Acquired - Berkshire Hathaway Part III

0:01I'm going with just water as my beverage this time and no peanut brittle. Well, I'd do a little heart attack last time after a lot of sugar. Yeah, I think you could hear it in my voice. I think I was a little manic. I'm going with a vitamin water zero because we're going to need the electrolytes for this marathon. Is vitamin water owned by Coca-Cola, baby. Coke. That's right. I was on my run this morning and I was listening to the Adam Mead book that I referenced and I ran by a Berkshire Hathaway properties like house for sale and I was just like it's pretty hard to go through your day without using a Berkshire product or service. I'm so excited. I literally like woke up in the middle of the night last night like and couldn't go back to sleep. I'm so excited. Really? Yeah. I love it. Welcome to season eight episode seven of acquired.

1:04the 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. Well, David, here we are, the final episode in our Berkshire trilogy. I feel like we're texting about this.

1:32I feel like we're like bungee developing the Halo franchise. Halo two was supposed to finish the fight. We're going to finish the fight. Last time was supposed to be the end. We're back for number three. Halo three was so good. It was so good. Now we have a lot to live up to. Well listeners, we told you about Warren's literally perfect record with the Buffett partnerships in the 60s, where he generated a positive return and beat the stock market every single year for 12 years.

2:00We then wandered the path with Warren of consolidating his investments into Berkshire Hathaway, joining forces with Charlie, swerving through regulators and coming out unscathed. Question mark. Yeah. When we last left off Warren and Charlie, we're in 1992, finishing up an absolutely monster run of returning over 27% per year for 22 years. Woo, spoiler alert.

2:30Not going to be the case this time. No, those were no doubt Berkshire's glory days. So today we will tell quite a different story, a story of what happens when a time-tested investment philosophy gets confronted with systemic changes in the world, like the PC and the internet, and concurrently, while the world was changing, so was Berkshire by virtue of their own success. So when you now need to write billion dollar checks to move the needle, There's only so many places you can go knocking, and all those places are quite visible to other investors too. So today, on part three, we will tell the story of the large and mature Berkshire Hathaway and examine what the future may hold with the next generation. Well listeners, are you an acquired Slack member? If not, come join us.

3:19The most recent thing that I want to highlight is the digital assets channel. It is one of the best entry points I've seen on the web for people to discuss everything going on in the crypto landscape. Yes, I just said crypto on the Berkshire episode in a very thoughtful and nuanced way. Just great discussion going on there. It's also great for beginners. So as always, come join us acquired.fm slash slack. All right, listeners.

3:45Now is a great time to talk about a new partner of ours here on Acquired. LaGora, the 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?

4:13So the founders did exactly what great founders do, operate with obsessive customer focus. They 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 drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with.

4:38Lagora's 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.

4:52And 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 LaGora 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

5:45Plenty 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. And lastly, to keep it short and sweet, if you are not an acquired LP, you should become one. Click the link in the show notes or go to acquired.fm slash LP.

6:14We can't wait to see you there. Well, David, before you take us in, listeners, as always, this show is not investment advice. David and I may, and I think I've already told you some of us do have investments in the companies we discuss, and this show is for informational and entertainment purposes. Only David Rosenthal tell us a story. All right. Well, as you said at the top of the show, last we left Warren and Charlie in 1982. They and in particular Warren are heroes. Times have never been better. Warren is a legend. He literally, single-handedly reversed a federal government decision and saved Solomon Brothers. It's crazy. His stature is unparalleled. Nothing that the finance world or the corporate world or the investing world or the business world has ever seen. He's the oracle of Omaha.

7:13People are flocking to the annual meetings, literally the annual shareholder meetings. Of course, Woodstock for Capitalism. Woodstock for Capitalists are attracting thousands of people. And it grew, of course, there was like a handful of people that would gather in a basement, and then there was at a hotel, and then it was at a larger venue. And by this point, he's entering arena territory. He's literally filling arenas like a rock star. And Berkshire Stock.

7:41the A, because there are only, well, it's not the A, because there is no A and B yet, just Berkshire Stock passes $10,000 a share, foreign away the highest, price single, you know, share of stock in history. Buffett himself is worth over $5 billion. He's rocketing up the Forbes list. But there is one person out there in America and the world.

8:11who is moving up that list faster than Warren. And fate is about to bring these two gentlemen together. Oh, man. So we left on the Solomon Brothers saga, and we're riding in with Bill Gates. Is that what you're telling me, David? We're riding in with BG3 Bill Gates, man who has been in the news a lot lately. Yep. Well, that's another topic for another day. So back in the previous summer of 1991 before Solomon, which would start going down in the fall of 1991 and wrap up in 1992. But before everything really kind of hits the fan, K Graham arranges for a fourth of July weekend bash on Bainbridge Island in Seattle. What a wonderful place. Bainbridge is like one of the best places in the world. Yeah, it's a mere ferry ride from Seattle, and then you feel like you're

9:10Millions of miles away from civilization. Totally. Gee, you know, it bites war and along, of course. Part of the festivities that are planned is that on the 5th of July of 1991, they're going to go over to the Hood Canal and spend all day with a very prominent Seattle area family. Mary and Bill Gates, the second, better known as Senior, and potentially their son Bill Gates III.

9:39might drop by. That's a point during the day. And this is where Bill Gates III. I mean, this is like famously his sort of family home growing up. He learns to swim out there. His father is a very prominent lawyer and angel investor and sort of galvanizer of the Seattle startup community from the early days. His mom's on the board of the United Way. Yep. Yep. So you know, this is long before Microsoft, but already sort of a prominent family in the area.

10:03Warren is a little reluctant to go on this trip and this is not sort of his thing, but as he puts it, quote, anything for Kay. So he goes out, he joins Kay and a few others this weekend. Similarly, Bill Gates III does not have a lot of interest in going out on the fifth for this all day event. He's super busy, he's running Microsoft, it's a public company, he wants to stay in Redmond and work, work, work. But Mary, his mom, forces him to come out.

10:31Bill would say later, as I told my mom, I don't know how well meeting a guy who just invests in money and picks stocks. Of course he's talking about meeting Warren and his parents would say, you gotta come meet Warren. Bill continues, I don't have many good questions for him, that's not my thing. I love how Gates judges the quality of his social time by the quality of questions that he can have for somebody.

10:53Quick side note, watching these old videos of Gates, I mean, we're so used to his polished image now, but when you go and you watch sort of videos of him from this time frame, especially in the early 90s, he's obviously so brilliant, but he's... He's mad, awkward. Yeah, and he's vigorous in the way that he sort of attacks lines of questioning and engages with challenges and it's assuming you are not the subject of his eye or it is a really fascinating thing to watch and totally different than the Gates you're sort of familiar with now.

11:22Yeah, that's a good fight. Yep. So Mary, though, forced his bill to come out, she still has mom. But what he's going to do, he's going to come later in the day, he's going to fly in on a helicopter so that he can, you know, get a good like half to three quarters of a day work in. This is July 5th at Microsoft. I mean, we've talked about this on the show, but like Microsoft in 1991, all throughout the 90s, until the DOJ case, it was intense. Like they were killers there.

11:50Yeah, you should think about it like Uber in 2016. Totally. So Bill's plan is he's going to fly in on the helicopter and then he's going to make the helicopter wait there, he'll eat dinner and then he's going to fly out and escape. Go back to work. So he's introduced to Warren and Warren immediately asks Bill what Bill thinks of IBM and whether they're going to do well in the future. I cannot believe.

12:17We're going to get to this much later in the episode, but Warren is already obsessed with IBM. My God, Warren. Don't buy IBM. Previewing that. Don't do it. Don't do it. Gates, of course, agrees with me here, and it's like, no, you should absolutely not buy IBM. You should buy two stocks and two stocks only, Microsoft and Intel.

12:37And you should buy nothing else and you should just hold them. This is 1991. So Microsoft at this point has about a $10 billion market cap and Intel has a $3 billion market cap. Oh my god. Gates is so deep in it. So obviously he's right here. But it is incredible that IBM, even though they made the computers, the value in the value chain did not accrue to them in any way, shape or form. They became completely, you know, dumb terminals and all of the value is captured by the chip maker and by the operating system maker which blindsided everyone just a brilliant business strategy. Totally brilliant business strategy. So Gates then, he's probably like pretty annoyed by this first question given that he doesn't care about stocks. He's like, look, there's two. He's by these. Don't do anything else. He's probably just listening to Bill Gates here. Gates turns around and asks Buffett about newspapers because

13:30Gates is probably already starting to think about coming after newspapers as part of, I think, I don't know if like, Encarta existed already at this point, but Microsoft's spinning up all sorts of stuff. Encarta was thinking encyclopedia, but then they would launch live and with the coming of the internet and all sorts of stuff.

13:49They were launching these things interestingly enough in like the 93 to 96 timeframe and there's this unbelievable interview that Bill Gates does with wire. I'll look it up and see if I can link it in the show notes where he's basically combatively arguing that content clubs could never be Microsoft's next business that they're just not big enough like you don't understand how big windows is. These are multi billion dollar businesses and unless we become Disney or something content clubs are just never going to cut it and it's fascinating.

14:19looking at that aggressive reaction by Gates and how he feels versus the market cap of say a Netflix today or how important it is to Amazon Prime strategy to have a content club as we talked about with Brad on the last episode. So Gates is at this point thinking, oh, we got a tiger by the tail with this Windows thing. There are a few other businesses as big as this one. Let's just go for the 10 plus billion dollar opportunities. Yeah. So here's where Buffett sort of surprises Gates.

14:48you know, Buffett is like, American newspaper man number one. Like, he started as the vapor boy, thinks it's the canonical franchise business. He owns, you know, based on the board of the Washington Post, owns the Buffalo evening news, all this stuff. He's like, look, today, newspapers are the best business out there. I'm thrilled to own them. But I got to be honest with you, I am starting to worry about their future.

15:15He doesn't know anything about the internet. He's actually not worried from that front. But he says, you know, I'm worried about the encouragement of TV and in particular cable television and people's news habits shifting to television, encouraging on newspapers. And Bill is like, hmm, okay, well, interesting. That's not quite the answer I expected from Mr. Buffett. So they start talking and they sort of fall into conversation and knowing the two of them a little bit, not personally, but through the show.

15:43You can imagine that they just sort of spend all day talking and like other people are there, Kays there, Bill's parents are there, a bunch of other, you know, Seattle area sort of dignitaries stopped by, two of the future founders of Madrona stopped by Bill Ruckles house who was an amazing man. Part of the Saturday night massacre in the Nixon administration, the first head of the EPA, Jerry Grinstein who was CEO of Burlington, Northern.

16:10At the time. No idea. Wow. He just drops by, lives in Seattle. Didn't he go on to become the CEO of Delta Airlines? He would. He would. Another erstwhile later in life were an investment. Yep. We'll get there. But Warren and Bill just totally ignore them. They're like super engrossed with one another. So at dinner, they're all there. I guess they're forced to like sit down and join the group for dinner. Bill Gates senior asked this August group assembled there. What?

16:39Factor asks a question to the table. He says, what factor does everybody think has been most important in achieving, you know, where you've gotten in life and their people at this table, we've gotten very far in life? And Bill and Warren both immediately reply with one word, which is focus. So these guys are like, they are two peas in a pod. After dinner, the sun goes down, the helicopter leaves, Bill Gates, the third stays. Yeah.

17:08Warren has drawn him away from his work. Amazing. So they become fast friends. Buffett goes back to Omaha after the holiday and on the first day, I don't know when the fourth and the fifth fell but on Monday or whatever the first trading day is after that. He makes another of his fateful immediate split second gut stock.

17:33Purchases tell us he bought Microsoft David. He did buy Microsoft just like he did with Geico Oh, I actually didn't realize he did he bought 100 shares of Microsoft for his personal account so that he could keep up with his friend Bill Gates So isn't that ridiculous? And he buys zero intel shares. Again, even giving his history with Intel and noise. Which is in retrospect, that feels like such a fraught strategy because not only are you losing out on the benefit of all the upside of actually being a shareholder in your vehicle, Berkshire Hathaway, you now want to spend a lot of time and dive deep with this person. And he's an insider. And now you personally own shares in his company and you're

18:20So you can't actually get a lot of the information that you want to talk about with them because it's too sensitive because you're a shareholder in a super meaningless way. This decision is confounding to me. Completely confounding. But he does invite Bill to join the Graham group, which is by now the Buffalo group, his group of cronies. And at the next meeting, which I think is in Vancouver, one of the sessions they're all kicking around. They're favorite stock ideas.

18:48and Bill Ruin from the Scoyot Fund throws out Kodak as a name he's thinking about. And barely gates immediately responds, Kodak is toast. I love it. It's so great, so great. And of course, Tom Murphy, Murphy is there in case there as well, both television media magnets. And they ask Bill whether he thinks television is toast to and Bill responds, This is a quote from the snowball. No, it's not that simple. The way networks create and expose shows is different than camera film, like Kodak, and nothing is going to come in and fundamentally change that. You'll see some fall off as people move toward variety, but the networks own the content and they can repurpose it. The networks face an interesting challenge as we move from the transport of TV onto the internet.

19:42But it's not like photography where you get rid of film. So knowing how to make film becomes absolutely irrelevant. This is crazy. This is 1992. Brilliant. And Gates just described like the next 30 years of media and the internet like right there. Wow. Isn't that unbelievable? Yeah. I think it's actually a Buffett quote predicting rain doesn't count. Building the arc does. Ooh. I love this one so much because there are so many of these. Look at.

20:11Steve Jobs describing the cloud in 1995 or whatever it is, or look at Bill Gates predicting how the media landscape would evolve based on technology and yet neither of those actually came to fruition where they became the market leader in that given thing that they clearly articulated in that captured and quoted video. Yeah, it's interesting. Personal life aside, I'll give Gates the benefit of the doubt here. I bet Microsoft would have made plays here.

20:40if not for the antitrust case. They weren't going to extend their advantage to media. Yeah, exactly. They weren't going to embrace and extend there. Okay. So we're going to come back to Bill in a minute and there's a very, very important reason why A, it's just like he has such an impact on Warren's life in so many ways as we'll see throughout this episode. But I think this is also a really good lens to view this part three of like, let's contrast Bill Gates and Warren Buffett as we go along here. So There is one more than one, but one in particular, other very famous Warren Buffett, Berkshire Classic investment that we have not yet covered in our two parts thus far. Yeah, you talked about it in the cold opener in the last episode. Well, you actually haven't touched it in the real story. I know. I know. Of course we are talking about Coke and Warren's investment in it, which is just classic classic Buffett in so many ways. It's just unbelievable.

21:39Back when Warren was starting up his partnerships way back. We're going back to part one of the episodes in the late 50s. He got to know one of his neighbors in Omaha. I can't believe that like all of his great investments come from his neighbors in Omaha. And their kids played together at this neighbor. His name Don Kio. And they both live on Farnham Street in Omaha. Side note, which is why Farnham Street is an analog project and Shane and everything he does over there is called. It's an amazing name. Farnham Street. So Kio was a salesman for the Butternut coffee company at the time and he had six kids. And the story goes that as Warren is a start numbers partnerships, he asked on how he's planning to save for college for all of his kids. It's thinking like, hey, I'm going to get down, you know, you know, this partnership thing gets money out of him.

22:33Don is pretty sharp though. He asks his kids what they think of Mr. Buffett. And his kids are like, oh, we love Mr. Buffett. He's great. He's always at home. Whenever we're playing with Lil Susie and Howie and Peter, you know, he's there and he doesn't like bother us, but he's at home. So Don is like, well, this guy clearly doesn't work very hard. He's always at home during the day. I'm not giving him my money. Soon after that though, in 1961, butternut gets acquired by the Duncan Coffee Company.

23:01Don moves to Houston, leaves Omaha with that. And then shortly after, in 64, Duncan gets acquired by Coca-Cola and Don moves to Atlanta. So fast forward to the mid-80s. By this point in time, Don is president and CEO of Coke. He is the Dan Burke, one might say, to the Tom Murphy of the legendary Coke CEO at the time, Roberto Guizetta, who is Yeah, incredible CEO, Cuban immigrant, ran Coke through all of the great ascendancy of the company. At this point, now Warren is a man about Washington, thanks to the posting K. And one night he gets invited to dinner at the White House. I assume I do thanks to K or as her date pair or something. And lo and behold, who shows up at the White House? But done. His neighbor from that's crazy. Yeah, they reconnect.

23:56At the White House, his neighbor from far industry and Don's like, oh yeah, like I'm CEO of a Coke now. And I take it that Warren has fully switched from Pepsi to drinking Coca-Cola at this point. No, not yet. Oh, Don converts it. Warren is like, hey, you know, really great to reconnect. I remember you didn't give me the money back in the day. How are you feeling about that now? I don't know what he said. Warren says, no, you know, hey, like, that's great. I'm happy for you. I'm kind of a Pepsi guy though.

24:23And really what I, you know, I like to do it. I have Pepsi all day, every day, I put cherry syrup in, and it's great. And tons like, Warren, we just launched a new product. We've got the product for you. You don't have to put the syrup in your Pepsi anymore. We've got cherry code. Oh, that's incredible. This is, I think they launched it in like 80, three. I want to say maybe some time around then.

24:44Also, I didn't realize the fact that the coffee company got rolled up into Coke and I presume the 70s, they were conglomerating earlier than I thought. I mean, obviously Coca-Cola is a multi-hundred-year-old brand, but they were single product for the majority of their life. I assumed it was like the 90s and 2000s when they started becoming this big portfolio of beverage brands, but it sounds like it was much earlier. It was, yeah, no, they were buying other stuff. I don't know how big it was versus the Cola business.

25:13But anyway, with Cherry Coke, Don convinces Warren to switch, and that of course causes Warren to start thinking, well, maybe I should take a look at an investing in Coke. And he becomes intrigued. And as he digs in, I think this was like 85 or so. And maybe, and it was in 83, I think, a couple years earlier, they had launched Diet Coke, and Diet Coke was like a monster. You know, Coca-Cola.

25:41Now classic as we will get into in a second. You know, it's great, but like Diet Coke is huge. Well, maybe the most successful beverage product launch of all time. It's a blockbuster. So Warren's intrigued, but he thinks, you know, hey, you know, stock prices kind of high, but I'll just keep an eye on it. And then new Coke happens, which you know, I knew about Night Red Velvet, but Do you remember this pen? How do you mess this up? Like if you're a company like Coca-Cola and you got all these big brains around the table and you basically have like a thing that's a trade secret. You don't have any IP protection around it but you have the magic formula and you have the brand, not yet world-renowned but sort of nation-renowned brand that is synonymous with like your sense of patriotism and it's associated with one particular very

26:36odd, very well-balanced flavor. How on earth do you replace that? What are you thinking? I think we ought to preview a bit here. Warren would always say that the, uh, get everybody in trouble in a minute, but, uh, Thing you'd like to about Coke is that the business could be run by a ham sandwich. Like, you know, literally just like you don't do it. Evidently not. I think they're probably just so bored. At least the ham sandwich wouldn't mess with the golden goose. Totally.

27:06You know, to be fair, this is the story is they ran all these blind taste tests and Pepsi had been, you know, making headway with market share. That delicious, lemony, weird, sweet thing they had going on. They try new flavors and one of them tests really well. People like it better than the old Coke recipe. So they literally pulled the old Coke recipe off the shelves and introduced new Coke and it is a unmitigated disaster.

27:32Pepsi's like, oh my god. This is the greatest unforced error in history. They start a price war. Coke gets into a huge fight with its bottlers, the stock plunges. And the rumors starts going around that Ron Pearlman, same dude from Solomon is circling. The Revlon gone activist investor. How could we have forgotten about this in the last episode? He was the villain in Marvel.

28:00That's right. Remember way back in the day our Marvel episode I forget that he like owned it for a while and ran it into the ground and yeah Pearlman what a guy So rumors ago around and he's targeting coke now in the wake of the the new coke disaster Enter white night Warren to save the day as always He rides in he buys 1.2 billion worth of stock on the open market in 1987, which equates to 6% of the company. And then just like good friend and Solomon, Goisetta and Kio ask him to join the board, which of course he does. The side note, the Coca-Cola board is where Warren meets Herb Allen from Allen in company and starts going to Sun Valley every year. So this is really, everything is coming up roses for Warren here.

28:55Man to like a company and be sort of prospecting it and just to watch them go through the new coke thing and just be sitting there grinning like an idiot like this is my chance The trick is knowing how to feel those in the moment, you know when you're not catching a knife That is falling but rather buying the dip as they say Warren Buffett the OG buy the dip investor and to add a little more nuance to that. I mean he does have this great strategy of an identifying an opportunity where a company has its back against a wall because there are activist shareholders or there's a deal that was on the table that's fallen through and suddenly they need cash fast and he like very much uses this lack of necessary approval by committees and red tape to just come in with cash making offer he feels good about it's sort of that

29:50better to be approximately right than precisely wrong. Kind of that approximately right. I eyeballed it. It looked good. I came in. I bought it and now I'm a big shareholder and it was a pretty good price. Yeah. Man, I hope at some point that Warren and Charlie sent a case of wine over to Ron Pearlman because like, man, they got some deals because of that guy. So in the 1988 Berkshire letter to shareholders, Buffett announces the Coke investment.

30:18saying of it, we expect to hold these securities that secures in Coke for a long time. In fact, when we own portions of outstanding businesses without standing managements, our favorite holding period is forever. And by the mid-90s, a few years later, Coke of course is recovered from the new Coke disaster. They have massively expanded internationally the late 80s, you know, and then through the 90s where when Coke went from being Still associated with Americana, but like everybody in America drank it to like everybody in the world drank Coke and this was part of the investment thesis too that there was the sort of this like unexplored massive opportunity to bring Coca-Cola to the rest of the world particularly through this

31:02brilliant innovative strategy that they have of just selling the syrup whether they're selling it to the restaurants that are putting it in the fountains or whether they're selling it to the bottlers who have to figure out water and carbonation everything locally they just are shipping the concentrate around the world so it's reasonably cost effective to have you know just a few places that need to know the secret formula and make this stuff it really can be a globally addressable market good work if you can get it for ham sandwich So Coke is printing money within a decade. Berkshire is up over 10x on Coke. And since then, so that was from like mid 80s to mid 90s, since then Berkshire is only up less than 4x on Coke from that point in time over the next. Yeah, what is that? 30, you know, 25 plus years. Oh, that's wild. Yeah. So 10x returns in the first decade and three and a half X in the next.

31:5925, which would sort of presage things to come. Man, compounding large numbers, David, sure is hard. It turns out it is. Well, while we're on this Coke thing, before we sort of leave it, I do think this is a good moment to address the value of brand. We haven't, we've sort of alluded to moats, especially in the Seven Powers discussion in our previous episode, but we haven't actually described how Warren thinks about moats and sort of brand as a moat.

32:26In the 95 annual meeting, he has this great quote, where he just lays it out for investors. And it's one of these rare moments where he describes the investment strategy. I think more than he necessarily intended to, but he's off the cuff. He's answering a question and he says, what we're trying to find is a business that for one reason or another, it can be because it's the low cost producer in some area. It can be because it has a natural franchise because of surface capabilities. It could be because of its position in the consumer's mind. It could be because of a technological advantage.

32:56or any kind of reason at all that it has this mode around it. And I just always thought this is like the clearest articulation of his view of, you know, sustainable competitive advantage. What makes a business durable and able to generate outsized profits over time. And boy did they nail it with Coke. I mean, this is just one of these classic examples of the brand mode is really real. And it's a global brand mode. Yep. Totally. Like the mode exists to clear how it works.

33:24It's straight over tackle. You're taking this international run in the same playbook. Yep. Great timing coming in in the new coke disaster right before international expansion. Well done Warren. Okay, David, you did mention that Coca-Cola is only up another three and a half X after that initial 10X when we look at you know, that sort of late 2000s time, looking at maybe 2009, Coca-Cola did represent close to 20% of Berkshire's equity portfolio construction. So like that, what 35X on their initial investment of the stuff that they own that are public markets before they wait in the Apple, which we'll talk about later, Coca-Cola is their biggest single holding of stock that they don't wholly own in a business. Yeah, it of course no longer is, but

34:11Yeah, I mean, this is huge. I mean, this is one of the key legs of the Berkshire Stool, his Coke, and also just speaks to how different the company is now. Like, you can barely see the Coke equity value in there. Yep. Okay. So back to the meeting of these two businesses here. So in 1997, there is this amazingly perfect moment. I think this moment kind of marks A major transition point in business and industry in the world and the rise of tech and the rise of the internet and how much the world is going to change. And it reminds me of, there's the famous quote in history. I think it's about Germany in the like 1850s where the quote is that German history reached its turning point and Germany failed to turn. This applies to Warren here. Investing in corporate history reached its turning point and Warren fails to turn.

35:09So summer 1997, we are at, of course, the Allen & Company Sun Valley conference. And there is a panel discussion hosted by Don Kio with the participants, three participants being one, Warren, two, Roberto, Guazetta, the CEO of Coke, and three Bill Gates. And so here it is, old-school, like the consumer brand, Coke, and...

35:38Bill Gates and Microsoft and Warren on the same stage. Everybody thinks this is going to be like a back patting affair, you know, maybe sort of a, you know, gentile changing of the guard or, you know, maybe something like that. But Bill kind of goes off script here. So Bill would later say that he meant this as a compliment, but he trots out Warren's ham sandwich phrase.

35:59when talking about Roberto and Don on stage. Oh wow. Wait, so you have the moderator of the panel is the president of Koch and you've got the CEO of Koch as one of the participants. Yeah, and then the other participant is like the largest, you know, shareholder and Koch. Right. And Gates is friend.

36:16So Gates says that like, oh, you guys got it easy. Hey, I'm saying what's good to run your business. And he compares that to Microsoft. He contrasts that with Microsoft where he says running Microsoft is such a high wire act that he suspects he's going to have to retire before he gets too old. Like indeed, he says well before he gets to age 60 because you need a young person in charge who can adapt and navigate the constant change in the technology business. So the other panel is Roberto is 65.

36:46And tragically later that year would die unexpectedly and very quickly of lung cancer. Don is 71 and Warren is 67. So Gates is literally just slapping them all in the face here. And Roberto has the stereotypical fiery Cuban temper here. He is hugely offended by this. I don't think he walks off stage but he never talks to Gates again for the rest of his life after this episode. I don't know how Don reacted to it.

37:15Warren kind of shrugs it off like he does like a like builds my friend like I just you know he's Billy's kind of like a he's like a wild animal you can't like bring him in public too much But the thing is like you know, this is a major social faux pas and gates is part but like he's totally freaking right well, I mean he's right and it is clearly this seminal moment for Warren where he's sort of like looking left and he's seeing the past. He's seeing the things he already owns. He's seeing these cash flowing, profitable, durable businesses and he looks right and he's seeing something he doesn't understand with Microsoft and it's outside a circle of confidence. So it's in Charlie's too hard pile to use a Charlie ism there and so he's team Coke. He's team

38:00Durable understandable old world businesses in this era there's so many opportunities for him to run toward the fire In technology and he just chooses not to he just runs away Alice has a great quote in the snowball she says Buffett avoided technology stocks partly because these fast-moving businesses could never be run by a ham sandwich He thought it no shame to have a business that could be run by a ham sandwich He wanted to get Berkshire Hathaway to the point where it could be run by a handstand. Which do we are today? I'd like I get it, right? Like he thinks, you know, I used to think this too, actually. I was like, oh man, I really want to find businesses that like a monkey could run them. The thing is though, those businesses don't exist anymore. You know, they exist, like Coke still exists. And it's fine. And plenty of these other businesses, but Gates is so right here.

38:51The future is change and the most valuable companies of the future and the most value that's going to be created are going to be created by companies and by leaders and entrepreneurs who are able to navigate change. You mentioned what you do. We just had Brad on in our last episode. Brad's down to talk about Amazon. I'm bound like you read that book and you just can't kind of like an odd like Bezos is.

39:15The world's richest person and he is still bringing such intensity. We cannot rest on our laurels. We have to change. We have to innovate every single day. This is not Coke.

39:26Yeah, well, okay, let's take this as the moment to dive a little bit deeper into why Buffett doesn't like tech stocks, because it's so meme-y in our culture today that he sort of is not a tech investor, that it's worth unpacking it a little bit. And he did have this interesting observation. I think it was in the late 90s that we're going to talk about the .com bubble here, but that there aren't any internet companies that have ever hit 100 million in a year in profits. And so I have no proof that it could possibly exist. And so Warren is investing, not speculating. And a lot of people will take offense to me saying that a lot of technology investing, especially in the early stages, is speculating. But the fact is, very early on, there's no revenue and there's certainly no profit. So you can't possibly do investing in the classic sense of valuing the business today at a discount to its future cash flows.

40:19It's speculating in a risk-managed way by putting your money in great people going after markets with promising futures, the sort of secular tailwind argument. In fact, Buffett has a very particular way that he thinks about valuation that is highly sensitive to how certain the future is. He's willing to pay up for very certain futures.

40:39which is why he values brands so much and if you think about this as like an expected value equation where you have two components the value of something if it happens and then the probability that it will happen but it is happy to pay for things with a modest value but a high probability of it happening but it's not his style at all to make bets on low probability very high potential value place like would be an Amazon or something that you're sort of talking about David, when you reference this incredibly nimble, rapidly adapting world where the chess board's constantly rearranging and you sort of need to, you know, make a bunch of high beta bets. Yeah, totally. I think the problem is that now we'll get to now later in the episode. But the world is just evolved to the point where like, that's the way the world works. Like, there's so much change and it's such constant that even Amazon, even Apple, even Microsoft need to be thinking that way. And if you don't think that way,

41:34Right, you can be Coke, but like Coke's value has only 3.5 X in 25 years. Those are the businesses you're going to get. So our friend, Andrew Marks, who's a great VC at TQ Ventures, he's actually known Warren and studied him for basically his whole life. He told me that I think the best way to put this about Warren that I've ever heard, which is that Warren was the world's greatest status quo investor. As long as the future was mostly going to look like the present, Warren is a savant at that type of investing. The future for Coke is mostly going to look like the present for Coke. He knows how to value that. He knows that they're going to recover from new Coke. He knows that there's an opportunity internationally. He can invest in that. He can see that. Right. So you're saying that, of course, the business will change and evolve and grow.

42:30But the chessboard, the world is the test world is reasonably static is reasonably static. Yeah. And that makes sense. Like for most of his life, that's been the case. Right. You hear comments like people are always going to love candy. Yeah. People are always going to like Coke. Like, it's not a bet on the world changing. It's a bet on someone operating a business really well in the world. Yeah. He used to say that he was absolutely certain as long as Cola doesn't cause cancer that board people are going to swallow coke tomorrow than they did today. Well, it turns out, you know, sugar is kind of linked to cancer and like that's kind of not a good thing. Like the world changes. You know, I don't think this is the thing where now this is what this moment to me represents this panel at Sun Valley in 97 is like, this is the transition to a world where more change is happening than not. Yeah, it's like that.

43:23There's a great weight but why graphic where the little stick figure is standing on the inflection point of an exponential curve. And it's not that the world wasn't changing quickly between the mid-50s and the early 90s. It was that...

43:37The rate of change hadn't compounded at the point where it was suddenly like the whole world is changing all at once You have the arrival of the internet the cycles of innovation or getting wildly compressed I mean we live in this world today where there's huge changes on the sentiment of the future like multiple new cycles per day in a super high fidelity high frequency way I didn't want to say you said it that was not the not at all the world that he invested in for the first 30 plus years of his career. Totally. So Warren definitely doesn't see this yet, if ever. But for the moment, Gates gets this. Certainly some other people in tech and in Silicon Valley and in Seattle, like, get this, that this is the world that we're moving into. But most of the world doesn't. So for Warren, he's just like, okay, back to business as usual. He is though concerned about the

44:33tech bubble that is forming that he had so many others see. And by this time by starting the late 90s, the Berkshire share price has gone to from about $10,000 a share to $34,000 a share. Over how many years from 92 to this is probably like 98 or so. Six years, three and a half X not bad. Yeah, not bad. 40 billion dollar market cap for Berkshire, but they've never split the stock.

45:02So people in this sort of, you know, part of the tech bubble craze was like day trading and people are now internet trading and like e-shares. I don't know if it's e-shares. E-trade. Yeah. Is happening. People are setting up publicly traded investment trusts that like mirror Berkshire's equity portfolio, like have like a shadow Berkshire. This is so brutal. I mean, this is like for the person that wanted to carefully control investment in the company. Someone says, Oh, well, if you can't buy an actual share of Berkshire, you can buy a fraction off share for me and all own a bunch of Berkshire underneath and it'll be like you own it. And that's like Warren's absolute worth. I think both these things are happening. So I think obviously there's demand from all this new retail investing to own Berkshire shares, but most people can't afford a $34,000 share then or now. I think two things are happening. One is what you're saying, which is people are buying

45:59Berkshire shares, putting them in a trust and then selling shares in that trust. The other thing people are doing is they're just like reading every, every, you know, 13F that comes out and 10Q and 10K. Oh, and buying the same security that Berkshire is buying and doing the same thing. What a ham-fisted way to do it. So, you don't have to benefit of the insurance flow and you don't have the wholly owned businesses. And the lag, it's going to be this thing where people feel like they're buying Berkshire or Berkshire associated, but they're actually buying well after Berkshire's already moved the price of that stock. So Warren finally comes around. He really, he thinks like, okay, people are getting swindled. I got to find some way to put a stop to this. I don't want to split the stock. And this was a meme at the annual meeting. Every single year someone asked the question, are you going to split the stock so that more people can invest in? He would always respond to something like, no, I love our current investor base. Why would I do anything that would change the great set of people that we already have as shareholders in this wonderful company? Yep. So he comes up with a brilliant idea.

46:58He decides that he is going to do a stock offering for a new class of shares, what he's going to call the baby B class of shares versus the newly recristened Brickshire A shares. And these are going to be tracking shares that are going to track one 30th, one divided by three zero of the A shares in terms of value, massively diminished voting rights.

47:27And he's going to sell this in a new offering that is actually open-ended. So there's no fixed amount. It's not like I'm offering X number of shares. He doesn't want to supply demand thing to happen. He doesn't want basically like microeconomic forces to happen and drive up the price of the b-shirts. So he's like, here's the price and we're going to make as many of them as we need to at that price. As people want him to buy. Even if you hoard him, it won't benefit you at all. Totally. Which also means However much demand there is because it's an offering. Berkshire is going to get the cash. This is like even better than float. You'd ever have to get the cash back. They're raising their series C. Yeah. I bet Buffett would go to the mat with you on its even better than float. He probably would. I mean, he is deleting the value. Yes. As a quick aside, I think this B-Share is offering is a really good place.

48:20to talk about when they are buying things with cash versus shares, sort of how they think about the two currencies they have at their disposal, the balance sheet cash and the shares they can issue and dilute the company. So Buffett notoriously likes using cash versus shares since he thinks the existing portfolio of Berkshire businesses are far better than pretty much every other business he could buy. So given that, why would he trade shares of these amazing businesses for something that who knows what it is? It may be good, but it's not as good as my treasure trove that I already have here. So they use cash, obviously, whatever they can, except when their shares have been richly valued by the market. And thus are a phenomenal currency to use after it crosses a certain point. So in 96, when he does the B shares offering, normally, Berkshire shares trade the A shares trade somewhere between like

49:111-1.5x book value of all of Berkshire's holdings. Well, in this case, the moment they decided, okay, it's worth it for us to dilute our shareholders and do this new financing event and do the B-Share's thing. It was trading in almost twice book value. It was nearly an all-time high.

49:28And so he gets all the credit. It's almost like the Bentonson strategy credit thing. Like he gets all the credit for doing this but it was a huge windfall for Berkshire to do it at the moment that they did. And they are wonderfully transparent about this as well because they know there's going to be crazy demand for the B shares. Kind of no matter what. So they write all these hilarious disclaimers. I'll just read my favorite one. Mr. Buffett and Mr. Munger believe that Berkshire's class A common stock is not undervalued at the market price stated above.

49:58Neither Mr. Buffett nor Mr. Munger would currently buy Berkshire shares at that price nor would they recommend that their friends or families do so. Yes. It's like Eric Yuan going on Bloomberg and saying it's too high. Price is too high. Price is too high. Oh my gosh. Well, this is great. And of course, you know what we're going to transition to next. Let's see out of 96. I think we're talking about. We're now in 98.

50:2698 are you keying off my buying something with shares? Yes, I am. Are we going insurance? We're going insurance. Tell me about January David. Let's talk January. So yeah, we're in hated issuing stock, but he's like, can stock is so overpriced. I said it not him. Note that he didn't say it's overpriced. He said it's not underpriced. Exactly. Exactly. So in 1988, it makes another shocking announcement. Berkshire is going to buy January, one of the world's largest reinsures for $22 billion. Remember just a few years ago, it was like huge news when Buffett would put $1.2 billion into Coke or I think buying the rest of Geico for $2 billion. That was huge. I think that was the biggest deal they'd done before. Yeah, so this general reinsurance purchased by farther largest acquisition ever. Yep, it is the elephant gun hunting phase of

51:25Warren's acquisition career. So yeah, it's literally the largest deal Berkshire's ever done by a factor of 10, and he does it with all stock. Not a dollar of cash goes out the door. He trades 20% of Berkshire's market cap for January. Wow. Spoiler alert does not go well. Famously, when Charlie is asked about the deal when it gets announced.

51:53Charlie is like the bluntest character as we have seen and as we will see at the end of this episode Charlie's response of the deal when asked about it is that Warren only called him quote very late in the game on this one So he's just kind of like I'm washing my hands of this and I think if there's one lesson in this series among many it is that if Charlie Munger is your business partner and you should probably always call Charlie early in the game not in the game See Solomon Brothers And so what was the really alluring thing about buying Genre because it massively multiplied the amount of float at their disposal by buying? Yeah, they got a bunch of float. To be honest, the alluring thing about buying Genre was that Warren thought that Berkshire Stock was overvalued and he wanted to take advantage of this moment in time and use it to do a big acquisition. And he also, this is according to Alice in the Snowball, most of not like all of Genre's investments because this was as we've

52:53talked about insurance companies with their float. They invest the float in securities and Warren and Berkshire prefer to do that in equities. Most of Jenry's investments were in debt and relatively conservative bonds and the like. Warren's worried about a equities crash coming along here because of the tech bubble. He wants to essentially delete Berkshire's security holdings. He doesn't want to sell security, because that would be a signal to the market. Warren Buffett is selling stocks.

53:23That might tip everything over into the crash. He's like, how can I change the mix of securities that we have at Berkshire without me doing something like that? I can do this all stock equity deal by January and essentially get a portfolio of 20-ish billion dollars of bonds that are going to be insulated from equity prices. Boy, that is some financial jujitsu engineering right there. He definitely overthought this one because January sucked to be blunt.

53:53I will say that's funny. You said that I just pulled up the historical price to book ratio of Berkshire. I think the only two times that it was meaningfully above 2x that the stock was trading above twice book was right around 96 when they did the b shares and then right around 98. So I think he definitely felt like those were great times to be using Berkshire stock. Use the currency. Yep. Yep. So yeah, January.

54:23So we didn't cover this last time because it didn't fit with the story but back in 1985 Warren made almost undoubtedly the best hire that he ever made in his career and he makes very few hires as we should see. He hired a jeet jane to run Berkshire's insurance businesses. A jeet is like this dude is a monster. You have no idea how unbelievably great a jeet is.

54:51He's an underwriting savant like this guy can like hear a crazy story that you tell him like what if I'm going to strap this guy to this rocket and then we're going to shoot it at a hurricane and you know I want insurance that bypasses the force measure and that can he'll give you a price for it. He's like I know exactly how to price this. He is jet jack ring roll reincarnation. So he grew up in India. He went to IIT in India and then he worked for IBM.

55:19Maybe this explains Buffett's fascination with IBM. It was like, a jeet came out of there. It's gotta be good. Then he goes to Harvard Business School, and then he goes to McKinsey, and then he joins Berkshire. We're talking about him. He's an insurance pricing savant. That is true. There's probably never been anybody better than a jeet at pricing insurance. He is also hyper aggressive. If a jeet had decided to be a venture capitalist, he would have been Bill Garley times 10.

55:48like hypersmart, hyperaggressive, for basically his whole career, I doubt this is still going on, probably at Warren's request, not Ajith's, but for like decades, every night, I don't know if it's every weeknight or every night of the week, they would do a call, a nightly call at 10 p.m. to go over the insurance portfolio and all the deals that Ajith was doing, like he's just a monster. So when he joins, he takes over all of Berkshire's other insurance businesses besides Geico to start and then he starts a new reinsurance business within Berkshire like himself like this is the great entrepreneurial story within Berkshire and famously he takes out an ad in business insurance magazine the full page ad when he starts this saying we are looking for more more casualty risks where the premium exceeds one million dollars

56:45Nobody does, this is the insurance business. This is crazy. Nobody does this. So he's basically saying like, I will ensure things that other people won't ensure because I'm more confident in my ability to price these weird crazy expensive policies. Yes. And the value of the premium for the policy, I want everything. I want the craziest, highest value premiums in the world that other insurers, like a Jenry and Swiss free and the like would never do. They're just like, that's just way too much money at risk.

57:13Right. They're factories. They're looking to identify the same thing over and over and over again and ensure it. These actually have a very fun name too. These are called supercats for super catastrophic insurance policies. Supercat is a really cool name for a pre-boring thing. Totally. I mean, this is stuff like, I think the story goes that after 9-11, where January would take huge losses in 9-11 and Berkshire and a Jeep would be fine. But after 9-11, a Jeep starts going around the world and like writing Terrorism insurance policies left and right because like everybody wants them now everybody's scared and he's like oh great like this is actually not that risky I'm gonna make a killing on these super high premium tens of millions of dollar policies Yeah, the crazy thing is like that January was basically mismanaged and they had these policies written in 9-11 that

58:04It had holes in them that they shouldn't have where they took on risk that they basically weren't being paid for and then just got destroyed. Yes, so here's what happens. The obvious thing to do in 98 when they buy Gen Rive would be to just give Gen Rive to a G, like a G is the greatest of all time, give him more.

58:23Instead, Buffett runs the White Knight Acquire or Playbook, even though he has no reason to now. You keep running your own business. Tells management, even though they're not the founders of the company, he's like, we love you. You keep running your own business. You do what you do. You know, I'm gonna be, this is a quote from Warren, strictly hands off. Yikes. So immediately after Berkshire Buys' January.

58:46News hits that January is a counterparty on a massive insurance fraud scheme called Unicover that I believe it was residential insurance. They immediately take a three hundred million dollar underwriting loss. This is like within the first week after pressure buys the company. Remember Buffett's rule number one, which was never lose money. Never lose money. Rule number two, see rule number one. Yeah. Well, first week on the job you'll lose three hundred million dollars. Great.

59:13Then they do a bunch of bad deals ensuring Hollywood box office receipts for movies. That loses them. I think about another billion dollars. It's rough. Then 9-11 happens. They lose all told close to another two billion dollars in 9-11. And then finally, and probably the worst offense given the Solomon history in the early 2000s. So a couple of years after the acquisition, January gets involved in a major accounting scandal with AIG.

59:42propping up AID's balance sheet. Nobody ended up going to jail on this one, but basically massively hurt Jenry's reputation and brought the regulators all over them. And this is the one thing Warren wants less than anything. Eventually, Warren would house the old management fire them and bring in Joe Brandon and Ted Montross to fix it. They do a good job. And then eventually Warren does hand the whole thing over to a G in 2016. So as he does now running January in addition to everything else, wild saga here. What a mess. What a mess. All right, listeners. Now is a great time to tell you about a long time friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF. Then everyone would not and you're done. But in an AI first world, that doesn't hold up anymore.

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1:02:08All right, David, take us on from January. Where else we going? All right, we can't move on fast enough for Warren's perspective. So before the tech bubble pops, he does one more surprising to outside watchers move, which is in 1999, he buys a utility company, for sure, buying a utility company. This is what Warren has come to, like the light company that provides your electricity. He buys mid-American energy holdings.

1:02:37and people want to know why it's Warren buying a utility, Alice Rates and the Snowball. Warren was already being ridiculed for his refusal to buy technology stocks. Now he had bought the light company How Dull. The energy business I think ends up being fine for Berkshire. It's another fine investment. He doesn't lose money. They're fine. It does come though with two managers that Warren seems to greatly admire. By the way, We talked about this in the pre-show, but we haven't yet talked about it on the episodes. You know how you see Berkshire Hathaway real estate agents all over the place? Oh, yeah. That came with mid-American energy holdings. They also had a real estate brokerage. So weird. How does that work? Like, my understanding of the electric company is that it's like a public utility. It's market by market, then, where some of them must be private companies. Yeah.

1:03:30I don't know exactly I mean there are lots obviously lots of utilities separate utilities and different geographies all across the country but yeah somehow they had a real estate brokerage in there as well so there is CEO of the company one David Sokol and the number two remember that name remember that name his number two guy named Greg Abel the Just announced. You need to remember that name. Future CEO of Berkshire Athaway. Yeah, that's how they come into the company. We're gonna hear much more about them later. So, okay, finally, all this tech bubble stuff comes to a head in the 2000 annual meeting where Warren and Charlie are just getting pummeled by questions from shareholders on stage in the arena asking, what on earth they are doing? Why do they not own technology stocks?

1:04:24Everyone else is getting these five X's in a year. What are you doing here trying to make me 15%? You're making me poor. Warren says, quote, I don't want to speculate about high tech. And then of course he goes on to speculate and he compares the whole thing to a Ponzi scheme. And then Charlie jumps in. This is my favorite. This might be my favorite Charlie moment of all time. He jumps in and he says, the reason we use the phrase wretched excess.

1:04:53is because it produces wretched consequences. It's irrational. If you mix raisins with turds, they're still turds. This is all time great mother quote. I don't know if there is a video of this. If there is, I haven't seen it, but I can just imagine like the entire arena just being like shocks like did Charlie Munger just say turds? Like what? I think Alice actually says that lie to the snowball. But if you think about what each of them is saying, It's telling, and it's actually quite different. Warren is saying, I don't understand this stuff, I refuse to engage, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no

1:05:50you know, the splatter from the turds is going to get all over your reasons too and drag it down. And when Warren says, you know, I'd understand this thing. It's a Ponzi scheme. He's referring to like the crazy multiples that people are paying on top of revenue because of course, profits don't exist much like today. But like, let's even walk it a few more levels. Often revenues don't exist for companies that are going public, which like that you only see in like space or like, you know, battery technologies or something now.

1:06:19But then even further like some of these companies are selling products but they have upside down unit economics and so they're not even like gross profit positive. So there there is all sorts of you could sort of understand why you would look over to Charlie and have him saying there's turds in here because Truly, there were. I mean, it's crazy some of the stuff going public. Then you look over to Warren and he understands all the financial infrastructure around it that the banks are incentivized to do it. That the earlier shareholders are incentivized to get marked up and get it public and then sell to get it off their books. You know, there was Ponzi scheme like things going on because there was so much rampant speculation about raisins and turrets. Yep. And so actually, I was curious about this. So I did some analysis.

1:07:03This is flash forwarding maybe too much, but yes, at the absolute height of the tech bubble when this shareholder meeting is happening, if you were to put a dollar into Berkshire Hathaway stock, the A, if you could buy a fractional share of the A for a dollar, that dollar, even today in May 2021, so 21 years later, invested in Berkshire would outperform the NASDAQ. It would definitely outperform the S&P.

1:07:33and it would very slightly up or form Microsoft. So if you invested a dollar in Microsoft and call it the first half of 2000 and held it to today and you invested a dollar in Berkshire, you would be doing better in Berkshire than Microsoft. So like Charlie's right here, like the splatter from the turds is going to get over the raisins, all over the raisins, including Microsoft. But if you invested a dollar in Microsoft versus Berkshire, At almost literally any other point in time, either before back in, like, 97, when the famous Sun Valley panel happened with Coke and the Ham sandwich and Bill Gates, Microsoft would be crushing Berkshire if you had put dollars in at that point in time. Oh, fascinating. If you were to invest a dollar in each just a year later in 2001, you would still be doing better on Microsoft, and then, of course,

1:08:25the farther you get along obviously anytime since any time since you're going to be doing much better this dynamic play out earlier to where like what did it IPO in like 80 to 83 somewhere in there somewhere I mean they're obviously like we put a dollar in a Microsoft early in the early days right man it's funny that the dynamic exists twice where if you're super early a Microsoft then of course it's going to multiply it insane number of times to now but the run up in the last five years has also been so crazy that if you invested any time after the the dot com recovery which only really was like a year. Yeah. Then yeah, it's gonna outperform Berkshire. It is, you know, it's both like Charlie is right here that like, yes. In that exact moment. The bubble popping is going to drag everything that is good down with it. But we're almost really at the point where like it doesn't even matter anymore. If you had invested at the top of the market in the tech bubble, you'd still be doing better than Berkshire, except for like a very narrow window of time. Yeah, another point that they're both

1:09:23Making here is that there's a lot of innovation going on for sure you look around There's for sure all these incredible things going on with the internet, but the underlying stuff that's going on with Microsoft and you know the hardware makers though as like all the whole ecosystem There's a dramatic amount of innovation the reason that they don't invest and this comes out in a 1999 fortune article That Warren writes, sort of, warning about the dot com bubble. Of course, he doesn't say the bubble is going to burst. He doesn't say he's calling it top, but he sort of beats around it a little bit and says he's not interested in buying right now. I think it's sort of the way he positions it.

1:10:00He talks about how in the early days of making cars, there were hundreds and hundreds and hundreds of car manufacturers, lots and lots of innovation going on. And today, you know, there are only a few. And so just because- He's this analogy at the annual meeting this year too, I think, right? Yep. Just because there is innovation, sure, that's great for the innovator in the short term, but for the investor, for the shareholder, That doesn't mean you're going to be able to capture value. You have to be able to create a mode. You have to be able to figure out what about the business creates that durable competitive advantage. So all the profits don't get arbitraged away. And I think he actually finishes the article citing the most perfect example of arbitraging profits away by over a hundred year period going from pure innovation

1:10:50to sheer commodity, which is the airline industry. And it highlights, I don't think this is exactly true anymore, but it was true at the point in 1999 when he wrote it, that the sum total of you add up all the profits and subtract all the losses from the whole airline industry, since the inception of airlines, it was a loss. Yeah. And then he says, this is sort of gruesome, but I think he ends the article right with saying that he'd like to think that if he could go back in time, to was a 1903 at Kitty Hawk when the right brothers flew that he would do capitalist favor and shoot them down. Yep, which is a insane way to put it. But the point that he's making is just so stark. And I'm sure it's not something I had really thought about. And it's certainly not something that was on people's minds in 99, which is the proliferation of innovation does not necessarily imply that there is

1:11:47value to be captured in a durable way by a single firm yep not necessarily it also doesn't necessarily imply that it won't be and of course Warren is hugely wrong about technology and the internet on this front but it also everybody remember what Warren says here about the airlines and what must be going on in his mind later in life when he buys every airline stock in the industry twice twice yeah okay For the moment though, tech bubble bursts, as we all know Warren, and he's still top of his game. Oracle Omaha, everybody's raining trays on him, he saw it all come in, all true. The early 2000s are, you know, more greatness for Warren. But then in July 2004, Susie passes away, and this is devastating to Warren.

1:12:44even though they haven't actually lived together for like 25 years at this point, he still loves her hugely and depends on her. And they're technically married, right? Even though they live. They're still technically married, even though they don't live together. Yeah, she lives in San Francisco. He lives in Omaha. Like we said last night, we're not going to cover it on acquired here. But his personal life is complicated. Let's just say he, I do not think at all that Warren is or was ever like a womanizer.

1:13:13But it is true that he had many women in his life. And I think it was all a buttboard. Anyway, it's all in the snowball. You can go read about it. But he's devastated when Susie passes away outside of his personal grief, though, which is acute. The most pressing issue is what's going to happen to the Buffett fortune and to Berkshire because in typical Warren fashion, until this point in his life, he never thought about it. He always assumed that Susie was going to outlive him.

1:13:43And the plan for the now 40 plus billion dollars of net worth that the Buffett family has, the plan was always that after Warren would die, Susie would set up a foundation there. She already had the Susan Buffett foundation and give it all away. That was the plan. But well, obviously that's not going to happen. Yeah, I mean.

1:14:07Warren has been thinking about the conundrum of what to do with his wealth since long before he was wealthy. I mean in his teenage years, he was already thinking about well when I'm really rich, what do I do with it all? And he is like immensely frustrated by any attempt that he has at philanthropy, which has to be why he basically says that's a Susie problem. She'll figure it out and set it up when I'm done. His frustrations largely come from the fact that He does have things that he really cares about and that he cares about promoting I think he's very worried about an impending human societal problem of over population which interestingly enough didn't end up happening that the world has sort of slowed and I believe maybe even stopped the global population growth He was very worried about not only when you use up all the energy on earth But are we gonna use up all the food and will famine be an issue? And so he had tried to

1:14:58give to various charities over the years but he was so obsessed with performance and metrics and that kind of money was a scoreboard that when he would give it and he couldn't sort of understand the investment return. He wasn't privy to the investment return. He couldn't sort of choose the investment manager that it really wasn't used to compound in the way that he was used to his investments compounding in a way that you could sort of see a dollar return on that it was just immensely frustrating and he'd really thrown his hands up in the air and kind of just donated here and there but had a big fortune. And I think as we chronicled in part one like there is this element of his psychology where like he just kind of cares about the scoreboard. He just wants the money to have as big a number as possible. He doesn't want to buy stuff. Giving it away like share like eventually he'll do that. But like he just wants to get the number as high as possible by the day he dies. That's what he cares about.

1:15:49which is of course competing with the fact that he wants people to like him. Not only does he want to be very wealthy, he wants the world's adoration. I mean, he throws himself a festival once a year for everyone to fly in and visit. Like, nowhere in security's law does it say that your shareholder meeting must be like this. This is not, this is a Warren Buffett creation to bring this upon himself. He wants to be a beloved sort of figure and teacher on top of being the wealthiest person on earth.

1:16:18You know, you could see how those things could come to a head. Yup. So you could accuse him of not being innovative in his investment philosophies. Never accuse him of not being innovative in finding ways to get what he wants. So after Susie dies, the wheels start turning. He invites Bill Gates to join the Berkshire board, which up into this point, the board was basically 100% his family.

1:16:45and close business associates that he actually worked with, like Charlie, Tom Murphy, Ron Olsen from MTO, Don Quillo's on the board, David Gattisman from New York back in the days, even though Gates is a close friend, I think he's the first real outsider who Warren's never done actual business with, purchased a business with that joins the board. So it's something something is a foot here. And then we all find out.

1:17:15Probably the reason why this was happening in 2006 Warren makes what was almost certainly the biggest decision and perhaps the most impactful decision in philanthropic history and I totally remember when this happened he calls press conference and he announces that he is going to give away 85% of his Berkshire stock which is worth $37 billion at the time And five-sixth of it is going to go to the Bill and Melinda Gates Foundation for them to manage. And the other one-sixth is going to go to his Children's Foundations and the Susan Buffett Foundation. So this is crazy. There's no Warren Buffett Foundation. He's not going to give the money away. He's not going to have to make any of these decisions. He offloads

1:18:05All of it to the Gates Foundation. Which really is remarkable. It's like he's like boy it's really hard to give money away. I don't know the first thing it better. I don't there's a lot of infrastructure required to do this. Actually that guy's already built the infrastructure and I very much trust him. And this is what's so amazing. Everybody is like this is like win win win for Warren. Everybody is like.

1:18:26Warren, you are the most amazing, most generous person to give. This is the biggest gift in history. You have done such an amazing thing for humanity. This of course leads to the giving pledge that indicates is an Ed Warren treat in 2010. And it becomes like the coolest thing in the world for billionaires to give their money away. Like Warren is like setting me like a status symbol here. And meanwhile, Warren is getting exactly what he wants. He never has to deal with any of this.

1:18:54Yeah, the one drawback for him has to be the fact that the Gates Foundation legacy will long outlive Microsoft's legacy in terms of the way that people remember Bill and Melinda. Microsoft will still be a successful company 50 years from now, but I don't think people will remember it as Bill Gates' legacy. The foundation absolutely. And so with Warren, it has to be for someone who is very concerned with his ego. It had to be a big trade-off to not have a gigantic endowment with his name on it. Yep. I get it. Who knows how much he planned this out, but like him doing this and then creating the giving pledge and driving all of the philanthropy that that does by making it like the ultimate status symbol to give your money away.

1:19:46Should have called it the Buffett Giving Club. Totally. That's going to go down in history as the number of billions, tens hundreds, I don't know how many billions are going to be given away because of this. It's pretty cool. It's pretty cool. It's pretty cool. I mean, it's amazing. It's wonderful. It's great for society. It's also Warren must just be so pleased with himself with this. That all happens in the mid to late.

1:20:162000s, which is an interesting turning point for Berkshire Hathaway's strategy I mean if you think about this period of like 1990 to 2005 maybe extended to 2010, you know, they're they're going after buying these good businesses where the operators still care about the businesses after they sell it. That's sort of like the secret to success. You leave the management in place except for January, those bad decisions, and maybe even mid-American energy. Well, Sokol was a good manager. He's just a little too good, as we'll see.

1:20:48You know, they could do this thing where they would like underpay versus private equity. They were the better option for these companies that were, you know, anywhere from the hundreds of millions to low billions in value. But it does get to the point pretty quickly with just the cash on hand that the amount of money they needed to play just got too large. And there's not enough furniture stores and family owned jewelry chains in America to go buy. Yep. And this is real. I mean, like, one thing that becomes clear in that is, you know, Warren keeps harping on We're so big it's hard to move the needle and like, that's really true. Right. He has been forecasting this for 25 years. Yeah. That's really true at this point. Like the law of gravity tying Berkshire to the S&P 500 is like, there's a lot of gravity. Yep. So the giving pledge, of course, you know, it's like 2006 when Warren makes his major gift to the Gates Foundation, but it's not until 2010 that

1:21:43they all launched the giving pledge. Why did it take so long? I assume it took so long because not too many people wanted to give away a lot of money in the intervening years between 2006 and 2010 because a little thing called the financial crisis happened. Done, done, done. As discussed so many times on this show, beginnings of Airbnb and Uber and cryptocurrency and on and on and on. What's that?

1:22:12article embedded into the Genesis block of Bitcoin. Yes, it was chancellor on brink of second bailout for banks, which allegedly is mocking the fractional reserve banking system, but yes, it is a very deep reference in the midst of the financial crisis. Indeed, indeed. So here's Warren an entirely too. He's freshly unencumbered by the weight of having to deal with his wealth. He's back in the saddle. He's not literally unretired but like figuratively unretired again for the third time. Ready to go to work. And he and Charlie have seen this movie before. They were there. They were leading players in the dress rehearsal of Solomon in the early 90s. So they're like, all right. Well, I think we know what to do here. The whole thing kicks off. I remember this so well in

1:23:08March of 2008, when Bear Stearns, the storied investment bank, failed. Just like Solomon, the problem at Bear was, you know, nominally it failed because they had two in-house hedge funds that were mortgage-back security hedge funds and those, you know, had huge losses. That wasn't what it failed. It failed because Bear's counter parties stopped trusting their paper and stopped being willing to trade with them and, like we saw, Solomon.

1:23:34You know a huge amount of their capital base turns over overnight because you're settling trades and you've counted parties on those trades and if your counted parties no longer trust that you're good for the money They're gonna stop trading for it with you and then it all vicious cycle comes to a screeching halt That's what happened with bear so during the course of one week in March from March 10th through which was Monday through the end of the week which would have been what I guess the 14th of Friday so Bairstearn stock had started the week trading at $63 a share. And by Friday, they're toast. They're bankrupt. And over the weekend, the Fed engineers an asset sale to JP Morgan for $2 a share. So the old Bairstearns entities completely bankrupt, the good assets, the non-toxic assets get put into an LLC that the

1:24:30government creates and JP Morgan buys it for $2 a share backstopped by government money so like if anything goes wrong JP Morgan's not on the hook. It's like it's bad. Never seen anything like that. Berkshire of course, I don't know if they got a call if I assume Warren probably got a call from somebody about Bear Stearns that week decided not to save them or bail them out but Berkshire has $37 billion of cash sitting on its books at this point which Today seems kind of quaint compared to Apple and Microsoft and the like, but you know back then nobody else had that kind of cash anywhere. The only people who had that were governments. Right. I have to assume the most valuable company in the world at that point probably was an oil company when probably was in the neighborhood of two to three hundred billion dollars. Yeah, but probably didn't keep a lot of cash on their books because you know, you're an operating company. You got all tied up in. Oh, for sure. But just making the point that like things are.

1:25:24Almost an order of magnitude smaller at the largest company in the world level totally both things like the companies are smaller and Nobody's piling up cash like internet companies are today except for Berkshire So they have all this cash. It's a great climate to invest But one of the lessons that I think Warren and Charlie took away from the Solomonic debacle was you don't necessarily want to be like a the major primary equity holder during a crisis in case things really go right you don't want to be that guy that's called up in front of congress you know you really don't so instead of making a lot of equity investments at this time they decide instead to pursue a different strategy they're gonna make debt and preferred equity fixed income investments in companies that need capital can you simplify that for us is it like

1:26:19Hey, we're going to loan you money. And if we want to, then we might exercise some warrants. Exactly. And we're going to own loan you money at a very high interest rate. And yeah, maybe we won't make equity type returns, but we're going to have a whole bunch of downside protection, a whole bunch of downside protection and some Warren upside. And we don't have governance over the company. Yeah. And you're not going to call us in front of Congress. So the first one of these that they do.

1:26:44is in April of 2008, right after the bear blow-up, Mars, the candy company diversified conglomerate, one of the largest private companies in the world, announces that it is acquiring, rigly, the chewing gum by another candy manufacturer. It's like the seized candy coming back to Roost here for $23 billion.

1:27:07but it's kind of hard to get financing from banks right now. That's a lot of gum. That's a lot of gum. I don't know what else, Rickley, how do I think they own the Cubs? I was going to say, there's no way there's even two billion dollars of gum a year purchased. Well, you know, hey Warren started by selling gum, right? You know, buying in bulk and breaking off the packs. All right, keep talking. I'm looking up what else, Rickley does. So, Mars is going to put up 11 billion dollars of equity for the deal. Goldman and T.P. Morgan are going to do a little over five and a half billion dollars debt, but they still got a six and a half billion dollar hole they need to fill. Well, in steps Warren and Berkshire. So they invest six and a half billion dollars to fund this deal of Mars, not Berkshire, buying Riggly. And they do it with 4.4 billion dollars of debt that Mars buys from Berkshire with an 11.45%

1:28:05Interest rate on the debt. That's a real like versus a great very stable company. This must really be their only option. I remember seeing in the last couple months that Amazon or Apple or you know somebody priced a debt offering recently at like something absurd, like a 0.3% interest rate or something like that. Yeah, times are very different and lots of options available for corporations. Lots of options available for capital.

1:28:3511.5% interest rate that is unreal. The other two billion Berkshire invests as preferred equity with a 5% interest rate. Picket some warrant coverage on it. All in, they end up realizing a 14% IRR on this deal, which is pretty good because there's not a lot of risk here.

1:28:55No, and as Warren would say, you know, people chewed a lot of gum in the past. We did chewed a lot of gum in the future. Oh, Warren. And David, it really is pretty much all gum. Like, this is crazy or at least a majority. So in 2007, they did over 5 billion in revenue.

1:29:09and they own, you know, juicy fruit, spear mint, double mint, big red extra or a bit. There's some other candies. So they own like all the gum breads. They do, yeah. Exactly. There's some candies too. There's, uh, and, but this may have been after the combination with Mars, but now under the, this subsidiary, under the, uh, wriggly subsidiaries, there's Skittles, Starburst, Altoids.

1:29:32gummy savers, lifesavers, that sort of stuff too. I'm having a heart attack just hearing all these names. But yeah, so like there's, you know, as I was saying, there's a huge arbitrage here, because I think this is also what Warren and Charlie realized, the government is bringing the bazookas out. They're slashing interest rates. They're throwing money into the system. Everything that we just saw them do during COVID.

1:29:57They first did during the financial crisis. Is this the start of quantitative easing? This is like the bazooka of quantitative easing. So you've got this crazy situation where government is making capital available for free. Basically, and Berkshire can come into these situations.

1:30:17and make capital available in fixed income guaranteed return with 10 to 15% yields. So why is that? Is it just that there's no way to get the fear of the Mars corporation, there's no way to get your hands on that free money? I think in this case, yes, I think there's also a reputational element to this too. If people are worried, especially in the financial sector, which we'll get to in a minute, people are worried about counterparty risk and trust and the effective runs on the bank and the investment bank sense.

1:30:47Well, bringing Brooks and Warren in is gonna do a lot to shore up trust here. And I guess another way of saying to get your hands on the money from cheap government, you know, cheap money from the government. That's a bailout. Yeah, that's a bailout. You don't want to be the company that got a government bailout. What others didn't. I'm probably doesn't help with trust too much. Yeah. So that's in April. And then Brooks is fairly quiet for the next few months. And I remember these few months in between March and September, I like the eye of the hurricane. You know, everybody's like, oh, it's got everything got to be okay here. Like, you know, it's a weird moment. But then, of course, September rolls around and 2008. It's funny because you have this memory of the spring. This was after my freshman year of college. That spring or it was like the spring quarter, I was completely oblivious.

1:31:39I was getting ready to go do my first internship at Cisco and I remember like preparing for it and going and there was not like a concern in my mind that like maybe my internship will get canceled or maybe these companies will go under I do however remember what you're about to tell like last few weeks my internship just watch it like being glued to the news and refreshing every day comes September yeah wow that's so fun yeah we had even though like we're so close in age we had such different experiences just like be being out of college and in the workforce. Yep. And sector. Like I just not that convinced that, you know, if you were outside of finance or if you were in tech at that point that you would have seen it that early, you would have heard the news about our stirrens, but it wouldn't be this sort of daily obsession. You're being like, oh, bass turn or whatever, you know, yeah. Interesting. Until the fall. Until the fall. Yeah. I mean, the fall was just like the nuclear bomb goes off. And September 2008, of course, we're talking about Lehman. So here's a fun story. This story is great. So.

1:32:34The Lehman Weekend, Warren is, of course, on vacation. I think he's in Canada with Astrid, his, by then, wife. I think they were married at that point. Certainly partner that lived together in Omaha. Yep. So he gets a call about Lehman. At any of rumors, it's been circling that Lehman was in trouble and counterparties were starting to not trust them. And like, Warren's about to go see a show, like some sort of performance in the theater. And he says, All right, well, I gotta go see this show. Send me a fax to the hotel that I'm staying at with the details of exactly what's going on and exactly what you want me to do. Send me a fax. So great. He doesn't even have blackberry. And he says this to Lehman Brothers. I don't know if it was a banker who was calling about, I assume it was probably. But it's about helping out Lehman Brothers. Yeah. He knows Dick Fold, who is the CEO of Lehman. It's about bailing out Lehman.

1:33:34because Lehman's getting worried that, like, the Fed might not be all out of here. Like, this might be the end. So after the show, Warren gets back to the hotel, there's no facts. So he's like, all right, well, I guess they didn't want me that bad. It must be good. A year later, in summer 2009, he's at Sun Valley, of course, with Little Suzy. And he's licks in his phone. He has like a flip phone.

1:34:00And she says, Dad, there's a text message on your phone. No way. Yes, yes, yes. And he's like, he's like, what's a text message? And it's from Lehman. And apparently, like, wires got crossed and it was asking for maybe like the facts number for the hotel or something. Like what hotel are you staying at?

1:34:23something. Oh my god. Isn't that amazing. How Warren Buffett could have saved Lehman brothers if he was a little more tech savvy. Totally. And it's a funny story. Of course, though, there's more to it. Like Warren could have gotten ahold of them and Lehman could if everybody really wanted. But yeah, turns out the actual story is I think that did really happen. Warren tells it in a video. I think it might be a well-street journal video, kind of a retrospective about the crisis. In March, right after the bear collapse, Dick Fold had called Warren about a capital injection then and Warren had studied it then. It isn't a Wall Street Journal video because there's this great moment. He goes in his office. He brings out the printed out Lehman Brothers 10 K from 2007 that he had studied in March with all of his handwritten notes. Amazing.

1:35:16So he was thinking about it. He was thinking about it. He went Solomon Brothers once he could have done it again. He was thinking about it, but he decided there was too much risk and maybe he's probably a little gunshot from Solomon Brothers. So he didn't invest in March and he like he wasn't. I think he says he wasn't going to do it again anyway in September. So on September 15th, of course, famously, Lehman Brothers declares bankruptcy goes under. Of course, everybody remembers Lehman and talks about Lehman.

1:35:42People forget that AIG also had a crisis that weekend the Fed ultimately did bail out AIG and not Lehman. Warren got a call about AIG too. He passed on AIG. So he did not invest in those financial firms in September 2008. However, he did get to other calls that he was slightly more receptive to specifically Goldman Sachs and GE.

1:36:11You wouldn't think of GE as a financial firm, but they had GE Capital, which is a large, very active financial player. And they were in trouble. Did you know that GE's consumer facing savings bank was sold to Goldman Sachs? This is like maybe seven, eight years ago. And Goldman Sachs rebranded it in a sloppy rebrand. It's kind of a quick one GS bank.

1:36:36And it's sad as GS bank for like two or three years. And then that became the underpinnings of Marcus. Oh, no way. I did not know that was originally a GE financial product. No way. And they're both Warren Buffett bailouts. 2008 swoop ups. Yeah, it's neat swoop ups. The very next week after the Lehman bankruptcy, Goldman must have called probably during that weekend too or shortly thereafter, Berkshire invests five billion dollars for preferred equity in Goldman with a 10% annual dividend. So essentially this is, you know, it's like, it's like, yeah, it's not preferred equity, like, preferred equity that you would get investing in a startup. It's a more debt-like instrument. So 10%. Keep on. The Solomon coupon, I think, was only 9%. So, man, this is worse in Goldman.

1:37:31with a call option for Goldman to call the preferred equity back for five and a half billion dollars, plus Berkshire got another five billion dollars of common stock warrants at a strike price of $115 a share. Those warrants end up becoming, they got really negotiated, I think, once with Goldman, but become quite valuable. Of course they did its Goldman. All told on that deal, Berkshire ends up making about $3 billion, so they get about $8 billion back on the $5 billion that they invested in Goldman. That's pretty good for fixed income. That happens within like two years. And how long did that last? Did they end up completely out of Goldman shortly thereafter? I think they held the equity that they exercised from the warrants for a while, but they don't end up making too much more than the $8 billion. So still, good deal.

1:38:27GE went slightly less well the week after Goldman on October 1st, Berkshire invests $3 billion in GE for basically the same deal, 10% coupon, warrants to buy $3 billion of common stock at $22 a share. Unfortunately, unlike Goldman, whose stock has of today is trading at $364 a share versus the 115 strike price that Berkshire got, GE, the strike price was $22.25. GE did briefly, very, very briefly trade above that mark in 2016, but its share price today is $13. That was not the last deal that Berkshire would do with GE. Do you know about the 2015 thing? Oh, no, I don't.

1:39:19They bought some rail cars from GE, which I think is now viewed as sort of a mistake in retrospect. Interesting. Like actual rail cars are a real car manufacturing business. I think actual rail cars, it was like a fleet, like managed by GE, so there's like a business umbrella associated with it. Huh.

1:39:40But it was, let's see, yeah, the subsidiary of Berkshire was Marmon Holdings Inc. and they acquired these assets. You know, it's all the GE real-car services fleet. Boom. Wow. Yeah, I think for a billion dollars. Wow. Small world. So I'll told in 2008 during the crisis, Berkshire would deploy about 18 billion dollars of the 37.

1:40:08billion dollars for cash that it had on hand. The six and a half into Riggly, five into Goldman, three into GE, two point seven billion into Swissry, Jenry's major competitor, which was odd, interested. Hey, Warren, I'll make money. That was at a 12% coupon rate. Not bad. This is my personal favorite, three hundred million dollar loan to Harley Davidson.

1:40:3515% interest rate. Wow. Dang. 250 million to Tiffany's at 10% and 150 million into sealed air at 12%. I don't know what that was. That was like an airline or like air manufacturer. I don't know something. Well, so this is, I mean, honestly, since like 95, when they bought the second half of Geico, This is probably one of the top two moves. All the shopping spree that they do in the fallout of 2008 and buying Apple, which I'm sure we'll talk about next. Oh, we will get to that. But I mean, truly, what else has been this sort of big win in the last 25 years? Nothing. And just in terms of capital deployment, this is the most capital that Berkshire has deployed since, if you could call the January.

1:41:28deal capital deployment, even though it was all with stock. But this is legitimately like, this is a very impressive move. I mean, this is your classic Buffet. Like, I'm going to wait until prices are rational again. And I'm going to do all my research. And then I'm going to be so prepared that when the moment presents itself, I can act in mere minutes and that he did. Now, here's some interesting stuff about this. So all of these deals, the $18 billion deployed in 2008.

1:41:58Actually, the net returns at the end of the day that Berkshire gets back from that capital. Turns out to be about $25 billion. So you are right, Ben. But from the actual 2008 investing, it's like, that's good. And it didn't lose money on any of this stuff during 2008. So like, roll number one, don't lose money. This is all fixed income.

1:42:19Right, if this were a venture fund, you'd say boy, for the vintage, yes, top 1%. Right, right, right, exactly, exactly. So good, but this is not like amazing, but there's a code to this. And would you say 16 deployed to get 25 back? 18 deployed to get 25 back over what time period? Probably all told five years, maybe less. Pretty good, pretty good. Yeah, but Warren.

1:42:48gets one last bite at the apple, not that apple, different at the financial crisis apple in 2011, which dwarfs all of this, which is amazingly, I thought that this happened in 2008, but no, it was in 2011, Bank of America. Oh yeah, how have we not talked about that? Yeah. It was not 2008, it was 2011.

1:43:13Bank of America gets caught up in that remember the Euro debt crisis that happened in 2011 and everybody's like oh no financial crisis again and At least in the US it ended up not being a big thing. I don't know how Bank of America got caught up in this but they did Berkshire stepped in did the playbook $5 billion of preferred equity with a 5% coupon on it So not as much as the 10% that they got from Goldman, but they got warrant coverage to buy $5 billion of common stock in Bank of America at a $7.14 strike price. Today, Bank of America is trading at a $42 stock price. That's a cool 6X. Cool 6X. Are they still B of A shareholders? Yep. Still B of A shareholders. They all in to date, Berkshire has made about $26 billion in profits.

1:44:10on the B of A deal way more than wow the seven billion dollars that they made from everything else during the financial crisis combined and I think more significantly more than any other investment that Warren made in his entire career up to that point has to be I mean they're playing with so many bigger dollars at this point that okay so let's call this three great moves then you're you're pretty good ones from the financial crisis. You're buying a apple and of course then the B of A one, which there's no way that he's done anything more better than this on an absolute dollar magnitude to this point. I'm sure Rodden, you know, return on an invested capital. Sure. But this B of A deal is a grand slam and a very important grand slam because we mentioned Wells Fargo right around this time. Wells Fargo is literally driving into the ditch with all of their scandals.

1:45:08purchase started buying Wells Fargo in 1989 so i don't think they ultimately lost money on it but like they had big gains and then those gains evaporated right it's like buying uh yeah you start buying bitcoin around like 15k and uh and you keep buying all the way out through 60 then you're probably about break even yeah kind of feels like that yeah it's just you know Warren is now in his 80s at this point and uh Yeah, 15 years ago he got the question, when are you going to retire? To which he always responds, what, like about five years after I'm dead? Five years after I die. Yep, that's his line. So to be frank, like this is his last hurrah. Like if you include B of A, you know, which was a grand slam grade investment, this is it. He's done after this in practice, although he doesn't know it. Starting in 2009, right after the financial crisis.

1:46:04That's when they change the format of the annual meetings where it's no longer people approaching the microphone. It's Becky Quick and Andrew Rossarket, you know, asking the journalists asking questions and moderating. He starts getting hammered. He and Charlie on just like, what is the succession plan? What are you doing? Like, you are 80 years old. How many more of these wild rives can you go on? And, you know, he gives his trademark sort of like evasive answers.

1:46:31He says that the most important qualification for his successor as CEO is running a large operating business. Experience doing that. Right, because Warren has so much experience running a large operating business. But the one part of the plan that does make a ton of sense is that he says he's going to split up his job into the CEO business side. That's going to be handled separately from the investing side, which will be run by one or more chief investment officers after he is no longer in charge. And to put a finer point on that, there's someone who is going to manage the equities portfolio, the stocks that they own, where they don't own the business 100% and then the stuff that they actually do own 100%. Yep. And this is something that they'd actually been laying the groundwork for for a long time. I vaguely remembered this, but going back and studying this, this is amazing. So all the way back in 2006, in the annual report, Warren and Charlie have been talking about this.

1:47:30and they come up with this idea like, well, what if we just put an open call for candidates in the annual report? No way. So in the 2006 annual report, they introduced this idea. Warren writes, quote, I intend to hire a younger man or a woman with the potential to manage a very large portfolio, who we hope will succeed me as Berkshire's chief investment officer.

1:47:56when the need for someone to do that arises. So this is for the equities portfolio. For the equities portfolio. As part of the selection process, we may in fact take on several candidates. So this is going on. And I think shareholders knew this, but people had forgotten by 2009, those three years ago, the financial crisis happened. There's no progress. Nobody's been hired. Finally, then, in 2010, they make a hire a surprising higher. 39-year-old Todd Coombs, a completely and totally unknown manager of a small hedge fund based in Connecticut called Castle Point Capital, and Todd had started his career working for the state of Florida's bank regulator, and then gone on to work at Progressive Insurance, Geico's big competitor, before becoming a hedge fund manager.

1:48:55And here's the thing like, you know, he's not, he's great. Like, this was a good hire, but he ran Castle Point his hedge fund for five years. During which time he amassed cumulative returns of 34% not annual, not IRR. Whoa. 34% total. This is not like how long it had been investing five years. Huh. This is not like a incredibly distinguished track record here. Buffett did.

1:49:24Almost that well every year for 12 years in the Buffett partnerships. Yes So everybody's a little puzzled and the plot thickens a little more So the Wall Street Journal, I think Todd's hiring was announced in like August or September I want to say sometimes towards the latter part of the year in July the Wall Street Journal ran a front page piece saying that the search for Warren Buffett's successor was almost done and they had the candidate. They knew who it was. David, when you sent me this article, I about lost it. This is crazy. I had never heard of this. Me neither. I can't believe I didn't see this when it happened. Unbelievably, the candidate, the chosen candidate that the Wall Street Journal reported on was Lee Liu, who has an amazing story himself.

1:50:24grew up in China was part of the Tiananmen Square protests, and we're going to the US, and eventually gets into investing, had an incredible track record, has an incredible track record, founded Himalaya Capital, mostly invested in China, and became close friends with Charlie Munger. He introduced Charlie to the BYD investment, which is how that happened for Berkshire. And if you're wondering, hey, this name doesn't sound super familiar. I didn't know he worked at Berkshire.

1:50:53That's because he never did. He never did. And this is unbelievable. Even at the beginning of the article, front page, Wall Street Journal, they get the money quote from Charlie. Charlie is quoted as saying it is a quote foregone conclusion that Lee would join Berkshire. And they even have a picture with him. Like there's a picture of Buffett with, it's crazy. Totally, totally crazy.

1:51:21So what happened? Like, how did this blow up? The world may never know exactly, but the scuttle butt is that it all came down to comp, to compensation. And the thing is, you know, Lee was and is incredibly successful on his own, running his own fund, where he's keeping two and 20, you know, 2% management fees and 20% of the profits. And yes, it would be like this amazing honor to go.

1:51:49work at Berkshire B. Buffett's successor, but kind of like Warren back in the day with the Graham Neuben partnership, where they offered him the keys and he was like, wait, why would I run your firm where you're keeping a piece of it? I'll just go do my own thing and I'll keep all the profits. I think that's what happened with Lee. So he didn't join. He still runs him. Eli has been incredibly successful by all accounts still has a Warren relationship with Charlie and Warren.

1:52:18But yeah, that's your original process, I think. I'll bet. And I did read about what the investment managers and we'll get to the second one here in a minute, how they're compensated. And Warren does kind of let it slip in an interview that they basically are compensated for their performance above the S&P every year. And there's some kind of like three-year characteristic to it where they're paid on a three-year basis. And there's an opportunity for Basically, Berkshire to have a clawback if they underperform in the sort of latter years or the three-year rolling basis. Yeah. So you can see for somebody like Lee, or this is total speculation of rumors that is online. It's never been confirmed one way or the other. But supposedly the other candidate, according to rumors, was David Einhorn from Greenlight Capital, I think his famous hedge fund manager. But for folks like that, it's not him.

1:53:10attractive value proposition, really, to go work at Berkshire. But for Todd, who's running a small like $100 million hedge fund, this is the chance of a lifetime. When this interview came out, I don't know, a few years ago, maybe more, the capital pool for each investment manager is $13 billion. So like, even on its own, it's a very large hedge fund, even your little sliver that you're managing. Yep.

1:53:35So huge opportunity for Todd. He joins at the end of 2010. It turns out, though, that Warren and Charlie didn't know it at the time, but they weren't actually done hiring. They were going to bring on as they referenced in 2006. They were going to bring on several candidates. You know how we talked about on the...

1:53:55We haven't talked about it in this series yet, but we talked about this on the Pinduoduo episode that Warren does these annual charity lunches that he auctions off. Yeah. The auctions actually happen on eBay, which is amazing. That's awesome. And I didn't realize the charity is the glide memorial church here in San Francisco. Great, great organization been involved in many great things over the years. In 2010, the same year where this is all going down, an anonymous bidder pays a record $2.6 million for lunch.

1:54:25with Warren. And the next year in 2011, it turns out it's announced that the same bidder paid $2.6 million again. So one person is paid $5.2 million for two lunches with Warren. Ted gets the job because he paid for lunches with him twice. Yes. Millions of dollars. Yes. 5.2 million dollars.

1:54:52for a job. Oh my god. Yes, listers. Of course, we are talking about Ted. Ted Wechler, the other investment manager at Berkshire today, was before Berkshire running a fairly large $2 billion hedge fund called Peninsula Capital Advisors, that he had been running for 12 years. He'd been immensely successful over those 12 years. He had over 12 X.

1:55:20the capital in the fund. So done very, very well. Ranna concentrated portfolio. His top holdings were like DeVita and direct TV. And he for two years in a row buys the lunch with Warren and he impresses Warren so much in these lunches that they reach a deal to bring Ted on. That's crazy. Isn't that crazy? And so the wheels have to start turning at this point for listeners out there like Okay, so Ben, you said they're each running $13 billion. Do they get to run their own hedge funds? This is something that I don't think we totally know what the decision making process is. You know, how much are they there to execute the sort of buffet and monger style versus how much are they there to say? Look, we have a risk profile that we're comfortable with. Here's how we've been doing it. Go to town. Yeah.

1:56:12I think the answer is it's somewhere in between, in terms of how much autonomy Todd and Ted have versus Warren and Charlie. So, it turns out, in 2011, the same year as Ted joins, there's a little bit of a scandal. Remember we told you to remember the name David Sokol.

1:56:34Well, in 2011, Berkshire acquires, fully acquires, a chemical company named Lubrizol for $9 billion. It turns out that the person that first got interested in acquiring said Lubrizol company was David Sokol, then running the energy business within Berkshire Hathaway. And everybody widely assumed and Buffett had basically implied that the name on the envelope to be the CEO of the business of that side when Warren stepped down was David. Like it was his job to lose. Well, it turns out that for some literally unfathomable reason, because it's not like he needed the money. I would assume David front ran the trade with the acquisition of Loopers all. So is a publicly traded company before? Is a publicly traded company before Brooks required it?

1:57:32He personally bought shares in the company, and then suggested to Warren that Warren looked into buying the company as a whole. Okay, that in and of itself isn't that bad. It's like, oh, hey, like I'm personally investing in this company, I think it's great. The problem was that after they started negotiating to buy the company, and David, I think, was involved in the negotiations, he kept buying, knowing that this was going on. Definitely, no, no.

1:58:02Yeah, he didn't end up being prosecuted or going to jail or anything, but once all this comes out, Buffett fires him, he leaves Berkshire, and Buffett makes statements that he can't believe that this happened and he can't understand why David did it. So that leaves the new name in the envelope, so to speak, as David's former number two, now number one in the energy business, Greg Able.

1:58:27who also came over in the mid-America energy acquisition. And as we now know, Greg is indeed going to be the next CEO of Berkshire Hathaway. So we've got the chest pieces here. We now know a jeet's name for insurance. We know Greg's name as sort of the non-insurance businesses. He's going to be the CEO and we've got Ted and Todd each managing their pool of money probably close to $20 billion now each on the public equity side. Warren has said, I think when they started It was about one billion each that they were managing. And then kind of as they proved themselves, he gave them more rope. But in the early days here, Warren is still managing. We thought we were talking to Charlie, but really Warren is still managing most of the investing for a brochure. And to be honest, he sort of just given it to Ted and Todd right away because he does a pretty terrible job like we can't mince words here in retrospect these years between

1:59:222011 and 2016. And I think we're probably some of the worst decisions that Buffett ever made and worst errors of his career. He has admitted publicly. I mean, not necessarily the way that you just phrased it, but he definitely has admitted publicly that Ted and Todd outperformed him. Yeah, that they did. I think he made that comment in 2019. And he said, yeah, they both beat the S&P by a little bit, but They've smoked me. They definitely spoke to him. So in November, 2011, 2011 was a weird year for Warren. Lubrizol's Purfches. Yeah. Yeah. You know, hiring Ted, which was great, but because of the charity launches, like, it's just weird. So in November 2011, for some God knows why reason. Warren finally pulls the trigger on the trade that he has been itching to make for 30 years. He puts

2:00:20$10.7 billion into IBM in 2011. Let's just take a quick refresher here. 2011. Four years after the App Store is launched. Seven years after Facebook is launched. This is not way back in time when it might have made sense. Three years after the famous Jeff Bezos.

2:00:44talk at startup school. It's exactly what I was gonna say. About AWS. AWS is already a thing. That is the default for startups. It has been for years to go and be the cloud provider. So what on earth? What kind of thesis does he have on IBM? Well, here's his thesis. He said, this is what he says publicly. He says, he has been, quote, hit between the eyes by how great IBM is and how strong and defensible its client relationships are.

2:01:13Ooh, brutal. Okay, Boomer. If this is the first technology investment that Warren Buffett is gonna make, maybe it's a good thing he didn't make any technology investments. Maybe it's a half a century too late. Yeah, seriously. He holds this thing until 2018 when he finally sells it. All told he loses two billion dollars in total sales of fur, like a river around a little over eight billion dollars. Oh, but just like that.

2:01:40The opportunity cost of $10 billion of capital in 2011, you put that into IBM. My God. I think about if you bought any other big tech company, just pick one. Don't even, I just pick one. You would have done great. Warren, go back to the monkey throw in the darts. Then in 2013, he partners with the private equity firm 3G capital to take craft private and then merge it with Hines.

2:02:06Warren you're partnering with a private equity firm like there you're enemy you know what they do right like Anyway, Berkshire puts 10 billion dollars into that deal their equity stake in craft hines today is worth about 11 billion dollars So you know they haven't lost money, but like again opportunity cost a capital here. That was 2013 anyway 2015 Berkshire acquires the aircraft parts manufacturer precision cast parts for $37 billion in Berkshire's largest deal ever bigger even. Oh, he skipped over the railroad in 2009. They bought. They finally bought the railroad. Good for that. That was a good deal. That was. Yep. That has done well for Berkshire Warren Buffett from 2008 to 2011. He was good. He was good in those years. But precision cast parts, man.

2:03:04bought it for $37 billion last year. They took a $10 billion right down on that deal. So that's a dog. And then the worst that we alluded to. Oh my God, in 2016, he starts investing in the airlines. This is the man who said that he was going to shoot down Orville and Wilbur. What was he thinking?

2:03:26Well, the interesting thing is so he sold the airlines in a panic sale right when the pandemic dips started. And we all know, of course, there was about five days where you could actually buy the dip before it came skyrocketing back. And somehow we didn't endure a real market crash in this global pandemic because, uh, monetary policy. Anyway. Thank you, Jerome Powell. Yeah. Buffet basically sells at the bottom with these airlines. And it's interesting because I don't fault him for the sale.

2:03:55It is a very reasonable thing to sell the airlines then because of the government didn't bail them out. They could have all gone to zero. I mean the government was paying some airlines payroll to sort of make it through that period. So I don't even know he sold it. I think right around the worst the bottom. I blame the buy. The new that he even had a comment years before that he had sort of like a.

2:04:20Is it like a romantic fascination or like a dirty habit about about owning airlines or something like that? Like he knew and he still did it. It's like that he can't have newspapers anymore. So he wants the airlines. Now, okay, to be fair to Warren. Again, the scuttle but here is and there's some comments to this effect that it actually was I think Ted who first got interested in the airlines and they talked about it.

2:04:45You know, and then Warren. So okay, you know, it's just kind of funny to me. You can't not make fun of Warren for this one. Like, right. It's it's bad. You can chalk this up to you should have known better. IBM precision cast parts like dude, those are bad. Those are bad. Well, and honestly, in this same time period, like J and J wasn't great. The 2008 investment he did there. Yep. The real cards that I mentioned was around 2015. Not that great.

2:05:11Not great. Well, and those are all the sins of commission not to mention the sins of omission of Google, wuj, Facebook, wuj, Amazon, wuj. And on top of all this, like you own AMEX. You understand AMEX. You understand the brilliance behind what became the credit card interchange business. And you let a 2006 IPO by Mastercard and a 2008 IPO by Visa.

2:05:37go right by you. These are crazy old companies that have been locked up inside the bank, you know, federations or however they were owned before. They're finally available for the public to buy. These stocks have gone, like these were criminally undervalued initial issuances. And Buffett just watches them go right by knowing the MX business. It's crazy. That's such a good, I hadn't thought about that. Like, yes, you're right to be allocating all this capital to these just dog businesses.

2:06:05When Visa and Mastercard put the tech companies aside are just sitting there. Oh, brutal. Okay, so we're we're hammering on Warren here rightly so, but there is one shining saving all sin absolving addition to Berkshire's portfolio during this time. That's right We are talking about the very same company that was Sequoia Capital's worst mistake ever by selling before the IPO. Berkshire and Warren are redeems everything by buying Apple Inc. Amazing. Amazing. This story, okay, so here's the story. In May of 2016, as Warren puts it in the quote, quote, one of the fellows in the office who managed money. AKA Ted. Yep.

2:06:58It's never been said whether it was Todd or Ted but I think it was Ted here because Todd really focuses on financial stocks and Ted does everything else as Warren puts it had put some money into Apple and indeed had put about a billion dollars. Let's assume it was Ted into Apple shares in May of 2016. That goes well and amazingly, Ted Todd whomever.

2:07:25manages to convince Warren that this is a good idea. I guess he's broken the seal with investing in IBM in technology stocks. And he convinced his Warren that they should really back up the truck here in Apple. So over the next two years, Berkshire Hathaway would ultimately put $36 billion to work.

2:07:48buying Apple stock, just under the total price that they paid for it per se in cast parts, which was the largest acquisition in Berkshire's history. To say it goes phenomenally well, that is the understatement of the century. This is unreal.

2:08:06And I'm sure there's lots of people out there who have been Apple shareholders from 2016 to 2021. So, you know, your brokerage accounts know what we're talking about here. And yeah, lots of people doing this. Not a lot of people doing this with 36 billion dollars in initial principle. As of the annual report of last year, the market value of Berkshire shares in Apple is worth 120 billion dollars. That is 89 billion dollars of gains in five years. So I think, I think, I can't figure this out exactly, but I think that is either more or close to more absolute dollar returns than the entire rest of Warren Buffett's career investing, even including the partnerships. Let's just say that again, more or close to more dollar returns than the entire

2:09:04rest of Warren Buffett's career that has come in the last five years with one stock. I mean, there's two angles to this. One, the irony is just dripping. Tripping. Warren, no tech stocks, Buffett, and Apple is approximately 50% of the dollars ever returned. Yep. The other side of it is interesting.

2:09:29because it basically is just a math problem. Of course, the last five years of something that's been compounding for 70 years, 65 years. Of course, the dramatic amount of the value is going to show up in the last five, whatever you're investing and assuming that you're continuing to find a reasonable rate of return, because that's how compounding works. But holy crap. The position was initiated when the man was 86 years old.

2:09:59And from some conversations I had, when Ted brought it up and sold Warren on the idea, the angle was not that it was a technology company, but more in spite of the fact that it was a technology company. We got to talk about this. Yeah, the biggest piece of positioning from what I've heard is that it's a consumer product with a powerful brand name, very low propensity for people to switch. There's sort of high lock in. There's a strong moat there.

2:10:27and in fact, it may even be the most valuable brand in the world. Now that we've planted that seed, I would like to go and once again read the quote from the 1995 annual meeting. What we're trying to find is a business that for one reason or another, it can be because of the low-cost producer in some area, it can be because it has a natural franchise because of surface capabilities, it could be because of its position in the consumer's mind, it can be because of a technological advantage. Oh, he sees it. It's interesting that it has this mode around it. I don't think that there is any better description of why you would want to buy and hold Apple than that exact quote from him 21 years before. So great. Here's the thing. This is all nepicking because like at the end of the day, like investing, it doesn't matter. You know, I played baseball growing up and my dad used to say to me,

2:11:25if you're listening, hi dad. When I'm learning, you know, who's learning mechanics about to swing properly, I love this guy. He used to say, look, if you could hit 300 in the big leagues, nobody would care if you stood on your head when you swung. All the matters is you hit 300. But until you learn how to hit 300, you should probably do it the right way. In investing, it's the same way. Like nobody cares what your thesis is. Nobody cares if you're right or wrong. Nobody cares why you bought the stock. At the end of the day, you just want to be in a position to be right.

2:11:53Warren got himself in a position to be right. That said, I don't think he understands anything about how Apple works, or what it does, or why all of this works. He says he has a quote at the 2018 annual meeting. He says, I didn't go into Apple because it was a tech stock. I don't think that it required me to take apart an iPhone or something and figure out what all the components were or anything.

2:12:20I think it's much more the nature of consumer behavior. Oh, yeah, he's in it for the M1. He's really impressed by the architecture. He feels that this sort of he's locked in the eye message strategy is the right one. Yeah. Oh, how funny is that? Yeah, at the end of the day though, like it doesn't matter. It doesn't matter. There was Ted's idea. It doesn't matter that Warren hated technology stocks. All the matters is that he was in a position to be right.

2:12:49and 89 billion dollars of gains later. Here we are. Yeah, that has to be up there with the single greatest investment return in history in terms of absolute dollars. I think it is. I think the, let's see, Naspers Tencent and the Softbank Alibaba investments I think are still better, but like, we're splitting hairs here. Well, they bought those companies in the first five years of their life remarkably Warren and Ted achieved this performance by buying Apple 35 years into its life. Yeah. That just says a lot about how 45 years into its life. The Fang stocks in the last few years. Wow. It does. Okay. So that is the big beat that we're going to end on. But let's bring it all home. January of 2018, Berkshire officially appoints

2:13:42Greg and a Jeep to vice chairman roles in the company. Greg for vice chairman of non insurance businesses, a Jeep for insurance businesses. The pandemic, of course, happens in March of 2020. Warren, you know, reaches his faith in America, but he dumps the headlines at the bottom, which, you know, I agree with you. I thought that's fine. Berkshire mostly misses out on the enormous bull run that happens when Jerome Powell and the Fed and Janet Yellen inject Literally more money than God into the economy Warren and Charlie continue to say that they think that crypto is rat poison squared But as far as I can tell at least I don't think they've made any attempt to actually study or understand what Bitcoin or Ethereum or any of crypto actually is and then the Kicker the big moment that we all if not saw

2:14:35heard about the day after hilarious slip hilarious slip at the 2021 annual meeting where Charlie let's it slip that shocker Greg Able is the name in the envelope. This clip is so funny for we'll link to it in the show notes, but it's the Warren and Charlie are like on stage sort of bickering about Berkshire's culture, and about preserving the culture. And Charlie just goes, Greg will preserve the culture. Yep. And then the look on Warren's face is priceless. He's, yeah, he's stammer. He's like, um, um, um, uh, dear and Charlie, you know, they have like, hopefully we've pointed out in the now, like God, what 10 hours we've been doing this series. Nine, David, don't get ridiculous. The, um, so we say dichotomy between

2:15:26How Warren is perceived and wants to be perceived and how he actually is. And you know, he's got that line about Charlie and I have never had an argument. You know, it was like, yeah, bullshit. You've never had an argument. I bet you had one after that. But, uh, but yeah, of course, they still love each other and Greg will be the CEO of Breaks Your Hathaway.

2:15:46We should say, too, the thing that's been happening quietly, sort of in the background, two things. Ted and Todd have been running their portfolios in a very different way than Warren has over the years. So I think Todd, and I don't know this for sure, but it was really buying Amazon, Snowflake, some of these tech stocks, other than Apple. So you sort of have...

2:16:11a non-war and approved strategy going on there, especially the snowflake deal buying those sort of pre-IPO shares and benefiting from that part was very interesting. And then also stock buybacks. It's very clear that what's happening is that...

2:16:25They don't see a better opportunity out there in the market to deploy capital than the businesses they already own. And so they'd rather just take everybody's shares and concentrate their positions in the existing Berkshire portfolio. And I thought Christopher Bloomstrom had a great quote in the Semper Augustus investments group letter that he writes that is epic. It is a full analysis of the accounting practices and valuation model for Berkshire. And he is this great quote.

2:16:54As long as capital markets remain overvalued and private investors flush with cash persist in investing at low yields, sharey purchases are a magnificent use of capital. And it really is such a good point that like you pick your head up, you look around, everything's got a sky high multiple on it. And you know, Berkshire shares at least the way that Warren sees it. Don't. Yeah. They don't. Now, it's a little bit tricky to sort of think about it this way because the quote unquote intrinsic value of their equities holdings are marked to market. So, you know, whatever, if you say, oh, gosh, Berkshire's not trading at a crazy valuation. Well, I mean, a big portion of what they hold is publicly traded equities that are at a higher than ever multiple, however you want to mention it. So there is sort of this interesting thing whereby doing stock buybacks, sure, they're not buying into any new companies that have crazy valuations, but they are buying

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2:19:34So 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. All right, David. I wrote up a little like bear and bull case. So as we start to translate a little bit to like, there is a playbook that we should enter here. But like now that we're sitting in present day, why don't we reflect a little bit on sort of present day and in the future? Well, what bull case that I don't think we've really talked about?

2:20:04Is a lot of people sort of think oh Berkshire's toast when when you know Buffett the retires and I don't think he's gonna retire so it passes away And the stock's gonna plummet and the performance is gonna go away I think if you've been listening to our episode You probably don't think that you might think the opposite right so the bull cases like they actually could do better under Greg like they might be less conservative They could run the business by keeping less cash on hand, which is of course a drag on returns. And frankly, there's an argument that Warren has gotten really gun-shy in buying stuff after a lot of the sort of sins of omission and commission that we mentioned above that it's not clear that he sort of trusts his instinct in this environment. The only thing that he clearly trusts is to just do the stuff that has worked in the past. And I'm not sure that's well suited for this environment.

2:20:57And not to mention Todd and Ted are pretty good. No matter what else they've done, they did Apple. So like that, everything else, the routing error. And especially when they're only managing 40 billion between them, I mean, that what did you say, 85 billion dollar gain? 89. 89. 89, unbelievable. So there's certainly that element. Just like one more piece of context on that. That's a whole zoom of gains.

2:21:26He literally created a Zoom market cap worth of gains. It's totally wild. Now the flip side, the sort of bear case is look, Warren has been successful in a lot of environments. And the thing you kind of should cheerly about Warren Buffett is that he's reasonably consistent. Someone will always be out performing him, but he has created this incredible rate of compounding for over half a century.

2:21:56So well, I think the case that Dave and I have been making do you hear for this whole episode is that the internet change things so fundamentally that his style doesn't really work anymore and that you do have to make bets based on the earth changing underneath you rather than just the earth staying the same and businesses being well run. The bear case on Berkshire would be it actually is the opposite. At some point, they buff it way of investing world changing or not.

2:22:25will actually be great and we're just in sort of a season right now that is just making him look foolish. And yeah, maybe it's been 10 or 15 years of the long season largely foolish decisions, but, but, you know, so I'm not sure this is where I come down, but that would be sort of the future bear case on if Berkshire changes too much from the long time tested Buffett strategy. I would also add another part to the bear case, which is warranted or not, right or not, or whatever. Like there is no question that Berkshire Hathaway and Berkshire Hathaway shareholders benefit from the Warren Buffett Halo effect. Absolutely. And there are some real tangible benefits to that like during the financial crisis where like, my God, there's deals he was getting on debt and preferred equity coupons. Nobody was getting that.

2:23:21And the calls he was getting, like that, that is real tangible benefits. And there's some intangible benefit. Like I definitely, lots of people, I think ourselves, myself, at least included now, having done all this work, it's like, all right, Warren, you're kind of past the hill on investing. But lots of people give them the pass and people still show up to the shareholders meeting and people still hold Berkshire Hathaway shares because they believe in Warren. And if Warren's no longer there, then what?

2:23:51Yeah, Berkshire Hathaway is a religion and an investment and the bear case is that at some point it just becomes an investment. A little bit more bear case stuff. If you think about capital allocation, if you think about maybe the way Jeff Bezos does it, ideally there are lots of potential growth engines inside your company to invest in to allocate your capital to otherwise you have to go and fight it out with every other investor for every publicly available investment vehicle. The only growth engine that Berkshire really has, like meaningful growth engine is Geico. And that's not a real growth engine. So it's really hard for them to consume capital internally in a way that would meet any hurdle rate that would be exciting. Like they kind of have to keep going shopping to deploy capital at this point. There's an element there that's a little bit scary if you're thinking about investing in a tech company versus Berkshire, which of course you never really should be thinking about one or the other. They're completely different buckets.

2:24:49But they don't have an internal growth engine inside that company. The last one is a little bit more nuanced angle on the thing that I mentioned before about if you do a sort of a sum of parts analysis on Berkshire, then you have to look at everything that's currently marked to market, which is eye-popping. There's definitely a lot of people out there that think that the stock is trading to a discount of the intrinsic book value of the holdings. And that, of course, would be the case if you fully valued the cash that's on their balance sheet.

2:25:19If you think about the multiples of the stocks that they own, I mean Apple has gone from being valued at something like seven X earnings to now like 30 X earnings. And to believe that like Berkshire is under priced argument, it's fundamentally based on agreeing that Apple is worth what it's trading for, which maybe is true with Apple, but you're also agreeing that like BNSF is sort of worth industry multiples for railroads, which if you look around are also meaningfully expanded recently. I just think asset prices are really high. So there's definitely this element of like, if you believe Berkshire's undervalued, then I think you're being pretty generous with how you value the sum of all the parts. Yep. I think that's true. But there's the capital allocation question of like, well, all assets are overvalued right now. So if you're going to take capital out of Berkshire, where are you going to put it? Right. Everything is only

2:26:17worth talking about when you compare it to its next best option. Yep. If anybody has any really good options for really solid assets that are under price right now, the acquired Slack, you know, acquired.fm-slash-slack, go, go, go, let, let folks. Hang out in the Investance Channel. Love it. Yep. Hang out in the Digital Assets Channel. That is where stuff is going on. That's where it's at. Playbook. Playbook. Let's do it. You want to kick it off?

2:26:44Yeah, I mean, the biggest one that's just so clear to me is that you need different strategies at different scales and the same playbook clearly didn't work as they gained more capital. You know, there was that great thing that they were doing forever of hiring great managers that were family owned businesses that you know, they bought for hundreds of millions of dollars and let them run and those things compound and you could be management light. It just doesn't work anymore. So you need a completely completely different playbook and The interesting sort of point that I want to make on that just like the original cigar bet playbook stopped working and they had to go exactly the point that I want to make on that is that They have set themselves up well where they have a remarkably flexible structure to do that So it's not a fund. It's an operating company. They have an infinite time horizon the goal is to never sell and there's no drag of fees and there's no drag of fees as a shareholder

2:27:43You can feel pretty good about the sticker performance is actually the performance you're gonna get you're not getting that less 20% And incentives are aligned if they are not investing they're not just sitting there collecting fees, you know They're itching too because they think that the best option for that capital right now is to sit in cash So even though we were knocking Warren for, like, oh, he's out of touch and his, you know, he doesn't understand the internet, he doesn't understand internet businesses, and the world changed from underneath him, and we spilled a lot of words on that. What he did get right is this operating company flexible structure, and probably set it up for success, I'd say probably because we're, I have an open question on culture and politics, but

2:28:27leaving enough flexibility inside the company then to make sure that they can react to whatever is coming, even if it's not in the Warren style. So that was a big one that I had. Say more about politics, unless you're saving it for later. No, I'm not. So this is something that concerns me. So you went from having one person making all decisions, where if capital was best used on acquisitions that we could use there, if capital was best used plow it into an internal growth engine when they had meaningful internal growth engines, you know, you can use it there. Like a jeet's business. Yep. Yep. If they wanted to go by stocking companies, they could go do that. Now each of those are independent fiefdoms. And so I'm sure there's ways they can sort of do horse trading, but people's comp largely is tied directly to their own portfolio. And so who kind of gets to say

2:29:23At the end of the day, no, this is what we're doing. I guess it's Greg. I guess it's the CEO, but you really have to nail the incentives to make that all work. And when you have a non-founder who doesn't quite have the same sort of influence and purview over all of those things, I think decision making, especially when you need to be able to do it in like an hour, for a really big deal, could get really thorny.

2:29:52Not to mention a CEO who doesn't have the investing mind that Warren does Greg is like great like he's a great operating executive But is he gonna be able to think in the same way as Warren and Todd and Ted about investments and Act with the same speed in conviction Right, I mean would the right thing to do here have been to go try like crazy. It might be very hard if not impossible to go find a Warren Buffet and just give it all to them. And sure they have these other guys as employees, but like you need a one head monster. This is the funny thing about the number one criteria for the next CEO being operating experience at a large company. Well, that's not Warren. Right.

2:30:45So yeah, so I'll be very, I mean, we may never know it may be 20 years before a book comes out, but I'll be very curious to see how contentious decisions get made between that new group of four that is sort of coming in. And if just Warren or just Charlie is left at some point with the four, what does that look like? That'll be weird for a little bit. I imagine if one of them leaves, they both leave at the same time. I would imagine too. The other thing I'll say on culture, and this is borrowed from some great research that some listeners sent us, their culture, They sort of talk about it like it's this virtuous thing. And if it's truly this like virtuous thing, then it's something that you can sort of codify and protect. I think the cultures are really sort of like independent inside each of these operating companies. Like I don't think if you're an employee at Borschheim's, like I don't really think you think about Lubrizol's culture or like they're completely, they have nailed it on the decentralization thing.

2:31:43So I think the only real sort of like shared cultural elements inside the hundreds of thousands of people that work inside or or for Berkshire Hathaway are one, don't put Berkshire's reputation at risk to bend over backwards to avoid paying tax, which takes money out of the business. Like just don't take money out of the business. Leave it all in and keep compounding it deferred however you can. And three, funnel all cash back to Berkshire for reallocation and I mean, that's the culture. Like those are the things that are really important to the head office for managers at their subsidiaries to follow. Yep. Well, should we go to grading? Yeah. Let's do this. I know you have a whole slate of ways that we could grade this one. So kick us off. Here we are. This is it. Man, the whole story. Nine, ten hours in. Okay, so I was thinking

2:32:41before we recorded about how to grade this. I don't usually write down any thoughts on grading before episodes, but I thought this is so momentous. You guys know David Rosenthal. He just wings it. He isn't really proud. Well, I do in grading. Okay. So I think there are four topics to discussing grading here. First, we've been through this whole thing. I think we got to grade Warren's entire career.

2:33:12Like, hopefully there's still a little bit more time. I don't know, maybe not. Probably, I hope not, that there's not more time. I hope there's more time in his life, but not in his investment decision making career. I think we're basically at the end here. One way or another, the man is 91 years old. Either way, dude, we're shipping this episode. So like create the cutoff. Yeah. Okay. We grade the career. I think we grade performance since we left off the last.

2:33:39episode, which was in 1992. So I did an IRR calc of January 93 through today. Great. Love it. Then I think we should grade recent years performance. And then the final question. I am a Berkshire Hathaway shareholder. Have been for a long time. I don't know if you are, but whether you are or not, you could pretend you are. If you are, what are you doing with your stock? Are you holding? Are you selling or are you buying more?

2:34:09Interesting. David, do you have a rate of return calculation on that the entire Buffet career? As a matter of fact, I do. I did some analysis on this. The entire Buffet career. So if you amalgamate 13 years in the partnership years at a 29.5% IRR during those years and you amalgamate that with then 50 years since the partnership through 2020 five zero years incredible in the Berkshire time frame Berkshire over that time period has had a 20% IRR you get a blended IRR of 22.3% across 63 years of active money management for Warren guys consistent quite consistent the more incredible number do you know what 100 dollars invested

2:35:09in the Warren Buffet Partnerships in 1959 and held through Berkshire today would be worth today. $100. Take a guess. Millions, but the compounding math breaks my brain. I don't know. 26.2 million dollars. Not bad for for a Hyundai. Wow. Take a hundred dollar flyer in would you say 65? 59.

2:35:3959 I mean, that's a long time and that was a lot more money than but inflation hasn't moved this fast Yeah That's a great stat a hundred dollars at the beginning of Warren Buffett's career following him all the way through is over 26 million dollars Yeah remarkable and that's a 22 point something percent IRR So it's not over his whole career, you know, he he flagged like it's not the same as the BPL the Buffett Partnership limited days but That is mighty good. Yeah, mighty, mighty good indeed. All right, so A, A plus, what do you have? Has anyone else been investing over this period of time? Like, I don't even know how to compare it to anything similar. No, I don't think. He outlasted everyone. Yeah, he outlasted everybody. I think. So, okay, I wrote down A. Maybe do a name. Okay, here's my rationale for an A. We can debate if this holds. My rationale for an A.

2:36:40Versus in a plus was that I think we will probably see better investors in our lifetime than Warren in the past and I think that's just a natural consequence of The numbers getting bigger over time and the world moving faster and they're being more change It depends what you mean better investors because I actually don't think so depending on how you think about this. So I'm not sure that you could do what Warren did over his career with a career starting today without taking on a lot more risk or a lot more leverage. Like it's just so competitive to be an investor now. Yeah.

2:37:26So I suspect if someone, if we go set a million people free over the next 70 years, there will be someone who outperforms Warren, but they will have done it with a lot more risk involved. And so there's a lot more sort of luck in being the one of those million that does better than him. Okay. So here was my thinking on that. I tried to think of like, I did not run the numbers. So I made this be way off. We can debate. I tried to think of a tangible example.

2:37:55And the tangible example I thought of is Sequoia capital as a whole. So when was it? 72? They're coming up on 50 years next year. Yep. And we don't have their aggregate returns across all their funds. But I suspect they might be as good or better than pressure. Interesting. Now, not a single person. Right. It's a firm.

2:38:20But it's an institutionalized culture, and if you can do something consistently, you sort of deserve to be in the same conversation. And here was my thought process on it. Well, you know, Apple aside, which we can't really put Apple aside. Like Warren deserves credit for that 100%. But absolutely, he's lost a step in recent years, whereas I feel like Sequoia has only gotten better or stayed at the top of its game.

2:38:48Yeah, I mean it feels like they adjust to the climate that they're in a year before the climate changes. Yeah, and it feels like Buffett adjusts 30 to 40 years after. Yeah, just on IBM. Maybe maybe 10 to 15 years after. Yep. Yep. That's a good question though. It's interesting. But remember that thing I mentioned earlier with the expected value calculation of the probability something could happen and the outcome it happens. Sequoia is doing the exact opposite of the Buffett thing. It's a shot on goal. Yep.

2:39:16where each shot could be absolutely huge. So it's obviously an extremely different asset class. But it is a approach that is, I think, more suited to, if you believe the hypothesis that the world today is more about change than Buffett's world when he was in his prime, the Sequoia approaches is the better approach in today's world, I think. Fascinating. I mean, we're going to, like, rye a lot, ball the growth versus value people out there, but I love it.

2:39:47Yeah, what do you think you put the gun in your hands a or a plus? It's an a I mean if he had finished strong it would be an a plus and you could argue Apple is finishing strong but it's just the numbers that I ran for This last period 1993 through today is a 13.5% IRR and like that's 28 and a half years. It's not like this is like a quick cycle. This is like two or three cycles. And so it's not like, oh, well, you can't just say his 13 and a half percent IRR, you know, was during a down cycle for Buffett style. Like, no, it's been, we've been through some stuff. And like, it's just not been a remarkable last 30 years.

2:40:32And that number, by the way, is just based on their stock price. It's the coming in at 11,800, January 1st, 93. Their stock just closed at $435,000 a share. So great. Okay, so this is good. This is the next set of grading criteria. Maybe we can jump back to then an overall view at the end. And let's compare that 13.5%. Remember the Buffett partnership limited? That was 29.5%. And then the last episode, where we talked about the heyday of Berkshire Hathaway ending in the Solomon. I mean, that was a 27% IRR in the 80s and the late 70s through the mid 90s. So it is diminished considerably, which they told us it would because of the amount of capital they're managing, but still. Yep. So what do we think? Is this a B for this period? Yeah, it's a B. It's a B. Yep. You know, we still definitely beat the S&P, like beating the market for sure, but just not.

2:41:29to his previous standards. Yeah. Okay, so then recent years. So I did a slightly different... What does recent years mean? Let's take the last five years, starting from the Apple investment, which is almost exactly five years ago. What's your analysis? So this, I think, was interesting in telling to me, like we've been saying, the Apple investment, so amazing.

2:41:56in the running for one of the best single investments of all time. Yet, Berkshire is so big in this law of gravity around the capital is so meaningful and Warren's other investments were so bad that in aggregate Berkshire's stock price performance over the last five years on a multiple basis is almost exactly the same as the S&P, even including Apple.

2:42:25it has tracked the market and not outperformed at all for the last five years. Now if you take out Apple, it's underperformed by about half foot turn on a multiple from the market. So Ted and Todd are making money, but Warren's not getting paid out of any of his carry. Warren is literally doing worse than the market in the last five years. Right. Oh, that's so interesting to think about. Yeah, because he's necessarily underperforming the S&P because he said Ted and Todd were overperforming it. Yep. Yep.

2:42:55and Berkshire as a whole is just simply tracking. That's pretty bad. I mean, that's a C to me. It's not worse than a C because it's not like it's a hedge fund where they're taking two and 20. It's the exact same thing as being in an index fund. Yep. I think that's right. A C. Yeah. Okay. So now the money question, literally the money. What are you doing with the money? Are we keeping it in Berkshire?

2:43:23Are we buying? Are we selling? Are we holding? So this is the moment I reveal for everyone 10 hours in that I actually have never held Berkshire Hathaway. No way, we've done all of this work. Yeah. This is not investment advice. This is especially this part is not investment advice and we really do urge you to talk to someone who knows about this stuff when considering making a purchase. But I've never owned, I've thought about it a lot and especially in this research I considered buying it many times and the place I basically arrived is it's very conservatively managed as a Berkshire expert quoted to me, it's a good widows and orphans stock. And frankly, I think it's a good way for someone who's rich to stay rich because of the way that they manage capital. I mean, they don't dividend out. So if you make a bunch of money every year, then you don't have the high taxes on the dividends. You know, it will continue to compound. You can sort of sell shares when you want to sell shares to free up some cash.

2:44:15it's not going to have a really big down year. Maybe if there's an extreme hurricane event, but you know, it's not going to have five really big down years. So I think that question comes down to like, where are you in your investing cycle in your life? And I'm not sure that it makes sense for young people to buy a brochure or at least people that are young in their wealth. Yeah. I differ from you in answer, but 100% agree with you in spirit and rationale. So my answer, I am a Brexit shareholder as I said at the top of the series have been for many years. So I'm going to continue to hold partially due to nostalgia for that and the way to ward Halo effect and I get my free tickets to the shareholder meetings should they ever resume in person. But no, the real reason I'm going to continue to hold is actually just a portfolio management strategy. It's not a large allocation of my portfolio. Almost all of the rest of my portfolio is

2:45:12Literally, the rest of my portfolio is heavy growth, tech stocks, digital assets, et cetera. San Francisco real estate. So this is like in your safety. This is in my quote unquote, safety portfolio. The way I think about it is just like, this is, should I need emergency liquidity for something in the near term, you know, I don't know what that would be, that's what My breakfast is it's exactly what you're saying. It's my bad term but the equivalent of a widow's northens fund of like terrible term. But the capital that I can feel good about I actually thought a lot about this over the past year. I used to keep an allocation in just like a fairly sizable allocation in cash for this purpose. And then I was like, well, that's just stupid today. Like you know, to keep cash is just dumb.

2:46:10Again, not investment advice. Not investment advice. But when you know, when yields on 10 year treasuries are like basically negative. Right. Just sitting there getting devalued in my bank account. Exit literally every day that goes by you're getting poorer and poorer, you know, hold a cash. Again, not investment advice. That's when I decided you know what I'm going to rework this and I'm going to have my allocate my liquidity allocation be to Berkshire because I can feel pretty confident it's not going to lose money.

2:46:38and I'll at least get some return on the capital. So I don't know that's kind of sad. I think for Berkshire that I think of it as like an alternative to cash, but I kind of think that's where the stock is at at this point. Fascinating. 10 hours in and this is where we arrive. Not with a bang, but a wiper. I will say the journey is the reward and I do want to sort of sum up this grading.

2:47:07Series, you know, of course, we'll get to carve out here in a second, but the completion of this with Possibly the best take on Warren Buffett of anyone. Ho-nom from Alto's, which is an investment firm that we very much respect recently tweeted that he is the only investor to build a company worth over half a trillion dollars and as Ho puts it, a few amazing founders have done it, but no investor comes close.

2:47:37Absolutely. A great way to leave it. However, if you will indulge me, I will spoil it with a less eloquent parting thought that I wanted to add to after, you know, gosh, we've spent hundreds of hours of research on this. This is, we've read six books. I know. This is the most like quicksatic thing that we've ever done. Hopefully you all have enjoyed this as much as we have because it has been an Absolutely freaking blast. Let's change the way I think too. Yeah, we have learned so much from doing this. And I was trying to really reflect on like, okay, what have I learned from this? What can I take away? What are my feelings? There's what I'm doing about my stock, you know, that's one thing, but like the real value is in the learning. And here's my take.

2:48:32It's related to this Warren was the greatest status quo investor of all time idea from Andrew Marx and and that the world we live in is different today. But I think Warren was right about another concept all throughout his career. He's preached believe in America America is undefeated you know in terms of capital growth in a place to invest your money. And I think that you know me may or may not be true to some extent today.

2:49:01But I think that concept is absolutely true for the internet and the future ahead for the internet today to me is like Los Angeles in 1950 or whatever it was that when Charlie was looking for a city. What was it that was large enough to have an impact but still small and growing enough that he could become somebody there?

2:49:30Yeah. That's the internet. And if there's one thing I've taken from this, it's that, you know, that may change someday, but for the period that we're in and going forward and despite all the ups and downs and, you know, like, oh, yeah, you know, Bitcoin and Ethereum, you know, and DeFi all crashed, like, you know, 50% this past weekend, it's all noise. Like, the internet is still the future.

2:49:56Some listener out there and please drop this in the slack or tweet at us if you do this we need a meme of With Warren and his slides saying never bet against America. We need David Rosenthal never bet against the Internet. That's right Never bet against the Internet. That's my takeaway. I love it 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 crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn

2:50:46what changes actually created value for customers, and how fast you can use that signal to guide what you shipped next. This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved.

2:51:05So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com slash acquired to get started. Carvouts. Carvouts. Let's do it. I've got two. One very related and the other very unrelated except to my joke at the beginning of the episode. The related episode is a book.

2:51:33Phil Fisher's common stocks and uncommon profits are classic. Really the counterpoint to the Buffett philosophy and the value investing tribe. Phil is the father of growth investing and this book was published in 1958.

2:51:55and Phil lived in the Bay Area here in San Francisco and I will confess I haven't finished the book yet. I'm still in the middle of it, but I'm riveted. The only reason I haven't finished is because we had to finish this episode. It's amazing. Phil basically saw the future of what tech company like Dynamics were going to be way back in the day and he writes about the value of corporate R&D and this sort of Paradox that like you can't measure the value on a balance sheet of like corporate R&D and the cost of it may be high and you don't know But the cost of not doing corporate R&D is even higher Really great, but highly highly recommend it Also, I believe recommended to me originally by Honam who you were just talking about my gosh He's everywhere. He's everywhere and then my second car about is the Xbox series S

2:52:52I finally got one. So the, and I was specifically looking for the S because like, I don't need, you know, I'm 36 years old. I don't need the X. I don't need like, I get my eyes can't even see well enough for the, the great graphics. But the S is awesome. This thing is like pretty cheap. I think it was $2.99, which is not that cheap, but the S in Game Pass, it works out to like, I don't know, what is it? Like $400 or something like that.

2:53:20all in for a year. And you get access to hundreds of games and all the best ones that have been playing Halo Master Chief Collection. And it's like Netflix. That's where Halo reference came from. It literally is like Netflix for gaming and it's so great. I haven't touched my switch since I got it. Highly recommend if you can find a series X or a series S. Game Pass just rocks. And I think it's on the Xbox One too. You can use it on the previous generation. Hardware. Sweet.

2:53:50All right, I have two because you have two, but they're the most connected my two car vats have ever been the first is I somehow never saw good fellas until this week and that movie is just So choice on so many levels. I mean it probably came just because I listeners will know I just finished the sopranos and that was my previous carve out and wanted more and the cast has like 25 overlapping people. It's the same freaking people. It's amazing. But it's it's a freaking work of art for anyone who hasn't seen it. I mean, it's like Scorsese. It is best. It's amazing direction. It's amazing cinematography. The dialogue is exceptional. It's just a just a tremendous story of this person's life. I've never been like a gangster movie person and I never thought I was, but this is so good. Then the OG this I I've not seen it. I have to watch it. It's great.

2:54:41It's great and it's not like you know like obviously there's the godfather and I've got a long rabbit hole to go down of like truly OG just watch one and two don't do that's what I hear and then my second one is the good fellas soundtrack it is like hit after hit after hit George Harrison Eric Clapton and Aretha Franklin and the the film sort of finishes with Layla by Derek and the Domino's and that is just like the best way to wrap up any epic Epic story I think if we had the rights which layla the electric electric, although the acoustic is also great. It's great. I'm an electric fan. Yeah. They're both great. Yeah. The electric creates more of a the sort of like epic conclusion mood that is sort of appropriate for that. We'll write Eric Clapton and see if we can get the rights to use that on the fade out of this episode. Great. Great. Actually, we probably won't. I'm sure he's listening.

2:55:37For sure, but whether or not you're a fan of the of the movie you're seeing it go listen to the soundtrack on Spotify So great when do you know when good fellows came out early 90s? I want to say like 91 something like that shortly before the Solomon Brothers scandal Yeah, while Warren was still in his his real hey day exactly exactly all right listeners, we're gonna leave it there with that Thank you so much to our sponsors. They've been wonderful. We have a slack you know this Come hang out with us. You'll like it. We have an LP program for people who want to be closer to the show. You get to hang out on the zooms live with us or with people like Brad Stone when we're recording a book club episode with them. It's super fun and frankly I don't you know all that stuff is great and if you want to engage more deeply in the show with you you know you should but you know there's nothing like sharing an episode with a friend or social media if you want to but just pass this along if you liked it David and I love

2:56:37getting to share these stories with new people, so. And thank you for joining us on this journey. We're so lucky that we get to do this and it's so much fun, but like this has been a whole new level of fun, at least for me. I don't know about you. Like 11 p.m. like trapped in this room for four hours. It has truly been awesome. All right, listeners, thank you so much. See you next time. We'll see you next time.