Acquired - Berkshire Hathaway Part I

0:00Gonna need some of that, you know, running like the goo that you eat. Oh man, I should have brought a snack. Well, great thing about not being alive. We could always just take a break if need be. It's true. On the Warren and Charlie don't take a break. It's true. Oh my god. What are we doing? We should have brought peanut brittle and cherry coaks. Oh snap. Well, for part two, peanut brittle and cherry coaks are mandatory. Yeah, mandatory.

0:26Well, that's okay because we're not really talking about Berkshire today. That's right. It was intentional. Yeah Welcome to season eight episode five of acquired the podcast about great technology companies and the stories and playbooks behind them I'm Ben Gilbert and I am the co-founder and managing director of Seattle based Pioneer Square Labs in our venture fund PSL ventures And I'm David Rosenthal and I am an angel investor based in San Francisco and we are your hosts Let's talk about the 10 most valuable companies in the world. The first nine are tech companies. There's of course the big five in the US plus Tesla, of course, because it's 2021. Of course. And then you have 10 cent and Ali Baba from China, the ninth TSMC, the Taiwan semiconductor manufacturer, and the 10th, the only non tech company. It's a 182 year old company that started as a textile mill.

1:35in New England, Berkshire Hathaway. As most listeners know, Berkshire is far from a textile mill today. It is a holding company unique in every way and by far the most successful in history. A few of the companies that they own outright include Dairy Queen, Duracell, Fruit of the Loom, Geico, NetJets, Seas, Candies, and even Brooks running shoes. See, that'll company, right? Oh, yeah. Oh, yeah. And I'm super loyal. I ran up Mount Sei wearing them the other morning.

2:06Nice. They also own large pieces of many of your favorite publicly traded companies, including Amazon, Johnson & Johnson, Coca-Cola, American Express, Kraft Heinz, Verizon, GM, Mastercard, Snowflake, and now they even own over a hundred billion dollars of Apple stock. And somehow the man behind it all, Warren Buffett, has claimed that purchasing Berkshire Hathaway was the biggest investment mistake he had ever made.

2:36And for many of you, you're probably learning that Warren Buffett purchased Berkshire Hathaway and it was not something that he founded, which is the first takeaway from this episode. He claims we will cover this again much later in the episode, but he claims that purchasing Berkshire Hathaway cost him 200.

2:54billion dollars in opportunity cost. Well, when you compound something over 50 years, you can, you can come up with some large numbers. So what the heck is this company? How did it come to be? And why is it that even at an all time high for the stock, so many analysts think it is underpriced today? Well, to do this right, we are going to need more than one episode, even an acquired sized episode. So welcome to our first part of our two part series on Berkshire Hathaway.

3:23And in this first part, most of it won't even be about Berkshire the company. It's about the man Warren Buffett and his mental iterations and learnings that would shape what Berkshire would come to be. People always try and reduce what Buffett does to a simple strategy, or even a few pithy quotes. In reality, Warren has learned, adapted, and reinvented his strategy at least four distinct times over the decades.

3:49In doing the months of research to prepare for these episodes, David and I both learned just how much Warren's thinking evolved to create the absolutely unreplicatable juggernaut that Berkshire Hathaway is today. So on this episode, we bring you the story of Warren Buffett, the learning machine. Are you an acquired Slack member?

4:11If not, what have you been waiting for? It is a stellar community discussing all things acquired recent episodes, but more importantly, it is just a genuine, smart group of people having a thoughtful, nuanced, and respectful discussion about the tech and investing news of the day. You can join at acquire.fm slash slack. All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, LaGora.

4:37the agentic operating system that is redefining how the world's best legal teams work. Yup, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. LaGora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry? So the founders did exactly what great founders do, operate with obsessive customer focus.

5:06They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done. And that's how you get features that customers love, like tabular review, where you...

5:19drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Lagores Bed here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work, and this means that the pie can grow even as each individual task takes less time.

5:39And they recently launched LaGora agent offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required. And LaGora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early LaGora numbers essentially speak for themselves when they have a head-to-head pilot with their top competitor, they win 70% of the time. Legora now has over a hundred thousand lawyers on the platform from 1200 legal teams in 50 countries. And crazily, they went from one million to a hundred million in ARR in about 18 months. Truly insane numbers. And that is the real test.

6:31Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in house at a company, you can learn more at logora.com slash acquired and just tell them that Ben and David sent you.

6:52All right, lastly, to keep this short and sweet, if you are not an acquired LP, you really should just become one. And aside from all the things that we tell you every episode about the LP program, we just did a really cool new thing. We called it a Community Q&A.

7:07with the founder of levels, Josh Clemente, after we had him on the show. And we thought, why wouldn't it be cool to let all the LPs pepper in with questions and interact with him? That was super fun. If you missed it, you can check out the recording in the LP Google Drive. And if you are not already a limited partner, you can click the link in the show notes or go to acquired.fm slash LP cannot wait to see you in there. All right.

7:32David, I think we are ready to do it. Listeners, as always, this show is not investment advice and you know, like Warren Buffett, we would never profess to give you investment advice. All of our best ideas, we will keep a deep dark secret maybe until long after we've executed them so we can sort of tell the world about our wonderful investments. But David and I may have investments in the companies that we discuss, the show is educational. Definitely do entertainment purposes. Only we hope you enjoy it.

8:01and without further ado, David Rosenthal, where are we starting the story? I have been a proud Berkshire Hathaway shareholder of the B, not the A, for pretty much my entire life. The greatest things that really, that my parents and grandparents gave me was a few shares of Berkshire B when I was a little tight. Never sold them. Very smart investment on their part. What's your cell date on them? What's your, where are you exiting the position?

8:29Uh, never. As it should be. As it should be. Okay. Before we dive into history and facts, we owe a big, big, big thank you to Alice Schroeder and her wonderful book, The Snowball, which I at least used as my main source for this episode. Ben, you read, uh, yeah, Buffett, the making of an American capitalist.

8:54A great book by Roger Lowenstein. I thought this book was awesome. People talk about snowball all the time as the one as the sort of more popular buffet biography. I thoroughly enjoyed this book so I think you can't go wrong. Yeah, well, we'll get to comparing contrast as we go here. But Alice's own story is pretty amazing. I didn't realize to looking this up. She was an equity research analyst on Wall Street covering insurance companies and she wrote to Warren in 1998 asking to talk to him.

9:23And Warren had never talked to Wall Street research analysts before, but for some reason, he takes her call. And she was the first research analyst to initiate coverage on Berkshire. Kind of amazing. And then in 2003, another author approached her about writing a book together on Buffett. She talks to Buffett and he says, well, why don't you just write it instead? And I'll give you full access, like thousands of hours with him. Oh, wow. Family, everybody, it's amazing.

9:53Amazing story so definitely go check out both the snowball and Buffett great books highly highly recommend and listeners will have to see how this goes this is the second time I think the New York Times would have been the first one but we're David and I both just read separate books and I think we both read them cover to cover obviously we've got a few dozen other sources that we use for this as well but we may have stories that one another does not know about yeah we shall see okay so I'll go first and start appropriately enough, back in 1867, with a journey from New York to Omaha, undertaken by a young gentleman named Sidney Buffett, who was working for his father's farm in Long Island, but he quits because he feels like he's not getting paid enough. And like so many young people, young men of his generation, he decides to go west.

10:52to seek his fortune. And he ends up in Omaha, Nebraska. He got part of the way west. Part of the way west. I think his maternal grandmother, grandfather was already there in Omaha. That might have been why he headed there. But the other reason was that Omaha was a boom town at the time. So in it existed for a long time, it was a kind of pit stop on the the Oregon Trail or the California Trail for gold prospectors heading out west. But after the Civil War, the U.S. Civil War, Lincoln decrees that Omaha is going to be the headquarters of the new Union Pacific Railroad, which is going to connect up the West Coast of the United States with the rest of the country and the town takes off. Now, interestingly,

11:45Union Pacific is still around and operating today. Ironically, as the second largest rail company in America after, of course. Berlin to Northern being the first. Berlin to Northern Santa Fe. Oh, goodbye. But that won't come until part two. So Sydney gets to town. He decides he doesn't want to be a farmer anymore. He instead wants to sell products from the farm. He opens up the first grocery store in Omaha.

12:14And he runs it. And then effectively passes it on to his son, his son Ernest Buffett. I think actually technically sets up a different store, but it's like the family business. So Ernest, his son is running the legacy of the grocery store in Omaha. And as Alice points out in this snowball, Ernest was very, very aptly named as, as we'll see.

12:39Under Ernest's management of the store, his quote that he likes to use is, the hours are long, the pay is low, the opinions cast in iron, and the foolishness is zero. Hardcore. Yeah. Hardcore. So typical of this sort of a new entrepreneurial middle class, Ernest and his wife Henrietta You know, they're fine with their children working in the store, but they want them to get a good education and become professionals. So most of their children go to the University of Nebraska, including their third son, Howard, who majors in journalism and works at the Daily Nebraska School newspaper. While he's working there, he meets a freshman who comes in and is applying for a job, Layla Stahl, whose father owned a local newspaper in

13:36Nebraska. And they meet, they hit it off, they marry. Of course, these are Warren's parents that we're talking about. And amazingly, you know, they meet at the college's newspaper in the very fitting. The newspaper business is going to play a large part in young Warren's life to come. So Howard graduates in 1925. He and Layla Mary. And as was typical of the time, unfortunately, she drops out of school by all accounts. She was like an incredibly promising student, very good at math. Her professors were very disappointed when she drops out to Mary Howard and become a housewife. Howard, of course, he wants to go into journalism and eventually politics, but Ernest is having none of it. His son needs a respectable professional career, the no-nonsense Ernest. So he instead suggests that Howard might want to do something

14:30you know, more, more useful, something more like selling insurance. So the just irides continue to mount here. Boy, we've got newspapers already. We've got insurance already. It's like either Berkshire Hathaway basically has an index on the American economy or the forces that would then shape or in forever are sort of already playing a role in his role. They're already stacking here. Probably some of both. Probably some of both. Maybe more of the latter because there's one more chip to stack.

14:59which is Howard, for two years, he's an insurance agent selling insurance. But we're in the late 1920s now. And it's the roaring 20s and it's go-go time. And Howard after a couple of years decides, you know, maybe this insurance stuff is pretty boring. You know, my customers here in Omaha, they don't want insurance anymore. They want stocks, baby. So he switches careers two years out of school.

15:28and goes from selling insurance to being a stockbroker in Omaha. I had to like look this up thinking about this. Like, well, you hear about stockbrokers. Like, what does it mean to be a stockbroker in Omaha in 1927? So you got to remember it's like, there's no Charles Schwab for one of it. Schwab was hugely innovative. Right. So how are you brokering stocks if you're not on the floor? Right. Like so there's the exchange, the New York stock exchange in New York, but then For all the rest of the retail public in America, how do they get stocks? You've got a local broker who is your sort of like combination financial advisor plus, you know, exchange access, you know, you're you call your broker or more often he calls and it was always a he at the time. He called you and would say

16:25Hey, you know, I've got this great stock that you might want to think about getting into. You know, I know you and your portfolio, your investment objectives and you had chat on the phone with him for a while or you go to his office and then you would sign up and you would buy shares. He would then call the exchange back in New York, get a trader on the line and then buy in your name. Some shares. Oh, so they would get a trader on like it. It wasn't like the brokerage is bought these big blocks and then they would sort of like some it was like, your broker would like call a trader on the floor to execute your trade. Well, I think it was kind of both. I think that was if you wanted a specific trade to happen. But more often what would happen was the big banks and financial firms and trading houses in New York, they had like product that they needed to move. They had issuances that they needed to move. They had trades that they were doing. They needed to count in parties to the trades. And so all these local stock brokers

17:24distributed throughout the country. They were like the distribution in Salesforce. People talk about sales and trading back in the day as part of investment banks. The sales part of it was sales to an effort to educate all these local brokers to then recommend and push stocks to the clients. Yeah, pretty fascinating. At this point in history, investing isn't really like a profession with a lot of sort of science behind it. It's kind of looked at as gambling, right? Like buying stocks. Totally. Fundamental analysis does not exist yet. It's like people think about stocks as exactly gambling is the right word. It kind of like, you know, tickets to bed on a horse. Like, oh, I like the name of this company here. I like what they're doing. But nobody's thinking about what's the capital structure of this company? What are its revenues? What are its growth prospects? That's not how this works. So Warren,

18:22would later in life as we shall see he would do a brief interlude working for his father at the firm as a stockbroker himself he called what they did equivalent to being a quote unquote prescriptionist versus being a doctor it would be like if you were you know a medical professional and you got paid based on the type an amount of pills that you prescribe to your patients versus the actual outcomes because you're just getting paid by the commission on every every stock that you sell. The incentives are totally misaligned. Oh, you're making me pull for my first playbook theme already. Like this is one of more, I mean, he's not even born yet in the story, but this will ultimately be one of his very first realizations is what is the point of me researching the crap out of these companies and picking stocks.

19:10When all I'm getting paid for is just to move product. You know, it's like a total, like you said, total incentive misalignment. Total instead of misalignment. But, but let's let's stick on Warren's father. Father Howard. Yep. Yeah. Okay. So Howard, 1927, he switches over to becoming a stockbroker. Things are really great. They're humming. Families doing great for two years. And then October 29th, 1929.

19:34I don't think we've talked about this on this show yet. Amazingly. No, we've made it 150 plus episodes without talking about Black Friday. Black Tuesday. Black Tuesday. Black Friday is a much happier event. A real capitalism fest. America is not a capitalism fest on black Tuesday. Left its mark on me. Yeah. Yeah. All right. So black Tuesday. Black Tuesday, of course, we're talking about the stock market crash on black Tuesday.

19:59over I think it actually wasn't that bad by modern standards. I think the Dow dropped like in the low teens maybe percentages on black Tuesday, but it was still shocking to people. The real problem is over the next three years after black Tuesday, the market loses 90% of its value. Could you imagine that like that's I mean during the in 2008, I think the market lost like close to 50% maybe, but 90% people just wiped out like it's Carnage. Yeah, the way that it's described in Lonestein's book is that what was unique and remarkable about the Great Depression was that even the smart money got wiped out because the people who sort of realized, ooh, things are cheap now, the crash is over, would buy in, and then even they lost all their money. And of course, that is the thing to fear when everyone's screaming by the dip. And of course, that hasn't happened to this level, as you're saying, since 1929, but just

20:58Crashed everyone? Well, to grossly over simplify, you know, what at least I think happened and why it hasn't fortunately happened since is the stock market crashed and that led people to panic and that led to runs on banks. People wanted their cash out of banks. Banks were, you know, not nearly as institutionalized as they are now. And there was no FDIC insurance that was put in place after the crash. So when there runs on the banks, that led to bank failures. So when the, when all these local banks failed, the Fed had to, I think, raise interest rates because it was like borrowing was so hard now, there was so much less like capital base available to borrow. So the interest rates had to go up. So you've got an economic shock. And then interest rates are going up. Like, I might be like, when coronavirus hit the Fed slash it is, you know, less than zero in same during 2008.

21:57So no, it was a double whammy of like economic shock plus major interest rate hikes. And that's just like that led to it was a decade of, you know, more than a decade really until World War II. The stock market, the Dow wouldn't return to its high before the crash until 1954. That's 25 years. That's a quarter century just lost like crazy, crazy, crazy.

22:26Okay, so back to Howard and the Buffets. Howard does something pretty crazy here. So it's bad. Warren is born less than a year after Black Tuesday on August 30th, 1930. Warren Edward Buffett is born. The next year, it wasn't until 31, Howard was working as a stock broker for Union State Bank and the bank fails. So not only is Howard out of a job, But all the family's money is at the bank. So they got no money. They got no job and Howard and Layla now have two kids. So what does Howard do? He does the 100% total contrarian move. First he does try to go to his father to Ernest and get a job at the family grocery store. Ernest is like, I can't, I don't have any money to pay you. I can't employ you.

23:24So Howard sets up his own stock brokerage firm So we're in the middle of the great depression really after the crash and he's like well, I know it'll be a stock broker and he's not totally crazy because you know the world is melting down But for anyone who does still have some wealth left They need something to do with it. Like, they're not going to put it in the stocks that they were in before the crash. So Howard has this sort of business plan. He starts going around Omaha to anyone who still has any wealth left and he advises them on hyper conservative investments that they can use their capital for. So like utility companies, municipal bonds, that kind of stuff.

24:13And it works like there's actually demand for this kind of service. So he's placing all these hyper conservative securities. He ends up making, I think pretty quickly, like way more money than he was making at the old job. Wow. I didn't realize that he sort of broke out of his own there and started his own brokerage. Yes, started his own brokerage. It would eventually come to be known as Buffett and Fock. And so the family actually, you know, Warren has no memory of this.

24:40of these two years of really hard times but kind of skates through the depression fairly well off his dad bought the dip his dad bought the dip exactly so Warren unsurprisingly to anyone who's heard of him which is probably everybody listening to this podcast turns out to be an extremely mathematical kid so he's like always counting things this is things counting bottle caps he's counting his weight He's running all sorts of analysis even as a little kid. Did you see he like was counting the occurrences of letters in like newspaper articles and then he and his friend would like tally them up and make bets on which letters were going to appear more often than others. Like he was he was counting completely arbitrary things just to count them. You might say that he has some budding OCD developing in his personal writing down license plates that went by. I mean it was hardcore. It was hardcore.

25:36So then, famously, as the story goes, there's actually a picture of this, for Christmas, when Warren is six years old, he receives one of those money coin changers, like that you wear on your belt, like the old style. I actually had one of these two when I was growing up. Me too, I got one for my grandpa. Amazing. With the little crank that you pushed down, the little lever. Yep, and then it spits out one coin at a time, and there's the separate slot for quarters and dimes and nickels and pennies.

26:06I mean, that thing was so cool. So Warren gets this and he becomes obsessed with it. This is like, you know, the combination of counting and collecting things and analyzing and money. He's just like, he wants to get as many coins as he possibly can to stuff into this thing. And then he starts keeping jars and his drawers of all the, all the buddy. It's amazing. So he starts to think like, how can I get more money?

26:33He goes, I assume to his grandfather to the grocery store and he buys packs of gum like in bulk and then he starts going around door to door in the neighborhood and selling individual packs of gum to mothers in the neighborhood for five cents a pop. Amazing. Then he starts, you know, he kind of gets this racket going. Then he starts selling soda.

26:57Door-to-door he starts selling magazines. Yeah, didn't he like on a vacation? He like goes and buys some coaks and he's like wandering around the edge of a lake selling coaks for like twice as much as he bought them for. I don't think this was in the snowball. What? Yeah, it's exactly that and it was coaks. I remember that despite his soon-to-come Pepsi addiction, his earliest childhood sales came from coaks. Amazing. So he started to accumulate the beginnings of the Warren Buffett wealth. When he's 10 years old, Howard takes him on one of his trips to New York and to Wall Street. And this is amazing. You probably probably read this too. Warren actually gets to meet the legendary Sidney Weinberg who was the head of Goldman Sachs at the time. He's 10 years old. Warren Buffett's 10 years old. And his dad takes him to meet Sidney Weinberg. And supposedly as their leader Warren's Sidneyer star struck the whole time.

27:55And as they're leaving, Sydney supposedly turns to him and says, what stock do you like Warren? And unfortunately, the snowball like, Alice doesn't say what Warren responds like, I want to know what the hot pick is. But he's totally starstruck. This makes a huge impression on him. And before they come home after the Weinberg meeting, his dad takes him to the stock exchange, the York stock exchange, the building for lunch.

28:24and they have this great like amazing lunch in this kind of gilded building and after lunch a waiter comes up to the table with a tray that has all of these different types of tobacco on it and rolling papers for cigars and Warren realizes that like oh after lunch at the exchange you get like a custom cigar made for you. Like you choose the tobacco or it says he's like, he has no interest then or ever in smoking a cigar or even in any of these trappings of wealth. But he realizes like, if this is how they roll at the New York Stock Exchange every day, there must be so much money here. I got to find a way to get me some of this. Do you know if you get to like see the trading floor as a 10 year old? I think so. I think so.

29:14Have you ever been? No, have you? Yeah. So I went and I was 16 or something as part of a high school trip where there was someone who had taken a class that I had previously taken who worked at the stock exchange and sort of got us in and we went on the balcony and all that. And it leaves a mark. I mean, looking out at this, this would have been...

29:34two thousand five or six something like that so it was mostly already computers and the people that are there are you know you don't have people making every trade live on the floor the way that you did would have in those days but even that it leaves an impression especially as a teenager how much gravitas there is there that that's sort of the central clearinghouse of equities in our nation yeah it's a impactful experience yeah it's like it's capitalism there incarnate so Warren says this trip and the wealth that he saw at the stock exchange and a Goldman, he says he didn't want, he didn't have any desire to have any of the fancy stuff, but he says he did want independence. He said, I realize wealth could make me independent. Then I could do what I wanted with my life. And the biggest thing I wanted was to work for myself. I didn't want other people directing me. The idea of doing what I wanted to do every day was important to me.

30:33Yeah, that certainly happened. It certainly happened. I just like resonates so much. I feel exactly the same way. So when he gets home, he decides that he's going to set a goal to amass this wealth that's going to get him the independence that he wants. He tells all of his family and friends that his goal is he's going to be a millionaire by the age of 35. Being a millionaire in those days would be equivalent to about 15 to 20 million dollars.

31:01in that worth today. So, you know, gosh, today I mean, like, like anybody can do it and it's great in doing our entrepreneurial startup friendly, you know, ecosystem. It's probably not totally crazy if a little kid said that they wanted to amass a $20 million fortune by the time they were 35 in Omaha in 1940. This was like totally nuts. Yeah, I'll bet. I mean, the other thing, it reminds me so much too of the You know, he would say several times throughout his life and I'm on a paraphrase that he doesn't want to be rich to be rich. He wants to, you know, have a lot of money because it's fun to have a lot of money and it's fun to watch it grow. And you can sort of already see that in like his ambition here is not to make some specific impact or to get to do a certain thing because he has passion for it. It's like, no, no, I want to be a rich person.

31:52And it's fascinating how even so early in his life, he's just unabashed about that. I mean, there's so many, like, I think we're talking to every founder right now that's going out and, like, 50% wants to be rich and 50% wants to accomplish the mission that they're on. And they're like, I'm here to accomplish the mission that we're on because we've all had it brow beaten into us that, like, it is not virtuous to want to be, and he's like, no, no, no, no. Like, I want to be a rich person. And later in his life, he would also decide, like, I want to be likeable, I want to be.

32:19you know, an icon in America. I want to be a platform for learning. I want to teach. But at this point, he's like, I want to be a rich person. I just want to be rich. Yeah. It's kind of amazing. Even the 50% of, you know, people and founders out there who like, do you just want to be rich? So you would never say that. It's a very buffet, uh, sort of singular focus. And frankly, like not caring about what other people think of him to just have that. Yeah. Just come out. So this is pretty amazing.

32:48He's 10 years old. He has this goal. And he figures something out at the age of 10 that just drives the entire rest of his life. And I think it's something that like 99.9% of people out there in the world never figure out, which is this concept that money can create more money, which is obviously compounding, which will spend most of...

33:16The rest of you know the next several hours here several hours on the next episode talking about But he figures this out like it just simply reduced to that money can create more money and the way he figures it out the story goes he Had gone to the library and taken out a book called one thousand ways to make one thousand dollars One of those like books that could only existed like the forties and fifties yep and One of the 1000 schemes that it describes in the book is that you could buy a penny weighing machine. So these things used to exist. They're like scales in public that would be on like street corners and in drug stores and stuff. And you would weigh yourself on it. I guess because like home scales. Oh, I've seen these in like grocery stores. Yeah. And so you'd pay a penny. You put a penny in the slot. And then you would get to

34:12way yourself. And so the scheme in the book is that you just go buy a penny weighing machine and then you collect the money over time and eventually you'll get a thousand dollars out of it. So Warren reads this and he's like wait a minute. What if I buy one weighing machine and then once I earn enough money from it I use that money to go buy another weighing machine and then I'll put in a different spot. And then I've got these two weighing machines both earning pennies every day. Well The rate at which I'll earn enough to buy my third weighing machine is going to be half as much time. And then I'm going to buy my fourth weighing machine. And you know, another third is last time. And so he figures this out. He apparently literally starts writing out, you know, essentially compound interest tables in his bedroom and his notebook, dreaming about all these weighing machines that he's going to have. Oh, it's so crazy. Amazing. Other kids would be like,

35:05thinking about using all this money to buy bubble gum or baseball cards or something. And he's 10. Like, I knew that later, as he gets into his teenage years, he's, you know, he's got a little pinball servicing business. But like, he's 10. That's crazy. He's 10. So yeah, so you're alluded to, he never does do the weighing machines. But when he's in high school, yeah, he doesn't actually end up by he just like does the formulas to see what it would be. No, he just does the formulas. Yeah. Oh, wow. But he does buy used.

35:34pinball machines in high school and like he makes a ton of money off these things. He puts them in barbershops. It's great. Do you know why he got out of that business? The pinball? No, I assume just because he graduated high school. No, this is a call back to our Nolan Bushnell episode. Warren found out that this was a business that if you get too powerful in it, Then you start having to contend with the mafia for, you know, who's getting a cut of doing that servicing. And he basically was like, well, I don't want anything to do with that. And he has his friend got out of that business. Wasn't Nolan saying something about, um,

36:08That pinball machines were linked to like boot lagging to during prohibition and like boot lagging money laundering Yeah, they've got sort of a storied history there that would then bleed into arcade games too because I think one it was an outcropping of the other That's right. These are these are doing more in less scrupulous early years. Oh, and he had this whole game too that he was running where he and his friend would basically pretend that they weren't the guys in charge, that they worked for some bigger company. And so whenever they'd get, like, you know, harassed for something or they would complain about prices or something like that, they would say, like, look, we're just, you know, we're the hired hands, like we're not the guys in charge. We gotta, we don't set the prices. It's such a good bit. Oh, Warren. So great. So the other thing he does when he gets back from the New York trip is, of course, he starts.

36:58buying stocks. He's got his dad, the stock broker right there, so he's got the line he can go buy stocks. So he, he convinces his big sister Doris to pool all of their money together. They're about like $250 between them. And, and he decides he's going to buy shares, preferred shares in a company called city's service. So they, together, you know, he's he's the sort of managing partner in this partnership by six shares for 38 bucks a share. And immediately the stock goes down to 27 bucks a share. So not a not a auspicious beginning. Doris is like freaking out about this. And Warren feels horrible. It's like eating him up. So the stock does recover to $40 a share. And Warren just unloads it. He's like, great, get the body back. Give Doris everybody back.

37:52but it keeps going. Pretty quickly, this stock goes to over $200 a share, but Warren had already unloaded. This is like me and Bitcoin in 2015. This is exactly what a 10-year-old Warren. Ben, if only you'd learn these lessons at age 10. Blue it. I'd say the incident makes an impression on him. He says he learns three lessons from this. I think he actually only learns one, but the first that he says he learns is, don't fixate on the price you paid for something. It's irrelevant.

38:22The second is don't rush to grab a small profit, stay focused on the big long-term wins. The irony is he would violate rules one and two, like many, many, many times until he was about 40 years old, so as we shall see. But the third lesson he does learn, which is that you can't control other people's emotions around money. So if you're going to take money from anybody, you need to make sure one that you're not going to lose it. And he's talking about his sister here. He's talking about his sister. Yep. And two, that you need to do something to manage their emotions or their ability to affect you so that they don't freak out and cause you to do uneconomic things. Warren might have sold it $40 anyway, but certainly that his sister was breathing down his neck to sell it. You know, it reminds me of early sequinities. Yeah, an apple.

39:15Warren decides it's best if the clients don't see how the sausage is made, so to speak. Which would absolutely inform his perspective on some of the partnerships he would do in the near future where he would not tell people the stocks he was buying on their behalf, which I remember reading those words and being like, what? This is like a blind undisclosed pool that he's running, but it's so easy to see how these early experiences make him realize Yeah, like if you want to be, you know, the completely independent free thinker that you are doing your own fundamental analysis and not moved, not only by the current price that things are trading at, but of the emotions of your investors or the demands of your investors for their tax consideration or for whatever reason they want to withdraw funds, then you better figure out how to hold and manage money on your own terms. Totally, totally. So.

40:11Meanwhile, shortly after the New York trip, Howard's career takes another turn. Pearl Harbor happens, and the US, of course, enters World War II. Howard is a staunch isolationist, and very... And define that for us, like xenophobic, anti-tree anti. It's unclear to me if he was xenophobic. I mean, he probably was. I wouldn't imagine he was the kind of person who loved foreigners.

40:40But he was certainly very against America entering the war. And he hated FDR and Roosevelt. He was like a diehard Republican. As apparently, we're many people in Nebraska at the time because he runs for Congress inspired by the US entry into World War II, which he thinks is the worst thing that has ever happened. And he wins. So the family moves to Washington and Howard becomes a US congressman.

41:10Warren, though, he hates it. He wants nothing to do with Washington. He loves Omaha. He wants to go back. So he campaigns his family to let him go live with the grandfather with Ernest back in Omaha. I know, and Warren's like, this is going to be great. You know, me and Gramps, we're going to become industrialists. We're going to be partners, buddy, buddy. We're going to be like, you know, the Rockefellers and the Morgan's is going to be great. He moves back, lives with his grandfather.

41:39and Ernest puts him to work in the store as a stock boy. And where it's like, wait a minute, I thought we were partners here. Yeah, I like the business you're running. I don't so much like the work that I have to do inside of it. Yep. So manual labor stock in the shelves, extremely low pay. Where it's like this sucks. I got to get out of here. Did you read too that like his grandpa was withholding a penny or two each day to simulate social security to like show war and what it was like to have to pay different levels of taxes?

42:09So great, so great. Ironically, somebody else would feel this exact same way about working for Ernest Buffett a few years earlier, though they would not intersect one Charles Thomas Bunger. So crazy. Like, how nuts is it that Charlie Bunger worked for Warren's grandfather in the same job that Warren did a few years later and they never met?

42:37Until what? They're 30s? Something like that. Yeah, until 1959. I never met. Wild. Crazy. So after this summer that Warren thought would be his future industrialist summer, he's like, all right, take me to Washington. I got to get out of here, get out of the store. He goes with the family to DC where he devises a new way for making money to earn his fortune.

43:05He gets a paper route delivering the Washington post amazing like beautiful for shadowing and when he can profess that I rose all the way from paper boy to chairman, albeit with some, you know, leaving the coming back in between. Yep. It's an amazing journey. An amazing journey. And of course, yes, you would later become the chairman of the Washington Post and partner to K Graham.

43:32What was part of the chairman? I think he was the chairman. Yeah, in K was the CEO. I think that's right. I mean, I think he got a board seat commensurate with his investment. And I think she gave him the chairman role because she had so much sort of respect for his council. Well, we'll hear more about that in part two to come. But he's got this paper out now. And remember, he was selling gum and soda door to door back. And I'll say, this is great. Now I've got The way that literally my foot in the door to all of the housewives in Washington DC, you know, I deliver them the paper, but I can sell them magazine subscriptions, I can sell them calendars, I can sell them all sorts of stuff. So he starts an empire in the streets of the suburbs of Washington DC. And he's doing crazy stuff like he's ripping off

44:20the labels on subscriptions that I think people have like put out to throw away. So he was basically understanding when subscriptions would expire. So he knew who to go sell, what subscriptions to, what time. There's brilliant strategy. Warren loves digging in the dirt for stuff. So by the time he's in high school in Washington, he's earning 175 bucks a month, which is more than what his high school teachers are making.

44:50And almost as much as the average US workers salary at that point in time. Wow. And Warren's in high school. Totally crazy. He's a master. Okay, he's not spending any of it, of course. He's a master over $2,000 in savings, which is the equivalent of, I don't know, $40,000, $50,000 today. How many high schoolers do you know that have?

45:15a mast, self-made, almost a full Bitcoin in savings. And how many high schoolers do you know that firmly understand what the value of that is compounded 7% every year for another 80 years? Like, you know that Warren is looking at that stack, imagining its future potential. Totally. So now he's got like some real actual capital to invest. What does he do? He's still buying individual stocks, still playing the stock market, but he really wants to be this like industrialist business man.

45:45He's decides he's gonna buy an actual business. He's 15 years old. So he buys a tenant farm in Nebraska back home for $1,200. So a tenant farm, he buys a farm, an active farm with a tenant on it that is working the farm because Warren's not gonna work the farm like no way. And the deal is with tenant farmers is the tenant farms, the land and the profits from The crops get split 50-50 between the tenant and the owner of the farm. Half the returns to capital, half the returns to labor. Yep. And of course if the tenant also gets to live there in addition to getting half the profits, right? Indeed, indeed. Wow, it's like Warren's first yielding asset. It's his first cash flow business. Huh. So Warren graduated high school in 1947 at age 16.

46:39I don't, he might have skipped a grade, or maybe he was just young. It certainly sounded that way. Sounded that way. And he goes to where else, the University of Pennsylvania's Wharton Business School, which then has probably now, I still sort of think of it as like the preeminent, you want to be an undergrad business major, you know, in the US or anywhere in the world, like Wharton is the place to go.

47:06But it's really his dad who makes him go. He doesn't want to go to school at all. He's like, I already know all this stuff. I just want to go get the work. And he wants to stay in Nebraska. I mean, he doesn't like going east. It's never been a great experience for him. And he's only comfortable doing it because he's like my dad's in Washington. So, you know, I have some family sort of close. I'll do it. Sure. So he does it. He doesn't study. You know, he like aces all the tests. You know, it's sort of ridiculous. After two years, his dad loses his congressional seat.

47:35and the family moves back to Nebraska and Warren uses this excuse to say, hey, why don't I transfer to the University of Nebraska at Lincoln, be back closer to home? He also has something else in mind, which is he knows if he goes to Nebraska, he can take a lot more courses, accelerate and graduate in three years and just get out of there.

47:58Yeah, I don't think he was like loving the social scene of college. I mean, he wasn't a drinker. He wasn't going on lots of dates. He had his eye on the prize. And for him, that was making money. And he frankly thought he was smarter than all of his college professors at Wharton. So I think- I mean, he probably was. With Warren Buffett, he's not wrong. He was probably pretty obnoxious about it. So at Lincoln, he goes to the Lincoln Journal newspaper.

48:26And he gets a job managing the country circulation, which means he now has 50 paper boys reporting to him all across the countryside in Nebraska. So he's that's his side hustle. He loads up on courses. He finished his degree a year early. So he's 19 now. He's just graduated college. He's ready to start his business career for real. But unlike when he went to undergrad, he actually does see some value in some further education, he decides there is a graduate school that he wants to go to that would actually be worth it. And that is to go to the prestigious Harvard business school. And he's so sure he's going to get he's going to like, look, I bought my first business at age 15. I met Sydney Weinberg when I was 10, like,

49:17There's no doubt I'm going to get in. He writes his application. It's all about being an investor and he goes and he does his interviews. He's sure he's going to get in and he gets rejected. Which Harvard Business School would forever forever be regretting? Totally. Now, I mean, I don't know. I don't know exactly what Harvard Business School was looking for in in 1947 at the time. But I think kind of sort of either notes or unbeknownst to Warren, I don't think he cared either way. I think this idea of like being an investor was sort of day class A, you know, like what you wanted to do. I mean, because investing, you know, people were still, still hangover from the depression and it was wartime. I think what you wanted to do is you wanted to be like madman, you wanted to work for, you know, a big...

50:08firm, you wanted to climb the ladder, you wanted the stability, like this idea of like being an investor and on your own, that was not what was proper at the time. And Ben Graham is only really starting to publish the intelligent investor, like this notion of how to analytically and from fundamentals do investing, you know, this still very much looked at as investing equals casino. We're still not quite in the era of that.

50:36being respected, and frankly, most people that are doing it are pretty much hucksters, are looking for their, just to make their commissions on the trades. And the people who were not, who were good and professionals and fantastic at the craft at this point in time, most of them are Jewish, which I assume there were probably some Jews at Harvard Business School, but not a lot. And it's kind of viewed as a Jewish profession. This is going to come up in a big way in a minute.

51:04Ben Graham's Jewish. The anti-Semitism that was running rampant at the time can't have helped things. Totally. You know, Sidney Weinberg, Jewish, like Goldman Sachs, the Jewish firm. And it was very much, you know, they were outsiders. They were not the establishment. So Warren is shocked by his rejection from HBS. He starts looking at the course catalogs for other business schools just to like, oh, man, what am I going to do? And he happens to see in the Columbia a graduate school business course catalog that there is a course taught by his hero Benjamin Graham and David Dodd, of course, and he's like holy crap. He would joke later. I assume this is joke. He said he would write a letter to them to plead his case to get into Columbia saying, I thought you guys were dead. I didn't realize you were alive in teaching classes.

51:59cuz he had like just picked up their book and was like this is that you know what the intelligent investor I think is the one he really read and was like this is incredible. So grams book the intelligent investor had just come out and Warren was obsessed with it now gram and dad together had written published security analysis back in nineteen thirty four but that was a textbook that was like an academic. I haven't read it but like it's super thick dense it's not meant to be.

52:29readable. The intelligent investor is like the day-an-econom and thinking fast and slow, you know, version of like, you know, it's case studies. It's like distilled down for public consumption. And for listeners out there who have read the intelligent investor, you're probably thinking, wait, that was supposed to be the not-dense one. Different era. Different era. So Warren's read, you know, the intelligent investor. And he loves it. He's like, this is amazing. And what the intelligent investor and security analysis in a even more dry way before it, what they did was they espoused. They were like, hey, you should think about stocks investing in stocks systematically and based on the fundamentals of the companies that they represent and as pieces of a business, not like tickets on horse race betting here. They basically introduced the idea of the discounted cash flow. This is the first notion that stocks are

53:25you know the market cap of a company is representative of the sum of all future positive cash flows or I guess all cash flows discounted at a certain rate back to today and you know this sort of forcing you to look and say does the price of the stock today reconcile with what you actually believe the business will yield or produce in its full lifetime you know that that was frankly novel it was and So dad is the chair of the finance department at Columbia, but Graham, he's an adjunct. He's a practitioner. So Warren is just so Gaga here because not only is he like, you know, a professor apparently wrote this book, Graham runs essentially like the first hedge fund in the world. He runs the Graham Newman partnership with Jerry Newman. They are a partnership that invests in stocks on

54:25Wall Street like there's nothing Warren wants to do more than be like these guys right I can literally go take a class from a guy who is actively employing at a real investment strategy on Wall Street mind blown Totally so the deadline for Columbia has passed by the time he gets figures this out So he writes a letter to dad and Graham is he's basically just like begging them to let him in well low and behold guess who at the time was chairing the admissions committee at Columbia Business School. It was dad. So dad gets this and reads it and is like, all right, well, I'm just going to laterally let this kid in. No interview, no discussion, no formal application. They just send Warren on and be like, all right, you're in. You're starting in the fall.

55:19Because this is like, hey, we, we basically see ourself in you. Like, no one is writing us about this thing that we're doing. And here you are crazy, excited about this super dry, relatively unexpected thing that we're doing in the world. Yes. Come join us. Come join us. So the fall of 1950 Warren arrives in New York City. At this point, he's compounded his net worth up to $10,000, which is a lot of money. Five X, what it was in high school five years earlier.

55:47but he still can't stand to part with any of his money. So rather than staying in the dorms at Columbia or renting an apartment, he rents a room at the YMCA for a dollar a day. This guy is truly cursed with having a firm grasp of the future value of his money compounded in the way that he feels he can.

56:08get a return on it. I mean, we can talk all we want about the virtue of compounding and the eighth wonder of the world. And frankly, I feel like I have a new understanding for it based on doing all this research.

56:21It's only like now that I'm feeling the heft of truly like what if I just put a thousand dollars into savings account, not a savings account, but in a index fund and access to 50 to 70 years from now. And you're like, oh my god, it turns into like a real big amount of money, almost no matter what. And it's like, you all know this. But when you're Warren and you've actually done all these calculations and all you're thinking about all the time with singular focus is the future compounded value of this money, how could you ever spend a dime? I mean, it truly is cursing to your lifestyle. Yeah. I mean, Alice writes about that that every time he looked at spending money, he would not see the sticker price for things. He would see it times eight or 10 or 20 of what that money would be worth in the future. And just to come back and say it. So we all have a firm understanding here. If you took that $1,000 and you want to invest it for 70 years, say getting a 10% per year return on it, which would be

57:18good. Like that would be a very good return. I think it's a little bit outpacing public markets. That's $800,000, 70 years from now. And like, you know, 70 years from now, my money has a lot less utility to me than it does today, because I will have not had it my whole life, which is the curse. But if you're Warren and all you're seeing all the time is that money in the future, my gosh. Well, I think that's the difference between Warren and most normal people, too, is That money in the future probably has about the same utility to him, because it's not about what he can buy with the money. It's just about the stack of money. Yep. For Warren, it is a scoreboard game, not a utility of the cash game. Yep. Totally. All right, listeners. Now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture.

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59:22the whole environment. And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance, and the work to earn and prove trust. We're huge fans of Vanta over here. And literally hundreds of acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at Vanta.com slash acquired. That's V-A-N-T-A dot com slash acquired for $1,000 off. And just tell them that Ben and David sent you. OK, so he shows up.

59:52Columbia in the fall of 1950. Signs up right away for Ben Graham's seminar, which is in the spring semester. So he's already read the Intelligent Investor cover to cover, you know, he's wearing out the pages so many times. He knows everything, but he really like, he's such a go-getter for this. He like, he really wants to impress Graham in the seminar in the spring. So he sees, I guess in Moody's and S&P put out like stock manuals at the time that was the main thing that people like Warren and Ben Graham and Newman and everybody browse through looking for stocks. He sees that the Graham Newman partnership owns 55% of and Graham is on the board of this little company in Washington called the government employees insurance company. Interesting. Sounds familiar.

1:00:47I mean, if Ben Graham's the chairman, like Shirley Warren wants to know more. Yeah. Well, Shirley wants to know more, but the government employees insurance company isn't mentioned anywhere in the intelligent investor. And, you know, the rest of the intelligent investor is full of case studies and talking about different stocks. But they don't talk about this company there. Why is that? Warren decides, hmm, I want to go investigate. I'm going to find out more about this company. This.

1:01:13Geico, if you will, for short. I'm going to go pay them a visit. So he hops on the train from Penn station, goes down to Washington on a Saturday morning and he just shows up at the office and he knocks on the door and he persuades a security guard at Geico to see if anyone's around who could talk to him, Warren sort of presumptuously at this time, although I guess he was signed up for the seminar says that he's a student of Ben Graham's and Ben Graham is the chairman of the board. So you know, might want to let me in as somebody talked to me. Eventually, the company's head of finance, Lorimer Davidson, is there that Saturday morning. And he's like, all right, kid, come on in my office. I'm gonna, he's figured I'm gonna do like a good Samaritan, indeed, give this kid 10 minutes of my time here. Well, it turns out that

1:02:02Lorimer or Davey, as everyone called him. He wasn't just like a finance dude at Geico. Not that there's anything wrong with being a finance dude. I guess he was a finance dude in a certain respect. He had been an investor and a bond salesman before joining Geico. So he was like, he was a lot more like Ben Graham than just an employee at Geico. The story of Geico, the founders, had thought that they could make auto insurance cheaper.

1:02:30by having commercials with geckos in them now, by selling the auto insurance direct to customers without using agents. And to be as cheap as possible and have the best underrating profiles possible, they also needed very responsible drivers. So they borrowed an idea from USAAA, which targeted military families for insurance. They target government employees, for sure, and since the government employees insurance company.

1:02:56It's also amazing that they're hunched that like government employees are going to be less prone to accidents than the general public was right that they could actually underwrite to, you know, we can give these people cheaper premiums because they're going to be less expensive to us like that that worked out for them. I mean, I guess seemed like a reasonable assumption. Yeah, that if you work for the government, you're maybe more conservative, less likely to drive under the influence of alcohol or you know, who does either way it worked.

1:03:26So, one of the two founders after a bunch of years wanted to sell, the family wanted to sell, and their stake and hired Davey to help find a buyer. Davey brings it to Graham, which is how Graham, at the company, he ends up negotiating a deal to buy out at a discount to the asking price, of course. Because it was fully privately owned, right? It was not a fully privately owned company, yeah. So, he buys out the 55% stake for the family owned for a million dollars.

1:03:54And then he turns around and puts Lorimer in charge of managing Geico's own investments. So Warren happened on the motherload beating this guy here. Like, you know, he's like a Graham disciple. He runs all the investments at Geico. So Warren to start peppering him with questions. Lorimer is super impressed. He's like, who is this 19 year old kid? They talk for four hours. That's Saturday morning. And Davey tells Warren all about how Geico works, how the insurance industry works.

1:04:23tells him about this magical thing called float. And Warren is like, he has seen like the revelation of, you know, God has handed down the 10 commandments on the mountain. And you mean you have other people's money that they're loaning you for free that you can do stuff with until you need it? Huh. And you may not even ever need it. Well, that's an interesting idea. Yeah. So what is this float?

1:04:50idea and how does Geico and all insurance companies work, the premiums that the customers pay Geico for their audio insurance, that cash comes in the door on day one. And Geico's expenses, they have to pay out claims on insurance claims later. So you pay the policy premiums up front. But then when they're accidents and stuff and then they go through court and blah, blah, blah, it could take years before you have to actually pay out any money if you pay out any money at all. Right. Right. Yeah. Supposing you have a good government employee that never wrecks their car, you might just make money. You might just make a lot of money and never have that you sit on and you never have to pay it up. And if you manage it well, you can make investments with it. And that's what Laura Mer is doing at Geico. He's easing all this float to make investments. And he's doing a pretty damn good job of it.

1:05:45There's sort of like two things that Warren realizes this that like I never fully put together before about insurance premiums. The first is this is a loan that someone is making you at 0% interest. You're like, well, that's a pretty good loan. Like I don't, I don't have to the service the debt. Well, like that means that I basically can make more profits because I don't have to take a cut of my profits every month to pay down the debt. Awesome. It's a interest free.

1:06:12The second amazing thing is wait, it's not one person that loaned me money. It's a gigantic set of thousands or tens of thousands or hundreds of thousands of people that are paying me money. Well, then what that means is they're predictable because that's not just somebody wakes up on the wrong side of the bed and says that they want their money back. Like the worst thing that can happen, save for some hurricanes to force out of the future a little bit, is that like One person wrecks their car and maybe another person's car, but nobody's wrecking all my customers cars at the same time. So that's the second thing that's amazing. And the third thing that's amazing is it's not a collateralized loan. So you don't have to have something in your business that sort of like warrants you being able to take on this big debt load. It's just a big uncollateralized interest-free distributed loan to you that you get to do something with until you need to pay it out.

1:07:07And especially back then, there was much less regulation about capital requirements for insurance companies and well, all financial institutions. So they really didn't have to keep any cash reserves. I mean, they could kind of do whatever they wanted with the money. Speaking of do whatever they want with the money, I think what was happening back then is that as you would sort of imagine in the early days of insurance, you would want your premiums to basically equal the amount of money that you would need to pay out in the future.

1:07:37What happens now is it's assumed that you can do interesting things to earn money on the float so And I didn't know this still doing the research when you pay for your car insurance They're actually collecting less in premiums than in total They will owe out to everyone so you need to do something interesting with the float in order to make it so that the insurance company doesn't go under which I never I never realized that it's kind of like a I suppose that probably happens with competition where everybody's just lowering and lowering their premiums until they realize, gosh, we effectively can sell our insurance below cost because we can invest the flow. Yep. And Geico's got the additional advantage which it still has to this day of they don't employ agents. So they just have a fundamentally better cost structure than all of their competitors, which means more money they get to play with.

1:08:27I bet if you call these guys by going direct, they can save you some money and like 15 minutes or less on your car insurance. How much money do you think they could save you like 15%? I can't imagine what the cost of customer acquisition is through an agent, but it seems like they could at least rebate that to you. Yeah. One one final flash forward here before we go back to the story. Everyone should go to BerkshireHathaway.com one to bask in the full glory of this beautiful website. But secondly, Please observe that there is a banner to purchase Geico insurance on the Berkshire website. It is the one thing that they do on that website other than a series of blue links to a shareholder documents. And it is an ad for Geico is like the most hilarious use of of web real estate. Hey, we have our current insurance through Geico. It's cheap. It's great. All right. Enough of this. So the next Monday, this is on Saturday.

1:09:24On Monday, Warren goes back to New York City and immediately liquidates 75% of his portfolio and loads up on Gecko. Like he's 75% concentrated in Gecko. He's like in love. And he thinks I'm going to show up at Graham seminar. I'm going to tell him about this. I'm just he's just going to go Gaga like this is amazing. I'm going to be his boy. It's going to be like, you know, his dreams of Ernest back in the day. Well, he shows up at the seminar and he tells Graham what he's done.

1:09:54Graham is not that impressed. He's like, you put 75% of your portfolio into Geico. What are you nuts? Yeah, because Graham, first of all, is not a one stock guy. He's a distributed, you know, portfolio approach guy. And second of all, I'm sure his next question was, yeah, and would you pay for it? Yeah, would you pay for it? So Geico was not a typical investment for the Graham Newman partnership.

1:10:20They probably only did it because he was able to weathe a deal out of Laura and the family. And there's a reason why it wasn't in the intelligent investor. So Graham's whole strategy, his whole mantra, basically he and dad basically invent discount of free cash flow, discount of cash flow evaluation, fundamental analysis, all that. And it comes to be known as value investing. But there's like a major problem with what they're doing, which Honestly, this conflation that Graham had of what between fundamentals and value investing persists to this day, and is still why there's religious wars about value versus growth investing. That's that he thought there was a very specific way to practice fundamental investing. What he and others called cigar butt investing. What does he mean by cigar butts? This is crude.

1:11:15The analogy is that, like, you could be walking along the street in those days in New York, and you might see smoked cigar butts laying in the street in the gutter. And some of them might still have a little bit of cigar on it. And so you could pick it up for free, not pay anything for the cigar, laid it up, and maybe still be able to get a puffer too out of these cigar butts for free. And the analogy, the reason why this analogy is used is that grams whole like thing that he looked for in companies of stocks that he bought was he wanted companies that were quote-unquote worth more dead than alive and he actually writes an article by this name. And what this meant was he looked for companies where like the book value of the assets like the cash on hand the value of their land property buildings.

1:12:09They're quick. If you shut the company down today, stop taking money from customers, paid out all your liabilities, stop the business, and you just sell off in a fire sale. Everything in the building, would you make more money from what you're selling off than what the market cap of the company is trading at? That was what he looked for.

1:12:31Which in that era, I mean, you could find those because you didn't have tons and tons and tons of people whose eyes were always on these stocks trying to figure out, hey, is anything trading below the book value that it should be trading below? And, you know, you could find them pretty often. You could find them, and not only there were far fewer people participating in the market and far less data available, but the people who were participating, they were mostly, you know, handicap and horse races. They weren't thinking like this.

1:13:01stocks that weren't hot, there were a lot of them out there. And so Graham referred to, he had kind of three big insights. He and Dodd that revolutionized investing. One was this concept that a stock is a piece of a business with cash flow profiles and going concerns and you should value it as such. Two was that price and value are two very different things. And the price of a stock at any given day may or may not reflect the actual value. Prices, what you pay, value is what you get. Exactly. And you can use this to your advantage. You have this concept of Mr. Market and Mr. Market comes to you every day and quotes prices for

1:13:46what you own and what you're looking what you're contemplating owning, but he gets a frenic and one day you'll quote high, one day you'll quote low, but the value stays the same. Right. It is the notion that he's your business partner in the venture and every single day he comes to you offering to buy out your stake at a price that is either too high or too low, almost never exactly reflecting the actual intrinsic value. And every single day you have the option to decide to sell or buy more. Yep. Very true.

1:14:16Points one and two, great, I totally agree with. Point three, I also agree with, but I disagree with the interpretation. And that's this concept of a margin of safety. The famous Ben Graham Warren Buffett, Charlie Munger, margin of safety. And of course, the way that Graham wanted to apply that is by companies that are so cheap, they are literally free of risk. Yup, yup. And so You know, it makes sense like investing involves risk as every disclaimer in history has told you and involves uncertainty. You don't know what's going to happen. So ideally, you want enough downside protection built in that you'll do okay no matter what. That makes sense. And yes, you do want that. But Graham's way of looking at this as we said was, I'm only going to buy things where if we literally shut down the business and sold off everything on hand, we would get our money backer.

1:15:11more. There's two problems with that, both on a downside and on the upside, on the downside. As we shall see, sometimes the liquidation value of the assets of a corporation aren't worth as much as you think they are. So you can try to sell off the property plant equipment. But if there are no buyers or no buyers at the price that you want, well, just because it says it's worth something on the books doesn't mean it's actually worth that.

1:15:40So that's one problem. The bigger problem though is that like this is the ultimate small ball way of making money. Like your upside is so fundamentally capped when this is how you're looking at the world. Like you could go do a hundred of these cigar butts or you could buy one guyco and just hold it for 20 years and make way more money. Yeah, it's fascinating. The way that I have been thinking about this, I think the closest analog is basically to gross margin in an operating business where if you're running a tech business with super high gross margin and high fixed costs like yeah you got to spend on the fixed costs but then you get that gross margin forever without having to change what business you're in but if you're in the business to selling lattes then every single time you need to go and pull a new espresso and so

1:16:31For Graham, this is the like stock equivalent of that analogy Yeah, he's in a high velocity business of constantly need to go and buy a new security Sell it for more than it's worth go buy another one sell it for more than it's worth and you're gonna make you know his notion is never count on making a good sale have the purchase price be so attractive that even a mediocre sale gives good results But you're gonna incur transaction costs every time you're gonna need to pay taxes every time like you're gonna have to do the work of actually identifying what you want to buy and sell every time it's a high Cogs business Yep, and it takes a long time

1:17:12So sadly, tragically, by the next year, Warren has succumbed to Graham's exhortations here, and Warren sells all of his Geico stock in 1952, early 1952 for $15,259. He makes over a 50% IRR on it, which is amazing. But if he just held onto the damn thing, He would have made hundreds of times more of his money. But of course, the grand way to analyze that business is like, hey, it's actually trading in a high price. Right. Yeah. It's price is at or above its value. So it's time to get out. Yeah. It's so interesting. I just want to take a step back for a second here and just reflect on that for a minute because this whole growth versus value thing, if you think about value in this narrowly defined concept of like

1:18:06Let's just keep using the cigar by analogy. You pick up the cigar, but you smoke it and it's done and knife throw it away. Like there's all the work we talked about of identifying the cigar, but the transaction cost of picking it up, of puffing it, of paying the tax on your gain of the puff and then discarding it and having to go through that whole process again. But the whole notion of growth investing is, well, wouldn't it be nice if that cigar actually got larger and larger and larger faster than you could smoke it?

1:18:32And not only do you have to not incur all those transaction costs there, but if you're willing to take some risk and be smart about analyzing what risks you're going to take, the business could grow the value of the business could even grow faster than the way that it's being priced in the market. That's this completely novel concept that exists outside the universe of what Ben Graham was willing to consider in investment. Totally.

1:19:00Now, to be fair to Graham, you know, he was doing all this through the depression. Like if you live 25 years and the stock market is flat to down for 25 years, of course, you're going to think this way. Yeah. And of course, we are all a product of our environment. And I think one of the phrases that is above it is that sort of.

1:19:23applies to this is we've talked about as the market a weighing machine where the market basically if you think about a weighing machine then it effectively equates value to price whatever you are spending is what it's worth or is it a voting machine where people are sort of setting price and voting on the price independent of the weight or the value of the actual underlying security and this is where the realization sort of comes in that in the long run it is a weighing machine but in the short run it's a voting machine the stock market.

1:19:53Totally. And sometimes the short run less longer than you would think. Yep. So all that said, Cigar by investing was still a sound strategy in the 1950s. You're kind of like in the land of the blind, you know, the one-eyed person is King or Queen or whatever. So, you know, the Graham approach works. And Warren is just like, lapping it up. So he takes the seminar.

1:20:21Warren becomes the first and only student to ever receive an A-plus in the class from Graham. Side note, also in that same class with Warren is one Bill Ruin, who was a stockbroker at the time at Kidder P-Body, and was auditing the class. And he realizes, he's like, man, this buff a guy like, he's going places. I'm gonna become friends with him.

1:20:50that would pay off handsomely as we will see at the end of the episode. So after graduation Warren, he wants more Graham. He can't get enough. So he goes to Ben and to do a new man and says, Hey, can I get a job at Graham, Newman? Can I can I work for you guys? And it was a pretty small place. I think there were only like six or seven people working there. And they talk about it and Graham though turns them down and says, You know, I'd love to hire you. The best student I've ever had, but Jerry and I have a, have a pre-strict policy here. And that is that we only hire Jews. And he would later recant on this and would hire Buffett in a couple years. But it makes sense. Like, you know, Graham was British, I think. And this is effectively like an affirmative action type comment, right? Where he's saying. Totally.

1:21:39we want to make an opportunity here for those who have been sort of persecuted and discriminated against. And this is, you know, 1952, World War II ended four years ago. And Graham was, I believe British European, I used Born in Europe. You know, this is like, it's a small firm, but they're like, hey, you know, we're pretty committed to giving to an opportunity here. So Warren is heartbroken, but not deterred.

1:22:09He goes back home to Omaha. Decides, okay, well, if I can't join the Graham Newman partnership, I'm just gonna set up my own partnership. I'm gonna do it myself. But both Graham and Howard Warren's dad talk him out of it. They both say, hey, you need some experience first working for someone else before you go and do your own thing. And the natural thing to do is when you go work for your dad's old brokerage firm, Buffett Fock, so Warren does. And he becomes the dreaded Prescriptionist working for his dad and he just hates it hates it hates it He's getting paid on commission, selling stocks. The whole idea of there's a room full of people who are tasked with moving a stock and calling all their customers to say you should buy this thing. It's about the most anti-war and buffet thing I can possibly imagine. Totally. He's just like, it's like organ rejection. So he's, you know, he's making his calls. He's doing what he has to do. He's moving, trying to move the product, but he gets on the phone with people and he's like, you know, he'll do whatever he has to do. But then he's like,

1:23:11Hey, but there's this company called Geico. They're an agentless insurance company. You should really consider buying that as well. And people think he's nuts. They're like insurance company that doesn't have agents. I want to talk to my agent like that's weird. So he doesn't have a lot of success. D to C, baby. They got this great website. Yeah. So there are two good things though that come out of his two year.

1:23:38Actually, I am curious, how did Geico work back then? Is it by mail? Is it by phone? Presumably the whole thing is done by phone. That's actually a good question. I assume phone. There might have been some tie-in with the government agencies that maybe there was like marketing that went out to agency employees.

1:23:58I don't know exactly. All right, we'll have to we'll have to do a spin out guy co episode at some point. Yeah, we will. Well, it'll come up again in part two. Don't worry. Warren gets another bite at the apple, so to speak. So two good things that come out of this little interlude back in Omaha. One, he reconnects with one Susie Thompson whose father Doc Thompson was a dean at the University of Omaha and had managed Howard's political campaigns.

1:24:26and Warren somehow persuades Susie to marry him, which shocking given what Warren Buffett was his personality and what he was like back then. And two, he also after, due to flea working for a while at the brokerage, persuades his dad to set up the first of the Warren Buffett partnerships with him called Buffett and Buffett. And basically, Warren puts some of his money in and his dad puts some of the family's money in and Warren just gets like some more capital under management to invest here. So it's his first sort of taste of being a being a principal. Yep. And I'd just add a little more color to that comment you made on sort of what Buffett was like back then and got Suzy to marry him.

1:25:14was and is a person of singular focus in his life. And he's sort of in his old age started to do more things, but he was never a socialite. He was never someone that was, you know, deeply diving into other people's interests and, you know, socializing to be social. He was a person that has always wanted to invest and make money. And so, of course, he did set his eyes on, hey, you know, I want to marry Susie and I'm going to make that happen. Well, there are all these stories about it like family dinners, even like they'd have friends over and Warren would just wander off upstairs and start go reading annual reports in the middle of like a dinner party. Yeah. He was like a like a wild man who all he did was invest in stocks. However, the flip side of this, these personality quirks of Warren, he is very singularly focused and he's very persistent. So despite the rejection from Graham Newman,

1:26:12Warren continues to write letters to Ben and Jerry constantly talking about his ideas talking about stocks. He's looking at he travels to New York frequently just to go see them and drop in After two years of this Jerry finally sits down with Ben and is like, you know, we've got this anti anti-semitism rule here, but Maybe we should make an exception and hire this kid. He's pretty special So Ben relents he he calls up Warren. He's like, all right. You really want to come work here? Fine. We can make it happen. Well, you don't need to ask Warren twice. He accepts on the spot. I don't think he even talks to Susie about it. Even though they have their daughter little Susie at this point and they're living in Omaha. He just accepts on the spot. They move them back to New York at a moment's notice. He literally shows up at the Graham Newman office a month before his initial start date.

1:27:11He's just like, yeah, you're not paying me this month. That's fine. I'm like, I'm here. I'm working. That's awesome. Uh, once again, he doesn't want to pay New York City housing crisis. So he moves the family into a crappy apartment in white planes, even though, you know, he's like pretty rich already from everything he's been doing. And he's now working at like the most prestigious hedge fund in the world. And you know, he's paying like You know, God knows how much like 50 bucks a month for an apartment way outside the city. That's crazy. Is it fair to call it a hedge fund? Like what differentiates a hedge fund versus just like a institutional money manager? That's a good question. I mean, I don't think really. I mean, I don't think they're taking like huge short positions or anything like that at this point in history. I don't think so. I think they would sometimes short stacks and Warren would actually famously

1:28:04I wasn't gonna put this in the script, but he was a real pain in the ass in high school. Arguably real pain in the ass for his whole life and in high school. He hated his teachers so much that he knew that they all had the teachers pension was mainly invested in 18t stock and so Warren went out and shorted 18t stock and brought the short the slips in and like put them on his teachers desk just to show you his betting against their retirement funds oh and in high school they would have like he was already sort of seen as sort of a savant so that probably would freak people out yeah uh what like what does he know that I don't yeah he was he didn't really care about people's feelings at least when he was in high school

1:28:46So he lands. He's he's at Graham Newman unsurprisingly. He just like crushes it pretty quickly within another two years. You know, Ben and Jerry are consulting him on everything that they do. Warren's coming up with most of the investing ideas that they're doing. He's involved in every decision that the firm makes. And he's really hitting his stride so much so that Ben at this, you know, Ben is we're not going to get super into it. He's he's a very colorful character. Shall we say had three wives, I think, and then the story goes, I think he started up a relationship after his last marriage with the girlfriend of, at the end of his life, with the girlfriend of his son after his son died. He's a character. So he is ready to retire. He wants to move to California, live the good life. So he and Newman is also getting old. Jerry's getting old. He's thinking about the same. They offer

1:29:44to make Warren a general partner at the firm and have him essentially continue Graham Newman. I assume they sort of stay as like, you know, partner emeritus or something like that. But this time Warren shocks them. And he's like, no, remember that home on my terms thing that I really care a lot about? Yep. He's like, I don't know. I don't want to run your firm. If I'm going to run a firm, I'm going to run my firm. And You know, I'm just here in New York to work with you guys. I don't actually like it in New York. Susie wants to be back in Omaha. I would do it in Omaha. So they hand up winding down the firm and Warren and Susie and little Susie their their daughter moved back to Omaha in 1956. This time for good. So here's the plan. Tell me how how well you think this is going to work.

1:30:40Warren's net worth is about $175,000 at this point after working at Graham Newman for two years. So sorry, a few million dollars by today's Yeah, so the average yearly salary for a worker in the United States at that point is $4,800 and he has $175,000 saved up in the bank account and he's 26 years old so The plan is, they have two kids now, how he's been born. So the plan is he's going to retire. And he says, you know, made my fortune. Susie really wants me to like, you know, be a father and all that. Be involved at home, you know, small requests. All right, I think I can retire. And if I said a budget that we can live on in Omaha, I'm going to enjoy the good life. This is so not warm.

1:31:37He says, I think we can, we'll set a budget of $12,000 a year. Remember the annual average income. That's three X. Yeah, like close to three X that he would be spending every year. We'll buy a nice house and Omaha. This is huge. We'll live like kings. And then, you know, also if there's the money, that'll be compounding. It'll grow. Great. It'll all be fine. And how much does he have in the bank again? 175K.

1:32:02So that's what 6.8% so that's probably about what he thinks he can generate passively by just leaving it in index fund and so he's effectively. I'm sure he thinks he can generate more. Right. He's still going to dabble a little bit. He's going to do a little bit of active management just on, you know, his own capital. Why do I feel like this didn't happen? I don't remember his part of the book. This did not happen. So he's despite his retirement.

1:32:28You know, he's hanging out with family and friends and stuff and they're talking to him and all he can talk about is money and so eventually some of these people are like, well, you want to manage my money? And where it's like, oh, okay, twist my arm. I don't even know if it's easy. I got some ideas. Yeah, I got some ideas. So he starts setting up these little vehicles around Omaha with family, first immediate family and then a few close friends to manage their money in addition to his own money that he's managing. And he structures these things actually really, I really like the way he structures these. So he says, remember these aren't, these are people he really cares about, you know, in his own more and way. He structures them as partnerships where there's a 4% annual return hurdle. And any returns that he generates above

1:33:274% he is the general partner in these partnerships keeps half of the upside of those returns. Half. I thought it was 25%. No, it was half. At least according to the snowball. Wow. So that's pretty huge. I mean, that's like 50% carry effectively. But there's the 4% benchmark return. So if it underperforms 4% then he gets no money. And he's not paying. There's no fees, right? He's not paying himself. There's no management.

1:33:55But it's even better. This is why I think it's actually pretty fair and I really like this structure. He personally puts himself on the hook for a quarter of the downside. So any money lost, I think between zero and 4% return, it's like a neutral zone where nothing happens. I think if there's any capital lost, he will personally cover 25% of the losses of his partners, which is, these are pretty good incentives.

1:34:24Yeah, he's so good at incentive alignment. Totally. And he hadn't even met Charlie yet. So he's finally living the dream. He's fully independent. He doesn't work for anyone else. He's got the, you know, he sort of has a partnership like Graham Newman, but it's it's all part time. You know, he has no employees. They're all separate partnerships. It's all friends and family. It's a little over $100,000 total in outside money. So not not that much money. And he does.

1:34:51Everything everything himself so the investing the accounting he he he files all the taxes himself for the partnerships. He has no employees No outside services his total expenses for doing all of this in 1956 you ready for this pen laid on me amount to $22 and 71 cents That's like our accounting at acquired. We're all the labor's free. Yeah, totally and that's between all of the gains that he generates and taking in some more money. By the end of the year, he's managing over half a million dollars for less than $23 in cost. That's pretty good, pretty good feel load on that. So word starts going around Omaha that like, hey, Warren's back in town. And so wait, let me understand real quick here. So this 25% of the downside is that like,

1:35:43GP commit where he was putting his own money in and that money was just at risk or was he sort of like additionally on top of that saying I will reimburse you for $25,000. Reimburses. Wow. Like a clothing. Yeah. So he actually, at this point in time, at first I thought this was weird, but then I understood it later. He does not really put in any of his own money. He only puts in $100 into each partnership. Huh. He's keeping his own money separate, which at first I was like, well, that's weird, but I think he did that because these are friends and family. The goal is to make returns for friends and family. He's essentially making the same investments separately with his own pool of capital. And then later, when he consolidates it all, he puts in all of his family's money as well. So I don't think he really thought of it as like, oh, this is a fee generating scheme. Right. It's just that, yeah, each one of these is the pool of capital for my friends. Yep. Yep. So word sites going around Omaha that

1:36:40Warren's back in town. He's taken on money if you want to invest with him. So he can't help himself. He starts, he's loving this. He's going around town. He's meeting with everybody. He can't stop pitching. He's raising money for his retirement activities. One family he gets introduced to is the Davis family in Omaha, the husband of which is a prominent doctor in town.

1:37:07They decide to invest $100,000 in this venture after discussing amongst the family while Warren is there saying, you know, Warren, you really remind us of a really bright young man who actually grew up next door to us. Now lives out in Los Angeles. You guys are like the spinning image of one another. It's really bright guy. We remember he was the smartest kid we ever knew.

1:37:33He's left Omaha now he lives out in Los Angeles. We'll have to we have to introduce you when he's back in town sometime Charlie Munger is his name More on that to come in the next episode But it was a while right like this was yeah, the seed was planted, but they wouldn't meet for years So that was in 1956 and the dinner that the Davis's would organize would not happen until 1959 So yeah, three more years before Warren and Charlie would meet So this all goes pretty well. And a couple of years later. Do you know the one other term that he asked of the Davises and then he would ask for everyone else going forward after that? Oh no. So this gets to his desire for doing business his way and not having other people sort of influence when he does distributions or anything like that. He is open for business one day of the year.

1:38:26to his clients and that day is December 31st and on that day they can either take money out or put money in but other than that it is managed by Warren and secret and so he does not have to disclose what he is buying or selling nor can they take money out. Interesting. I knew that he obviously didn't disclose what the holdings of the partnerships were but I didn't know that it was only that one day that you could take money in or out. Interesting.

1:38:55So this goes pretty well pretty quickly Warren's rounded up nearly a million dollars across seven different partnerships and after the first year or so of running this his stakes so his intention with this effectively carried interest that he sets up the half 50% of the profits above the 4% benchmark threshold is he wants to essentially grow his equity ownership of these pools. He's not going to take that money out in cash. Of course he's not. There's transaction costs. There's taxes. There's Warren Buffett. He's Warren Buffett. So he does so well within the first year or so that his fees are on paper, $83,000, which is almost half of what his net worth was when he started this thing. And due to that, he owns 9.5%.

1:39:53of the combined partnership starting from essentially zero his hundred dollars that he put in. He now owns almost 10% of these pools. And that's of course because in that very first year when the Dow finished the year down eight and a half percent, Buffett made ten and a half percent that year for his partners. Pretty good, pretty good. So he now has enough capital under with the million dollars at his control.

1:40:20that he can start to do the kind of things that Graham Newman used to do. So we didn't really talk about this, but there was another aspect to the cigar butt style of investing. It wasn't just that Ben and Jerry and then Warren, when he joined, would look for companies with book value above trading value. They would then mass big positions in those companies, try and get themselves on the board like Graham did with Geico, although he didn't need to be agitated with Geico, both with the other, with the cigar butt companies.

1:40:49They would then like, agitate actively to get the companies to liquidate assets and distribute the cash out to shareholders. Oh, it does sound like a hedge fund after all. Yeah, these guys are like, they're like Bobby Axelrod out there like corporate raiders. So now with a million bucks, that is disposal. Warren can start to do this. So the first of the companies he does this with is a company called Sanborn Map. He puts 35% of the capital of the partnerships into it gets control of the company forces it to split itself into and makes a quick 50% profit on the spin-off boom like he's shooting fish in a barrel you can do this all day by the end of 1960 total capital is up to two million

1:41:40And Warren's share is worth a cool quarter of a million dollars or 13% of the partnership in 1961. And let me pause before you go into 1961 just to recap a few of the returns here year over year.

1:41:55The second year, he made 41%. The third year, he made 26%. The fourth year, 1960, he made 23%. All well, the Dow is having some good years, some bad years. So it's losing money sometimes. It's making money sometimes. Ward hasn't lost a dollar. He's outperformed every single year. He stayed positive every year. In fact, the partnership results as a whole so far, if you compound over those four years, are 141%.

1:42:24compared to the Dow's 43%. So, you know, whatever Warren is doing is working. Wow. So then, 1961, I don't have the Dow numbers in 1961, so I don't know relatively how good this performance was. The Dow numbers in 1961 are 22.4%. 22.4. Pretty good here. Pretty good. Warren does 46% in 61, which not only, you know, generates a bunch of returns, compounds the capital. The partners that like, please take more of our money, bunch more money flows in. The partnerships are managing over $7 million in total, which is larger than Graham Newman ever was. Wow. And let me start quoting from some Buffett annual letters here, because this is an interesting phenomenon. He was

1:43:15a wonderful writer. He had sort of trained himself both in public speaking and taken some classes in that and in writing. And he wrote these, as I'm sure many people would guess, some prolific shareholder letters to his partnership every year. That actually is not something that he did in the early Berkshire years. It took him years to start doing that again, but he really felt like it was incumbent upon him to do this when he was running these investment partnerships. So let me just read from you a few of these 1962.

1:43:44If my performance is poor, I expect the partners to withdraw. 1963, it is a certainty that we will have years when we deserve the tomatoes. 1964, I believe our margin over the Dow cannot be maintained. 1965, we do not consider it possible on an extended basis to maintain the 16 0.6% point advantage we had over the Dow. This goes on and on and on where Warren continues to caution, I don't think this is sustainable. I don't think we can keep crushing it as hard as we are. And he does this to this day, every year in the Brexit letter, 50 years later. Oh, amazing. Well, 60 years later, unreal. Yep. So at this point in 1962, when he's now bigger than Graham Newman ever was,

1:44:34He finally gets an office. He'd been working out of their spare bedroom at the Omaha House all these years, doing everything himself. He gets an office. He hires a couple people. He consolidates all these various vehicles into just one vehicle, the Buffett partnership limited. And this is when he puts all of his own money in as well. So he's got a single vehicle. He's now, you know, I don't know if he ever said he officially unretired, but like he's in business.

1:45:04He's in business. He also codifies in these letters he's sending out a few official, quote unquote, ground rules for the partnership, just like Don Valentine did back in Sequoia in the early days to their limited partners. And there are a few rules in there. The last one, kind of like you were saying, been hallmark of the Buffett style for years to come. I cannot promise results to our partners. What I can and do promise is that a our investments will be chosen on the basis of value not popularity. B, we will attempt to bring risk of permanent capital loss, not short-term rotational loss to an absolute minimum by maintaining a wide margin of safety. And C, my wife, children and I have virtually our entire net worth invested in the partnership. Pretty good ground rules. By halfway through that year.

1:46:011962 when he consolidates everything. Warren is 31 years old and his net worth crosses the million dollar mark. So he's achieved his dream. He made it. He made it four years early. The next year in 1963, Buffett finds the second great investment of his lifetime and also the second great mistake that he would make on the back end of it. The first of course being Gecko.

1:46:29American Express. So this is great. Some listeners probably already know this story here. And before we dive into this story, I think the framework that I would use for if you're listening to this and hearing a lot of this for the first time, you know, you heard about Geico, you know, you're sort of hearing these puzzle pieces where there's a lesson learned from each of these companies that Buffett was sort of the first to figure out that these businesses are each interesting in a puzzle piece way that fits in with other businesses, that in the sum of its whole could create this kind of unbelievable capital-efficient flywheel. And I don't know flywheels the right term. Puzzle pieces put together into a beautiful puzzle or mosaic might be the right term, but it really is like him understanding all these unique

1:47:20types of businesses that have these characteristics that he can then use in the future. And American Express, I feel, is sort of like the second big lesson for him after he learns about the insurance business that put the first one. Well, I think you're totally right about the puzzle piece fitting together aspect. He learns that in his third greed investment, which will be the last one we'll cover on this episode. So that's coming up. Okay. So back to American Express in 1963.

1:47:48You know, Buffett is still under the Graham spell here. Like, he's looking for cigar butts. That's what he's doing. Uh, he's looking for deals and MX is no cigar. Or as as Charlie Munger would later put it, he's looking for fair businesses at good prices. Great prices. Yeah. Fair businesses at great prices. Not great businesses at fair prices. Yep. Exactly. Which is the Charlie way of doing things that Buffett would later wisely adopt. So You wouldn't think that AMX, you know, AMX is at this point. It would still widely respected today. But back then, American Express is like the most trusted financial services company in America. It had been around already for close to 100 years. The Travelers checks business. Some many listeners are probably not familiar with Travelers checks, but was just an absolute juggernaut and an amazing business. The idea was if you were traveling,

1:48:46And this is before credit cards are growing up. Yeah, me too. Even when I was in college when I studied abroad, my parents got me MX Travelers checks. The idea was you would go to your local American Express office, give them money cash. They would in return give you Travelers checks, which were essentially like a guaranteed paper for that amount of value backed by MX.

1:49:10And then you could take those checks anywhere where you traveled. And if you like lost them, you could go to MX, but more importantly, when you're traveling internationally, you could use this as a way to get funds in whatever the local currency was. Right. Cause wherever you're traveling, doesn't know about your hometown bank and may not even know about your home country bank. And so this is the way to have your credit accepted everywhere. Right. There are no ATMs and credit cards are still early, early days, although MX was a pioneer there and had the emergency express.

1:49:39credit card. Anyway, it's this gilded institution. In 1963, they have a small subsidiary of the company that issued operated warehouses and issued warehouse receipts. So what does this mean? It's like the equivalent of a traveler's check for warehouses. You would have warehouses full of a commodity of something, say, salad oil, in this case, soybean oil to be exact. And you would get MX to come in, inspect the warehouse and issue paper that says like, oh, yes, there are XYZ tons of soybean oil in this warehouse. And then you could take that paper and you could collateralize it. You could borrow against it. You could trade against it. You're essentially financializing this product.

1:50:34pretty brilliant business that Amex was in. But it was small. This was much smaller than their consumer business. So all this is great until a pretty shady commodities trader named Anthony Tino de Angelus in New Jersey, of course, of all places, decides that he's going to pull one over on Amex. He has his warehouses with them. He decides to fill his tanks, which were supposedly filled with soybean oil.

1:51:04with seawater instead and defraud the inspectors and then collateralize it and borrow against it and run a Ponzi scheme essentially. Didn't he try and bet with it? He then took it and made some risky investment with his check that said, hey, this is worth so many tons of salad oil and then he ended up basically losing it all. Yeah, there was something about how to deal with the futures market and...

1:51:32It was crazy. I mean, you can't make this stuff up. It was something with like Russia and the Soviet Union. They're soybean crop failed that year and people thought they were going to have to buy US soybean oil and then they didn't. So the price collapsed. Anyway, ridiculous stuff. But anyway, suffice to say he's now got a piece of paper that someone's coming and saying, okay, give me what that piece of paper is worth. And of course, not only does he not have it, but there's nothing in the warehouse back it up either. So the piece of paper is worth zero.

1:52:01So all in it comes to over a hundred and fifty million dollars worth of fraud that happens and Theoretically amics is on the hook for this now legally it's debatable like Tino defrauded them So you know whether they should actually be on the hook or not is debatable But like they're American Express there the CEO says like we're gonna you know settle we're gonna with the creditors. We're gonna we're gonna cover this this scandal like rocks amics stock on Wall Street so the share price drops by over 50% and analysts and people out there think the company's not gonna survive Buffett though thinks otherwise he sees an opportunity so he and his new employees they go around Omaha, New York and a bunch of other places and they just start like interviewing Consumers and talking to them at banks and saying like hey, what do you think of amics have you heard about the

1:52:56So are you being oil, scandal, the salad oil scandal? Are you still using the travelers checks? Are you using the credit card? And consumers are like, I haven't heard of this. Scandal, what are you talking about? Of course, I trust the travelers checks. So, above the figures that AMEX can easily absorb all of these losses, even if they covered the whole thing out of cash on hand, they have over $200 million of cash on hand, plus over $500 million of float.

1:53:24from the travelers checks business. And this is a similar lesson that he learns from Geico, which is, look, all of this debt that the company has that they owe out to these people with travelers checks. As long as there's not a scandal, they're not going to have a run on us. They're not going to come at us all at once. It's a sort of portfolio distributed liability. And so as long as I do my diligence and I assume that consumer confidence hasn't been rocked and there's not going to be a run on AMX, then hey, we're actually in good shape. So he makes a huge bet on AMX. At this point in time, the partnership BPL Buffett Partnership Limited has over 17 million in capital. Buffett puts three million

1:54:14into Amix right away, like a huge position at this time. And eventually he puts 13 million in total into Amix and owns 5% of the company. Amix ends up settling the case the next year for $60 million. The stock goes through the roof and they make two and a half times their money on the $13 million invested. So amazing win.

1:54:42Second great investment, you know, of his career. And similarly, second incredibly stupid decision. Once he gets up two and a half X, he sells it all. Brutal. Brutal. Brutal. He did not listen to our Sequoia Capital Part One episode. He did not.

1:55:04This is something that he sort of saw too that is a departure from Graham and wouldn't really come about until later with like Coca-Cola, but this is the first sort of twink of it, of Buffett really recognizing the defensibility, the moat that comes from brand, because brand doesn't show up on a balance sheet, but it's a huge asset. And so it's one of these things where I think Buffett starting to, you know, flex a little bit and say, hey, I actually can analyze these businesses a little bit beyond the black and white numbers that are shown up on the financial statements by doing a little bit of a different form of diligence and assigning value to things that are a little bit less tangible than than previous value investors have in the past. Yeah, I mean, Ben Graham. I could you imagine talking to Ben Graham about brand and the value of brand? He would like kick you out of his office. Ben Graham wouldn't even talk to you about.

1:56:01Product like he's like if you're talking to me about probably I'm not interested in hearing your opinion on the how the company's product blah blah blah show me that it's underpriced relative to book value. I can't imagine taking that to brand. I want to know how many machines they have in the factory and what I can sell them for. Yep. Totally. So that's the AMX story right around the same time in parallel. Buffet finds another cigar butt that he is just Over the moon, excited about. And this one he hears about from a friend, I think in New York, Dan Cowan. It's a failing New England textile manufacturer who stock was selling for well less than the book value of assets. I think about 50%. Yeah, I think the, I have the numbers here. Yes. So the book value of all the property, plant, equipment, and cash on hand at this company is $20 a share.

1:56:59And the stock is trading at 750. So Warren is just like, his eyes get real big, real, real big here. So what is the company we are talking about? We are talking about Berkshire Hathaway. So Berkshire, the company was really Hathaway, had its origins way back in New England, whaling times like, like Moby Dick style, which Side note, I tried to read that book once and I was like, oh, this would be cool. It's like a wailing adventure. It's an American classic. That is the most difficult book I've ever tried to read. I got like 50 pages in and I was like, no.

1:57:39It's your intelligent investor. Yeah, total. It was the security analysis, but if I needed the intelligent investor version of it, there you go. Yeah, I mean, I think the way to think about New Bedford was like they were an industry town and their industry was wailing and wailing oil. And then when they sort of pivoted as a town and needed a second industry textile, sort of cropped up based on all the competency and talent labor and stuff that they had in the town. The business leaders in town sort of collectively decided that text also is going to be thing, and we think about whaling now, and it seems barbaric, and it totally was. But it was the biggest industry in America. So New Bedford, Massachusetts, was the wealthiest town in America during the whaling years. I did not realize that. Yeah, this was not like some little thing. There's a reason why Melville wrote his novel about whaling. So in 1888, after the whaling business was in decline, thankfully, because it was horrible.

1:58:36Horatio Hathaway and Joseph Knowles found Hathaway manufacturing company, which would then go on to acquire and merge with a bunch of other mills over the years. There's just sort of one problem with this business plan that the elders of New Bedford come up with, which is that building textile mills in New England was a really, really dumb idea. Really dumb idea. Why is that? Because if you think about it, what do textile mills do?

1:59:05cotton, raw cotton from the South, you know, from the South, and they turn it into, you know, yarn, finish products, et cetera. Berkshire Hathaway eventually would become, I think the largest or one of the largest producers of men's suit linings. Yep, synthetics, too, like polyester. Yep, synthetics. So you're importing this cotton from the South, right? That means that like the cotton's got to get on ships and come up to New England.

1:59:33Well, if you're gonna put a bunch of cotton on ships, you could also send it to places that have a cheaper cost than the former wealthiest town in America. Or just not put it on ships. Well, not in the beginning. In the 1880s, you had to put it on ships because the climate in the South, the humidity was such that you couldn't, like there were problems with producing the cotton. So they needed to send it to some cooler climate. You needed to send it to a cooler climate, but you didn't need to send it to New Bedford, Massachusetts.

2:00:02It's still like, okay, it's not great off the bat. But then in the early 20th century, industrial air conditioning is invented. And now you don't need to put it in ships at all, like just build the factories, the textile mills there, which people did. So the business is kind of limping along, but it's been operating for a long time. So there's like a lot of mills, a lot of plant and equipment. There is a decent amount of cash on hand. By this time in the 60s, It's run by a descendant of Knowles named Seabury Stanton. And Stan, he's like the Don Quixote figure of like the New England textile business industry. He sees himself as like preserving the legacy, the wonderful institution of great textile manufacturing in New England. And he is going to do everything he can to protect

2:00:58and bring the industry back to his glory days. So he is every year just spending millions of dollars outfitting all the mills with all the latest technology doing everything he can to like bring back the glory days. Yes, he is not once heard of the sort of like Buffett-esque notion of, you know, what's your return on invested capital in the business? No, no, no, no, no, if we have capital spending, just pouring into the business.

2:01:26He's like no bless oblige. So Warren hears about this from Cowan and he's like, oh, this is gonna be amazing. I'm gonna make so much money here. He starts buying the stock. Seabury, once he finds out that Buffett is buying the stock, he starts buying the stock himself. He's like, oh, I don't want anybody taking my baby away from me. And let alone these guys that have a reputation of being corporate raiders.

2:01:54At first, Buffett is happy about this because he doesn't really want to own this company. He's like, oh, good. The price is going up. Once it gets to a certain point, I'll sell. And if I sell to Seabury, like all the better, I don't really care. So he goes and he meets with Stan. They discuss the company making a tender offer to buy outstanding shares, in particular, Warren's shares, and they...

2:02:19have a corning to Warren, they have a handshake deal at $11.50 a share. And Warren says, great, if you launch a tender offer at that price, I will sell my shares. He goes back to Omaha, gets a letter in the mail, tender offer is announced at $11.38, $11.38. So what's that 11.3738 something like that?

2:02:47Yep, so 12.5 cents a share less than what they talked about. And this is like, I still don't understand that I've read a lot about this. Nobody, including Warren can really seem to explain why Warren gets so worked up about this because that's not in his personality. Like, he cares a lot about money, but it's not in his personality to get worked up about things or to get emotional about stocks. But he goes off the deep end. He is like pissed.

2:03:16The best explanation I've seen is sadly his father Howard was dying around this time and passed away right around this time and must have been affecting Warren. Well, and Buffett is also, you know, he's built a lifetime reputation on doing right by his word and in dealing in good faith. And I have to imagine that, you know, facing off against someone who is not dealing with good faith and is sort of reneging on an agreement that can't sit well. Totally.

2:03:45Although, you know, the munger version of what to do here would be when somebody deals in bad faith, you just don't deal with them. Warren, you know, it would have been completely understandable to say like, all right, fine, whatever. I'm just going to sell my stock at 11 and three eights, get out of this, be done with it, still make a lot of money. If you want to, you know, fight, it would be also totally rational to just hold the stock and say, I'm not selling.

2:04:13Instead Warren says, screw you. I'm going to launch a tender offer for your shares. Which is so uncharacteristic for him. He starts canvassing the entire shareholder base trying to get anybody to sell him shares. He is on a mission like a man possessed that he wants to get control of Brooks your hat the way and kickstand out of his company. And this is like a big-ish company at this point. I think it's something like 15,000 people work in the mills. Yeah, it is not a small company. It would become a small company, but it is currently a large company. It's now a non-existent company, except in name. So by April 1965, Warren gets enough shares to get himself elected to the board. The next month, he stages a boardroom coup, essentially, also very uncharacteristic.

2:05:10He forces Stanton out and installs himself as Chairman. He's one. And his prize is the super crappy company. And it's not like, what's he gonna do? He can shut down the mills, but then he's got to lay off like 15,000 people and have the whole town of New Bedford hate him.

2:05:30But then what's he gonna do with the buildings? He's gonna sell the buildings to whom? He's gonna sell the equipment to whom? Right, the wailing industry's done. Every other textile manufacturer is also not doing great at this point. Like, it's a pretty terrible asset to own other than if he really could have liquidated it for book value, then awesome. But frankly, he couldn't have. And he's got this reputational thing, which I think we're seeing come into play here and we'll definitely see more of it in the second episode in the series, which is Buffett.

2:05:59deeply cares about his reputation and will ultimately derive a tremendous amount of value from his reputation and so he doesn't want to be seen as this raider who comes in and destroys the local economy and shuts down the mills and so he basically doesn't like he makes a deal with himself with the rest of the company with other and he's like look we're just gonna I think like You probably know better than I do, but basically not continue to invest like crazy. Only make very smart investments, eventually make no additional investments into the company, but at least keep it running. Yes. So he would say to Alice in the snowball about this, about nature, quote, so I bought my cigar butt and I tried to smoke it. It's amazing. You walk down the street and you see a cigar butt and it's kind of soggy and disgusting and repels you, but it's free.

2:06:49And there may be one puff left in it. Berkshire didn't have any more puffs. So all you had was a soggy cigar butt in your mouth. That was Berkshire Hathaway in 1965. I had a lot of money tied up in that cigar, but I would have been better off if I'd never heard of it in the first place. What did you say at the top of the show? It cost him in terms of compounded opportunity capital. So yeah, in 2010 he did the math and claimed that Not only was purchasing Berkshire the worst biggest mistake of his investing career, but had he taken the money that he put into Berkshire and instead just invested it directly in an insurance company by 2010 he figures he would have made about $200 billion in incremental returns. But like Steve Jobs said, you can only connect the dots looking backwards, not looking forwards.

2:07:46And now there's an energy company that bears its name and real estate brokerage that bears its name and on and on and on. So not only that, but I do think if he hadn't bought Berkshire, I don't think he would have made his third great investment or at least wouldn't have made it in the same way and figured out the same lesson from it that really drove the entire rest of his career and what Berkshire had the way would become.

2:08:15So the next couple of years, despite all this pressure, nonsense, things go great. Thanks to American Express, at the end of 65, the partnership has $37 million in assets. Buffett's net worth is about $7 million. And that year, 1965, the Dow did 14%. And of course, Buffett's partnership did 47%. So still not only beating the Dow, but positive every year of its existence so far. Crazy.

2:08:45So all this success is sort of building up and weighing on Warren. So in January of 66, thanks to, now knowing from you, that on December 31st was the day that partners could take money out or put money in, on December 31st of 65, partners invest another $6.8 million in the partnership. Wouldn't you? Yeah, all in, baby.

2:09:12So for the first time Warren doesn't know what to do with all the money. He starts sitting aside some cash reserves. Like he's never done this before. He's always been a hundred percent invested and he starts to worry that he might not be able to find enough good investments for all the capital he now needs to play as he is cautioning in his letters every year. Yep, so he closes the partnership to new capital at that point says.

2:09:41Not going to take any more capital, continue invest this and compounding, but like there's danger in getting too big. I might not be able to perform in the same way. This is like a disciplined seed stage venture capitalist saying no, I don't want to grow my fun size. I don't want to have to change my strategy and invest in different things. I want to stay true to the thing that I'm good at. Yep. So this is before we get to his third grade investment.

2:10:06I think maybe in part because of this mindset of like I'm gonna stay true to do what I'm gonna. He makes the biggest missed opportunity ever. Maybe in history. I was teasing Ben over the last couple days texting him saying, I've got something in this episode that I don't know if you know, but is just the most unbelievable thing that you will never imagine. Lay it on me. In 1967, he writes his partners, saying that he's introducing a new ground role to the partnership. And this one is quite literally the opposite of Don Valentine. He says, we will not go into businesses where technology, which is way over my head, is crucial to the investment decision. I know about as much about semiconductors or integrated circuits as I do about the meeting habits

2:11:02of the shrunched. It's a Polish word. It means beetle in Polish. Typical, you know, Warren way with words here. This is very unfortunate. Very. What was the company? Very unfortunate decision to see 1967. It predates Microsoft by seven years. Predates Apple. It's way after IBM. What's around this time?

2:11:33Deck, or now it's post-deck. Oh no. You'll get it if you think about it enough. I mean, is it looking value origins? We've talked about it in a lot of early Sequoia investment. Just pre-s Sequoia. Sequoia was started in 72, but this is all the crew that downed out. Is it an Arthur Rock investment? It is an Arthur Rock investment. Is it Intel? We're talking about Intel here. Oh no way. Get this. So buff it at this point.

2:12:02is on the board of Grinnell College in Iowa. He's a trustee of Grinnell College, which by the way he was introduced to by Susie. Susie became an incredible civil rights activist and Grinnell College was involved in the civil rights movement and Martin Luther King spoke at Grinnell College six months before he was killed and Susie brings Warren.

2:12:27to the college to listen to King speak, and Warren is incredibly moved by Dr. King. And so he decides after that to join the board, they were trying to recruit him to join the board. And so he does. Do you know who else was on the board? One of Grinnell College's most famous alumni alongside Warren Buffett? Uh, Nois, or Bingo. Robert Nois. Wow.

2:12:54alumni of Grinnell College, inventor of the integrated circuit, part of the traitorous eight who left Shockley, semiconductor to start Fairchild, and then co-founder of Intel with Gordon Moore and Andy Grove is on the board of Grinnell with Warren, not only that, but Warren, of course, chairs the endowment investment committee at Grinnell, right?

2:13:22Of course, that would make sense. When noise leaves to start Intel, and Arthur Rock is putting the deal together to finance Intel, noise brings it to the Investment Committee at Grinnell College and says, hey, there's a hundred thousand dollar piece. I think Grinnell should invest in this company. I think this is really gonna be big. I know what I'm doing. He saw the deal. Warren approves the investment.

2:13:48And Grinnell does invest $100,000 in the Intel seed round effectively, but Warren never goes near it for the partnership for himself. And in fact, says I will never invest in technology companies. Unreal. Unreal. And basically held to that for another 45 plus years. Totally. Not until Apple. And I think, well, I haven't done the research yet.

2:14:16I think Apple bubbles up within Berkshire from Todd James, not from Warren. I mean, talk about the sins of omission. Like, this is before Sequoia. Imagine if Warren had financed Intel, Warren Buffett could have been Warren Buffett plus Sequoia capital. Wow.

2:14:38And realistically, what would he have done with it? If he did invest in it, like he's never invested in business. So first of all, he's never invested in technology business to this point. He's never invested in something that early, right? Everything he's bought has been these public, you know, their pieces of public companies. Yep, established on cash flow businesses. Yep.

2:15:01The Buffett Partnership doesn't wholly own any businesses, so it doesn't even own anything private, right? Every single thing is a SEC registered. Well, Berkshire is now private at this point. Okay. Okay. I'm just trying to do a little bit of math on like, what do you have held it? How long would you have held it? Right. You know, all of these things, but here's the thing, like this whole, like, weren't always justifies not doing.

2:15:26technology investments by you know his whole circle of competence thing that really is a Charlie Munger thing but that weren't adoptively I stay with him what I know my circle of competence I know the boundaries of my competence it doesn't make any sense to me because he invests in plenty of businesses that he doesn't know anything about at the beginning like textiles, like insurance, you know, like retail. Yeah. And the question is, like, are the dynamics in those businesses more closely related to each other than they are to technology businesses? Like our, our high growth, pre-product market fit, or like pre-scale technology businesses, just so completely different. Yeah. I think that's maybe what Warren thinks, but he's got some kind of mental block here, because like, with Intel, you got noise and more and Andy Grove.

2:16:15coming from Fairchild. Like, you know what Fairchild is? It's a staff like, it's an amazing business. And they've like, we've got the thing, we're gonna basically dethrone Fairchild. I don't know. Anyway, I just read this and I was like, jaw on the floor. It also goes along with his notion of independence of thought that like he doesn't really care what other people think about a company that if he doesn't understand it from first principles in a way that he's sort of gonna build it up from fundamentals, then it's not his cup of tea and he's not investing. I mean, that has a very... All this sounds like Warren Buffett to be, but it turned out to be a bad decision. It does. I mean, that's Warren for you. So, anyway, back to the story. I just thought that was so amazing. Yeah. So, Berkshire meanwhile, unlike Intel, is quickly becoming a major problem. Buffett, of course, stops, stands, you know, investing in the business.

2:17:12But once you stop investing like they were already uncompetitive. Now they're wholly uncompetitive and they're just, you know, losing money. So he says like, gosh, I got to do something. Like Brikshire is going to burn through all of its millions of dollars, a cash reserves. If I don't do something here and I don't want to shut the business down as we were saying. Right. So he starts thinking about like, well, could I just buy something else within Berkshire used the money that's sitting there and essentially just kind of transformed the business around it. So he starts looking around and there's a company right there in Oma that he's been eyeing for a while called National Indemnity and this is the third great investment where we're essentially going to leave the investing portion of this story.

2:18:06And national identity, David, to me sounds like an insurance company, would that be right? That would be right. It is run by Jet Jack Ringwalt. All right, listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part.

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2:19:54So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely at scale, go check out servicenow.com slash acquired and tell them that Ben and David sent you. Okay, so back to national indemnity and jet jack Ringwald. So what national indemnity does, they're very different than Geico. Indemnity national, they ensure super esoteric risks. Like, you know, Geico wants the boring safe driver, low risk, wide aggregate insurance. These guys want the hole in one policies, right? What we were talking about on the Virgin Galactic episode with the X Prize. They would be ensuring the X Prize. They want the riskiest, craziest wildest stuff out there as Jet Jack was famous for saying there's no such thing as a bad risk, only bad rates.

2:20:50And of course he's right. You could price anything as long as you price it right. And they were very good at pricing risks and Jack famously like he would personally go dig into they once there's some story about there once ensuring like a settlement on a murder case or something like that. And he was a murder case or maybe it was something and.

2:21:14He went personally and did a bunch of detective work to figure out how likely it was that the case was gonna go wood way or the other and then he praised the risk. And they happened to be right down the street from Warren's office in Omaha. I feel like half of the Berkshire orbit companies are like, huh, Warren happened upon them in Omaha and they happen to be these like Best in class businesses. It's unbelievable little Nexus. It's so folksy. Yeah, it's hilarious. And differently in how they did this thing, Geico, but similar to Geico, National got to use its float for a super long time because most of the policies they were writing never cashed in. Like they were the type of things they were ensuring where like it was long tail stuff like stuff that was very unlikely to happen. So

2:22:09They just get used to the money for a long, long, long time. Jack, though, he's getting older. He's considering selling the business, but it's his baby. He's super, super fickle about it. Like, you know, he wants to sell. He doesn't really want to sell. And he make noises about it every now and then Warren knows all this. So in February 1967, he catches him in sort of a dour mood. They're like having lunch or something at some point. Warren's courting him and They work out a deal in 15 minutes. 15 minutes or less to sell your company. And Warren's like, I'm gonna buy this company for Berkshire, not the partnership. This is it. I'm gonna transform Berkshire into a Chinese company. So they hammer out a one-page deal at the price ring wall wanted. No audited financials, promised to keep the company in Omaha, promised not to fire any employees. Every literally gives Jet Jack everything he wanted, like no reason to say no. And they do it.

2:23:06And Jack even sticks around and continues running the business because he can't disengage. He's obsessed, which Warren wanted anyway. So it's great. Puzzle piece. That's like a little little learning Warren's going to employ later. Yep. Yep. He's just adding to his adding to his quiver of tricks of the trade here. So it becomes part of Berkshire. And in doing this deal, it's unclear how much Warren thought about this ahead of time.

2:23:34or more like he was just looking for something to buy for a Berkshire, but he sort of stumbles upon, this is probably like the single greatest in say that Buffett has across his entire career of marrying an insurance business with first one in Berkshire, but then many operating companies. And so how it works is so he knows he already knows going back to Geico that within the insurance business, you have flow, you can invest the flow. That's great. And then you can compound your capital for free. Essentially, the problem though, not that it's a problem, but the limiter on this is that you do need to keep some cash on hand as an insurance company because like, you got to pay out some policies like, you know, at any given month, you might need to pay some stuff out. So you can't just go invest.

2:24:31all of your capital into other things. But if you actually combine an insurance operation with other non-insurance operating businesses, you can invest all of your capital in all of your float because an operating business both consumes capital but also spits off cash also produces the capital. And so you can keep the capital from the float tied up in the operations of operating businesses and then buying more operating businesses to attach, and then if you ever need to pay off claims, well, you just pull a little capital over from the cash flow every month that's coming out of, say, a railroad or say, like, you know, anything that's very predictable like a candy store or a dairy queen or, you know, what have you? This is brilliant because

2:25:30This now enables Bart Warren through this insight to start building up 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, and you can start to see how this ping pong's back and forth.

2:25:59He actually writes a paper after the national acquisition, where he talks about the capital requirements for insurance companies in this insight. He says, by most standards, national indemnity is pushing its capital quite hard. It is the availability of additional resources in Berkshire Hathaway that enables us to follow the policy of aggressively using our capital, which, on a long range basis, should result in the greatest profitability within national indemnity.

2:26:28Berkshire could put additional capital international should underwriting turn sour. It's a boom. Berkshire is still a dog, but the insight was huge. Like he can go out and just run this playbook all day long. It's amazing. Right. So this is the beginning of Berkshire morphing from a series of textile mills into a holding company that has all these incredible cash flow flywheels happening inside of it.

2:26:57Yeah, and it's not just a holding come unlike the, you know, nifty 50 conglomerates of the 60s, which were just like holding companies for the sake of being holding companies. Right. It's a holding company with a purpose. Right. Like these companies actually benefit each other rather than just, hey, we have a whole bunch of capital. So we're going to roll up companies that never really interacted all. Yeah. Yeah. And I should say it's not like the products interact. It's not like the managers meaningfully interact the way that and this little foreshadowing here but the way that Berkshire will eventually run is capital is managed by the central head office and when a business needs cash or produces cash it goes to the head office and the capital allocation is done there but all the actual operations of the businesses are done inside the business and so it's this insight that the synergies or the flywheels or the connectivity whatever you want to call it don't have to happen from

2:27:54The managers of the business is actually dealing with each other, it can happen at the capital allocation level. Yeah. And it also gives Warren, you know, Warren is already a what's in a generation talent when it comes to capital allocation, but it gives him this huge margin of safety because back to the Ben Graham concept, he doesn't have to chase cigar butts anymore because his cost of capital is way lower than anybody else out there.

2:28:24He's got all these policyholders lending him money for free in a non-delutive way. It's not really dead. It's not really equity. It's just free cash that he gets to play with. Yep. So he can go buy businesses and craft them onto this flywheel. And he has this margin of safety. We're like, even if he doesn't, he does make great investments and great purchases. But even when he doesn't, he's still benefiting from it because he's adding on to this capital flywheel. Yep.

2:28:51Yep, and it's a national indemnity such a good pickup for Buffett too because he's the master of probability. I mean, if we go back and look at AMX, you know, the market was scared off because there could have been a run on AMX. But Warren looked at it probabilistically, figured out the probability of it actually happening was low, assessed the expected value, multiplying the probability by the sort of potential outcome and was like, oh, this is an expected value positive bet with a margin of safety. And he's just a genius probabilistic thinker. And so when you apply someone like that to owning an insurance company, not only is he a brilliant probabilistic thinker, an individualistic decision maker who doesn't need third parties to give him social proof that something's a good idea. Now there's this third leg of the stool also, which is sort of this

2:29:39master capital allocator. So the capital allocation, the probabilistic thinking, and the individualistic decision making, he's now got these like three crazy tools at his disposal and owning an insurance company is awesome for someone like that. Yeah. And he's playing with a stacked deck here. Like he can't lose. Yeah. So no wonder he becomes the best investor of all time. Well, so we're about to see some pretty excellent returns here.

2:30:06Through 1967 and 1968, the Dow does well in 67. It's at 19%, 19% return that year. We're starting to kind of see some go-go action going on in the market. 1968's a little cooler, but it's 7.7%. Across those years, Warren did 36% in the Buffett Partnerships in 67, then had its best year ever with a 59% return in 1968.

2:30:36He's untouchable. He's just like, he's like Steph Curry. He's just draining threes here. I mean, if we look all the way from 57 through 69, the Dow, the compounded results of the Dow were 153%. The compounded results of the partnership were 2,795%. It's a 28x that we're ended over the 12 years of the Buffett partnership. He's just like playing out of his mind.

2:31:06Yeah. Unreal. Wow. But as hopefully we've painted on this episode, you know, there's probably the best quote. I don't think we said this at the top of the episode, but probably the best quote about Buffett that has ever, most apt quote that has ever been said about him was in a Forbes piece that came out, I think right around this time, which, and it says, Buffett is not a simple person, but he has simple tastes. And so hopefully we painted a picture here of like, he's a really complex dude. Like, you know, he comes across folksy, he drinks his coquets, his peanut brittle, but he doesn't use a computer for his analysis. But like, there is deep, deep analysis. Yeah. And there's a lot of, there's a lot of psychology going on in his head. So.

2:32:00You think like, I mean this insight, this whole thing about insurance, the flow, the flywheel and the operating businesses, this insight should have and did drive the entire rest of his career. Like the next five decades is this. But he doesn't see it. Like he's really worried at this time, you know, what started a few years ago of, I don't know that I can invest all this capital in the partnership. I don't know that I can keep generating these returns, close the partnership to new capital. I'd have to go buy really big businesses or buy businesses outright to deploy this much capital. And I don't have access to that. You know, these are the types of businesses we can buy and we buy smaller shares of them. Yep. So in 67, he writes a letter to the partners saying, quote, I am out of step with present conditions. On one point, however, I'm clear, I will not abandon a previous approach.

2:32:59the cigar butt investing strategy whose logic I understand, although I find it difficult to apply in the current environment, even though it may mean for going large and apparently easy profits to embrace an approach which I don't fully understand, have not practiced successfully and which possibly could lead to substantial permanent loss of capital. He's like mentally struggling here with this dichotal like times have never been better and he's never been more worried.

2:33:27I mean, he is Ben Graham through and through with this point in his life. It's rule number one, don't lose money. Rule number two, C rule number one. And then you also have this thing going on where because everything is so tied to the purchase price, rather than the betting that you'll be able to generate a positive outcome, his mood is tied to purchase prices. So even though everything's going up, he's looking at it like this sucks. Like I can't find anything attractive to buy. And it's all You know, he's almost, his mood is very much inverse of the market. And he's feeling, I think, like, I've got so much to lose now. I've got all these gains. He's not playing like he's got nothing to lose anymore. He's playing like he's got everything to lose. So he's in such a bad place that even after this brilliant national indefinity pickup for Berkshire, in 1968, he tries to unload Berkshire. He tries to wholesale sell it.

2:34:23to Munger and David goddess, who is an investor in the partnership. And fortunately for Warren, they're either too smart or too dumb to take him up on it. They've a difficult Charlie fashion, Charlie's looks like it's like, you're telling me you want to sell this thing and you want me to buy it, knowing that you want to sell. Why on earth would I buy something?

2:34:49knowing that you want to sell. The mutual admiration respect there is so telling. So telling. So by mid 1969, Warren's like, he's done. He starts making plans to wind down the partnership. He's like, dejected. He's going to hang up his spurs after his greatest year ever. After his greatest year ever, you know, definitely there was some tension with Susie as well or Susie was like, we're worth like Many, many millions of dollars. Like, what are you doing here? And interestingly, many millions of dollars, but he's still kind of an unknown person. Like Wall Street doesn't yet know the name Warren Buffett the way that they would in the next couple decades. And he's not sort of being called on. He's not a celebrity investor. He's not informing the public on investing. This is very much just about staying private and making money. Yep. Yep. So.

2:35:46on Memorial Day 1969. He writes a letter to the partners and he says, if I am going to participate in the investment business publicly, I can't help being competitive. I know I don't want to be totally occupied without pacing an investment rabbit all my life. The only way to slow down is to stop. And then he says he's giving notice of his formal retirement at the end of the year. He's going to wind up the partnership.

2:36:15distribute out all the securities to the partners in the beginning of 1970. That's it. He's done. He's walking away. He's like Jordan. He's going to play minor league baseball. That's a very apt analogy. That's exact. This is the last dance except it's not really the last dance. The partners are shocked. They rightly never thought Warren could give up the game. Of course, he can't.

2:36:44give up the game, as we'll see next time. They ask Warren what to do. He thinks about recommending them to Charlie, but Charlie at this point is like, I don't know, I don't want a bunch of new investors either. I'm worried about the market too. So he sends the big investors to David Gattisman at First Manhattan Bank in New York, his big firm can manage big clients. And the small one, the small investors, he ships over to Bill Ruin.

2:37:10who had, back from his class, with Ngram, Bill had just left Kitter P body and was setting up his own fund, the Sequoia fund, not to be confused with Sequoia capital, but equally incredible performance over the last 60 years. And that's kind of where he leaves it. So January 1970, he liquidates all the public securities. He unwinds the partnership at this point. He owns 26% of the partnership.

2:37:39He gets 16 million in cash 18% of Berkshire 20% of diversified retail company, which was a joint venture. He had with Charlie owning department stores ill advised place to invest and we keep mentioning Charlie here. Do not worry stay tuned. We will have the full monger story in part two in part two and 2% of blue chip stamps, which was another Charlie JB And that's it. He also owns the Omaha Sun, which was like a vanity purchase to get back to his newspaper roots. And the partners have to decide with these private companies, Berkshire diversified Blue Chip and the Sun, whether they want to sell their steak and Buffett says he's happy to buy their steaks from them if they want to sell or if they want to keep them. So he rates a long FAQ to the partners, including, should I hold my stock in the private companies?

2:38:38To which he writes all I can say is that I'm going to do so hold the stock and I plan to buy more So with that cryptic statement he drops the mic he's out out of the game and he owns how much of Berkshire Hathaway at this point 18% Hmm as he rides into the sunset and I think That little cliffhanger is probably a great place to leave it on history and facts for this first half of Berkshire Hathaway. I don't know. We're at about three hours, dude. That's enough. Should we go another hour? We could talk about the part after this where he tries to figure out what to do with his life. Well, the market is doing crazy things or, you know, the little bit of warm water that he gets into with Charlie and the feds. But maybe, maybe let's hold on that and we'll start.

2:39:36part two off with some of that wandering pre going all in on Berkshire Hathaway. Back Lake Jordan. Where in the four or five? Yep. Well, boy, do we have some fun playbook things to dive into this episode? The first one that I have, I actually, I decided to leave Berkshire land for a moment to illustrate the point. So the point that I wanted to make is.

2:40:03Sure, Warren Buffett is really into compounding. Like I think that would be an understatement and everyone in the audience is probably chuckling if they've made it with us that far. Another fascinating thing is David, you just mentioned he took this distribution in cash at the end of the wind down. And what I'm thinking is, ah, that's got to kill him to have to take these transaction costs, these taxes. Like he must have really wanted to wind down the partnership to make that happen.

2:40:30to illustrate the point of how much transaction costs and taxes can interrupt the beautiful thing that is compounding. I went to a paper that was written in May of 2020 from the Yale School of Management by AJ Wasserstein, Mark Agnew, and Brian O'Connor, who are collaborators with someone that we have had on the LP show. David, do you know who that person is? Hamilton? Will Thorndyke.

2:40:59Will Therndake, I should have gotten that. Author of the outsiders who came in on our book club. Of course. And they did some great analysis in this paper called on the nature of long-term holds where they basically ran a little simulation and showed what would happen if you held something that had continuous compounding for 25 years and you paid taxes once in your 25 or if you had continuous compounding happening where you paid taxes every five years. Basically, if you withdrew in cash and then reinvested in the exact same or an equally producing asset. And is this assuming taxes are all long-term capital gains? Yep. Yep. It's assuming 25% which would be some combination of federal capital gains and some state tax as well. So, if you invested one dollar and just let compounding do its thing for 25 years, you would end up with

2:41:54$24.9 at the end, and this is assuming a compounding rate of 15%. So you take your dollar, 25 years later, it's worth $25. Now, if you pay taxes every five years, that same dollar is worth $16.8. So it's a 50% increase in the amount that you are left with at the end if you just don't interrupt compounding by doing the thing that all humans want to do which is manage the money do stuff be active and I think that it's just really an insight that Warren has sort of like begun to have here I think in the Buffett partnership he moved stuff around much more than he later would in Berkshire Hathaway but this sort of uninterrupted power of compounding you know taxes transaction costs whatever the things are

2:42:48If you can find yourself betting on a winner and just let it ride, that is the very best strategy you can possibly employ. And it feels to me at the end of this story, he's like, he's really starting to grasp that. Yeah. Well, it's kind of like, so there's this great, this is, we go way out there in left field, but hey, we're three hours into this episode. So who knows how many people are still listening? There's this great book called Transitions by William Bridges.

2:43:17And it's wonderful. And it's about psychologically dealing with transitions in your life, even if it's like a good transition, like getting married or having a kid or, you know, bad transitions too, like big changes in your life. And the whole theme of it is that when you have a transition, like the old you needs to die before the new you can arise. And to my, I kept thinking about this through this.

2:43:46story here in this part one of like Warren was so successful. He was the most successful Ben Graham disciple that there was more successful than Ben himself. But that wasn't gonna work anymore. And he needed to get to start to understand these things that you're talking about. And he needed to symbolically, you know, die the old Warren to have the new Warren arrive.

2:44:16And I think that's what happened here with the closing down of the partnership, whether he knew it or not, almost assuredly, he did not. He needed to close the chapter on like that part of his life to start to embrace some of these very different philosophies. Yeah. Fascinating. That's a really good point. I've never thought about that sort of like literal let the old you die. I think that way. It's a really good but recommended to anyone.

2:44:42Well, speaking of Ben Graham, this notion of independence of thought, there's a Ben Graham quote that the stock investor is neither right nor wrong because others agreed or disagreed with him. He is right because his facts and analysis are right. And this is something that I think as a venture investor is so difficult.

2:45:00because so much of the success of a company when you're investing in it depends on its ability to in the near term raise future capital from someone who is not you. So it encourages this sort of herd mentality of, do other people perceive this to be a hot company in the same way? Whereas what Ben Graham is looking at is the complete opposite side of the spectrum, no growth at all, exclusively looking at cigar butts, it's like, You have to hang your hat exclusively on your independent analysis, which is way easier to do when you have a book value staring you in a face and you're only going to do basically a one-time transaction on it. But it is, I think, a thing, this sort of independence of thought. And it's something that we can all bring a little bit of Ben Graham into our lives. And it's funny because the positive and the negative hit you in different ways. When other people are telling you you are right, it's very easy to accept the idea that you are right.

2:45:55What other people are telling you you are wrong, you know that, hey, maybe what I'm supposed to do is be contrarian here and trust my gut. And it's funny how you want to say, well, look, just because other people are telling me I'm wrong, it doesn't mean I'm wrong. But if other people are telling me I'm right, I'm definitely right. Totally. I think you raised a really good point in there, too. Two good points. One, yeah, we could all use a little more Ben Graham in our lives.

2:46:24But people talk about value investing adventure and blah, blah, blah. And like, you know, some people try to do it. Other people have been mowing why it doesn't happen. You raise a really, really good point, which is that it kind of can't because you need other people to believe too. And unless you're going to be willing to just wholly finance a company yourself, But even then, like that's a slippery slope, but the company needs to recruit employees, it needs to recruit partners, it needs to recruit customers. Like you can't just be, you gotta be bringing people into the fold, you gotta be a missionary to succeed in the startup world.

2:47:13Right yeah, it's funny how it basically it in a growth company and in a very small growth company especially you cannot be the oldie believer otherwise it won't work Yep, which maybe is a reason why as painful as it is to go back and talk about it Maybe is why Buffett investing in Intel and technology never would have worked in the first place He just wasn't in a mindset to be able to think like that Yeah, it is a completely different way of thinking. Well, speaking of not being in the right mindset, you know, Buffett spinning down the partnership in its very best year ever or after it's very best year ever, this is sort of like there's a boom time going on and that's a terrible time for Warren to be buying. And I think that the classic Warren Buffett aphorism be fearful when others are greedy and greedy when others are fearful springs to mind where it's easy to say

2:48:11This guy shut down his investment partnership when everyone else was being greedy, you know, like he did not return 50 plus percent. Right. It's crazy. Like what most people would say, let's go raise so much more capital to deploy. It is like a really adherent to principles approach of, you know, if you truly do believe the fearful one others, a greedy and vice versa comment. There is no better illustration than that. Yeah.

2:48:41And interestingly, though, I bet he would probably also say it was the wrong decision. You know, I mean, like the right decision in the long run because it enabled Berkshire, but like in a vacuum like, he was crazy. He sort of kept going. Yeah. Maybe. I mean, that's the whole sort of Bill Gurley enjoy every last minute of the upside. You never know when the downturn's going to happen. So you have to invest through all cycles. That's true unless you're Warren Buffett and you can actually pick the cycles.

2:49:12Like so far he has proven and we will see in future years too. He is remarkably good at having a lot of cash when he needs a lot of cash and being fully invested when he needs to be fully invested. Yep. That is true. That is true. Don't time the market unless you're the Oracle of Omaha I think is the second part of that phrase. Well he does have saying that I actually first heard from Jamal.

2:49:37of all people, very different approach than Warren, although great in his own way, but the quote from him, it's not timing the market, it's time in market, which to your point would be like a, do as I say, not as I do. He also says invest in index funds and goes out and is incredibly concentrated himself.

2:50:01Yeah, I mean, it's funny listening. I was watching the Flash Forward a little bit, but I was watching the first recorded annual meeting, the 94 annual meeting with Ian Charlie, and he's remarking on, well, sure, if you have no conviction, then you're any better than any fool at picking stocks, you should go on as many stocks as possible. You gotta be diversified. You gotta be covered in case of downturns. If you feel like you're investing in managers who are excellent and have fortified their businesses so that they'll be excellent through all cycles, Then you should own as few as businesses as you possibly can. I own one. I trust the managers implicitly. It's just a very worn, buffet quilt. But for all of us who are taught diversification, that's another way of saying that we should all be reverting to the mean. And if you believe you actually have a gift and have an edge, then you know, bet on your ability to perform superiorly, which he has done. Incredibly well. Yeah. A couple others here that I think are worth highlighting.

2:51:01And I'll save a lot of these that are better illustrated in part two. I think the one that I really want to harp on here is Buffett's singular life focus and obsession is Getting as much money as possible and watching it grow and doing it in the most ethical stand-up way possible on his own terms and What we're witnessing is just the result of that singular focus of that complete maniacal singular focus when applied by someone who is a genius savant at that and also has trained himself to become a master communicator. And I think there's just very few examples in the world where someone truly is world class at something and is singularly focused on it. And I think that when you have that, that is when you have these, you know,

2:51:5110 Sigma events, or I don't know how many state or deviations from the bean this is, but this performance is remarkable and enduring. And we'll talk about this in grading, but this is a 29.5% compounded return every year for 12 years.

2:52:10Partnerships. Yeah, it is, you know, you mentioned Michael Jordan. I don't think that's a ridiculous analogy. And I think Jordan's singular focus on winning. I think is a very, a very reasonable comparison. He's naturally the best in the world. He is the hardest working. And he's singularly focused on it. So I think that's very apt. Totally. There's a, I just pulled up. There's a wonderful quote from Mike Meritz that I love that was in the book leading that he wrote with Sarah Alex Ferguson.

2:52:39It says, the great ones eliminate all distractions and focus only on what matters. Shut out the things that don't matter and don't let their time get stolen away. People forget how few hours there are in a year. You must focus on what's important and not do what's not. We haven't talked about his work habits, but Warren is the singular embodiment of that. He sits in his office all day and he reads annual reports.

2:53:08period, but like six plus hours a day he's just reading. And the other hours he's talking to Charlie. Right. And there's massive life trade-offs to that. Like if you've decided that that's the thing you want to do and that's what makes you happy, great. But do not pretend that it doesn't come without trade-offs because like for someone who wants a well-rounded life, yeah, that's not it. You're not going to get it. Totally.

2:53:34The last one that I'll highlight here and then I'll save the rest for part two because there's so many other things here worth discussing, but I think they'll be better illustrated by the full embodiment of Berkshire Hathaway as it is today, is the secrecy of his ideas.

2:53:48Not to get too much into power, but I think he was actually counter position to every other stock picker who got paid to look smart in the short term. Warren did not care about looking smart in the short term. His business was not that. He wanted to make the most money long term. So he stayed quiet about his ideas to like a religious extent. And he never ever wanted to move the market or cannibalize that rare, really good idea that he had by sort of showing his hand too early and trying to appear smart.

2:54:18And he didn't have that national brand. He was never paid on commission or transactions. He aligned the business model with his long-term goal. And that was totally counter position to the market. Yep. Totally agree. Aligning the business model. Yep. Only one I throw in there, which will probably also come up in part two. But but I think it really came out here in part one is just like the I say this all the time. It's the Sequoia capital.

2:54:46Let your winners run, like selling Geico, selling AMX, those were massive mistakes. And as brilliant as all the things that Warren did and as brilliant as his performance was in this first part of his career, it's just impossible for me to look at it and I think, man, it could have been 10 times better had he not made two very simple mistakes.

2:55:15And when you're saying just like Sequoia, you're talking about like the hard learned lesson of selling Apple and making a $6 million profit on it. Yep. Yep. So true. All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig. Yes. There is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale. Yep. In the...

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2:56:25Well, all right. As a little precursor to grading here, let's do a quick value creation value capture. On these episodes, we always compare how does the value that they create compare to the value that they actually capture? You know, is it very little like Wikipedia? Do they capture a lot like Google does? And then, of course, a second part, how does the value created for the world, not just for shareholders?

2:56:46Compare to any value destruction so sort of talking from like an ethical moral perspective on the first one David you might say well Warren Buffett is a pure play investor so that by default means he's just capturing as much value as he's creating like he's not out there innovating and creating a new product for the world is that a value creation type person So I'm curious to your thought on that. On part two, that will definitely not be true. I think Berkshire Hathaway from this point forward will have lots of value creation to talk about. But what about up to this point, to 1970, what companies created value for the world that otherwise wouldn't have created net new value because Warren was involved? Yeah, well, I mean, and even stepping back and looking at the whole Ben Graham entourage and

2:57:36cigar butt investing like you could make a super real argument that it's all that is value destructive investing coming after companies and breaking them up and liquidating them like there was a going concern providing value to customers that is no longer going and not employing people and like Yeah, there was definitely some value destruction here now I think you could also argue about the cigar butt investing in Ben Graham that before Him and them There was just rampant speculation that was happening and that's ultimately value destructive for everybody to so he did lay the groundwork for Fundamental investing Value-based investing in the purest sense of the word value not as anti-growth but as like true Investing in value as opposed to speculating so that's all great for the world

2:58:34Right, if you think about all the like pensions that invested from the Graham era through today that you know generated money for there the people whose pensions they support like that's awesome to the extent that they had access to public equities that were no longer sort of just treated as lotteries. Yep. So yeah, and then Warren, you know, gosh, I don't know. I was probably neutral to Berkshire Hathaway his involvement like He stopped investing in the business, but the business was going to die any faster. That's a good question. It is interesting because the least charitable view that you can take on investors, like pure investors, is that you're just reallocating piles of money. So you're not creating new value for the world. And that's like the least charitable in lots of ways. I mean, if you think about the ways that great venture investors or value add, like

2:59:30Yes, there's something there to bringing a lot more than capital. If you think that some of the things we'll talk about in part two, where someone with a really strong reputation can sort of come in and save a business who has sort of in the midst of blowing up like a Solomon brothers or something like that. That is much more than reallocating money from one pile to another. So you are legitimately creating new value for the world. It's interesting though.

2:59:56Up to 1970 where we've sort of covered here, I'm not really sure you could make an argument that what the Buffet Partnerships were doing was any type of value creation. I don't really think so. It laid the groundwork for a lot of value creation, but yeah. Yeah. It's actually very interesting to examine like in the financial sector pure play investors, what else is value creative? Well, you can.

3:00:21If you increase liquidity in markets, that's value-creative. If you come up with more innovative instruments that allow for, I guess it's again, companies get funded faster, or companies get funded with fewer fees, that provides value. Warren's not really doing any of this at this point, though. No. No, not at all. Yeah. Not at all.

3:00:42It's just coming at it from the other side because normally when we're talking about a new tech product that's created, we start from a place of, well, they created all this value, did they capture it? And with pure investing and pure finance, you're starting from this place of like, well, all right, they definitely were moving value from one place to another, but where did they grow the pie? Yeah, I don't think they really did at this point. Nope. Okay, so grading, the Buffett partnerships returned 30% for 12 years.

3:01:12compounded. So that's a 28x. David, how do you think about that? Is that a A? Is that a C? Well, it's interesting, right? We were talking before the show about how we're gonna approach this question. And I think it depends like everything, the lens through which you look at it. If you look at the Buffet Partnerships, like a fund, which they essentially are.

3:01:41is essentially a hedge fund. Any fund that returns 28x over, you know, 12 year standardish lifetime of a fund, that's incredible. That's one of the greatest of all time. You know, the, I, there may be some Sequoia and benchmark funds that are approaching that, but I don't think any of them hit that number.

3:02:07No, I think the super fantastic recent benchmark fund was like a 25x. Right. So even that, and that had what like Uber and we work and snap in the same fund, I think. Yep. Yep. So yeah, from a fund, grading it through that lens, a plus no doubt. Now interestingly though, if you were to look at it relative to a individual, company investment, which I think would be a stretch. I think it is much more like a fund. It is a fun total company. But it's not that impressive these days, you know, that you would return 28X on an individual investment over 12 years. I mean, their individual investments in crypto these days that are returning 28X in six months. Well, I mean, it's been 12 years since Bitcoin was invented and it's returned 62.

3:03:07No, I'm sorry, 6.2 million X. So, crypto is a whole different. Right. So that just blows it out of the water. It's really interesting though, like I don't back in these times, there probably wasn't anything that was returning on this level, an individual style, I mean Intel for sure, but like the concepts of venture investing or investing in private companies, we were talking about like maybe 15 people in the world that did that. Yeah, that's a great point. Yeah, so I hadn't thought about normalizing for the time period because I mean, I thought about when I looked at this, the numbers sort of jump out at me of like, oh, I have an IRR number on a 12-year fund. Like cool, let's compare it to venture. Oh, I have a cash on cash on a 12-year fund. So like a 28x on a 10-year fund with a two-year extension. Like, this is a top 0.1% venture fund.

3:04:04You know, this is like people say, I want to be top desser, I want a 3X, I want a 5X. Like, funds don't 28X, especially with the inflation adjusted millions that Buffett was investing then. So it's a, it's a crazy, impressive feat. I mean, I, to, like, just to assign a letter, this is an A plus. And frankly, the fact that A, they never lost money. They, they not only beat the Dow, but they had a positive return every single year. Crazy, impressive, and a positive return.

3:04:31with the option to take your money out. So there's not an illiquidity premium, unlike venture, you know, it's just crazy. And actually beats the now graded Berkshire Hathaway has been around a lot longer and it today. And they're managing way more money than the Buffett Partnerships ever were. But, you know, this 30% or 29.5% definitely beats the pants off of Berkshire's returns, you know, since ever since we're in went full time, which we'll talk about in the next episode.

3:05:00What is full-time? I think Warren was just a man ahead of his time. Yep. A-plus. We're dancing around trying to figure it out. A-plus. No doubt. Yep. All right. Carvents? Carvents. Mine is a very, very, very different way of thinking, investing, looking at the world, but fascinating. Balaji Shrinivasan.

3:05:28on the Tim Ferris show. Another three hour podcast that came out a few weeks ago. A wildly fascinating. The Laji is a very interesting character that many people in tech know he was a partner at injuries and Horowitz for a while. He founded Council. He was a founder of a company called Earn.com. I think that Coinbase acquired then he became the CTO of Coinbase. He's a crypto, evangelist, trans, human, evangelist, trans, national, you know, anyway, very interesting podcast, lots of seemingly out there ideas discussed, but always worth considering these things. I really enjoyed it. Yeah, it's like next on my queue to check out it's like right after all the stuff that I was listening to to do the Berkshire research. Yeah, we haven't had a lot of time for other carve outs recently.

3:06:22I will say this is the first time I've started research like months in advance just like giddy to do this episode so. I know. This was so fun. All right, mine is also something that I listened to via audio. You can read it via text as well, but since time was such a big audio consumer, I chose to listen and hearing it straight from the horse's mouth, I much prefer it to reading, especially in this case, packing McCormick wrote a wonderful piece called Not Boring One Year In and I can't recommend reading it and especially the narration and hearing it in his voice enough. I don't know if it just particularly resonated with me because you know we're friends with Packie and we've been watching his journey or if his journey is just like remarkably similar to acquired so just reading it I'm like just screaming in my car while listening to it. Yes I get certain moments but it is the most awesome open book cathartic telling of his first year.

3:07:18I can't believe it's only been a year. What a crazy thing. He's accomplished. And the biggest thing that resonated with me is that there's both a process and not a process. And he's like, I have certain things that I do because I need to get the content out once a week or twice a week. And so I have a set schedule that I need to follow.

3:07:39But I never actually know like what the content's going to be and I need these lightning bolts of creativity. And I would say that David and I aren't quite as wide in the gamut that we run of like where the, you know, a not boring piece can look quite different than the sort of what acquired mold is although recently who knows. But I definitely know that thing of like, okay, there's a set of activities that I need to do to go generate ideas and then I can.

3:08:06At some point I need a narrow and pick one and then I need to run with one of those ideas and I think that's a for a person who is Creating on any sort of regular schedule be it creating in products you're making creating in the blog stuff you're writing creating in podcast whatever it is like that is such a real emotion to identify with and Package is such a great job writing about it. I think anyone who makes stuff should go read not boring one year in yeah, it was so good. I loved that piece Packing my friend you are gifted Indeed Well as we wind down here, we should say there is a a Berkshire Hathaway 2021 annual shareholder meeting that will be coming up on May 1st. So if you like David and Hi

3:08:52are becoming sort of a converted Buffett head. That is a great thing to tune into and watch on that lovely Saturday on Yahoo Finance. We will have part two coming out here in the near future. We definitely look forward to talking about all things Berkshire with you, both past as we've covered on this show up to the present as we'll do on part two and looking into the future with the Berkshire annual meeting. So tune into that if it sounds interesting. It's Warren and Charlie on stage.

3:09:21just fielding questions for hours and hours and hours on end. So it should be pretty good. We should totally in post-COVID times. A go go next year. B be like all, you know, artists and steel and just do the same thing. We should like we should totally do this. We should just like get up on stage and then we should have All our sponsors, all our partners. Oh my gosh. Out in the concourse. Out in the concourse. We'll have bronze buss of Warren and Charlie. Thank you to our good friends at Tiny. Yeah. And we'll just have a we'll have a big acquired fest. I'm in. Let's do it.

3:10:00All right, I'm gonna keep the wine down brief everyone. If you like this episode, share it with your friends. If you have a friend who's a value investor or not a value investor or you talk about this stuff with, share it. Feel free to share it from social media. If you're getting excited about the annual meeting coming up for Berkshire, feel free to point people to this as a resource. And it's definitely one of the things that inspired David and I to do it. Become an LP. We love our LPs. We love everyone, but we love our LPs the most. Join the Slack.

3:10:27It's a great conversation there, and I'm sure there'll be much discussion of this episode there. I think that's all I got. Listeners, thank you so much, and we will see you next time. Let's see you next time.