Buffett Playbook: The discussion centers on how Buffett’s style evolved from deep value and control situations to high-ROE brands and disciplined capital allocation at reasonable prices.
Japan Opportunity: The hosts highlight Buffett’s growing stakes in Japanese trading houses, citing corporate governance reforms, focus on book-value accretion, and improved capital allocation in Japan.
Apple (AAPL): Extensive review of why Buffett bought in 2016—dominant ecosystem, heavy buybacks, strong returns on capital, and limited M&A dilution—positioning Apple as a quintessential Buffett compounder.
High-ROE Brands: Companies like American Express (AXP) and Coca-Cola (KO) are praised for brand strength, focused business models, and shareholder-friendly capital return, though valuation discipline remains paramount.
Banks Framework: They detail Buffett’s bank checklist—high return on assets, conservative funding (low loans-to-deposits), and tight expense control—contrasting safer operators with riskier growth models.
Capital Allocation: Emphasis on buying firms improving capital deployment (buybacks/dividends vs. diworsifying M&A) and avoiding complexity where the edge is unclear.
Market Stance: Noting Buffett’s patience (few new buys beyond Japan and selective energy) and willingness to sit in cash/T-bills until expected value is compelling.
Owning vs. Stocks: They discuss pros/cons of owning whole businesses versus public stakes, including exit flexibility and management-change dynamics at Berkshire Hathaway (BRK.B).
Transcript
Welcome, welcome, welcome. How's everybody doing? Hope you are doing well. My name is Andrew with Focus Compounding on Air Live with Jeff Ganon. Jeff, how's it going today? It's going very well, Andrew. How's it going with you? It's going great. We hope it's going great with everybody else as well. If this is the first time you're tuning in with us, thank you so much for joining us. Be sure to check out all of our content that we push out into the investing universe. The best way to do that is to follow me on X at focusedmpound. Uh if you are watching on the screen right now, this is focuscompounding.com. If you want to get access to investment writeups from Jeff going all the way back to 2005, you can click that blog section to get our archive. Um so much information. You could type in a topic on your mind in the search bar right here. click find and you will find a bunch of different writeups that Jeff had uh wrote through the years um and basically be able to get his thoughts on that topic. I guarantee it whatever you are interested in investing wise especially if it has a value investing bent you could type it in and you will find something um related to that topic at our website focuscompounding.com. Be sure to hit the subscribe button too wherever you are listening or watching us here today so you will be updated every time we upload a podcast. So in today's podcast, Jeeoff, I want to talk about uh how to spot a business that Warren Buffett would like and really talk about through the years how Buffett's investing has changed. Um tailor it to perhaps the individuals that aren't investing. What do you think, Jeeoff? think there's some individuals listening that have, you know, over hundred billion dollars to invest. Yeah. You think it's it's probably likely not. So maybe we could, you know, talk through different stages of Buffett's investing and relay it back to the individual. Uh but stick with this Buffett theme as we uh come up to the annual meeting, which of course we will be at. So if you are going to be in Omaha uh the week before, I mean the meeting's May 3rd, which is on a Saturday. If you're going to be there leading up to it that week and you are a um interested investor, like to talk about stocks, uh reach out to me at andrew@focuscompound.com. We'll see if we could set something up on uh the schedule. So, email me andrew focuscompound.com if you are going to be uh at Omaha. So, anyways, yeah, let's just talk through how Buffett uh you know, how he thinks about things. You know, I think now more than ever, Jeff, it's a great time to be talking about these sort of stuff. You know, I don't think this is like the.com uh era where he's at the uh the conference and he's being laughed at by all the the tech wives and all, you know, everybody. Oh, this crazy old man from from Omaha. He's off his rocker, right? And basically my entire life he's been known as the old man. Uh but he just keeps living, so whatever, right? Uh 29. So, but um yeah, let's talk about that. So, you know, just generally, why don't you talk through Buffett's investing style and how it's really changed through the years. And just because Buffett invests a certain way today does not mean that that's the way that everyone listening should invest. There's one subsack I do want to shout out. What is it? Uh, is it dirt? I say I should probably know the name if I'm gonna, you know, shout him out. Uh, is it dirt value stocks? Dirt cheap stocks. Yeah. Yeah. He's a dirt cheap stock is a substack. I know. Yeah. Let's see. Yep, there we go. Dirt cheap stocks. So, great place. Like I think the stuff that he talks about, it's like Buffett 1.0 type of stuff that he focused on. um you know he gives these little tidbits here that link to his substack. So yeah, why don't we just start uh you know from Buffett 1.0 and go through how it's changed and we'll just go from there. So there's this book Buffett's Early Investments and that Brett Gardner is the author and this published in the last year and that one has let's see Marshall Wells, Grief Brothers, Cleveland Worsted Mills, Union Street Railway, Philadelphia and Reading, that's a big one, British Columbia Power, American Express, Studio Baker, Hot Child Cone, and Walt Disney Productions. So several of those are not um uh like netnet type stuff. American Express 1964 is obviously high quality business. Walt Disney Productions 1966 is high quality business. I mean the most high quality in the entertainment industry although at the time it was the cheapest probably. Um Hot Cone and Steu Baker are are third rate in their industry. British Columbia powers an arbitrage. Um, some of them still exist to today, right? So, uh, the Cooper Company that's still around and just different containers now 70ome years later. And then Union Street Railway, that's covered in the snowball a little bit. Philadelphia and Reading is probably the most important one because that gave him the idea for Bergkshire Hathaway to turn into a holding company everything because Philadelphia reading is a Graham Newman controlled company. it they didn't own a lot of it but they controlled it effectively and they did a lot of things to change how the capital was allocated over time. So it's a mix even from the early years of having an importance of business um quality but the really important thing is a low enough cost too. All of those are pretty cheap. I mean an interesting thing to say today is can you invest like Warren Buffett? Uh he's not buying anything. So we can see his filings. He is buying the Japanese net the Japanese um trading companies trading houses. Yeah. Mhm. the other day. Um, which he and you know said in the annual letter that he would buy more of them. Everything else except accidental is probably not a purchase by him. Uh, I mean he could be buying VeraSign or Sirius, but those are less likely. I think those are much more likely not him. Constellation Brands, unless it's going to be some huge purchase over time, that's not him. Pool Corporation, I don't see that being him at all. um and Dominoes, but I also don't see that as likely being him. So, they're either very very small changes or he didn't do them. So, and he has been selling Bank of America still and he was selling Apple. So, he's buying some a small amount when it gets under a certain price um of accidental and that's it right now. So, for the last and he's buying the the Japanese trading companies. That's definitely true. That's a big investment. So today he would be doing nothing you know because we know that he is doing nothing. Um so that's a difficulty for people. I mean how do you do that if you're managing money or something? How do you do that today? I don't know. He left the game once before and I guess he would maybe would have had to do the same thing in the 1990s or today. Um, you know, that's why Bergkshire is a vehicle that he could use continuously and stay in the game all the time instead of if he was managing money or something. But individual investors could do the same thing. I mean, you don't have to buy anything. You can hold treasury bills and things and buy what you want uh over time. You don't have to allocate money every year. Maybe there's some years where you buy no stocks like is kind of the case with him sometimes. Um, so I I think you know the Japanese trading companies for instance are not that different than some of the things in the book about his early investments. I think you would make the same sort of investments then and now. They haven't really changed. Um, the companies that you see at the top of that list, your Apple, your American Express, Coca-Cola, skip the oil companies, you got Moody's, Craft, he did buy Chub, that was almost certainly him. Um, so all those if we do everything from that point up are just too expensive. I mean, he probably like some of his businesses, but they're too expensive, you know? So, there's not a lot of cases. I mean, it depends on the tax rates, but I would say there's not a huge number of cases in his history where he's paid more than probably 10 times or so what he thinks uh pre-tax profits are on a company, which in his early years might be 20 times and then other times like 15 times PE. So he's probably not buying at a P PE adjusted for cash and things like that more than 15 very rarely in his career. Even if you hear that he bought Coke at 18 times or 20 times or whatever, you have to look to see how much it was growing and what kind of the forward number is on that. He paid a really high price for Buffalo Evening News, but he expected to be able to save a bunch of money right away on that. You know, Sees Candies, they expected to raise prices right away. And it wasn't a huge price. It was more in line with what I just said. Um, so the biggest one is, you know, lower pees than than the market has. So that's obviously a problem for today more so than anything else, I think. Not only that, but think of all the the pod shops where they don't care about valuation. They'll just short it because it's going down or or buy it because it's continuing to go up in momentum. It's just so different that way. You know, I even think I I uh that is true about Buffett. He's probably never paid or or not often more than 10 to 12 times pre-tax profit. I remember actually I think he has said that before as well like publicly like on how he thinks about valuation because everyone's always trying to trail everything down everything down to a formula. So I don't know if they asked him that at Omaha or what but I do remember when I started learning about Buffett I I distinctly had that in like my valuation notes on how he thinks about valuation. Yeah. That was like 10 to 12 times operating income or pre-tax income. Yeah. Yeah. He doesn't buy the cheapest possible companies of all, but he only shops in the basically the half that's lower pees normally. There's some exceptions. Coke was not a below market PE or something when he bought it. But around market level PES and below. So even if he buys, you know, what's perceived to be a high quality company, something's going on with it at the time that he buys it that is not at a unusually high PE ratio. Um, and that can happen with a company where it has good past results, but for whatever reason at the moment the PE isn't very high. Um, but no, he he's never done kind of um, so those would be I guess you could call them growth at a reasonable price or whatever type things. So valued boarding on growth at a reasonable price, but he's never really done the Phil Fisher thing of paying up for stocks in terms of their P ratios and things like that. And then he's usually stayed in I mean the big thing is avoiding technology things. Um he has bought as I just mentioned he has bought things in retail and some other things that change over time uh and not always done well. So he has been in some rapidly changing industries that maybe he didn't intend to be in, but he certainly avoided technology things almost exclusively um throughout his career. Why do you think he sticks to certain industries like banking, insurance, consumer, all that sort of stuff? I mean, he still does. I mean, he's done energy. He has done pretty everyone acts like he doesn't do anything that's really um like sexy, but he has he does go into all these different industries. I guess it's just really he's not buying like social media companies and and mag seven, which should probably be changed to bag seven um and and stuff all like that. I don't think he cares that there is a public market for stocks and um in terms of how he evaluates whether he would buy it or not. And then I think he makes all the big big difference between him and everyone else is he makes all of his decisions completely himself. Doesn't rely on other people at all. Occasionally Bergkshire has bought a stock with Buffett doing it that was clearly someone else wanting it. Like they, you know, Charlie and everything really wanted BYD for a while and him to get it. Um he bought a little Costco and Charlie probably wanted to buy a lot of Costco but that was his one uh concession to doing that. So because Costco was too expensive. So I think um that that to me is the biggest one. If you have analysts, if you have if you pay for research services and read a lot of things and rely on that stuff in terms of making your decisions or you're looking at it over a shorter period of time, uh kind of having other aims besides just, you know, objectively trying to buy things that you think are cheap whether they were publicly traded or not. I think those are the two differences. So complete independence of thought that he has and the idea of treating it as if there isn't a market because that's why he talks about Ben Graham things all the time. Um those are very much the basic philosophies of Ben Graham. Although people like to talk about things like the formulas of the netn nets and the different things that's not what he stressed in his teaching so much. Um what he really stressed is complete independence of thought and acting you know the Mr. market um type analogy there of of looking at it as if there isn't a market at all really and he did talk about margin of safety and all that too but those were the really big ones. Um so the simple answer is like for anyone there should be things you don't understand and he feels he doesn't understand technology. Um, other people may say they don't understand banking things or energy things or political things of different countries or whatever, but there's just whole areas of businesses that if you were just buying businesses without being in markets, there's whole things you probably would never invest in. And so there's whole areas that he doesn't invest in. Were there any investments that stood out in the Buffett's early investments book? There's no investments in there that I didn't know about. Um, but the most interesting one is Philadelphia and Reading. Um, but I knew plenty about it because it it is the example for Birkshire Hathaway. And then actually he buys um later in his career he has another experience with it when he buys Fruit of the Loom actually. But um Philadelphia and Reading uh let's see [Music] um okay let's see okay Ben Graham first bought P&R stock at $18 per share from Baltimore and Ohio Railroad. He increased his position in 1954. So that's what we're talking about. So this is near the end of Grim Newman. And um then what happened from that is they decided to change what they were invested in over time and to buy into other companies, acquire them entirely and in some cases entire them acquire them entirely and leave the um uh current manager in place. So um for instance they signed a good example is one of the first ones that they uh it this is basically Fruit of the Loom. It had the Fruit of the Loom license that was producing for it but it wasn't actually Fur of the Loom um like it was the Lency. It's kind of the same story that happened with um Tempropedic or the Tempropedic which is the US company eventually took over the Tempropedic which is who it was licensing from. Same thing with Union Underwear. So, um, when they signed when they bought Union Underwear, they signed a 5-year management contract with the CEO was already in place, and then they gave him a bonus of 10% of the, um, operating profits. Mhm. And so, that idea of buying these companies and leaving people in place, and that had been basically a coal company. So it's just like the Phil deal that we just talked about from the annual lead uh annual letter. Yeah. The way he incentivized them. Yeah. Yeah. So that's what he would do over time in terms of finding different things about capital allocation. I mean the big thing with Buffett, I mean this is really really obvious because of the Burkshire Hathaway thing, but in most of his investments they have a strong capital allocation aspect to them. So a ton of them are industries that have shrunk or consolidated. So, um, Union Street Railway in there is, um, it's a street car company, but it's actually a bus company. Um, because that had shrunk dramatically. That was a boom industry into, I don't know, maybe the 1920s or something, and then it plummeted from there. So, the industry didn't really exist before the 1900 or something, then grew for 25 years, and then plunged down to almost nothing. And that's because as people got cars and everything that got rid of them using uh and to some extent buses that got rid of people using um street cars which you could see in an old movie or something but now you know a trolley business basically. Um and they were really big form of public transportation for a brief period there. Same thing here with like the coal industry because that was a coal that was tied directly to railroads. Um so a lot of these we saw that with whether it was um airlines when he made those investments in airlines or railroads um is you know did the capital allocation rationalized and all of that kind of thing and would it be better going forward but even when it's individual companies KO he you know he bought them when they stopped acquiring things and started buying back stock and doing all of that and so that's very common for his changes into different things is that he expects he expects an increasing return return on capital over time. So, he expects it to get even better than it appears to be, which is something he's talked a lot about with the um Japanese trading companies, right? It's not just that they're cheap and everything, but it's that they're cap allocation. Y changed. So, what was weird about that though, did it already change? like there wasn't really a long-term record of that capital allocation when he bought in which is sort of unusual from how these other companies are. It's ve very very obvious that it changed dramatically and it's Japan like their attitude towards it. Oh, they had extensive things in all their annual reports. all of them do even the smaller ones um uh that go on and on about it and even like a reg from a regulatory perspective if you could recall during that time it it changed as well like they were almost incentivizing or encouraging uh managers to think a certain way about capital allocation. I believe all the companies you invest in have a section uh I think where they would at least say whether they trade below book value and why they trade below why they think they trade below book value and what they're doing to get above book value. Yeah. Which is not done in the United States. So but if every company had to do that that was trading below book value that might improve capital allocation right. So, so some of it is regulatory things and then other ones are just the companies copying each other. So, you know that that's a big thing for that. So, I mean I they have very very extensive annual reports generally as compared to American companies. Not so much in terms of describing the business and giving you actual financial data but more in terms of describing their corporate governance philosophy and a lot of a lot of things about their their board and their management and things like that. So, let's talk about Buffett 1.0. I know uh as it relates to banks and financials. Well, we we'll talk about banks first and then insurance. What do you think he would look for in a bank? Well, he did buy some banks uh when he was both in the partnership years, which has been covered in some places although it's not in that book um because there's not a lot about it. It is covered a little bit in one of his partnership letters and you can find those in places. And then also uh when he bought Illinois National on the Rockford Bank, Rockford Bank. Uh so in each case there's a few interesting things. One, they were good banks. Two, he got a special deal. And what is uh Wait, first off, what does good bank? What does that mean? Like good efficiency uh ratio. Yeah. So I mean I'd have to check, but the Rockford Bank was probably one of the most efficient banks in the country when measured on a return on assets basis, you know. Um, it's covered in capital allocation, the Jacob Mcdana book. It's covered a few other places where you could find it, but that actually has year-by-year financials that would give you return on assets. And certainly in terms of now return on equity might have been fairly normalish in that it was in the low double digits even though return on assets was very very high. But that is an issue. So a bank that grows quickly but has a low return on assets and has a decent return on equity is somewhat more risky sometimes. And so something like um I could pull it up I think. Well actually I don't think I can because it's no longer public company but I was going to say if I could find the history of first republic that was a bank that had only so so return on assets but much faster growth. Here's the we got the history. So through quick it's a point4 PE. Oh yeah. Yeah. Too soon or what? Yeah. That was a wild situation when First Republic failed. That was quick. Happened quick. So it never had a return on assets from 2017. Not fail, but was eventually purchased. But yeah, you know what I mean. Mhm. So it it never it um and this was like the compound bro's favorite stock by the way, First Republic. Yeah. Well, I think we and many others do business with them, right? Uh, yes we did. We did. We don't. We did. Yeah. So, I mean Yeah. I mean I I think I don't know but I mean I think that helps Interactive Brokers as a stock or something too, you know, and and other things things that people are familiar with as opposed to ones that they don't know anything about. But yeah. Yeah. Like they have the firsthand experience of being a customer. Yeah. Mhm. So they they probably on a return on assets basis or something had like the exact same kinds of numbers as Frost, which we've talked about before. Um yeah, pretty much. Uh and yet, you know, loans to deposits for them were generally twice as high, right? So Frost was going at 4550% and they were going at 9500% or more. And they're growing twice as fast. So I mean, if things get better, it works out for you eventually, I guess. But what I meant is the efficiency um was very high in terms of the um return on the assets. Um in their case, Illinois National, it was like you said, an expense-based thing. They're very good at controlling expenses and then they were pretty conservative in terms of what they were um what they held. Uh and then you know as is talked about in that book and I think Buffett mentioned before in like some annual meeting or something you know there there was a law that was in effect in Illinois at the time which meant that they really could only have one location in the state. So they weren't able to just merge them and to have um banks across states but not just even that but have a bank that kind of um had many different branches across the state. So, it was a matter of having a lot of deposits per that one branch and being very, very frugal. Um, and then just not making bad loans. But as long as you made, you know, I mean, because it was a bank, it made loans, but honestly, if it had just owned any sort of interest yielding thing, um, that, you know, that they hadn't selected badly, they just had a kind of normal um, experience in it compared to everybody else. they would have done great because their cost of capital was below other people's because of how um how cheap it was uh for them to gather the deposits on like an exp operating expense basis, you know, and so there's I I think the snowball talks about that or certainly I think Charlie Mer talks about that that you know um that he did not want a hightouch service kind of bank and everything. He wanted to keep expenses as low as possible, have as few employees relative to customers and everything as possible and really get costs down and then he could, you know, make more money while paying the same or higher for people's savings. Um so, uh it wasn't a super fast growing bank actually if you look at it even while Bergkshire owned it and it didn't have it had high but not you know impossibly high returns on equity but it had some of the highest returns on assets in the country. Um and and then when I said that he had bought into something in a in a situation with a um bank and the partnership years, that's a similar thing in that there's a large owner of the bank and the bank didn't pay dividends initially and so he he had reasons to think that the stock might be undervalued, but that if he looked at it as an entire business, it looked cheap. I mean, that's what's common to all of Buffett's things. I mean, he likes good management, good cap allocation, but he's willing to buy on any sort of valuation basis. Um, so he likes it cheap, but he'll sometimes buy things that are um earning nothing. Berkshire Hathaway was earning nothing. Um, the uh uh street railway that I mentioned was earning basically nothing. Um, but in those cases they are super cheap compared to assets. Like they could be liquidated probably for close to what they were selling for initially. So, yep. So, there you go. That's another one. Um, now that was a bit of a problem because a lot of it was in inventory. So, then, you know, he had uh Harry Bottle get involved with that that to have to turn that around and that came close to going under for that reason because the company kept getting more and more and more inventory. But whereas in Bergkshire Hathway he more quickly once he was able to get control had someone or I should say Dempster Mel there's a period where he was influencing but not really controlling and I think they hired someone that he wasn't wild about and then they didn't enforce things as hard as he wanted whereas in the case of Bergkshire with um Ken Chase there um I think that they you can see that they quickly brought down inventory and stuff really really fast. uh in the first couple years he was at Bergkshire, even though profits weren't amazing or something, cost uh I mean revenues weren't amazing, what they did with costs were good and then what they did with with cash was even better. So they slashed um some expenses and they really slashed like working capital that they didn't need out of the business. Um so turned things to cash. So kind of what you can get out of a net if you have control or something. Um, so that's the other thing I think that that's a huge difference between Buffett like 1.0 or whatever we're talking about and 2.0 uh that people don't appreciate is that he's trying to do the same thing. He it's always been about get something cheap but good and a good manager and then have the right capital allocation. When he was younger, the easiest way to achieve that laws were a little bit different. he was working with less capital and he was just willing to put up with a lot uh was to go activist on these things, take control of them and then to do it himself and that's the most effective way because then he controls it and everything and that's the cheapest because we've talked about that before with other companies. People ask why is this company traded this or whatever and you say well there's someone incompetent there and they control enough to block smart things being done. That's the most common reason why like a micro cap that is actually pretty good business consistently trades at not a good price today would be there's something in place that stops someone from being an activist in it and the capitalization isn't that great. Just stopping someone from being activist is not a problem. I mean if they're doing a good job then it doesn't add anything to the value of the stock that people think there will be activism in it. it's only in cases where there's no chance for activism and the people running it are the cap allocation is poor and things like that. So he always had the same sort of strategy that way. But then he became middle-aged and decided I never want to do a dumpster mill again. I never want to be hated by the whole town, you know. Mhm. And he didn't want to have to pull out his wallet and look at pictures of his kids during the board meeting because he was so angry. Yeah, that was the same board map. Yep. Yep. What were they? Smoking cigars. They So they they owned almost no stock in that one and he was hoping for them to, you know, to to um basically do a big buyback or to distribute the the cash that they were sitting on basically the investments that they were. So that's a pretty famous one. Sort map D. Those are not in the Buffett's um earliest investments uh early investments. Um so I think that's more the big change than people realize. I think it's a change in terms of personality and I think it's for durability because he would he did quit the business. So it's just like he's not going to keep doing this forever. So to be able to stay investing for all that time he changed. Um he's never said that that was kind of optimal in terms of getting the best returns. But it was optimizing for longevity because no one else stays in that long. You know, you can have the approach of um well, take like Phil Fischer versus um Peter Lynch. The the Peter Lynch approach of owning a million stocks and meeting with every management and doing everything you can and being aware of everything and putting in all the hours and doing all that. Great. But he didn't last that much longer than a decade doing that. And then he was like, I have to stop. If you have a portfolio of half a dozen stocks or something more along the the Phil Fischer approach and know each one really deeply, then maybe you could do that for decades and decades. And with Buffett, if you just give up on things that are hostile investments and things like that, then you can last longer that way. Um, so I think that's that I actually think that what he's aiming for has stayed remarkably the same. Um, it's just what he's been willing to do to achieve that has changed. And then the size, the opportunity side. Yeah. And that's changed mostly because of size, but also I think somewhat because of changes in um investing, mainly private equity for him. He's become a major competitor. So we hit on I mean capital allocation, the way he thinks about that. What about growth? How do you think he thinks about growth? Doesn't care. Yeah, that's his big advantage because the focus on the cap allocation because growth is I don't want to say growth is never undervalued in the market. There's probably times where it is, but um but what's what I mean what is growth like define it. I mean if it's growing at GDP, do you consider that growth? Yeah. Yeah. But I mean some of the he doesn't care if it shrinks. I mean that's the point about if you have if you take over a company if you have that kind of but then it becomes much more of a capital allocation story. I mean it always is but if it's shrinking you need to be pulling things and moving things reinvesting things right returning it to shareholders doing stuff that's different. Yeah. Otherwise the profitability will decline if you just focus on the return on capital and everything. If you put more capital into a business and doesn't grow then the profitability will decline. And on the other side, if you um if you don't add capital and yet profits go up, then your profitability increases and profitability ratios. We just went over uh the other week um when we talked about the letter what he kind of talked about. I was saying almost as if they're permanent holdings. They all have really high returns on equity and really high returns on capital. Um I mean, I looked at lots of things about does growth as a strategy work and eh probably not. I mean the the issue is here growth has two aspects to it. One is asset growth which is pretty negatively associated with returns and then profitability which is pretty positively associated. So obviously if you have a good business you want it to grow. If you have a bad business you want it to shrink and so growth as a strategy is a little difficult that way. I think everything that's growth captures normally in terms of people's returns and investors who say they're growth investors are really profitability investors. Now, they might be profitability quality investors in terms of future quality. That is, it's not showing up in terms of profits today, but the customer economics are so good that I know that it will later, but you're betting on it being a high quality business. There's no such thing as like growth, and I love businesses that grow really fast, but aren't great businesses. We just talked about First Republic. That was a very average for a bank business that was growing faster than most banks, right? So, it had the same profitability as Frost and yet it had higher, you know, it was pushing the capital harder, but also it was growing twice as fast as as Frost or something at that time. Yeah, we could compare the two. So, 10-year Kager earning assets 20% return on equity 10.3. Look at Frost. Yeah, I mean, look at the difference there. 10-year Kager earning assets 6.4. the return equity was better 12%. Yeah. So, if we look at um what have we talked about before? Let's see. [Music] Um I mean, look, if you look at a company like um over the counter markets, right? Or Copart or I don't know, there's a lot of other ones. Uh you know, um Copart, it's been a while. Yeah. So Cobalt's a little bit harder because there's a physical aspect to it and everything but it's not a big part of it. So it doesn't matter. Um growth there is really good but growth there is really good to a large extent because return on capital is really high. So one return on equity is very high which is the thing that really matters you know to the owners what matters is the return on equity nothing else. So if a bank or insurance company or whatever is in theory super leveraged but has a really high return on equity that's okay. If a real estate company's that's okay. you would just have to know that you could continue to achieve that and you kind of have to know the industry and all that to know if that's going to be the case. But what matters and Buffett's always said that he said he likes businesses that earn a high return on equity without unusual leverage or you know undue leverage he said at times. So that's the number that really matters and if that number is high then growth you know is good. Um if the average return in the stock market is let's say 10% a year historically or something then as long as you have a return on equity that's sustainable um that is say 11% or higher then growing is good but otherwise growing isn't necessarily good and companies often not not always but sometimes companies shrink and then grow and sometimes companies pivot from doing one thing to doing another and a lot of times s that's where they become affordable. And so many of the cases that is in the early investments and that you can just see from what Buffett has done is cases where there's some sort of change around the business that has to do with that. Um where there's a fear that growth will slow down, but he doesn't think profitability will slow down. They'll start paying out or something like that instead or they'll start doing other things. um or there's a lot of fear about growth, but it proves that that isn't the difference between a um how do I put this like um so as an example he had two investments in there in the ear Buffett's early investments book and in that one is a coupage which is a it makes containers for shipping basically what those containers were changed over time um so it's a barrel maker originally And then there's different kinds of barrels, but it went into different things from there cuz that's what it is for. And um there's fear about growth in that case. And then something like um Hot Cone, which was a uh department store in Baltimore, there's concerns about growth there, too. Um the difference is that one of those which you bought in a big way the the department store did not do well and it's because of competition and that's a profitability issue. So a couple things happened. One big cities decline versus um suburbs. Two, the company had three other competitors right in the middle of of Baltimore there. And then also Baltimore as a city declined in importance um in desiraability for people to come into the city to to shop and do other things. So um you know that was just a competitive issue and that is more important to him than other things. I mean when he sells something it's often he doesn't like the capital allocation risk profile whatever of that he sees management doing or he sees a change in the competitive situation. I don't see a lot of situations where he just sees a change in like growth as being his reasoning for doing that. Mhm. Did you see uh reports this week that he's selling their real estate business to Compass? What's that all about? He I mean because we were just actually talking last week how he doesn't really sell anything. He just kind of just put won't put more capital into it and just kind of let it run off or whatever. Right. So I thought that was kind of that was kind of weird, right? Unusual that way. Yeah, it would be one of the first cases where he sold something um an entire business. Uh I haven't seen confirmation that they're doing that. I also don't know what the relationship is there and with um the energy company and everything where that's housed and all that but because part of the real estate business was originally um part of a larger business um but that they actually bought something else after that so I'm not sure um some things have changed in the brokerage business over time um but you know that was actually a couple years ago so or yeah a couple years ago. I don't you know I don't know how many of the decisions that are being made now are made by him and how many are made by others right so we might see more of that but that is very unusual to sell an entire company if that's really what he's doing although I guess it would just be combining it with another very large um company but that's also like I said I mean I think I saw the same articles you have but that's you know was several days ago and not confirmed a different things so but yeah he hasn't done that and that obviously has hurt Bergkshire's returns over time, the abil, you know, you don't have any ability to exit things. Um, so that's another thing with the like 1.0 versus 2.0 we were talking about is that, you know, I think we we did talk about this with the letter, but I noticed that he went on and on much more about how buying entire businesses gives you some advantages, but some disadvantages versus owning a stock. And so that was interesting that you don't have to own things forever. That sometimes that's a mistake, you know. Yeah. Yeah, he did highlight that. Yeah. And one and I think one reason is psychological which he kind of laid out which is it's very easy to deal with a management change because with a stock he just sells the stock when he doesn't like the management but it's hard for him to make a management change when he owns the company. Now other owners of businesses think that that's one of the advantages. They get to change the management but he's very reluctant to do that. Do you think that'll change when Greg is CEO? from like an operator standpoint be much more willing to cut bait or do you think that culture will continue? Um, yeah, I think he probably will and I think people will be they'll be more likely to quit and everything too and leave and go to other places too. Um, you know, I don't know how much of an advantage it is after the first person that you bought from leaves. I think it's advantage. I mean, he's often buying from a founder. Not always, but often. And until recently with really big companies, he was that was pretty common. Um, you know, I don't know that there's huge advantages to like having a second generation person or whoever was picked as the successor stay in place. And that has happened with Bergkshire because he's owned some things for so long, Buffett, that they've gone through a few. Um, I mean, we know he has change management a few times in some things, but it doesn't seem like it's very common. Mhm. Mhm. How do you think about how do you think he thinks about like the competitive position then? Right. He's that's the thing he's most worried about in companies is probably competition. Um so when we talk about like shrinking industries or industries that are are in decline um well if an industry is in decline, there's probably not a lot of competition, right? It's not like Nvidia or uh AI where there's every company in the world competing for that market share. It's like a land grab and spend as much capital as possible, right? Mhm. So, how do you think he thinks about that? I think that's the biggest reason why he doesn't own technology things. He said that before where people say like, "You don't understand it. What do you mean? You don't understand if people consume it. You don't understand if um how it works." And no, he means he doesn't understand the future economics of it. I mean that that um talk that Alice Schroeder did about um the tab card company was a really good one for understanding that in terms of when he did not invest and then later when he would invest in it. Do you want to lay that out refresh that in people's brains? Yeah. So they're coming so there's there's some complexity with this but there are some things with IBM where um basically uh the company's making punch cards basically which are like um for they were consumable that went into computers computers here are making calculations of things that aren't things that personal computers and stuff like that and so they're literally making calculations but they used this and um they needed in high volume produced and then also So there's an issue of the location, how quickly you can get to them and everything. So um he was worried at first that they'd be put out of business by IBM figured that they put them out of business right away. And then within a year or so, it literally was only just about a year of seeing their financials, he realized how high their returns on capital were and how willing people were to buy from them instead of from IBM. Um and so then he was willing to put in money and it actually turned out to be an incredible investment over time. Um very very small investment though, but a huge part of that was the turnover in terms of how high sales were versus the capital in it because they basically just needed like a card press. Um I don't remember what the equipment's called, but um which you know and and then you had a tiny tiny amount of inventory probably um and just putting these things out and sending them out to their clients. Um so and you had a huge installed base that they had nothing to do with, right? So, you know, um, and so he was willing to invest in that. And I think Apple's the same sort of situation. Probably looked at Apple a lot and then you can see at what point did he decide to invest in Apple where he decided, I'm not worried about the technology stuff. I'm willing to invest in it now. And it's not crazy because when um, let's see. Okay. So, he's actually ironically one of the best tech investors ever. Well, in terms of how much dollars he made. Yeah.$100. on a dollar for-dollar basis for sure. Okay. So, he first bought a stake in Apple. You know, the AI here tells me in the first quarter 2016. Maybe that's true. Maybe it's not. Is that Gemini? Did you Google it? Uh I just did it through a browser. That's that's none of those things. Um that anyone's heard of. I don't know who they're using. So um uh that is 9 years uh a little less than 9 years from when the iPhone was first released, right? His iPhone would have been like 2007 or something. So and it wasn't I mean I'm sure they sold a lot, but it wasn't obvious that it had huge market share until a couple years later. We could see find like Blackberry's market share and whatever things of other whatever pass for a smartphone at the time plunging and them going up. That probably took two three years. So it had complete dominance for you know I don't know seven years or something um when he bought in and in tech things that seems like oh that's so so slow whereas you know with Coke you could buy in you know be an early investor and it decades and decades into it but I don't know at what point did you know I mean a few things had to happen one we know Steve Jobs talked to him so Steve Jobs had to die because of the cap allocation right and then he had to be sure that Apple was really um uh dominant in terms of the iPhone basically. Yeah, because Steve talked about what he should do with all the cash. Yep. Yeah. So, those are kind of the two things. And then the price had to be kind of okay. And the price was I believe we could look this up and um well, it only goes back to 2016 now. I was going to say you could look I mean that you can look back further on quickfests but actually it had been there was a couple years where it was quite reasonably priced on a PE it was coming down and pretty good price for a few years there you had like a threeyear or so period at least of having a below market PE in Apple even though it was still growing and everything at the time um although it was going to slow down a lot I guess. Yeah. He bought actually at a time when it really slowed down right it actually that was like a terrible year for them. Yeah. Yeah. So, yeah. Um, but in terms of we can see things like margin that stayed stable, but things like return on capital actually got better while he owned it probably. Um, yeah, it did. Mhm. So, he bought actually at pretty much the bottoming out of the return on capital, maybe one year ahead of it bottoming out. Yeah. So, great timing, right? So he timed it to have one of the lowest possible pees that the stock would have and to have one of the lowest possible returns on um capital at the time too. I mean was that something that just happened or is that something that you thought you think he thinks or he thought would happen like with return on capital improving? Um yeah well what's interesting is so Apple's a really really good example of something that Buffett would buy. I think what's really attracted to him is Apple almost never makes meaningful acquisitions. Um it's like a cultural thing. We'll see if they ever change that up. But because of that, he could have a lot more faith that as they piled up a lot of cash and everything, they were going to um have to uh do what he wanted basically in terms of what the returns would come from. So, if we look, they've bought since he got involved, shares outstanding have declined what, 5% a year, 7%, 3%. 3%'s the lowest, 7%'s the highest. Um, and then they've also paid a dividend. But more importantly than that, like the stock uh the number of shares outstanding going down, yeah, that's important, but we shouldn't just look at a corporate basis. The other thing is they've really really not expanded that much beyond the iPhone franchise. Like they make a lot more from services and all that, but it's all connected to his exposure to profits from that same ecosystem of that Apple name there is just gotten bigger and bigger every single year and that's where most of the money has gone and then some has gone to pay dividends, right? But otherwise, whereas he was in some other businesses where even if they bought back stock, that wasn't always true because they expanded into other things and sometimes they diluted to buy other things and that was a big problem when he was in some consumer products ones. Um, you know, Bergkshire ended up with Duracell and different things happened with Gillette, but you know, and then Gillette merged with PNG, but um, you know, I I don't think he wanted Gillette to to own Duracol probably. I don't think he wanted what was it? Um, what did Coke buy? There would have been a few different ones. I guess there was a Let's see. Um, was it one of the was it Gatorade acquisition? probably he was a KO shareholder when that happened. Probably. Um so, you know, they just get away from the main brand that way. As much as he likes Coke, you know, Coke has expanded to all sorts of different things um related to their core brand as their core brands declined that way. Um instead of just buying back all their stock and everything the way that Apple has. So, you know, he his I mean, we can look on uh what his I mean, he it's actually it's really easy to look um if we go to Data Roma and look at his biggest investments. The thing that stands out to me is these are not necessarily the biggest companies in the world that he owns stock in. He would have to own because they're really big, but these are some of the biggest brands in the world. Apple is not just a big company of big tech companies. It is most dependent on a single brand. American Express is very dependent on a single brand. Um Coca-Cola, Moody's, it's one business basically. You know, Craft Hinds is a couple businesses, but those are really where we end the Buffett investments probably. you know, I mean, he owns some things down below, but you know, that's because he's either selling them or he didn't get as much as he wanted or whatever. But when we look at the things that are $10 billion and up, they're also really really they're high return businesses that are really dependent on one thing and not widely diversified usually. so he can understand the competitive situation and like what their returns will be if they return either to him or they invest more in that dominant brand. [Music] Um that's why the capital allocation thing is so important in the different stories that are told in books like that one the early investments book because you can see when he gets involved and what direction they're headed in from then and that's true with all I mean American Express was going through change the he invested in a few different times but uh the if we go back 30 some years when he invested most of what you see in that stock now um they were going through changes in a direction he liked getting rid of other things focusing in on the American stress brand. Coke was doing kind of similar things in terms of taking, you know, buying back stock and not diversifying. Um, you know, Moody's was a spin-off actually. He got as a spin-off. Um, because it was originally part of Dun and Bradstre. So yeah, it's more of like a pure play, which is much easier from like a when you're underwriting or thinking about it, the competitive position, what the business could look like. It's much easier to understand if it is a pure play that way. Yeah. And I think that's one reason. I mean, they said, you know, Charlie and and Warren had both said that they should have invested in Google, that they knew about its advertising strength from buying things for Geico. But I think that's a big reason why they didn't invest in Google Alphabet and probably a big reason they didn't invest in Amazon. Um, Amazon's alo retail thing, but that they, you know, did so many other things and it's hard to evaluate whether those things will be successful or not. So he likes very singly focused businesses um where he can understand the the math and everything pretty simply. Um I mean he puts a very high priority on being able to do everything in his head without it writing anything down and having a high degree of confidence in it. I would say you know in terms of when we compare him to other investors. So that means forming opinions about things like Apple and American Express and stuff and not you know Nvidia or not some of the others. Even when you ask about things like oil companies, he just talks about the price of oil and the cap allocation like so if he thinks the price of oil is going up over time and he likes their cap allocation and then they're cheap compared to like what they own. He doesn't talk a lot about you know getting into complex analysis of them. Mhm. Um, we've always talked about that. I was like, do you think he goes into a complex analysis like that? Do you think it's different where he's not writing a blog or a Substack or putting out investor presentations, you know? Yeah, I think that's kind of a big advantage that he has. Um, if you're inactive enough, if you're pretty active, I think it can help to blog or to write things up or whatever. But in general, I think that, you know, when I've written things up, I try to do it a little differently that way. But it's not good to try to kind of pitch your investment. Um, for a few reasons. One of the biggest one is you spend an incredible amount of time on things that don't really matter that much to show, oh yes, I know about that and everything. Oh, yes, I know about the carbon capture at the whatever place. Is that really going to matter? You know, he probably puts an expectancy, you know, um, on it. That's how I think it he kind of value expectancy and all sorts of things and it's like well could this work out? Yes. What's the chance that doesn't work out? What's the chance that you know it um actually like loses money some of these things, you know, that's part of it. When anyone does a write up, they they always say, you know, it's a lottery ticket. They say, "Well, let's just put it at zero and it's a lottery ticket for whatever." But a lot of times it doesn't work out that way. Like if you own six different money losing internet things on the side, it's true that one of them could take off and that'll be great. But in many cases, you pump in additional money into them to lose a bit over time. And so it's even worse than that. On projects that are more like, you know, engineering type things or or things like I mentioned, carbon capture or something, people always say, "Oh, it's a you know, um like let's put a value of zero to whatever on it." But the first time that someone does something with the technology, they often lose an incredible amount of money. So like the first person to try, the first company to try to put in this new boiler to do this thing at this plant, I mean, it probably will not be good. Um, but they'll figure out how to make it, you know, successful in further technologies, you know. Um, I mean I I guess my point with that is just like I think he does an analysis that way, but it's very easy to be like, "Oh, he should have seen Apple early or something, but he has to see Apple, but not falsely see Blackberry or something like that." And that may be harder than people think without hindsight on it. Like yes, at some point you could see that with Apple, but when is that point? Is it really immediately or is it a few years down the road? You know, I mean, go back to BlackBerry and how hard that would have been. Honestly, it's like the saying that they have massive market share. It's enterprise, right? So corporate, they have their own niche that way. And then the iPhone comes out and even at that point, I mean, I remember when the iPhone came out, everyone's like, "What? Who would want a touchscreen? What's the point of all of that?" Blah blah blah. People were still against it. and then just completely plummet. Completely plummet basically like what within a year. Read that book losing the signal or whatever. Yeah. Yeah. Yeah. And if that's the kind of thing with the magic formula when people ask does the magic formula work or something. I mean the magic formula is like Buffett without judgment that way though. So it catches both Apple and and Blackberry and you know I mean Boba talked about in the letter though your winners do more than make up for that if you're willing to hold. So if you get into good businesses at least if you get into ultra cheap businesses like incredibly below liquidation businesses or really great businesses if some of those are in the mix and then you hold on to everything you can afford to have some losses in other things because you get many times your return in the things that you keep as long as you keep them long enough. you're not like saying I'm going to sell everything when it goes up 20%. Um, but yeah, that's that's true. The median return in like we've talked about nets or something. The median return in nets is like a market type return or something, but the return is higher because if as long as people will hold some of them for a little while, they're so cheap they go up so much. It's the exact same idea with great businesses. Um, if you just bought a sampling of everything out there and held it forever, then obviously that's not going to work the same way. But as long as he buys things like apple and coke and all those and then things that are much smaller. So you have a seized candy that pays for a lot of things, you know. Um and then at Bergkshire they starve the other things for capital which is the other part of it. So you don't recycle it. So that's kind of you know a really big thing there. He's very good at that. He's um does not sell his winners and then buy more of the losers. Yeah, that's true. He definitely does not. Yeah. No. and and he does it in the businesses he owns just because that's easy to do. The winners will grow and then the losers they just don't let grow because they're not earning enough return on capital and everything. And then in his own portfolio, he does that mainly by, you know, long-term holding things and so not just selling something because he gets bored and wants to buy something cheaper or whatever. So he's selling a winner to buy a loser. But in both parts, he's very good at that as compared to most investors. Yeah. So I mean I think yeah, he would buy smaller companies. People always ask that and think, "Oh, is that really not true or whatever?" But he's always he's always said that and said the things about how you could earn high returns and things. Um I mean the other thing is he does follow the you know um book I would recommend is a man for all markets. he follows the Ed Thorp kind of approach of um he only invests in things where he has an edge, you know, and so that's true of the early Buffett, that's true of later where he, you know, he he just doesn't do anything where he goes, "Oh, well, I'll just, you know, I'll do this to diversify or I'll do this to have that." He doesn't look at it at portfolio thing at all that way. He's not buying oil for any other reason than he thinks oil companies have. he expects them to do better than your average business for each individual investment that he makes and then by doing that he kind of thinks it will work out whereas most other people are trying to do something else you know so yeah so man for all markets fortunes formula other things about the Kelly formula Kelly criterion one of the key takeaways for investors I think is not so much I mean bet sizing is important Buffett buys bets big when he has an advantage but the other key thing is to really, you know, um the difference between that and a lot of finance theory stuff is do not invest in anything where you don't have an edge. Um so, you know, the bet itself is on expected value basis not more attractive than other things that you could do. Let's put it that way. So, um and a lot of investing is doing things where that's not the case. I mean, it's, you know, saying, "Okay, I'll be underweight certain stocks that are in my benchmark or something." Okay. But part you're now making a a small bet, but part of your bet is a small bet that has nothing to do with edge. It has nothing to do with what you expect the value to be or something. It's just setting aside part of your portfolio to do that. So, people are doing that to diversify. They're doing that for all sorts of other things. And it's kind of like buying insurance on different things or tamping down on it's using money capital that you have access to to not put it to its best use. Whereas Buffett's always directing it to where do I have the highest, you know, mathematically where do I want to put it and not thinking about anything else. I don't think he's ever thought about like diversification for instance in terms of like um diversification in terms of I need to own a few things because of risk. Yes. But not diversification in terms of um I should own some oil or I should own some Japanese things or something. Not like taking a barbell approach. Yeah. No. Mhm. So I mean and that and he's in the insurance business and that's you know natural way of thinking about that. I mean, he said that in things like annual meetings straight flat out where he said, "Look, we we'll make any bet where we think that were we to get a hundred chances to do the same thing, on average, we would make money on it, you know, and we'll reject anything where that's the case, too." So I think there's I forget what one is from but there there was some annual meeting where he literally says something like look if you give us a coin that pays 7 to5 you know we might bet a couple percent of Bergkshire's net worth on that you know um because we have an advantage and it's not a risk to you know you're not risking the company whenever you're doing that but most people wouldn't say oh I can bet hundreds of millions of dollars or a billion dollars something on a coin flip where I have a slight edge you know, but you don't get that very much is his point. Like it's not very often that you have a fair coin flip with that happening. So I just think the main things that he has that the problem that I have with most things is it's not very mathematical. We did talk about one which is like well we talked about high return on capital but the other one we talked about was um like let's call it EV to EBIT or PE or whatever. he does pay a low price versus earnings. But the other stuff I just think is higher return on capital over time is what he expects, you know. Um, and then the problem is how to apply it today. I don't know because he's not buying anything today. And I think there's other factors for that with his age and stuff, but I think the market's big factor with that. Got it. Cool. Well, I want to thank everybody so much for tuning in with the both of us on the Focus Compounding Podcast. If you're going to be in Omaha for the Bergkshire meeting, uh, reach out to me, Andrewfocusedcounting.com. Make sure you hit the subscribe button wherever you are watching or listening to us here today. You'll be notified, um, whenever we upload a podcast. Eight years strong, Jeff. Crazy. Um, crazy, crazy. Um, and of course, if you're interested in learning about our money management services, you can reach out to me at andrew focuscompound.com. I want to thank everybody so much for all the support and we will see you in the next podcast.
Warren Buffett’s Playbook: Past and Present
Summary
Transcript
Welcome, welcome, welcome. How's everybody doing? Hope you are doing well. My name is Andrew with Focus Compounding on Air Live with Jeff Ganon. Jeff, how's it going today? It's going very well, Andrew. How's it going with you? It's going great. We hope it's going great with everybody else as well. If this is the first time you're tuning in with us, thank you so much for joining us. Be sure to check out all of our content that we push out into the investing universe. The best way to do that is to follow me on X at focusedmpound. Uh if you are watching on the screen right now, this is focuscompounding.com. If you want to get access to investment writeups from Jeff going all the way back to 2005, you can click that blog section to get our archive. Um so much information. You could type in a topic on your mind in the search bar right here. click find and you will find a bunch of different writeups that Jeff had uh wrote through the years um and basically be able to get his thoughts on that topic. I guarantee it whatever you are interested in investing wise especially if it has a value investing bent you could type it in and you will find something um related to that topic at our website focuscompounding.com. Be sure to hit the subscribe button too wherever you are listening or watching us here today so you will be updated every time we upload a podcast. So in today's podcast, Jeeoff, I want to talk about uh how to spot a business that Warren Buffett would like and really talk about through the years how Buffett's investing has changed. Um tailor it to perhaps the individuals that aren't investing. What do you think, Jeeoff? think there's some individuals listening that have, you know, over hundred billion dollars to invest. Yeah. You think it's it's probably likely not. So maybe we could, you know, talk through different stages of Buffett's investing and relay it back to the individual. Uh but stick with this Buffett theme as we uh come up to the annual meeting, which of course we will be at. So if you are going to be in Omaha uh the week before, I mean the meeting's May 3rd, which is on a Saturday. If you're going to be there leading up to it that week and you are a um interested investor, like to talk about stocks, uh reach out to me at andrew@focuscompound.com. We'll see if we could set something up on uh the schedule. So, email me andrew focuscompound.com if you are going to be uh at Omaha. So, anyways, yeah, let's just talk through how Buffett uh you know, how he thinks about things. You know, I think now more than ever, Jeff, it's a great time to be talking about these sort of stuff. You know, I don't think this is like the.com uh era where he's at the uh the conference and he's being laughed at by all the the tech wives and all, you know, everybody. Oh, this crazy old man from from Omaha. He's off his rocker, right? And basically my entire life he's been known as the old man. Uh but he just keeps living, so whatever, right? Uh 29. So, but um yeah, let's talk about that. So, you know, just generally, why don't you talk through Buffett's investing style and how it's really changed through the years. And just because Buffett invests a certain way today does not mean that that's the way that everyone listening should invest. There's one subsack I do want to shout out. What is it? Uh, is it dirt? I say I should probably know the name if I'm gonna, you know, shout him out. Uh, is it dirt value stocks? Dirt cheap stocks. Yeah. Yeah. He's a dirt cheap stock is a substack. I know. Yeah. Let's see. Yep, there we go. Dirt cheap stocks. So, great place. Like I think the stuff that he talks about, it's like Buffett 1.0 type of stuff that he focused on. um you know he gives these little tidbits here that link to his substack. So yeah, why don't we just start uh you know from Buffett 1.0 and go through how it's changed and we'll just go from there. So there's this book Buffett's Early Investments and that Brett Gardner is the author and this published in the last year and that one has let's see Marshall Wells, Grief Brothers, Cleveland Worsted Mills, Union Street Railway, Philadelphia and Reading, that's a big one, British Columbia Power, American Express, Studio Baker, Hot Child Cone, and Walt Disney Productions. So several of those are not um uh like netnet type stuff. American Express 1964 is obviously high quality business. Walt Disney Productions 1966 is high quality business. I mean the most high quality in the entertainment industry although at the time it was the cheapest probably. Um Hot Cone and Steu Baker are are third rate in their industry. British Columbia powers an arbitrage. Um, some of them still exist to today, right? So, uh, the Cooper Company that's still around and just different containers now 70ome years later. And then Union Street Railway, that's covered in the snowball a little bit. Philadelphia and Reading is probably the most important one because that gave him the idea for Bergkshire Hathaway to turn into a holding company everything because Philadelphia reading is a Graham Newman controlled company. it they didn't own a lot of it but they controlled it effectively and they did a lot of things to change how the capital was allocated over time. So it's a mix even from the early years of having an importance of business um quality but the really important thing is a low enough cost too. All of those are pretty cheap. I mean an interesting thing to say today is can you invest like Warren Buffett? Uh he's not buying anything. So we can see his filings. He is buying the Japanese net the Japanese um trading companies trading houses. Yeah. Mhm. the other day. Um, which he and you know said in the annual letter that he would buy more of them. Everything else except accidental is probably not a purchase by him. Uh, I mean he could be buying VeraSign or Sirius, but those are less likely. I think those are much more likely not him. Constellation Brands, unless it's going to be some huge purchase over time, that's not him. Pool Corporation, I don't see that being him at all. um and Dominoes, but I also don't see that as likely being him. So, they're either very very small changes or he didn't do them. So, and he has been selling Bank of America still and he was selling Apple. So, he's buying some a small amount when it gets under a certain price um of accidental and that's it right now. So, for the last and he's buying the the Japanese trading companies. That's definitely true. That's a big investment. So today he would be doing nothing you know because we know that he is doing nothing. Um so that's a difficulty for people. I mean how do you do that if you're managing money or something? How do you do that today? I don't know. He left the game once before and I guess he would maybe would have had to do the same thing in the 1990s or today. Um, you know, that's why Bergkshire is a vehicle that he could use continuously and stay in the game all the time instead of if he was managing money or something. But individual investors could do the same thing. I mean, you don't have to buy anything. You can hold treasury bills and things and buy what you want uh over time. You don't have to allocate money every year. Maybe there's some years where you buy no stocks like is kind of the case with him sometimes. Um, so I I think you know the Japanese trading companies for instance are not that different than some of the things in the book about his early investments. I think you would make the same sort of investments then and now. They haven't really changed. Um, the companies that you see at the top of that list, your Apple, your American Express, Coca-Cola, skip the oil companies, you got Moody's, Craft, he did buy Chub, that was almost certainly him. Um, so all those if we do everything from that point up are just too expensive. I mean, he probably like some of his businesses, but they're too expensive, you know? So, there's not a lot of cases. I mean, it depends on the tax rates, but I would say there's not a huge number of cases in his history where he's paid more than probably 10 times or so what he thinks uh pre-tax profits are on a company, which in his early years might be 20 times and then other times like 15 times PE. So he's probably not buying at a P PE adjusted for cash and things like that more than 15 very rarely in his career. Even if you hear that he bought Coke at 18 times or 20 times or whatever, you have to look to see how much it was growing and what kind of the forward number is on that. He paid a really high price for Buffalo Evening News, but he expected to be able to save a bunch of money right away on that. You know, Sees Candies, they expected to raise prices right away. And it wasn't a huge price. It was more in line with what I just said. Um, so the biggest one is, you know, lower pees than than the market has. So that's obviously a problem for today more so than anything else, I think. Not only that, but think of all the the pod shops where they don't care about valuation. They'll just short it because it's going down or or buy it because it's continuing to go up in momentum. It's just so different that way. You know, I even think I I uh that is true about Buffett. He's probably never paid or or not often more than 10 to 12 times pre-tax profit. I remember actually I think he has said that before as well like publicly like on how he thinks about valuation because everyone's always trying to trail everything down everything down to a formula. So I don't know if they asked him that at Omaha or what but I do remember when I started learning about Buffett I I distinctly had that in like my valuation notes on how he thinks about valuation. Yeah. That was like 10 to 12 times operating income or pre-tax income. Yeah. Yeah. He doesn't buy the cheapest possible companies of all, but he only shops in the basically the half that's lower pees normally. There's some exceptions. Coke was not a below market PE or something when he bought it. But around market level PES and below. So even if he buys, you know, what's perceived to be a high quality company, something's going on with it at the time that he buys it that is not at a unusually high PE ratio. Um, and that can happen with a company where it has good past results, but for whatever reason at the moment the PE isn't very high. Um, but no, he he's never done kind of um, so those would be I guess you could call them growth at a reasonable price or whatever type things. So valued boarding on growth at a reasonable price, but he's never really done the Phil Fisher thing of paying up for stocks in terms of their P ratios and things like that. And then he's usually stayed in I mean the big thing is avoiding technology things. Um he has bought as I just mentioned he has bought things in retail and some other things that change over time uh and not always done well. So he has been in some rapidly changing industries that maybe he didn't intend to be in, but he certainly avoided technology things almost exclusively um throughout his career. Why do you think he sticks to certain industries like banking, insurance, consumer, all that sort of stuff? I mean, he still does. I mean, he's done energy. He has done pretty everyone acts like he doesn't do anything that's really um like sexy, but he has he does go into all these different industries. I guess it's just really he's not buying like social media companies and and mag seven, which should probably be changed to bag seven um and and stuff all like that. I don't think he cares that there is a public market for stocks and um in terms of how he evaluates whether he would buy it or not. And then I think he makes all the big big difference between him and everyone else is he makes all of his decisions completely himself. Doesn't rely on other people at all. Occasionally Bergkshire has bought a stock with Buffett doing it that was clearly someone else wanting it. Like they, you know, Charlie and everything really wanted BYD for a while and him to get it. Um he bought a little Costco and Charlie probably wanted to buy a lot of Costco but that was his one uh concession to doing that. So because Costco was too expensive. So I think um that that to me is the biggest one. If you have analysts, if you have if you pay for research services and read a lot of things and rely on that stuff in terms of making your decisions or you're looking at it over a shorter period of time, uh kind of having other aims besides just, you know, objectively trying to buy things that you think are cheap whether they were publicly traded or not. I think those are the two differences. So complete independence of thought that he has and the idea of treating it as if there isn't a market because that's why he talks about Ben Graham things all the time. Um those are very much the basic philosophies of Ben Graham. Although people like to talk about things like the formulas of the netn nets and the different things that's not what he stressed in his teaching so much. Um what he really stressed is complete independence of thought and acting you know the Mr. market um type analogy there of of looking at it as if there isn't a market at all really and he did talk about margin of safety and all that too but those were the really big ones. Um so the simple answer is like for anyone there should be things you don't understand and he feels he doesn't understand technology. Um, other people may say they don't understand banking things or energy things or political things of different countries or whatever, but there's just whole areas of businesses that if you were just buying businesses without being in markets, there's whole things you probably would never invest in. And so there's whole areas that he doesn't invest in. Were there any investments that stood out in the Buffett's early investments book? There's no investments in there that I didn't know about. Um, but the most interesting one is Philadelphia and Reading. Um, but I knew plenty about it because it it is the example for Birkshire Hathaway. And then actually he buys um later in his career he has another experience with it when he buys Fruit of the Loom actually. But um Philadelphia and Reading uh let's see [Music] um okay let's see okay Ben Graham first bought P&R stock at $18 per share from Baltimore and Ohio Railroad. He increased his position in 1954. So that's what we're talking about. So this is near the end of Grim Newman. And um then what happened from that is they decided to change what they were invested in over time and to buy into other companies, acquire them entirely and in some cases entire them acquire them entirely and leave the um uh current manager in place. So um for instance they signed a good example is one of the first ones that they uh it this is basically Fruit of the Loom. It had the Fruit of the Loom license that was producing for it but it wasn't actually Fur of the Loom um like it was the Lency. It's kind of the same story that happened with um Tempropedic or the Tempropedic which is the US company eventually took over the Tempropedic which is who it was licensing from. Same thing with Union Underwear. So, um, when they signed when they bought Union Underwear, they signed a 5-year management contract with the CEO was already in place, and then they gave him a bonus of 10% of the, um, operating profits. Mhm. And so, that idea of buying these companies and leaving people in place, and that had been basically a coal company. So it's just like the Phil deal that we just talked about from the annual lead uh annual letter. Yeah. The way he incentivized them. Yeah. Yeah. So that's what he would do over time in terms of finding different things about capital allocation. I mean the big thing with Buffett, I mean this is really really obvious because of the Burkshire Hathaway thing, but in most of his investments they have a strong capital allocation aspect to them. So a ton of them are industries that have shrunk or consolidated. So, um, Union Street Railway in there is, um, it's a street car company, but it's actually a bus company. Um, because that had shrunk dramatically. That was a boom industry into, I don't know, maybe the 1920s or something, and then it plummeted from there. So, the industry didn't really exist before the 1900 or something, then grew for 25 years, and then plunged down to almost nothing. And that's because as people got cars and everything that got rid of them using uh and to some extent buses that got rid of people using um street cars which you could see in an old movie or something but now you know a trolley business basically. Um and they were really big form of public transportation for a brief period there. Same thing here with like the coal industry because that was a coal that was tied directly to railroads. Um so a lot of these we saw that with whether it was um airlines when he made those investments in airlines or railroads um is you know did the capital allocation rationalized and all of that kind of thing and would it be better going forward but even when it's individual companies KO he you know he bought them when they stopped acquiring things and started buying back stock and doing all of that and so that's very common for his changes into different things is that he expects he expects an increasing return return on capital over time. So, he expects it to get even better than it appears to be, which is something he's talked a lot about with the um Japanese trading companies, right? It's not just that they're cheap and everything, but it's that they're cap allocation. Y changed. So, what was weird about that though, did it already change? like there wasn't really a long-term record of that capital allocation when he bought in which is sort of unusual from how these other companies are. It's ve very very obvious that it changed dramatically and it's Japan like their attitude towards it. Oh, they had extensive things in all their annual reports. all of them do even the smaller ones um uh that go on and on about it and even like a reg from a regulatory perspective if you could recall during that time it it changed as well like they were almost incentivizing or encouraging uh managers to think a certain way about capital allocation. I believe all the companies you invest in have a section uh I think where they would at least say whether they trade below book value and why they trade below why they think they trade below book value and what they're doing to get above book value. Yeah. Which is not done in the United States. So but if every company had to do that that was trading below book value that might improve capital allocation right. So, so some of it is regulatory things and then other ones are just the companies copying each other. So, you know that that's a big thing for that. So, I mean I they have very very extensive annual reports generally as compared to American companies. Not so much in terms of describing the business and giving you actual financial data but more in terms of describing their corporate governance philosophy and a lot of a lot of things about their their board and their management and things like that. So, let's talk about Buffett 1.0. I know uh as it relates to banks and financials. Well, we we'll talk about banks first and then insurance. What do you think he would look for in a bank? Well, he did buy some banks uh when he was both in the partnership years, which has been covered in some places although it's not in that book um because there's not a lot about it. It is covered a little bit in one of his partnership letters and you can find those in places. And then also uh when he bought Illinois National on the Rockford Bank, Rockford Bank. Uh so in each case there's a few interesting things. One, they were good banks. Two, he got a special deal. And what is uh Wait, first off, what does good bank? What does that mean? Like good efficiency uh ratio. Yeah. So I mean I'd have to check, but the Rockford Bank was probably one of the most efficient banks in the country when measured on a return on assets basis, you know. Um, it's covered in capital allocation, the Jacob Mcdana book. It's covered a few other places where you could find it, but that actually has year-by-year financials that would give you return on assets. And certainly in terms of now return on equity might have been fairly normalish in that it was in the low double digits even though return on assets was very very high. But that is an issue. So a bank that grows quickly but has a low return on assets and has a decent return on equity is somewhat more risky sometimes. And so something like um I could pull it up I think. Well actually I don't think I can because it's no longer public company but I was going to say if I could find the history of first republic that was a bank that had only so so return on assets but much faster growth. Here's the we got the history. So through quick it's a point4 PE. Oh yeah. Yeah. Too soon or what? Yeah. That was a wild situation when First Republic failed. That was quick. Happened quick. So it never had a return on assets from 2017. Not fail, but was eventually purchased. But yeah, you know what I mean. Mhm. So it it never it um and this was like the compound bro's favorite stock by the way, First Republic. Yeah. Well, I think we and many others do business with them, right? Uh, yes we did. We did. We don't. We did. Yeah. So, I mean Yeah. I mean I I think I don't know but I mean I think that helps Interactive Brokers as a stock or something too, you know, and and other things things that people are familiar with as opposed to ones that they don't know anything about. But yeah. Yeah. Like they have the firsthand experience of being a customer. Yeah. Mhm. So they they probably on a return on assets basis or something had like the exact same kinds of numbers as Frost, which we've talked about before. Um yeah, pretty much. Uh and yet, you know, loans to deposits for them were generally twice as high, right? So Frost was going at 4550% and they were going at 9500% or more. And they're growing twice as fast. So I mean, if things get better, it works out for you eventually, I guess. But what I meant is the efficiency um was very high in terms of the um return on the assets. Um in their case, Illinois National, it was like you said, an expense-based thing. They're very good at controlling expenses and then they were pretty conservative in terms of what they were um what they held. Uh and then you know as is talked about in that book and I think Buffett mentioned before in like some annual meeting or something you know there there was a law that was in effect in Illinois at the time which meant that they really could only have one location in the state. So they weren't able to just merge them and to have um banks across states but not just even that but have a bank that kind of um had many different branches across the state. So, it was a matter of having a lot of deposits per that one branch and being very, very frugal. Um, and then just not making bad loans. But as long as you made, you know, I mean, because it was a bank, it made loans, but honestly, if it had just owned any sort of interest yielding thing, um, that, you know, that they hadn't selected badly, they just had a kind of normal um, experience in it compared to everybody else. they would have done great because their cost of capital was below other people's because of how um how cheap it was uh for them to gather the deposits on like an exp operating expense basis, you know, and so there's I I think the snowball talks about that or certainly I think Charlie Mer talks about that that you know um that he did not want a hightouch service kind of bank and everything. He wanted to keep expenses as low as possible, have as few employees relative to customers and everything as possible and really get costs down and then he could, you know, make more money while paying the same or higher for people's savings. Um so, uh it wasn't a super fast growing bank actually if you look at it even while Bergkshire owned it and it didn't have it had high but not you know impossibly high returns on equity but it had some of the highest returns on assets in the country. Um and and then when I said that he had bought into something in a in a situation with a um bank and the partnership years, that's a similar thing in that there's a large owner of the bank and the bank didn't pay dividends initially and so he he had reasons to think that the stock might be undervalued, but that if he looked at it as an entire business, it looked cheap. I mean, that's what's common to all of Buffett's things. I mean, he likes good management, good cap allocation, but he's willing to buy on any sort of valuation basis. Um, so he likes it cheap, but he'll sometimes buy things that are um earning nothing. Berkshire Hathaway was earning nothing. Um, the uh uh street railway that I mentioned was earning basically nothing. Um, but in those cases they are super cheap compared to assets. Like they could be liquidated probably for close to what they were selling for initially. So, yep. So, there you go. That's another one. Um, now that was a bit of a problem because a lot of it was in inventory. So, then, you know, he had uh Harry Bottle get involved with that that to have to turn that around and that came close to going under for that reason because the company kept getting more and more and more inventory. But whereas in Bergkshire Hathway he more quickly once he was able to get control had someone or I should say Dempster Mel there's a period where he was influencing but not really controlling and I think they hired someone that he wasn't wild about and then they didn't enforce things as hard as he wanted whereas in the case of Bergkshire with um Ken Chase there um I think that they you can see that they quickly brought down inventory and stuff really really fast. uh in the first couple years he was at Bergkshire, even though profits weren't amazing or something, cost uh I mean revenues weren't amazing, what they did with costs were good and then what they did with with cash was even better. So they slashed um some expenses and they really slashed like working capital that they didn't need out of the business. Um so turned things to cash. So kind of what you can get out of a net if you have control or something. Um, so that's the other thing I think that that's a huge difference between Buffett like 1.0 or whatever we're talking about and 2.0 uh that people don't appreciate is that he's trying to do the same thing. He it's always been about get something cheap but good and a good manager and then have the right capital allocation. When he was younger, the easiest way to achieve that laws were a little bit different. he was working with less capital and he was just willing to put up with a lot uh was to go activist on these things, take control of them and then to do it himself and that's the most effective way because then he controls it and everything and that's the cheapest because we've talked about that before with other companies. People ask why is this company traded this or whatever and you say well there's someone incompetent there and they control enough to block smart things being done. That's the most common reason why like a micro cap that is actually pretty good business consistently trades at not a good price today would be there's something in place that stops someone from being an activist in it and the capitalization isn't that great. Just stopping someone from being activist is not a problem. I mean if they're doing a good job then it doesn't add anything to the value of the stock that people think there will be activism in it. it's only in cases where there's no chance for activism and the people running it are the cap allocation is poor and things like that. So he always had the same sort of strategy that way. But then he became middle-aged and decided I never want to do a dumpster mill again. I never want to be hated by the whole town, you know. Mhm. And he didn't want to have to pull out his wallet and look at pictures of his kids during the board meeting because he was so angry. Yeah, that was the same board map. Yep. Yep. What were they? Smoking cigars. They So they they owned almost no stock in that one and he was hoping for them to, you know, to to um basically do a big buyback or to distribute the the cash that they were sitting on basically the investments that they were. So that's a pretty famous one. Sort map D. Those are not in the Buffett's um earliest investments uh early investments. Um so I think that's more the big change than people realize. I think it's a change in terms of personality and I think it's for durability because he would he did quit the business. So it's just like he's not going to keep doing this forever. So to be able to stay investing for all that time he changed. Um he's never said that that was kind of optimal in terms of getting the best returns. But it was optimizing for longevity because no one else stays in that long. You know, you can have the approach of um well, take like Phil Fischer versus um Peter Lynch. The the Peter Lynch approach of owning a million stocks and meeting with every management and doing everything you can and being aware of everything and putting in all the hours and doing all that. Great. But he didn't last that much longer than a decade doing that. And then he was like, I have to stop. If you have a portfolio of half a dozen stocks or something more along the the Phil Fischer approach and know each one really deeply, then maybe you could do that for decades and decades. And with Buffett, if you just give up on things that are hostile investments and things like that, then you can last longer that way. Um, so I think that's that I actually think that what he's aiming for has stayed remarkably the same. Um, it's just what he's been willing to do to achieve that has changed. And then the size, the opportunity side. Yeah. And that's changed mostly because of size, but also I think somewhat because of changes in um investing, mainly private equity for him. He's become a major competitor. So we hit on I mean capital allocation, the way he thinks about that. What about growth? How do you think he thinks about growth? Doesn't care. Yeah, that's his big advantage because the focus on the cap allocation because growth is I don't want to say growth is never undervalued in the market. There's probably times where it is, but um but what's what I mean what is growth like define it. I mean if it's growing at GDP, do you consider that growth? Yeah. Yeah. But I mean some of the he doesn't care if it shrinks. I mean that's the point about if you have if you take over a company if you have that kind of but then it becomes much more of a capital allocation story. I mean it always is but if it's shrinking you need to be pulling things and moving things reinvesting things right returning it to shareholders doing stuff that's different. Yeah. Otherwise the profitability will decline if you just focus on the return on capital and everything. If you put more capital into a business and doesn't grow then the profitability will decline. And on the other side, if you um if you don't add capital and yet profits go up, then your profitability increases and profitability ratios. We just went over uh the other week um when we talked about the letter what he kind of talked about. I was saying almost as if they're permanent holdings. They all have really high returns on equity and really high returns on capital. Um I mean, I looked at lots of things about does growth as a strategy work and eh probably not. I mean the the issue is here growth has two aspects to it. One is asset growth which is pretty negatively associated with returns and then profitability which is pretty positively associated. So obviously if you have a good business you want it to grow. If you have a bad business you want it to shrink and so growth as a strategy is a little difficult that way. I think everything that's growth captures normally in terms of people's returns and investors who say they're growth investors are really profitability investors. Now, they might be profitability quality investors in terms of future quality. That is, it's not showing up in terms of profits today, but the customer economics are so good that I know that it will later, but you're betting on it being a high quality business. There's no such thing as like growth, and I love businesses that grow really fast, but aren't great businesses. We just talked about First Republic. That was a very average for a bank business that was growing faster than most banks, right? So, it had the same profitability as Frost and yet it had higher, you know, it was pushing the capital harder, but also it was growing twice as fast as as Frost or something at that time. Yeah, we could compare the two. So, 10-year Kager earning assets 20% return on equity 10.3. Look at Frost. Yeah, I mean, look at the difference there. 10-year Kager earning assets 6.4. the return equity was better 12%. Yeah. So, if we look at um what have we talked about before? Let's see. [Music] Um I mean, look, if you look at a company like um over the counter markets, right? Or Copart or I don't know, there's a lot of other ones. Uh you know, um Copart, it's been a while. Yeah. So Cobalt's a little bit harder because there's a physical aspect to it and everything but it's not a big part of it. So it doesn't matter. Um growth there is really good but growth there is really good to a large extent because return on capital is really high. So one return on equity is very high which is the thing that really matters you know to the owners what matters is the return on equity nothing else. So if a bank or insurance company or whatever is in theory super leveraged but has a really high return on equity that's okay. If a real estate company's that's okay. you would just have to know that you could continue to achieve that and you kind of have to know the industry and all that to know if that's going to be the case. But what matters and Buffett's always said that he said he likes businesses that earn a high return on equity without unusual leverage or you know undue leverage he said at times. So that's the number that really matters and if that number is high then growth you know is good. Um if the average return in the stock market is let's say 10% a year historically or something then as long as you have a return on equity that's sustainable um that is say 11% or higher then growing is good but otherwise growing isn't necessarily good and companies often not not always but sometimes companies shrink and then grow and sometimes companies pivot from doing one thing to doing another and a lot of times s that's where they become affordable. And so many of the cases that is in the early investments and that you can just see from what Buffett has done is cases where there's some sort of change around the business that has to do with that. Um where there's a fear that growth will slow down, but he doesn't think profitability will slow down. They'll start paying out or something like that instead or they'll start doing other things. um or there's a lot of fear about growth, but it proves that that isn't the difference between a um how do I put this like um so as an example he had two investments in there in the ear Buffett's early investments book and in that one is a coupage which is a it makes containers for shipping basically what those containers were changed over time um so it's a barrel maker originally And then there's different kinds of barrels, but it went into different things from there cuz that's what it is for. And um there's fear about growth in that case. And then something like um Hot Cone, which was a uh department store in Baltimore, there's concerns about growth there, too. Um the difference is that one of those which you bought in a big way the the department store did not do well and it's because of competition and that's a profitability issue. So a couple things happened. One big cities decline versus um suburbs. Two, the company had three other competitors right in the middle of of Baltimore there. And then also Baltimore as a city declined in importance um in desiraability for people to come into the city to to shop and do other things. So um you know that was just a competitive issue and that is more important to him than other things. I mean when he sells something it's often he doesn't like the capital allocation risk profile whatever of that he sees management doing or he sees a change in the competitive situation. I don't see a lot of situations where he just sees a change in like growth as being his reasoning for doing that. Mhm. Did you see uh reports this week that he's selling their real estate business to Compass? What's that all about? He I mean because we were just actually talking last week how he doesn't really sell anything. He just kind of just put won't put more capital into it and just kind of let it run off or whatever. Right. So I thought that was kind of that was kind of weird, right? Unusual that way. Yeah, it would be one of the first cases where he sold something um an entire business. Uh I haven't seen confirmation that they're doing that. I also don't know what the relationship is there and with um the energy company and everything where that's housed and all that but because part of the real estate business was originally um part of a larger business um but that they actually bought something else after that so I'm not sure um some things have changed in the brokerage business over time um but you know that was actually a couple years ago so or yeah a couple years ago. I don't you know I don't know how many of the decisions that are being made now are made by him and how many are made by others right so we might see more of that but that is very unusual to sell an entire company if that's really what he's doing although I guess it would just be combining it with another very large um company but that's also like I said I mean I think I saw the same articles you have but that's you know was several days ago and not confirmed a different things so but yeah he hasn't done that and that obviously has hurt Bergkshire's returns over time, the abil, you know, you don't have any ability to exit things. Um, so that's another thing with the like 1.0 versus 2.0 we were talking about is that, you know, I think we we did talk about this with the letter, but I noticed that he went on and on much more about how buying entire businesses gives you some advantages, but some disadvantages versus owning a stock. And so that was interesting that you don't have to own things forever. That sometimes that's a mistake, you know. Yeah. Yeah, he did highlight that. Yeah. And one and I think one reason is psychological which he kind of laid out which is it's very easy to deal with a management change because with a stock he just sells the stock when he doesn't like the management but it's hard for him to make a management change when he owns the company. Now other owners of businesses think that that's one of the advantages. They get to change the management but he's very reluctant to do that. Do you think that'll change when Greg is CEO? from like an operator standpoint be much more willing to cut bait or do you think that culture will continue? Um, yeah, I think he probably will and I think people will be they'll be more likely to quit and everything too and leave and go to other places too. Um, you know, I don't know how much of an advantage it is after the first person that you bought from leaves. I think it's advantage. I mean, he's often buying from a founder. Not always, but often. And until recently with really big companies, he was that was pretty common. Um, you know, I don't know that there's huge advantages to like having a second generation person or whoever was picked as the successor stay in place. And that has happened with Bergkshire because he's owned some things for so long, Buffett, that they've gone through a few. Um, I mean, we know he has change management a few times in some things, but it doesn't seem like it's very common. Mhm. Mhm. How do you think about how do you think he thinks about like the competitive position then? Right. He's that's the thing he's most worried about in companies is probably competition. Um so when we talk about like shrinking industries or industries that are are in decline um well if an industry is in decline, there's probably not a lot of competition, right? It's not like Nvidia or uh AI where there's every company in the world competing for that market share. It's like a land grab and spend as much capital as possible, right? Mhm. So, how do you think he thinks about that? I think that's the biggest reason why he doesn't own technology things. He said that before where people say like, "You don't understand it. What do you mean? You don't understand if people consume it. You don't understand if um how it works." And no, he means he doesn't understand the future economics of it. I mean that that um talk that Alice Schroeder did about um the tab card company was a really good one for understanding that in terms of when he did not invest and then later when he would invest in it. Do you want to lay that out refresh that in people's brains? Yeah. So they're coming so there's there's some complexity with this but there are some things with IBM where um basically uh the company's making punch cards basically which are like um for they were consumable that went into computers computers here are making calculations of things that aren't things that personal computers and stuff like that and so they're literally making calculations but they used this and um they needed in high volume produced and then also So there's an issue of the location, how quickly you can get to them and everything. So um he was worried at first that they'd be put out of business by IBM figured that they put them out of business right away. And then within a year or so, it literally was only just about a year of seeing their financials, he realized how high their returns on capital were and how willing people were to buy from them instead of from IBM. Um and so then he was willing to put in money and it actually turned out to be an incredible investment over time. Um very very small investment though, but a huge part of that was the turnover in terms of how high sales were versus the capital in it because they basically just needed like a card press. Um I don't remember what the equipment's called, but um which you know and and then you had a tiny tiny amount of inventory probably um and just putting these things out and sending them out to their clients. Um so and you had a huge installed base that they had nothing to do with, right? So, you know, um, and so he was willing to invest in that. And I think Apple's the same sort of situation. Probably looked at Apple a lot and then you can see at what point did he decide to invest in Apple where he decided, I'm not worried about the technology stuff. I'm willing to invest in it now. And it's not crazy because when um, let's see. Okay. So, he's actually ironically one of the best tech investors ever. Well, in terms of how much dollars he made. Yeah.$100. on a dollar for-dollar basis for sure. Okay. So, he first bought a stake in Apple. You know, the AI here tells me in the first quarter 2016. Maybe that's true. Maybe it's not. Is that Gemini? Did you Google it? Uh I just did it through a browser. That's that's none of those things. Um that anyone's heard of. I don't know who they're using. So um uh that is 9 years uh a little less than 9 years from when the iPhone was first released, right? His iPhone would have been like 2007 or something. So and it wasn't I mean I'm sure they sold a lot, but it wasn't obvious that it had huge market share until a couple years later. We could see find like Blackberry's market share and whatever things of other whatever pass for a smartphone at the time plunging and them going up. That probably took two three years. So it had complete dominance for you know I don't know seven years or something um when he bought in and in tech things that seems like oh that's so so slow whereas you know with Coke you could buy in you know be an early investor and it decades and decades into it but I don't know at what point did you know I mean a few things had to happen one we know Steve Jobs talked to him so Steve Jobs had to die because of the cap allocation right and then he had to be sure that Apple was really um uh dominant in terms of the iPhone basically. Yeah, because Steve talked about what he should do with all the cash. Yep. Yeah. So, those are kind of the two things. And then the price had to be kind of okay. And the price was I believe we could look this up and um well, it only goes back to 2016 now. I was going to say you could look I mean that you can look back further on quickfests but actually it had been there was a couple years where it was quite reasonably priced on a PE it was coming down and pretty good price for a few years there you had like a threeyear or so period at least of having a below market PE in Apple even though it was still growing and everything at the time um although it was going to slow down a lot I guess. Yeah. He bought actually at a time when it really slowed down right it actually that was like a terrible year for them. Yeah. Yeah. So, yeah. Um, but in terms of we can see things like margin that stayed stable, but things like return on capital actually got better while he owned it probably. Um, yeah, it did. Mhm. So, he bought actually at pretty much the bottoming out of the return on capital, maybe one year ahead of it bottoming out. Yeah. So, great timing, right? So he timed it to have one of the lowest possible pees that the stock would have and to have one of the lowest possible returns on um capital at the time too. I mean was that something that just happened or is that something that you thought you think he thinks or he thought would happen like with return on capital improving? Um yeah well what's interesting is so Apple's a really really good example of something that Buffett would buy. I think what's really attracted to him is Apple almost never makes meaningful acquisitions. Um it's like a cultural thing. We'll see if they ever change that up. But because of that, he could have a lot more faith that as they piled up a lot of cash and everything, they were going to um have to uh do what he wanted basically in terms of what the returns would come from. So, if we look, they've bought since he got involved, shares outstanding have declined what, 5% a year, 7%, 3%. 3%'s the lowest, 7%'s the highest. Um, and then they've also paid a dividend. But more importantly than that, like the stock uh the number of shares outstanding going down, yeah, that's important, but we shouldn't just look at a corporate basis. The other thing is they've really really not expanded that much beyond the iPhone franchise. Like they make a lot more from services and all that, but it's all connected to his exposure to profits from that same ecosystem of that Apple name there is just gotten bigger and bigger every single year and that's where most of the money has gone and then some has gone to pay dividends, right? But otherwise, whereas he was in some other businesses where even if they bought back stock, that wasn't always true because they expanded into other things and sometimes they diluted to buy other things and that was a big problem when he was in some consumer products ones. Um, you know, Bergkshire ended up with Duracell and different things happened with Gillette, but you know, and then Gillette merged with PNG, but um, you know, I I don't think he wanted Gillette to to own Duracol probably. I don't think he wanted what was it? Um, what did Coke buy? There would have been a few different ones. I guess there was a Let's see. Um, was it one of the was it Gatorade acquisition? probably he was a KO shareholder when that happened. Probably. Um so, you know, they just get away from the main brand that way. As much as he likes Coke, you know, Coke has expanded to all sorts of different things um related to their core brand as their core brands declined that way. Um instead of just buying back all their stock and everything the way that Apple has. So, you know, he his I mean, we can look on uh what his I mean, he it's actually it's really easy to look um if we go to Data Roma and look at his biggest investments. The thing that stands out to me is these are not necessarily the biggest companies in the world that he owns stock in. He would have to own because they're really big, but these are some of the biggest brands in the world. Apple is not just a big company of big tech companies. It is most dependent on a single brand. American Express is very dependent on a single brand. Um Coca-Cola, Moody's, it's one business basically. You know, Craft Hinds is a couple businesses, but those are really where we end the Buffett investments probably. you know, I mean, he owns some things down below, but you know, that's because he's either selling them or he didn't get as much as he wanted or whatever. But when we look at the things that are $10 billion and up, they're also really really they're high return businesses that are really dependent on one thing and not widely diversified usually. so he can understand the competitive situation and like what their returns will be if they return either to him or they invest more in that dominant brand. [Music] Um that's why the capital allocation thing is so important in the different stories that are told in books like that one the early investments book because you can see when he gets involved and what direction they're headed in from then and that's true with all I mean American Express was going through change the he invested in a few different times but uh the if we go back 30 some years when he invested most of what you see in that stock now um they were going through changes in a direction he liked getting rid of other things focusing in on the American stress brand. Coke was doing kind of similar things in terms of taking, you know, buying back stock and not diversifying. Um, you know, Moody's was a spin-off actually. He got as a spin-off. Um, because it was originally part of Dun and Bradstre. So yeah, it's more of like a pure play, which is much easier from like a when you're underwriting or thinking about it, the competitive position, what the business could look like. It's much easier to understand if it is a pure play that way. Yeah. And I think that's one reason. I mean, they said, you know, Charlie and and Warren had both said that they should have invested in Google, that they knew about its advertising strength from buying things for Geico. But I think that's a big reason why they didn't invest in Google Alphabet and probably a big reason they didn't invest in Amazon. Um, Amazon's alo retail thing, but that they, you know, did so many other things and it's hard to evaluate whether those things will be successful or not. So he likes very singly focused businesses um where he can understand the the math and everything pretty simply. Um I mean he puts a very high priority on being able to do everything in his head without it writing anything down and having a high degree of confidence in it. I would say you know in terms of when we compare him to other investors. So that means forming opinions about things like Apple and American Express and stuff and not you know Nvidia or not some of the others. Even when you ask about things like oil companies, he just talks about the price of oil and the cap allocation like so if he thinks the price of oil is going up over time and he likes their cap allocation and then they're cheap compared to like what they own. He doesn't talk a lot about you know getting into complex analysis of them. Mhm. Um, we've always talked about that. I was like, do you think he goes into a complex analysis like that? Do you think it's different where he's not writing a blog or a Substack or putting out investor presentations, you know? Yeah, I think that's kind of a big advantage that he has. Um, if you're inactive enough, if you're pretty active, I think it can help to blog or to write things up or whatever. But in general, I think that, you know, when I've written things up, I try to do it a little differently that way. But it's not good to try to kind of pitch your investment. Um, for a few reasons. One of the biggest one is you spend an incredible amount of time on things that don't really matter that much to show, oh yes, I know about that and everything. Oh, yes, I know about the carbon capture at the whatever place. Is that really going to matter? You know, he probably puts an expectancy, you know, um, on it. That's how I think it he kind of value expectancy and all sorts of things and it's like well could this work out? Yes. What's the chance that doesn't work out? What's the chance that you know it um actually like loses money some of these things, you know, that's part of it. When anyone does a write up, they they always say, you know, it's a lottery ticket. They say, "Well, let's just put it at zero and it's a lottery ticket for whatever." But a lot of times it doesn't work out that way. Like if you own six different money losing internet things on the side, it's true that one of them could take off and that'll be great. But in many cases, you pump in additional money into them to lose a bit over time. And so it's even worse than that. On projects that are more like, you know, engineering type things or or things like I mentioned, carbon capture or something, people always say, "Oh, it's a you know, um like let's put a value of zero to whatever on it." But the first time that someone does something with the technology, they often lose an incredible amount of money. So like the first person to try, the first company to try to put in this new boiler to do this thing at this plant, I mean, it probably will not be good. Um, but they'll figure out how to make it, you know, successful in further technologies, you know. Um, I mean I I guess my point with that is just like I think he does an analysis that way, but it's very easy to be like, "Oh, he should have seen Apple early or something, but he has to see Apple, but not falsely see Blackberry or something like that." And that may be harder than people think without hindsight on it. Like yes, at some point you could see that with Apple, but when is that point? Is it really immediately or is it a few years down the road? You know, I mean, go back to BlackBerry and how hard that would have been. Honestly, it's like the saying that they have massive market share. It's enterprise, right? So corporate, they have their own niche that way. And then the iPhone comes out and even at that point, I mean, I remember when the iPhone came out, everyone's like, "What? Who would want a touchscreen? What's the point of all of that?" Blah blah blah. People were still against it. and then just completely plummet. Completely plummet basically like what within a year. Read that book losing the signal or whatever. Yeah. Yeah. Yeah. And if that's the kind of thing with the magic formula when people ask does the magic formula work or something. I mean the magic formula is like Buffett without judgment that way though. So it catches both Apple and and Blackberry and you know I mean Boba talked about in the letter though your winners do more than make up for that if you're willing to hold. So if you get into good businesses at least if you get into ultra cheap businesses like incredibly below liquidation businesses or really great businesses if some of those are in the mix and then you hold on to everything you can afford to have some losses in other things because you get many times your return in the things that you keep as long as you keep them long enough. you're not like saying I'm going to sell everything when it goes up 20%. Um, but yeah, that's that's true. The median return in like we've talked about nets or something. The median return in nets is like a market type return or something, but the return is higher because if as long as people will hold some of them for a little while, they're so cheap they go up so much. It's the exact same idea with great businesses. Um, if you just bought a sampling of everything out there and held it forever, then obviously that's not going to work the same way. But as long as he buys things like apple and coke and all those and then things that are much smaller. So you have a seized candy that pays for a lot of things, you know. Um and then at Bergkshire they starve the other things for capital which is the other part of it. So you don't recycle it. So that's kind of you know a really big thing there. He's very good at that. He's um does not sell his winners and then buy more of the losers. Yeah, that's true. He definitely does not. Yeah. No. and and he does it in the businesses he owns just because that's easy to do. The winners will grow and then the losers they just don't let grow because they're not earning enough return on capital and everything. And then in his own portfolio, he does that mainly by, you know, long-term holding things and so not just selling something because he gets bored and wants to buy something cheaper or whatever. So he's selling a winner to buy a loser. But in both parts, he's very good at that as compared to most investors. Yeah. So I mean I think yeah, he would buy smaller companies. People always ask that and think, "Oh, is that really not true or whatever?" But he's always he's always said that and said the things about how you could earn high returns and things. Um I mean the other thing is he does follow the you know um book I would recommend is a man for all markets. he follows the Ed Thorp kind of approach of um he only invests in things where he has an edge, you know, and so that's true of the early Buffett, that's true of later where he, you know, he he just doesn't do anything where he goes, "Oh, well, I'll just, you know, I'll do this to diversify or I'll do this to have that." He doesn't look at it at portfolio thing at all that way. He's not buying oil for any other reason than he thinks oil companies have. he expects them to do better than your average business for each individual investment that he makes and then by doing that he kind of thinks it will work out whereas most other people are trying to do something else you know so yeah so man for all markets fortunes formula other things about the Kelly formula Kelly criterion one of the key takeaways for investors I think is not so much I mean bet sizing is important Buffett buys bets big when he has an advantage but the other key thing is to really, you know, um the difference between that and a lot of finance theory stuff is do not invest in anything where you don't have an edge. Um so, you know, the bet itself is on expected value basis not more attractive than other things that you could do. Let's put it that way. So, um and a lot of investing is doing things where that's not the case. I mean, it's, you know, saying, "Okay, I'll be underweight certain stocks that are in my benchmark or something." Okay. But part you're now making a a small bet, but part of your bet is a small bet that has nothing to do with edge. It has nothing to do with what you expect the value to be or something. It's just setting aside part of your portfolio to do that. So, people are doing that to diversify. They're doing that for all sorts of other things. And it's kind of like buying insurance on different things or tamping down on it's using money capital that you have access to to not put it to its best use. Whereas Buffett's always directing it to where do I have the highest, you know, mathematically where do I want to put it and not thinking about anything else. I don't think he's ever thought about like diversification for instance in terms of like um diversification in terms of I need to own a few things because of risk. Yes. But not diversification in terms of um I should own some oil or I should own some Japanese things or something. Not like taking a barbell approach. Yeah. No. Mhm. So I mean and that and he's in the insurance business and that's you know natural way of thinking about that. I mean, he said that in things like annual meetings straight flat out where he said, "Look, we we'll make any bet where we think that were we to get a hundred chances to do the same thing, on average, we would make money on it, you know, and we'll reject anything where that's the case, too." So I think there's I forget what one is from but there there was some annual meeting where he literally says something like look if you give us a coin that pays 7 to5 you know we might bet a couple percent of Bergkshire's net worth on that you know um because we have an advantage and it's not a risk to you know you're not risking the company whenever you're doing that but most people wouldn't say oh I can bet hundreds of millions of dollars or a billion dollars something on a coin flip where I have a slight edge you know, but you don't get that very much is his point. Like it's not very often that you have a fair coin flip with that happening. So I just think the main things that he has that the problem that I have with most things is it's not very mathematical. We did talk about one which is like well we talked about high return on capital but the other one we talked about was um like let's call it EV to EBIT or PE or whatever. he does pay a low price versus earnings. But the other stuff I just think is higher return on capital over time is what he expects, you know. Um, and then the problem is how to apply it today. I don't know because he's not buying anything today. And I think there's other factors for that with his age and stuff, but I think the market's big factor with that. Got it. Cool. Well, I want to thank everybody so much for tuning in with the both of us on the Focus Compounding Podcast. If you're going to be in Omaha for the Bergkshire meeting, uh, reach out to me, Andrewfocusedcounting.com. Make sure you hit the subscribe button wherever you are watching or listening to us here today. You'll be notified, um, whenever we upload a podcast. Eight years strong, Jeff. Crazy. Um, crazy, crazy. Um, and of course, if you're interested in learning about our money management services, you can reach out to me at andrew focuscompound.com. I want to thank everybody so much for all the support and we will see you in the next podcast.