Timeless Secrets of the World’s Greatest Investors | Warren Buffett, Peter Lynch & More! (TIP762)

Summary

• Investment Strategy: The podcast emphasizes the importance of staying ahead of the market and exiting early from businesses in structural decline to avoid significant losses.
• Warren Buffett's Lessons: Warren Buffett's success is attributed to his integrity, honesty, and transparency, which have helped him build trust and receive opportunities in private businesses.
• Margin of Safety: Benjamin Graham's principle of buying assets for less than their worth is highlighted, with a focus on finding margin of safety in earnings predictability and business fundamentals.
• Peter Lynch's Approach: Lynch's method of finding stock ideas through real-life observation and investing in what you know is discussed, emphasizing the value of personal experience in identifying investment opportunities.
• Scuttlebutt Technique: Philip Fischer's Scuttlebutt method is recommended for gaining an informational edge by gathering non-financial insights from customers, suppliers, and competitors.
• Market Inefficiencies: John Templeton's strategy of investing in under-researched areas like micro caps is explored, highlighting the potential for finding undervalued opportunities.
• Value Flexibility: John Nef's approach of being flexible with investment strategies, including buying high-quality businesses at higher PEs, is suggested for achieving superior long-term returns.
• Win-Win Relationships: Charlie Munger's principle of investing in win-win relationships, both in business and personal life, is emphasized as a key to long-term success and fulfillment.

Transcript

(00:00) So any business that is expected  to grow but fails to meet the market's   expectations is going to experience a pretty  big price drop. The key is to just try to stay   ahead of the market. Let's suppose that you  think a business is in maybe some sort of   structural decline. In that case, I'd rather  exit early, potentially foregoing profits   to avoid the mass exodus that's probably  going to follow once it's well established   that the business is in a structural decline. (00:25) So what Sleep and Zakaria really nailed   was that the businesses that they chose were just  so good that even if they grew at lower rates,   they still maintained a reasonable valuation  because it was just common knowledge that these   businesses had near impenetrable modes and had  high high levels of customer loyalty. [Music] Hey,   real quick before we jump into today's episode,  if you've been enjoying the show, please hit that   subscribe button. It's totally free. (00:54) helps out the channel a ton   and ensures that you won't miss any  future episodes. Thanks a bunch. Today,   I'll be discussing 10 lessons from value investing  legends. Since I spend so much of my time trying   to uncover subtleties that legendary investors  have employed to achieve their incredible results,   I thought it would be a good idea to maybe  break down one major lesson from each of them.  (01:14) I've intentionally chosen ones that I  think have impacted others and myself, but might   not necessarily be the most obvious choice in  some of the cases. I could easily spend an entire   episode on any of these investors and I have done  so on nearly every investor that I will mention   today. But today I'm going to focus on these 10  timeless lessons that I think I've learned from   investors just at the apex of their profession. (01:36) Now the first person I'm going to cover   is none other than the goat himself, Warren  Buffett. So it was hard to choose what exactly   I wanted to share from Buffett because when it  comes down to what I've learned from Buffett,   I can't help but think of that great Jim Synagol  quote. He was asked if he learned a lot from Soul   Price about the retail industry. (01:52) And Jim replied, "No,   that's inaccurate. I learned everything. I have  learned nearly everything I know about investing   from researching Warren Buffett." But the lesson  that I chose from Buffett is just how to succeed   with maximum integrity, honesty, and transparency.  You see, Warren Buffett isn't admired just for his   monumental gifts in investing and value creation. (02:12) He's also admired for his character.   He's a person that you can genuinely trust to put  shareholders needs above his own, to be honest   about his mistakes, and to not hide or sugarcoat  things when it's obvious that he's made a mistake.   The thing about Buffett's honesty and transparency  is that I believe they really contributed   significantly, if not entirely, to his success. (02:32) Without his honesty and integrity,   I think it's unlikely that he would have continued  to receive fantastic opportunities in private   businesses, which he has added to Bergkshire's  list of fullyowned companies. Warren certainly   has a history of being out there and searching for  ideas, but he's also so well-liked and admired by   others that people will go out of their way  to make introductions on Buffett's behalf.  (02:54) And they do this simply because he's  just built such an excellent reputation over   the years that making a deal with him can be  very easy if you're very well aligned with how   he thinks. Now, one notable example of this is  a littleknown subsidiary of Berkshire Hathway   called Forest River or an RV manufacturer. (03:12) So, picture this. It's 2005. Warren   Buffett is relaxing in his office, pouring over  annual reports. A two-page fax arrives at his   office. Warren curiously reads the facts from  a man named Peter Legal. He explains that he'd   love to sell his RV manufacturing business to  Berkshire Hathway. The price, $800 million.  (03:31) Warren Buffett didn't know a thing about  the RV industry, but given what he learned from   the facts, he began doing some due diligence.  The next day, Buffett made him an offer and   within a week, Legal was in Omaha to shake  on a deal after 20-minute meeting. Legal said   regarding that agreement, "It was easier to sell  my business than to renew my driver's license.  (03:51) " Now, there just aren't that many  people on Earth who conduct business in this   way. And I think it's significant reason why  Warren has been successful over the years.   business owners know that when Bergkshire  acquires them, they can remain in control   of the business without worrying that Buffett's  going to come in and, you know, lay off half of   their workforce or massively change their culture. (04:10) They also know that Warren's very likely   to hold on to that company forever. And if  the business requires additional capital,   Warren will gladly provide it, assuming the  returns on investment are adequate. Transparency   and trust offer additional benefits that aren't  discussed very much as well. For one thing, trust,   just like a good business, compounds over time. (04:30) Every cent you drop in the trust jar   today will be worth multiple times its worth  if you continue to add to that bank. Warren   has always been a trustworthy person, even  back in his 20s when he started the Buffett   partnerships. And that trust has evolved into  its current state, and it's not an advantage   that competitors can easily attack. (04:49) Another interesting point about   transparency is that it can really save a company  a significant amount of money and headaches.   A good example of this is Warren's own shareholder  letters. So since he has nothing to hide,   he's written them the entire time and they're  always full of a lot of honesty and transparency.  (05:04) If he had things to hide, he  might be forced to just, you know,   hire a PR firm that can charge exorbitant fees  to clean up any of his messes. And then lastly,   his high levels of honesty attract just  like-minded individuals, which is why Bergkshire   Hathway has so many CEOs that are just absolute  superstars in its ranks. Talent just attracts   talent and people are well aware of this. (05:26) L Simpson is an excellent example   of a tremendous investor with an incredible  track record and a long history of working   at Berkshire Hathaway. However, there's  been several high performing individuals   who have worked or currently work for  Bergkshire and I'm sure there'll be   several more. The common saying is that we  are the average of the five people that we   spend most time around. Buffett knew this. (05:43) So, his nature allowed him to be   surrounded by people who continue to push him and  make him even better. If you can adopt Buffett's   traits of trust and transparency, chances are  you'll attract some very highquality individuals   into your life that will make you better,  too. One such high-quality individual who   pulled Warren into his orbit was Benjamin Graham. (06:03) And while I wanted to get fancy with a   lesson from Graham that wasn't super obvious, just  his bedrock principle of margin of safety was just   too hard to pass up. So, the margin of safety is a  simple principle. Buy assets for less than they're   worth. It's such a simple lesson, but surprisingly  few investors actually use it to help avoid   making big mistakes and taking on too much risk. (06:26) While the few investors who do consider   margin of safety assume that margin of safety  is embedded in things like assets and boring,   you know, capital inensive legacy businesses,  there is definitely a margin of safety in many   areas of investing, not just in these boring  companies with outdated business models.   So, while Graham loved using a company's  balance sheet to find a margin of safety,   there are more areas inside of a business that  you can use to search for a margin of safety.  (06:51) So, earnings predictability is one way  of looking at it. You can have a capital light   business that has a ridiculously high book  value and the company can still have a very   large margin of safety. So, let's take a simple  example here. We'll call a business fast grow to   illustrate. So let's say this company is  in the growth stage of its development.  (07:09) But the company also has a loyal customer  base and very high switching costs. The business   is expected to grow its earnings per share by  about 26% annually with good visibility for the   next 3 years. So the company currently has an EPS  of a dollar and trades at only 10 times earnings.   Now this implies a share price of just $10. (07:28) In 3 years, the company is expected   to have an EPS of $2. Let's also note that the  business has very low tangible assets and trades   at five times book value. It also has negative  working capital. So using Graham's traditional   margin of safety of looking at net working  capital, this business is not interesting at all.  (07:43) But we know a few things. So a business  growing this fast probably shouldn't trade at a   10 times earning multiple. What should it  have? Probably something higher than the   market. As of August 7th, the PE of the S&P  500 is around 29. So let's say 30 is a better   number. Now that we have a better idea of a  terminal multiple, we think the business is   going to be worth about $60 in 3 years time. (08:05) The business converts 100% of earnings   to cash just to keep things simple. So using  an 8% discount rate, this business is worth   $47. So we are achieving a massive margin  of safety without considering assets at all.   Now in this case, if we can buy the business for  $10, we have a massive, massive margin of safety.  (08:24) And that margin of safety allows the  company to make several hiccups and screw-ups,   and we still won't lose any money. Now, what  might some of those mistakes look like? So,   I came up with three hypotheticals.  So, let's say the terminal year comes   around. The market turns bearish and we  have to use a lower terminal multiple.   Let's say it just stays at 10 times earnings. (08:42) In that case, the business is still worth   $20, double our initial buy in. Heck, even  if the multiple cuts in half, we're still   breaking even. Second is the business's growth  stalls. So, let's say EPS growth gets cut in half   at just 13%. In 3 years, the EPS is now about  $150. Perhaps now the PE of 10 makes a little   more sense and the business is now worth $15. (09:04) We still haven't lost money. We actually   made 50%. Now, worst case scenario is the whole  growth thesis just completely falls apart. Let's   say the business is not growing. It's taking on  debt to just stay afloat. Let's say EPS halves   to 50 and the PE multiple contracts to five times  as it's just no longer seen as a growth business.  (09:22) Now, yeah, you're losing money as the  stock price is trading for just a quarter of   what you bought it for. So, these are just a few  scenarios that could happen to a business that   aligns a lot more closely with what I specifically  look for and how I view a margin of safety. So,   traditional value investors such as Graham would  argue that fast growth has no margin of safety   simply because its tangible assets are so low. (09:43) However, we live in a market where   intangible assets simply re supreme. And  examining the margin of safety in the way   that I just outlined is an excellent way  to measure the risk involved in any bet.   One interesting aspect of Benjamin Graham was  that he was a highly quantitative investor.   And what quantitative investors often  overlook is how a company's fundamentals   can also contribute to its margin of safety. (10:06) So a company's business model can offer   a margin of safety that might not be visible  to a quant. Factors such as switching costs,   network effects, economies of scale, or even  brand can all make a business far more valuable   than its financial statement might indicate.  Or what about culture? Over the long term,   a business's actual value will depend on the   culture that has been established within it. (10:28) A culture of innovation and excellence   will always outperform one that stifles innovation  and pushes out its top performers. Let's suppose   you were to find two businesses today with  similar margin of safety. In that case, you know,   chances are the business with the excellent  culture probably has additional hidden variables   and further increases its margin of safety. (10:48) The company with a poor culture may   look cheap on paper in the short term, but  over the long term, this is the business   that's most likely to deteriorate. Now,  there's an additional valuable lesson   from Benjamin Graham that I really wanted to  share as well, which is crucial to understand,   and that's his experience of just holding Geico. (11:05) So, Geico is fascinating because it was a   holding that generated the majority of Graham's  net worth. There's no way to know for sure,   but I've read that Geico stake made up over 50%  of his net worth once he retired. Now the most   interesting thing about Geico was just that it  was at odds with many of the investing tenants   that he put forth in the intelligent investor. (11:23) I came up with three here. So the first   one was broad diversification. So since Geico made  up nearly 50% of his net worth, he wasn't really   practicing much diversification at all when it  came to Geico. The second is just his reliance on   investing in cigar butts. Geico may have started  as a cigar butt, but it really turned into a   compounding engine, which wasn't traditionally  what Gran was known for. looking for.  (11:46) And the third one here is just his  principle of selling when price reaches   intrinsic value. So, this one's a little bit  tougher to say because it's really impossible   to find any data on what Geico traded for for  the nearly 25 years that Graham held many,   many decades ago. However, my assumption is that  it's pretty impossible that Geico's price never   exceeded its intrinsic value over 25 years. (12:08) I just find that hard to believe. Now,   here's what Benjamin Graham himself wrote  about his thoughts on Geico. Ironically enough,   the aggregate of profits acrewing from this  single investment decision far exceeded the   sum of all the others realized through 20 years of  wide-ranging operations in the partner specialized   fields involving much investigation, endless  pondering, and countless individual decisions.  (12:29) Are there morals to the story of value to  the intelligent investor? One is that one lucky   break or one supremely shrewd decision, can we  even tell them apart, may count for more than   a lifetime of journeyman efforts. So the lesson  here is that you can be flexible on some of your   core principles if the opportunity is right. (12:48) Next, we move on to someone who taught   me just so much about identifying new stock  ideas, and that's Peter Lynch. So the beauty   of Peter Lynch is in the simplicity of one of  his methods for just finding stock ideas and   that's through simple real life observation.  The overarching point that Lynch made was to   invest in what you already know. (13:08) This meant you didn't need   to mentally overreach to understand  a potential investment. But let's get   into some of the more specifics of how  you can use this to your advantage. The   first step is to do something such as  looking at your shopping habits. There   are a few ways to take advantage of this. (13:23) First, you could just look at your   monthly bills, find out where you're spending  all your money, and determine if you could   easily stop spending money there or switch to  something cheaper. If you're finding that there's   products or services that you just can't replace  or just don't want to quit using, you might find   an excellent investing idea to dig into. (13:41) That is, of course, assuming the   business is publicly traded. Second  is just observing where you shop. So,   even if you don't shop for a specific product,  if you're in an area such as your local shopping   mall that has several different stores, just  monitor which ones are the busiest. One of the   tip mastermind community members did this to  just find an idea, which was Dutch Brothers.  (14:01) So, every day he'd pass one of their  locations and see just cars lined up literally   going into the street with people who wanted to  buy beverages from Dutch Brothers. I've used this   as well to find one of my biggest investing  successes in Aritzia. So when I first started   learning about the business case for Aritzia, I  would look in stores whenever I was near one and I   began asking women I knew about their experiences  as at Aritzia as well and it was super helpful and   helping me understand the strength of their brand. (14:27) I also use this as a monitoring tool. So   whenever I'm in a city with an Aritzia location  such as, you know, Hawaii or New York or Toronto,   I always try to make it a priority to walk  into the store to see how busy it is. And   I can honestly say that they're always  always busy, which is an excellent sign.  (14:43) A few other points to consider when using  this method that Lynch made sure to emphasize. So,   first thing is when you travel, notice what  stores are full and which ones are empty.   Another one is to make sure that you're  looking for things such as long lines,   new store openings, rapid shelf turnover. (14:58) And then lastly, just compare your   observations with multiple locations to  see if it's a real trend and not just a   trend in a single location, which obviously  isn't interesting at all. So, the next one I   like to observe is how my wife spends her money.  So, my wife loves shopping a lot more than I do,   so I'm constantly peppering her with questions  about interesting products she's considering   or even new e-commerce sites she's exploring. (15:22) And this can give you a vast range of   options. For instance, when I own Inmode,  a facial aesthetics machine manufacturer,   I recall my wife telling me that she knew one of  her mother's friends who had used one of their   machines and had a very positive experience  with it. Now, this helped me understand that   InMode had a decent chance of continuing to  scale their products since at least one of   their customers liked what they were offering. (15:42) Another great way my wife has helped me   is just simply by asking questions about specific  brands that she knows better than I do. So,   I've already mentioned Aritzia and my wife  grew up literally 5 minutes away from the very   first Aritzia location. Additionally, she's  been shopping at Aritzia for 20 plus years.  (15:57) So, she's a gold mine of information to  just help understand how uh Aritzia has created   this customer loyalty. And on my own, I just would  never have probably gotten these insights. So,   it's really really helpful. Another way to find  new investment ideas is just to observe the   products and services that your children enjoy. (16:17) For instance, my son loves a few things.   So, I got five here. One, YouTube, which is  owned by Alphabet. Two, Disney, a publicly traded   company. Three, Hot Wheels owned by Mattel.  Four, Lego, not publicly traded. And five,   FisherPrice, also owned by Mattel. So, with  that information, I can see if maybe there's an   investment case for Alphabet, Disney, or Mattel. (16:37) I could tell you right off the bat that   Disney just doesn't interest me. Alphabet  could be interesting. And I checked Mattel,   but it has 10-year compounded annual growth rates  of revenue at 0.15% and EPS of only 2.2%. So,   that instantly tells me there's nothing to  be interested in. As for Lego, it's too bad   it's private because sometimes I actually  wonder if I like Lego more than my son does.  (16:58) Now, I did a check on Lego anyways  to see what kind of growth that it might   have or what's disclosed even though it's a  private business. Unfortunately, its metrics   are also very uninteresting if they are indeed  true. So, the numbers I found was that revenue   actually decreased by 2% in 2023 and in that same  year, operating profits declined by about 5%.  (17:17) So, numbers like that cause me to  have zero interest. Now, out of all these,   Alphabet would probably be the one that I find the  most interesting. However, since the business is   just so large, I would still probably take a pass.  But, you know, according to Reuters, YouTube could   be valued at something like $500 billion.  Now, to be honest, if YouTube was spun out,   I would probably have a very, very close look. (17:35) So, not only does my son love it,   but I also love YouTube and use it very, very  often. I also use it as a research tool as part   of my job. TIP is obviously also very present  on YouTube. You might actually be watching or   listening to this on YouTube right now. Now,  this transitions to the last area of where I   like to look for ideas, which is from your job. (17:55) So, I use several services on a very   regular basis. And a few of these off just the  top of my head. I use Gmail, Google Calendar,   Google Drive, Slack, Last Pass, Riverside,  and Adobe Audition. Now, the owners of the   first three are Alphabet, Salesforce own Slack,  LastPass, and Riverside are private, and Audition   is owned by Adobe. Now, we've already covered  Alphabet, so I'm not going to go over it again.  (18:16) Salesforce and Adobe are actually pretty  interesting. So looking at the 10-year kegger   for sales force first revenues 27% EPS 28% and  free cash flow 31%. They have no debt either and   they're led still by their founder Mark Beni off.  Adobe is buying back shares has a 10-year kegger   of 13% revenue growth and 14% earnings per share. (18:36) So out of those two, I like the growth of   a business like Salesforce, but I will admit  that I just don't know that much about the   company. Perhaps I should put it on the wait list.  However, before I would ever decide to invest in a   business like Salesforce, I'd have to conduct  pretty extensive research and due diligence,   which brings us to our next investor whom I  consider to be just the master of that area,   and that person is Philip Fischer. (19:00) So, he wrote the excellent   book Common Stocks and Uncommon Profits, which I  discussed in a lot of detail on tip 646. And one   of my biggest lessons from Mr. Fischer regards  the power of Scuttlebutt. So, Scuttlebutt is   just one of the most potent ways that investors  can gain an information edge. Scuttlebutt is   simply learning more about a specific business  by using alternative sources of information.  (19:20) Everyone has access to things such as a  company's public documents. Therefore, reading   them or other easily accessible information on  the internet won't provide you anformational   edge. It's definitely required, but again, it  won't provide you an edge. But if you speak to   other people who are involved in the business, the  industry the company is in, or in the competition   of the business, you can learn a heck of a lot. (19:42) So in the book, The Sleuth Investor,   the author discusses examining three  different parties to sleuth within a   company. They are customers, employees,  and suppliers. I'll zero in on customers   here because I think that's the most critical  area to look at. So when it comes to customers,   there are three specific types to consider. (19:59) There's the end user. There's the   person who decides whether to sign a check or  to purchase a product. And then there's the   check signers themselves. You can also look at  things like current customers, former customers,   and potential customers. Speaking to any  of these people will yield very high value   information about the relationships  that customers have with the business.  (20:18) The primary purpose of Scuttlebutt is to  gather non-financial information about a business.   So it enables you to learn about factors such  as competitive advantages, management quality,   growth prospects, and potential risks. Other  great people that would be interesting to   talk to would be suppliers who can just  reveal the company's bargaining power,   payment reputation, and reliability. (20:40) You can talk to competitors who   are often the best critics as they're have no  problem highlighting where a company is going   to be strong or weak. You can talk to employees,  current or former, which can provide incredibly   valuable insights into things like culture,  management, effectiveness, and innovation.  (20:55) And then lastly, people like industry  experts who can offer a lot of context about   trends, regulation, and market dynamics. So, I  try to stay informed about all of the businesses   that I own, but you know, I must admit that it's  pretty challenging. A CEO of a company is likely   to know who all of their customers are, but  they're very unlikely to share that information   as that's an action that's frowned upon. (21:15) Suppliers can also be very tough   to find simply because it's not obvious who the  suppliers are for a specific company. Competitors   are probably the easiest to figure out because,  you know, anyone involved in the business won't   have a problem sharing that information with you. (21:29) When you look at current employees,   personally, I find it nearly impossible in  my experience. People just don't seem to   want to speak about their own business,  probably just to avoid getting into any   trouble. Industry experts are not hard to get  information from either. So industry experts   can be found just all over the internet. (21:45) But you have to understand some   of the incentives of the industry experts.  Generally speaking, they're incentivized   to talk up the industry. So if you find one to  talk, remember that very, very closely. I recall   finding a coal expert who was widely available  on the internet. Guy was all over YouTube and   podcasts. And while he always appeared to be  very thoughtful, given his various positions   within the industry in terms of investments, it  was evident that talking up the commodity was in   his best interest. So, our next lesson comes from (22:10) Sir John Templeton, and that's to fish   where there's just no fisherman. My idea came from  this when reading the book The John Templeton Way.   So, Templeton began investing in Japan in the  1950s, nearly three decades before the major   bubble began to form. And he was investing in  Japan during a time when just nobody was willing   to touch Japanese stocks with a 10-ft pole. (22:30) But John saw incredible value at this   time. So in the early 1960s, the Japanese economy  was growing at an average of 10%. And the US   economy was growing at an average rate of only 4%.  In other words, the Japanese economy was expanding   2 and 1/2 times faster than the US economy.  But many stocks in Japan cost 80% less than   the average of the stocks in the United States. (22:50) So in a written report in 1960, there   were two reasons why foreign investors refused to  invest in Japan despite these cheap valuations.   The first one was that there was too  many fluctuations in the stock price and   the second was that there just wasn't enough  information. So this really got me thinking,   you know, where could other investors in today's  markets find areas of the market that have large   amounts of volatility and lack information. (23:12) And if you look hard enough,   there's always areas of the market like  this. My personal choice has been micro   caps. Instead of looking at the massive  US market, I stick with my home country,   Canada. And in Canada specifically, I look at  micro caps. So, whenever I'm speaking with members   of the tip mastermind community, they often  ask about micro caps and how I research them.  (23:31) And it's ironic because one of  the main impediments I hear from people   is that they specifically don't research micro  caps specifically because there's a lot less   information out there on them. So, if you look at  the popular news or analysis sites such as Seeking   Alpha, you're going to be very disappointed at  what you find when trying to research micro caps.  (23:50) And that's because barely any analysts  cover micro caps because they know that funds   or their readers just can't or don't want  to buy them. So that is why when you look   at a business such as you know Alphabet  or Amazon, you're never going to learn   out a new analysis which can help inform you. (24:06) But the problem with investing this   way is that you're investing in very well-known  businesses and there's just less inefficiencies.   I'm never going to say that there aren't  inefficiencies in large and mega caps. You know,   consider Meta for further proof of that. But I  will say that there are areas of the market where   there's just these massive inefficiencies and they  occur a lot more often and in my opinion the part   of the market that I think I can understand that  is regularly inefficiently priced are micro caps.  (24:33) So this is also backed by research. In  the book, what works on Wall Street by James   Oshanaughy, he writes, "Between 1964 and 2009, as  if, as a Computat scenario one illustrates, you   required stock prices greater than a dollar, but  put no return limit and allowed for stocks with   missing data to be included, then the portfolio  earned an average compounded annual return of 28%.  (24:58) " Yet, when you require that all stocks  have share price of greater than a dollar and   have limited the monthly return to any security  to 2,000% per month, as we see with scenario 2,   returns decline by approximately 10%. And the  portfolio earns an average compounded return   of 18.2%. So, this second number, even though  it's obviously a lot lower than the first one,   was way higher than other market cap deciles. (25:23) Now, I'm sure that some investors have   identified other maybe rare aspects of the  market that are inefficient to exploit. And   if you look close enough long enough, you're  probably going to find areas that you can   find very easy to understand, but might not  be understandable by the average investor.   And that's an area that you could exploit. (25:39) So, the key is really in understanding   where to fish where there are no fishermen.  Jim Ran once said that you're the average of   the five people you spend the most time with.  And I really could not agree with him more.   And one of my favorite things about being a  host of this show is having the opportunity   to connect with high quality, like-minded  people in the value investing community.  (25:59) Each year, we host live in-person events  in Omaha and New York City for our tip mastermind   community, giving our members that exact  opportunity. Back in May during the Bergkshire   weekend, we gathered for a couple of dinners  and social hours and also hosted a bus tour   to give our members the full Omaha experience. (26:21) And in the second weekend of October 2025,   we'll be getting together in New York City for  two dinners and socials as well as exploring   the city and gathering at the Vanderbilt 1  Observatory. Our mastermind community has   around 120 members and we're capping the group at  150. And many of these members are entrepreneurs,   private investors, or investment professionals. (26:44) And like myself, they're eager to   connect with kindered spirits. It's an excellent  opportunity to connect with like-minded people   on a deeper level. So, if you'd like to check  out what the community has to offer and meet   with around 30 or 40 of us in New York City in  October, be sure to head to the investorspodcast.  (27:04) com/mastermind to apply  to join the community. That's the   investorspodcast.com/mastermind or simply  click the link in the description below.   If you enjoy excellent breakdowns on  individual stocks, then you need to   check out the Intrinsic Value podcast hosted by  Shaun Ali and Daniel Mona. Each week, Shaun and   Daniel do in-depth analysis on a company's  business model and competitive advantages.  (27:30) 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. (27:50) It's rare to find a show   that consistently publishes highquality,  comprehensive deep dives that cover all   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. There's four of them. (28:10) So, the first one is to find areas of the   market where information is just hard to find.  The second is that the higher the volatility,   the better. The third is that  if you can't find any analysis,   you're probably on the right path. And fourth,  try to find a community of people who specifically   try to exploit some of these mispricings. (28:28) Today, there's tons of communities   out there that specialize in pretty much anything  that you're interested in. If you can find and   get access to those communities, you can usually  access pretty small groups of people trying to   find inefficiencies in the market together. John  Templeton in his time just didn't have access   to this, so he had to do it all by himself. (28:46) I can reach out to many, many people   to find interesting ideas in micro caps. And  since there's just so many ideas, the idea   flow just never really ends. The interesting  thing about inefficiencies is that they rarely   last. Micro caps tend to grow through cycles of  popularity and unpopularity. In Templeton's case,   once the rest of the world started catching on to  just how much of a bargain Japanese stocks were,   they began bidding up the prices,  which removed that inefficiency.  (29:12) But by that point, Templeton was long  gone. So, if you exploit inefficiencies, you must   keep your ear to the ground to observe when they  are disappearing. Otherwise, you risk holding the   bag. And if you're holding the bag, you either  break even if you had the right entry point,   you lose money if the cycle goes down more than  you thought, or you have to wait a multi-year time   period until that cycle changes to make a profit. (29:35) Now, the next investor I want to highlight   is John Nef, who I just released an episode  about on tip 747. One of my favorite aspects   of John Nef was that he was an investor with  a very valuebased approach, but he also wasn't   afraid to buy businesses that I think most  traditional value investors wouldn't touch.  (29:55) So, Nef considered himself a low PE  investor, and that's definitely where the   bulk of his money was made. However, he also  understood that flexibility was just crucial   to achieving superior long-term returns. He owned  names like Home Depot that traded over 20 times   earnings and even owned names like IBM, Xerox, and  Intel during the latter part of the Nifty50 years.  (30:14) So, Nef wasn't afraid to take positions  in businesses where he found value. Now, this is   a valuable principle to consider for investors  who might limit themselves to a single investing   strategy. If you're only looking at businesses  with singledigit pees, for instance, there will   be boom and bust periods in your opportunity set. (30:32) And it, you know, it's totally okay to   invest that way. People like Bob Rosati have  made a career out of investing in just this   manner. However, I think you really broaden your  horizons if you view value the way that NEFT did,   and that's to find undervalue assets  rather than focusing exclusively on low PE.  (30:49) And this is a lesson that I've tracked  for nearly my entire investing career. While I   do enjoy investing in stocks with singledigit  pees, I'm also attracted to businesses that   might have a PE that exceeds 30. But for good  reason. Some businesses are just so exceptional   and resilient that they simply deserve to be  priced higher than a lower quality alternative.  (31:07) A sticky SAS business that is growing its  recurring revenue at 30% per year and has nearly   all of its revenue as recurring revenue deserves  a premium versus a cigar butt that is trading,   you know, cheap based on its assets. So, let's  dive into this topic in some more detail. So,   let's make up a hypothetical cigar business. (31:27) We're going to call it ugly duckling   or just ugly for short. So Ugly is a discount  shoe retailer that buys leftover inventory   from failed brands and resells it in outlet  style stores. So its competitive advantage   is just it's cheap and it has no loyal  customers. It's got no in-house brand.   Sales are lumpy and completely unpredictable. (31:47) Since the business is a lowcost provider,   its gross margins typically range in the 15 to  20% range. But the company's struggling to grow   because its operating results just aren't strong  and banks are very hesitant to lend it any money.   going to the capital markets as an option,  but their growth prospects are so dire that it   just might not work out the way management wants. (32:06) However, if you examine the balance sheet,   they don't require much debt to operate. They  own a significant amount of their stores and   they have substantial amounts of inventory. So,  if you were to look at this on a balance sheet   basis as maybe a liquidation play, you would make  money just by selling all the business's assets   rather than keeping the business running. (32:23) So, what's a business like this   worth? It might trade at five times earnings,  attracting value investors to the company.   Perhaps the catalyst would just be  some sort of liquidation event of the   entire business. Or maybe a new leadership  could come in and improve the business and   identify new ways to expand.  The point is the business is   cheap and I think kind of deserves to be. (32:41) Could this business be worth 10   times earnings resulting in a double if they  maybe strung together a few good quarters? I   doubt it. Let's look at a business we'll call  Cloud Nest. So this business is a cloud-based   collaboration software for small businesses.  Customers pay a yearly fee for project   management, file sharing, and communication. (32:58) The business has 95% of its customers   on multi-year contracts. Revenue is about as  predictable as the sun rising and setting,   and gross margins are 75% and climbing as the  business onboards new customers and tests out   its pricing power. Customers are extremely  loyal with retention rates of about 98%. The   market is just massive as they've only penetrated  about 1% of small businesses in North America.  (33:21) Additionally, the company is developing  new modules that current customers are willing   to pay more for as they expand their offerings.  The business is hugely profitable, boasting 25%   net margins, and net income has grown at a 30%  kegger for the last 3 years, showing no signs of   slowing down. Now, do you think Cloud Nest has  any business trading at a five times earning   multiple? 10 times seems like an absolute steal. (33:44) Heck, a business like this trading at,   you know, 20 times its value could still yield  excellent results if it can continue growing at   those rates. while improving its margins. So  let's say this business can continue growing   net income at 30% for the next 3 years. That  means EPS will more than double over a 3-year   period. So if you bought it at 20 times  earnings, your investment should double   with absolutely no multiple expansion needed. (34:05) However, a business like this can easily   justify, you know, 30 or 40 times earnings, that  would add a substantial amount to the investment.   This is why growth should be factored in to any  investment and reflected in its stock price.   Now, let's move on here and imagine that  the year is 1999 and Howard Marx is at   a quiet dinner in Midtown Manhattan. (34:25) The NASDAQ has just tripled in   the last 3 years and the air is just thick with  the optimism of innovative technology. Everyone   at Howard's Table is eagerly discussing stocks,  young billionaire founders, fast-moving IPOs, and   the fortunes that were made in a matter of weeks.  Someone leans over to Marks and asks, "Howard, may   I ask what your hottest tech pick is right now. (34:46) " Mark slowly smiles, shrugs,   and says,"None." It's a baffling response to the  normal person. To most people in the room, not   owning.com stocks is complete madness. But this  is why Markx has been so successful for so long.   He doesn't think like everyone else. Instead of  asking what everyone else was asking, which was,   "What stock should I buy that will continue  going up in price?" He was asking what happens   when everyone else buys a stock and I don't. (35:12) So the way everyone else was wrapping   up this question was by using something called  first order thinking. It's a simple and direct   way of thinking. Most people concluded that  companies growing rapidly in terms of you know   revenue or those even with just an idea that  revenue would increase in the future were the   ones that were becoming these market darlings. (35:33) Therefore they were the ones that people   should buy. But second order thinking is much  more complex and requires more mental energy.   Markx would look at the problem this way. Since  everyone knows the company is growing fast,   there will be significant buying pressure. As  buying pressure increases, the stock price will   rise. So the question wasn't, "Is the company any  good?" It was what is the best decision to make   knowing that everyone is piling into the stock. (35:56) Markx wasn't looking at the surface   question. He was peering and looking an extra  layer deeper, examining factors such as the   expectations embedded in the stock price,  which gave him a much more accurate view   of the market psychology. Let's now look  back even further and go back to the mid   1800s when thousands of people rushed to  California to live out the American dream   by finding a very precious resource, gold. (36:19) So, Americans headed to California in   droves carrying pickaxes and shovels. And they  did this with visions of glittering fortunes.   They were thinking in the purest form of  first order logic. Gold is valuable. Go   to where the gold is and find it yourself.  Now in 1853, a Bavarian immigrant arrived   in San Francisco. His name was Levi Strauss. (36:40) Instead of thinking about gold like   everybody else, he noticed a need that was missing  for all gold diggers. This was a pair of just good   pants that wouldn't rip a few days or weeks  after digging. Instead of joining the gold   finding frenzy, he decided to make his fortune  by supplying the prospectors with just strong   pants that could withstand a lot of punishment. (37:01) And this is how Levi's jeans was born.   So Levi Strauss was thinking in the second  order. And instead of taking the risk of   finding gold or just going completely broke  like many people did, he simply just supplied   the diggers with the equipment they needed to  attempt to find their own riches. And in the   process, he built an incredible business that  remains in existence today, 172 years later.  (37:22) Now, we get back to MarkX. So, the people  at his dinner most likely ignored his comment.   They went allin on the dotcom bubble. And a year  later, many of these people were seeking a new   career or employer as their funds and fortunes had  evaporated. Markx, by contrast, would continue to   compound his investors capital successfully  for many more decades like he's doing today.  (37:43) And Markx did this by investing  in the less obvious deals that everyone   on the street didn't love. And that's really  the lesson in Mark's brilliance. Don't just   ask what will happen, but continue to ask  what will happen after that. Just do that   for a few decades and you're bound to find some  incredible investments with just large margin   of safety and a more than adequate upside. (38:02) So my favorite use case for this   is determining whether I'd be taking too much  risk by buying an investment at a given price.   So purchasing an expensive business means the  business is just priced for perfection. And when   a company is priced that way, it must continue to  meet sky-high expectations. The problem with this   line of thinking is that businesses will stumble. (38:21) You know, regulators will get in the way,   the economy will throw a curveball, or management  will face some sort of crisis. So I like using   second order thinking to determine if a  business's expectations are set correctly.   Poor quality businesses are likely to fail to  meet expectations. High-quality businesses tend   to beat expectations alarmingly regularly. (38:40) I also employ second order thinking   to observe enterprises that don't meet  expectation in the short term but are   likely to improve in the long run. Next,  we encountered two exceptional investors   in Nick Sleep and K Sakaria who founded  the Nomad Investment Partnership. These   two made an investing career out of riding  just three key stocks and doing as little   tinkering as possible while holding them. (39:02) And the lesson here is simple but   not easy to put in practice. And that's to  treat your winners as businesses that you keep,   not ones that you trade in and out of. And these  aren't investments you just look to, you know,   double your money, then run to the next idea.  Sleep and Zakaria spent their entire investing   career looking for a very specific business model. (39:21) These were what was called scale economies   shared. It states that when a business grows,  it passes on its scale benefits to its customers   rather than retaining them for their own use. The  three businesses that they wrote were Berkshire   Hathaway, Costco, and Amazon. Now, I've tried to  grasp whether this is a business template that   appeals to me, and I concluded that I would  never say no to a business model like that,   but I'm also not going to go out of my way  to exclusively search for business models   that fit the scale economy shared model (39:49) that Nomad was obsessed with.   Instead, I search for businesses that I can  ride for hopefully multi-year and maybe even   multi-deade time periods and businesses that  are likely to just increase in intrinsic value   over my holding period. This is what Sleep and  Zakaria were trying to do. They had basically   whittleled down all of their decisions  to these three stocks that I just listed.  (40:12) And the stocks were just so good that  they were able to extend their holding periods   for longer and longer periods of time. And  even since they closed their fund in 2014,   they still hold the vast majority of their net  worth in these three names. But they didn't   reach this conclusion overnight. They invested  in other businesses that even shared the same   business model but didn't quite make the cut. (40:31) There are other companies, you know,   Air Asia, Carpetright, ASOS that were in the  portfolio at one point along with several   other classic value investments trading at a  fraction of liquidation value. But over time,   Sleep and Zakari observed that the businesses  that were at the top of the rung, even within   the ultra specific business model, were the  ones that deserved most of their capital.  (40:52) I enjoy reviewing my top three businesses  and noting if they exhibit any specific   characteristics. So, my top three positions  make up 42% of my portfolio. And to be honest,   they don't really share a business model between  the three. And I'm perfectly fine with that.   So, even though I find Nomad's approach  interesting, it's not the actual business   model that taught me the most significant lesson. (41:11) It's simply to find businesses that you   can ride for extended periods of time and make  sure to hold them as long as they continue to   perform well. And in that sense, yes, I think I'm  doing that pretty well. The three businesses in my   top three generate a significant amount  of cash. And when I think about them,   they do actually share a few similarities. (41:31) So, I came up with five. So the   first one is that they don't pay a regular  dividend. Second, they don't meaningfully   buy back shares. Third, they consistently  invest more and more in growth. Fourth,   they don't allow cash to grow excessively. And  fifth is that their moes are continuing to expand.  (41:50) Now, these are all characteristics  of businesses that can compound value simply   because they can reinvest all of their cash flow  back into their business at high rates of return.   So, while their free cash flow numbers may not  look amazing, I'm actually okay with that because   they're constantly using that cash to reinvest  into their business at very high rates of return.  (42:11) So, this is a business model  that really attracts me the most. While   many value investors are looking for  businesses that are growing, you know,   maybe in the high single digits or low double  digits, they're also accepting that returns are   going to come from things like multiple expansion,  buybacks, or even dividends. I just prefer to not   rely on them as much to give me returns. (42:29) While I love buying businesses on   a cheap multiple, one of the great benefits of  compounders is just the steadiness in which they   can compound capital. So for that reason,  they tend to carry higher multiples and   maintain those higher multiples. As of today,  the forward earnings multiple on my top three   businesses are 29 times, 41 times, and 90 times. (42:47) So the third business which I won't name   with the 90 times multiple is pretty distorted  by the fact that it's growing so rapidly which   penalizes it very significantly under  IFRS due to significant depreciation   and amortization. So the multiple gets  cut significantly when I make a lot of   adjustments but it still is a pretty high ratio. (43:06) So you'll notice that the first four   points mean businesses are just optimized for  growth. They aren't trying to grow a steady   dividend to you know draw in capital. They know  that the best use for capital is to invest in   the businesses that they're already in. The  risk of owning businesses like this relates   purely to just the future and the unknown. (43:26) Once the market no longer believes   that these businesses will grow at high rates,  they will no longer be given a premium multiple.   This is my most significant concern. My  primary maintenance tasks are basically   tracking growth and observing the direction  that things are moving. I learned this the   hard way with Evolution AB, an i gaming business. (43:45) So any business that is expected to grow   but fails to meet the market's expectations is  going to experience a pretty big price drop. The   key is to just try to stay ahead of the market.  Let's suppose that you think a business is in   maybe some sort of structural decline. In that  case, I'd rather exit early, potentially forgoing   profits to avoid the mass exodus that's probably  going to follow once it's well established that   the business is in a structural decline. (44:09) So what Sleep and Zakaria really   nailed was that the businesses that they  chose were just so good that even if they   grew at lower rates, they still maintained  a reasonable valuation because it was just   common knowledge that these businesses had near  impenetrable modes and had high high levels of   customer loyalty. To execute Nomad's strategy  on yourself, you must have active patience.  (44:30) I first learned of active patience from  Ian Cassell, who wrote, "The longer I invest,   the more I realize you get one or two great  opportunities every few years. The rest of the   time is spent wondering if you'll ever get another  great opportunity again and convincing yourself   to own mediocre opportunities while you wait. (44:48) Mediocrity is the price you pay for   impatience." Nomad did an exceptional job  avoiding impatience and practicing active   patience. If you want to learn to improve the  skill of active patience, focus on three areas.   So the first area is developing your temperament.  This is done by managing your emotions and   understanding your default reactions to  things like risk, losses, and volatility.  (45:09) By journaling on your decision-m, you  can build awareness to help anticipate emotional   triggers and respond intelligently rather  than relying on things like impulse. Second,   find your principles. Clear principles provide  a northstar for evaluating opportunities.   Create things like a non-negotiable checklist of  criteria that you just refuse to deviate from.  (45:29) This helps filter incoming ideas to  further help remove mediocrity. And third   is just commit to your principles. Once you know  temperament and principles, the hard work really   comes in. So the hard work is just staying true  to your rules and avoiding the temptation of   good enough. You can try to reduce noise by  doing things such as improving your investing   environment and saying no firmly and often. (45:54) Monish Pabry has evolved as an investor   very similar to Sleep and Zakaria, moving from  cheap cigar butts to businesses that are a   little higher up in quality. But I think it's  important not to only focus on where investors   like Pabry are today, but also to learn lessons  from their experiencing managing smaller sums   of capital. So let's imagine we're in 2012. (46:12) Mish Pabry finds himself in quiet   reflection in the evening scanning financial  news using his usual mild skepticism. But a   specific car company gives him a jolt. In Mon's  mind, the financial press is sharing fears of   the business with headlines such as fiat teeters  on the brink of bankruptcy. Mon gets interested   as he checks the price of fiat and sees it  trading at the very bottom of the bargain bin.  (46:35) But even though it's cheap, how can a  business in just this bad of a financial situation   be saved? His answer comes in the form of Sergio  Marion, the man who had saved the company in the   first place. Moniche begins conducting his due  diligence on the business and his skepticism   slowly fades as he learns more and more. (46:53) Fiat Chrysler has a market cap of   $5 billion but has annual sales of 140 billion  meaning the business was trading at less than   4% of its revenues. Additionally, the company  was still turning a profit and a very good one   at that given its share price. It had $222  in EPS and was trading at a price of around   $4, meaning it had a PE of around two times. (47:13) Now his eyes really began to widen.   But Babry does some more digging. He knows  not to fall for every business with low   singledigit P multiples because many of these  businesses just don't deserve to be held by an   intelligent investor. Many of these businesses  are on life support and aren't worth the hassle   of trying to understand any deeper than that. (47:30) But Fiat Chrysler has an additional   asset that the market is overlooking  and that's Ferrari. At this time,   Ferrari was a subsidiary of Fiat  Chrysler. He decides to deduct 40%   of the 2012 purchase price as a value derived  from Ferrari. And this is how he arrives at a   PE of only one. From there, the rest is history. (47:50) It's not publicly disclosed when he sold,   but within 2 years, Fiat Chrysler was trading  in the teens and low 20s, meaning that it was   a multiagger from that $4 price point, which  he reportedly started buying. My main lesson   here isn't actually that you have to find  businesses that have a PE of one. However,   companies where you as an investor can just  peer into the future often have valuations   that simply do not make any sense. (48:14) Whether that's a PE of 1, 5,   10, or 20, or whatever number you want to use,  there are businesses out there that are just   significantly mispriced. The key here is just  in finding them. They won't appear on things   like traditional screens. And like PBR's research  into fiat, additional adjustments to a business's   financials are required in order to really get a  clear picture of that business's intrinsic value.  (48:37) That's where the opportunity  exists in understanding the value of a   company offers that is being overlooked  by the market. So when examining fiat,   it was apparent to Pabry that the market wasn't  properly valuing the golden goose within Fiat,   specifically in Ferrari. Once a few simple  adjustments were made, the core Fiat Chrysler   business was even cheaper than the market thought. (48:57) So, how can investors use this to their   advantage? You can look at a business as the  sum of its parts. Looking at each segment of   a business individually, valuing each, and  then adding it all together to come up with   a more accurate picture of value. This  is a method that I've used in the past,   but haven't always been very successful with. (49:15) Bosch Health was a business that appeared   cheap on a sum of the parts calculation.  Still, poor management ultimately just   completely derailed the entire hypothesis,  and investors just headed for the exit in   droves once they realized that management was  unlikely to help the market recognize its full   value. This experience left a very bad taste in  my mouth regarding some of the parts investments.  (49:37) As I evolved, the model still made  sense to me, just in a different form. So,   Monich was looking for a business where the future  cash flow of the company provided the margin of   safety. Like I mentioned with the evolution  of Ben Graham's margin of safety principle,   this was a lesson that really helped me  improve my thought process as an investor.  (49:53) Instead of looking at a business as a  sum of their assets, use the future earnings or   cash flow to help you determine what a business  is worth. That would give you a very firm floor   on your downside and a nice upside if the  business had additional growth levers that   it could pull. In this light, if you look far  enough into the future, really any business   growing at a decent rate becomes a PE of one. (50:14) If a business today is trading at a PE   of 30 and growing EPS at 25% then it becomes a  PE of 1 in 15 years. Now I don't trust myself   to assume any business can grow at 10% for 15  years let alone 25%. So instead of using the   number one I like to see what I think the  multiple will be just a few years down the   road based on its current stock price. (50:34) When I look at a business like   Topicus I think it will grow its owner's  earnings by about 30% a year from now.   That means its future price to owner's earnings  drops by about 23% in just a year's time. And if   it continues to grow at that high rate for a  few more years, the multiple will continue to   drop precipitously. And that's my opportunity. (50:52) Since the market won't allow that number   to continue to fall, I make money simply by  owning it and letting my conviction and their   ability to compound their cash keep me as a  shareholder. And as long as I have conviction   that the future cash flow can grow at a given  rate, then I have my low PE stock. So instead of   looking at a business with a PE as just a single  target, I view PE as more of a moving target.  (51:14) And this is how I can justify owning some  of the higher price businesses in my portfolio   that I believe can continue to grow at rates the  market just doesn't expect them to grow at. This   method works exceptionally well in some of the  smaller businesses I own, which can grow their   bottom lines at 30, 50% or even more in a year.  When a company can double its income in a year,   the trailing PE shown to the market isn't an  accurate reflection of what that business is   likely going to be worth in a year's time. (51:40) So, let's say a business will double   its profits in a year, but only has two quarters  of profits. So, its trailing 12-month PE may not   even exist since the earnings from the last two  quarters don't actually cover the losses from   the two preceding them. Therefore, many investors  will examine these businesses just very briefly,   conclude that it's not profitable, and move on. (51:59) However, if you examine the business   more closely and determine that it can sustain  its momentum in sales and high profit margins,   then profits are likely to continue growing  into the future. And if future quarters are   anything like the previous two, then  the business can grow very quickly. So,   let me just use a straightforward example here. (52:16) So, let's take a business,   we'll call it XYZ. It's grown its  revenues at 50% for the last 3 years,   but has only inflected positively in net income  in the previous two quarters. In the last quarter,   they had 1.25 25 million in  profit. The business doesn't   require any dilutive financing or debt. (52:33) The company is valued at about   $10 million today. So, let's assume that they can  continue selling while keeping costs controlled.   And if we annualize the profits, we arrive  at $5 million and the business is trading   at a forward PE of only two. Now, this happens  more regularly than you think. You just have to   be willing to go and look for the opportunity. (52:50) So, finally here we get to Charlie Mer,   the person who may have had the most considerable  impact on me, not only in investing, but in life.   There are so many lessons I've learned from  Charlie, but I've chosen one that I've started   really leaning into more and more lately,  which is to invest in and surround myself   with people who offer win-win outcomes. (53:07) So, I believe this principle is   most effective in personal relationships,  which I'll discuss further shortly. But   it also obviously applies in investing,  and the business that Charlie invested   in that best exemplifies this is Costco. So,  it's hard to find a party that just doesn't   win from being part of the Costco ecosystem. (53:24) The prime parties that come to mind are   customers, suppliers, employees, and investors.  Let's start here with customers. So, what do I   get from shopping at Costco? I get things like the  lowest prices that I'll find on essential items.   I may have to buy larger quantities, but the  pricing is just unmatched by most stores because   they just can't match Costco's buying power. (53:47) Costco has also developed deep trust with   customers due to their exceptional return policy.  I also occasionally enjoy the extra perks such as,   you know, Costco cookies. Next up are suppliers.  So, suppliers gain added stability and reliability   from working with Costco, which is a trusted  long-term partner in the market. If a business   wants to grow and scale, then partnering with  Costco is just a great opportunity as it has   the ability to put your product in front of  many customers and help build your brand.  (54:15) Since Costco has been partnering  with suppliers for such a long time,   they're also very, very reliable. Now, when  we look at employees, employees at Costco   are very well taken care of. Since Costco can buy  their product for cheaper, it allows it to spend   more money elsewhere, such as on its employees. (54:30) This enables them to pay above average   wages and offer great benefits, extending  them to part-time workers as well. They   also do a great job of promoting from within.  As a result, they have lower turnover rates   compared to their competitors and have built a  very solid reputation among employees. Lastly,   we have investors. This is a pretty easy one. (54:49) Since Costco's inception as a private   business in 1985, the stock has returned  nearly 3,800% to shareholders, which is   about a 20% kegger. And the returns just keep  on coming. So, if you look at the last 5 years,   its kegger has been 25%. The business  is resilient through economic cycles   and pays a steady and growing dividend. (55:06) They also have growth opportunities   as they expand their store network. So, as you can  see, Costco is one of those rare businesses that   truly creates win-win outcomes across the board.  That's why Charlie loved it, because it's not just   profitable, it's fair, durable, and trusted by  nearly everyone involved. But here's the thing.  (55:24) While I admire this dynamic in business,  I've actually found that principle is even more   powerful in life. Businesses may come and  go, but the quality of your relationships   determines the quality of your life. And just  like Costco, the best relationships that I've had   are the ones that everyone walks away better off. (55:42) All my best relationships are with people   that I can hopefully try to provide as much value  as possible to, but there's no way I can offer the   right amount of value to everyone, which is why I  think you can only maintain a very limited number   of very highquality relationships. However,  the key is to ensure that the relationships   you do have are mutually beneficial. (55:59) So, what exactly constitutes a   win-win relationship? I think it's reciprocity  that multiplies. Whenever I try to give value,   I often find that I receive it back  multiple times over. A hidden benefit   of win-win relationships is just the  exposure to serendipity. When you have   people in your life who want to provide you  with value, they often surround themselves   with people looking to do the exact same thing. (56:20) And this allows you to tap into their   network, further enhancing the power of win-win  relationships. Then most importantly, I derive   most joy from relationships where I'm just excited  to be around that person rather than dreading it.   Win-win relationships must be nurtured. One  thing I've noticed as I've gotten older and   taken on more and more family responsibilities  is that maintaining relationships is a lot more   difficult than when I had fewer responsibilities. (56:44) Since I have a lot less time, I'd rather   eliminate toxic people from my life as my time  is precious. Now, by focusing my time and effort   on people that really bring me joy, I build a  self-reinforcing cycle of support, generosity, and   opportunity. When it came to toxic people, Charlie  Munger once said, "The great lesson of life is to   get them the hell out of your life and do it fast. (57:07) " And I think that's very key. I've come   to learn that people just tend not to change their  mindsets. If people are stuck in an entitlement or   scarcity mindset, it's very doubtful that I  or anybody else for that matter will change   their minds on that. So toxic people have a  way of offering win-lose relationships where   you put in value and you receive none in return. (57:28) The simple removal of these relationships   is just a massive boost to the quality of your  life. Ultimately, a life curated around these   win-win relationships is just one that's  filled with higher quality interactions,   deeper fulfillment, and significantly  reduced exposure to negativity. And that,   to me, is the essence of the win-win principle. (57:46) Invest deeply in people and relationships   where value flows both ways, and be quick to  cut out all the ones that don't. In investing,   that might look like Costco. In life, it looks  like surrounding yourself with people rooted in   trust, generosity, and abundance. In both  cases, the rewards compound over time,   not only in terms of wealth, but also  in terms of happiness and meaning.  (58:08) That's all I have for you today. Want  to keep the conversation going? Follow me on   Twitter at irrationalmr kts or connect with me  on LinkedIn. Just search for Kyle Grief. I'm   always open to feedback, so feel free to share  how I can make this podcast even better for you.   Thanks for listening and see you next time. My  investing philosophy is that I invest like a   business owner, not a trader or a speculator. (58:34) Every stock that I own in my mind   represents a real ownership and a share of  a business. And I don't take that process   lightly. I try to imagine the people managing my  money are close associates who I know personally.   This can create biases, sure, but my primary  goal is to invest in people I trust and give   them a chance to make improvements  when things inevitably go sideways.