Is Berkshire Hathaway Undervalued Right Now? (Chris Bloomstran Explains) (TIP810)

Summary

Stig has invited legendary investor Chris Bloomstran from Semper Augustus to teach us how to value Berkshire Hathaway on …

Transcript

00:00:00:00 - 00:00:29:05 Unknown  9.3% growth in intrinsic value is kind of  in line with what I would expect annually,   on average for the next 10 or 15 years,  and that would be between 10 and 12%,   which is what it's been for the last  quarter century. The days of compounding it,   28% a year are gone. But I think if you  look at the moving parts of Berkshire,   the key moving parts, they can grow the  earning power of the business by 10 to 12%. 00:00:29:07 - 00:00:49:17 Unknown  Welcome to the investor's podcast. I'm  your host, Stig Brodersen, and I'm here   with Chris Brown strand. And this episode has  been published the week we get before the Big   One. And of course, we're talking about the books  at Hathaway annual shareholders meeting. Chris,   welcome to the show. Well, I think  we're making this an annual tradition,   but always fun to catch up and  look forward to the conversation. 00:00:49:17 - 00:01:08:23 Unknown  Thanks for having me. You bet. Chris. I was  going through some of our older conversations.   I think this might be the sixth time you're  you're on and it's always around this special   time of the year. So we have this window  after your wonderful, wonderful letter has   been published. But then just before Berkshire.  And so this is it. This is the pre-game banter. 00:01:09:05 - 00:01:29:03 Unknown  Chris, are you excited about the weekend?  I am, it's my favorite week of the year.   My favorite used to be two days, used to blend  on Friday and back on Sunday. And and my little   group of friends. We have a glass of Burgundy  and have a steak dinner. Go to the meeting,   get up early, go to the meeting, repeat the  Burgundy and steak dinner, and then go home. 00:01:29:05 - 00:01:48:24 Unknown  And then started going to the Markel meeting. And  anymore. I go in on Wednesday and usually have 3   or 4 speaking engagements. So it's a little more  of a production. And the meeting just got bigger   and bigger. But the people that go, the people  that I've known for years and new people you meet,   there's something special about the Berkshire  community that you just don't find anywhere else. 00:01:49:12 - 00:02:07:04 Unknown  There's something that Warren and Charlie created  that attracts all these quirky people that share   a similar value system. So it's it's fun.  And to have the changing of the guard and   have great running the show and Warren in the  front row is going to be very different. But,   should be a great weekend.  Yeah. How do you feel about it? 00:02:07:06 - 00:02:23:16 Unknown  I'm sure there's going to be a very special  feeling this year. Without Buffett, I,   I imagine that you would be sitting there  with the board of directors, but he won't   be up on stage. I think that is confirmed.  How is the meeting going to be different,   other than the obvious fact, I guess. Well,  they've said it's going to be shorter. 00:02:23:18 - 00:02:50:16 Unknown  I like the fact that Greg and Ajeet are going to  field questions about the operating companies and   the insurance businesses, and then he's going  to include Adam and Katie on stage as well,   to get a little more color from the subsidiaries.  And so where Warren and Charlie would spend,   well, six hours plus fielding questions,  some with very little business relevance,   they were able to talk a lot  about teaching and life wisdom. 00:02:50:16 - 00:03:21:07 Unknown  And I expect this to be a heck  of a lot more business focused,   which will be great. It's going to be shorter,  but hearing from these folks that are running   the subsidiaries about what's going on,  what concerns them is going to be great,   wonderful. And, Chris, let's let's jump  right into it because I wanted to talk   about your annual letter, and I feel a  bit, a bit torn about telling you this,   Chris, because I know I'm supposed to read the  letter from A to C, and I actually do do that. 00:03:21:10 - 00:03:50:05 Unknown  But first, like every good crime novel, I have to  figure out who the killer is. I have to look at   the intrinsic value updates first. So I would  go in this case straight to page 148 and see   what's the value. Well, it's Chris's assessment  of the intrinsic value. And of course you provide   different methods. But let me just start by  asking how much has the intrinsic value of   books Halloway changed from 2024 to 2025, and  what have been the major drivers behind that? 00:03:50:07 - 00:04:19:17 Unknown  Well, as you know, as you read the letter for  a long time and we've talked now for years,   I've got four essential methods  that reconcile to each other,   that help put Berkshire's intrinsic value  on a framework. I do a sum of the parts,   I do a GAAP adjusted financials, and those are  somewhat related to the GAAP. Adjusted financials   are a great teaching tool because there's so  many different moving parts inside Berkshire   that require adjustments to GAAP earnings to  kind of get to what I call economic earnings. 00:04:19:18 - 00:04:44:03 Unknown  It's just a useful section from a teaching  standpoint. And then you've got a very simple   price to book. In recent years, I've used 175%  of book value, stated Berkshire's books I used   before noncontrolling interests, and then the old  classic two prong method, because for years, if   you go back 25 years, 20 years, Warren would give  you on a per share basis, marketable securities. 00:04:44:03 - 00:05:00:20 Unknown  They would give you the operating earnings  and you could apply whatever multiplier you   wanted to each, and you could back out  whatever you wanted. And so he he took   those out and he put them back in and he  changed his methodologies. And I went back   and forth with it. But I still do that.  That would be similar to a price to book. 00:05:00:20 - 00:05:27:01 Unknown  And I find over different periods of time,  some of my measures are more meaningful and   more relevant than others. You tend  to get distortions. So, for example,   the railroad and even the energy business, but  the railroad in particular are under earnings,   I think, relative to what they should earn  on a normalized basis. Well, I don't make   an adjustment for the under earnings in the  railroad, which is still under by a billion now. 00:05:27:01 - 00:05:47:02 Unknown  It's been improving in the last couple of years  dramatically, but they've still got a ways to   go and graded rest that letter this year. But  then on underwriting will Berkshire is still   over earning what I think they would earn on a  normal basis, where we all strip out earnings   from the stock portfolio, both realized  gains and unrealized gains and losses. 00:05:47:04 - 00:06:11:05 Unknown  I also strip out underwriting, whether it's high  or low, and assume that Berkshire is going to   underwrite over time, but a 5% pretax and so well,  they're still over earning, albeit less this year   than the prior year. I don't make that adjustment.  So at the moment, on an earning power basis,   Berkshire looks like it's earning less than I  say it probably would on a globalized basis. 00:06:11:07 - 00:06:37:20 Unknown  And then for the year you had the stock  portfolio require some work to figure out   what the return was. I come up with 13.7%.  You got to take the 13 have holdings,   the non 13 F holdings like the Japanese trading  companies. And I put those together and the   portfolio was up 13.7 on a total return basis.  And that drives in addition to retention of   earnings and what Berkshire earns on an operating  basis that drives the capital of the business. 00:06:37:20 - 00:07:02:20 Unknown  The book value when the assets of the business.  So book value grew 10.5%. And so I come up   with you just do a simple average of my four  methods of progression of 9.3% year over year,   which gets you to a little over 1.2 trillion.  Almost 1.25 trillion by market cap would be   intrinsic value. And on a per share basis, that  went from the B shares a year ago were 522. 00:07:02:20 - 00:07:46:12 Unknown  I've got them at 570 per share now,  and the shares are up to 855,003 96.   So at the current price, this morning the stock's  trading at about $0.85 on the dollar a fair value.   We had a chance to buy it a couple times. The  Berkshire stopped buying shares back in 2024.   Greg announced a couple weeks ago  after the stock declined post the   earnings release that he had initiated share  repurchases, again in consult with Warren,   and made sense in that the valuation relative  to intrinsic value, at least per my calculation,   was back down to where it was in 2024  when they stopped buying shares back. 00:07:46:14 - 00:08:10:13 Unknown  So Greg made the announcement. The stock rose.  We can get out of rabbit hole for a minute if you   want. But even beyond my GAAP adjusted earnings,  simply taking operating earnings, which Berkshire   has a supplemental release to the 10-K is  the ten QS. And they'll strip out from GAAP   earnings. The earnings from the stock portfolio.  And they'll break out earnings by subsidiary. 00:08:10:13 - 00:08:36:21 Unknown  So the railroad, the energy operation,  the MSR Group and the insurance operations   and the world took that operating  earnings release. This year and said,   oh my God. Quarterly earnings were down  30%. And year over year they were down   by almost 7%. Well, they really weren't  on an economic basis. And so there were   3 or 4 really key things that the media  misses and most commentators miss on it. 00:08:36:23 - 00:09:04:10 Unknown  And so where operating earnings  were $44.5 billion for the year,   that was down by almost $3 billion year over  year. So a number of things transpired. So   one thing you've got to do is adjust for  currency movements. So in the footnote to   that operating earnings release, they  tell you about any gains or losses on   the currency translation of Berkshire's  debt denominated in foreign currencies. 00:09:04:12 - 00:09:27:11 Unknown  So they've got a bunch of money, 15 ish  billion borrowed in yen. And they've got   a smaller amount of euro borrowings, and  they've got a small, even a smaller amount   of pound sterling borrowings. Well, all of  the Japanese debt that they borrowed at 1.2%,   went to finance the purchase of the  five Japanese trading companies in   intervals over the last few years, and  they own about 10% of each of those. 00:09:27:13 - 00:10:05:01 Unknown  When you own a foreign asset, the trades  publicly. The Japanese trading companies   trade in Tokyo. If the dollar declines  against the yen on a translation basis,   that helps. On a reported basis, the value  of your holdings, and vice versa. If the   dollar rises that arms to buy those holdings,  well, for the 2024 or 2025 2024, you had a   $600 million change loss on currency, and then  you had a $1.1 billion gain in the next year. 00:10:05:01 - 00:10:29:02 Unknown  The Delta, there was $1.7 billion. I strip  that out, and I think you should strip it   out because the currency movement is getting  translated into the stocks. But Berkshire   ignores the changes in the value of the  stocks from recording to earnings recording   their operating earnings. Well, likewise,  they have the mark to market the value of   the debt. So if the dollar declines  against the yen, it helps the stocks. 00:10:29:02 - 00:10:48:12 Unknown  But it identically offsets the face value  of the debt. Now in a realistic basis of   Berkshire chose to just refinance or repay  all that debt at the moment and the dollar   had harmed its position against the end.  They would they would have a loss. But you   have an identical offset movement in the  end. So you need to strip those two out. 00:10:48:14 - 00:11:10:17 Unknown  Well, then you get down to each subsidiary which  you look at the main key moving drivers. The   railroad was up. Its earnings were up almost 9%  for the year. The energy business was up almost 7%   for the year. And the manufacturing service retail  group's earnings were up 4.5%. Well, those three   key drivers of value are half of Berkshire's  value and half of its economic earning card. 00:11:10:17 - 00:11:36:18 Unknown  They were all up, not down the quarter. They  were not down for the year. And so within   each of those moving parts in underwriting. So  Berkshire's been selling Apple and a handful   of other stock. So its common stock portfolio  was lower. So its dividends earned are lower.   Now its cash investments are way higher. But  the fed started cutting interest rates in 2024. 00:11:36:18 - 00:11:57:21 Unknown  And so Berkshire is earning less on its T-bills.  And so its earnings are down from those two.   And those naturally are driving operating  rates down. But on an underwriting basis,   Geico went through a period in the pandemic  where they it was just awful. You made a   whole bunch of money in the pandemic. And then  coming out of it, everybody was driving again. 00:11:57:21 - 00:12:18:10 Unknown  And so for a time, they had to give money back.  All of the auto insurance companies had to refund   money in various iterations. Geico did their  giveback program, where they give you a 15%   on the role of your six month policy. Well,  then you had a period of inflation. You had   inflation and used car prices. You had supply  chain disruptions, you couldn't get parts. 00:12:18:12 - 00:12:40:15 Unknown  Inflation was running nine, 10%. So  all of a sudden the auto industry   and Geico went from minting money for a  short period of time to the pandemic to   losing a bunch of money or breaking  even at best. And so, one by one,   the state insurance commissions gave the  auto insurance companies price increases   sufficient to where the industry went  from suffering to minting menacing money. 00:12:40:15 - 00:13:12:14 Unknown  So Geico in 2024 underwrote it almost an 80%  combined, which is incredible because they   normally ride at Ford, I think. I think for the  year 2024, they were underwriting it 82%, which is   essentially an 18% pretax profit margin. Well, in  2025, they still underwrote it, an 85% combined.   So there was some deterioration, but that's still  a 15% pretax margin where against they would   normally they in progressive try to underwrite  it for on the industry breaks even over time. 00:13:12:16 - 00:13:31:00 Unknown  So the industry is still really profitable.  Well when you get into the footnote and you   know what's happening in auto, they had price  increases. Nobody's getting price increases   now because the industry is making a ton of  money for a period of time when they couldn't   get enough realistic price on an auto policy  in California, they stopped writing business. 00:13:31:02 - 00:13:47:13 Unknown  And to do so, they stopped advertising in  markets where they didn't want to write. And   so their policies in force cascaded down.  Well, here in this hard market last year,   they put their foot on the gas,  which they should be when they're   as profitable as they are at the moment.  You want as much business as you can get. 00:13:47:15 - 00:14:12:01 Unknown  So their underwriting expenses went up  by 270 basis points. They spent over $1   billion more in 25 and 24 on auto. And so they  increased their policies in force by 5%. They   didn't get price. That was all volume.  And so to me, the thing is still really   profitable. But then in reinsurance,  you know how the insurance game works. 00:14:12:03 - 00:14:43:02 Unknown  Your actuaries establish loss reserves, which  will evolve over the life of policy and auto.   It's very quick tail business. In the first  year, two thirds of your losses develop your car,   the auto and the insurance company pays to get  it fixed right away. So 65% is paid in year one,   another 20% is paid by year two,  and then the last three years are   longer term resolutions of things  like lawsuits and medical claims. 00:14:43:04 - 00:15:08:04 Unknown  But it's all paid out in five years. If  you have a workman's comp policy, then that   thing might pay out over 30 years.  So you established a loss reserve,   and then Berkshire's got their lost triangles in  the footnotes. And every year they will assess   the degree to which losses are developing in line  with either favorably or unfavorably against what   the actuaries had originally estimated  and what they're estimated each year. 00:15:08:06 - 00:15:34:12 Unknown  Well, Berkshire being Berkshire, is always  conservative and you don't find many periods   where they've not been conserved on the  reserving. So they tend to have positive   reserve development. While in 2024 they had  $1.7 billion in positive reserve development,   meaning they were too conservative by  a factor of $1.7 billion for all of its   prior year underwriting in 2025. It was  still positive, but by only $1.1 billion. 00:15:34:12 - 00:16:03:13 Unknown  So $600 million less. I would make  that adjustment for those differences.   And then Berkshire being Berkshire in its  manufacturing service, retail group, there   were every year the occasionally take these small  charges against goodwill for asset impairment   because they've got a gazillion businesses  inside and they've taken some write downs on   one of the trucking businesses next release. So  in 2025, there were $1.4 billion of write offs. 00:16:03:15 - 00:16:24:20 Unknown  Write, write downs of goodwill. The prior  year there were already was 1.5 billion,   net 400 million the prior year. So there was 1.1  billion more additional write downs in 2025 or   24. Those are non-operating. Those are simply  a reflection of businesses that we bought,   don't have the earning power anymore  relative to what we paid for them.   Most companies will exclude those from earnings. 00:16:24:21 - 00:16:50:18 Unknown  Berkshire just throws in and operating  earnings. So where for the year it look   like operating earnings declined by almost  $3 billion. No they were actually up by 1.1   billion. But the world reacted. Nobody in the  media got it right. And the stock just started   getting just just beat up. So Greg comes  in with an acknowledgment to where he and   in consultation with Warren, thinks fair  value is started buying the stock back. 00:16:50:20 - 00:17:16:12 Unknown  I wish they hadn't filed and told the world they  were buying it, because I doubt they're going to   get that much bought. Reuse the stock jumped  back up. Now the reality is, and Grady knows   that we're in a tough market. There's too much  capital and reinsurance, there's too much capital.   And a lot of the property lines, even an auto  holding on to market share is going to be tough   because if the industry is really profitable,  your competitors are going to lower prices. 00:17:16:14 - 00:17:48:22 Unknown  So Berkshire is now classic running off insurance  business. They're not renewing policies. And   they've got a history of not writing business.  Well it's unfavorable. I've got a letter I put the   table from Berkshire's 2004. I think it was annual  letter, the history of whatever they called it,   portrait of a disciplined underwriter. And  so for 13 years in a row, they ran insurance   premiums down from $232 million to $50 million  because the insurance prices were not adequate. 00:17:48:22 - 00:18:11:08 Unknown  Berkshire does that. Nobody else does  it that way. And they're in the process   now of shrinking insurance premiums, both in  reinsurance and in some of the property lines   within the the surplus in the primary group. So  long winded about earnings and my GAAP adjusted.   But even on the operating earnings, you've  got to make some translations to operating   earnings to actually figure out what's  going on, where economic profitability is. 00:18:11:08 - 00:18:31:14 Unknown  And so if you put it all together, Berkshire  did grow their earnings, operating earnings   last year by over $1 billion. I think the price  to book and the two prong are probably a little   more reflective of value today, because there's  an underwriting in a couple of subsidiaries that   are pretty key, like the railroad, which I  think Berkshire has the chance to resolve. 00:18:31:14 - 00:18:49:05 Unknown  Some of that, but it doesn't get  accounted for in some of my numbers,   so some are more conservative than others. But  I think, you know, 9.3% growth in intrinsic   value is kind of in line with what I would expect  annually, on average for the next 10 or 15 years,   and that would be between 10 and 12%, which is  what it's been for the last quarter century. 00:18:49:06 - 00:19:07:01 Unknown  The days of compounding at 28%  a year are gone. But I think if   you look at the moving parts of  Berkshire, the key moving parts,   they can grow the earning power of the business  by 10 to 12% and kind of continue what they do   with share repurchases. You got to look  at all in a on a per share basis anyway. 00:19:07:04 - 00:19:37:11 Unknown  And so there's probably more than you  wanted. But I think intrinsic was up a   little. And so here we are talking in  mid March. This will be out closer to   the meeting. But if you linearly grow earning  power and intrinsic value by 10%, you know,   maybe instead of 570 on the B shares they're worth  580 or 585. You shouldn't do it with precision,   but the stock is trading at a reasonable discount  to fair value to where maybe a little bit cheaper. 00:19:37:11 - 00:19:59:06 Unknown  Berkshire buys a bunch back, and then we've got  a bunch of clients that don't own it or don't   own enough. And I was buying it in August  on the B shares at 460. I was buying it a   couple of weeks ago for 84. 80 is kind of  the new 60 when you're six months on. And   I like the stock down or not up, because we've  always got cash and cash flows to put to work. 00:19:59:06 - 00:20:20:02 Unknown  And we like buying stocks cheap. And I think  Greg's going to wind up doing the same thing.   Let's talk a bit about Greg. And first I should  say your letter. And I'm probably going to say   this ten times throughout this recording. It's  absolutely outstanding. And I would encourage   everyone to go through all of your methodologies  in terms of the how to value Berkshire. 00:20:20:02 - 00:20:36:09 Unknown  I think that I'm not saying that  everyone has to do it every year,   but I think you need to do it at least once  or twice and understand the strengths and   weaknesses of each. I think it gives you a  very good picture of the bigger drivers. No,   actually you should do it every  single year with all of them. 00:20:36:11 - 00:20:56:19 Unknown  I should actually say that.  But, Chris, you gave me,   you gave me a hand off to talk a bit more  about Greg. Yeah, I like you. You know,   I speak with people in the value investing  community all the time, and it's been quite   anticipated. The first letter here from Greg,  like, what could we expect? And I should say,   like, I feel like people have been all  over the place, at least in my equity. 00:20:56:22 - 00:21:20:17 Unknown  But here some have been very positive and others  have been honestly borderline indifferent,   to put it nicely. And I think I speak  for many listeners of the show, Chris,   whenever I say that, I don't respect anyone's  take on on anything merchant related as well as   yours. So not that that you're going to be the  tie breaker here, but I can't help but to put   you on the spot and ask you, what should  we think about Rebel's letter this year? 00:21:20:19 - 00:21:44:18 Unknown  I thought it was good. Yeah. First time writing.  He's not going to be as funny ever as Warren,   but I think he hit on all of the things  he needed to touch on. He paid a nice,   brief early tribute to Warren, as he should have  done, really demonstrated that he's a Berkshire   guy. I mean, he he gets the culture, he gets the  integrity, he gets the value system of the place. 00:21:44:20 - 00:22:24:02 Unknown  I like the fact that he he took the letter that  he wrote to Berkshire's almost 400,000 employees,   and he broke that up into a handful  of sections and elaborated on each of   those talking points. Demonstrates that he gets  it, but he gets the conservatism of Berkshire   talked about specifically. Some of the businesses  were earning cash flow from operations basis,   which I like to see Berkshire earn 44.5  billion talked about, pilots improvements   and that it was throwing off over a billion,  maybe a billion for cash from operations. 00:22:24:04 - 00:22:55:21 Unknown  Talked a little bit about the Oxy Kim deal.  That was his deal. The Bell Laboratories,   the pest control business. They bought  a share repurchases. So, you know,   he got he got to where I think he's the right  guy for capital allocation, demonstrated that   he gets it. Got into the nuances of some of the  subsidiaries far deeper than Warren has done,   especially in recent years, but even perhaps  entirely talked about insurance and some of   the things that I talked about a few minutes ago,  with Berkshire still writing it at 87% combined. 00:22:55:21 - 00:23:12:24 Unknown  I mean, that's more profitable than they  should be. And he did. He's not going to   say it like that. But he said, hey, we're  still writing in an 87% combined. Talked   about Geico, talked about some of the  headwinds that they're going to face,   which we just talked about. There's going to have  pricing pressure from some of the competitors. 00:23:13:01 - 00:23:38:12 Unknown  No insurance commissioner is going to give  you price increases when the industry is   too profitable. So either profitability gets  eroded for loss inflation or from too much   competition. And it's probably the nature of  property casualty insurance, especially auto,   probably the latter. I mean, you're going  to see a lot of pricing pressure and price   competition from Geico's competitors. Talked  about repo was talked about Adam Johnson. 00:23:38:12 - 00:24:00:00 Unknown  Katie's going to be at the meeting. His  move to have Adam, who runs Netjets,   oversee 32 or 30. I think it's 32 of the operating  subsidiaries. So this is what Greg's done. Greg   has been running Berkshire effectively as its  CEO since 2018, when he became vice chairman.   He's got his arms around all those businesses.  He knows what he can handle, Warren has said. 00:24:00:00 - 00:24:22:15 Unknown  The guy just lives, breathes. All he does is  Berkshire balances, still coaches hockey. So   he's got a balance in his life. But but he's  got his arms around this business and he's   leaning on Adam. He has a lot of confidence.  And to be essentially the CEO just overseeing   32 of the businesses is great. Can't handle  the direct reports from all those companies. 00:24:22:17 - 00:24:40:08 Unknown  Warren's approach was I'm not going to  oversee anything. I mean, I buy you I'll   let you run your thing. You know, if you call  me for help, I'll catch you on the back, say,   good luck. You'll solvent your smart  guy. Greg's then much more involved.   He's proven that he's much more involved.  And now he's got Adam helping with that. 00:24:40:10 - 00:24:57:05 Unknown  And so I thought it was a good letter. I don't  know what else the world would have expected   him to get into. He spent however many pages.  It was 16 or 17 pages. I talked about culture,   and he talked about the big  moving parts and summarized the   key subsidiaries. What was going on with  those businesses? I thought it was fine. 00:24:57:05 - 00:25:20:23 Unknown  Oh, that was good. Wonderful. It's not easy to  to follow someone like like Buffett. You know,   it's it's almost like, what do you want  whenever you win the Super Bowl you want   to win another. It's difficult to make  everyone happy in this world. I mean,   you can't fill the shoes. The  expectation bar is really high,   and he seems humble enough that he gets it,  that he knows he's not going to be the next war. 00:25:21:00 - 00:25:42:14 Unknown  It'll have a shorter leash with all of the  Berkshire watchers, both in the media and   otherwise, and he's seemingly perfectly fine  with that. I mean, he gets what his role is   and I thought he conveyed it pretty adequately  and nicely. And this year's letter is, first   of what I hope for many. Yeah. I wanted to speak  to you about a specific paragraph in his letter. 00:25:42:14 - 00:26:03:01 Unknown  This is page 16 for anyone who is so inclined to  print it out. So I'm just going to quote it here,   Chris at Berkshire equity investments  are fundamental to a capital allocation   activities. Responsibility ultimately resides  with me as CEO. Ted Wessler manages about 6% of   our investments, including a portion of the  portfolio formerly overseen by Ted Coombs. 00:26:03:03 - 00:26:24:21 Unknown  Ted's impact extends beyond these investments, as  he continues to pay a broader role in accessing   significant opportunities, providing valuable  input on our businesses, and supporting Berkshire   in various other ways. And quote Chris, whenever  I read that, I, I put that in my magic mug here,   and I made an exclamation point. And  then I said, Ask Chris that question. 00:26:24:21 - 00:26:48:16 Unknown  I was really curious to hear what your take  was. There's a few interesting notes about that.   I mean, a Warren and Charlie hired Ted and  Todd. Todd left to join J.P. Morgan. He had   been running Geico where he different hats. He  was part of the triumvirate with J.P. Morgan and   Goldman to try to fix health care. And they  threw up their hands that that is unfixable. 00:26:48:18 - 00:27:11:02 Unknown  I'm not sure that there was a role at Berkshire  that matched what Todd thought his role might be,   and so he moved on, which was fine. I think  Ted's a good investor. I think he picked up   Todd's portfolio. My guess is a bunch  of that portfolio's probably been sold,   which we'll see, I would guess in  the in the next 13 hour filing. 00:27:11:04 - 00:27:32:11 Unknown  But I liked the structure. And when he said  that Ted is running 6% of the investments,   he didn't specify what that that was. Of  the $300 billion stock portfolio or the   $700 billion combined assets, which are now  over $120 billion at the holding company,   or if it was just the 580 or whatever  that are in the insurance operation. 00:27:32:13 - 00:28:02:05 Unknown  So whether he's running 6% of 700 billion  or 6% of 300 billion in don't know,   it's north of 18 billion. I like how Greg's role  and even Ted's role have evolved, and that capital   allocation needs to be done by Greg. It needs  to be done by Warren's replacement. Because   when you get into the teeth of a financial crisis  or a recession, you're weighing opportunity cost. 00:28:02:07 - 00:28:28:21 Unknown  And so of the 370 plus billion dollars in  cash, there's probably a $100 billion round   number that's dedicated to the insurance  operation. But either needs to be Aldo's   cash or fixed income. Berkshire doesn't  have a lot of fixed income securities.   They have mostly T-bills. So Berkshire has  you know, call it 270 billion plus another   40 billion a year that are generated by  the operating companies to put to work. 00:28:28:23 - 00:28:50:05 Unknown  I think instead of judging his letter, judging  what Berkshire does at the next opportunity.   And he said we need to be opportunistic. Warren  acknowledged that in 0809 he screwed up and he   didn't do enough. So you got the 5 billion  or the $3 billion into the GE. And Goldman   preferred got some of the Dow Preferreds. The  Warren's later did some of the Bank of America. 00:28:50:05 - 00:29:16:12 Unknown  But on the stock part, I didn't do a lot of  stock portfolio. And Berkshire had has had   cash reserves that have averaged about 14% of  for mass that since 1998. He could have swung a   lot harder and acknowledged that he should have  swung a lot harder. We're all going to judge,   Greg. I'm going to judge Greg by how hard  he leans into opportunity when it comes,   and it's only going to come  in a crisis or recession. 00:29:16:14 - 00:29:41:23 Unknown  You may get a chance to buy the one off business,   but you're going to do some of it in the  stock portfolio. You're going to do some   of it buying whole businesses. As Greg in  the letter elaborated on Ted's role. I mean,   Ted's running a sizable amount of capital, but I'm  uncertain that they're talking regularly. The next   big opportunity to buy an entire business  are to get a big chunk of money at cost. 00:29:41:24 - 00:30:02:14 Unknown  Warren got 36 billion invested in Apple at  cost heads roll, maybe running a farm system.   I think my guess would be when Greg does an oxy  chem deal, one of the folks inside Berkshire,   he's going to lean on for an opinion  is going to be Ted. So Ted's role is   beyond just running his little  corner of the stock portfolio. 00:30:02:14 - 00:30:27:01 Unknown  But he's he's looking at deals. If they're  looking at buying companies, ratings are   going to have more than his own set of eyes on  these deals. He'll have they'll have folks on the   board that have expertise in various industries  that he'll rely on. So Greg's got a Rolodex,   he's got his network of managers within the  business. And so as he approaches capital   allocation, it's not just Greg sitting in  an office in Des Moines making decisions. 00:30:27:03 - 00:30:46:23 Unknown  He's got the Berkshire empire at his disposal,  and Ted's going to wind up being an indispensable   part of that. I mean, that's how if I  was running it, that's how I would do   it. I think that's how it's evolved. And so I  like that commentary because it confirms what   I think is probably the right way to tackle the  capital allocation levers, which is Greg's role. 00:30:47:01 - 00:31:09:10 Unknown  It's hugely important that he gets it when  he's got the willingness to swing hard,   when it makes sense to swing hard. And just  because the media tells you, oh my God, this cash   pile is out of control. They're too conservative  now. They're going to do it on Berkshire's terms.   And I hope he's the right guy for the job  because we're going to get those opportunities. 00:31:09:10 - 00:31:33:24 Unknown  And as you know, it's not easy when you're staring  down the barrel of a financial crisis. It's not   that easy to pull the trigger. In retrospect, it's  always really easy because you can pinpoint how   ridiculously low prices were and how great  the opportunity was. I think you'll do it,   but I'm not going to judge Greg until after  the fact, and that maybe this year and maybe   five years from now, maybe ten years  from now, I hope it's not ten years. 00:31:33:24 - 00:31:52:20 Unknown  And I don't think it'll be ten years,  because I've got that little section   in my letter about the opportunity costs to  hold a cash. And you you will never recover   if you're sitting on cash earning 3% for  too long. If you compound stocks linearly   at 10%. This is what my table shows. You  take $100, it becomes 110 a year, one. 00:31:52:20 - 00:32:21:19 Unknown  It becomes $121 a year or two it  becomes $259 a year or ten week.   Pretty soon I wrote it 5 or 6 years.  And stocks don't compound linearly,   nor does Berkshire. But you get to the  point where you've got to have a 30 or   40 or 50% drawdown to have justified owning  the cash. And so at the next big opportunity,   he's got to put $300 billion on the order of $300  billion to work if sufficient opportunity exists. 00:32:21:19 - 00:32:38:07 Unknown  And if you get through a cycle like that  and a period and they find they can't do it,   that they don't have the opportunities to buy  whole companies, there are plenty of places in   the stock market to put that capital to work.  There are among the largest cap companies in   the world, and in the United States, there are  some really good businesses that they could buy. 00:32:38:11 - 00:33:00:18 Unknown  10% of 15% of them that are liquid are enough to  do it pretty easily. But you got to run at the   right price. And so I'll judge him harshly. The  shareholder community should judge harshly. If he   doesn't swing hard at the next big chance, you'll  be interesting to see when that happens. You know,   Chris, I was speaking with our mutual  friend Tobias Carlisle here the other day. 00:33:00:18 - 00:33:20:19 Unknown  We actually. Not that it's super important  for business. He was actually the one who   introduced us back in the day, and we talked  about purchase valuation. For the record,   I came up with a very lazy method and $547 per  BCA. I should probably send Toby a message and   say, don't listen to me. You should  probably just read me Chris's letter. 00:33:20:22 - 00:33:40:10 Unknown  I'm sure he already is doing that. Knows  he's not listening to me anyways. Chris,   we talked about Greg Abel's compensation.  That was actually the way I wanted to take it,   and we talked about how his new compensation as  the CEO was, you know, of 25 million, in a way,   was an obscene amount of money in the way it  wasn't compared to, you know, what's the angle? 00:33:40:10 - 00:34:01:14 Unknown  Are you comparing to what others in  that position would make out compared   to the hundred thousand dollars that both were  making before? Then there was the dynamic with   I mean, you she do we have and there are so many  other things to this. And so I wanted to ask you,   Chris, what are your thoughts on the  compensation package for Greg Abel   and which compensation model would you have  preferred to me, it's the right way to do it. 00:34:01:18 - 00:34:24:22 Unknown  When Greg Energy got promoted, moved up, kicked  up to vice chair of operations and insurance,   they had matching salaries and I  don't remember where they started,   but they were 17 million or $18 million. And a  couple of years ago they were whatever 20 year,   28 gas 21 Greg now that he is 25  million, there's no better way to do it. 00:34:24:22 - 00:34:45:24 Unknown  Compensation is a hard thing. He's already  rich and he's in his early 60s. I mean,   he's at the age where the typical CEO  who knows that he or she is going to be   in that chair for four years and they're  going to get an obscene amount of stock   options and restricted shares. They're  highly motivated to get the stock up. 00:34:45:24 - 00:35:14:04 Unknown  And then you've got these goofy compensation  schemes and different performance hurdles,   some of which are better aligned with shareholders  than others. Greg's already rich. I mean, he   was paid out for his modest, modest 1% ownership  position in Berkshire Hathaway Energy three years   ago. Four years ago, whatever it was for $870  million or so, call it 600 million net of tax. 00:35:14:06 - 00:35:33:09 Unknown  He turned around and prior to  that, I was a little I was,   I wouldn't say concerned and I don't  know how much liquidity he had. And   he had that big bag position that was  illiquid, privately owned on paper. But   I think he owned five eight shares and just a  couple B shares. And so I own more than Greg. 00:35:33:09 - 00:36:02:23 Unknown  And Greg was running around as vice chairman  for a bunch of years. And you thought, gosh,   you really want to see the CEO or  the CEO to be on more of the stock,   but when he was paid for his position,  he turned around pretty quickly and has   cumulatively bought, I don't know, 100 plus  million $110 million at cost of Berkshire,   which on a market value basis it  was pushing 180 or $190 million. 00:36:03:00 - 00:36:25:12 Unknown  And presumably he's got other equity market  investments. I don't think he's going to be   a guy that has 30 homes and owns islands  where he's going to live within his means,   like Warren has. And so I don't think there's  a performance hurdle that would be suitable,   other than the fact that Warren trusted him in  a role that we hope he's in for a long time. 00:36:25:14 - 00:36:45:12 Unknown  The shareholders trust him. He's got a  responsibility to Berkshire, and I think   he's taken that on very positively. And so if I  were in his shoes, I wouldn't want to disappoint   Warren. I wouldn't want to disappoint the board.  I wouldn't want to respond to shareholders. I   wouldn't want to disappoint myself. So I'm going  to exert every, every ounce of energy that I have. 00:36:45:12 - 00:37:07:10 Unknown  This this is me speaking for Greg. I  mean, I'm I'm going to do everything   I can to make sure that Berkshire and I  are successful over what hopefully is a   20 year rock mix that I'm not going to get as  long of a run as Warren is. You know, 1965,   Warren was 35 and I'm 62 or 63. And hopefully  I get a couple decades doing this thing. 00:37:07:10 - 00:37:28:14 Unknown  And because he gets the culture, he's not going  to put the business in harm's way. There's no   return on equity hurdle. There's no hurdle that  that would wind up being short term in nature,   that I think would be an improvement over being  paid a sum of money, a good sum of money. It's   not outrageous. It's way less when a lot of  CEOs make it's not $1 trillion pay package. 00:37:28:16 - 00:37:50:16 Unknown  And then to turn around and say, yeah, I'm going  to buy the stock with all my money is essentially   Warren for years. And years and years, and Charlie  making $100,000. It's I don't need the money. I'm   already rich. I'm motivated by the responsibility  of running Berkshire Hathaway. So I, I think in   Berkshire's case, and it's rare, but they've  never given a stock option away to anybody. 00:37:50:16 - 00:38:09:18 Unknown  They've never given a restricted share  away. The board is extremely I mean silly   how little they're paid to the board meeting  a few hundred dollars for a board meeting.   You make a little bit more if you're on the  audit committee, but the board all owns big   positions in the stock and everybody's  bottom and paid for them out of pocket. 00:38:09:18 - 00:38:32:21 Unknown  Ozzy on far more than Greg, but he's been  around Berkshire since 1986. Every share   he bought was paid for out of pocket. And so  there's an alignment when you reach into your   own pocket and chunk down very real capital, your  livelihood is driven by how Berkshire does. And   you could argue that the compensation should  be tied to how the insurance operation does. 00:38:32:21 - 00:38:53:03 Unknown  And Greg should have been compensated by how  the operating companies do. But no, I mean,   they're in it for the entirety of Berkshire,  and there's a benefit to having all of these   businesses under the Berkshire umbrella.  And so I right, is approaching his role no   differently than Greg. And that's a maintain the  culture be never put the business in harm's way. 00:38:53:03 - 00:39:16:10 Unknown  And let's just grow the economic earning power  of the business as best we can without subjecting   the business to undressed. And so I like the comp  structure, I like the constructive to Chris. And I   think that there are a lot of people who might  be thinking, shouldn't it be tied to this KPI   or that KPI? And I'm going to use a metaphor  here, that's probably not going to work well. 00:39:16:10 - 00:39:40:12 Unknown  But we did start our conversation before we  hit record, talking about a bit about the   stones and music. And, you know, I built this  side for the stones. I listened to a lot of   the Beatles throughout my entire life and  probably read too many books about the lyrics,   and they're still like this interview that Paul  McCartney is doing, why he's being asked about the   meaning of this and that, and he would very often  come back to, you know, don't don't overthink it. 00:39:40:17 - 00:39:57:18 Unknown  In this case, just rhymed. So that's  that's life. And so and so of course,   there had been a lot of other meetings for the  other songs, but I don't know if I can necessarily   use this metaphor here to talk about the comp  structure, because I think for for a company like   Berkshire Hathaway, there is a lot to be said  about quote unquote, the optimal constructed. 00:39:57:18 - 00:40:22:22 Unknown  But it it really comes down to the integrity  of the person. And I've seen a lot of obscene   compensation structures. And we're  going to talk more about that later,   Chris. But at the end of the day, it really comes  down. What I've seen, it comes down to integrity.   I've seen some terrible structures that that  sometimes in led to good results, not because of   the structure, but because the person who managed  that company was just really, really good person. 00:40:22:22 - 00:40:39:18 Unknown  And I think there's only so much you can do  with incentives. And this is not going to   be very helpful, I think. And this is my  own I'm not a psychologist by any means,   but I think a lot of it comes down  to good parenting. That's my own   conclusion sometimes is like, why  is this person behaving so, so well? 00:40:39:18 - 00:41:02:11 Unknown  There's he probably had good parents.  Like, it's definitely not because of   this thing here in his capacity. It's no,  he's like he's just an honorable guy and   that's why he's managing the company.  Well yeah. There's a lot to integrity   and morality. And either you've got it or you  don't. And there's no pay package. There's no   compensation structure that's going to  alter behavior depending how you wired. 00:41:02:11 - 00:41:30:03 Unknown  I think it's unfortunate the way most  compensation systems are structured with   a modest salary performance bonus  that may or may not have hurdles.   And then he's got longer term and shorter  term hurdles on your performance shares,   your restricted shares. There's just too  much short termism that comes with the   way most comp structures are structured,  and it's the ones that align properly. 00:41:30:03 - 00:41:48:00 Unknown  Things like return on capital that where you  tend to get better behavior. But you're right,   it boils down to the people. Speaking of which,  you famously said, show me the uncensored ratio,   show the outcome. And of course, there are  a lot of caveats to that. But I was looking   at your portfolio here the other day,  Chris, list what is publicly available. 00:41:48:00 - 00:42:14:10 Unknown  And I was curious. Whenever you look across  your portfolio, what do you think is the most   shareholder aligned compensation structure?  What concerns you the most? And then if I   can add another question to that, how  much misalignment would shareholders do   to tolerate if the underlying business is  exceptionally good, but also none of these   are perfect. You just don't find a commercial  about oh, that's that's the the gold standard. 00:42:14:12 - 00:42:33:22 Unknown  You know, I found the Ark of the covenant.  That's so what I found over my 35 years   managing money and breeding proxy statement  is you just have to get used to tasting a   little bit of your vomit. And if it's too  much vomit, then you need to move on. And   that's generally when you sign somebody that  doesn't have the integrity or what have you. 00:42:33:24 - 00:43:08:01 Unknown  It's funny, I've you know, I love AI for  its search capability. And so recently I   said Gemini said run supper's 30.5 portfolio  and summarized the top 20 holdings through   their proxy statements on how each company's  compensation systems work. And I wanted to   see how accurate it was. I'll be good  at it was absolutely accurate. I mean,   it pulled out my top 20 holdings, US  holdings, the ones that we disclose in   order and summarize the bonus hurdles, the  short term hurdles, the performance hurdles. 00:43:08:03 - 00:43:31:06 Unknown  And it nailed the ones that I think get it right.  Lean Commons. I've talked about Commons many,   many times and how they got a return on capital  hurdle motivation. Dollar general it has a three   year rolling return on invested capital. Then they  throw in their bonus, which uses EBITDA, which is   a terrible way to do it all and does an adjusted  cash flow in or return on invested capital. 00:43:31:07 - 00:43:56:21 Unknown  They don't have an opportunity set to reinvest in  the business. So you want to measure the business   by its operating cash flow in a cyclical  business over time, the ones that I really   struggle with are the ones that are adjusted  EBITDA heavy, or where you're motivated by   sales growth with no tie to profitability. So  Starbucks is in the middle of turning around. 00:43:56:21 - 00:44:17:11 Unknown  They've got a new CEO, but I like  couldn't stand the prior one and I   forget the name of the acronym for their  program, but they're measuring comp based   on back to Starbucks based on same store  sales growth and operating income. Well,   there's no tie to the capital earned at each of  the stores deckers, which we made a big position. 00:44:17:13 - 00:44:51:24 Unknown  They've been a huge growth story, and they're  compensated based on revenue growth and pretax   income. It's it's suitable for what they do.  They don't have an EBITDA structure. They run   net cash on the balance sheet. They've never  resorted to leverage. So you wouldn't run an   EBITDA. But EBITDA, which is above all the lines,  if you're motivated by EBITDA and revenue growth,   you could put a whole bunch of business on the  books and not have any of that make any money,   because if you've got a lot of interest expense  and your capital intensive business and you've   got big maintenance, CapEx, you may throw off a  lot of EBITDA cash flow, but you may not make any 00:44:51:24 - 00:45:13:07 Unknown  return on capital. And so those structures wind  up being pretty poor. And more often than not,   you see it in the way companies make acquisitions,  then how they deal with their own company shares.   And so you've got to be careful with comp  and make sure you're not too disciplined.   But you almost always taste a little bit  of your vomit with everything you own. 00:45:13:09 - 00:45:41:04 Unknown  I love the way you set that. And  I'm sure after testing out Gemini,   you went straight out and bought more alphabet  stock though it's just a just a bad joke. You   know what? It's tie two of my favorite  annual letters together here. Of course,   your letter and then Buffett's and specifically  I'm talking about the 1999. And I'm really I   really like that I'm in such good company because  you're actually one of the people here who would   set this trade if I don't quote the right letter,  even if it's if it's back in the in the 90s. 00:45:41:04 - 00:46:00:19 Unknown  But back then Warren talked about profit  margin mean reverting. And he was he was I   guess you could say he was ultimately wrong but  historically correct. And in your recent letter   you point out that and I've got a quote here  from the letter. The S&P 500 now trades for 26   times current earnings against the second highest  profit margin in the history of the stock market. 00:46:00:21 - 00:46:23:13 Unknown  That's against all stock markets anywhere in the  world. Ever. High prices mixed with high margins   are typically a recipe for bulk returns or worse,  end quote. And so, first of all, very eloquently   written. But I wanted to ask you, some would  say that we entered a new normal. And I know   it's always painful when we say new normal, but  some would say that we have entered a new normal. 00:46:23:19 - 00:46:50:16 Unknown  Technology has allowed profit margins  to fundamentally be higher due to just   new business models. Now, what  would you say to that? Well,   I think that's right. Profit margins are  durably higher than they were when we were   more of a manufacturing based economy. Warren's  1999 article in fortune was the amalgamation   of a series of speeches that he gave, one  honoring Ben Graham, I think, at Columbia. 00:46:50:18 - 00:47:14:16 Unknown  But essentially he was essentially he was saying,  we're at a secular peak without saying we were   a secular peak, and margins and multiples were  high. And he he noted correctly, but ultimately,   wrongly, that margins were rangebound. And and I  think he used a range of 4% to 6.5%. And in 99,   the profit margin on the S&P 500 got up to seven  and a half or 7.6% wherever it wound up getting. 00:47:14:16 - 00:47:50:03 Unknown  So that was above the historical norm.  Now, at a moment, they hit 8.9% in 1929,   but from the point of that secular peak, he  was right. And a high multiple to earnings,   mid 20s, multiple to earnings contracted  when margins came back down to 5.8%. So   he was correct where he was wrong. And  what he didn't see was margin by 2021,   growing the 13.3% and then falling in  2022, but recovering back to 12.8%. 00:47:50:03 - 00:48:12:14 Unknown  Most recently. Now of that increase  from mid 70s or mid 60s, wherever you   would have put the prior range double it to  current levels, 3% of the increase has come   from lower and lower interest rates. Even  though rates ran up in the last few years,   we still have an extraordinarily high amount  of debt on the corporate balance sheet. 00:48:12:16 - 00:48:38:10 Unknown  But the interest rates are so much lower than they  were for several decades that the interest burden,   the interest expense, has been lower. And that  contributed three points to profit margin. The   tax code at the corporate level for a lot of years  was 35%. It changed the handful of years ago to   21%. That added 1% to the after tax margin, which  I thought would get competed away right away. 00:48:38:10 - 00:48:58:21 Unknown  It did not. But then what? You wouldn't  have known in 99, maybe you would have   for the Microsofts of the world, the cap  light. But Microsoft in 99 was doing a   37 or 38% margin on 20 billion of sales.  They were making $7.5 billion. It didn't   take any Apple to run that business. And then  along came Google and along came the others. 00:48:58:21 - 00:49:25:12 Unknown  And so the profit margins of those  businesses, with the exception of   the retail side of Amazon, but the side  of Amazon, you've got a handful of very,   very profitable businesses from a margin  standpoint. And so margins double. Now,   I do think there's still a mean reverting  aspect to margins, but I've still I've   seen papers and commentary say that because  margins are higher, multiple should be higher. 00:49:25:14 - 00:49:50:13 Unknown  I don't think that's right at all. I mean,  if you could argue that returns on capital   are durably higher than I think the multiple  on a higher return on capital business should   be higher. But if you look at the return  on equity and nuances as to how it gets   overstated in the current environment based  on share repurchases above book value, based   on write offs and write downs over time based on  the amount of historical assets that are carried. 00:49:50:13 - 00:50:12:05 Unknown  The historical cost in what's been an  inflationary period for the last few   years. Book values are understated, meaning  returns on equity are overstated. So I don't   think you've had a durably wide meeting across the  whole stock market, across the S&P 500 increase   in returns on equity. You sure has had it in a  handful of tech businesses and other companies. 00:50:12:07 - 00:50:43:19 Unknown  And I've got my five factor work that we've had  in the letter for 2 or 3 years, four years maybe,   where I take the five variables that  make up return dollar, sales growth,   change in the share count, the multiple and the  margin which all four of those are multiplicative   factors. And then whatever your dividend yield  winds up being, to argue that the high current   margins coupled with very high multiples, you can  bake in scenarios for each of the five variables. 00:50:43:19 - 00:51:11:19 Unknown  And it's really hard to get to more than a  5% return. And depending on where margins   and multiples head from here, you  can get to a loss for a decade,   which is what happened after the 1999  peak. Two interesting things one,   when Warren talked at length many times  about the tailwind that he enjoyed from   growth in real GDP per capita, the United  States was the economic engine of the world. 00:51:11:21 - 00:51:43:09 Unknown  That was the case and real GDP per capita.  And I've got a table in the letter that that   breaks this up by sales grew at over 2%, 2.5% for  decade, decade, decade. It wasn't it wasn't the   same rate of growth every decade. But when total  credit market debt reached 250% of GDP in 2000,   now 300, almost 350%, and in even more  recent years, post the financial crisis,   the government piece of total credit  market debt is now over 100% of GDP. 00:51:43:11 - 00:52:19:00 Unknown  At a point, more and more leverage is deleterious  to economic growth. It's the law of diminishing   returns. And so, indeed, for the last 25  years, real GDP per capita is growing 1%,   a little bit less than 1% at less than half  its rate of growth. And this is adjusting for   population growth and for inflation.  And I would say if the long term PE,   which was always 15 in the last quarter century,  if you take it now over 100 years, probably 16 or   17 would be the long run average growth is a big  component to what you should pay for an asset. 00:52:19:02 - 00:52:55:11 Unknown  Faster growing asset warrants, a higher PE, lower  growing asset, more PE. If aggregate growth on a   real population adjusted growth in the economy,  maybe the long run average is not 17 or 16 or even   15. Maybe it's supposed to be 13. Are you looking  to connect with high quality people in the value   investing world? Beyond hosting this podcast,  I also help run our Tip Mastermind community,   a private group designed for serious investors  inside yummy vetted members who are entrepreneurs,   private investors, and asset managers people who  understand your journey and can help you grow. 00:52:55:15 - 00:53:19:06 Unknown  Each week, we host live calls where members share  insights, strategies, and experiences. 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If you enjoy   excellent breakdowns on individual  stocks, then you need to check out   the Intrinsic Value podcast hosted  by Sean O'Malley and Daniel Manca. 00:54:12:03 - 00:54:37:15 Unknown  Each week, Sean and Daniel do in-depth  analysis on a company's business model   and competitive advantages, and in real  time, they build out the intrinsic value   portfolio for you to follow along as they  search for value in the market. So far,   they've done analysis on great businesses like  John Deere, Ulta Beauty, AutoZone, and Airbnb.   And I recommend starting with the episode on  Nintendo, the global powerhouse in gaming. 00:54:37:17 - 00:54:57:23 Unknown  It's rare to find a show that consistently  publishes high quality, comprehensive,   deep dives that cover all of the aspects of  a business from an investment perspective.   Go follow the Intrinsic Value podcast  on your favorite podcasting app and   discover the next stock to add  to your portfolio. Or watch list. 00:54:58:00 - 00:55:24:01 Unknown  And then you take these cap light businesses that  have been just unbelievably successful. The Mag   seven were 8% of the S&P 514 or 15 years ago.  There are 37% of the stock market sitting there   trading at 30 plus times earnings. They also  have very high profit margins and on average   in the low 20s. Well, at my roundtable,  tulip mania in the fall, I made the joke. 00:55:24:03 - 00:55:49:12 Unknown  These things are rapidly turning into  EBITDA stories, which is incredible   because they were net cash on the balance  sheet, free cash generating machines that   didn't take any capital to here you are  all of a sudden in this AI arms race,   and all of a sudden increasing proportion  of cash flow from operations is going into   CapEx. These companies have gone from net cash  in in some cases to a little bit of net debt. 00:55:49:14 - 00:56:16:05 Unknown  You don't have enough cash flow from  operations to support share repurchases,   to support all of the things the companies  spend money on, if they're going to dedicate   this vast amount of money to CapEx. And so  when you put CapEx on the balance sheet,   regardless of the number of years over  which you amortize it for depreciation,   you're putting depreciation expense, which  largely is maintenance on the balance sheet,   and now you're putting interest on the  balance sheet, which is interest expense. 00:56:16:05 - 00:56:38:07 Unknown  And so all of a sudden you've got depreciation  charges which are going to grow very rapidly.   They will trail the growth in CapEx. So to me  the profit margins of what had been capitalized   businesses are not only at risk, that they're  far more likely than not to contract over the   next period of years how quickly they contract.  I don't know that they're going to come down. 00:56:38:07 - 00:57:16:14 Unknown  I don't see that there's enough revenue  possibility relative to the AI money being   spent. The CapEx on AI being spent for  chips and data centers and what have you   to support current margins. And when you  overlay high margins with high multiples,   which is what you have at an extreme with those  handful of tech businesses which were properly   rewarded for their economic success and they were  properly rewarded with high multiples, I think   you're at an inflection point and you could  say it's an inflection point for the S&P 500,   but it's probably an inflection point for the most  richly valued of this large corner of the S&P 500. 00:57:16:14 - 00:57:41:00 Unknown  So long answer to your question. But Warren  was wrong. And I don't think the margin goes   back to a range of 4.5% to 6%. You take  margins down from today's 12.8% to ten,   and you're going to crucify a 26 multiple. They're  onex. So multiples come in when margins come in.   Wall Street investors in general  don't like compressing profit margins. 00:57:41:02 - 00:58:01:13 Unknown  And they punish the stocks with lower multiples  lower and lower multiples when margins come   down. I think there's a heck of a lot of  risk margins for reasons related to CapEx,   but also reasons related to how the economy  is structured and competitive forces. To me,   there's there is a mean reverting, but it's at  a higher level. It's at a durably higher level. 00:58:01:13 - 00:58:26:01 Unknown  But I think Warren then was right about the mean  reversion. And likely if you put them on the spot,   say the same thing today. Well, Chris, we  should continue talking about multiples,   but perhaps it's more multiples on revenue  more than multiples on profits. You have   this wonderful, wonderful section here  in your letter about you contrast the   era of AI canals, railroads,  autos, electric, fiber, telecom. 00:58:26:01 - 00:58:48:10 Unknown  It was very, very thoughtful. And what I would  really like to zoom in on is this section here   you have about valuing open AI. So that  goes back to life. Mitchell opined about   speaking about multiples. And and you break  down each funding round and then you ask   what can go wrong. So let me tongue in cheek,  admittedly, Chris, ask you what can go wrong. 00:58:48:12 - 00:59:08:21 Unknown  Broadly, I touched on it in my comments  just recently. The CapEx number is even   just out of the big hyperscalers  were just shy of $400 billion last   year on $400 billion CapEx. If you're  writing off the asset over ten years,   which is too long, there's a debate over whether  it should be 3 or 4 years or 5 or 6 years. 00:59:08:23 - 00:59:31:09 Unknown  It's not about the debate. It's you're  putting depreciation on the income statement,   depreciation expense, and it's a real  expense. It's a real charge. If your   depreciation schedule linearly on a straight  line basis is ten years on 400 billion of CapEx,   that's $40 billion of depreciation  expense. As far as I can tell,   aggregate revenues supported on this  incremental CapEx are about $30 billion. 00:59:31:11 - 01:00:03:04 Unknown  And now we're going to spend projections  of perhaps three or more trillion dollars   cumulatively over a 5 or 6 year period of  time on $3 trillion to make a 15% return   on on the capital that's spent, and  in $450 billion in profit. The four   big hyperscalers all have cash flows of  operations at just over $100 billion.   And I'm talking incremental profitability  required from revenues that are now $30 billion. 01:00:03:04 - 01:00:30:02 Unknown  So who knows who winds up winning if there  can be a winner. I equated AI to past   capital cycles. Capital cycles involve  big capital expenditures in the past,   largely funded by debt, the current  iteration oddly being funded by these   companies that have enormous free  cash and cash from operations,   which is changing rapidly because those numbers  are starting to exceed cash flow from operations. 01:00:30:04 - 01:00:52:09 Unknown  But then you've got peripheral players like OpenAI  and they're all vying to create these models that   train first and then infer. And but the dollars  being spent are incredible. So if you go back   over the history, Robert, I thought it would be  fun to go through the various. There are 16 or   17 funding rounds, and Microsoft came in early  with a couple of funding rounds at $11 billion. 01:00:52:11 - 01:01:14:01 Unknown  The valuation at those moments was something  like 28 or 29 billion. And so to me,   if I'm not a venture capitalist, so I  would be a terrible venture capitalist   because I don't have vision. But if I'm  going to put $11 billion in a business,   I want to own $11 billion of the capital or the  assets, and there may be a lot of growth to come. 01:01:14:01 - 01:01:34:15 Unknown  And I get that. And so I'm kind of tongue in  cheek about that. But Microsoft was pretty   rational. But then they had these successive  funding rounds. And I think cumulatively,   OpenAI is raise something like $73 billion by  year end. They're doing a $100 billion funding   round at what they hoped was an 830 billion  valuation. I think they just do it at 750. 01:01:34:17 - 01:02:03:19 Unknown  But India came in with capital of that  came in SoftBank came in with capital.   And so here's an entity, Sammy's OpenAI  that's raised call it 73. They've already   burning through 50. They're burning through  it fast. And the valuation rounds just went   higher and higher. So I mean two years ago  not even two years ago, a year and a half ago,   they did one, this is after Microsoft,  Microsoft stop putting money into it. 01:02:03:21 - 01:02:29:22 Unknown  And they negotiated it. Well, because  they own the IP. So if if OpenAI fails,   Microsoft owns OpenAI. ChatGPT. I see  you had a funding round in October of   24. They raised 6.6 billion and $157 billion  valuation, 150 seven's a lot greater than 6.6,   but 6.6 would be a fraction of the business.  Then they did one a few months later, 40 billion. 01:02:29:22 - 01:02:52:15 Unknown  They raised it a $300 billion valuation.  But they did one just this past October   at a $500 billion valuation, but the same $6.6  billion that they collected in the earlier one.   Insiders were cashing out. So they they did a  $500 billion valuation, and the insider sold   $6.6 million worth of the private company  stock. Now they're running out of cash,   and they're they're raising another $100 billion. 01:02:52:15 - 01:03:21:09 Unknown  So you and I could build car plants. We can  build models if somebody is willing to give   us a whole bunch of money. But you ask, what  could go wrong? Well, the entities that have   more resources than that are embedded in more  architecture. So Google has essentially committed   outspending everybody, and they've all committed  outspending each other. Most of the CEOs of these   companies have said, yeah, we could be making a  big mistake, but we can't afford not to do this. 01:03:21:11 - 01:03:53:05 Unknown  But Google's got there already.  Their ad supported platform meta,   which has their llama free, is  massively ad supported. Anthropic   is just my understanding is and there's  even the article in this morning's journal,   they're just killing OpenAI with the success  and corporations with their flawed models.   And so all I share of AI search has dropped  from mid 80s to mid 60s, and it's falling fast. 01:03:53:07 - 01:04:10:17 Unknown  You've got regulatory risk. We're going  to find out on fair use. The Europeans   are very aggressive when this front and  you've got you've got a lawsuits on Elon.   When Sammy flip from to this thing is  a not for profit which is what he had a   lot of agreed to at the outset. Elon put  it I think $30 million into this thing. 01:04:10:19 - 01:04:29:13 Unknown  Sam a flip over a couple different  degrees to now a fully for profit.   They're planning on going public and Elon  suing them. And it's not going to be a   lawsuit with an M in front of the aliens.  It's not going to be a millions lawsuit.   It's going to be a billions lawsuit.  So there's OpenAI specific in the guy. 01:04:29:13 - 01:04:54:11 Unknown  Sam went to high school, same school  as my daughter, three quarters of a   mile from where I'm sitting right  now. I don't share against people,   but when a guy sits there on a stage a  couple days ago and says, intelligence,   we're going to sell like a utility, like water or  electricity, my skin crawls a little bit, and so   I don't think they will raise enough money to have  the resources to be the one that wins this thing. 01:04:54:13 - 01:05:17:00 Unknown  Maybe they do. Maybe they don't. I don't need to  play in the game, but I think it's a tough hurdle.   But it's it's a proxy for it's going to be a tough  hurdle for the aggregate of all of these guys in   this arms race, because the numbers are just  frankly, staggering. And I don't see how you've   got enough revenue and then profit opportunity to  make the whole thing generate a return on capital. 01:05:17:02 - 01:05:38:17 Unknown  Yeah. And I'll just, casually mention that  for those of you who are watching the video,   the Chris is short is saying tulip mania,  and the name of his company is Emperor   Augustus. I'm not hinting at anything.  I'm just, just casually mentioning that,   Chris, I can't help myself. I should  probably preface this by saying that   one of the favorite parts of your letters,  whenever you talk about share repurchase. 01:05:38:17 - 01:06:00:12 Unknown  And here we're not talking about perks. Yeah,  we're talking about the general stock market.   And I have to say, this year's letter did  not disappoint. So you point out that once   reported for 2025, the S&P 500 combined share  repurchase is likely to exceed $1 trillion.   That's a TI. I just want to say for the record.  And so someone tuning in might be thinking,   wow, that's $1 trillion that's  be returned to shareholders. 01:06:00:12 - 01:06:22:12 Unknown  That must be amazing. And and  over a quarter of a century,   companies spend more than half of their profit.  Your buybacks. Yes. I think you made it out to   2.7% of market cap annual on average. But  then you also look at the aggregate share   count. It has not. That's really so impressive.  But perhaps not the right way being impressive. 01:06:22:14 - 01:06:48:15 Unknown  Can you think of anything regulatory that could  change that in favor of shareholders? Or do you   think that you're you're basically at its core  it's fighting a losing battle whenever it comes   to basic human nature. Whenever you're looking  at this, this creature that's being created   with your repurchases, I think you're fighting a  losing battle. You've had various congresspeople,   senators, representatives talk  about banning share repurchases. 01:06:48:15 - 01:07:16:02 Unknown  Well, there's nothing evil about a share  repurchase. And done intelligently the way   Berkshire's done it over time. That the  way we like to see our companies do it is   there's an acknowledgment that the stock is  trading at a discounted fair value, and we   don't have a better use for the capital. So  buy your share price and when it's cheap,   if we've got opportunities to make good  and great returns on equity or capital,   doing something else, that we should do  that first and don't do it with leverage   and and excessively put the company at risk  just for the sake of shrinking the share. 01:07:16:02 - 01:07:39:07 Unknown  Count the trillions. Interesting. Because if  you do, I don't know. We're earnings wound up   officially once all the companies reported for  the fourth quarter. But I think estimates what   I put my letter. The other were 263 and change per  share for the S&P, which is oh $2.25 trillion. So   a trillion, which is big numbers. The first time  that number will be a trillion is 40, whatever. 01:07:39:07 - 01:08:06:19 Unknown  44 or 45% of net income should probably  rather look at the repurchases as a percentage   of cash flow from operations or on  average, cash from operations is   roughly going to match net income. It's it's  materially different for some businesses,   but on average, they tend to be pretty close.  And so a third or 40% of profits on average,   for the last 40 years have gone to share  repurchases or of cash flow operations. 01:08:06:21 - 01:08:30:20 Unknown  It's staggering to think that over the last  quarter. So if you go back to the late 90s,   if you go back to the 90s, the share count  for the S&P grew dramatically. It grew by   something like 40%. Microsoft share count  was just growing exponentially because they   were giving 6 or 7% of the shares per year to  their employees, not just the top executives,   but everybody was getting shares,  they were getting stock options. 01:08:30:22 - 01:08:51:02 Unknown  And it was wonderful as the stock went up  because you got an option at 30 bucks a share,   now, 60 bucks the shares, you doubled  against your cost and Silicon Valley   hadn't figured out offsetting dilution with  share repurchases. And then you had the bank   market crash and the tech bubble imploded.  The S&P dropped 50%. The Nasdaq dropped 80%. 01:08:51:04 - 01:09:16:06 Unknown  There were people that had exercised stock  options. Were the stocks that then declined so   much that they had a tax liability that exceeded  the value of what their shares were worth,   and so they shifted from stock options to a  larger preponderance of restricted shares,   which are less dilutive because you're not  giving away as many shares. There's no option   component to it with a restricted stock, whether  it's got a performance quotient to it or not. 01:09:16:08 - 01:09:47:14 Unknown  It's basically the value of the stock at  the moment. You give it away and you earn   it over some vesting period, with or without some  performance hurdle. So you had a period of 15 or   20 years where the issuance of stock to employees,  largely executives, largely the top executives,   was about 2% of outstanding shares for a  year. And then for a bunch of years they   were buying back on average, they being the S&P  500 aggregate of companies were buying back 2.7%. 01:09:47:16 - 01:10:08:04 Unknown  So there was a period of time where they  shrunk the share count by 7/10 of 1%   per year. But then you get periods like the  financial crisis where the banks blow up and   they have to recapitalize and the share count  ballooned up. So what you get as a buy high,   sell low mentality, because most companies are  price sensitive to their share repurchases,   they're simply trying to offset the dilution. 01:10:08:06 - 01:10:35:13 Unknown  That's coming from giving huge dollar amounts  of money. I mean, compensation packages that   are way higher than Greg's $25 million.  And so we've gotten to the point now where   there's more need for capital. So since June  2020, the share counts actually risen by 3.3%,   which is staggering to me that you can spend  $1 trillion and the share count still goes up. 01:10:35:15 - 01:10:59:24 Unknown  And now for 25 years, there's no change to the  share count. In fact, for 25 years it's grown   by 1.8%. But you're essentially, if 30 to 40% of  what every company makes goes to retire shares,   you have not shrunk the share count  who got rich, the executives. And you   could say in the case of the shareholder,  those repurchases supported the stocks. 01:11:00:01 - 01:11:29:02 Unknown  And that's why we're trading at 26 times  earnings today. And that's probably the   case. But those were dollars that didn't go into  reinvestment in property, plant and equipment   or acquisitions. That was money that was spent  simply levitating stock to make executives rich,   driving up the stock price to higher and  higher levels. And at 26 times earnings,   even if you take the Mag seven out 22 times  earnings for the S&P for 93, the share repurchases   have been largely folly because they're not  executed the way they should be executed. 01:11:29:04 - 01:11:45:12 Unknown  I don't know what fixes that, because if  you get the job as CEO when you're 60 and   they give you a bunch of stock on the barrel  head, because that's what your competitors get,   and that's what the compensation consultant  says you should get. I'm going to get rich   by driving the stock price up for four years,  and I may be aggressive with my accounting. 01:11:45:14 - 01:12:16:06 Unknown  I may set performance hurdles back to the  Eliding shareholders that are not aligned.   And I don't know how you fix that. I don't think  there's any regulatory scheme that can fix it.   More likely than not, the action of the  stock market and a deep recession and a   really deep recession may serve to fix it. But  I guarantee you that the proxy voting companies,   when they weigh in on governance,  don't look at it the right way. 01:12:16:08 - 01:12:36:06 Unknown  They don't look at it this way. Those folks are  not aligned with shareholders best interests.   They're aligned with ESG and data and all  kinds. Crazy stuff. Berkshire should be a   proxy on how to do it, but it can't be an echo  back to Greg's compensation and him saying I   would buy the stock back. He was fortunate to  be in a position to be rich when he became CEO. 01:12:36:06 - 01:13:01:18 Unknown  He got rich because he owned 1% of BTG. The next  CEO is not going to come to the party with a net   worth of 6 or 7 or $800 million at the moment  he or she becomes CEO, and so the compensation   of that person needs to be sufficiently high  relative to the 1.2 or 3 trillion of assets.   And it'll be a larger number depending on how  many shares Berkshire buys back over time. 01:13:01:21 - 01:13:23:17 Unknown  But you want the comp to be high enough,  but aligned with. So the CEO might need a   $25 million. Sorry. I mean that's crazy.  It sounds to him that somebody needs $25   million, right? That's a reasonable amount of  comp to run a business the size of Berkshire   Hathaway. We could talk all day about share  repurchases and executive compensation. 01:13:23:19 - 01:13:50:20 Unknown  It's so badly done in so many places that when  you find it done reasonably well, it's pretty   glorious. Yeah, I like the way you think about  it. It's almost like saying, what is the Buffett   says about leverage that if you're smart, you  don't need leverage. And if you're not smart,   you definitely should not use leverage. And it's  sort of like the same thing about if you're not   already financial independent, you probably are  not the right person to run in the first place. 01:13:50:22 - 01:14:12:20 Unknown  But right. You should also be comes at really well  because you have a lot responsibilities, but it's   sort of like this chicken and egg kind of thing.  So thank you for your perspective on that. I'll   add to that share repurchase thing even though a  trillion is a big number and a back to the eye in   the CapEx spending, those numbers are so big  in 650 to $750 billion for the current year. 01:14:12:20 - 01:14:37:18 Unknown  They're going to consume more than all of the  cash flow from operations from Microsoft, meta,   Google, Amazon, that there's less capacity to  keep buying the stocks back. And so you've seen   share repurchases among some of those 20  largest businesses start to decline. And   that also back to the argument about PS and  multiples and what the right numbers are. 01:14:37:20 - 01:14:57:15 Unknown  Even though it's trillions a big number, it's  shrinking. I've got a chart letter that shows   repurchases, the percentage market cap going  down and down or down. Well, that's partly a   function of the prices, the valuations. The PE  is going up and up and up. But if fewer dollars   are committed to the share repurchase, one of  those big supports for stock prices goes away. 01:14:57:15 - 01:15:15:21 Unknown  Because now the dollars are going into  the ground in datacenters or into space,   which you off on another tangent.  So they may not be the supportive   selves that the market is at. And so for  that, if we keep giving executives 2 or   3% of the companies per year, you may see  the dilution factor go up and up and up. 01:15:15:22 - 01:15:43:16 Unknown  It's been pretty modest in the last five  years, but that could very well increase.   And a rising share count is deleterious to  the investors return. It's one of your form   formal look at it factors. Chris, I wanted  to end this interview here in a bit more of   a philosophical note, perhaps because I, I  really liked how you started your letter by   talking a bit about guy's choice not to mess up  like capital and giving his health situation. 01:15:43:16 - 01:16:04:00 Unknown  And of course, what has unfolded is it's not  defeat by any means. It's it's really a really   shows courage and integrity and putting family and  clients first whenever, especially whenever. It's   incredible difficult. And I should say, you're  shifting away from guy and talking about this in   general terms. It really makes one think about how  none of us are immune to negative health events. 01:16:04:00 - 01:16:44:09 Unknown  And sometimes cognitive decline can be gradual and  hard for for us to see. And and so as investors,   we often talk about the downside protection in  businesses that we invest in. But I'm curious   to hear how you think about that for Augustus  and beyond planning for something catastrophic   happening, you know, like being hit by a bus,  metaphorically, what kind of structures and   safeguards have you put in place to ensure that  if your judgment were to deteriorate slowly,   perhaps in a way that's very difficult  to self detect, that you ensure that your   clients are fully protected and you would  continue to operate with this discipline. 01:16:44:09 - 01:17:03:02 Unknown  And I, I feel a bit torn about asking you  a question, because it kind of feel like it   comes across as very rude. And that's that's not  at all my intention with the question. And I'm, I   was curious to hear if you thought about it. Well,  for those that don't know what you're what you're   talking about, guy spear, mutual friend of ours  is do you think the Berkshire world is an acolyte? 01:17:03:02 - 01:17:20:24 Unknown  He runs a really nice business, told aquamarine.  He's got a very good long term track record he's   struggling with. Well, he's struggling  with, pretty bad form of brain cancer.   And he had his family join him at one  of my dinners in Omaha last year. And   he was in recovery, and we thought full  remission and thought he was in good shape. 01:17:20:24 - 01:17:58:23 Unknown  And it came back late last year and, you know,   praying that he gets through it. He's got  a wonderful family. But he made the very,   very difficult decision to focus on his  health and his family and close his firm   and return the capital to his investors. And  that's just a brutal thing, because I'm sure,   like Warren and Charlie, like me, I mean, I hope  my, my, I'm 57 years old and my plan is to go out   either in a pine box like Charlie did, 34 days  shy of his 100th birthday, or just struggle. 01:17:58:23 - 01:18:20:23 Unknown  Enough with my vision. We're out on  a hard time reading ten K's at age 95   to pass the baton. So we'll never sell  the firm. I hope at 57 I get at least   another three three decades to do  what I'm doing. I love what I do,   I've never felt like I've worked doing this  thing. I've got a response ability to our clients. 01:18:21:00 - 01:18:40:00 Unknown  If I were to get hit by the proverbial boss  institutions, you're just going to move capital.   We got an obligation. The people that have  been with us for a long time that entrust   us with capital, that if I were to not get  hit by a bus and to have cognitive decline,   and I worry about it because I played football  on a high level and I had number of concussions. 01:18:40:02 - 01:18:59:24 Unknown  So, you know, you sit there on a Saturday  or Sunday morning, you go out, geez,   I'm drawing a blank. On remembering somebody whose  name, hopefully that's not the football. And maybe   it's that I'm getting older, or maybe it's  the fact that I had too much red wine last   night. On the weekend, some combination  of a three. But I think so business wise. 01:18:59:24 - 01:19:23:11 Unknown  If something were to happen suddenly. What?  Chad knows the portfolio like the back of   his hand. We've got young investment people  working with us that are evolving and growing.   We have a plan in place to essentially  respectably with a good friend of mine,   merge our operations in the event that I or  he he running his firm would, depart suddenly. 01:19:23:13 - 01:19:46:13 Unknown  So he's somebody that I'd be very comfortable  having my family's capital with and my clients   capital with. So we've got that in place  as well. But I think to your point about a   slow cognitive decline, we talk about  tulip mania. This is my roundtable,   where I've got 30, 32 of really  my best friends, colleagues,   contemporaries, peers in the investment  world that I've got in over the years. 01:19:46:13 - 01:20:11:06 Unknown  We get together for four days in Saint  Louis and go through 12 or 13 companies   and have a lot of great discussions and eat  well and drink well between my family and my   colleagues and even my clients, many of whom  are as much friends now as they are clients,   I've got enough people in my  universe that would, I believe,   would be candid and say, Chris, you  know, you're starting to slow down. 01:20:11:08 - 01:20:27:12 Unknown  You need to do something. You need to you  need to think about having your finger   on the trigger of capital. I'm confident  that there's are enough people that think,   enough of me, that know me well enough  and that I trust, and there's a mutual   trust that I would do the same for them.  And I think they would do the same for me. 01:20:27:12 - 01:20:59:09 Unknown  So without expressly, being able to say that with  certitude, I've got friends who would say, Chris,   you're an idiot, you need to stop it. You've got,  you know, early dementia and you need to focus on   family. And so I think we're set on that front. I  hope it doesn't come to that. I'm going to really   I really do think the pine box, although,  you know, I may not get 100 years because as   Charlie or Warren said a couple of years ago after  Charlie had passed, he noted the a having neither   of them been athletes, that the non-athletes  bodies tend to live longer in your selling. 01:20:59:12 - 01:21:17:13 Unknown  Oh my God, I played college football. I  just scratched a few years of my life.   But then he said, obviously, that women tend to  outlive men, and noted that in his later years,   he was convincing Charlie to either  change operation. You know, I could I   could contemplate something like that to  add a few years to that, to the runway. 01:21:17:15 - 01:21:39:20 Unknown  Now, I kidding aside, I think between suddenly  how did you go bankrupt? Bilbo gradually at   first and then suddenly. Well, that's either how  you go out and either physically go out suddenly   or you mentally go out gradually. And I  think we've got a pretty good formal and   informal structures in place to accommodate  either or or any combination of the two. 01:21:39:22 - 01:21:59:12 Unknown  I'm very happy to hear that, Chris.  And of course you thought about it,   so thank you for your very eloquent response.  Chris, before I let you go and give you a hand   off to where people can find the letters,  home page, is there anything that we   haven't covered that we should cover here in our  conversation? No, I mean, I think this is great. 01:21:59:16 - 01:22:24:01 Unknown  I'd encourage everybody. I'll tell a story.  A couple years ago, I started off my letter   with my story of, I don't know, ten years  ago, I was trading a bunch of messages   with Warren and about something different  that I noted that I just calculated that   Berkshire could decline by 99.3% and share  price, and still adopt from the S&P 500. 01:22:24:03 - 01:22:43:20 Unknown  And in his correspondence back with the other  stuff, he noted, Ben Graham would be proud.   But let's not test the math. So there I was a  couple of weeks later at that Charlie's meeting,   Wesco in Pasadena. I said, hey, I came  up with this number and ran it by him,   and he said, Chris, that's  just simple compound interest. 01:22:43:20 - 01:23:10:20 Unknown  That's not impressive. And so you just slink  away and go back to your seat. You just brushed   me. So in going through last year and then I  updated this year with with better numbers,   we were able to calculate market returns, S&P  500 returns from all of the big secular peaks   and troughs over the last hundred year or so 29  peak, 32 trough, 3740 to 66ft, so on and so forth. 01:23:10:22 - 01:23:34:00 Unknown  And it's pretty amazing. The differential of  putting capital to work near a secular peak,   not even at. But if you do it at a secular  peak or at a secular low, the difference   compounding series. So I ran the numbers over  time, and it's amazing how much disparate,   how widely disparate the returns get from the  famous Ibbotson. 10.5%. And I realize something. 01:23:34:02 - 01:23:53:23 Unknown  You've read the letter and maybe you didn't  read this part, but there's section, I think,   from pages 994 to 104 that everybody should  read, because it's my tribute to Warren,   and I talk about the track record, and there's  several things in it. His performance record   versus the S&P at the moment he announced  his retirement and first weekend in May. 01:23:54:00 - 01:24:14:14 Unknown  There was no trailing one two,  three four, five six, seven eight,   910 year return. Berkshire outperformed in every  yearly interval, looking backward as of that day,   which is pretty credible. But on a 99% return,  what would be the single best day in the history   of the stock market, the US stock market, to  put money to work? What single day would it be? 01:24:14:16 - 01:24:31:09 Unknown  I'll ask you. Oh man, now you're quizzing me.  I actually, I know it's easy for me to say,   but for those who are watching the video  I actually am using, I am going through   from A to Z. But there was a specific date  you mentioned. Was it just after the Great   Depression? There was this? Yeah. You like people  think it's this date, but it's the other date. 01:24:31:09 - 01:25:04:11 Unknown  Was that is that the second you talked about that  is okay good a good one. So S&P 500 June 1st,   1932. The S&P had fallen 86.2 or 86.4%  from its peak in 1929. The Dow Jones,   which is what you're talking about, had  fallen 89%. And kind of more famously,   I think it was July 8th, 1932, of  that the Dow traded in its low,   but the S&P is low was on June 1st,  1932 at $4.40 on the day of the Dow low. 01:25:04:13 - 01:25:30:05 Unknown  It was 441, so it was a penny cheaper.  A month earlier, five weeks earlier,   and any of that from that day. So so if  you can put money to work on that day,   what do you do for a third of a century? And  you would have made 15% per year and change   by having bought the low for the next third  of a century through September 30th, 1964. 01:25:30:07 - 01:26:00:24 Unknown  So compounding at that rate for that long,  you turn each hundred dollars into just about   $10,000. So 100 bagger and a third of a century.  Wow. Would you be willing to lose 99% of your   money on that date? And you know what? You know  where I'm going with this. Yeah. September 30th,   1964. And put your money in one  company stock for the next 61 years. 01:26:01:01 - 01:26:37:23 Unknown  Well, yes, you would have, because on that  99% decline from the measurement period,   the first the beginning of the fiscal  year when Warren got control of Berkshire,   Berkshire compounding at 19.7% and grew  each hundred dollars to $6.1 million,   the S&P could have fallen 99% from 10,000 to  $100 and still grow. So during that period,   where Berkshire grew to 6.1 million at 19.7% by  growing at 10%, the S&P grew from $100 to 45,000. 01:26:38:02 - 01:26:59:19 Unknown  So 45,000, you get 6.1 million. That's how you can  fall 99.26% or whatever it is. But you can do it   twice, because if you do the whole record from the  single best moment in history of the stock market   to buy the S&P 500, June 1st, 1932, you compounded  it 12 point whatever it was, I think it was 12.1%. 01:26:59:19 - 01:27:48:15 Unknown  Maybe it was 12.5%, but you grew $100 to 4.4  million. Berkshire grew $100 to 6.1 million in   33 fewer years. So Berkshire Hathaway on Warren's  watch outperformed the S&P 500 over nearly a   century, buying the market at the absolute low, I  think, and I said in the letter, and we'll see if   Warren will agree, because he's got to read that  part at least, whether Charlie would have been   impressed with that, because even though it's  just pure compounding interest in pure algebra,   seeing the start to tail S&P compounding  at 12 and change from $100 to 4.5 million,   knowing that Berkshire grew to 6.1 million  for each hundred is pretty impressive. 01:27:48:15 - 01:28:12:07 Unknown  And that's the legacy of the track record. And  that I've got more of a testament to what he   did for teaching and integrity and the way  business they should be. Right. So there's   a ten page section of the letter that I  hope, even if you don't like getting into   the accounting nuances of conglomerates,  there's about a ten page testament to war   that's partly track record, partly human  record, but it's pretty fun reading. 01:28:12:09 - 01:28:31:24 Unknown  I think it was fun writing for me.  Yeah. And I should probably also say,   Chris, because I heard you and I think you  also mentioned this year on the podcast,   the people who read your letter there is,  there's a self-selection of those people. And I,   I very often talk with my team about it and  they're like, can we really talk about this? 01:28:32:00 - 01:28:51:14 Unknown  Isn't this two like you probably can because  there's a self-selection and the people who are   not interested, they're just going to drop off,  and then you're really going to be with kindred   spirits. And so to me, it's whenever people are  telling me that they're reading your letter,   Chris, I just know they're awesome  people. It's that simple. Well,   I think there's a quirkiness to people  that are listening to your regular podcast. 01:28:51:14 - 01:29:11:13 Unknown  They're reading my letters that there's  intellectual curiosity about the investing world,   that people self-select and listening to you or  reading me or listening to us talk once a year.   That's probably true. Yes, that's probably  true. I can't help us sneak in. One quick   question here. Before that, you go with Warren,  read a letter and send you a note each year. 01:29:11:14 - 01:29:35:05 Unknown  Like, what's the kind of the relationship? How  does it work? Well, one of the biggest honors and   surprises that I had was, jeez, might have been  2002. I've got the letter hanging in my office,   but I received a letter from Warren  letting me know that a friend it heads,   and our letters have only been on our website  and public since 2000 and the 2050 letter. 01:29:35:07 - 01:29:53:03 Unknown  So we would send our letters just to our  clients and to my 30 or 40 quirky friends.   Right. So now my letter made its way to  how many wrote that somebody friend of   mine sent me. Friend of mine. What I'm  talking wasn't a friend of mine. Being   Warren sent me a copy of your January 1st,  1999 letter, which I thoroughly enjoyed. 01:29:53:03 - 01:30:10:13 Unknown  And if you have any of your prior letters,  please send it my way. In any future letters,   I'd love to read anything you write. So  he's been reading my letters. You know,   we have some back and forth and  over the years. But so, I mean,   I write the thing at a level where  I know Warren is going to read it. 01:30:10:15 - 01:30:32:00 Unknown  I also know my clients are going to read  it. Some of them are more sophisticated   than others. I also know students are going to  read it and learn from it. So I try to write,   for myriad audience that are have different  levels of sophistication, but I always put,   reasonable amount of effort into it, knowing  that that he is looking at it every year. 01:30:32:02 - 01:30:52:14 Unknown  What a motivation to have. I also can't help but  talk about this labor of love that that really is   that there is it seems to me like there is this  ethos in the value investing community probably   comes all the way from Benjamin Graham, where even  though you don't have to, you're supposed to help   the next generation. It's just it's part of the  honor code for the life that have better words. 01:30:52:14 - 01:31:09:08 Unknown  And I'm really happy that you are, that you're  helping the value investing as much as your   career. So so thank you for our service to  the value investing community. If I can be,   I don't know if I'm in the position where  I can thank you on behalf of the value   investing community, but I truly believe that  you're doing a massive service to all of us. 01:31:09:12 - 01:31:31:06 Unknown  So thank you for that. Well, you're nice that you  nice to say that, and I appreciate that. It means   that means more than you'll know. As I said in  my tribute to Warren, he didn't have to teach.   I mean, the archive of the Berkshire letters,  the older letters were Warren teaching about   executive compensation and disciplined  underwriting and nuances on accounting. 01:31:31:08 - 01:31:50:05 Unknown  He didn't have to do that. He could have just  written a quick three page letter about the   subsidiary and dotted the I's and cross the  cheese, but he taught, and then he entertained   students and he would speak on campuses. And in  later years he would have large groups of students   come visit. And so I'm fortunate and blessed  that, I don't know, seven eight, nine, ten times. 01:31:50:07 - 01:32:13:20 Unknown  There's no consistency here, but I find myself  being asked to speak on college campuses. I've   been at Notre Dame every year for the last several  years. I've spoken at Columbia a bunch of times,   and New York has spoken a light in my son's  investment principles Warren Buffett class,   which my friend Harvey Eisen  put up the money for and tried   to get Warren to fly down to attend my  talk and have dinner the night before. 01:32:13:20 - 01:32:41:09 Unknown  This was just last year. Not because Warren did  it, not because he had to teach. But, you know,   he his mentor, Ben Graham, was such an important  figure for him. Warren and Charlie have been   such important for us as Berkshire acolytes  that what little that I've learned over time,   I take immense joy in being able to share.  And when young investors or students,   I find they're reading the  letter, it's pretty gratifying. 01:32:41:09 - 01:33:11:11 Unknown  And I'll never be as great of a teacher  as Warren. But what little I know,   I'm I'm happy to share. And I do it with  more verbosity for sure. I've been trying   to get even told Warren I'm trying to  shrink the letter for told him a few   years ago I was going to shrink it by 2.6  pages a year so that when I was his age,   which was the 91 width of matching length  letters, they wrote back and said, haha,   you're going to have to recalibrate, because when  you read my letter a few days after your release   years, you're going to see it's the shortest  one that I've ever written, and I tried to cut 01:33:11:13 - 01:33:31:13 Unknown  35 pages of my some of the parts  intrinsic value commentary out,   and a couple friends said, Chris, it's your  letter. Just do it. People think the letters   to wrong anyway are going to think it's too  long. Whether you write 50 pages or 180,   whatever it was this year. And  so it's funny you should mention,   because I do remember you mentioned that  in the past, you want to make it shorter. 01:33:31:15 - 01:34:03:13 Unknown  Then there was like 182 pages, and  then we still have some appendix   that was lined up completely unintended. But I  commit I'm going to commit to you now, this will   be, the secular part of the separate letter.  Okay. Well, said Chris, I won't take up more   of your time. Thank you. I just want to say it's  been absolutely amazing, as it always is this time   of year, we get to to talk about your letter box,  the stock market, the price is absolutely right. 01:34:03:23 - 01:34:22:03 Unknown  Whenever it comes to a wonderful,  wonderful letter, it's completely   free. Where can people find it? Well, you  get what you paid for. They're all on the   website. Semper augustus.com. We've got the  archives of the letters and a bunch of the   podcast that I've done in recent years, various  interviews, some of the stuff with Kate Weller. 01:34:22:05 - 01:34:46:03 Unknown  But as soon as you drop this, we'll have it  posted and we'll keep it up. So we've got the   archive of the letters and then a separate tab for  interviews and podcasts. And I'm still on Twitter,   though less, in fact, during the  letter writing process this year,   my my Twitter account got hacked, my account got  hacked. Some cryptocurrency group, I got a notice. 01:34:46:05 - 01:35:07:00 Unknown  I was working on the letter. I got a  notice saying. So somebody logged in from   an unfamiliar device. Change your password.  And by the time I saw that 30 minutes later,   when a password had been changed, I couldn't  get into the account. And in short order,   there was a Solana based outfit that was  sending out messages using my user profile. 01:35:07:02 - 01:35:29:20 Unknown  It was a process to try to get the service  people at X to fix the problem, which they   finally did. But it took, it took a couple weeks  and way more than hours and energy on members,   and we try to recover that than we wanted.  So I'm there, but I don't post as much on the   site. I usually when something material  happens at Berkshire, I talk about it. 01:35:29:22 - 01:35:48:15 Unknown  I still often only look at my Twitter account,  my X account once every week or two now. Okay,   wow, that that must be a scary experience.  And I also just want to say, for the record,   if if anyone named Chris Brewster and  they're trying to sell me Solana coins,   I don't think it's you. It  would take about a second. 01:35:48:17 - 01:36:13:10 Unknown  Rest assured, it's not, All right. Thank you so  much for your time, Chris. Thanks again. This   was great. Oh, it's fun talking to you. Thanks for  listening. To tip visit the Investors podcast.com   for show notes and educational resources. This  podcast is for informational and entertainment   purposes only and does not provide financial,  investment, tax or legal advice. The content   is impersonal and does not consider your  objectives, financial situation or needs. 01:36:13:16 - 01:36:35:21 Unknown  Investing involves and risk, including possible  loss of principle and past performance is not   a guarantee of future results. Listeners  should do their own research and consult   a qualified professional before  making any financial decisions.   Nothing on this show is a recommendation or  solicitation to buy or sell any security or   other financial product. Hosts, guests and the  Investor's Podcast Network may hold positions   in securities discussed and may change  those positions at any time without notice. 01:36:36:00 - 01:37:04:03 Unknown  References to any third party products, services  or advertisers do not constitute endorsements,   and the Investor's Podcast Network is not  responsible for any claims made by them.   Copyright by the Investor's Podcast Network,  all rights reserved. Buffett is on replaceable.   Charlie's unreleased, but will never replace the  wit and the humor and the banter and everything   we loved about it. The numbers will decline  over time, but there's a reason to gather. 01:37:04:05 - 01:37:10:15 Unknown  There's a reason for the value investing community   gather because we value a lot of  the same characteristics and so all.