because it's an offering. Birch is gonna the cash. This is like even Better than float you'd ever have to give the cash back.

They are raising their series. C yeah, I bet buffs would go to the match. You on the even Better than float.

he probably would. I mean that he is deleting the value.

yes. As a quick aside, I think this by sher is offering is a really good place to talk about when they are buying things with cash versus shares. So how they think about the two currencies they have at their disposal, the baLance sheet cash and the shares they can issue and delete the company.

So um buffer t notoriously likes using cash versus shares since he thinks the you know existing portfolio of burger businesses are far Better than pretty much every other business he could buy. So given that, why would he trade shares of these amazing businesses for something that who knows what IT is? Maybe good, but it's not as good as my treasures that already have here.

So they use cash, obviously, whatever they can accept when their shares have been richly valued by the market and thus are a phenomenal currency to use after crosses a certain point. So in ninety six, when he does the b shares offering. Normally berk shares shares trade that the a shares trade somewhere between like one to one point five facebook value of of all vertus holdings.

Well, in this case, the moment they decided, okay, it's worth IT for us to delete our shareholders and do this new financing event and do the b shares thing IT was treating in almost twice book value was like merely an all time high. And so he gets all the credit almost like the benton's strategy credit thing, like he get all the credit for doing this. But IT was a huge windfall for burkhard d to do IT at the moment that they did.

And they they are wonderfully transparent about this as well because they know there's going to be be crazy demand for the by shares kind of no matter what. So they write all these hilarious disclosure. I'll just read my favorite ones.

Mister buffett and mister monger believe that burchell's class a common stock is not under valued at the market Price stated above. Neither mister buffer t nor mr. Monger would currently buy burker shares at that Price, nor would they recommend that their friends or families do so.

Yes.

it's it's like eric on going on bloomberg and saying it's too high Prices.

too high phrases too. I oh my god. Well, this is great. And of course, you know what?

We're going to transition to you next. Let's see out of ninety six, uh, I think we're talking .

about or ninety eight.

ninety eight. Are you king off my buying something with shares?

Yes, I am.

Are we going insurance?

We're going insurance.

Tell me about january.

David. Let's talk january. So yeah, we inhabit showing stock, but he's like, stock is so overpressed. I said IT not him .

know that he didn't say it's overPriced.

That is not under Price exactly, exactly. So in one thousand nine hundred and eighty eight, he makes another shocking announcement. Burker is gna buy january one of the world's largest reactions for twenty two billion dollars.

Remembered just a few years ago. I was like huge news when buffer would put one point two billion dollars into coco. No, I think buying the rest of I go for two billion dollars like that was huge. I think that was the biggest deal .

the'd done before, yes, of this general reinsurance purchase by further largest acquisition ever.

Yeah, IT is the elephant gun hunting phase of orange according career. So yeah, it's literally the largest deal virtues ever done by a factor of ten. And he does IT with all stuck. Not a dollar of cash goes out the door. He trades twenty percent of burch's market cap for january.

Wow.

spoiler does not go well famously would charly is asked about the deal when he gets announced. Jersey is like the blueness character. As we have seen and as we will see at the end of the emphasis charley's response to the deal when asked about IT is that Warren only called him quote very late in the game on this one.

So he's just kind of like I washing my hands on this. And I think if there's one lesson in this series among many IT, is that if charlie monger is your business partner, you should probably ly always call charlie early in the game, not in the game. c. Salomon brothers. And so what .

what was the really a learning thing about buying january? Because IT massively multiply the amat of float at their dispose by yae.

Yeah, they got about to float, to be honest. The a learning thing about buying genre was the Warren thought the berkshires stock was overvalued, and he wanted to take advantage of this moment in time and use IT to do a big acquisition.

And he also this, according Alice in the snow ball, most, if not like all of january, is investments, because talked about insurance companies with their float, they invest the float in securities and warn bircher e prefer to that in equities. Most of generali's investments were in debt and relatively conservative bonds in the lake. And so warnings worried about the equities crash coming along here because the tech bubble, he wants to essentially delete partial security holding.

He doesn't want to sell security. And because that would be a signal to the market, like warm buffer is selling stacks that might tip everything over into the crash. He's like, how can I change the mix of securities that we have a picture without media and something like that? I can do this all stock I could deal by jan re, and essentially get a portfolio of twenty billion dollars of bonds that are gonna insulated from equity .

Prices for that is some financial due jeu engineering right there.

He definite overthought this one because january sucked.

Uh to be blunt, I will say funny you said that I just pull up the historical uh Price to book ratio of burger. I think the only two times that I was meaningfully above two x that the stock was in above twice book was uh right around ninety six when they did the by shares then right around ninety eight. So I I think he definitely felt like those were great times to be using picture .

stuff for currency. Yeah so um yeah january. So we didn't cover this h last time because I didn't fit with the story.

But back in nineteen eighty five, warn made almost doubled the best higher that he ever made in his career. Uh and he makes very few higher. As we can see.

He hired a jet je to run birchers insurance businesses. A jet is like, this study is a monster. You have no idea how unbelievably great egy is.

He's an underwriting savant like this guy can like hear a crazy story that you tell him like what if i'm onna strap this guy of this rocket and then we're going to shoot in a hurricane and you know I want insurance that bypasses the force measure and that can hell give you a Price .

for he's a kind I know exactly had a he. So I G he grew up in india. He went to I I T in india, and then he worked for IBM.

Maybe this explains buffs. Fascine idea was like, g take about in area, it's got to be good. Then he goes to harvard school.

Then he goes to machines, I, and then he joins burger. You were talking about him like he's an insurance pressing savant. That is true. This probably never been anybody Better than a jet at pricing insurance. He is also like hyper aggressive, like if if a jet had decided to be a venture capitalist, he would have been like bill, early times ten, like hyper smart, hyper aggressive. For basically as hok I double this, still going on, probably a warrant request, not ejects.

But for like decades, every night I enough is every week, night to every night of the week, they would do a call, a nightly call at ten P M to go over the insurance portfolio and all the deals that A G was doing. He is not just a monster. So when he joins, he takes over all of burch's other insurance businesses.

Besides, guy, go to start. And then he starts a new rein, turn business within bircher like himself, like this is the great entrepreneur story within worker. And famously, he takes out an ad in business insurance magazine, the full page add when he starts to this, saying, we are looking for more, more casualty risks where the premium exceeds one million dollars. Nobody does this is the insurance business is like, this is crazy.

Nobody does this. So he's basically saying like I will ensure things that other people won't ensure because i'm more confident, my ability to press these weird, crazy, expensive policies.

Yes, and the value, the premium for the policy, I want everything I went, the craziest, highest value premiums in the world that other insures, like a genre and swiss ery in the would do. There are just like this way, too much money risk.

right? There are factories they're looking to identify the same thing over and over over again and ensure IT. These actually have a very fun name to.

These are called super cats. Yeah, super catastrophic insurance policies. Super cat is a really cool name for a free, boring thing. totally.

I mean, this is stuff like, I think the story goes that after nine eleven, where january would take huge losses in nine eleven and butcher energy would be fine, but after nine eleven, a jeet starts go to around the world, is like writing terrorism insurance policies left and right because like everybody wants them now, everybody scared and he's like, great. Like this is actually not that risky. I'm going to make a killie on this super high premium, tens of millions of our policies yeah .

the crazy thing is like the january was basically mismanaged and they have these policies written in nine eleven that had holes in them that they shouldn't have, where they took on risk, that they basically weren't being paid for .

and then just got destroyed. yes. So here's what happens. The obvious thing to do in india when they by Jerry, would be to just give Jerry to A G, like A G is the greatest of all time. Give him more. Instead, buffet runs the, the, the White night acquire playbook, even though he has no reason to you.

Keep in .

even the founders, the company we love you, you, you, your business, you do what you do. You know, i'm going to be this, a quote from Warren, strictly, hands off. Yx, so immediately after bertrade, zed, january news hits that january is a counter party on a massive insurance for the scheme called unit cover, that I believe I was residential insurance.

They immediately take a three hundred million dollar underwriting loss. This is like within the first week after approach bites the company, remember buffs role number one, which has never lose money, never rule number two. See rule number one, yeah, first week on the jobs, you will lost three hundred million down is great.

Then they do a bunch of bad deals, ensuring hollywood box office proceeds for movies that loses them. I think about another billion dollars. It's rough.

Then nine, eleven happens. They lose, all told, close, another two billion dollars in nine, eleven. And then finally, i'm probably the worst offense given the Solomon n history in the early two thousand.

So a couple years after the acquisition generally gets involved in a major accounting scandal with A I G propping up A I G baLance, nobody ended up going to jail on this one. But like basically like massively january reputation and brought the regulators all over them and think this is the one thing. Warn, once less than anything, eventually warn would ask the old management, fire them and bring in joe Brandon and ted montreal to fix IT.

They do a good job and then eventually warn, does hand the whole thing over, do A G in twenty sixty. And so A G is now running generally. In addition, everything else, wild saga here.

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where else we go on, we can move on fast enough. Warren's respective. So before the tech bubble pops, he does one more surprising to outside waters move, which is in nineteen ninety nine, he buys a utility company before buying a utility company.

This is what warn is come to, like the light company that provides electricity. He buys mid american energy holdings. And people want to know, why is, why is warn buying a utility? Alice rates in the snowball warn was already being ridiculed for his refusal to buy technology stocks.

Now he had bought the light company. How dull. Uh, the energy business said that gets up and fine for picture like it's another fine.

He doesn't leave money. They're fine. IT does come though with two managers that warn seems to greatly admire. By the way, we talked about this in the pressure, but we haven't even talked about IT on the episodes.

You know how you see berger half way realest state agents all over the place? Oh yeah, that came with mid american energy holdings. They also had a real state brokers.

So weird, how does that work? Like I my understanding of the electric company is that it's like a public a utility is market by market then that where some of them must be private companies .

yeah I don't know exactly. I mean, there are lots obviously lots of utilities, separate utilities in different geographical all across the country. We have somehow they had a real programs in there as well. So there is C E, O of the company when David soco and the number two, remember that name, remember that name, his number two, I named greg, able to just analytic .

future .

C E O of birthday. Yeah, that's how they come into the company. We're hear much more about them later. So okay, finally, all this tech bull stuff comes to ahead in the two thousand annual meeting where warn in earlier just getting pulled by questions from shareholders on stage in the rena, asking what on earth they're doing? Why do they not own technology stacks?

Everyone else is getting these five aces in a year. What are you doing here trying to make me fifteen percent?

You're making me poor. Uh, Warren says, quote, I don't want to speculate about high tech and of course, he goes on speculate and he compares the whole thing to a posy scheme. And then character jumps said, this is my favorite, might be my favorite moment of all time, e, jeff said.

Edy says the reason we use the phrase rtd access is because IT produces retard consequences. It's rational. If you mix reasons with turds, they're still turns .

all time. Great money. Quote.

I don't know if there is a video of this, if there is, I haven't seen that. But I can just imagine like the entire rena just being like shocks, like the currently monger, just say turds like I think guy is actually says that like the new ball. But if you think about what each of them is saying, it's telling and it's actually quite different.

Warn is saying, I don't understand this stuff. I refuse to engage. Now upon this game, charlie saying something different here, he gets that there are reasons the text tucks like microsoft and I like. And you know, there are there real companies in there, but there are also turns. And microsoft may be doing great, but even when this whole tech bubble thing pops and IT, will you know the splatter from the terms is gonna get all over your reasons to and and drag a dam?

And when Warren says, you know, I don't understand the thing, it's upon the scheme he is referring to like the crazy multiples that people are paying on top of revenue because, of course, profits don't exist much like today, but like let's even wait a few more levels. Often revenues don't exist for companies that are going public, which like that you only see in like space or like you know battery technologies or something now.

But then even further, like some of these companies are selling products, but they have upside down unit economy, so they're not even like gross profit positive. So there is all sorts of you could sort of understand why you would look over a charlie and have him saying there's turds in here because truly, there were I me crazy some of the stuff going public. Then you look over the Warren and he understands all the financial infrastructure around that, that the banks are incentivised to do IT, that the earlier shareholders are incentivised to get marked up and get in public and then sell to get off their books. You know, there was ponty scheme like things going on because there was so much rampant speculation about raises in terms yeah.

so actually I was curious about this. So I did some analysis. This is flash fording, maybe too much, but yes, at the absolute hide the tech bubble when this shareholder meeting is happening, if you were to put a dollar into burger hathaway stuck D A.

If you could buy a fractional share of the a for a dollar, that dollar even today in may twenty one. So twenty one years later, invested in burger would outperform the as deck IT would definitely out perform the S M. P.

And I would very slightly perform microsoft. So if you had invested a dollar microsoft you know call IT the first half of two thousand and held IT to today and you'd invested a dollar in berkshire, um you would be doing Better in burker than microsoft. So like charlies right here, like the splatter from the third is going to get over the reasons, over the reasons including microsoft. But if you had invested to a dollar in microsoft versus burger at almost literally any other pointing time, either you know, before back in like ninety seven, when the the famous you are some valley panel happened with with coconut sandwich gates, ico soft would be crushing. If you had put doors .

at fast .

a dollar in each just a year later in two thousand one, you would still be doing Better on microsoft. Of course, the father.

you got a lot.

obviously any time sense, any time since you can we .

do a much Better to play out earlier too or like what did that? I and eighty to eighty three .

and in the are obviously put a link microsoft early.

early days right now. It's funny that the dynamic exists twice where if you're super earlier, microsoft and of course, is gna multiple in saying number of times to now. But the run up in the last five years has also been so crazy that if you invested any time after the the dot com recovery, which only really was like a year yeah then yeah can now perform .

picture IT is that it's like charly is right here that like yes, in that exact moon, the bubble popping is going to drag everything that is good down with IT. But we're almost really at the point where like IT doesn't even matter anymore. If you had invested at the top of the market in the tech bubble, you'd still be doing Better than berger except for like a very narrow window of time.

Yeah, another point that they're both making here is, is that there is a lot of innovation going on for sure. You look around, there's for sure all these incredible things going on, on the internet. But the underlying stuff that's going on with microsoft, the hardware makers, that ecosystem, there is a dramatic amount innovation.

The reason that they don't invest in this comes out in a nineteen ninety nine fortune article that warn, right, sort of warning about the the dot com bubble. Of course, he doesn't say the bubbles gna burst. He doesn't say he's calling the top, but he sort of beats around IT a little bit and says he's not interested in buying right now, I think, is sort of the way he positioned in.

He talks about how in the early days of making cars, there were hundreds and hundreds and hundreds of car manufacturer, lots and lots of innovation going on. And today, you know, there are only a few. And so just because .

analogy at the annual meeting this year, too, I think great.

Just because there is innovation, sure, that's great for the innovator in the short term. But for the investor, for the shareholder, that doesn't mean you're going to be able to a capture value. You have to be able to create a mote.

You have to be able to figure out what about the business creates that durable competitive advantage. So all the profits don't get arba away. And I think he actually finishes the article citing the the most perfect example of arbitral ging profits away by over one hundred year period, going from pure innovation to share commodity, which is the airline industry. And he highlights, I don't think this is exactly true anymore, but IT was true at the point in ninety ninety wrote that the some total of you add up all the profits and attract all the losses from the whole airline industry since the inception of airlines. IT was a loss .

yeah and then he says this is a serve and gruesome but uh, I think he ends the article right with saying I that he'd like to think that if he could go back in time to was in one thousand nine hundred and three a Kitty hawk when the right brothers flew. That he would do capitalists of favor and shoot them down.

Yep, which is a in saying way to put IT. But the point that he's making is just so stark. And i'm sure it's not something I had really thought about and it's certainly not something that was on people's minds in ninety nine, which is the proliferation of innovation does not necessarily imply that there is value to be captured in a durable way by a .

single firm. Yep, not necessary. He also doesn't essay him that he will be and of course, warn is hugely wrong about technology and the internet on this front but and also everybody remember what warrants says here about the airlines and what must be going on in his mind later in life when he buys every airline stock in the industry.

Twice, twice. yeah. Oh, okay. For the moment, though, take bubble birth, as we all know, warm.

And he's still top of his game of oracle, omaha, everybody. He's raining praise on him. He saw IT outcome in all trip. The early two thousands are, you know, more greatness for Warren. But then in july two thousand four, susie passes away and this is devastating to Warren, even though they haven't actually lived together for like twenty five years at this point, he still loves her hugely and and depends on her. They are they are technically .

married right there.

still technically married, even though they don't live. Yeah, he lives in the eco. He lives in like we said last night, we're not going to cover IT on quiet here. But his personal life is complicated. IT lets to say, I do not think at all that warn is or was ever like a womanizer, but IT is true that he had many women in his life, and I think he is all about board. It's all this nobody you go read about IT.

But he's devastate ted when sue passes away outside of his personal grief though, which is acute, the most pressing issue is what's going to happen to the buffet fortune and the berkshires, because intituled warn fashion. Until this point in his life, he never thought about IT. He always assumed that susie was going to outlive him.

And the plan for the now forty plus billion dollars of networks that the buffet family has, the plan was always that after warn would die, susie would set up foundation there. He already had a Susan buffer t foundation and give IT all away. That was the plan. But well, obviously that's not gonna. En.

yeah. I mean, warn has been thinking about the conundrum of what to do with his wealth since long before he was wealthy. I mean, in his teenage years, he was already thinking about what, i'm really rich.

What do I do with at all? And he is, like immensely frustrated by any attempt that he has at philanthropy, which has to be why he basically says, at a suzy problem, she'll figure IT out and set IT up when i'm done. His frustrations largely come from the fact he does have things that he really cares about and that he cares about promoting.

I think he's very worried about an impending human societal problem of over population, which interestingly enough didn't uh end up happening, that the world history of slowed and I believe maybe even stops the global population growth. He was very worried about not only going to use all the energy on earth, but are we going to use all the food? And will famine be an issue? And so he had tried to give to various charities over the years, but he was so obsessed with performance and metrics.

And that kind of money was a score board that when he would give IT and he couldn't sort of understand the investment return, he wasn't private to the investment return. He couldn't sort of choose the investment manager that IT really wasn't used to compound in the way that he was used to his investments, compounding in a way that you could sort of see a dollar return on that. IT was just immensely frustrating and and he'd really thrown his hands up in the air and kind of just donated here and there, but had a big fortune.

You and I think is we want to to one like there is this element of psychology where, like, he just kind of cares about scoreboard. He just wants the money to have a bigger number as possible. He doesn't to buy stuff giving in a way like shit eventually held you, that he just wants to get the number as high as possible by the day he dies. That's what he cares about.

which is, of course, competing with the fact that he wants people to like him. Not only as he want to be very wealthy, he wants the world's generation. I mean, he throws himself a festival once a year for everyone to fly in and visit.

Like nowhere in security law does that say that your shareholder meeting must be like this is not. This is a warn buffer creation. To bring this upon himself, he wants to be a beloved sort of figure and teacher on top of being the wealthier person on earth. And you know, you could see how those things could .

come to ahead. yeah. So you could accuse of not being innovative in his investment physics, never accused of not being innovative in finding ways to get what he wants.

So after suzy dies, the wheel start turning, he invites bill gates to join the burger board. Wait up into this point, the board was basically one hundred percent. His family and close business associate that he actually worked with, like charactery run all from mto donkey s on the board.

David godman from new york back in the days, even though gates is a close friend, I think he's the first real like outsider who warns, never done actual business with virtues, done business with that, joins the board. So is something to put here. And then we all find out probably the reason why this is happening. In two thousand six, Warren makes what was almost certainly the biggest decision in props, most impactful decision in philtres pic history.

And I totally remember when this happened, he calls press conference and he announced that he is going to give away eighty five percent of his worker stack, which is worth thirty seven billion dollars at the time, and five, six of IT is going to go to the bill and more instigates foundation for them to manage. And the other one six is gonna to his children's foundations and the Susan buffer t foundation. So this is crazy.

There is no one in buffer foundation. He is not to give the money O A. He's not to have to make any these decisions. He offload all of IT to the gates foundation.

which really is remarkable. It's like he's like, boy is really hard to give money away at another first thing. Better I don't there's a lot of infrastructure require to do this, actually, that guys ready built the infrastructure.

and I very much trust him. And this is what so amazing everybody is like. This is like win, win, win for warm.

Everybody is like worrying. You are the most amazing, most generous perspective. This is the biggest gift in history.

You have done such an amazing thing for humanity. This, of course, leads to the giving pledge that educates is, warn, treat in twenty ten. And IT becomes like the coolest thing in the world.

For billionaire to give their mother away. Like warm is like setting you like A A status simple here. And meanwhile, warn is getting exactly what he wants. He never has a .

deal with any of this. Yeah, the one drawed back for him has to be the fact that the gates foundation legacy will long outlive microsoft legacy in terms of the way that people remember bill in Manda. Microsoft will still be a successful company fifty years from now.

But I don't think people will remember IT as bill gates as legacy the foundation. absolutely. And so with warn, you know, IT has to be for someone who is very concerned with his ego. IT had to be a big trade off to not have a giant ticket downtown with his name on IT.

Yeah, I get that. Who knows how much he play in this out, but like him doing this and then creating the giving pledge and driving all of the philanthus ropy that that does by making IT like the ultimate data symbol to give your money away.

Should I all IT the buffet .

giving club? Totally like that. You know, get to go down in history as like the number of billions, ten hundreds I did, that knows how many billions it's gonna be given away because of this lake.

Yeah, so pretty cool. It's pretty cool. I think it's amazing. It's wonderful to be great for society. It's also like why must just be so pleased with himself with this um so that all happens in the mid to late two thousands.

which is an interesting turning point for picture halfway strategy. I mean, if you think about this period of like nineteen ninety, two thousand and five, maybe extended to two thousand and ten, you know they're going after buying these good businesses where the Operators still care about the businesses after they sell IT that sort of like the secret to success, you leave the management in places suffered. January is Better decision and maybe even in american energy.

Well, so l was a good manager. He just little too kid as well, say they could do this .

thing where they were like underpay vers private equity. They were the Better option for these companies that were, you know, anywhere from the hundreds of millions to low billions in in value. But IT does get to the point pretty quickly with just the cash on hand that the amount of money they needed to ploy just got too large. And there's not enough furniture stores and family owned jewelry chains in .

amErica to go bye. And this is real. I mean, look, one thing that becomes clear and that is you warrant keeps harping on or so big, it's hard to move the needle. And like that's really true .

where he has been forecasting this for twenty five years.

Yes, that's really true at this point. Like the law of gravity tying berkshire, the S M P five hundred is like there's a lot of gravity yeah so the giving pledge, of course you know it's like two thousand six when warn makes this major gift to the gates foundation. But it's not until two thousand that they all launch the giving pledge.

Why did IT takes along? I assume IT takes along because not too many people wanted to give away a lot of money. In the intervening years between two thousand and six and two thousand and ten, there's a little thing called definitely crisis happened.

done as discussed so many times on the show, beginning of airbnb and uber and crypto currency yeah on on and on.

What's that article embedded into the genesis is black of bitcoin?

yes. IT was chancellor on brink of second bailout for banks, which allegedly marking the fractional reserve banking system. But yes, IT is A A very deep reference uh, in the midst of the .

financial sis. Indeed, indeed. So here's Warren, an entirely y two. He's freshly unencumbered. The wait of having to deal with his wealth, he's back in the subtle.

He's not literally and retired, but like figures, timely and retired again for the third time, ready to go to work. And he entirely, i've seen this movie before. They were there.

They were leading players in the dress rehearsal of Solomon in the early nineties. So they like quite well, I think we know what to do here. The whole thing kicks off.

I remember this so well in march of two thousand eight, when bear sterns the story, investment bank failed, just like salmon. The problem at bear was in ominous, failed because they had two in house hedge funds that were mortgage back security heads. Funds in those sio had huge losses.

That wasn't what IT failed. IT failed because bears counterparties stopped trusting their paper and stopped being willing to trade with them like saw you know a huge amount of their capital base turns over overnight because you're settling trades and you have any parties on those trades. If country party is no longer trust that you're good for the money, they're going to stop trading for with you. And then at all, this is cycle comes to a screeching alt. That's what happened with bear.

So during the course of one week in march, from march tenth through uh, which was monday through the end of the week, which would have been what I guess the fourteen th, the friday so bear stern stack had started the week trading at sixty three dollars to share, and by friday the toast, the bankrupt, and over the weekend the fed engineers and asset sale to J. P. Morgan for two dollars share.

So the old bear sterns entry is completely bank up the good assets, the non toxic assets get put into A L, L, C. That the government creates. And J, P.

Morgan buys that for two dollars a share backed, stopped by government money. So like, if anything goes wrong, jp margins not on the hook since is bad. Never seen that anything like that burger.

Of course, I don't know if they got a call, if i've soon weren't probably got a call from somebody about pair sterns that week decided not to save them are bail out. But berger has thirty seven billion dollars of cash sitting on its books at this point, which today seems to kind of kind compared to apple and microsoft and the lake. You know, nobody else had that kind of cash anywhere. The only people who had that or governments.

right? I have to seem the most valuable company in the world at that point probably was an oil company and probably was in the neighborhood of two to three hundred billion dollars.

yeah, but I probably didn't keep out of cash on their books tied up and table for sure.

But just making the point that like things are almost an order of magnitude smaller at the largest company, the world level.

totally, both things like the companies are smaller and nobody y's piling up cash like internet company inside toh except a bircher. So they have all this cash is a great climate to invest. But one of the lessons that I think weren't surely took away from the Solomon debacle le, was you don't necessarily want to be like, uh, the major primary equity holder during a crisis in case things really go right.

You don't want to be that guy that's called up in front congress. You know you really do. So instead of making a lot of equity investments at this time, they decided instead to pursue a different strategy. They're gonna make debt and prefer equally fixed income investments in companies that need capital.

Can you simplify that for us? Is IT like, hey, we alone new money and if we want to, then we might exercise more ants exactly.

And we're going to money at A A very high interest ate. And yeah, maybe we won't make equity type returns, but we're gonna .

whole bunch of downside protection .

of downtown text upside and we don't .

have governance over the company.

Yeah and you're not going to call us in front of congress. Ah so the first one of these that they do is in April of two thousand eight, right after the bear blow up mars, the Candy company diversified. Keller, one of the largest private companies in the world, announced that IT is acquiring, rigged the two, incur another Candy manufacturer like the sees Candy coming back to rest here for twenty three billion dollars.

But it's kind of hard to get financing from banks right now. It's a lot of gum. It's a lot of gum. I don't know what else quickly had to think they own the cubs.

And I was going to say there's no way there's even two billion .

dollars of gump a year purchase. So he selm keep talking.

I'm looking to put all icky does.

So mars is going to put up eleven billion dollars of equity for the deal. Goldin and T. P. Morgan are gona do a little over five and a half billion dollars debt, but they still got a six and a half billion dollars hold. They need to fill well in steps, warring in picture. So they invest six and a half billion dollars to fund this deal of mars, that picture buying riglar. And they do IT with four point four billion dollars of debt that mars buys from broker with an eleven point four five percent industry on the dead that are real, like there is a very, very stable company.

This must really be their only option.

I remember seeing in the last couple months that amazon or apple, or you know somebody traced a debt offering recently at like a something absurd, like a zero point three percent interest ate something like that yeah times are .

very different. And lots of options available for CoOperations.

lots of options available for capital eleven and a half percent industry that is unreal. The other two billion vertue investors preferred equity, uh with five percent interest rate that gets some more and coverage IT, all in the end up realizing a fourteen percent I R R on the deal, which is pretty good because there's not a lot of rescue.

No, and I worried, would say of people too lot of in the past year and a lot of in the future .

nod and David IT really .

is pretty much all gum like this is crazy, or at least a juror's. So in two thousand and seven, they did over five billion in revenue. And they own, you know, juicy fruit experiment, double ment, big grad, extra orbit, there's some other candies.

So they own like all the gun.

Yes, exactly. There is some candies too. There are. And but this may have been after the combination with mars, but now under the this subsidiary, under the weekly subsidiary's, there's schedule starburst, autoists, gumy, savers, lifesavers, that sort of stuff to i'm having a .

heart detect is hearing all these names but yes so like there you I was said there's a huge arbitrary at here because I think this is also what um for n naturedly realized the government is bringing in the bazookas out. They're slashing interest rates. They're throw and money into the test. Everything that we just saw them due during COVID, they first did during the financial crisis.

Is this the start of quantitative easing?

This is like the bazooka of quantitative easing. So you've got this crazy situation where government is making capital available for free, basically, and worker can come into these situations and make capital available in fixed income, you know, guaranteed return with ten to fifteen percent yields.

So why is that? Is that just that like that? There is no way to get the fear. The mars corporation, there's no way to get your hands on that free money.

I think in this case, yes, I think there is also a reputational element to this two, right? Like if people are worried depression in the financial sector, which will get two minute, people are worried about counterparty risk in trust, and due to the effective photo runs on the bank and the investment bank sense, why bring and breakfast and Warren in is gna do a lot to shore up trust here.

And I guess another way of saying to get your hands on the money from cheap government, cheap money from the government.

that's a bail out. Yeah, that's a bail out.

You don't want to be that the company that got a government bail out when others didn't.

I'm probably doesn't help with trust too much. Yeah so that in April and then birches fairly quiet for the next few months. And I remember these few months in between march and september. I like the eye of the hurricane. You know everybody he's like a it's going everything that be okay here like you know it's it's a weird moment but then of course, september rolls around and two thousand eighteen.

it's funny. You have this memory of the spring. This was after my freshman year of college that spring, or was like the spring quarter, I was completely oblivious.

I was getting ready to go to my first internship at this go. And I remember like preparing for IT and going. And there was not like a concern in my mind that like maybe my internship will get cancelled or maybe these companies will go under. I do, however, remember what you're about to tell. Like last few weeks, my internship just watched like being included to the news and refreshing every day comes of temple.

Yeah wow, that's so far yeah. We had even know like we're so close in age we had such different experiences, just like me being out of college and in the .

workforce and sector. Like I just not that convinced that if you were outside of finance or if you were in take at that point that you that early you would heard the news about our stern, but IT wouldn't .

be this sort of daily above, you know yeah interesting. Until the fall, until the fall. Yeah I mean, the fall was just like the nuclear bomb goes off and selected two thousand name, of course, were talking about leman.

So here's a fun story. The story is great. So the lemon weekend, Warren is, of course, on vacation, I think, is in canada. Who is adored is by that wife. I think they're married .

at that point. Certainly partner live together. Maha, yep.

So he gets a call about lemon and eighty hundred years have been circling that lemon was in trouble in counterparties where started not trust them in the endlessly warrants about to go see uh, a show like exam sort of performance in the theatre and all right, well, I got to go see the show. Send me a facts to the hotel that i'm staying at with the details of exactly what's going, exactly what you want me to do. So be a fact. So great. He doesn't have blackberry .

and he says this two lemon brothers .

I don't know if he was a banker who was calling about. I assume that .

was probably man helping out leman brother.

Yeah, he knows dick fold, who is the C. E. O of leman. It's about bAiling out women because lemon's get to worried that like the fed might not be all out here, like this might be the end. So after the show where and gets back to the hotel, there's no facts. So really well, guess they didn't didn't want that a year later in summer two thousand and nine, he's at sun valley, of course, with little suzy and he's leaks at this phone he has like a foot phone and h, he says, dad, there's a text message on your phone.

No, yes, yes.

yes.

And he's he's like.

what's a text message? And it's from lemon and apparently like wires guy crossed IT was asking for maybe like the fact number for the hotel is not like what hotel you staying at her something.

oh my god.

is a that amazing? Uh, how warn buffet .

could have saved leaving brothers if he was a little more tax heavy and .

it's a full ty story. Uh, of course there there's more to I like could have to hold if everybody really .

want turns out the .

actual story is I think that did really happen or and tells IT in a video I think I might be. Well, street erne video, kind of a retrospective about the grass in march, right after the bear collapse. Dick fold had called warn about a capital injection then, and warn had studied IT then. H IT is in a world street journal. Video, because this is great moment he goes in his office, he brings out the printed out leman brothers ten k from two thousand and seven that he had studied in march, with all of his handwritten notes all over.

amazing. So he was thinking about, he inking about IT .

brother he again, he had risk and maybe pretty little gung I from salmon brother. So he didn't invest in Martin like he wasn't I think he says he he wasn't going to do IT again anyway in september. So on september fifteen th, of course, famously lemon brothers declared bankrupcy goes under.

Of course, everybody remembers lemon and talks about lemon. People forget that A I G also had a crisis that weekend. The fed ultimately did bail out A I G.

And not lemon weren't got a call about A I G too. He he passed on A I, G, so he did not invest in those financial firms in september two thousand eight. However, he did get two other calls that he was slightly more receptive to, specifically golden sex. And G, E. You couldn't think of G, E as a finial firm, but they had G, E capital, which is a large, very active financial player, and they were in trouble.

Did you know that G, E, consumer facing savings was sold to goldman sacks? This is like maybe seventy years ago, and goldman sax rebranded IT in a sloppy we branch, kind of a quick one, G S. Bank and IT SAT as gs bank for like two or three years. And then that became .

the understandings of Marcus. No way.

I did not know that was gone.

Final product way. And there both rn buffs .

bailouts, two thousand and eight two bubs.

two thousand, eight two bubs the very next week after the lemon bank psy golbin must call probably daring that weekend, two or or shortly there after bircher invest five billion dollars for preferred equity in goldman with a ten percent annual dividend. So essentially this no it's it's like dead. It's not preferred that what would you like prefer equity that you would get investing in to start up.

It's A A more debt like instrument. So ten percent keep on the Solomon, keep on, I think was only nine percent. So man, this is worse.

And golbin with a call option for golbin to call the prefer equity back for five and half billion dollars plus. Burke got another five billion dollars of common stock warrants at a strike Price of one hundred and fifteen dollars a share. Those warrants end up becoming, they got really goes, he said, I think, once with golden, but become quite .

valuable.

All told, on that deal, berk sha ends up making about three billion dollars. So they get about eight billion dollars back on the five billion dollars that they invested in golbin. That pretty good for a fixed income that happens within like two years.

And how long did that last? Did they end up completely out of goldman shortly .

there after I think they held the equity that they exercised from the warrants for a while, but they don't end up making two more than the a billion dollars. So so good deal. Uh, G E was slightly less well, the week after a gold men on october picture.

Invest three billion dollars in G E. For basically the same deal. Ten percent. Keep on warrants to buy three billion dollars of common stack at twenty two dollars a share.

Unfortunately, unlike goldmine, who stuck as of today, is trading at three hundred and sixty four dollars a share per system, one fifteen strike Price. That burger got. G E.

The strike. Crace was twenty two dollars and twenty five cents. G. E. Did briefly, very, very briefly trade above that mark in twenty sixteen, but its share Price today is thirteen dollars. Not so good.

That was not the last deal that burger would do with G. E. Do you know about fifteen thing?

Oh, no, I don't.

They bought some rail cars from G, E, which I think is now viewed as a sort of a mistake in retrospect.

Interesting, like actual rail cars or railcar manufacturing business.

I think actual real cars, IT was like a fleet like a managed by g others like a business umbrella associated with IT. But IT was a let's see yeah that the subsidy area of burker was more man holding and assets, all the G. E. Real car services fleet boom.

wow.

yeah. I think for a billion dollars.

wow. Small world. So all told, in two thousand eight, during the crisis, worker would deploy about eighteen billion dollars of the thirty seven billion dollars cash that I had on hand, the six and a half individually, five into golden, three into G E, two point seven billion into swiss y january. Major competitor.

which was I D interesting.

Hey, why not make money? That was at a twelve percent. Keep on rate, not bad.

This is my personal favor. Three hundred million dollar loan to hardly David son, a fifteen percent interest. wow. Two hundred hundred and fifty million tiv ties at ten percent, and one hundred and fifty million into sealed air at twelve percent. I don't know what I was that was like a airline or like air manufacture .

out of something. Well, so this is, I mean, honestly, since like ninety five when they bought the second half of guy co, this is probably one of the top two moves, all the shopping spray that they do in the fall out of two thousand eight, and buying apple, which i'm sure will talk about next.

we get to.

But I ve been truly like, what else has been this sort of like big win in the last twenty five years? nothing.

And understand terms of capital deployment. This is the most capital that work deployed since if you could call the january deal, capital deployment even though was all with with stack.

but this is legitimate. This is a very impressive move. I A classic buffet like i've get to wait until Prices are rational again and I going to do all my research, and then i'm gna be so prepared that when the moment presents itself, I can acted few minutes and that he did. No.

here's some interesting stuff about this. So all of these deals, the eighteen billion dollars deployed in two thousand eight, actually the net returns at the end of the day that bircher gets back from that capital turns out to be about twenty five billion dollars. So you you are right then.

But from the actual two as a investing is like that good. And I didn't lose money on any other stuff during two thousand. Tes, like all number, don't lose money. This is all .

fixed income, right? If this were a venture fund.

you'd say, boy, for the vintage top one percent, right? Exactly, exactly. So good. But this is not look amazing. But there is a koa to this.

And what you say, sixteen deployed to get twenty five back.

Eighteen deployed to get twenty five .

back over what time period?

Probably all told, five years, maybe less. So get very pretty good, pretty good. yeah. But Warren gets one last by at the apple. Not not that apple different at the financial crisis.

Apple in twenty eleven, which door of all of this, which is amazingly, I thought that this happened in two thousand eight. But no IT was in two thousand eleven. Bank of america, yeah, how we not .

talk about them.

IT was not two thousand and eight. IT was twenty eleven. Bank of amErica gets caught up in that.

Uh, remember the euro debt crisis that happened to eleven and obvious ly financial crises again, at least in the U. S. Da, a big thing. I don't know how bank amErica could I caught up in this, but they did. Burger stepped in. Did the playbook five billion dollars prefer equity with a five percent give on on IT? So not as much as the team percent to take out from global, but they got warrant coverage to buy five billion dollars of common stack in bank amErica at a seven dollar and fourteen cent strike Price today bank of amErica trading at a forty two dollar stock Price .

to cool six x.

cool six x they .

still a.

still be A A shareholders. They all in to date, picture has made about twenty six billion dollars in profits on the b of ideal way more than wow the seven billion dollars that they made from everything else during the financial crisis combined and I think more significant more than any other investment that warrant made in his entire career up to that point.

Um has to be I mean, they're playing with so many bigger dollars at this point that okay. So let's call this three great moves, then your your pretty good ones from the financial crisis you're buying of apple and of course then the ba a one which there's no way that he's done anything more uh, Better than the absolute dollar magneto. This point i'm i'm sure run return on invest capital. sure.

But this be of a deal is a grant lam and a very important grand slam because so we mentioned wells fargo right around this time. Wealth argo is literally driving into the ditch with all of their scandals. Pressures started buying well, fargo in one thousand eighty nine. So I don't think they ultimately lost money on IT, but like they had big gains and then those gains evaporated.

right? It's like buying yeah you start buying bit point around like fifteen k and and and you keep buying all the way out through sixty and you're probably about break even kind of feels .

like that you and just going to warn is now in his eighties at this point and yeah .

fifteen years ago, he got the question when when you get to retire to which he always responds. What like about five years after i'm dead.

five years after I did here, that his line so to be Frankly like this is his last her like, uh, if you include be of a which was a grand slammed grade investment, this is IT. He's done after this in practice, although he doesn't know IT.

Starting in two thousand nine, right after the financial crisis, that's when they changed the format of the annual meetings where it's no longer people approaching the beckie k and andero socket, not asking the journalists, asking the questions and moderating he sites hamed he entirely. What is the succession plan? What are you doing? Like you are eighty years old.

How many more of these wild rives can you go on? And you know, he gives his trademark sort like evasive answers. He says that a the most important qualification for his successor as CEO is running a large Operating business.

Experience doing that. Rk, as Warren has so much experience running a large Operating business. But the one part of the plan that does make a ton of sense is that he says he's gna split up his job into the CEO business side that can be handled separately from the investing side. We'll be run by one or more chief investment officers after he is no longer in charge.

And to put a finer point on that, there is someone who you know is gonna aged, the equipment folio, the stocks that they have where they don't own the business, hundred percent, and then the stuff that they actually do, one hundred percent. yeah.

And this is something that they had actually been laying the groundwork for, for a long time. I, I vegal remembred this, but going back and study this, this is amazing. So all the way back in two thousand and six in the annual report, weren't in jersey, have been talking about this. And they come up with this idea like, well, what if we just put an open call for candidates in the annual report?

No way.

So in two thousand and six in airport introduced this idea. Warm, right? So I intend to hire a Younger man, or a woman with the potential to manage a very large portfolio, who we hope will succeed me as burger's chief investment officer when the need for someone to do that arises.

So this is for the .

EQ portal for the equity portfolio. As part of the selection process, we may, in fact, take on several candidates. So this is go IT on, and I think shareholders knew this.

But people have forgotten by two thousand nine, there was three years ago, the financial crisis happened. There's no progress. Nobody been hired. finally.

Then in two thousand and ten, they make a higher, a surprising higher thirty nine year old tod homes, a completely and totally unknown manager of a small hedge fund basing connective called castle point capital. And todd had started his career working for the state of florida bank regulator and then gone on to work at progressive insurance. Guy goes, big competitor.

yeah. Before becoming A H one manager, and here's the thing like you know, he said is great, like this was a good higher, but he ran castle point, his head run, for five years, during which time he asked cumulative returns of thirty four percent, not annual, not I R R. Wow, thirty four percent total. This is not like .

how been investing five years.

huh? This is not like a uh, incredibly distinguish track record here.

But he did almost that well every year for twelve years in .

the buffet partnerships. So everybody is a little puzzled, and the plot thickened a little more. So the wall street journal, I think tod's hiring was announced in like August or september, I want to say, sometime to red later part of the earth.

In july, the wall street journal ran a front page peace, saying that the search for warn buffett's successor was almost done, and they had the candidate. They knew who I was. David.

when you sent me this article, I have lost IT. This is crazy. I had never heard of this.

Me neither. I can't believe I didn't see this when that happened. Unbelievably, the canada, the chosen canada, that the austria general burdon was.

Lee luu, who has an amazing story himself, grew up in china, was part of the tata square protest and going to the U. S. And eventually gets into investing, had an incredible track record. Hasn't incredible track record founded hima, a capital mostly invested in china, and became close friends with charly monger. He introduced charly to the byd investment, which is how happened for future.

And if you're wondering, hey, this name doesn't sound super familiar. I didn't know he he worked at pressure.

He never did. He never did. And this is unbelievable. Even at the beginning of the article front page, while street journal they get the money quote from charlie, charlie e is quoted as saying this is a quote, foregone conclusion that lee would join picture and they even have .

a picture with him like there's a picture of buffer with, it's crazy.

totally, totally crazy.

So what happened? Like how did this blow up?

The world may never know exactly but the skettles, but is that IT all came down, the cap, the compensation. And the thing is, you know, leave is and is incredibly successful in his own running, his own fund, where he's keeping two and twenty two percent management fees and twenty percent of profits.

And yes, IT would be like this amazing honor to go work at burger b buffet successor, but kind of lake war in back in the day with the gram newman partnership where they offered him the keys. And he was like, why why would I run your firm where you're keep in a piece of IT? I'll just could do my own thing and i'll keep all the profits.

I think that's what happened, would leave. So he enjoying his to run simili has been incredibly successful by all account, still has a warm relationship with charlie and Warren. But yeah that through arrange in the process, I think but .

and I did read about what the investment agers and i'll get to the second one here in a minute, how they're compensated and warn those kind of let IT slip in an interview that they basically are compensated for their performance above the S N P. Every year. And there's some kind of like three year characteristic to IT where they are they're paid on a three year basis and there's an opportunity for basically make sure to have a clawback if they under perform in, in the sort of latter years of the three year rolling basis.

yes. So you can see for somebody like clear, this is total speculation and rumors that is online. It's never been confirmed. One where the other bt, supposedly the other canada, according to rumours, was David in horn from Green light capital, I think famous hedge fund manager. But for folks like that, like it's not an attractive value proposition really to go work at picture. But for tid, who was running a small like a hundred million dollar hedge fund, right, this is the chance of a lifetime when this interview .

came out out few years ago, maybe more. The capital pool for each investment manager is thirteen billion dollars. So like even on its zone, it's a very large hedge fund. Even you're little sliver that you're remaining. You so huge .

opportunity for tod. He joins at the end of twenty ten IT. Turns out though that warn and jie didn't note that time, but they weren't actually done hiring.

They were going to bring on, as they referenced in two thousand and six, they are going to bring on several candidates. You know how we talked about on the um we have talked about the city. We talked about this on the episode that warrant does these annual charity lunches that he is off yeah actually auctions actually happened on ebay, which is amazing.

That's awesome. And I didn't realized, uh, the charity is the glide memorial church here. And seven cisco, great, great organization, been involved in many great things over the years. In twenty ten, the same year where this is all going down, an anonymous bitter pays a record two point six million dollars for lunch with warm and the next year in twenty eleven, IT turns out it's announced that the same bitter paid two point six million dollars again. So one person has paid five point two million dollars for two lunches .

with ted gets the job because he paid for lunches with him twice. Millions of dollars, yes.

five point two million dollars for a job. Uh, yes, listers. Of course, we are talking about ted. Ted whistler, the other investment manager, a picture today was before berkshire running a fairly large two billion dollar hedge fund called peninsula capital advisers, uh, that he had been running for twelve years. He had been immensely successful over those twelve years.

He had over twelve, axed the capital in the fund, so done very, very well, ran a concentrated portfolio. His top holdings were like divide a and direct T, V, and he, for two years in a row, bias the launch of warring. And he impresses warrant so much in these lunches that they reach a deal to bring ted on.

That's crazy. That's crazy. And so the wheels have to start turning at this point for listening ers out there like, okay, so then you said there each run in thirteen billion dollars, do they get to run their own hedged funds? This is something that I don't think we totally know what the decision making process is.

You know how much are they there to execute the sort of buffet and monger style verses? How much are they there to say, look, we we have a risk profile that we're comfortable with. Here's how we've been doing IT .

go to town yeah, I think the answer is, is somewhere in between in terms of how much thought T. H. Warn and Jerry.

So IT turns out twenty eleven, the same year as ted joins, there's a little bit of a scandale. Remember we told you to remember the name David. So cal, well, in twenty eleven, berkshires acquires, fully acquires a chemical company named lubercal for nine billion dollars.

IT turns out that the person that first got interested in acquiring, said liberal company was David circle, then running the energy business with embryo hathaway. And everybody widely assumed, and buffet had basically implied, that the name on the envelope to be the C. E.

O of the business of that side, when warn stepped down, was David like there was his job to lose? Well, IT turns out that for some literally unfazed reason, because it's not like he needed the money. I would assume David front ran the trade with the acquisition of liberals. All so is a publicly .

traded company before, is a publicly .

traded company before berks required IT. He personally bought chairs in the company and then suggested to Warren that warn, look into buying the company is a whole okay. That end of itself isn't that bad.

It's like, oh, like, I personally invest in this company and think it's great. The problem was that after they started negotiating to buy the company and David, I think, was involved in the negotiations, he kept buying, knowing that this was going on definitely a no no. Yeah he he didn't end up being prosecuted or are going to jail or anything. But who once all this comes out, buffet fires or he leaves picture and we know about that, makes statements that he can't believe that this happened and he can understand why, David. So that leaves the new name in the envelope, so to speak, as David's former number two, now number in the energy business, greg gable.

who also came over in the amErica energy acquisition.

And as we now know, greg is indeed going to be the next C.

O. We've got the chest pieces here. We now know a name for insurance.

We know greg's name, uh, as sort of the non insurance businesses, he's going to be the C. E. O. And we've got ted and taught each managing their pool of money, probably close to twenty billion dollars. Now each on the .

public equity has said, I think started IT was about one billion each that they are managing. And they kind of as they prove themselves, he gave them more rope. But in the early days year, Warren is still managing.

We know we are talking to charlie, but really Warren is still managing most of the investing for picture. And to be on the teacher, just given that the ten time right away, because he does a pretty terrible job like we can, means words here. In retrospect, these years between twenty eleven and twenty sixteen, I think we're probably some of the worst decisions that buffett ever made and worst terrors of his career.

He has admit publicly, I mean, not not necessarily the way that you just face IT, but he definitely has admitted publicly that ted and thought out performed him yes, that they did. I think he made that comment in twenty ninety and he said, yeah, they they both beat the S. M. P. By a little bit, but they smoke me.

They definite spoke him so in november twenty seven, twenty eleven was a weird year for warn user's .

perch yeah, yeah you know.

hiring ted, which is great, but because of the charity lunches, is like, just win. So in november twenty eleven, for some god knows why reason, warn finally pulls the trigger on the trade that he has been itching to make for thirty years. He puts ten point seven billion dollars into IBM in twenty eleven. This take .

quick for twenty eleven, four years after the APP store launched. Yep, seven years after facebook is launched. You like this is not like way back in time when IT might have made sense .

three years after the famous jeff bias talk at start up school.

Say .

about A W S.

A W S is already a thing that is the default for startups that has been for years to go and be the cloud provider. So what on earth, what kind of theses does you have an idea?

This is he. This is what he says publicly. He says he has been, quote, hit between the eyes by how great IBM is and how strong and defensible its client relationships are. Oh, brutal OK bomber. If this is the first technology investment that warm buffet is going to make, maybe it's a good thing he didn't make any technology investment.

Maybe it's century two a yeah.

Seriously, he holds this thing until twenty eighteen when he finally sells IT. All told, he loses two billion dollars a in total cells for like a river. The little over eight billion dollars, particularly the opportunity cost of ten billion dollars of capital in twenty eleven. You put that in the IBM. My god.

I think about, if you ought any other big tech company. I just pick one. Don't even end that. I just pick one. You would done great one.

Go back to the monkey there on the darts. Then in twenty thirteen, he partners with the private equity firm 3g capital to take craft private and then merge IT with hans。 Weren't you've partner with a private equity firm? Like there your enemy? You know what they do, right? Like, uh, anyway, burker puts ten billion dollars into that deal.

Their equity stake in craft hines today is worth about eleven billion dollars. So you know they went lost money. But like, again, opportunity cost of capital here that was tonic thirteen anyway, twenty fifteen.

Burker acquires the aircraft parts manufactured precision cast parts for thirty seven billion dollars in burch's, largest deal ever. Bigger even oh, escape over the railroad in two thousand and nine. They bought they finally the that that was a good deal.

That was, yes, that has done welfare picture warm buffet from two thousand eight two, twenty eleven. He was good. He was good in those years.

But precision cast parts man bought for thirty seven billion dollars last year. They took a ten billion dollar write down on that deal. So that's a dog.

The worst though, we allowed to. Oh my god. In twenty twenty sixteen he starts investing in the airlines. This is the man who d said that he was going to a shoot down orval in wheeler. Er uh, what was he thinking?

Well the interesting thing is so he sold the airlines in a panic sale right when the pandemic c dip started. And we all know, of course, there was about five days where you could actually buy the dip before I came sky rocking back, and somehow we didn't endure a real market crash in this global pandemic. Cause a monetary policy.

anyway, use your own power.

Yeah, profit basically sells at the bottom with these airlines. And it's interesting because I don't falt him for the sale. IT is a very reasonable thing to sell the airlines because of the government didn't build them out.

They could have all gone to zero. I mean, the government was paying some airlines payroll to sort of make IT through that period. So I don't even though he saw that, I think right around the worst, the bottom I blame the boy knew that he even had a comment years before that. He had sort of like a is IT like a romantic fascination or like a dirty habit about about owning airlink or something like that, though he knew and he still did IT.

it's like that he can have newspapers anymore. So he wants the airlines now. Okay, to be fair to our and again, the skettle about IT here is and there are some comments to this effect that IT actually was, I think, ted who first got interested in the airlines and they talked about IT, you know and then Warren h so okay, you know, it's just kind of food you can not make fun warrant for this one. Like, right? It's it's bad.

Can check this up to you ouldn't .

known Better. I B, M, precious part. Do bad. That was bad. Well.

and honestly, in the same time, very like j and j wasn't great. The two thousand and eight investment he did there, the real cards that I mentioned was around twenty fifteen not. And those are all the sense of commission, not to mention the sense of omission of google watch, facebook watch, amazon watch.

And on top of all this, like you own M, X, you under stand M, X, you understand the brilliance behind what became the credit card international business. And you let a two thousand and six IPO by master card in a two thousand and eight IPO by VISA go right by you. These are crazy old companies that have been locked up inside the bank, you know, federations, or however they were owned before they're finally available for the publi C2Buy the se soc ks s h av e gon e lik e the se wer e cri minally und ervalued. The initial issuances and buffer t just watched them go right by knowing the M. X.

Business is crazy. That's I thought about that. Yes, you're right to be allocating all this capital to these dog businesses when VISA 和 master card put the tech companies aside or just sitting there。 Oh brutal.

Okay, so we're him and not worry here really. So but there is one shining saving all sin absorb. I just the virtuous portfolio during this time, that's right.

We are talking about the very same company that was sqa capitals. Worst mistake ever by selling before the IPO berkshires and Warren redeems everything by buying apple inc. Amazing, amazing.

This this story. okay. So here's the story in may of twenty sixteen, as Warren quick in the quote, could one of the fellows in the office who manage money?

A K A ted? Yep.

it's never been said whether I was taught or ted. But I I think IT was ted here because tod really focuses on financial stacks. Ted does everything else.

As one puts, IT had put some money into apple, and indeed had put about a billion dollars. Let's assume that was said into apple. Shahar s, in many of twenty sixteen, that goes well.

And amazingly, ted ever manages to convince, warn that this is a good idea. I guess, you know, he's broken the seal with investing in IBM in technology stacks. Any comments is warn that they should really back up the truck here in apple. So over the next two years, berger hathaway would ultimately put thirty six billion dollars to work buying apple stock just under the total Price that they pay for precision cast parts, which was largest acquisition in pictures history. To say IT goes phenomenally well, that is the understatement of the century.

Yeah.

this is unreal.

And i'm sure there's lots of people out there who have been apple shareholders from twenty sixteen and to twenty twenty one. So know your broken accounts, know what we're talking about.

And yeah, lots people doing this. Not a lot of people doing this with thirty six billion dollars in initial principle. As of the annual report last year, the market value of burger shares in apple is worth one hundred and twenty billion dollars.

That is eighty nine billion dollars of gains in five years. So I think I think I can figure this out exactly, but I think that is either more or close to more absolute dollar returns than the entire rest of Warren buffett s career. Investing, even including the partnerships, was to say that again, more or close to more dollar returns than the entire rest of Warren buffer s career that has come in the last five years with one stuck.

I mean, there's two angles to this one. The irony is just .

dripped war in no .

text tox buffet and apple is approximately fifty percent of the dollars ever turned up. The other side of IT is interesting because IT basically is just a math problem yeah like of course, the last five years of something that's been compounding for seventy years fifty uh sixty five years, of course, the uh dramatic among of the value is going to show up in the last five, whatever you are investing and assuming that you're continuing to find a reasonable rate of return because that's how compounding works. But holy crapped my get the .

position was initiated when the man was eighty six years old.

And from some conversations I had when ted brought IT up and sold warn on the a the angle was not that IT was a technology company, but more in spite of the fact that that was a technology company.

We we get to talk about this.

Yeah, the biggest piece of a positioning from what i've heard is that it's a consumer product with a powerful brand name, very low propensity for people to switch. There's sort of I lock in. There's a strong moat there.

And in fact, IT may even be the most valuable brand in the world. Now that we've planned to that seed, I would like to go and but once again, read the quote from the thousand nine hundred ninety five annual meeting. What we are trying to find is a business that for one reason or another, IT can be because of the low cost producer.

In some area, IT can be because IT has a natural franchise because of. Surface capabilities. IT could be because of its position in the consumers mind. IT can be because of a technological advantage, not at all, and that IT has this mode around IT. I don't think that there is any Better description of why would want to buy and hold apple than that exact quote from him twenty one years before.

So great. Here's the thing. This is on the picking because like at the end of the date, like investing IT doesn't matter. I played baseball growing up, and my dad used to say to me, if you're listened, I dad, when i'm learning, you know, was learning mechanics, how to swing properly. I love this good.

He's to say, look, if you could hit three hundred in the big leagues, nobody would care if you stood on your head when you swang, all the matters is you hit three hundred. But until you earn out to hit three hundred, you know, you should help to do the right way. Investing is the same way.

Like nobody cares what you is. Nobody cares if you are right wrong. Nobody cares why you about stack at the end of the day, you just want to be a position to be right and warn got himself in a position to be right.

That said, I don't take key understands anything about how apple works or what IT does or like why and all of this works. You know, he says he has accorded the two thousand eight in your meeting. He says, I didn't go into apple because IT was a text stack. I don't think that IT required me to take apart an iphone or something and figure out what all the components were or anything. I think it's much more than nature .

of consumer behavior. Ah yeah he's IT for the m one. He's really impressed by the the architecture.

He feels that this .

sort of strategy is the right one.

How fuddy is that? Um yeah at the end of the day though, like IT doesn't matter IT does not matter. There was that idea IT doesn't matter that warn he ted technology stacks all the matters is that he was in a position to be right and eighty nine billion dollars of games later here we are yeah.

that has to be up there with the single greatest investment return in history in in terms of absolute dollars.

I think IT is I think the.

let's say.

nas tenant and the soft bank alibaba investments, I think you're still Better. But like we're splinting here is here.

Well, they they bought those companies in the first five years of their life. Remarkably, warn and ted achieve this performance by buying apple thirty five years into its life.

yeah.

I just says a lot about how .

forty five years the fang .

stocks in the last few years.

Wow, IT does. okay. So that is the big beat they're are going to end on. But let's bring IT all home.

January of twenty eighteen, burker officially appoints greg energy to vice chairman roles in the company, greg for vice terminal. Non insurance businesses are jeep for insurance businesses. The pandemic, of course, happens in much of tony. Tony one created es, his faith in america, but he dumped the airlines at the bottom, which, you know, I agree with you, I that's fine.

Burger mostly misses out on the enormous ball run that happens when ampal in the fed and jane elen inject literally more money than god into the economy, warn entirely, continue to say that they think the cyp du is rat poison squared. But as far as I can tell at least, I don't think they've made any attempt to actually study or understand what inter theory or any of cypher actually is. And then the take over the big moment that we all, if not, saw, heard about the day after. Hilarious slip, hilarious slip at the twenty twenty one annual meeting where charly lets slip that shocker. Great gable is the name in the envelope.

This clip is so funny for what will link to in the show notes. But it's the warm and earlier are like on stage sort of biggert about burch's culture and about a preserving the culture and truly just goes greg wood, preserve the .

culture and the look on warrants face is is less he yeah his stammer .

is is like um um uh during you know they have like hopefully we've .

pointed out in the now I got what ten hours we've been doing this series nine David.

don't get ridiculous .

the um so we said the economy between how warn is perceived and wants to be perceived and how he actually is and you know he's got that line about charly and you've never had an argument you like that you've never had an argument that you had one did that um but but you of course they still love each other. And gig will be the C E. O of birch hathaway.

we should say to the a thing has been happening quietly sort of in the background or two things you know ted and todd have been running their portfolios in a very different way than warn house over the years so I think tod and I don't know this for sure but was really buying amazon snowflake coming some of these these tech stocks um other than apple.

So you sort of have a non work approve strategy going on there, especially snowflake al in IPO, share energy from the interesting and then also stock by backs. S IT is very clear that what's happening is that they don't see a Better opportunity out there in the market to deploy capital than the businesses they already own. And so they'd rather just take everybody shares and concentrate their positions in the existing berkshires portfolio.

And I thought Christa bloom strap had a great quote in uh in the sample of justice investment group letter that he writes that is epic that is a full analysis of the accounting practices and valuation model for picture and he is a great quote. As long as capital markets remain overvalued and private investors flush with cash persist in investing at low yields, Sherry purchases are a magnificent use of capital. And IT really is such a good point that like you pick your head up, you look around, everything's a sky high multiple on IT.

And you know bertie shares at least the way that weren't sees IT don't yeah they don't. Now it's a little bit tRicky to start a think about IT this way because the in court intrinsic value of their equity holdings are marked to market. So you know whatever if if you say, oh, gash burch is not treating at A A crazy valuation, well, I mean, a big portion of what they hold is publicly traded equities that r at aid higher than ever multiple, however you wanted mention IT.

So there is sort of this interesting thing where by doing stock by byblus, sure, they're not buying into any new companies that have crazy evaluations, but they are buying more of the companies they already own at market Prices. You we wanna think our long time friend of the show, venter, the leading trust management platform, venta, of course, automates your security reviews and compliance efforts. So frameworks like soc two, I saw twenty seven o one gdpr and hip complaints in modeling ing vent to takes care of these otherwise incredibly time and resort training efforts for your organza and makes them fast and simple.

Yeah, fanta is the perfect example of the quote that we talk about all the time here and acquired jeff basis, this idea that the company should only focus on what actually makes your beer taste Better. I E spend your time and resources only on what's actually going to move the needle for your product and your customers and outsource everything else that doesn't. Every company needs compliance and trust with their vendor's and customers. IT plays a major role in enabling revenue because customers and partners demand IT, but yet IT add zero flavor to your actual product that IT takes here.

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So as we started to translate a little bit to like there is a playbook that we should enter here. But like now that we're sitting in present day, why don't we reflect a little bit on on sort of present day in and in the future? Well, what bullet case that I don't think we've really talked about is in a lot of people sort of think, oh, bircher s toast when when you know buffet the retires and analysts the retired so passes away and the stocks is going to plumb IT and the performance is gna go away. I think if you've been listening to our episode, you probably don't .

think that you might think the opposite.

right? So the bull case is like they actually could do Better under greg, like they might be less conservative. They could run the business by keeping less cash on hand, which is, of course, a drag on returns.

And Frankly, like there's an argument that Warren has gotten really gn shy in buying stuff after a lot of the sort of sins of omission and commission that we mentioned above, that a is not clear that these sort of trust is instinct in this environment. Uh the only thing that be clearly trusted to just do the stuff that has worked in the past, and i'm not sure that's well suit for this environment. no.

So and not to mention tod tetter.

pretty good no matter what else they've done, they did apple. So like that everything else rounding air and especially when they're only managing forty billion between, I mean, that what did you say, eighty five billion dollar gain, something like that, eighty nine, unbelievable. So there's certainly that element.

just not like one more piece of context on that. That's a whole zoom of gains literally created a zoom market cap worth of gains.

It's totally wild. Now the flip side, the sort of bear case is, look, Warren has been successful in a lot of environments. And the the thing you can should cheerlead about Warren buffer t is that he's reasonably consistent. Someone will always be out performing him, but he has created this incredible rate of compounding. Third, over half a century.

So well, I think the case, the David nyborg making do you here for this whole episode, is that the internet changed things so fundamentally, that his style doesn't really work anymore, and that you do have to make bets based on the earth changing underneath thew, rather than just you are staying the same and businesses being well run. The bare case on burger would be, and actually is the opposite at some point, the buffet way of investing, world changing or not will actually be great. And we're just in sort of a season right now that is is just making him look foolish. And yeah, maybe it's been ten or fifteen years of largely foolish decisions but but made, you know so i'm not sure this is where I come down but that would be sort of the future bare case on um if overture changes too much from the long time tested buffs strategy.

I would also add another part of the bare case which is warranted or not right or not or whatever like there is no question that burkha hathaway and burke hathaway shareholders benefit from the warn buffer t halo effect. absolutely. And there are some real tangible benefits to that, like during the financial crisis where like my god, there's deal he was getting on dead and preferred equity coupons, nobody was getting that and the calls he was getting like that, that is real tangible benefits. And there is some intensive benefit like I definitely lots of people, I think ourselves, myself only included now having done all this work like you, you kind of pass the hill on investing, but lots of people give them the past and people still show up to the shareholders is meeting and people still hold back to hathaway shares because they believe in warn. And if it's no longer there.

then what yeah burger health away is a religion ended investment. And the bare cases that at some point that just becomes an investment a little bit more barcy stuff. H, if you think about capital allocation, if you think about maybe the way jeff OS does IT, ideally, there are lots of potential growth engines inside your company to invest in to, okay, your capital to othe wise, you have to go and fight IT out with every other investor for every publicly available investment vehicle. The only growth engine that berkshire really has, like meaningful growth engine is echo, and that's not a real growth engine.

So it's really hard for them to consume capital internally in a way that would meet any hurdle rate that would be exciting like they cannot a have to keep going shopping. To deploy capital at this point. There is an element there that's a little bit scary if you're thinking about investing in a tech company versus picture, which of course, you you never really should be thinking about one of the other.

They are completely different buckets, but they don't have an internal growth engine inside that company. The last one is a little bit more new on tankle. On the thing that I mentioned before about if you do a sort of a sum of part analysis on bircher, then you have to look at everything that's currently mark to market, which is eyehole.

You know there is definitely a lot of people out there that think that the stock is trading to a discount of the intrinsic book value of the holdings. And that, of course, would be the case if you fully valued the cash that's on their baLance sheet. But if you think about the multiples of the stocks that they own, I mean, apple has gone from being valued at something like seven x earnings to N L like thirty x earnings.

And to believe the like burger is under Price argument is fundamentally based on agreeing that apple is worth what is trading for, which may be is true with apple. But you are also agreeing that like B N S F is sort of worth industry multiples for railroads, which if you you look around, are also meaningfully expanded recently. I just think asset Prices are really high. So there is definitely this element of like if you believe vertues under value, then I think you're being pretty generous with how you value the sum of all the parts.

Yep, I think that's true. But there's the capital location question of, well, all as is, are our value right now. So if you going to take capital out of picture, where are gonna put IT right?

Everything is only worth talking about when you compare IT to its next best option. 要 if anybody has any really good options for， uh, really solid assets that are under Price right now. Quiet, slack, you know, quiet that F, M, slash, slack. Go, go, go.

Let let folks out the investment channel. You hang out the digital assets channel that is where stuff is going on. It's playbook, playbook. Let's do IT you want to kick IT off? yeah.

I mean, the biggest one is just so clear to me is the you need different strategies at different scales and the same play, but clearly didn't work as they gained more capital. You know that there was that great thing that they were doing forever of hiring great managers that were family on businesses that they bought for hundreds of millions of dollars and let them run.

And those things compound and you could be management light IT just doesn't work anymore. And so you need a completely, completely different playbook. And the interesting sort of point that I want to make on that.

just like the original car bet playbook talking.

and they had to go exactly the point that I want to make on that is that they have set themselves up well where they have a remarkably flexible structure to do that. So it's not a fun. It's an Operating company. They have an infinite time horizon. The goal is to never .

sell and there's no drag of fees.

And there's no drag of fees.

A shareholder you can feel pretty good about the sticker performance is actually the performance are gonna get you not in that last twenty percent.

And incentives are aligned. If they are not investing, they're not just sitting there collecting fees, you know they are itching to because they think that the best option for that capital right now is to sit in cash. So even though we were knocking war in for like o he is not a touch and his you know he doesn't understand the internet, he doesn't understand businesses and the world change from the net.

And we still a lot of words on that. What he did get right is this Operating company flexible structure and probably set IT up for success. I say probably because where we have an open question on culture and politics, but leaving enough flexibility inside the company then to make sure that they can react to whatever is coming even if it's not in the war style. So that was a big one that I had .

say more about politics unless you're saving IT for later. No.

i'm not. So this is something that concerns me. So you went from having one person making all decisions where if capital was best used on acquisitions that we can use there, if capital is best used, play a IT into an internal growth engine when they had meaningful internal growth engines. Know you can use that there .

like a jets business.

Yep, yep. If they wanted to go by stocking companies, they could go do that now how each of those are independent freedoms. And so i'm sure there's ways they can sort of do horse strating.

But people's come largely is tied directly to their own portfolio. And so who kind of gets to say, at the end of the day, know this is what we're doing? I guess it's greg.

I guess it's the C E. O. But you really have to nail the incentives to make that all work. And when you have a non founder who doesn't quite have the same sort of influence and preview all over all of those things, I think decision making, especially when you need to be able to do IT in like an hour yeah for a really big deal IT could get really thorny.

Not to mention the C. E. O, who doesn't have the investing mind that warrant does. Greg is like, great. He's a great Operating executive. But is he going to be able to think in the same way as Warren and taught ted about investments and act with the same speeding conviction?

right? I mean, what the right thing to do here have been to go try like crazy and might might be very hard, if not impossible, to go find a war and buffett and just give IT all to them and sure they have these other guys is employees, but like, you need a one head monster.

This is the funny thing about the number one criteria ia for the next CEO being Operating experience at a large company. Well.

that's not a right. Yes, i'll be very I mean, we may never know that maybe twenty years before a book comes out, but i'll be very curious to see how contentious decisions get made between that new group before that is sort of coming in. And if just warn or just charlie is left at some point with the four, what does that look like? That will be weird for a little bit. I I imagine if one of them leaves, they both leave at the same time.

I imagine to the other thing I will say.

i'm culture. And this is borrowed from some great research that some listeners sent us. Their culture, they sort of talk about IT like it's this virtuous thing. And if it's truly this like virtuous thing, then it's something that you can sort of qualify and protect. I think the cultures are really sort like independent inside each of these Operating companies. Like I don't think if you're an employee bore shames, like I don't really think you think about leber's l's culture or like either completely they they have nailed IT on the decentralized thing.

So I think the only real sort of like shared cultural elements inside the hundreds of thousands of people that work inside or or four per hathaway are one don't put burch's reputation at risk to bend over backwards to avoid paying tax, which takes money out of the business, like just don't take money at the business, leave at all and keep compounding IT deferred, however you can. And three fun, all cash back to picture for relocation. And I mean, that's the culture, like those of the things that are really important to the head office for managers at their subsidies to follow. Yp, well.

should we go to grading? Yeah, let's do this.

I know you have a whole slate of ways that we can greet this one. So so .

kick us off, man. The whole story, nine, ten hours in. Okay, so I was thinking before we recorded about how to read this. I don't usually write down any thoughts on greeting before episodes, but I thought this is so romantic.

You guys know David rose and thought he just wings IT isn't .

really prep what I do in greeting. Um okay. So I think there are four topics to discuss in grading here.

First, we've been to this whole thing. I think we got a grade warns entire career like hopefull. There's still a little bit more time.

I know maybe not probably. I hope not that there's not more time. I hope there's more time in his life, but not in his investment decision making career. I think there are basically at the end here, one way or another. The man is eighty one years old.

Either way, you were shipping the episode. So like, create the cut off. Yeah.

okay, we grade the career. I think we grade performance since we left off the last episode, which was in nineteen ninety two.

So like I did A I R calk of january ninety three, three today, great love IT.

Then I think we should grade recent years performance. And in the final question, I am a bircher hat shareholder. Have been for a long time.

I don't know if you are, but whether you are not, you could pretend you are. If you are, what do you doing? The stack you holding? Are you selling? Are you buying .

more interesting, David, do have a rate of return calculation on that. The entire buffet career.

As a matter of fact, I do I did some analysis on this, the entire buffer career. So if you alga thirteen years in the partnership, years at a twenty nine point five percent I R during these years, and you imagine that with then fifty years since the partnership, three, twenty, twenty five years, years, incredible in the worker time frame burkill e over that time period has had a twenty percent I R R. You get a blended irr of twenty two point three percent across sixty three years of active money management for warn guys.

consistent.

great. consistent. The more incredible number. Do you know what one hundred dollars invested in the warm buffer partnerships in one thousand hundred and fifty nine and held three brochure today would be worth today? One hundred dollars. Take a guest.

millions. But the compounding math breaks my brain. I I don't know.

Twenty six point two million. Not bad for a for a hundred.

Ty, wow, take a hundred dollar fire and would you say sixty five?

Uh, fifty nine.

fifty nine.

I mean, that's a long time .

and that was a lot more money than but inflation isn't move this fast. Yeah, that's a great step. One hundred dollars at the beginning of warn buffs career.

Following them all away through is over twenty six million dollars. Yeah, remarkable. And that's a twenty two point something percent I R R. So it's not over his whole career, you know he he flagged like it's not the same as the P, P, L, buffet partnership limited days, but that is might be good.

Yeah, mighty.

mighty good indeed. I saw A A plus. Where are you? Has anyone else been investing over this period of time? Like I don't even know how to compare IT to anything similar.

He lasted everyone. Yeah, he lasted everybody, I think. Um so okay, I roll down a, maybe do your name okay? Here's here is my rational for N A. We can debate if this holds my rational for N, A versus in a plus was that I think we will probably see Better investors in our lifetime then warrant in the past. And I think that's just a natural consequence of the numbers getting bigger over time and the world moving faster and they're being more change .

IT depends what you mean, Better investors because I actually don't think so depending on how you think about this. So i'm not sure that you can do what warn did over his career with a career starting today without taking on a lot more risk or a lot more leverage like it's just so competitive to be an investor now. yes. So I suspect if someone if we go set a million people free over the next seventy years, there will be someone who outperforms Warren, but they will have done IT with a lot more rest um involved. And so there's a lot more sort of luck in being the one of those million that does Better than him.

okay. So here was my thinking on that. I I tried to think of like I did not run the number, so I may just be way off we can debate. I tried to think of a tangible example, and the tangible example I thought of is the qua capital as a whole. So at seventy two, the coming up on fifty years next year, and we don't have their aggregate returns across all their funds, but I suspect they might be as good, Better than butcher.

interesting.

Now not a single person, right?

A firm, but it's an institutionalize ed culture. And if you can do can do something consistently, you sort of deserve to be in the same conversation.

And here is my thought process on IT weren't, well, you know, apple aside, which we can't really put apple a de like warn deserves credit for that one hundred percent. But absolutely, he's lost a step in recent years whether I feel like sqa has only gotten Better or stayed at the top of its game.

Yeah I mean, IT feels like they adjust to the climate that they are in a year before the climate changes. And IT feels like buffet adjust thirty .

to forty years after.

Now just on IBM, yeah, maybe maybe ten to fifteen years after.

Yep, that's a good question. Now is interesting.

But remember that thing I mentioned earlier with the expected value calculation of the probability something could happen and the outcome IT happened. Sqa is doing the exact opposite of the buffer thing. It's a shots on goal, uh, where each shot could be absolutely huge. So it's a obviously extremely different .

asset class. Yep, but IT IT is a approach that is, I think, more suit too, if you believe the hypothesis that the world today is more about change than buffer tt world when he was in his prime. The squair approaches is the Better approach in today's world, I think.

fascinating. I mean, we're going to like real life, although growth forces value people out there. But .

yeah, what do you think I put the gun in your hands? A R, A place? Oh.

it's an A. I mean, if he had finished strong, IT would be an a plus. And you could argue apple is finishing strong, but is just the numbers that I ran for this last period, one thousand nine hundred ninety three through today is a thirteen point five percent I R R.

And like that's twenty eight and a half years. It's not like this is like a quick cycle. This is like two or three cycles.

And so it's not like, oh, well, you can just say his thirteen and half percent I R R, you know was during a dow cycle for buffet style. Like now it's been we've been through some stuff and like it's just not been a remarkable last thirty years. And that number, by the way, it's just based on their stocks Price. It's the coming in at one thousand eight hundred january first ninety three, the stuck just closed at four hundred and thirty five thousand dollars in asia.

Uh, so great. Okay, this this is good. This is the next grading criteria. Maybe we can jump back to the an overall view at the end.

And let's compare that thirty point five percent member, the buffet partnership limited, that was twenty nine point five percent. And then the last episode where we talked about the hay day of birth health way, uh ending in the solo, and that was a twenty seven percent I R R eighties and the the late seventies through the the um mid nineties. So IT is diminish considerably, which they told us IT would, because of the capital are managing.

but still no. So what think uh, to be for this year to be to be yes, yeah, we still definitely beat the S M P. Like beat in the market for sure, but just not to his previous standards.

yeah. okay. So then recent years, so I did a slave, different.

What what does recent years mean?

Let's take the last five years, starting from the apple investment, which is almost exactly five years ago.

What's your analysis?

So this that was interesting and telling to me like like we've been saying, the apple investment, so amazing in the running for one of the best single investments of all time. Yet worker is so big in this law of gravity around the capital is so meaningful and warns other investments were so bad that in aggregate, berk shares stock Price performance over the last five years on a multiple basis is almost exactly the same as the S. M.

P. Even including apple. IT has tracked the market and not out performed at all for the last five years. Now you take out apple, it's underperformed by about half of turn on a multiple from the market.

So ted and todder making money but warns not getting paid out .

in any of his curry born is literally doing worse than the market in the last five years right now.

That's so interesting to think about yeah because this is necessarily under performing the S M P because .

he said that were over performing yeah and virtue as a whole is just simply as a very bad I think that's A C to me. And it's not it's not worse than to see because it's not like it's a head fun where they are taking to into one like you just it's the exact same thing is being .

in a index fund. Yes, I think I try IT to see.

Yeah okay. So now the money questioned, literally the money. What do you do with the money?

Are we keeping IT in future? Are we buying? Are we selling? Are we holding?

So this is the moment I reveal for everyone ten hours, and that I actually have never held .

berger health way. No way.

We've done all of this work. This is not investment advice. This is especially this part is not a investment advice, and we really do urge you to talk to someone who knows about this stuff when considering making a purchase.

But i've never owned. I ve thought about IT a lot, and especially in this research I considered by him many times in the place I basically arrived. It's very conservatively managed.

As a berk share expert quoted to me, it's a good widows and orphans stock. And Frankly， I think get a good way for someone who's raced to stay rich because of the way that they manage capital. I know they don't dividend out.

So if you make a bunch of money every year, then you don't have the high taxes on the dividends. You will continue to compound. You can sort of cell shares when you want to cell shares to free up some cash.

It's not going to have a really big down year. Maybe if there's an extreme in event, but you know it's not going to have five really big down years. So I think that question comes down till like where are you in your investing cycle in your life? And i'm not sure that IT makes sense for Young people to buy picture or at these people they're .

Young in their wealth. Yeah I dif er from you in answer but a hundred percent agree with you in spirit and rational uh smile to I am a british hair holder, as I said at the top of the series have been for many years so I am going to continue to hold partially due in nostalgia for that and the wait a word halo effect.

I get my free tickets to the share older meetings should they ever resume in person uh but now the real reason i'm going to continue to hold is actually just a portfolio management strategy. It's not a large allocation of my portfolio. Almost all of the rest of my portfolio is literally the rest of my portfolio is heavy growth. Text tacks, digital assets is at a secret of real state.

So this is like in your safety.

This is my I got my safety portfolio. Way I think about IT is just like this is IT. Should I need emergency liquidity for something in the near term? You know I don't know what that would be.

That's what my picture is, is exactly what you are saying. It's my bad term, but the equivalent of a as north fund of like terrible, terrible ble term. But the capital that I can feel good about, I actually thought a lot about this over the past year. I used to keep an allocation and just like a fairly sizable allocation and cash for this purpose and then I was like, well, that's just stupid today, like you don't keep catches is just dumb again.

not investing.

not investment advice. But when you know when yields on ten year treasurer are like basically negative, right?

There are devalue in my .

yeah exit literally every day because by you're getting more important, you hold a cash again, not investment advice. That's when I decided, you know what I marry worked this and i'm going to have my almy liquidity allocation be the burchill because I can feel tty confident, is not going to lose money and at least get some return on the capital. So I don't know that kind of sad, I think, for burger that I think of, IT is like an alternative to cash. But I kind of think that's where the stack is at, at this point.

Fascinating, ten hours in and this is where we arrive.

uh, not with a bang.

but a winter. I will say the journey is the reward. And I do want to sort of sum up this grading this series. Of course, we'll get to work out here in the second, but the completion of this with possibly the best take on warn buffer t of anyone whom from altos, which is investment firm that we very much respect, recently tweet that, uh, he is the only investor to build a company worth over half a trillion dollars. And as hope puts IT, a few amazing founders have done IT, but no investor .

comes close. Absolutely a great way to leave how F I, if you will indulge me, uh, I will spoil IT with A A less eloquent parting. Thought that I want to add two after, yeah, you know, guess we've spent hundreds of hours of research.

This is, we've read six play. This is the most like, quick atic thing that we've ever done. Hopefully you all have enjoyed this as much as we have because IT has been .

an absolute freaking blast. Let's change .

the way I think too learned so much from doing. And I was trying to really reflect on like, okay, what have I learned from this? What can take away? What are my feelings? There's what i'm doing about my stack, you know that's one thing.

But like the real value is in the learning. And here's my take is related to this. Warren was the greatest status quo investor and that the world we live in is different today.

But I think Warren was read about other concepts all throughout his career. He's preached, believe in america. AmErica is undefeated. Do you know in terms of capital growth in a place to invest your money? And I think that you know may, may or may not be true to some extent today, but I think that concept is absolutely true for the internet.

And um the future ahead for the the internet today to me is like los Angeles in nineteen, you know fifty or whatever. IT was that when charly was looking for a city? Well what is IT that was uh large enough to have an impact but still small and growing enough that he could become somebody there?

Yeah that's .

the internet. And if there's one thing i've taken from this is that um you know that may change some day but for the period that were in and going forward and display all the ups and downs and the delic oh yeah you know that in in the theory of A D I O crash you know fifty percent this past weekend, it's all noise like the internet is still the future.

Some listener out there and please drop this in the slack or treated us. If you do this, we need a mean of a with warn and his slides saying never. But against america, we need David rose and fell. Never bet against the internet.

Never bet against the internet. That's my .

take away. I love IT.

Carve outs, carve outs, let's do IT. Uh, i've got two, one very related and the other very unrelated, except to my joke at being in the episode. The related episode is a book fill Fishers, common stocks and uncommon profits are classic, really the counterpoint to the buffet philosophy and the value investing tribe.

Fill is the father of girl investing. And um this book was published in one hundred and fifty eight and fell, lived in the bay area. Here is efforts as go.

And I, I, I work fast. I haven't finished about the of middle of IT, but I riviere the only reason haven't finished finish this episode. It's amazing. Feel like basically saw the future of what tech company like dynamics we're gonna be way back in the day. And he he rates about like the value of corporate R N.

And this sort of paradox that like you can't measure the value on the baLance sheet of like corporate R N D and the cost of IT may be high and you don't know, but the cost of not doing corporate R N D, it's even higher. Really great, but highly, highly recommended. Also, I believe, recommended to me originally by home. Now who you are the talking about?

H he's everywhere. He's .

everywhere. And that my second car bet is the x box series. S I finally get on through IT.

So the and I .

was specifically looking for the best because I I don't need you know there be six years old. I don't need the X I don't need like I get my eyes, skin you and see well enough for the the, uh, great graph ics. But the s is awesome. This thing is like pretty cheap. I think he was two ninety nine, which is not that cheap, but the s and game pass IT works out to like, I don't know what is he like, four hundred dollars or something like that all in for a year and you get access to hundreds of games and all the best ones that i've been playing. Halo mater chief collection and it's like .

netlist email reference.

the halo reference coming.

See.

IT literally is like netflix for gaming. And it's so great. I haven't touched my switch since I got IT.

Highly recommend if you can find a series x or a series s game as just rocks. And I think it's on the experts. One, two, if you can use on the previous generation hardware.

Sweet, and I have two, because you have two, but there are the most connected. My two car vets. Urban, the first is, I somehow never saw god felis until this week, and that movie is just so choice on so many levels.

I mean, IT probably came just because I listening as well know I just finished the sopron OS. That was my previous car. Outen wanted more in the cast has like twenty five overlapping people.

It's the same freaking people. It's amazing. But IT is a frequent work of art for anyone who who wasn't seen that.

I mean, it's like course says that is best. It's amazing direction. It's amazing cinematography.

The dialogue is exceptional. It's just a just a tremendous story of this person's life. I've never been like a ganger movie person and already I thought I was. But this is so good.

Then the the O G I I have not seen. I have to watch IT.

It's great. It's great. And it's not like, you know like obviously there's the godfather and i've got a long b and hole to go down of like truly .

O G just watch one and two don't you?

That's what I hear. And then my second one is the good fellow soundtrack. IT is like true hit after hit after hit and a George Harrison, eric clapped and A F A Franklin and uh the the film sort of finishes with lily by day and the dominus and that is just like the best way to wrap up any epic pic story.

I think if we have the rights .

which the electrons c although the Austin is also great.

is great, i'm an electric the yeah .

the electric creates more of a the sort of like epic conclusion mood that is sort of appropriate for that alright, are clapped and see if we can get the rights to use that on the fade out of this episode. And great, great. Actually we probably want for sure. But whether or not you're fan of the movie, you've seen to go listen to the sound track on spotify.

So great. When do you know when goodfellow .

ws came out early nineties? I want to say like ninety one, some like that shortly before for .

the Solomon brother scandal yeah well and was still in his his real headache.

Exactly, exactly art lessons. We are gna leave IT there. With that. Thank you so much to our sponsors. They've been wonderful.

We have a slack you know this come hang out with us. You'll like IT. We have an lp program for people who want to be closer to the show. You get to hang out on the zoom live with us or with people like brad stone when we're recording a book club with them.

It's super fun and Frankly, ly I do you know all that stuff is great and if you want to engage more deeply in the show with you, you know you should but you know there's nothing like sharing an episode with um a friend or social media if you want to but just pass this along if you like that. David, I love getting to share these stories with new people. So and .

thank you for joining us on this journey. We're so lucky that we get to do this and it's so much fun like this has been a whole new world of fun.

at least. P, M, like, trapped in this room for four hours. IT has so fully been awesome. Are Alice. Thank you so much.

See you next time. We'll see you next time.