Podcast Summary
The Challenges of a Mature Berkshire Hathaway in a Changing Market: Successful businesses must constantly adapt to changing markets, while also seeking out alternative sources of capital beyond just equity. Financial literacy is crucial for entrepreneurs to navigate these challenges. Joining relevant communities, such as Acquired LP and digital asset channels, can provide valuable insights in rapidly-evolving industries like crypto.
The third episode of Berkshire Trilogy talks about the story of a large and mature Berkshire Hathaway and the challenges it faced due to systemic changes like the PC and the internet. As Berkshire became successful, it became difficult to invest in new places and achieve the same returns. Financial literacy is essential for entrepreneurs, and they must try to understand various sources of capital other than equity. The podcast also highlights the need to become a part of Acquired LP and join the digital assets channel on the web to discuss everything in the crypto landscape.
Warren Buffett and Bill Gates' Meeting in 1991: Gates advised against buying IBM and recommended buying Microsoft and Intel. Gates also asked Buffett about newspapers as he was considering entering the industry through Microsoft.
Warren Buffett and Bill Gates met at a social event organized by Kay Graham in July 1991. Gates was initially reluctant to go meet Buffett, but his mother convinced him to come later in the day via helicopter. Buffett asked Gates about IBM and his opinion on its future, to which Gates advised against buying it. Gates then recommended buying only two stocks: Microsoft and Intel. This was in 1991, when Microsoft had a $10 billion market cap and Intel had a $3 billion market cap. Gates, who was already thinking about entering the newspaper industry through Microsoft, inquired about newspapers from Buffett.
Bill Gates and Warren Buffet's Take on Achieving Success and the Future of TV Networks: Focus is crucial for success. Building networks and exposing content differs from traditional camera film and TV transport. The future poses challenges for TV networks as we shift to the Internet.
Bill Gates and Warren Buffet became fast friends and during their friendship, Buffett bought 100 shares of Microsoft. Before buying these shares, Buffett thought that content clubs like Netflix and Amazon Prime won't succeed which was a somewhat aggressive reaction by Gates. Buffett was surprised by Bill Gates' reaction and both of them concluded that focus was the most important factor for achieving success. Even though Buffet owned shares of Microsoft, he did not get a lot of information from Gates due to sensitivity issues. Gates believes that the way networks create and expose shows is different from camera film. In the future, networks will face an interesting challenge as we move from the transport of TV onto the Internet.
The Importance of Building the Right Product Before Approaching Investors: Before seeking investment, focus on building a useful product that solves a customer's problem. Accurate predictions on industry trends don't count unless the right product is built to compete in the market. The right product can generate long-term benefits for the business.
Building the right product that attracts customers can impact investment decisions. Warren Buffett's investment in Coca-Cola was born out of Don Keough's pitch for Cherry Coke, a new product. It is essential to build a useful product that solves a customer's problem before approaching an investor. Predicting the future of industries and technologies accurately does not count unless one creates the right product to compete in the market. Gates' and Jobs' predictions on cloud computing and media landscape did not become the market leader because they did not build the correct product that customers wanted. Building the right product can convert skeptics into enthusiasts and generate long-term benefits for the business.
Warren Buffett's Long-Term Investment in Coca-Cola.: Warren Buffett's long-term investment strategy is founded on buying quality brands with strong market leadership, demonstrated by his investment in Coca-Cola, which allowed him to ride the dip and expand globally with its magic formula and Diet Coke success.
Warren Buffett's investment in Coca-Cola was influenced by the company's strong brand, trade secret of the magic formula, and massive success of Diet Coke. Despite the company's blunder with New Coke, Buffett's strategy of buying-the-dip allowed him to ride in as a white knight, buying $1.2 billion worth of stock and joining the board. His favorite holding period is forever, supporting his long-term investment strategy. The investment thesis included the massive opportunity for Coca-Cola to expand globally by selling concentrated syrup. This allowed for cost-effective production and made the market a globally addressable one. The investment highlights the importance of sticking to a long-term strategy and buying quality brands with strong market leadership.
Warren Buffett's Investment Strategy in Coca-Cola: Invest in businesses with a durable competitive advantage or 'moat', like Coke's global brand moat. A brand's value as a moat is exemplified by Berkshire Hathaway's 10X return on their investment in Coke.
Warren Buffett's successful investment in Coca-Cola showcases his investment strategy of finding businesses with a durable competitive advantage or 'moat'. The value of a brand as a moat is exemplified by Coke's global brand moat. Berkshire Hathaway has seen a 10X return on their investment in Coke in the first decade and a 3X return in the following 25 years. Despite this, in 2009, Coca-Cola represented close to 20% of Berkshire's equity portfolio, a 35X return on their initial investment. In 1997, a panel discussion featuring Warren, Roberto Goizutea, and Bill Gates showcased the rise of tech and the Internet. Gates' remark about Warren's 'ham sandwich' phrase was a major social faux pas, but he was ultimately proven right about the challenges of the tech industry.
Warren Buffett's Old-School Investment Strategy in the Modern World: Even in a world where change is constant, it's important to invest in businesses that are durable and can recover from changes. However, leaders and entrepreneurs must also navigate change and adapt to create the most value.
Warren Buffett's investment strategy was to invest in businesses that were durable, understandable, and old-world, which is why he avoided technology stocks. He valued businesses with a modest value but a high probability of success, unlike low probability, high potential value plays like Amazon. However, the world has evolved, and even companies like Amazon, Apple, and Microsoft need to constantly adapt to the changing world. The future is uncertain, and to create the most value, companies, leaders, and entrepreneurs must navigate change. Warren was the world's greatest status quo investor who invested in businesses that were reasonably static, where the future was mostly going to look like the present. He valued businesses that could recover from changes but did not bet on the world changing.
Warren Buffett's Strategic Move to Create Baby B Shares and Maintain Stock Value: Warren Buffett's innovative approach to creating a new class of shares with reduced voting rights enabled him to raise capital without splitting the stock. This move also showcased his focus on preserving the value of Berkshire's shares and mitigating potential threats to market demand.
Warren Buffett's decision to create a new class of shares, the Baby B class, with massively diminished voting rights and an open-ended offering, was a brilliant move to avoid splitting the stock and diluting the value. This allowed Berkshire to get the cash from however much demand there was, which was even better than float. Buffett's decision to do a stock offering shows his concern about people buying fractional shares from others; this is Warren's worst nightmare. People were setting up publicly traded investment trusts that mirrored Berkshire's equity portfolio, which meant that people would be buying Berkshire shares well after the price of the stock. This move by Buffett shows how he thinks about the two currencies at his disposal: the balance sheet cash and the shares they issue.
Buffett's Strategy for Cash vs Shares: Buffett prefers using cash over shares, but will use shares when they are richly valued by the market. He traded 20% of Berkshire's market cap for Gen Re in 1988, but it did not go well and Munger was unhappy with the deal.
Buffett prefers using cash over shares except when his shares are richly valued by the market. In 1996, he did the B-shares offering when the shares were trading almost twice book value. They did this because it was a huge windfall for Berkshire. However, he traded 20% of Berkshire's market cap for Gen Re in 1988, which was by far their largest acquisition ever. He did this because he thought Berkshire stock was overvalued and he wanted to take advantage of the moment in time and do a big acquisition. He furthermore changed the mix of securities that Berkshire had this way. However, Gen Re did not do well, and Charlie Munger was not happy with the deal.
The rise of Ajit Jain in the Berkshire Empire: Ajit Jain is a talented underwriter with an entrepreneurial spirit who turned the struggling Gen Re around by taking hyper-aggressive risks and utilizing his expertise to price insurance policies.
Ajit Jain is considered to be the best hire that Warren Buffet has ever made and is an underwriting savant with an entrepreneurial spirit. He is hyper-aggressive and is said to have never come across anyone better than him at pricing insurance. Ajit started a new reinsurance business within Berkshire, and famously took out an ad looking for 'super cat' policies, insuring items that other companies wouldn't touch. Ajit runs Gen Re now, after being given complete control in 2016. Gen Re, after being bought by Berkshire, went through a terrible phase of underwriting losses, accounting scandals, and bad deals. Eventually, Warren entrusted it all to Ajit, who seems to be running it well.
Vouch vs Traditional Insurance Companies; Berkshire Hathaway's Investment Strategy: Vouch offers a quick and cost-effective solution for startup insurance needs. Berkshire Hathaway's successful investment in MidAmerican Energy Holdings highlights the importance of understanding the market and separating valuable investments from risky ones.
Vouch provides business insurance for startups with a full digital experience that takes under 10 minutes, whereas traditional insurance companies consume extra time and cost. With Vouch, one can save up to 5% more on their coverage. Berkshire Hathaway bought MidAmerican Energy Holdings that ended up being an excellent investment and brought real estate brokerages along with the utility company. Warren and Charlie's refusal to buy tech stocks resulted in them being ridiculed, but Charlie's insightful comment about turds and raisins clearly indicated his understanding of the tech bubble. Investors need to recognize and separate the Microsoft-like companies from turds to avoid losses, as often, revenues do not exist for companies that go public.
Investing in Innovation vs Durability: What Warren Buffet's Strategy Can Teach You: Don't always follow the hype around innovative companies. Look for a durable competitive advantage or 'moat' before investing, as not all innovation leads to sustainable profits. Consider a company's business model before investing.
Investing early in a company is not always the best long-term strategy for investors, as innovative companies tend to attract a lot of speculators. Berkshire Hathaway, under Warren Buffet's leadership, invests in companies that have a durable competitive advantage, or a 'moat.' Although there is innovation happening all around, not all of it has the potential to create sustainable profits. The airline industry, for example, has seen innovation turn into a commodity, leading to an overall loss for the industry. It's important for investors to consider a company's business model and competitive advantage before investing, rather than being swayed by the hype and speculation surrounding innovative products or companies.
Warren Buffett's Complicated Relationship with Philanthropy: Warren Buffett's obsession with metrics and desire for high net worth led to frustration with philanthropy, but his decision to give away 85% of his stock to the Bill and Melinda Gates Foundation is a historic and impactful moment in giving.
Warren Buffett's personal life was complicated and he was immensely frustrated with philanthropy. He was obsessed with performance and metrics and wanted to see a dollar return on his charitable donations. Warren's goal was to get his net worth as high as possible, but he also wanted the world's adoration. After Susie passed away, he became more concerned about what would happen to his fortune and his charitable interests. He invited Bill Gates to join the Berkshire board and made the decision to give away 85% of his Berkshire stock, worth $37 billion, to the Bill and Melinda Gates Foundation. This decision is likely the biggest and most impactful decision in philanthropic history.
Warren Buffett's philanthropy legacy through the Gates Foundation.: Warren Buffett's decision to give away his wealth to the Gates Foundation created the ultimate status symbol for billionaires, leading to social impact through the Giving Pledge. However, it also shows the limitation of Berkshire Hathaway's buying strategy and the impact of the financial crisis on philanthropic efforts.
Warren Buffett's decision to offload his wealth to the Gates Foundation is a remarkable win-win-win scenario. It relieves him of the burden of giving money away while allowing him to be perceived as the most generous person, creating the ultimate status symbol for billionaires to give their money away. It also led to the creating of the Giving Pledge and philanthropic activities that will positively impact society for a long time to come. However, this also shows that Berkshire Hathaway's strategy of buying good businesses was limited by the amount of cash on hand as the amount to deploy got too large. The financial crisis delayed the launch of the Giving Pledge as many people were not keen on giving away money during that time.
Investment Strategies During the Financial Crisis: Berkshire Hathaway pursued a different investment strategy during the financial crisis, choosing to make debt and preferred equity investments instead of bailing out bankrupt entities. Their investment in Mars helped fund the acquisition of Wrigley and earned an unreal 11.45% interest rate.
During the financial crisis, the government was using various strategies and tactics to control the situation. One such strategy was to buy non-toxic assets from bankrupt entities, and JP Morgan was one such entity. Berkshire, on the other hand, had billions of dollars in cash reserves but decided not to save or bail out Bear Stearns. Instead, Warren and Charlie chose to pursue a different investment strategy, which involved making debt and preferred equity fixed income investments in companies that needed capital. One such investment was in Mars, which was acquiring Wrigley for $23 billion but faced difficulty due to lack of financing. Berkshire invested $6.5 billion to fund the deal, earning an unreal 11.45% interest rate on the debt. The financial crisis led to the government using various tactics and strategies, including slashing interest rates and throwing money into the market.
The Importance of Trust and Reputation in the Finance Industry During a Financial Crisis: Trust is crucial in the finance industry, and bailing out troubled companies involves significant risks, even with thorough examination of their financials.
During the 2008 financial crisis, the government made capital available for free which led to companies like Berkshire Hathaway providing fixed income guaranteed returns with 10%-15% percent yields. However, there was also a reputational element to this where fear and lack of trust in the financial sector led to companies like Lehman Brothers being in trouble. Warren Buffett was approached to bail out Lehman Brothers, but due to the risks involved, he ultimately decided against it despite studying the company's financials and considering it. This highlights the importance of trust and reputation in the finance industry, and the risks involved in bailing out troubled companies during a financial crisis.
How Warren Buffett Made $25 Billion during the 2008 Crisis: Warren Buffett waited for rational prices and did thorough research before investing during the 2008 crisis. His investments in financial firms like Goldman Sachs yielded significant returns, while his investment in GE did not fare as well. His investment strategy is a valuable lesson in patience and discipline.
Warren Buffett waited until prices were rational again and did all the research for capital deployment. Berkshire Hathaway invested in various financial firms, including Goldman Sachs and GE during the 2008 crisis and made a net return of $25 billion on the $18 billion deployed. The investments in Goldman Sachs turned out to be quite profitable, while the investment in GE did not fare well. The shopping spree during the 2008 crisis and the subsequent investment in Apple are some of the most impressive moves made by Berkshire Hathaway in the last 25 years.
Warren Buffett's Succession Plan for Berkshire Hathaway: Warren Buffett's careful selection of Todd Combs as the equities portfolio manager and the reorganization of his roles at Berkshire Hathaway shows his succession planning strategy, ensuring a future for the company without him.
Warren Buffett's investment in Bank of America was a grand slam, making Berkshire about $26 billion in profits. It is his last hurrah, as he starts getting questioned internally about his succession plan. He plans to split up his job into the CEO business side, and the investing side. The groundwork for this was laid back in 2006, when Warren and Charlie introduced the idea of putting an open call for candidates in the annual report. Finally, in 2010, they hired Todd Combs, an unknown manager of a small hedge fund, to manage the equities portfolio. This marks the beginning of a new era for Berkshire Hathaway, as they plan for a future without Warren at the helm.
The Pros and Cons of Joining Berkshire Hathaway for Investors: While Warren Buffet's Berkshire Hathaway is a prestigious investment firm, successful investors value autonomy and compensation. Networking and making connections can lead to major opportunities in the finance industry.
Li Lu was once considered for becoming Warren Buffet's successor but declined the offer due to compensation concerns. While it may be an amazing honor to succeed Buffet, successful investors like Lu and David Einhorn value their autonomy and control over their own funds more. The compensation structure at Berkshire is not very attractive to them, despite the company's size and reputation. For someone like Todd, who was running a small hedge fund, joining Berkshire was an opportunity of a lifetime. And, in fact, one of the current investment managers at Berkshire, Ted Weschler, bought two lunches with Buffet for $5.2 million and impressed him enough to secure a job. This shows how networking and making connections can lead to major opportunities in the finance industry.
Warren Buffett's Failed Investment in IBM and Opportunity Cost in Big Tech: Even legendary investors like Warren Buffett can make bad decisions. It's important to continuously evaluate and update investment strategies and not hesitate to take calculated risks to maximize returns.
Warren Buffett's decision-making process for running hedge funds is still uncertain. Todd and Ted manage their pool of money close to $20 billion each on the public equity side, proving themselves to be better than Buffett in investing. In 2011, Warren made one of the worst decisions of his career when he bought IBM instead of investing in big tech companies that could have been much profitable. Although this was his first technology investment, he lost $2 billion in total sales. The opportunity cost of $10 billion of capital in 2011, invested in any other big tech company, could have been a successful investment.
Warren Buffett's Ups and Downs in Investments: Despite some missed opportunities and failures, Warren Buffett remains successful due to good decision-making and risk management, as shown by his $89 billion gain in just five years from investing in Apple.
During the past decade, Warren Buffett's investments have had their ups and downs. While many of his purchases, including IBM and Precision Castparts, have not been successful, his decision to invest $36 billion in Apple in 2016 has been a huge success. Berkshire's stake in Apple is worth $120 billion today, representing a gain of $89 billion in just five years. This is more or close to more absolute dollar returns than the entire rest of Warren Buffett's career investing, even including the partnership's. Despite the success of Apple, there are many missed opportunities among Buffett's portfolio, including Visa and Mastercard. Despite this, Buffett remains one of the most successful investors in history, and his success with Apple is a testament to the importance of good decision-making and risk management in investing.
Warren Buffet's Successful Investment Strategy with Apple: Investing success lies in finding a business with a strong brand 'moat'. Apple's powerful brand name and consumer products make it an excellent investment opportunity. Berkshire's vice chairman appointments highlight its focus on steady growth and cultural legacy.
Investing is all about being in a position to be right, and Warren Buffet achieved that by buying Apple, despite not knowing much about the technology. The key to his success lay in finding a business that has a 'moat' around it - a strong brand that is difficult for consumers to switch from. Apple's consumer product and powerful brand name make it an excellent investment. While Buffet's Apple investment may not be the single greatest investment return in history in terms of absolute dollars, it demonstrates the importance of finding the right opportunity at the right time. Additionally, Berkshire's recent appointments of Greg and Ajit to the company's vice chairman roles show its focus on steady growth and maintaining its cultural legacy.
Berkshire Hathaway's non-traditional tech stock investments and focus on stock buybacks: Berkshire Hathaway's investment strategy under Todd and Ted differs from Warren Buffet's conservative approach, with success seen in tech stocks and emphasis on stock buybacks as a way to acquire more of existing holdings.
Berkshire Hathaway's Ted and Todd have been buying Amazon, SnowFlake, and other tech stocks, which is a non-Warren approved strategy. Berkshire sees stock buybacks as a magnificent use of capital, as the capital markets remain overvalued. Doing stock buybacks helps them buy more of the companies they already own at market prices. There is a bull case that Berkshire could do even better under Greg than it has under Warren, as they might keep less cash on hand and be less conservative. Todd and Ted did Apple and have been managing $40 billion between them, gaining $89 billion, which is a whole Zoom market cap worth of gains. The bear case is that Warren has been successful in a lot of environments, but he's gotten gun shy and may not trust his instinct in this environment.
Adapting Investment Strategies to Changing Times - The Buffett Way.: Investment strategies need to remain flexible and adapt to changing times. Berkshire Hathaway's operating company structure and infinite time horizon allow for flexibility and the ability to never sell, but different strategies are necessary at different scales.
Investment strategies need to be adapted according to the changing times. The Buffett way of investing may not work in the current times as the world is changing. Berkshire Hathaway does not have many internal growth engines to invest in and has to keep deploying capital externally. Although the stock may be undervalued, the asset prices are high and the valuations are fundamentally based on agreeing that the invested assets are worth the returns. It is important to have different strategies at different scales and a flexible structure to adapt to the changing times. Berkshire Hathaway has a remarkably flexible structure as it's an operating company with an infinite time horizon and the goal is to never sell.
The Importance of Incentives and Decision-Making in Berkshire Hathaway's Culture: Incentives must be aligned to ensure successful decision-making, particularly for important deals. Despite its decentralized structure, Berkshire Hathaway maintains a shared cultural identity that varies within individual operating companies. It's essential to evaluate Buffett's entire career, performance since 1992, culture, and decision-making abilities when analyzing the company's success.
Incentives are aligned in Berkshire Hathaway and there is no drag of fees, which means as a shareholder, the sticker performance is actually the performance you're going to get. However, the decentralization of decision-making could pose a challenge due to conflicting interests of independent fiefdoms. The culture at Berkshire Hathaway is truly independent inside each of the operating companies, and only a few shared cultural elements are important to the head office. The four topics that need to be graded for Warren Buffett's career are his entire career, performance since 1992, culture, and decision-making abilities of the new group of four coming in. It is important to nail the incentives to make sure decision-making works for big deals that need to be done in an hour.
Warren Buffett's Impressive Career and the Need for Adaptation: Warren Buffett's long-term success was impressive, but adapting to change may be necessary for success in today's world. This may involve taking on more risk or leverage, with the approach taken by Sequoia Capital potentially being more suited to current conditions.
Warren Buffett had a consistent and impressive career with a blended IRR of 22.3% over 63 years of active money management. $100 invested in 1959 and held through Berkshire today would be worth $26.2 million. While there may be better investors in the future with bigger numbers and faster change, achieving the same level of success as Warren Buffett today may require taking on more risk or leverage. The Sequoia Capital approach of adapting to change may be better suited to today's world. Buffett's recent years of performance were not as remarkable, resulting in an A rather than an A+ rating, but his overall career was quite impressive.
Berkshire Hathaway's Stock Performance and Management Style: Berkshire Hathaway may not be suitable for young investors seeking growth, but is a good option for those looking for stable and low-risk investments. Holding Berkshire stocks may serve as an emergency liquidity fund for short-term needs. Investors need to evaluate their position in their investing cycle before deciding to buy, hold, or sell Berkshire stocks.
Berkshire Hathaway's stock price performance has not outperformed the market in the last five years, even including the success of Apple investments. It has tracked the market on a multiple basis, leading to a C grade. Berkshire's management style is conservative, making it a good option for those who want stable and low-risk investments. However, it may not be suitable for young investors who seek growth. Investors need to evaluate their position in their investing cycle and decide whether to buy, hold, or sell Berkshire stocks. Holding Berkshire stocks may serve as an emergency liquidity fund for short-term needs. Overall, Berkshire Hathaway's performance has dwindled but remains a good option for certain investors seeking safe investment options.
The Future Belongs to the Internet: Why Warren Buffett's Belief in America Still Holds True Today.: In today's world, the internet remains a growing city with endless opportunities to become somebody and invest our money. We should have faith in America's future and embrace the power of the internet. Also, consider Phil Fisher's classic book, Common Stocks and Uncommon Profits, as a counterpoint to the Buffett philosophy. Lastly, the affordable Xbox Series S offers a great gaming experience with access to a vast gaming library through Game Pass.
The world we live in is different today, but Warren Buffett's belief in America still holds true for the Internet. The Internet is the future and we should never bet against it. Despite all the ups and downs, Bitcoin and Ethereum crashes, the internet is still the growing city that we can become somebody in and invest our money. The real value is in the learning and the journey is the reward. We should believe in America and the Internet. One should also consider Phil Fisher's Common Stocks and Uncommon Profits, a classic book that is the counterpoint to the Buffett philosophy and the value investing tribe. Lastly, Xbox Series S is a great option for gamers with affordable prices and a huge gaming library through Game Pass.
The Artistry and Soundtrack of Goodfellas and Recommendations for Game Pass and LP Program: Goodfellas boasts exceptional direction, cinematography, dialogue, and story, with a hit soundtrack to match. Game Pass and LP Program provide engaging experiences for Xbox fans. Share and join for even more fun!
Goodfellas is a work of art, with amazing direction, cinematography, exceptional dialogue and a tremendous story of a person's life. The Goodfellas soundtrack is also a hit after hit from George Harrison and Eric Clapton to Aretha Franklin, which wraps up the epic story perfectly. If you haven't seen the movie, go listen to the soundtrack on Spotify. Game Pass is an amazing product that is available on the Xbox One and previous generation hardware. Sharing an episode with a friend or social media will help spread these amazing stories with new people. Joining LP program is a great way to engage more deeply in the show and hang out with them on Zoom. Overall, it's been a whole new level of fun for David and Ben, and we're lucky that they get to do this!
