Podcast Summary
Warren Buffett's Journey to Building Berkshire Hathaway: Warren Buffett's mental iterations and learnings played a crucial role in building Berkshire Hathaway, showing that success is not only about making the right decisions but also learning from mistakes.
Berkshire Hathaway is the only non-tech company in the list of top 10 most valuable companies in the world and is a unique holding company with diversified businesses. Despite being the most successful holding company in history, Warren Buffett considers purchasing Berkshire Hathaway the biggest investment mistake he made, which cost him $200 billion in opportunity cost. In this two-part series of Acquired, the first part is focused on the man behind the success of Berkshire Hathaway, Warren Buffett, and his mental iterations and learnings. The research done by the hosts, Ben Gilbert and David Rosenthal, shows just how much Warren's thinking evolved to create the unreplicatable juggernaut that Berkshire Hathaway is today. Additionally, the episode promotes a community discussing all things Acquired at acquired.fm/slack and berkshirenerds.store, where Warren and Charlie's busts are sold.
Warren Buffett's Success Story: From Family Business to Investment Pioneer: Early exposure to the business world and family business support can foster a successful career. Warren Buffett's story demonstrates the importance of these factors in one's path to success.
Warren Buffett's success story is rooted in Omaha, Nebraska, where his grandfather, Sidney Buffett, migrated in search of fortune and set up the first grocery store in the city. This successful family business was later run by Warren's father, Howard Buffett. From a young age, Warren was exposed to the business world and developed a keen business acumen, which led him to becoming a pioneer in the investment world. He is a proud shareholder of Berkshire Hathaway and professes to never give investment advice like his mentor, Benjamin Graham. One of the best sources of information on Warren's life is Alice Schroeder's book called The Snowball. Warren's experience and background are a testament to the importance of family business and exposure to business at a young age.
Warren Buffett's Early Understanding of Stockbroking: Warren Buffett's early understanding of the misaligned incentives in stockbroking made him question the need for picking stocks, leading to his later indexing of the American economy with Berkshire Hathaway.
In the early 20th century, being a stockbroker meant acting as a local broker for the public, calling customers to recommend and push stocks, with no science behind investing, and mainly viewed as a form of gambling. Warren Buffett's father, Howard, switched from selling insurance to becoming a stockbroker, but following the 1929 stock market crash, the family's future changed. The experience of working in his father's firm made Warren realize the incentives were misaligned, and he later questioned why he should research companies and pick stocks rather than move product. The irony of Howard's father suggesting insurance as the more respectable, professional career choice, while Berkshire Hathaway ultimately indexed the American economy for insurance and newspapers, could not be clearer.
The Great Depression, FDIC, and Conservative Investments: Howard and Warren Buffett's focus on conservative investments during the Great Depression and Howard's establishment of his own brokerage showed the importance of taking cautious financial measures during tough economic times, while Warren's analytical mind helped him become a successful investor.
The stock market crash of Black Tuesday in 1929 caused a panic that led to runs on banks and bank failures. The Federal Deposit Insurance Corporation (FDIC) was put in place after the crash to provide bank insurance. Howard Buffett set up his own stock brokerage firm during the Great Depression and advised on hyper-conservative investments such as utility companies and municipal bonds that worked and enabled him to make more money than his old job. Warren Buffett always had a mathematical and analytical mind, counting objects like bottle caps and analyzing newspaper articles. This fascination with numbers would lead him to become one of the greatest investors of all time.
Warren Buffett's Early Pursuit of Wealth: Warren Buffett's desire for wealth was driven by a personal desire for independence and the enjoyment of watching money grow, which ultimately fueled his later success as an investor and philanthropist.
Warren Buffett wanted to amass wealth to gain independence and work for himself. His early experiences with money, including selling gum and soda door to door, meeting Sidney Weinberg at age 10, and seeing the trappings of wealth at the New York Stock Exchange, inspired his ambition to become a millionaire by age 35. His desire for wealth was not solely to make an impact or accomplish a certain mission, but because he found it fun to have and watch money grow. This unabashed pursuit of wealth may seem unusual or unvirtuous, but it helped fuel Buffett's later successes as an investor and philanthropist.
Warren Buffett's Early Lessons on Money and Ethics: Money can create more money through compounding. Focus on learning, holding onto good investments, and staying ethical for success.
Warren Buffett realized at the age of 10 that money can create more money through compounding. This is a concept that 99.9% of people never figure out. Buffett initially wanted to make money by buying penny weighing machines and was smart enough to figure out how to compound his earnings by reinvesting in more machines. Later, he started a pinball servicing business and made a ton of money. Buffett learned three lessons from his experience with Cities Service: don't fixate on the price you paid for something, always keep learning, and understand the power of holding onto a good investment. Buffett refused to get involved with illegal businesses like bootlegging or arcades and learned how to be honest and ethical in order to be successful.
Lessons in Managing Money According to Warren Buffett: Be patient and focus on long-term gains. Control your emotions and not let others influence you. Invest time in fundamental analysis and managing money on your own terms. Warren Buffett's journey proves the power of staying focused and managing money wisely.
Don't rush for small profits and stay focused on big, long-term wins. You can't control other people's emotions around money, so make sure you are managing their ability to influence you so that you don't do uneconomic things. To be a completely independent free thinker doing your own fundamental analysis and not moved by the emotions of your investors, figure out how to hold and manage money on your own terms. Warren Buffet learned these lessons from his early experiences like selling gum and soda door-to-door, delivering newspapers, and managing clients' money. An amazing journey from paperboy to chairman is a perfect example of how staying focused and managing money on your terms can result in tremendous success.
Warren Buffett's early experiences emphasize the importance of understanding the value of money and investing at a young age.: Determination and understanding the true value of opportunities can lead to success, even in the face of societal rejection. Warren Buffett's early experiences showed the importance of investing at a young age and valuing education.
Warren Buffett's early experiences show the importance of understanding the value of money and investing at a young age. He purchased his first business at 15 and invested in his first cash flow business, a farm with a tenant, at 15. He also recognized the value of education, accelerating his degree in three years and aiming for Harvard Business School. However, he faced rejection due to the societal view of investors at the time. This shows that despite the difficulties, one can achieve success through determination and understanding the true value of opportunities.
Warren Buffett's Financial Journey - From the YMCA to Billion Dollar Empire: Warren Buffett's success in finance was founded on his passion for investing and his understanding of the future value of money. His commitment to saving and compounding his net worth led to his financial success.
Warren's obsession with Benjamin Graham and David Dodd's investment strategies, including the discounted cash flow and fundamental analysis, led him to plead his case to get into their course at Columbia Business School. His passion for investing and compounding his money led him to rent a room at the YMCA instead of buying an apartment to save money. His approach to spending money was solely based on its future value, which allowed him to compound his net worth to $10,000 before starting school. Warren's understanding of the future value of money and his commitment to investing laid the foundation for his successful career in finance.
Warren Buffett's Investment Philosophy and the Concept of Float.: Warren Buffett's success as an investor is attributed to his curiosity, passion for investing, and willingness to take risks and learn from experts. Understanding the concept of 'float' helped shape his investment philosophy and achieve greater knowledge and freedom, rather than just wealth.
Warren Buffett's curiosity and passion for investing drove him to investigate the Government Employees Insurance Company and its investment strategies. Through his interaction with Lorimer Davidson, the company's head of finance, he learned about the idea of 'float' - insurance premiums collected in advance and invested for profit. Understanding this concept helped shape Buffett's investment philosophy and he used it as a cornerstone of his own business. Buffett's willingness to take risks, investigate opportunities and learn from experts played a big part in his success as an investor. For him, wealth was not an end in itself but a means to achieve greater knowledge and freedom.
Warren Buffett's Investment in GEICO: Warren Buffett recognized the benefits of insurance premiums as a source of interest-free debt and predictable income, leading him to invest in GEICO despite criticism from his mentor. This strategy allowed GEICO to invest in the 'float' and maintain a cost-efficient structure.
Warren recognized the advantages of insurance premiums which includes interest-free debt, predictability due to a large number of payers, and uncollateralized loan. Insurance companies like GEICO collect less than they owe to everyone, so they invest the 'float' to make profits. GEICO's absence of agents helps them have a better cost structure allowing them to invest more and more in the 'float.' Warren liquidated 75% of his portfolio to invest in GEICO, but his mentor Graham was not impressed. Graham believed in value investing but had a problem with cigar butt investing, where you pick up a free cigar butt and get a few puffs despite it being of no significant value.
The Importance of Investing with Both Upside Potential and Downside Protection: Investing is not just about low prices and avoiding risk, but also considering the potential for high returns. Graham's method of investing requires a balance of both downside protection and upside potential for long-term success. Understanding the concept of Mr. Market and gross margin equivalent can help make informed investment decisions.
Value is different than price and investing involves risk and uncertainty. It's important to consider downside protection, but solely focusing on buying companies worth more dead than alive can limit upside potential. Graham's method is akin to a high COGS business with transaction costs and taxes. Holding onto quality companies like GEICO for the long term can lead to massive returns, even if the market price appears high at the time. Understanding the concept of Mr. Market and gross margin equivalent in stocks can help navigate investing in a more calculated manner.
Value Investing vs. Growth Investing: Which is better for long-term growth?: Although value investing has been revered for decades, investing in a company's potential for growth can be more profitable in the long run. External factors may sway the stock market in the short term, but in the long term, value equates to price.
Value investing may not always be the best strategy for long-term growth. Although the whole notion of growth investing was not considered a good investment by Ben Graham, the idea of investing in a company's potential growth has become more popular over the years. In the short run, the stock market can be impacted by various external factors such as politics, economy, and emotions, making it a voting machine. However, in the long run, the stock market becomes a weighing machine, where value equates to price. Warren Buffett's early years of experience in the stock market taught him that investing in a company's potential growth can be more profitable than investing in what is considered to be a value stock.
Warren Buffett's persistence and focus paved the way for his success in investing.: Despite quirks, determination is key in pursuing goals. Investing requires persuasion, dedication, and a willingness to take risks in order to succeed.
Warren Buffett's persistence and singular focus on investing, despite his personality quirks, ultimately led to his success at Graham-Newman and paved the way for his future as an investor. He was able to persuade his wife Susie to marry him and convinced his father to set up the Buffett and Buffett Partnerships, giving him his first taste as a principal. Buffett continued to write letters and travel to New York to pitch his investment ideas to Ben and Jerry, leading to his acceptance at Graham-Newman. He quickly became an integral part of the firm and was offered a partnership, but instead chose to pursue his own investment opportunities.
Warren Buffett's Incentive-based Partnership Model: By structuring partnerships to align incentives and putting himself on the hook for a quarter of the downside, Warren Buffett managed over half a million dollars with no employees or overhead costs, fully living his dream of independence while generating returns for loved ones.
Despite initially planning to retire and live a modest life in Omaha, Warren Buffett eventually started managing money for friends and family through his own partnerships. He structured these partnerships to align incentives, with a 4% annual return hurdle and any returns above that split 50/50 between him and his partners. He also put himself on the hook for a quarter of the downside. Despite having no employees, outside services, or overhead costs, he managed over half a million dollars by the end of the year with expenses of only $22.71. This allowed him to fully live his dream of being independent and managing his own money, while still generating returns for loved ones.
Warren Buffett's Unique Investment Approach: Warren Buffett's success lies in his distinctive investment style, such as only allowing investments on one day of the year and focusing on companies with book value above trading value. Through his exceptional returns, public speaking, and writing skills, he became a master of his trade.
Warren Buffett's success in raising money for his investment ventures lies in his unwavering desire to do business his own way, and his exceptional returns that outperform the Dow each year. He only allows money to be put in or taken out one day of the year, December 31st. He amasses big positions in companies with book value above trading value and agitates for distribution of cash to shareholders, much like corporate raiders. He starts with a million dollars and multiples it quickly, reaching total capital of $7 million, larger than even Graham-Newman. He achieves astounding returns of 141% in just four years, compared to the Dow's 43%. He becomes a master at both public speaking and writing which sets him on to the path of his future successes.
Warren Buffett's Ground Rules for Investing: Warren Buffett's investment success is grounded in three essential rules: investing based on value, minimizing the risk of permanent capital loss, and investing almost all his personal net worth in the partnership.
Warren Buffett believed that it was incumbent upon him to write shareholder letters to his investment partnerships every year, cautioning that sustainable performance cannot be maintained. By 1962, he had a single vehicle - the Buffett Partnership Limited - to consolidate all his investments and ground rules for his partners. He codified three ground rules that were the hallmark for his future investments: choosing investments based on value, keeping the risk of permanent capital loss to a minimum by maintaining a wide margin of safety, and investing almost all his personal net worth in the partnership. Four years early, at the age of 31, Buffett crossed the million-dollar mark in net worth. In 1963, he invested in American Express, starting with fair businesses at great prices, and learned the second great lesson after GEICO for his future investments.
Buffett's Lesson on Valuing Brand as an Asset: Beyond financial statements, recognizing the value of a strong brand can be a huge asset in investing. With a brand's moat, a company can weather a scandal and maintain profitability.
Buffett recognized the defensibility of brand as a huge asset. AmEx scandal rocked the stock market and the share price dropped over 50%. Despite the $150 million fraud loss, AmEx settled the case with $60 million, and the stock went through the roof. Buffett made a huge bet on AmEx, investing $13 million and owning 5% of the company. He learned to assign value to things beyond tangible financial statements. AmEx's success rests on its brand's moat. Buffett flexed his analysis on the company's financial statements and its brand. The scandal didn't affect the public's trust in AmEx, so the company was still profitable. However, after making 2.5 times his investment, Buffett sold the stock.
Berkshire Hathaway's Origins and Initial Investments: Even the wealthiest towns can make bad decisions, but valuable investment opportunities can arise from them. Building rapport and conducting thorough research before investing can lead to successful outcomes.
Berkshire Hathaway had its origins in New Bedford, Massachusetts, which was the wealthiest town in America during the whaling. When the whaling business declined, the elders of New Bedford decided to build textile mills which was a really dumb idea due to the high cost of importing cotton from the south. However, they continued to operate for a long time, but in the 60s, it was run by Seabury Stanton who spent millions of dollars every year, outfitting the mills with all the latest technology. Warren Buffett hears about this from a friend, buys the stock which pushes the price up. Eventually, Warren meets with Stanton and they discuss the company making a tender offer to buy outstanding shares, but the final tender offer was $11-12 a share less than what they talked about.
Warren Buffett's Principles and Lessons for Successful Investing: Warren Buffett values good faith and reputation, and learned from his mistake of investing recklessly. He made a deal to only make smart investments, which drove his successful career and made Berkshire Hathaway what it is today.
Warren Buffett's personality is not to get worked up about things or to get emotional about stocks, but he gets angry when someone is not dealing in good faith and is reneging on an agreement. He built a lifetime reputation on doing right by his word and in dealing in good faith, and he cares a lot about his reputation. Despite making a mistake by purchasing Berkshire Hathaway in 1965, he made a deal with himself, with the rest of the company, and not to continue to invest crazy and only make very smart investments. He learned a great lesson from this mistake, which drove the entire rest of his career and what Berkshire Hathaway would become.
Warren Buffett's Missed Opportunity with Intel and Technology Companies: Staying true to your strengths is important in investing, but don't limit yourself based on preconceived notions. Venture out and learn about new industries, as they may have similarities to what you already know.
Warren Buffett missed the opportunity to invest in Intel when it was in its seed round because of his mindset of staying true to what he's good at. He had written to his partners that he wouldn't invest in businesses where technology was crucial to investment. He later approved the investment of $100,000 from Grinnell College's endowment investment committee, which he chaired. Ironically, he never invested in technology companies until Apple, which was through Todd Combs and not him. His justification for not investing in technology was his circle of competence, which seems to be a Charlie Munger idea. However, he invested in businesses he knew nothing about at the beginning. The dynamics of these businesses may be more closely related to each other than to technology businesses.
Buffett's investment strategy and National Indemnity's success.: Buffett's investment success stems from independent thinking and analyzing companies from first principles. National Indemnity's success was due to their expertise in pricing and underwriting risks, and their ability to use float for extended periods. Vouch, a modern startup insurance provider, offers expert guidance and tailored coverage for startups.
Buffett's investment decisions are based on his independence of thought and understanding a company from first principles. He transformed a struggling Berkshire business by looking for opportunities within the company and investing in National Indemnity, a highly specialized insurance company that writes policies for the riskiest and wildest stuff out there. They are good at pricing risks, with Jack Ringwalt personally digging into cases to figure out how likely they were to go one way or the other. National Indemnity got to use its float for a super long time since most of the policies they wrote never cashed in. Vouch, a modern and flexible startup insurance provider, provides insurance for today's startups and includes expert guidance via Zoom, chat, call, email and proprietary coverages engineered specifically for startups.
Warren Buffett's Two-Sided Flywheel Strategy: Warren Buffett's strategy of combining an insurance operation with non-insurance operating businesses creates a two-sided flywheel of increasing cash flow and capital that provides a huge margin of safety and lower cost of capital.
Warren Buffett's insight of combining an insurance operation with non-insurance operating businesses and investing all the capital, all of the float is brilliant. This enables him to build a two-sided flywheel of more and more insurance businesses and operations that generate more and more float, that he can then invest that capital in more operating businesses, which generate more monthly cash flow, which enables him to take on more and more float. Thus, Berkshire morphs from a series of textile mills into a holding company that has all these incredible cash flow flywheels happening inside of it. This provides a huge margin of safety to Buffett because he has a lower cost of capital than others.
Warren Buffett's Success and Struggles in the Buffett Partnerships: Warren Buffett's success was a result of his probabilistic thinking, individualistic decision-making, and capital allocator skills. Despite his achievements in the Buffett Partnerships, he struggled with maintaining his success and the pressure of his gains.
Warren Buffett's success can be attributed to his genius probabilistic thinking, individualistic decision-making, and master capital allocator skills. Owning an insurance company was the perfect fit for someone like him with these three tools at his disposal. He achieved excellent returns in the Buffett Partnerships, outpacing the Dow with a 28X gain over 12 years. However, despite his success, Buffett struggled mentally and emotionally because he was worried about sustaining his success and the pressure of his gains. He was concerned about not losing money and struggled with finding attractive purchases despite the market's rise. By mid-1969, Buffett was done with the partnership and started making plans to wind it down after achieving his greatest year ever.
The Negative Impact of Interrupting Compounding Illustrated through Simulation: Long-term thinking is crucial for patient investing and interrupting compounding with taxes and transaction costs can result in a significant reduction in final value. Even experienced investors like Warren Buffett face difficult decisions in this regard.
The importance of not interrupting compounding is illustrated through a simulation that shows the negative impact of transaction costs and taxes on continuously compounded investments. The simulation finds that, over 25 years, paying taxes every 5 years instead of letting the investment compound uninterrupted results in a 50% reduction in the final value. This emphasizes the significance of long-term thinking and the potential benefits of patient investing. It also showcases how Warren Buffett had to make difficult decisions to wind down his partnership and pay taxes on his distributed assets, which he must have found painful as heavily invested in long-term compounding.
Letting Go of Old Beliefs and Embracing New Philosophies for Growth and Success.: To achieve success, we must be open to new ideas, think independently, be missionary in our approach, stick to our principles, and be mindful of cycles for better long-term outcomes.
Letting go of old beliefs and ways of thinking can be necessary for growth and success, as seen in Warren Buffett's decision to close down his partnership and embrace new philosophies. Ben Graham's emphasis on independent analysis and thinking can also be valuable in making investment decisions. In the startup world, it is important to be a missionary and bring others into the fold for a company to succeed, making it difficult to apply value investing principles. Despite the challenges and potential regrets, sticking to principles and being mindful of cycles can ultimately lead to better outcomes in the long term.
Warren Buffet's Strategies for Remarkable Performance: Invest in trusted companies, eliminate distractions, stay quiet about ideas, and let winners run. Having a singular focus and being world-class at something can result in remarkable, enduring performance.
Warren Buffet's success lies in his ability to pick cycles, having a lot of cash when he needs it, and being invested when he needs to be. His singular focus and obsession with getting as much money as possible in an ethical way, on his own terms, has resulted in remarkable, enduring performance. Buffet's strategy is to invest in companies he trusts and to eliminate distractions by focusing only on what matters most. He stays quiet about his ideas as he wants to make the most money long-term and not appear smart in the short-term. Letting winners run is also a crucial strategy. Finally, being world-class at something and having a singular focus can result in 10 sigma events or remarkable performance.
Capchase offers an innovative financing solution for SaaS companies, enabling them to grow without debt or dilution.: Capchase helps SaaS companies extend their runway by 8 months and minimize dilution by up to 16% compared to traditional financing methods, aligning with Warren Buffett's philosophy of maximizing cash flow and avoiding dilution. However, ethical evaluation of value creation and capture is necessary.
Capchase offers a revolutionary cash flow financing solution for SaaS companies, helping them turn predictable revenue into growth capital without taking on debt or dilution. By financing growth through Capchase, founders can extend their runway by 8 months and avoid upwards of 16% dilution compared to traditional financing methods. This approach aligns with Warren Buffett's philosophy of avoiding dilution and maximizing cash flow. While pure play investors like Buffett may not create new value for the world in the same way as venture capitalists, increasing liquidity in markets can be considered value creative. However, there may be instances of value destruction, such as with the Graham era of cigar butt investing and breaking up companies. Overall, value creation and capture should be evaluated and compared ethically and morally.
The Success of Buffett Partnerships and Its Impact on Investing.: While the Buffett Partnerships achieved impressive returns, the investing landscape has evolved, highlighting the importance of creating innovative financial instruments that provide value for companies.
Buffett Partnerships returned 30% for 12 years making it one of the greatest hedge funds of all time, with a return of 28X. Normalizing for the time period and illiquidity premium, it is an A+ and beats the pants off of Berkshires returns ever since Warren went full-time. However, from an individual investment standpoint, it's not impressive as some crypto investments have returned 28X in six months. Investing in private companies in those times was rare and venture capital as we know today did not exist. Overall, the key takeaway is that creating innovative financial instruments that provide value for companies is important in the investing world.
How to Generate Creative Ideas for Regular Content Creation: Create a set of activities to generate and narrow down ideas. Follow a schedule while also allowing for moments of spontaneous creativity. Don't miss the recommended reading on value investing and join the community for insightful conversation.
For anyone creating on a regular schedule, there is a need to have a set of activities to generate ideas and then narrow down and pick one to work on. This process is necessary to produce content, be it blogs, podcasts or products. It involves following a schedule but also requires lightning bolts of creativity. The Not Boring, One Year In piece captures these emotions and is a must-read for anyone who makes stuff. The hosts recommend tuning into the Berkshire Hathaway annual shareholder meeting for those interested in value investing. They also invite listeners to become LPs and join the Slack community for great conversation. Sharing the episode with friends is encouraged.
