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Berkshire Hathaway Part III

Season 8, Episode 7

Limited Partner Episode

June 6, 2021
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The Complete History & Strategy of Berkshire Hathaway (Part III)

It's time. We wrap our Berkshire Hathaway trilogy with Warren and Charlie entering a new era: the age of the internet. Can they and Berkshire adapt to this brave new world? We find out. And, after 9+ hours, we render our final judgments on Berkshire and Warren's career. Is "Never bet against America" still the right longterm approach? Or is there another, even bigger Snowball out there that Warren may be missing?

If you love Acquired and want more, join our LP Community for access to over 50 LP-only episodes, monthly Zoom calls, and live access for big events like our recent Book Club event with Brad Stone. We can't wait to see you there. Join here at: https://acquired.fm/lp/

The Berkshire Hathaway Playbook:


1. The Berkshire Hathaway "Culture"

Berkshire Hathaway really only has three key cultural tenants that stretch across its huge array of operating businesses and investments:

  • Don't put Berkshire's reputation at risk (i.e., don't be Salomon Brothers).
  • Don't take money out of the business (i.e., re-invest and avoid or defer paying tax whenever possible).
  • Funnel all excess cash back to Omaha for re-allocation (i.e., if you can't find a good use for excess cash, give it back to Warren).

2. You need different strategies at different company scales and points in time.

  • Berkshire's greatest longterm strength has been its ability to adapt and employ different strategies as it and the world has changed. From the transition from cigar butts to wonderful businesses as we saw in our last episode, to diluting the equity portfolio with fixed income assets from Gen Re before the internet bubble crash, to focusing on preferred equity during the financial crisis and ultimately making a non-controlling stake Apple the largest asset in the whole Berkshire portfolio, Warren and Charlie have demonstrated remarkable flexibility during their investing careers.

3. There are huge advantages to a company structure where one person makes all decisions.

  • Warren's ability to make $10 billion+ decisions on his own and within an hour (usually with input from Charlie) is truly unique in the global history of business, and allows Berkshire the flexibility to capitalize on opportunities that no one else can act upon, like the financial crisis. At the same time this setup obviously carries risk — not so much in Warren making bad decisions (cough, airlines), but in missing other opportunities simply due to lack of diversity in thought. Which leads us to our last playbook theme...

4. Never Bet Against The Internet. (aka the "Rosenthal doctrine")

  • Andrew Marks of TQ Ventures perhaps sums up Warren's career best: he's the greatest "status quo investor" that's ever lived, as embodied in his "never bet against America" philosophy. As long as the future looks mostly like the present, nobody is better than Warren at handicapping probabilities and picking winners. But that's no longer the world we live in today. As Doug Leone laid out in our Sequoia Part II episode, we now live in a world of accelerating change: what works today is unlikely to keep working tomorrow. And where is that dynamic baked into the very fabric of existence? The Internet. Never bet against it.


Links:


Carve Outs:


Episode Sources
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Sponsors:

  • Thanks to Tiny for being our presenting sponsor for all of Acquired Season 8. Tiny is building the "Berkshire Hathaway of the internet" — something they're so dedicated to, they even make and sell bronze busts of Warren & Charlie online! if you own a wonderful internet business that you want to sell, or know someone who does, you should get in touch with them. Just like Berkshire, they commit to quick, simple diligence, a 30-day or less process, and will leave your business to do its thing for the long term. You can learn more about Tiny here and find their Berkshire Nerds store here.
  • Thank you as well to Vouch and to Capchase.

We finally did it. After five years and over 100 episodes, we decided to formalize the answer to Acquired’s most frequently asked question: “what are the best acquisitions of all time?” Here it is: The Acquired Top Ten. You can listen to the full episode (above, which includes honorable mentions), or read our quick blog post below.

Note: we ranked the list by our estimate of absolute dollar return to the acquirer. We could have used ROI multiple or annualized return, but we decided the ultimate yardstick of success should be the absolute dollar amount added to the parent company’s enterprise value. Afterall, you can’t eat IRR! For more on our methodology, please see the notes at the end of this post. And for all our trademark Acquired editorial and discussion tune in to the full episode above!

10. Marvel

Purchase Price: $4.2 billion, 2009

Estimated Current Contribution to Market Cap: $20.5 billion

Absolute Dollar Return: $16.3 billion

Back in 2009, Marvel Studios was recently formed, most of its movie rights were leased out, and the prevailing wisdom was that Marvel was just some old comic book IP company that only nerds cared about. Since then, Marvel Cinematic Universe films have grossed $22.5b in total box office receipts (including the single biggest movie of all-time), for an average of $2.2b annually. Disney earns about two dollars in parks and merchandise revenue for every one dollar earned from films (discussed on our Disney, Plus episode). Therefore we estimate Marvel generates about $6.75b in annual revenue for Disney, or nearly 10% of all the company’s revenue. Not bad for a set of nerdy comic book franchises…

Marvel
Season 1, Episode 26
LP Show
1/5/2016

9. Google Maps (Where2, Keyhole, ZipDash)

Total Purchase Price: $70 million (estimated), 2004

Estimated Current Contribution to Market Cap: $16.9 billion

Absolute Dollar Return: $16.8 billion

Morgan Stanley estimated that Google Maps generated $2.95b in revenue in 2019. Although that’s small compared to Google’s overall revenue of $160b+, it still accounts for over $16b in market cap by our calculations. Ironically the majority of Maps’ usage (and presumably revenue) comes from mobile, which grew out of by far the smallest of the 3 acquisitions, ZipDash. Tiny yet mighty!

Google Maps
Season 5, Episode 3
LP Show
8/28/2019

8. ESPN

Total Purchase Price: $188 million (by ABC), 1984

Estimated Current Contribution to Market Cap: $31.2 billion

Absolute Dollar Return: $31.0 billion

ABC’s 1984 acquisition of ESPN is heavyweight champion and still undisputed G.O.A.T. of media acquisitions.With an estimated $10.3B in 2018 revenue, ESPN’s value has compounded annually within ABC/Disney at >15% for an astounding THIRTY-FIVE YEARS. Single-handedly responsible for one of the greatest business model innovations in history with the advent of cable carriage fees, ESPN proves Albert Einstein’s famous statement that “Compound interest is the eighth wonder of the world.”

ESPN
Season 4, Episode 1
LP Show
1/28/2019

7. PayPal

Total Purchase Price: $1.5 billion, 2002

Value Realized at Spinoff: $47.1 billion

Absolute Dollar Return: $45.6 billion

Who would have thought facilitating payments for Beanie Baby trades could be so lucrative? The only acquisition on our list whose value we can precisely measure, eBay spun off PayPal into a stand-alone public company in July 2015. Its value at the time? A cool 31x what eBay paid in 2002.

PayPal
Season 1, Episode 11
LP Show
5/8/2016

6. Booking.com

Total Purchase Price: $135 million, 2005

Estimated Current Contribution to Market Cap: $49.9 billion

Absolute Dollar Return: $49.8 billion

Remember the Priceline Negotiator? Boy did he get himself a screaming deal on this one. This purchase might have ranked even higher if Booking Holdings’ stock (Priceline even renamed the whole company after this acquisition!) weren’t down ~20% due to COVID-19 fears when we did the analysis. We also took a conservative approach, using only the (massive) $10.8b in annual revenue from the company’s “Agency Revenues” segment as Booking.com’s contribution — there is likely more revenue in other segments that’s also attributable to Booking.com, though we can’t be sure how much.

Booking.com (with Jetsetter & Room 77 CEO Drew Patterson)
Season 1, Episode 41
LP Show
6/25/2017

5. NeXT

Total Purchase Price: $429 million, 1997

Estimated Current Contribution to Market Cap: $63.0 billion

Absolute Dollar Return: $62.6 billion

How do you put a value on Steve Jobs? Turns out we didn’t have to! NeXTSTEP, NeXT’s operating system, underpins all of Apple’s modern operating systems today: MacOS, iOS, WatchOS, and beyond. Literally every dollar of Apple’s $260b in annual revenue comes from NeXT roots, and from Steve wiping the product slate clean upon his return. With the acquisition being necessary but not sufficient to create Apple’s $1.4 trillion market cap today, we conservatively attributed 5% of Apple to this purchase.

NeXT
Season 1, Episode 23
LP Show
10/23/2016

4. Android

Total Purchase Price: $50 million, 2005

Estimated Current Contribution to Market Cap: $72 billion

Absolute Dollar Return: $72 billion

Speaking of operating system acquisitions, NeXT was great, but on a pure value basis Android beats it. We took Google Play Store revenues (where Google’s 30% cut is worth about $7.7b) and added the dollar amount we estimate Google saves in Traffic Acquisition Costs by owning default search on Android ($4.8b), to reach an estimated annual revenue contribution to Google of $12.5b from the diminutive robot OS. Android also takes the award for largest ROI multiple: >1400x. Yep, you can’t eat IRR, but that’s a figure VCs only dream of.

Android
Season 1, Episode 20
LP Show
9/16/2016

3. YouTube

Total Purchase Price: $1.65 billion, 2006

Estimated Current Contribution to Market Cap: $86.2 billion

Absolute Dollar Return: $84.5 billion

We admit it, we screwed up on our first episode covering YouTube: there’s no way this deal was a “C”.  With Google recently reporting YouTube revenues for the first time ($15b — almost 10% of Google’s revenue!), it’s clear this acquisition was a juggernaut. It’s past-time for an Acquired revisit.

That said, while YouTube as the world’s second-highest-traffic search engine (second-only to their parent company!) grosses $15b, much of that revenue (over 50%?) gets paid out to creators, and YouTube’s hosting and bandwidth costs are significant. But we’ll leave the debate over the division’s profitability to the podcast.

YouTube
Season 1, Episode 7
LP Show
2/3/2016

2. DoubleClick

Total Purchase Price: $3.1 billion, 2007

Estimated Current Contribution to Market Cap: $126.4 billion

Absolute Dollar Return: $123.3 billion

A dark horse rides into second place! The only acquisition on this list not-yet covered on Acquired (to be remedied very soon), this deal was far, far more important than most people realize. Effectively extending Google’s advertising reach from just its own properties to the entire internet, DoubleClick and its associated products generated over $20b in revenue within Google last year. Given what we now know about the nature of competition in internet advertising services, it’s unlikely governments and antitrust authorities would allow another deal like this again, much like #1 on our list...

1. Instagram

Purchase Price: $1 billion, 2012

Estimated Current Contribution to Market Cap: $153 billion

Absolute Dollar Return: $152 billion

Source: SportsNation

When it comes to G.O.A.T. status, if ESPN is M&A’s Lebron, Insta is its MJ. No offense to ESPN/Lebron, but we’ll probably never see another acquisition that’s so unquestionably dominant across every dimension of the M&A game as Facebook’s 2012 purchase of Instagram. Reported by Bloomberg to be doing $20B of revenue annually now within Facebook (up from ~$0 just eight years ago), Instagram takes the Acquired crown by a mile. And unlike YouTube, Facebook keeps nearly all of that $20b for itself! At risk of stretching the MJ analogy too far, given the circumstances at the time of the deal — Facebook’s “missing” of mobile and existential questions surrounding its ill-fated IPO — buying Instagram was Facebook’s equivalent of Jordan’s Game 6. Whether this deal was ultimately good or bad for the world at-large is another question, but there’s no doubt Instagram goes down in history as the greatest acquisition of all-time.

Instagram
Season 1, Episode 2
LP Show
10/31/2015

The Acquired Top Ten data, in full.

Methodology and Notes:

  • In order to count for our list, acquisitions must be at least a majority stake in the target company (otherwise it’s just an investment). Naspers’ investment in Tencent and Softbank/Yahoo’s investment in Alibaba are disqualified for this reason.
  • We considered all historical acquisitions — not just technology companies — but may have overlooked some in areas that we know less well. If you have any examples you think we missed ping us on Slack or email at: acquiredfm@gmail.com
  • We used revenue multiples to estimate the current value of the acquired company, multiplying its current estimated revenue by the market cap-to-revenue multiple of the parent company’s stock. We recognize this analysis is flawed (cashflow/profit multiples are better, at least for mature companies), but given the opacity of most companies’ business unit reporting, this was the only way to apply a consistent and straightforward approach to each deal.
  • All underlying assumptions are based on public financial disclosures unless stated otherwise. If we made an assumption not disclosed by the parent company, we linked to the source of the reported assumption.
  • This ranking represents a point in time in history, March 2, 2020. It is obviously subject to change going forward from both future and past acquisition performance, as well as fluctuating stock prices.
  • We have five honorable mentions that didn’t make our Top Ten list. Tune into the full episode to hear them!

Sponsor:

  • Thanks to Silicon Valley Bank for being our banner sponsor for Acquired Season 6. You can learn more about SVB here: https://www.svb.com/next
  • Thank you as well to Wilson Sonsini - You can learn more about WSGR at: https://www.wsgr.com/

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Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

Ben: Welcome to season 8, episode 7 of Acquired. The podcast about great technology companies, 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, and our Venture fund, PSL Ventures.

David: And I'm David Rosenthal, and I'm an angel investor based in San Francisco.

Ben: And we are your hosts. Well, David, here we are, the final episode in our Berkshire Trilogy.

David: We were texting about this. I feel like we're like bungee developing the Halo franchise. Halo 2 was supposed to be the—

Ben: Finish the fight.

David: We're going to finish the fight. Last time was supposed to be the end. We're back for number three, and Halo 3 was so good.

Ben: It was so good.

David: That was the best.

Ben: See, 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. We then wandered the path with Warren of consolidating his investments into Berkshire Hathaway, joining forces with Charlie, swerving through regulators, and coming out unscathed?

David: Question mark?

Ben: Yeah. When we last left off, Warren and Charlie were in 1982 finishing up an absolutely monster run of returning over 27% per year for 22 years.

David: Spoiler alert. Not going to be the case this time.

Ben: No. Those were no doubt Berkshire’s glory days. 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. Concurrently, while the world was changing, so was Berkshire by virtue of their own success. When you now need to write billion dollar checks to move the needle, there's only so many places you can go knocking. All those places are quite visible to other investors, too. 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.

Listeners, are you an Acquired Slack member? If not, come join us. The 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. It's just a great discussion going on there. It's also great for beginners. As always, come join us, acquired.fm/slack.

Now, on to our presenting sponsor for all of season eight, Tiny. Today we will continue our exclusive interview miniseries with Jeremy on building wonderful, internet businesses. Jeremy, we are living in a world of increasing financing options. Venture capital was the only sort of financing available for tech companies in the 90s. We now have everything from venture debt to revenue loans, to lending against contracts like our fellow sponsor, CapChase. How do you think about the forms of alternative financing that's available to companies now?

Jeremy: I think good old financial literacy is really underrated in entrepreneurs these days. Perhaps it's a reaction to the MBAs of the dot-com era. But I think it's very surprising to me how many very successful founders and entrepreneurs don't really understand—even basically—what a capital structure is, or how you can borrow money from a bank, or do all sorts of things. I think part of that is because of the simplicity of the funding model on the West coast. There's just much more financial sophistication, say, in private equity in New York or something like that.

I think founders should absolutely try and brush up a little bit on their financial knowledge because as any kind of first-year analyst in New York will tell you, equity dollars are always the most expensive form of money, but oftentimes it's the only trick that the founder knows when there's really a lot of different sources of capital that they could or should be tapping.

Ben: Really keen insight. Thank you so much. Thank you to Tiny. If you are contemplating a sale or even wonder what it might look like in the future for your wonderful internet business to sell, you should reach out and just tell him that Ben and David from Acquired sent you. You can learn more at tinycapital.com or by clicking the link in the show notes.

Lastly, to keep it short and sweet, if you are not in Acquired LP, you should become one. Click the link in the show notes or go to acquired.fm/lp. We can't wait to see you there.

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. The show is for informational and entertainment purposes only. David Rosenthal, tell us a story.

David: All right. Well, as you said at the top of the show, last we left Warren and Charlie in 1992 they—in particular Warren—are heroes. Times have never been better, it's great. Warren is a legend. He literally, single-handedly reversed a federal government decision and saved Salomon Brothers. It's crazy. His stature is unparalleled. Nothing that the finance, corporate, investing, or business world has ever seen. His the oracle of Omaha, people are flocking to the annual meetings, literally the annual shareholder meetings.

Ben: Of course, Woodstock for capitalism.

David: Woodstock for capitalists, is attracting thousands of people.

Ben: And it grew. Of course, there were a handful of people that would gather in the 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.

David: He's literally filling arenas like a rockstar. Berkshire stock passes $10,000 a share. Far and away, the highest set-priced single 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 who is moving up that list faster than Warren. And fate is about to bring these two gentlemen together.

Ben: Oh man, so we left on the Salomon Brothers saga, and we're riding in with Bill Gates. Is that what you're telling me David?

David: We're riding in with BG3, Bill Gates. Man, he's been in the news a lot lately.

Ben: Yeah.

David: That's another topic for another day. Back in the previous summer of 1991 before Salomon, which would start going down in the fall of 1991, and wrap up in 1992. But before everything really kind of hits the fan, Kay Graham arranges for a Fourth of July weekend bash on Bainbridge Island in Seattle.

Ben: No way.

David: What a wonderful place. Bainbridge is one of the best places in the world.

Ben: Yeah. It's a mere ferry ride from Seattle, and then you feel like you're millions of miles away from civilization.

David: Totally. She invites Warren 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 II, better known as Sr. And potentially their son, Bill Gates III, might drop by at some point during the day.

Ben: And this is famously his sort of family home growing up. He learns to swim out there. His father is a very prominent lawyer, an angel investor, and sort of galvanizer of the Seattle Startup Community from the early days.

David: His mom's on the board of the United Way.

Ben: Yup. This is long before Microsoft, but already sort of a prominent family in the area.

David: Warren is a little reluctant to go on this trip. This is not sort of his thing, but as he puts it, “anything for Kay.” 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.

Bill would say later, as I told my mom, I don't know about meeting a guy who just invests in money and picks stocks. Of course, he's talking about meeting Warren. His parents, you got to 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.

Ben: Quick side note. Watching these old videos of Gates, we're so used to his polished image now, but when you go and you watch some videos of them from this time frame, especially in the early 90s, he's obviously so brilliant. But he's—

David: He’s mad-awkward.

Ben: Yeah. He's vigorous in the way that he sort of attacks lines of questioning and engages with challenges, and he’s assuming you are not the subject of his ire, it’s a really fascinating thing to watch, and totally different from the Gates you’re sort of familiar with now.

David: Yeah, that's a good point. Mary, though, forces Bill to come out. She’s still his 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 get a good ½–¾ of a day working. This is July 5th at Microsoft. We've talked about this on the show, but Microsoft in 1991, all throughout the 90s until the DOJ case, it was intense. They were killers there.

Ben: Yeah. You should think about it like Uber in 2016.

David: Totally, so Bill's plan is he's gonna fly it on the helicopter, and then he's going to make the helicopter wait there, he’ll eat dinner, and it's gonna fly out and escape, go back to work. 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 we'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, like don't do it. Don't do it.

Gates, of course agrees with me here and he's like, no, you should absolutely not buy IBM. You should buy two stocks, and two stocks only: Microsoft and Intel. And 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.

Ben: 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 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.

David: Totally brilliant business strategy. So Gates then was probably pretty annoyed by this first question, given that he doesn't care about stocks. He's like, buy these two, just buy these, don't do anything else. Probably just listen to Bill Gates here. Gates turns around and asks Buffett about newspapers, because Gates is probably already starting to think about coming after newspapers as part of, I don't know if Encarta existed already at this point, but Microsoft is spinning up all sorts of stuff. Encarta, I was thinking of an encyclopedia, but then they would launch Live, and with the coming of the Internet. All sorts of stuff.

Ben: They were launching these things interestingly enough in the 1993–1996 time frame. And there's this unbelievable interview that Bill Gates does with Wired—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. You don't understand how big Windows is. These are multi-billion dollar businesses. Unless you become Disney or something, content clubs are just never going to cut it.

It's fascinating looking at that aggressive reaction by Gates and how he feels versus the market cap of saying Netflix today or how important is it to Amazon Prime strategy to have a content club, as we talked about with Brad on the last episode. So Gates, at this point thinking, oh, we got a tiger by the tail with this Windows thing. There are few other businesses as big as this one. Let's just go for the $10+ billion opportunities.

David: Yup. Here’s where Buffett sort of surprises Gates. Buffett is like American newspapermen number one. Started as the paperboy, it's the canonical franchise business. He owns, based on the board of the Washington Post, owns Buffalo Evening News, all the 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.

He doesn't know anything about the Internet. He's actually not worried from that front but he says, I'm worried about the encouragement of TV, and in particular, cable television, and people's news habits shifting television, encroaching on newspapers. Bill’s like, okay, interesting, that’s not quite the answer I expected from Mr. Buffett.

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, you can imagine that they just sort of spend the whole day talking. Other people are there, Kay’s there, Bill’s parents are there, a bunch of other Seattle-area sort of dignitary stop by, two of the future founders of Madrona stop by, Bill Ruckelshaus who was an amazing man, part of the Saturday Night Massacre in the Nixon Administration, the first head of the EPA, Jerry Grinstein who is CEO of Burlington Northern.

Ben: I have no idea. Oh, wow.

David: [00:15:34] drop by, lives in Seattle.

Ben: Wasn't he the one to become the CEO of Delta Airlines?

David: He would. Another erstwhile later in life Warren investment. We'll get there. Warren and Bill just totally ignore them. They were super engrossed with one another. At dinner, they’re all there. I guess they're forced to sit down and join the group for dinner. Bill Gates Sr. asked this odd guest group assembled there, what factor does everybody think has been most important in achieving where you've gotten in life? And there were people at this table who've gotten very far in life. Bill and Warren, both immediately reply with one word, which is focus. These guys are like two peas in a pod. After dinner, the sun goes down, and the helicopter leaves. Bill Gates III stays.

Ben: Woah.

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

Ben: Tell us he bought Microsoft, David.

David: He did buy Microsoft, just like he did with GEICO.

Ben: Oh, I actually didn't realize he did.

David: He bought 100 shares of Microsoft for his personal account, so that he could keep up with his friend Bill Gates. Isn't that ridiculous? And he buys zero Intel shares. Again, even giving his history with Intel and Noyce.

Ben: Which in retrospect 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, so 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.

David: Completely confounding. But he does invite Bill to join the Graham Group, which is by now the Buffet group, his group of cronies. At the next meeting, which I think is in Vancouver, one of the sessions they're all kicking around their favorite stock ideas, and Bill Ruane from the Sequoia fund throws out Kodak as a name he's thinking about. Bill Gates immediately responds, Kodak is toast.

Ben: I love it.

David: It’s so great. Of course, Tom Murphy is there, and Kay’s there as well; they’re both television media magnates. They asked Bill whether he thinks television is toast, too, 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 from 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. But 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.

Ben: That is a brilliant impression.

David: Gates just described the next 30 years of media and the Internet right there.

Ben: Wow.

David: Isn’t that unbelievable?

Ben: Yeah, I think it's actually a Buffett quote, “Predicting rain doesn't count. Building the ark does.” I love this one so much because there are so many of these. Look at Steve 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.

David: 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 if not for the antitrust case of the DOJ.

Ben: They’re working to extend their advantage to the media.

David: Yeah, exactly. They were 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. 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 great lens to view this part three of, let's contrast Bill Gates and Warren Buffett as we go along here. There is more than one, but one in particular other very famous Warren Buffett's Berkshire classic investment that we have not yet covered in our two-parts thus far.

Ben: You talked about it on the cold opener in the last episode, but we actually haven't touched it in the real story.

David: I know, I know. Of course, we were talking about Coke and Warren's investment in it, which is just classic Buffett in so many ways. It's just unbelievable. Back 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 all of his great investment comes from his neighbors in Omaha. Their kids played together, this neighbor is named Don Keough, and they both live on Farnam Street in Omaha. Side note, which is why Farnam Street is, and the Knowledge Project, and Shane, and everything he does over there is called—

Ben: It’s an amazing name.

David: Farnam Street.

David: Keough was a Salesman for the Butter-Nut Coffee Company at the time and he had six kids. The story goes that as Warren is starting up his partnerships he asked Don how he's planning to save for college for all of his kids. His thinking like, hey, I’m going to get Don on this partnership thing; get some money out of him.

Don 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 little Susie, Howie, and Peter, he's there. He didn't bother us, but he said, hmm. 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 Butter-Nut was acquired by the Duncan Coffee Company. Don moves to Houston, he leaves Omaha with that. Then shortly after in 1964, Duncan gets acquired by Coca-Cola, and Don moves to Atlanta.

Fast forward to the mid-80s. By this point in time, Don is president and COO of Coke. He is the Dan Burke, one might say, to the Tom Murphy of the legendary Coke CEO at the time, Roberto Goizueta, who is an incredible CEO. Cuban immigrant, ran Coke through all the great ascendancy of the company.

At this point now, Warren is a man about Washington, thanks to the Post and Kay. One night, he gets invited to dinner at The White House, I assume either thanks to Kay, or as her date there or something. And lo and behold who shows up at the White House? Don.

Ben: His neighbor from… that's crazy.

David: Yeah. They reconnect at the White House, his neighbor from Farnam Street. Don's like, oh, yeah, I'm COO of Coke now.

Ben: I take it that Warren has fully switched from Pepsi to drinking Coca-Cola at this point?

David: No, not yet.

Ben: Oh.

David: Don converts him. Warren is like, hey, 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 if he said that. Warren says, that's great, Don. I'm happy for you. I'm kind of a Pepsi guy, though. Really what I like to do, I have Pepsi all day, every day. I put in Cherry syrup in it and it's great. Don’s 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 Coke.

Ben: That was incredible.

David: I think they launched it 1983, I want to say, maybe, sometime around then.

Ben: Also I didn't realize that the fact that the coffee company got rolled up into Coke, and I presume the 1970s, they weren't 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 the 90s and 2000s when they started becoming this big portfolio of beverage brands, but it sounds like it was much earlier.

David: It was and they were buying other stuff. I don't know how big it was versus the cola business. Anyway, with Cherry Coke, Don convinces Warren to switch. That of course causes Warren to start thinking like, oh, well, maybe I should take a look at investing in Coke. He becomes intrigued. As he digs in, I think this was 1985 or so, maybe it was in 1983, I think. A couple years earlier, they had launched Diet Coke, and Diet Coke was like a monster.

Coca-Cola, now Classic, as we will get into in a second, was great, but Diet Coke is huge, maybe the most successful beverage product launch of all time. It's a blockbuster. So Warren’s intrigued, but he thinks, hey, stock price is kind of high. I'll just keep an eye on it. And then New Coke happens. I knew about and I've read about, but do you remember this Ben?

Ben: How do you mess this up? If you're a company like Coca-Cola, and you got all these big brains around the table, and you basically have 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 a nation renowned brand that is synonymous with, like your sense of patriotism and its associated with one particular, very odd, very well-balanced flavor—how on Earth do you replace that? What are you thinking?

David: I think—the preview of it here—Warren would always say that the—get everybody in trouble in a minute—thing he liked about Coke is that if a business could be run by a ham sandwich, literally just like—

Ben: Evidently not.

David: Evidently not. I think they were probably just so bored.

Ben: At least a ham sandwich wouldn't mess with the golden goose.

David: Totally. To be fair, the rest of the story is they ran all these blind taste tests, and Pepsi had been making headway with market share.

Ben: That delicious lemony, weird, sweet thing they had going on.

David: They try new flavors, and one of them tests really well. People like it better than the old Coke recipe. They literally pulled the old Coke recipe off the shelves and introduced new Coke, and it is an unmitigated disaster. Pepsi'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 rumor starts going around that Ron Perelman, the same dude from Salomon, is circling.

Ben: The Revlon, gone activist investor, and [00:27:15] guy.

David: How could we have forgotten about this in the last episode? He was the villain in Marvel.

Ben: That's right.

David: Remember way back in the day our Marvel episode? I forget that he owned it for a while, and ran it into the ground. Perelman, what a guy. Rumours going around he's targeting Coke now in the wake of the New Coke disaster.

Enter white knight 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 friends with Salomon, Goizueta, and Keogh asked him to join the board which, of course, he does.

Side note, the Coca-Cola board is where Warren meets Herb Allen from Allen & Company, and starts going to Sun Valley every year. Everything's coming up roses for Warren here.

Ben: To like a company and be sort of prospecting it, just to watch them go through the New Coke thing, just be sitting there and grinning like an idiot, like this is my chance. The trick is knowing how to feel those in the moment, when you're not catching a knife that is falling but rather buying the dip, as they say.

David: Warren Buffett, the OG buy-the-dip investor.

Ben: And to add a little more nuance to that, he does have this great strategy of 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, he very much uses this lack of necessary approval by committees and red tape to just come in with cash, make an offer he feels good about, it's sort of that better 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.

David: Yeah. I hope at some point that Warren and Charlie send a case of wine over to Ron Perelman because like, man, they got some deals because of that guy. In the 1988 Berkshire letter to shareholders, Buffett announces the Coke investment saying of it, “We expect to hold these securities,” the securities in Coke, “for a long time. In fact, when we own portions of outstanding businesses with outstanding management's, our favorite holding period is forever.”

By the mid 90s, a few years later, Coke had recovered from the New Coke disaster. They have massively expanded internationally, the late 80s and then through the 90s when Coke went from being still associated with Americana, but like everybody in America drank it, to everybody in the world drank Coke.

Ben: This was part of the investment thesis, too, that there was sort of this unexplored, massive opportunity to bring Coca-Cola to the rest of the world, particularly through this brilliant 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 just a few places that need to know the secret formula and make this stuff. It really can be a globally addressable market.

David: It's good work if you can get it for a ham sandwich. Coke is printing money within a decade. Berkshire is up over 10X on Coke, and since then—that was from mid-80s to mid-90s—Berkshire’s only up less than 4X on Coke from that point in time over the last

Ben: Really?

David: Yeah. What is 30, 25+ years?

Ben: That's wild.

David: Yeah. So 10X returns in the first decade, and 3½X in the next 25, which would sort of presage things to come.

Ben: Compounding large numbers, David, sure is hard.

David: It turns out it is.

Ben: 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 the brand. We 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.

In the 1995 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 his position and the consumers mind, it could be because of a technological advantage, or any kind of reason at all that it has this moat around it.”

I just always thought this is the clearest articulation of his view of 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 moat is really real and it's a global brand moat.

David: Totally. The moat exists, clear how it works. It's straight over tackle. If you’ve taken this international, run the same playbook. Yeah, great timing coming in in the New Coke disaster right before international expansion. Well done, Warren.

Ben: Okay, David. You did mention that Coca-Cola's only up another 3½X after that initial 10X. When we look at that sort of late 2000s time, looking at maybe 2009, Coca-Cola did represent close to 20% of Berkshire's equity portfolio construction. That was 35X on their initial investment. Of the stuff that they own that are public markets before they wade into Apple—we'll talk about later—Coca-Cola is their biggest single holding of stock that they don't wholly own in a business.

David: Yeah, and no longer is, but yeah, this is huge. This is one of the key legs of the Berkshire stool is Coke. And also just speaks to how different the company is now. You can barely see the Coke equity value there.

Back to the meeting of these two businesses here. In 1997, there was this amazingly perfect moment. I think, this moment kind of marks a major transition point in business and industry in the world. It starts with the rise of tech and the rise of the Internet, and how much the world is going to change.

It reminds me of a famous quote in history. I think it's about Germany in the 1850s, where the quote is, “The 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 failed to turn.

So summer 1997, we were at the Allen & Company Sun Valley Conference, and there was a panel discussion hosted by Don Keough with three participants, being (1) Warren, (2) Roberto Goizutea, the CEO of Coke, and (3) Bill Gates. So here it is, old school, the consumer brand, Coke; Bill Gates and Microsoft; and Warren on the same stage. Everybody thinks this is going to be like a back-patting affair. Maybe sort of a genteel changing of the guard, or 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 when talking about Roberto and Don on stage.

Ben: Oh, wow. Wait, so you have the moderator of the panel as the president of Coke, and you've got the CEO of Coke as one of the participants?

David: Yeah, and then the other participant is the largest shareholder in Coke and Gates’ friend. Gates says that, oh, you guys got it easy. Your ham sandwich could 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. 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.

The other panel is Roberto is 65, and 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.

Roberto has the sort of stereotypically 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. Warren kind of shrugs it off like he does, like hey, Bill’s my friend. He's Bill. He's kind of like that. He's like a wild animal. You can't bring him in public too much. The thing is, this is a major social faux pas in Gates’ part, but he's totally freaking right.

Ben: He's right, and it is clearly this seminal moment for Warren where he's sort of 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. It's outside the circle of his confidence, so it's in Charlie's too hard pile, to use a Charlie-ism there. He's team Coke. He's team durable, 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.

David: He just runs away. Alice has this 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 ham sandwich, too.”

So not until after he was gone. I get it. I used to think this too, actually. I was like, oh man, I really want to find businesses that like a monkey could run. The thing is those businesses don't exist anymore. They exist, like Coke still exists, and it's fine, and plenty of these other businesses. But Gates is so right here. The future is changing 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, leaders, and entrepreneurs who are able to navigate change.

You mentioned we just had Brad in our last episode, Brad Stone to talk about Amazon Unbound. You read that book and you just take it kind of in awe. Bezos is the 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.

Ben: Yeah. 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 in our culture today that he sort of is not a tech investor. It's worth unpacking it a little bit. He did have this interesting observation, I think it was in the late 90s, that we're going to talk about the dot com bubble here.

There aren't any internet companies that have ever hit a hundred million in a year in profits. I have no proof that it could possibly exist. Warren is investing, not speculating. 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. 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, which is why he values the brand 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. Buffett 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 plays, 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 boards are constantly rearranging and you sort of need to make a bunch of high beta bets.

David: Yup. Totally. I think the problem is that, now, we'll get to now, later in the episode. But the world has just evolved to the point where, like, that's the way the world works. There's so much change, and it's so constant that even Amazon, even Apple, even Microsoft need to be thinking that way. And if you don't think that way, you can be Coke but like Coke’s value has only 3.5xed in 25 years. Those are the businesses you're going to get.

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, 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.

Ben: Right. So you're saying that, of course, the business will change, and evolve, and grow but the chessboard...

David: The world is the chess world.

Ben: The world is reasonably static.

David: Is reasonably static, yeah. That makes sense. For most of his life that's been the case.

Ben: Right. You hear comments like people are always going to love candy. People are always gonna 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.

David: Yeah, he used to say that he was absolutely certain as long as cola doesn't cause cancer that more people are going to swallow Coke tomorrow than they did today. Well, it turns out sugar is kind of linked to cancer. That's kind of not a good play. The world changes. I think this is the thing, we're now this is what this moment to me represents, this panel at Sun Valley in 1997 is like this is the transition to a world where more change is happening than not.

Ben: Yeah, it's like that. There'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 the rate of change hadn't compounded to 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 are getting wildly compressed. I mean, we live in this world today, where there's huge changes in the sentiment of the future, like multiple news cycles per day in a super high fidelity, high-frequency way.

David: Crypto.

Ben: 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.

Ben: Totally. 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 get this, that this is the world that we're moving into. But most of the world doesn't. So for Warren this is like, okay, back to business as usual. He is though concerned about the tech bubble that is forming, that he and so many others see. By this time, by the late 90s, The Berkshire share price had gone from about $10,000 a share to $34,000 a share.

Ben: Over how many years from 1992 to?

David: To, this is probably like 1998 or so.

Ben: Six years, 3½ x. Not bad.

David: Yeah, not bad. $40 billion market cap for Berkshire, but they've never split the stock. People in this sort of, 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.

Ben: E-trade.

David: E-trade, yeah, is happening. People are setting up publicly traded investment trusts that mirror Berkshire's equity portfolio, like heavily shadow Berkshire.

Ben: 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 fractional share from me, and I'll own a bunch of Berkshire underneath, and I'll be like you, own it. That’s Warren's absolute worst nightmare.

David: I think both these things are happening. 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: (1) is what you're saying, which is people are buying Berkshire shares, putting them in a trust, and then selling shares in that trust. (2) The other thing people are doing is they're just like reading every 13F that comes out and 10-Q, and 10K.

Ben: And buying the same portfolio?

David: Buying the same securities that Berkshire is buying, and doing the same thing.

Ben: What a ham-fisted way to do it.

David: Totally.

Ben: You don't have the benefit of the insurance flow, and you don't have the [...].

David: Totally.

Ben: And the lag, it's going to be this thing where people feel like they're buying Berkshire Associated, but they're actually buying well after Berkshires or even the price of that stock.

David: Way, way less. Warren finally comes around. He really, he thinks like things, okay, people are getting swindled. I have to find some way to put a stop to this. I don't want to split the stock.

Ben: 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 it? He would always respond 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, shareholders in this wonderful company.

David: Yup. He comes up with a brilliant idea. He 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 rechristened Berkshire A-shares. And these are going to be tracking shares that are going to track 1/30 of the A-shares in terms of value. Massively diminished voting rights. 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.

Ben: He doesn't want a supply-demand thing to happen. He doesn't want basically micro economic forces to happen, and drive up the price of the B-shares. 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.

David: As people want to buy.

Ben: Even if you hoard them, it will benefit you at all.

David: Totally. Which also means however much demand there is, because it's an offering, Berkshire is going to get the cash. This is even better than float. You never have to get the cash back.

Ben: They're raising their series-C.

David: Yeah.

Ben: I bet Buffett would go to the math with you on that’s even better than float.

David: He probably would. I mean, he is deluding the value.

Ben: Yes. As a quick aside, I think this B-share is offering is a really good place to 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 thing issue, and dilute the company.

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, whenever they can. Except when their shares have been richly valued by the market, and thus a phenomenal currency to use after it crosses a certain point.

In 1996, when he did the B-shares offering. Normally, Berkshire shares trade that the A-shares trade similar between 1 the 1.5 x book value of evolved Berkshires 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 shares thing. It was trading at almost twice book value.

David: Wow.

Ben: It was merely an all-time high. He gets all the credit. It's almost like the Ben Thompson strategy credit thing. 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. 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 under valued at the market price stated above. Neither Mr. Buffett nor Mr. Munger would currently buy Berkshire shares at that price, nor would they recommend that their friends or families do so.”

David: Yes.

Ben: It’s like Eric Yuan going on Bloomberg and saying, it's too high.

David: The price is too high, price is too high. Oh my gosh. Well, this is great. Of course you know what we're going to transition to next.

Ben: Let's see. Out of 1996, I think we're talking about.

David: We’re now 1998.

Ben: 1998, are you keying off my buying something with shares?

David: Yes, I am.

Ben: Are we going insurance?

David: We're going Insurance.

Ben: Tell me about Gen Re, David.

David: Let's talk Gen Re. Yeah. Warren hates it. Warren hated issuing stock, but he’s like, stock is so overpriced. I said it, not him.

Ben: Note that he didn't say it's overpriced, he said it’s not under priced.

David: Exactly exactly. In 1988, he made another shocking announcement. Berkshire is gonna buy Gen Re, one of the world's largest reinsurers for $22 billion. Remember just a few years ago it was huge news when Buffett would put $1.2 million into Coke or buy the rest of Geico for $2 billion. That was huge. I think that was the biggest deal they've done before.

Ben: Yeah. This General Reinsurance purchased by far their largest acquisition ever.

David: Yup. It is the elephant gun hunting phase of Warren’s acquisition career. 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 Gen Re. Spoiler alert, it does not go well. Famously, when Charlie is asked about the deal when it gets announced, Charlie is like the bluntest character as we have seen and as we will see at the end of this episode.

Charlie's response to the deal when asked about it is that Warren only called him quote, “Very late in the game on this one.” He's just kind of like I'm washing my hands off this. I think if there's one lesson in this series among many it is that if Charlie Munger is your business partner you should probably always call Charlie early in the game, and not late in the game, see Sullivan Brothers.

Ben: What was the really alluring thing about buying Gen Re? Because it massively multiplied the amount of float at their disposal by buying.

David: Yeah, yeah they got a bunch of float. To be honest, the alluring thing about buying Gen Re 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. This is according to Alice in The Snowball, most if not all of Gen Re’s investments, talked about insurance companies with their float, they invest the float insecurities. Warren and Berkshire prefer to do that in equities.

Most of Gen Re’s investments were in debt and relatively conservative bonds and the like. Warren is worried about equities crash coming along here because of the tech bubble, he wants to essentially dilute Berkshire’s Security Holdings. He doesn't want to sell security, because that would be a signal to the market. Like Warren Buffett is selling stocks. That 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 Gen Re and essentially get a portfolio of 20-ish billion dollars of bonds that are going to be insulated from equity prices.

Ben: Boy, that is some financial jiu-jitsu engineering right there.

David: He definitely over thought this one because Gen Re sucked to be blunt.

Ben: I will say that it's funny. You said that I just pulled up the historical price to book ratio of Berkshire. I think the only 2 times 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. I think he definitely felt like those were great times to be using Berkshire stock for currency.

David: 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 shall see. He hired Ajit Jain to run Berkshire’s Insurance Businesses. This dude is a monster. You have no idea how unbelievably great Ajit is.

Ben: He's an underwriting savant. This guy can 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 majeure and that can help give you a price for it. He's like I know exactly how to price this.

David: He is a jet-jackering roll reincarnate. Ajit, he grew up in India. He went to IIT in India and then he worked for IBM. Maybe this explains Buffet’s fascination with IBM. Ajit came out of there, it's gotta be good. Then he goes to Harvard Business School and then he goes to McKenzie and then he joins Berkshire. We were talking about him like he's an insurance pricing savant—that is true. There's probably never been anybody better than Ajit at pricing insurance. He is also hyper aggressive. If Ajit had decided to be a venture capitalist, he would have been like Bill Gurley times 10. Hyper-smart, hyper-aggressive for basically his whole career. I doubt this is still going on, probably at Warren’s request not Ajit’s.

But for decades, every night, I don't know if it’s every week night or every day of the week, they would do a nightly call at 10:00PM to go over the insurance portfolio and all the deals that Ajit was doing. He’s just a monster. When he joins, he takes over all of Berkshire's other insurance businesses besides Geico to start. Then he starts a new reinterred business within Berkshire, like himself. This is the great entrepreneurial story within Berkshire.

Famously, he takes out an ad in Business Insurance Magazine full page ad when he starts this saying we are looking for more, more casualty risks where the premium exceeds $1 million. This is the insurance business. This is crazy. Nobody does this.

Ben: So basically he’s saying like I will insure things that other people won't insure because I'm more confident in my ability to price these weird, crazy, expensive policies, yes.

David: 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 Gen Re and Swiss Re and the like would never do. They're just like, that’s just way too much money at risk.

Ben: Right and they are factories. They're looking to identify the same thing over and over and over again. These actually have a very fun name too, these are called super cats—super catastrophic insurance policies. Super cat is a really cool name for a pretty boring thing.

David: Totally. I think the story goes that after 9/11, where Gen Re would take huge losses on 9/11 and Berkshire and Ajit would be fine. But after 9/11, Ajit starts going around the world writing terrorism insurance policies left and right. Everybody wants them now, everybody’s scared. He's like, oh great. This is actually not that risky. I'm going to make a killing on this super-high premium tens of millions of dollar policies.

Ben: The crazy thing is that Gen Re was basically mismanaged and they had these policies written in 9/11 that 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.

David: Yes. Here's what happens. The obvious thing to do in ‘98 when they buy Gen Re would be to just give Gen Re to Ajit. Ajit is the greatest of all time, give him more. Instead, Buffet runs the White Knight AcquirerPlaybook even though he has no reason to now.

Ben: You keep running your own business.

David: 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. “I’m going to be,” this is quote from Warren, “Strictly hands off.” Yikes. Immediately after Berkshire buys Gen Re, news that Gen Re is a counterparty on a massive insurance fraud scheme called Unit Cover that I believe was residential insurance. They immediately hit a $ 300 million underwriting loss. This is within the first week after the approach survives the company.

Remember Buffet’s rule number one, which is never lose money. Rule number two is your rule number one. First week on the job you lost $300 million. Great. Then they do a bunch of bad deals insuring Hollywood box office receipts for movies that lose 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 Salomon history in the early 2000s, so a couple of years after the acquisition, Gen Re gets involved in a major accounting scandal with AIG propping up AIG’s balanced sheet. Nobody ended up going to jail on this one but basically, massively hurt Gen Re’s reputation and brought the regulators all over them.

This is the one thing Warren wants less than anything. Eventually, Warren would oust the old management, fire them, and bring in Joe Brandon and Tad Montross to fix it. They do a good job. And then eventually Warren does hand the whole thing over to Ajit in 2016. Ajit is now running Gen Re in addition to everything else. Wild saga here.

Ben: What a mess.

David: What a mess.

Ben: Before we move on and while we are talking insurance, listeners, you know, it's time to talk about Vouch. I have a new story to tell you all this time around. And I recently received this email from a founder, describing their experience with a legacy insurance company to provide insurance for their startup. Now, I'll read this word for word.

“I am completely spent, I can't take it anymore. The process with our insurance company and my renewals has blown my mind with the paper forms, scanning mailed invoices to an office that I am not in daily, etc., there has to be a better way that does not consume more of my time than the price of the policy itself. Whatever I have spent on premiums, I'll give 2x this year on administrative cost.”

David: Wow, is former Gen Re management running this?

Ben: Crazy, right? I got this and I was just like…

David: Dude, you got to get Vouch.

Ben: How fast can I respond to check out Vouch? Vouch is the literal exact opposite of this. As you know, from previous episodes they provide business insurance for startups, they are the company that got business insurance for us to Acquired in honestly, less than 10 minutes. That it says in the copy they sent over, I should have timed it. My recollection is it was literally under 10 minutes, website, full digital experience, awesome. Night and day, literally does not begin to describe Vouch versus other incumbents. It is truly unbelievable. The step function better that they have been able to achieve in this industry.

You know this by now, they're backed by some of the best investors including Ribbit, YC, SVD and Index. Acquired listeners, you all get an extra 5% off your coverages which for business insurance can be a meaningful amount. You can click the link in the show notes or go to vouch.us/acquired to learn more.

David: What a great business.

Ben: Truly. All right, David take us on from Gen Re. Where else are we going?

David: All right, we can’t move on fast enough. Before the tech bubble pops, he does one more surprising to outside watchers move which is in 1999. He buys a utility company. Berkshire buying a utility company. This is what Warren has come to. The link company that provides you electricity. He buys Mid American Energy Holdings and people want to know why is Warren buying a utility?

Alice writes in the snow ball, Warren was already being ridiculed for his refusal to buy technology stocks. Now, he had bought the light company, how dull. The energy business ends up being fine for Berkshire. It’s another fine investment. It 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 in the episodes. You know how you see Berkshire Hathaway real estate agents all over the place?

Ben: Oh yeah.

David: That came with MidAmerican Energy Holdings. They also had a real estate brokerage.

Ben: So weird. How does that work? My understanding of the electric company is that it's like a public utility. It’s market by market then that some of them must be private companies.

David: Yeah, I don't know exactly. Obviously, there are lots of separate utilities in different geographies all across the country. Yeah, somehow there are real estate brokerages in there as well. There is the CEO of the company, one David Sokol and the number two.

Ben: Remember that name.

David: Yeah, remember that name. His number two, a guy named Greg Abel.

Ben: You need to remember that name.

David: Future CEO of Berkshire Hathaway. Yeah, that's how they come into the company, you hear much more about them later. Finally, all this tech novel 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?

Ben: Everyone else is getting these five x's in a year. What are you doing here? Trying to make me 15%?

David: You’re making a poor. Warren says, “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 is because it produces wretched consequences, it's irrational. If you mix raisins with turds, they're still turds.”

Ben: All-time great movie quote.

David: 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 Monger just say turds? What? I think Alice actually just says that live. It was noble. 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. It’s a Ponzi scheme. Charlie is saying something different. He gets that there are reasons in tech stocks like Microsoft and the like. They are the real companies there. But there are also turds and Microsoft may be doing great. But if, and when this whole tech novel thing pops and it will, the splatter from the turds is going to get all over your raisins too and drag it down.

Ben: When Warren says that I don’t understand this thing, it’s a Ponzi scheme. He is referring to the crazy multiples that people are paying on top of revenue. Because of course, profits don’t exist much like today. But let’s even walk a few more levels. Often revenues don’t exist for companies that are going public. Which like that you only see in space or like battery technologies or something now. But then even further, some of these companies are selling products but they have upside down unit economics. They’re not even gross profit positive.

You could understand why you would look over to Charlie and have him saying there’s turds in here, because truly there were. It’s crazy some of that stuff is 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 they earlier shareholders are incentivized to get marked up and get it public and then sell to get it off their books. There was a Ponzi scheme like things going on because there was so much rampant speculation about raisins and turds.

David: Actually, I was curious about this. I did some analysis. This 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, if you could buy a fraction of a share of DA 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 SMP, and it would vary slightly outperform Microsoft.

If you had invested $1 in Microsoft in the first half of 2000 and held it to today and you’ve invested a dollar in Berkshire, you would be doing better in Berkshire than Microsoft. Charlie’s right, the splatter from the turds is going to get all over the raisins, including Microsoft. But if you had invested a dollar in Microsoft versus Berkshire at almost literally any other point in time, either before in like ‘97 when the famous Sun Valley panel happened with Coke and ham sandwich and Bill Gates, Microsoft would be crushing Berkshire if you would put dollars in at that point in time.

Ben: Totally fascinating.

David: 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 the farther you go along.

Ben: Obviously any time since.

David: Anytime since you’re going to be doing much better.

Ben: Does this dynamic play out earlier too? When did it IPO, in ‘80 or ‘83 somewhere in there?

David: Somewhere. They’re obviously putting a dollar into Microsoft early.

Ben: In the early days. Right. Man, it's funny that the dynamic exist twice where if you're super early at Microsoft and of course it's going to multiply it and say 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 dot com recovery which only really was like a year. Then yeah, it's going to outperform Berkshire.

David: Charlie is right here like yes.

Ben: In that exact moment.

David: The bubble popping is going to drag everything that is good down with it. But we're almost really at the point where 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.

Ben: Yeah, another point that they're both making 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 the hardware makers, they’re always like, oh, 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 a top, but he sort of beats around a little bit and says he's not interested in buying right now. I think it's sort of the way he positions it.

He 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. Today, there are only a few.

David: It’s this analogy at the annual meeting this year too, I think, right?

Ben: Yup. 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 mote. You have to be able to figure out what about the business creates that durable, competitive advantage so all the prophets don't get arbitraged away. 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 to sheer commodity, which is the airline industry.

He highlights, I don't think this is exactly true anymore, but it was true at the point in ‘99 when he wrote it that the sum total if 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.

David: 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 in 1903, and Kitty Hawk, when the Wright brothers flew that he would do capitalists a favor and shoot them down.

Ben: Yup. Which is an 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 value to be captured in a durable way by a single firm.

David: Yup, 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. 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.

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 praise on him. He saw it all come in, I'll trip, the early 2000s are more greatness for Warren, but then in July 2004, Susie passed away. This is devastating to Warren even though they haven't actually lived together for like 25 years at this point. He still loves her hugely and depends on her.

Ben: They're technically married, right? Even though they live...

David: They’re still technically married, even though they don't live together.

Ben: Thousand miles away.

David: She lives in San Francisco. He lives in Omaha. Like we said last night, we were not going to cover it on not Acquired here, but his personal life is complicated. I do not think at all that Warren is or was ever a womanizer. But it is true that he had many women in his life and I think it was all aboveboard. 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 in 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 and the plan for the now $40 billion plus 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 obviously that's not going to happen.

Ben: Warren has been thinking about the conundrum of what to do with his wealth since long before he was wealthy. In his teenage years, he was already thinking about when I’m really rich, what do I do with it all? He is 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 overpopulation. 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 going to use up all the food and will famine be an issue. He had tried to give 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 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. It was just immensely frustrating and he'd really throwing his hands up in the air and kind of just donated here and there, but had a big fortune.

David: Yup. I think as we called in part one, there is this element of his psychology where he's curious 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 surely eventually, he'll do that. He just wants to get the number as high as possible by the day he dies. That's what he cares about.

Ben: Which 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. He throws himself a festival once a year for everyone to fly in and visit. Nowhere in Securities Law does it say that your shareholder meeting must be like. This is a Warren Buffett creation to bring this upon himself. He wants to be a beloved figure, and teacher, on top of being the wealthiest person on earth. You could see how those things could come ahead.

David: You could accuse me of not being innovative in his investment philosophies. Never accuse him of not being innovative in finding ways to get what he wants. After Susie dies, the wheels start turning. He invites Bill Gates to join the Berkshire board. Up into this point, the board was basically 100% his family and close business associates that he actually worked with like Charlie, Tom Murphy, Ron Paulson from MTO, Dan Kiyo is on the board, and David [Gadisman] 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 that joins the board. Something is afoot here. And then we all find out probably the reason why this is happening. In 2006, Warren made what was almost certainly the biggest decision and perhaps most impactful decision in philanthropic history and I totally remember when this happened. He calls a 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 5/6 of it is going to go to the Bill and Melinda Gates Foundation for them to manage. And the other 1/6 is going to go to his children's foundations and the Susan Buffett Foundation.

This is crazy. There's no Warren Buffett Foundation, he's not going to give the money away. He’s not going to make any of these decisions. He off loads all of it to the Gates Foundation.

Ben: Which really is remarkable. He's like, boy, it's really hard to give money away. I don't know the first thing about her. There's a lot of infrastructure required to do this. Actually, that guy's already built the infrastructure, and I very much trust him.

David: This is what is so amazing. This is like a win-win-win for Warren. Everybody is like, Warren, you are the most amazing, most generous person. 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 the Gates is an end and Warren trade in 2010. It becomes like the coolest thing in the world for billionaires to give their money away. Warren is setting a status symbol here.

Meanwhile, Warren is getting exactly what he wants. He never has to deal with any of this.

Ben: 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. He's very concerned with his ego. It had to be a big trade-off to not have a gigantic endowment with his name on it.

David: Yeah, I get it. Who knows how much he planned this out, but 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.

Ben: Should have called it the Buffett Giving Blood.

David: Totally. That's going to go down in history as the number of billions, tens, hundreds, God knows how many billions are going to be given away because of this. It's pretty cool. It is pretty cool. It's amazing, it's wonderful, it's great for society. Warren must be so pleased with himself with this. That all happens in the mid to late 2000s.

Ben: Which is an interesting turning point for Berkshire Hathaway's strategy. If you think about this period of 1990 to 2005, maybe extended to 2010, they're going after buying these good businesses where the operators still care about the businesses after they sell them. That's the secret to success. You leave the management in place except for [...] decision and maybe even MidAmerican Energy.

David: [...] was a good manager. He's just a little too good, as we'll see.

Ben: They could do this thing where they would under pay versus private equity. They were the better option for these companies that were 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 need to deploy just got too large, and there's not enough furniture stores and family-owned jewelry chains in America to go by.

David: This is real. One thing that becomes clear is that Warren keeps harping on, we're so big, it's hard to move the needle. That's really true.

Ben: He has been forecasting this for 25 years.

David: It’s really true at this point. The law of gravity tying Berkshire to the S&P 500 is, there’s a lot of gravity. The giving pledge, it’s like 2006 when Warren makes his major gift to the Gates Foundation. But it's not until 2010 that they all launch 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.

Ben: Dun dun dun. As discussed so many times on this show, the beginnings of Airbnb, Uber, and cryptocurrency on and on and on.

David: What's that article embedded into the Genesis block of Bitcoin?

Ben: 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.

David: Indeed, indeed. Here's Warren and then Charlie 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 has seen this movie before. They were there, they were leading players in the dress rehearsal of Salomon and early 90s. All right, I think we know what to do here. The whole thing takes off. I remember this so well, in March of 2008 when Bear Stearns, the story of an investment bank failed, just like Salomon, the problem at Bear was that they failed because they had in-house hedge funds that were mortgage-backed security hedge funds and those had huge losses.

That wasn’t why it failed. It failed because Bears counterparties stopped trusting their paper and stopped being willing to trade with them. Like we saw a Salomon, a huge amount of their capital base turns over overnight because you're settling trades and your counterpart is on those trades. If their counterparties no longer trust that you're good for the money, they're going to stop trading forward to you and then the vicious cycle comes to a screeching halt. That's what happened with Bear. During the course of one week in March from March 10th which was Monday to the end of the week, which would have been, what? I guess the 14th, the Friday. Bear Stearns stock had started the week trading at $63 a share and by Friday they're toast. They’re bankrupt.

Over the weekend, the FED engineered an asset sale to JP Morgan for $2 a share. The old Bear Stearns entity is completely bankrupt, the good assets, the non-toxic assets get put into an LLC that the government creates and JP Morgan buys it for $2 a share backstopped by government money. If anything goes wrong, JP Morgan is not on the hook. It's bad, never seen anything like that.

Berkshire, of course, I don't know if they got a call, 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 have that are governments.

Ben: Right. I have to assume the most valuable company in the world at that point probably wasn't an oil company and probably was in the neighborhood of $2-300 billion.

David: Yeah. But probably didn't keep a lot of cash on their books because you know you’re an oil and fuel operating company, you got all tied up in capital.

Ben: Oh, for sure but just making the point that things like that are almost an order of magnitude smaller at the largest company in the world.

David: Totally, both things. The companies are smaller and nobody is piling up cash like internet companies are today, except for Berkshire. They have all this cash. It's a great climate to invest in, but one of the lessons that I think Warren and Charlie took away from the Salomon debacle was you don’t necessarily want to be like the major primary equity holder during the crisis. In case things really go, right? You don't want to be that guy that's called it before the congress. You really don’t. Instead of making a lot of equity investments at this time, they decide instead to pursue a different strategy. They’re going to make debt and preferred equity fixed income investments in companies that need capital.

Ben: Can you simplify that for us? Is it like, hey were to loan you money and if we want to do then we might exercise some warrants?

David: Exactly, and we're going to loan you money out of a very high interest rate. Yeah, maybe we'll make equity type returns, but we're going to have…

Ben: A whole bunch of downside protection.

David: A whole bunch of downside protection and some warrant upside.

Ben: And we don't have governance over the company.

David: And you're not going to call us in front of congress. The first of these that they did was 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 Wrigley, the chewing gum candy manufacturer for $23 billion. But it's kind of hard to get financing from banks right now.

Ben: That’s a lot of gum.

David: That's a lot of gum. I don't know what else Wrigley, they won against the Cubs.

Ben: I was going to say, there's no way there's even $2 billion of gum a year purchased.

David: Hey, Warren started by selling gum, buying in bulk, and breaking up the packs.

Ben: Right, keep talking. I’m looking up what else Wrigley does.

David: Mars is going to put $11 billion of equity for the deal. Goldman and JP Morgan are going to do a little over five and a half billion dollars of debt but they still have $6.5 billion holding they need to fill. In steps Warren and Berkshire. They invest $6.5 billion to fund this deal of Mars, not Berkshire, buying Wrigley and they do it with $4.4 billion of debt that Mars buys from Berkshire with an 11.45% interest rate of the debt. That’s unreal! Mars is a great, very stable company.

Ben: This must really be their only option.

David: I remember seeing in the last couple months that Amazon or Apple or somebody priced a debt offering recently at something absurd like 0.3% interest rate or something like that.

Ben: Yeah. Times are very different and there are lots of options available for corporations.

David: Lots of options available for capital. 11.5% interest rate, that is unreal. The other 2 billion Berkshire Investments Preferred Equity with 5% interest rate that gets more in coverage on it all in the end up realizing a 14% IRR on this deal. Which is pretty good because there's not a lot of risk here.

Ben: Now, as Warren would say, people chew a lot of gum in the past and chew a lot of gum in the future.

David: No, Warren.

Ben: David it really is pretty much all gum. This is crazy. You are at least a majority. In 20017, they did over 5 billion in revenue and they own JC Fruits, Pyramid, Doublemint, Big Red, Extra, Orbit. There's some other candies.

David: They own all the gum brands out there.

Be: They do. Yeah, exactly. There are some candies too. But this may have been after the combination with Mars but now under the Wrigley subsidiaries, there's Skittles, Starburst Altoids, Gummy Savers, Lifesavers that sort of stuff too.

David: I’m having a heart attack just hearing all these things. But yes, as I was saying there's a huge arbitrage here. Because I think this is also what Warren and Charlie realize, the government is bringing the bazookas out. They’re slashing interest rates, they're throwing money into this. Everything that we just saw them do during COVID, they first did during the financial crisis.

Ben: Is this the start of quantitative easing?

David: This is like the bazooka of quantitative easing. You've got this crazy situation where the government is making capital available for free, basically, and Berkshire can come into these situations and make capital available in fixed income guaranteed return with 10%-15% percent yields.

Ben: Why is that? Is it just like 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?

David: I think in this case, yes. I think there's also a reputational element to this too, really. If people are worried, especially in the financial sector which we'll get to in a minute, people are worried about counterparty risk, trust and effective runs on the bank of the investment bank sense. Well, bringing Berkshire and Warren is going to do a lot to shore up trust here.

Ben: And I guess another way of saying to get your hands on the money from cheap money from the government, that's a bailout.

David: Yeah, that's a bailout.

Ben: You don't want to be the company that got a government bailout when others didn't.

David: And probably doesn't help with trust too much. That’s in April and then Berkshire is fairly quiet for the next few months. I remember these few months between March and September are like the eye of the hurricane. Everybody’s like, it's got everything, going to be okay here. It's a weird moment but then of course September rolls around in 2008.

Ben: It's funny because you have this memory of the spring. This was after my freshman year of college, which was like spring quarter. I was completely oblivious. I was getting ready to go do my first internship at Cisco. I just remember preparing for it and knowing. And there was not a concern in my mind that, like maybe my internship will get cancelled, or maybe these companies will go under. I do, however, remember what you're about to tell, like the last few weeks of my internship, just watching like being glued to the news and refreshing every day come September.

David: That’s so funny. Even though we’re so close in age, we had such different experiences just like me being out of college and the workforce.

Ben: Yup. And sector. I’m just not that convinced that 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’ve heard the news about Bear Stearns, but it wouldn't be the sort of daily obsession.

David: Yeah, interesting.

Ben: Until the fall.

David: Until the fall. The fall was just the nuclear bomb going off. September 2008, of course, we’re talking about Lehman. Here is a fun story. This story is great. On Lehman weekend, Warren is, of course, on vacation. I think he’s in Canada, with Astrid, his then wife. I think they were married at that point.

Ben: Certainly a partner, they live together in Omaha.

David: Yup. He gets a call about Lehman. Rumors have been circling that Lehman was in trouble and parties were starting to not trust them and the like. Warren is about to go see a show, like some sort of performance in the theater. He says, “All right, well, I got to 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. Exactly what you want me to do.” Send me a fax. So great. He’s just doing it on Blackberry.

Ben: And he says this to Lehman Brothers?

David: I don't know if it was a banker who was calling. I assumed it was.

Ben: But it was about helping out Lehman Brothers.

David: Yeah, he knows Dick Fuld, who is the CEO of Lehman. It’s about bailing out Lehman. Because Lehman’s getting worried that the feds might not bail them out of here. This might be the end. After the show, Warren gets back to the hotel, there's no fax. He's like they just didn't want me that bad.

Ben: Must be good.

David: A year later, in summer 2009. He's at Sun Valley, of course, with little Susie and she looks at his phone. He has like a flip phone and she says, “Dad, there's a text message on your phone.”

Ben: No way.

David: Yes, yes, yes.

Ben: You have got to be kidding me.

David: He’s like, what's a text message? And it's from Lehman, and apparently like wires got crossed, it was asking for maybe like the fax number for the hotel and stuff. Like, what hotel are you staying at or something.

Ben: Oh my God.

David: Isn't that amazing?

Ben: How Warren Buffett could have saved the Lehman Brothers if he was a little more tech-savvy.

David: Totally. It’s a funny story. Of course though, there's more to it. Warren could have gotten ahold of them if everybody really wanted it. Turns out the actual story is I think that did really happen. Warren tells in a video, I think it might be a Wall Street Journal video, kind of a retrospective about the crisis. In March, right after the Bear collapse, Dick Fuld had called Warren about a capital injection then and Warren had studied it then. It isn't a Wall Street Journal video because this is a great moment. He goes into his office, he brings out the printed out Lehman Brothers 10K from 2007, that he had studied in March with all of his handwritten notes all over it. Amazing.

Ben: He was thinking about it.

David: He was thinking about it.

Ben: He went to Salomon Brothers once he could have done it again.

David: He was thinking about it, but he decided there was too much risk and maybe he's probably a little shy from Salomon Brothers. He didn't invest in March. I think he said he wasn't going to do it again anyway in September. On September 15th, of course, famously Lehman Brothers declared bankruptcy, goes under. Of course everybody remembers Lehman and talks about Lehman. People 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. He did not invest in those financial firms in September 2008. However, he did get two other calls that he was slightly more receptive to, specifically Goldman Sachs and GE.

He 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.

Ben: Did you know that GE’s consumer-facing savings bank was sold to Goldman Sachs? This is like maybe 70 years ago and Goldman Sachs rebranded in a sloppy re-branch kind of a quick one, GS Bank. And it sat as GS bank for like two or three years and then that became the underpinnings of Marcus.

David: No way. I did not know that.

Ben: Was originally a GE financial product.

David: No way. They were both Warren Buffett bailouts.

Ben: 2008 sweep ups.

David: 2008 sweep ups. The very next week after the Lehman bankruptcy, Goldman must have called probably during that weekend too or shortly thereafter. Berkshire invests $5 billion for preferred equity in Goldman with a 10% annual dividend. Essentially it's like debt. It's not preferred equity, like preferred equity that you would get investing in a start-up at some more debt-like instrument. 10% coupon to Salomon, coupon I think was only 9%. Man, this is worse than Goldman. With a call option for Goldman to call the preferred equity back for $5.5 billion plus Berkshire got another $5 billion of common stock warrants at a strike price of $115 a share.

They got renegotiated I think once with Goldman but became quite valuable.

Ben: Of course they did, it’s Goldman.

David: All told on that deal, Berkshire ends up making about $3 billion so they get about $8 billion back on $5 million that they invested. They’re pretty good for a fixed income. And that happens within two years.

Ben: How long did that last? Did they end up completely out of Goldman shortly thereafter?

David: I think they held equity that they exercised from the warrants for a while but they didn't end up making too much more than a billion dollar system. Good deal. GE went slightly less well the week after Goldman on October 1st, Berkshire invested $3 billion dollars in GE for basically the same deal. 10% coupon, Warren divides $3 billion of common stock at $22 a share. Unfortunately, unlike Goldman who stock as of today is treating at 364 per share versus the 115 strike price that Berkshire got. GE, the strike price was $22.25.

GE did very briefly trade above that mark in 2016 but its share price today is $13. Not so good.

Ben: That was not the last deal that Berkshire would do with GE. Do you know about the 2015 thing?

David: Oh no, I don't.

Ben: They bought some rail cars from GE which I think is now viewed as sort of a mistake in retrospect.

David: Interesting, like actual rail cars are a real curve manufacturing business.

Ben: I think actual rail cars. It was like a fleet managed by GE as others, like a business umbrella associated with it. The subsidiary of Berkshire was Marmon Holdings Inc. and they acquired these assets. It's all the GE real car services fleet.

David: Boom. Wow.

Ben: Yeah. I think for a billion dollars.

David: Wow, small world. All told, in 2008 during the crisis, Berkshire would deploy about $18 billion of the $37 billion of cash that it had on hand. The $6.5 billion into Wrigley, $5 billion into Goldman, $3 billion into GE and $2.7 billion to Swiss Re, Gen Re's major competitor, which was odd. That was in the 12% coupon rate, not bad. This is my personal favorite, $300 million loan to Harley Davidson at a 15% interest rate. $250 million to Tiffany's at 10%, and $150 million into Sealed Air at 12%. I don't know what that was. Was that an airline or air manufacturer or something?

Ben: I mean honestly, since ‘95 when they bought the second half of Geico, this is probably one of the top two moves. The shopping spree that they do in the fallout 2008 and buying Apple which I'm sure we’ll talk about next.

David: We will get to that.

Ben: I mean truly, what else has been this big win in the last 25 years?

David: Nothing. Just in terms of capital deployment, this is the most capital that Berkshire has deployed since if you could call the Gen Re deal capital deployment even though it was all with stock.

Ben: But this is legitimately a very impressive move. I mean this is a classic Buffett, I'm going to wait until prices are rational again. I'm going to do all my research. I'm going to be so prepared that when the moment presents itself, I can act in mere minutes and that he did.

David: Now, here's some interesting stuff about this, all of these deals, the $18 billion deployed in 2008, actually the net returns at the end of the day that Berkshire gets back from that capital turns out to be about $25 billion. You are right Ben, but from the actual 2008 investing, that's good. He didn’t lose money on any of the stuff during 2008, like rule number one, don't lose money. This is all fixed income.

Ben: Right. If this were a venture fund, you’d say, for the vintage, it’s top 1%.

David: Right, exactly. Good, but this is not amazing. But there's a quota to this.

Ben: What did you say, $16 billion deployed to get $25 billion back?

David: $18 billion deployed to get $25 billion back.

Ben: Over what time period?

David: Probably all told, five years, maybe less. Pretty good, but Warren gets one last bite at the apple, not that Apple, the financial crisis apple in 2011 which dwarfs all of this, which is amazing. I thought that this happened in 2008 but no, it was in 2011, Bank of America.

Ben: Yeah, how have we not talked about them yet?

David: It was not 2008. It was 2011. Bank of America gets caught up in that—remember the Euro debt crisis that happened in 2011? Everybody was like, financial crisis again. 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. Not as much as the 10% that they got from Goldman, but they got Warren coverage to buy $5 billion of common stock in which Bank of America had a $7.14 strike price. Today, Bank of America is trading at a $42 stock price.

Ben: It's a cool 6X.

David: Cool 6X.

Ben: Are they still B of A shareholders?

David: Yup. Still B of A shareholders. They, all in to date, Berkshire has made about $26 billion in profits on the B of A deal. Way more than the $7 billion that they made from everything else during the financial crisis combined. I think significantly more than any other investment that Warren made in his entire career up to that point.

Ben: It has to be. I mean they're playing with so many bigger dollars at this point that, okay let's call these three great movies then. Your pretty good ones from the financial crisis, your buying of Apple and of course then the B of A one. There's no way that he's done anything more better than this on an absolute dollar magnitude to this point. I'm sure of the return on invested capital, for sure.

David: B of A deal is a grand slam. 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. Berkshire started buying Wells Fargo in 1989. I don't think they ultimately lost money on it. They had big gains and then those gains evaporated.

Ben: Right. You start buying Bitcoin around $15,000 and yet you keep buying all the way up through $60,000, then you're probably about break even. It feels like that.

David: Yup, interesting. Warren is now in his 80s at this point.

Ben: Yeah, 15 years ago he got the question when are you going to retire? To which she always responds, about five years after I'm dead.

David: Five years after I die. Yup, that’s his line. To be frank, this is his last hurrah. If you include B of A, which was a grand slam great 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, that's when they changed the format of the annual meetings where it's no longer people approaching the microphone. It's Becky Quick and [...], the journalists asking questions and moderating.

He starts getting hammered internally, he’s like, what is the succession plan? What are you doing? You are 80 years old. How many more of these wild rides can you go on? He gives his trademark evasive answers. He says that the most important qualification for his successor as CEO is running a large operating business experience doing that. 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.

Ben: 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%.

David: Yup. This is something that they've actually been laying the groundwork for a long time. I vaguely remember this but going back and studying this, this is amazing. All the way back in 2006 in the annual report, Warren and Charlie had been talking about this. They come up with this idea, what if we just put an open call for candidates in the annual report?

Ben: No way.

David: Yeah. In the 2016 annual report, he introduced this idea, Warren writes, I intend to hire a younger man or woman with the potential to manage a very large portfolio who we hope will succeed me as Berkshire's chief investment officer when the need for someone to do that arises.

Ben: This is for the equities portfolio?

David: This is for the equities portfolio. As part of the selection process, we may in fact take on several candidates. This is going on. I think shareholders knew this but people had forgotten by 2009. That was three years ago. The financial crisis happened. There's no progress. Nobody's been hired. Finally in 2010, they made a hire. A surprising hire, 39-year-old Todd Combs. A completely and totally unknown manager of a small hedge fund based in Connecticut called Castle Point Capital.

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 hedge fund manager. Here's the thing, Todd is great. 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, 34% total.

Ben: How long had he been investing?

David: Five years. This is not like an incredibly distinguished track record here.

Ben: Buffett did almost that well every year for 12 years in the Buffett partnerships.

David: Yes. Everybody's a little puzzled and the plot thickens a little more. I think Todd's hiring was announced in August or September, I want to say, sometime 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. They had the candidate. They knew who it was.

Ben: David, when you sent me this article, I about lost it. This is crazy. I had never heard of this.

David: Me neither. I can't believe I didn't see this when it happened. Unbelievably, the chosen candidate that The Wall Street Journal reported on was Li Lu who has an amazing story himself. He grew up in China, he was part of the Tiananmen Square protests, immigrated to the US and eventually got into investing. He has an incredible track record. He founded Himalaya Capital, mostly invested in China and became close friends with Charlie Munger.

He introduced Charlie to the BYD Investment which is how it happened for Berkshire.

Ben: If you're wondering this name doesn't sound super familiar. I didn't know he worked at Berkshire. That's because he never did.

David: He never did. This is unbelievable, even at the beginning of the article front page of The Wall Street Journal, they get the money quote from Charlie. Charlie is quoted as saying it is a foregone conclusion that Li would join Berkshire.

Ben: They even have a picture with him. There was a picture of Buffett. It's crazy.

David: Totally crazy.

Ben: What happened? How did this blow up?

David: The world may never know exactly but the scuttlebutt is that it all came down to compensation. The thing is, you know Li was and is incredibly successful on his own, running his own fund where he keeps two and 20, 2% management fees and 20% of the profits. Yes, it would be like this amazing honor to go work at Berkshire to be Buffett's successor, but like Warren back in the day with the Graham-Newman 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 just could do my own thing and I'll keep all the profits.

I think that's what happened with Li. He didn’t join. He still runs Himalaya. He’s been incredibly successful. By all accounts still has a warm relationship with Charlie and Warren. That threw a wrench in the process, I think.

Ben: I'll bet. I did read about the investment managers and we'll get to the second one here in a minute, how they're compensated. Warren does let it slip in an interview that they basically are compensated for their performance above the S&P every year. There's some 3-year characteristic to it where they're paid on a 3-year basis. There's an opportunity for basically Berkshire to have a claw back if they underperform in the latter years of the 3-year rolling basis.

David: You can see for somebody like Li, this is total speculation and rumors that are 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. The famous hedge fund manager. But for folks like that, it's not an attractive value proposition really to go work at Berkshire. But for Todd who's running a small $100 million hedge fund, this is the chance of a lifetime.

Ben: When this interview came out, I don’t know, a few years ago maybe more the capital pull for each investment manager was $13 billion. Even on its own, it's a very large hedge fund, even your little sliver that you're managing.

David: Yup. Huge opportunity for Todd. He joined 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 with the hiring. As they referenced in 2006, they're going to bring on several candidates. Do you know how we talked about on the—we haven't talked about on the series yet, but we talked about this on the Pinduoduo episode that Warren does these annual charity lunches that he auctions off? The auctions actually happened on eBay which is amazing.

Ben: That's awesome.

David: I didn't realize the charity is the Glide Memorial Church here in San Francisco, a great organization involved in many great things over the years. In 2010 the same year where this is all going down, an anonymous bidder paid a record $2.6 million for lunch with Warren. The next year in 2011, it turns out, it's announced that the same bidder paid $2.6 million again. One person has paid $5.2 million for two lunches with Warren.

Ben: Wait, Ted gets the job because he paid for lunches with him twice, millions of dollars?

David: Yes. $5.2 million for a job at Berkshire.

Ben: Oh my God.

David: Yes listeners, of course we're talking about Ted, Ted Weschler. The other investment manager at Berkshire today was before Berkshire, running a fairly large $2 billion hedge fund called Peninsula Capital Advisors that he was running for 12 years. He’s been immensely successful over those 12 years. He had over 12X’ed the capital in the fund. Done very, very well, ran a concentrated portfolio, his top holdings were Davita and DirectTV. For two years in a row, he buys lunch with Warren and he impresses Warren so much with these lunches that they reach a deal to bring Ted on.

Ben: That's crazy.

David: Isn’t that crazy?

Ben: The wheels have to start turning at this point, for listeners out there who are like, 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. How much are they there to execute the Buffett and Munger 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.

David: Yeah. I think the answer is it's somewhere in between in terms of how much autonomy Todd and Ted have versus Warren and Charlie. 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? In 2011, Berkshire fully acquired 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.

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. 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 rammed the trade with the acquisition of Lubrizol.

Ben: It’s a publicly traded company before.

David: It’s a publicly traded company before Berkshire acquired it. He personally bought shares in the company and then suggested to Warren that Warren look into buying the company as a whole. That in itself isn't that bad. It’s like, hey, I’m personally invested 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 in knowing that this was going on definitely, I don't know.

He didn't end up being prosecuted or went to jail or anything, but once all this comes out, Buffett fires him or he leaves Berkshire. Buffett makes statements that he can't believe that this happened and he can't understand why David did it. 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 Abel.

Ben: Who also came over in the mid-American energy acquisition?

David: As we now know Greg is indeed going to be the next CEO of Berkshire-Hathaway.

Ben: We've got the chess pieces here. We now know Ajit’s name for insurance. We know Greg's name as sort of the noninsurance businesses. He's going to be the CEO. We've got Ted and Todd, each managing their pool of money probably close to $20 billion now each on the public equity side.

David: Warren has said, I think, when they started it was about $1 billion each that they are managing. As they proved themselves, he gave them more rope. But in the early days here, Warren is still managing—we’re talking to Charlie, but really Warren is still managing most of the investing for Berkshire. To be honest, he’s given it to Ted and Todd right away, because he does a pretty terrible job, we can't mince words here. In retrospect, these years between 2011 and 2016 I think were probably some of the worst decisions that Buffett ever made and worst horrors of his career.

Ben: 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.

David: Yeah, that they did.

Ben: I think he made that comment in 2019. He said, yeah, they both beat the S&P by a little bit but they smoked me.

David: Yeah, they definitely smoked him. In November 2011, 2011 was a weird year for Warren.

Ben: Lubrizol purchase.

David: Yeah. Hiring Ted which is great but because of the charity lunches, it's just weird. In November 2011, for some God knows why reason, Warren finally pulled the trigger on the trade that he has been itching to make for 30 years. He put $10.7 billion into IBM, in 2011.

Ben: Let's just take a quick refresher here, 2011. Four years after the App Store was launched. Seven years after Facebook was launched. This is not way back in time when it might have made sense.

David: Three years after the famous Jeff Bezos talk at the Startup School.

Ben: That’s exactly what I was going to say.

David: …about AWS.

Ben: AWS is already a thing. That is the default for startups and has been for years to go and be the cloud provider. What on earth? What thesis does he have on IBM?

David: Well, here’s his thesis. This is what he says publicly. He says, he has been hit between the eyes by how great IBM is and how strong and defensible its client relationships are. Brutal. If this is the first technology investment that Warren Buffett is going to make, maybe it's a good thing he didn't make any technology investments.

Ben: Maybe it's half a century too late.

David: Yeah, seriously. He holds this thing until 2018 when he finally sells it, all told he loses $2 billion in total sales or for wherever on little over $8 billion. But the opportunity cost of $10 billion of capital in 2011, you put that into IBM? My God.

Ben: Think about if you bought any other big tech company. Just pick one, you would have done great.

David: Warren, go back to the monkey throwing darts. Then in 2013, he partnered with the private equity firm 3G Capital to take Craft Private and then merge it with Hines. Warren, you're partnering with a private equity firm? They're your enemy, you know what they do, right? Anyway, Berkshire puts $10 billion into that deal. Their equity stake in Kraft-Heinz today is worth about $11 billion. They haven’t lost money but again opportunity cost to capital here. That was 2013.

Anyway, in 2015, Berkshire acquired the aircraft parts manufacturer Precision Castparts for $37 billion in Berkshire's largest deal ever, bigger even—we skipped over the railroad. In 2009 they finally bought the railroad. That was a good deal. That has done well for Berkshire. Warren Buffett from 2008 to 2011, he was good. He was good in those years. But Precision Castparts, he bought it for $37 billion last year they took a $10 billion write down on that deal. That's a dog.

The worst that we alluded to, oh my God, in 2016, he started investing in the airlines. This is the man who said that he was going to shoot it down Orville and Wilbur. What was he thinking?

Ben: Well, the interesting thing is so he sold the airlines in a panic sale right when the pandemic dip started and we all know of course there was about five days where you could actually buy the dip before it came skyrocketing back. Somehow we didn't endure a real market crash in this global pandemic because of monetary policy.

David: Thank you Jerome Powell.

Ben: Buffett basically sells at the bottom with these airlines and it's interesting because I don't fault him for the sale. It is a very reasonable thing to sell the airlines then because if the government didn't bail them out, they could have all gone to zero. I mean the government was paying some airlines’ payroll to make it through that period. Even though he sold it, I think right around the worst—the bottom, I blame it on the buy. He knew that he even had a comment years before that he had a romantic fascination or like a dirty habit about owning airlines or something like that. He knew when he still did.

David: It’s like you can’t have newspapers anymore, so he wants the airlines. To be fair to Warren, again the scuttlebutt 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. It's just funny, but you can't not make fun of Warren for this one. It's bad.

Ben: You can chalk this up, so you should've known better.

David: Yup. IBM, Precision Castparts, those were bad.

Ben: Honestly in this same time period, J&J wasn't great, the 2008 investment he did there. The rail cars that I mentioned were around 2015, not that great.

David: Not great.

Ben: Those are all the sins of commission, not to mention the sins of omission of Google, Facebook, Amazon. On top of all this, 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 go right by you. These are crazy old companies that have been locked up inside the bank federations or however they were owned before, they're finally available for the public to buy. These stocks were criminally undervalued initial issuances and Buffett just watches them go right by, knowing the AmEx business, it's crazy.

David: I hadn't thought about that. You're right, to be allocating all this capital to these dog businesses, when Visa and MasterCard put the tech companies aside that are just sitting there, brutal. Okay, so 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 redeems everything by buying Apple Inc.

Ben: Amazing.

David: Amazing. Here's the story. In May of 2016, as Warren puts it in the quote, one of the fellows in the office who manages money…

Ben: Aka Ted.

David: …yup. It’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 $1 billion, let's assume it was Ted, into Apple shares in May of 2016. That goes well. Amazingly, Ted, Todd or whomever manages 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 convinces Warren that they should really back up the truck here in Apple.

Over the next two years, Berkshire-Hathaway would ultimately put $36 billion to work buying Apple stock, just under the total price that they paid for Precision Castparts, which was the largest acquisition in Berkshire's history. To say it goes phenomenally well is the understatement of the century.

Ben: Yeah.

David: This is unreal.

Ben: I'm sure there's lots of people out there who have been Apple shareholders from 2016 to 2021. Your brokerage accounts know what we're talking about here.

David: Lots of people doing this, not a lot of people doing this with $36 billion in initial principal. As of the annual report of last year, the market value of Berkshire's shares in Apple is worth $120 billion. That is $89 billion of gains in five years. 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 partnership's.

Let's just say that again, more or close to more dollar returns then the entire rest of Warren Buffett's career that has come in the last five years with one stock.

Ben: I mean, there's two angles to this. One, the irony is just dripping.

David: Dripping.

Ben: Warren No-Tech-Stock Buffett and Apple is approximately 50% of the dollars ever returned. The other side of it is interesting because 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.

David: The position was initiated when the man was 86 years old.

Ben: 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.

David: We got to talk about this.

Ben: 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 a high lock in. There is a strong moat there. 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, or any reason at all, that it has this moat around it.

I don't think that there is any better description of why you would want to buy and hold Apple and that exact quote from him 21 years before.

David: It’s so great. Here's the thing, this is nitpicking because at the end of the day investing, it doesn't matter—I played baseball growing up. My dad used to say to me, if you're listening. Hi dad. I was learning mechanics on how to swing properly. I love this quote, 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 that matters is you hit 300 but until you learn how to hit 300, you should probably do it the right way.

Investing is the same way. 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. Warren 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 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. I think it's much more the nature of consumer behavior.

Ben: Yeah, he's in it for the M1. He’s really impressed by the architecture.

David: He’s locked in to iMessage.

Ben: He feels that this integrated strategy is the right one.

David: How funny is that? At the end of the day though, it doesn't matter. It doesn't matter that it was Ted's idea. It doesn't matter that Warren hated technology stocks. All that matters is that he was in a position to be right. $89 billion of gains later, here we are.

Ben: Yeah, that has to be up there with the single greatest investment return in history in terms of absolute dollars.

David: I think it is.

Ben: Let's see, Naspers Tencent.

David: Naspers Tencent and Softbank Alibaba investments, I think they're still better. But we're splitting hairs here.

Ben: 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.

David: Yeah.

Ben: That just says a lot about...

David: No 45 years into its life.

Ben: The Fang stocks in the last few years.

David: It does. 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 Greg and Ajit to vice chairman roles in the company. Greg for vice chairman of noninsurance businesses. Ajit for insurance businesses. The pandemic of course happens in March of 2020. Warren preaches his faith in America, but he dumps the airlines at the bottom, which I agree with you, that's fine. Berkshire mostly misses out on the enormous bull-run that happens when Jerome Powell and the FED inject literally more money than God into the economy.

Warren and Charlie continue to say that they think their 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, Ethereum or any crypto actually is. The kicker of the big moments that we all, if not, saw or heard about the day after, the hilarious slip at the 2021 annual meeting where Charlie lets it slip that Greg Abel is the name in the envelope.

Ben: This clip is so funny, we’ll link to it in the show notes, but Warren and Charlie are on stage bickering about Berkshire's culture and about preserving the culture, Charlie just goes, Greg will preserve the culture.

David: Yup. The look on Warren’s face is priceless.

Ben: Yeah, he stammers.

David: Hopefully we've pointed out in the now like what 10 hours we've been doing this series.

Ben: Nine, David, don't get ridiculous.

David: This dichotomy between how Warren is perceived and wants to be perceived and how he actually is. He's got that line about Charlie and I have never had an argument. Bullshit, you’ve never had an argument. I bet you had one after that. But of course, they still love each other and Greg will be the CEO of Berkshire Hathaway.

Ben: We should say to that a thing that's been happening quietly in the background—two things. Ted and Todd have been running their portfolios in a very different way than Warren has over the years. I think Todd, and I don't know this for sure but, was really buying Amazon, SnowFlake, some of these tech stocks other than Apple, so you have a non-Warren approved strategy going on there.

Especially the Snow Flake deal, buying those pre-IPO shares and benefiting from that is very interesting. Then also, stock buybacks. It's very clear that what's happening is that they don't see a better opportunity out there in the market to deploy capital than the businesses they already own. They'd rather just take everybody’s shares and concentrate their positions in the existing Berkshire portfolio. I thought Christopher Bloomstran 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.

He has this great quote, as long as capital markets remain overvalued and private investors flush with cash persist in investing at low yields, share repurchases are a magnificent use of capital. It really is such a good point that you pick your head up, you look around, everything's got a sky high multiple on it. Berkshire shares at least the way that Warren sees it don't.

David: They don't.

Ben: Now it's a little bit tricky to think about it this way because the intrinsic value of their equities holdings are marched to the market. If you say Berkshire's not trading at a crazy valuation. 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. There is this interesting thing where by doing stock buybacks, sure, they're not buying into any new companies that have crazy valuations but they are buying more of the companies they already own at market prices.

David: Yup.

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I think I hear Warren and Charlie hooting and hollering in the background.

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David, I wrote up a little bear and bull case. As we start to translate a little bit to—there's a playbook that we should enter here but now that we're sitting in the present day, why don’t we reflect a little bit on the present day and in the future. One bull case that I don't think we've really talked about is a lot of people sort of think Berkshire's toast when Buffett retires. I don’t think he'll retire until he passes away. The stock's going to plummet. Their performance is going to go away. I think if you've been listening to our episode, you probably don't think that.

David: You might think the opposite.

Ben: Right. The bull case is they actually could do better under Greg. They might be less conservative. They could run the business by keeping less cash on hand which is of course a drag on returns. Frankly, there's an argument that Warren has gotten really gun shy in buying stuff after a lot of the sins of omission and commission that we mentioned above. It's not clear that he 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. I'm not sure that's well suited for this environment.

David: Not to mention Todd and Ted are pretty good.

Ben: No matter what else they've done, they did Apple. Everything else surrounding air, and especially when they're only managing $40 billion between them, I mean what did you say $85 billion gain or something like that?

David: $89 billion.

Ben: $89 billion, unbelievable. There’s certainly that element.

David: One more piece of context on that, that's a whole Zoom of gains. He literally created a Zoom market cap worth of gains.

Ben: It's totally wild. Now the flip side, the bear case is Warren has been successful in a lot of environments. The thing you should cheerlead about Warren Buffett is that he's reasonably consistent. Someone will always be outperforming him but he has created this incredible rate of compounding for over half a century. While I think the case that David and I've been making here for this whole episode is that the Internet changes things so fundamentally that his style doesn't really work anymore, that you do have to make that space on the earth changing underneath you rather than just the earth staying the same and businesses being run.

The bear case on Berkshire would be, and actually is the opposite, at some point the Buffett way of investing, world changing or not, will actually be great. We're just in a season right now that is just making him look foolish. Maybe it's been 10 or 15 years of largely foolish decisions, I'm not sure this is where I come down but that would be the future bear case if Berkshire changes too much from the long time tested Buffett strategy.

David: I would also add another part to the bear case which is warranted or not, right or not or whatever, there is no question that Berkshire Hathaway and Berkshire Hathaway shareholders benefit from the Warren Buffett halo effect.

Ben: Absolutely.

David: There are some real tangible benefits to that like during the financial crisis where like, my god, those deals he was getting on debt and preferred equity coupons, nobody was getting that. The calls he was getting were real tangible benefits. There are some intangible benefits, I definitely—lots of people, I think ourselves—myself at least included now having done all this work is, alright Warren, you're past the hill on investing. Lots of people give him a pass and people still show up to the shareholders meeting and people still hold Berkshire Hathaway shares because they believe in Warren. If Warren’s no longer there, then what?

Ben: Yeah, Berkshire Hathaway is a religion and an investment. The bear case is that at some point it just becomes an investment.

David: Yup.

Ben: 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 a meaningful growth engine is Geico and that's not a real growth engine. It's really hard for them to consume capital internally in a way that would meet any hurdle rate that would be exciting. They 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, but 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 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 at a discount of the intrinsic book value of the holdings. That, of course, would be the case if you fully valued the cash that's on their balance sheet. But if you think about the multiples of the stocks that they own, I mean Apple has gone from being valued at something like 7X earnings to now like 30X earnings. To believe that Berkshire is underpriced 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 BNSF is worth industry multiples for railroads which if you’d look around are also meaningfully expanded recently.

I just think asset prices are really high. There's definitely this element of if you believe Berkshire's undervalued then I think you're being pretty generous with how you value the sum of all the parts.

David: Yup. I think that's true but there's the capital allocation question of all assets being overvalued right now, so if you're going to take capital out of Berkshire, where are you going to put it?

Ben: Right. Everything is only worth talking about when you compare it to its next best option.

David: Yup.

Ben: If anybody has any really good options for really solid assets that are under price right now, the Acquired Slack acquired.fm/slack, go….

David: We’ll let folks hang out at the investments channel. I love it.

Ben: Yup.

David: Hang out the digital assets channel. That is where stuff is going on.

Ben: That’s where it's at. Playbook?

David: Playbook, let's do it. You want to kick it off?

Ben: Yeah. I mean the biggest one that's just so clear to me is that you need different strategies at different scales. The same playbook clearly didn't work as they gained more capital. There was that great thing that they were doing forever of hiring great managers that were family owned businesses that 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.

You need a completely, completely different playbook. The interesting point that I want to make on that…

David: Just like the original cigar butt playbook stopped working and they had to go to…

Ben: Exactly. The point that I want to make is that they have set themselves up well where they have a remarkably flexible structure to do that. It's not a fund. It's an operating company. They have an infinite time horizon. The goal is to never sell.

David: There's no drag of fees.

Ben: There's no drag of fees.

David: As a shareholder, you can feel pretty good about—the sticker performance is actually the performance you're going to get. You're not getting that less than 20%.

Ben: Incentives are aligned. If they're not investing, they're not just sitting there collecting fees, they are itching too, because they think that the best option for that capital right now is to sit in cash. Even though we were knocking Warren for like he's out of touch and he doesn't understand the Internet, and he doesn’t understand internet businesses and the world change from underneath him, we spilled a lot of words on that.

What he did get right is this operating company's flexible structure and probably set it up for success, I say probably because we have an open question on culture and politics, but leaving enough flexibility inside the company then to make sure that they can react to whatever's coming. Even if it's not in the Warren style. That was a big one that I had.

David: Say more about politics unless you're saving it for later.

Ben: No, I'm not. This is something that concerns me. 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 plowing it into an internal growth engine when they had meaningful internal growth engines, you can use it there.

David: Like Ajit’s business. Yup.

Ben: Yup. If they wanted to buy stock in companies, they could go do that. Now, each of those are independent fiefdoms. 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, so who gets to say at 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. When you have a non-founder who doesn't quite have the same influence and purview over all of those things, I think decision making, especially when you need to be able to do it in an hour for a really big deal, could get really thorny.

David: Not to mention a CEO who doesn't have the investing mind that Warren does. Greg is great. He's a great operating executive, but is he going to be able to think in the same way as Warren and Todd and Ted about investments and act with the same speeding conviction.

Ben: Right. What the right thing to do here has been to go try like crazy. It might be very hard if not impossible to go find a Warren Buffett and just give it all to them. Sure, they have these other guys as employees but do you need a one headed monster.

David: This is the funny thing about the number one criteria for the next CEO being operating experience in a large company, that's not Warren.

Ben: Right. Yes, 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 coming in and if just Warner or just Charlie is left at some point with the four, what does that look like? That will be weird for a little bit. I imagine if one of them leaves, they both leave at the same time.

David: I would imagine too.

Ben: The other thing I'll say on culture and this is borrowed from some great research that some listeners sent us, their culture, they talk about it like it's this virtuous thing. If it's truly this virtuous thing then it's something that you can codify and protect. I think that cultures are really independent inside each of these operating companies. I don't think if you're an employee of Borsheims, I don't really think you think about Lubrizol’s culture. They have nailed it on the decentralization thing. I think the only real shared cultural elements inside the hundreds of thousands of people that work inside or for Berkshire Hathaway are one, don't put Berkshire's reputation at risk.

Two, bend over backwards to avoid paying tax which takes money out of the business. Don't take money out of business. Leave it all in. Keep compounding it. Differ it however you can. Three, funnel all cash back to Berkshire for reallocation. I mean that's the culture. Those are the things that are really important to the head office for managers at their subsidiaries to follow.

David: Yup.

Ben: Should we go to grading?

David: Yeah. Let's do this.

Ben: I know you have a whole slate of ways that we could grade this one, so kick us off.

David: Yeah, this is it. The whole story, 9, 10 hours in. Okay, I was thinking before we recorded about how to grade this. I don't usually write down any thoughts on grading before episodes, but I thought this was so momentous.

Ben: You guys know David Rosenthal. He just wings it. He doesn’t really prep.

David: Well, I do in grading. I think there are four topics to discuss in grading here. First, we've been through this whole thing. I think we got to grade Warren’s entire career. 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.

Ben: Either way dude, we're shipping this episode, so create the cut off.

David: Yeah. We create the career, I think we grade performance since we left off the last episode which was in 1992.

Ben: I did an IRR calc of January ’93 through today.

David: Great. I love it. Then I think we should grade recent years performance and then the final question, I am a Berkshire Hathaway shareholder. I 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 do you do with your stock? Are you holding? Are you selling? Are you buying more?

Ben: Interesting. David, do you have a rate of return calculation on that, the entire Buffett career?

David: As a matter of fact, I do. I did some analysis on this. The entire Buffett 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, 50 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.

Ben: That guy's consistent.

David: Quite consistent. The more incredible number, do you know what $100 invested in the Warren Buffett Partnerships in 1959 and held through Berkshire today would be worth today? $100, take a guess.

Ben: Millions but compounding math breaks my brain, I don't know.

David: $26.2 million. Not bad for a hundred.

Ben: Wow, take a $100 flyer in, what did you say, ’65?

David: ’59. I mean that's a long time.

Ben: That was a lot more money then, but inflation has moved this fast. That's a great stat, $100 at the beginning of Warren Buffett's career following them all the way through is over $26 million.

David: Yeah.

Ben: Remarkable. That's a 22% something percent IRR? Over his whole career, he flagged. It's not the same as the BPL or the Buffett Partnership Limited days but mighty good.

David: Yeah, mighty good indeed.

Ben: What, A, A plus? Has anyone else been investing over this period of time? I don't even know how to compare it to anything similar. He outlasted everyone.

David: Yeah, he outlasted everybody. I wrote down A. Here's my rationale for an A. We can debate if this holds. My rationale for an A versus an A plus was that I think we will probably see better investors in our lifetime than Warren in the past. I think that's just a natural consequence of the numbers getting bigger over time and the world moving faster and there being more change.

Ben: It depends what you mean better investors, because I actually don't think so, depending on how you think about this. I'm not sure that you can do what Warren did over his career with the career starting today without taking on a lot more risk or a lot more leverage. It's just so competitive to be an investor now. I suspect if we 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. There's a lot more luck in being the one of those million that does better than him.

David: Okay, so here was my thinking on that. I tried to think of it like I did not run the numbers so I may just be way off, we can debate. I tried to think of a tangible example and the tangible example I've thought of is Sequoia Capital as a whole. When was it? ’72, they're coming up on 50 years next year. We don't have their aggregate returns across all their funds, but I suspect they might be as good or better than Berkshire.

Ben: Interesting.

David: Now, not a single person, it's a firm.

Ben: But it's an institutionalized culture and if you can do something consistently, you deserve to be in the same conversation.

David: Here was my thought process on it. Apple aside, which we can't really put Apple aside, Warren deserves credit for that 100%. But absolutely he's lost a step in recent years, whereas I feel Sequoia has only gotten better or stayed at the top of its game.

Ben: Yeah. I mean it feels like they adjust to the climate that they're in a year before the climate changes. It feels like Buffett adjusts 30-40 years after. No, just on IBM. Maybe 10-15 years afterwards.

David: Yup. That's a good question though.

Ben: It's interesting. But remember that thing I mentioned earlier with the expected value calculation of the probability something could happen in the outcome, it happens. Sequoia is doing the exact opposite of the Buffett thing. It's a shot on goal where each shot could be absolutely huge. It’s obviously an extremely different asset class.

David: Yup. But it is an approach that I think is 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 approach is the better approach in today's world I think.

Ben: Fascinating. We're going to rile up all the growth versus value people out there.

David: I love it. What do you think? I’ll put the gun in your hands. A or A plus?

Ben: It's an A. I mean, if he had finished strong it would be an A plus. You could argue Apple is finishing strong but just the numbers that I ran for this last period, 1993 through today is at 13.5% IRR. That's 28 and a half years. It's not like this is a quick cycle. This is like two or three cycles. It's not like you can't just say his 13.5% IRR was during a down cycle for Buffett style. No, we've been through some stuff. It's just not been a remarkable last 30 years.

That number by the way is just based on their stock price. It's coming in at $11,800 January 1st, ’93. Their stock just closed at $435,000 a share.

David: It’s so great. This is good. This is the next set of grading criteria. Maybe we can jump back to an overall view at the end.

Ben: Let's compare that 13.5%. Remember the Buffett Partnership Limited. That was 29.5%. Then in the last episode where we talked about the heyday of Berkshire Hathaway ending in the Solomon, that was a 27% IRR in the 80s and the late 70s through the mid-90s. It has diminished considerably which they told us it would because of the amount of capital they're managing, but still.

David: Yup. What do we think? Is this a B for this period?

Ben: Yeah, it’s a B.

David: It’s a B. It's still definitely beat the S&P. Beating the market for sure, but just not to his previous standards.

Ben: Yup.

David: Okay. Recent years, I did a slightly different…

Ben: What does recent years mean?

David: Let's take the last five years starting from the Apple investment, which is almost exactly five years ago.

Ben: What's your analysis?

David: This I think was interesting and telling to me. Like we've been saying, the Apple investment is so amazing in the running for one of the best single investments of all time. Yet, Berkshire is so being in this law of gravity around the capitalist, so meaningful. 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. It 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 a turn on a multiple level from the market.

Ben: Ted and Todd are making money, but Warren's not getting paid out in any of his carry.

David: Warren is literally doing worse than the market in the last five years.

Ben: Right. That's so interesting to think about. Because he's necessarily underperforming the S&P because he said Ted and Todd were over performing it.

David: Yup. 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 a hedge fund where they're taking 2 and 20. It's the exact same thing as being in an index fund.

Ben: Yup. I think that's right, a C.

David: Yeah. Now, the money question, literally the money. What are you doing with the money? Are we keeping it in Berkshire? Are we buying? Are we selling? Are we holding?

Ben: This is the moment I reveal for everyone 10 hours in that I actually have never held Berkshire Hathaway.

David: No way. We've done all of this work.

Ben: Yeah. This is not investment advice. 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. 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. 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. If you make a bunch of money every year, then you don't have to pay high taxes on the dividends. It will continue to compound. You can sell shares when you want to sell shares to free up some cash. It's not going to have a really big down year. Maybe if there's an extreme hurricane event but it's not going to have five really big down years. I think that question comes down to where are you in your investing cycle in your life? I'm not sure that it makes sense for young people to buy Berkshire. At least, people that are young in their wealth.

David: Yup. I differ from you in answer but 100% agree with you in spirit and rationale. My answer, I am a registered holder as I said at the top of the series, has been for many years. I'm going to continue to hold partially due to the style drift for that and the way of Warren, the halo effect. I get my free tickets to the shareholder meeting should they ever resume in person. But 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—literally the rest of my portfolio is heavy growth tech stocks, digital assets, etc. San Francisco Real Estate.

Ben: This is for your safety.

David: This is in my safety portfolio. The way I think about it is just, should I need emergency liquidity for something in the near term, I don't know what that would be, that's what my Berkshire is. It's exactly what you're saying. It's my bad term, but the equivalent of a widows and orphans fund, 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 a fairly sizable allocation in cash for this purpose. Then I was like, well that's just stupid. To keep cash is just dumb.

Ben: Again, not investment advice.

David: Yeah. Not investment advice. But when yields on 10 year treasuries are basically negative…

Ben: Right. Just sitting there getting devalued in my bank.

David: Yeah. Literally every day that goes by, you're getting poorer and poorer holding cash. Again, not investment advice. That's when I decided I'm really worth this and I'm going to have to allocate my liquidity allocation to Berkshire. Because I can feel pretty confident it's not going to be money and I’ll at least get some return on the capital. I don't know, that's kind of sad for Berkshire that I think of it as an alternative to cash. But again, I think that's where the stock is at, at this point.

Ben: Fascinating. At 10 hours in and this is where we arrive.

David: Not with a bang but a whimper.

Ben: I will say it, the journey is the reward. I do want to sum up this grading, this series of course we will get the carve outs here in a second, but the completion of this with possibly the best take on Warren Buffett of anyone, Ho Nam from Altos which is an investment firm that we very much respect, recently tweeted that he is the only investor to build a company worth over $500 billion. As Ho puts it, a few amazing founders have done it but no investor comes close.

David: Absolutely. A great way to leave it. However, if you'll indulge me, I will spoil it with a less eloquent parting thought that I wanted to add too after.

Ben: Yeah.

David: We spent hundreds of hours of research on this.

Ben: We’ve read six books.

David: I know. This is the most quixotic thing that we've ever done. Hopefully, you all have enjoyed this as much as we have because it has been an absolute freaking blast.

Ben: It's changed the way I think too.

David: Yeah.

Ben: I mean truly.

David: We have learned so much from doing this. I was trying to really reflect on what I have learned from this? What can I take away? What are my feelings? There's one thing I'm doing about my stock, that's one thing. But the real value is in the learning. Here's my take, it's related to this Warren was the greatest status quo investor of all time idea from Andrew [...] 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 in terms of capital growth and a place to invest your money. I think that may or may not be true to some extent today. But I think that concept is absolutely true for the Internet. The Internet today to me is like Los Angeles in 1950 or whatever it was 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.

Ben: Yeah.

David: That's the Internet. If there's one thing I've taken from this it's that—that may change someday, but for the period that we're in going forward, just despite all the ups and downs and like, Bitcoin, and Ethereum, all crashed 50% this past weekend, it's all noise. The Internet is still the future.

Ben: Some listener out there and please drop this in the Slack or tweet at us if you do this, we need a meme with Warren and his slide saying never bet against America. We need David Rosenthal, never bet against the Internet.

David: That’s right. Never bet against the Internet. That's my takeaway.

Ben: I love it. Carve outs?

David: Carve outs, let's do it. I've got two. One very related and the other very unrelated except for my joke at the beginning of the episode. The related episode is a book, Phil Fisher's Common Stocks and Uncommon Profits, a classic. Really the counterpoints to the Buffett philosophy and the value investing tribe. Phil is the father of growth investing and this book was published in 1958 and Phil lived in the Bay Area here in San Francisco. I will confess I haven't finished the book yet, I'm still in the middle of it, but I am riveted. The only reason I haven't finished it is because we have to finish this episode.

It's amazing Phil basically saw the future of what tech company dynamics were going to be way back in the day. He writes about the value of corporate R&D and the paradox that you can't measure the value on the balance sheet of 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. A really great book. I highly recommend it. Also I believe it was recommended to me originally by Ho Nam, who you were just talking about.

Ben: My gosh. He's everywhere.

David: He's everywhere. Then my second carve out is the Xbox Series S. I finally got one.

Ben: Sweet.

David: I was specifically looking for the S because I'm 36 years old, I don't need the X. My eyes can't even see well enough for the great graphics, but the S is awesome. This thing is pretty cheap. I think it was $299, which is not that cheap but the S and Game Pass, it works out to, I don't know, what is it like $400 or something like that all in for a year. You get access to hundreds of games and all the best ones. I've been playing Halo, Master Chief Collection. It’s like Netflix for gaming.

Ben: That’s where your Halo reference came from.

David: That’s where the Halo reference is coming from.

Ben: I see.

David: It literally is like Netflix for gaming and it's so great. I haven't touched my Switch since I got it, highly recommend it if you can find a Series X or a Series S. Game Pass just rocks. I think it's on the Xbox One too. You can use it on the previous generation hardware.

Ben: Sweet. Alright, I have two because you have two, but they’re the most connected, my two carve outs have ever been. The first is I somehow never saw Goodfellas until this week and that movie is just so choice on so many levels. I mean it probably came just because, listeners will now, I just finished The Sopranos and that was my previous car out and wanted more. The cast has like 25 overlapping people. It's the same freaking people. It's amazing.

But it is a freaking work of art, for anyone who hasn't seen it. I mean it's like Scorsese at his best, it’s amazing direction, it's amazing cinematography. The dialogue is exceptional. It's just a tremendous story of this person's life. I've never been a gangster movie person. I never thought I was but this is so good.

David: Ben, the OG. I have not seen it. I have to watch it.

Ben: It's great. Obviously there's The Godfather. I've got a long rabbit hole to go down of truly OG.

David: Just watch one and two, don't do three.

Ben: Yeah. That’s what I hear. Then my second one is the Goodfellas’ soundtrack. It is hit after hit after hit. George Harrison, Eric Clapton, Aretha Franklin and the film finishes with Layla by Derek and the Dominos. That is just the best way to wrap up any epic story. I think if we had the rights…

David: Which Layla, the electric version or the acoustic version?

Ben: The electric. Although the acoustic is also great.

David: It's great. I'm an electric fan, though.

Ben: Yeah.

David: They're both great.

Ben: The electric creates more of an epic conclusion mood that is 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.

David: Great.

Ben: Actually, we probably won't.

David: I'm sure he’s listening.

Ben: For sure, but whether or not you're a fan of the movie or have seen it, go listen to the soundtrack on Spotify.

David: It's so great. Do you know when Goodfellas came out?

Ben: Early 90s. I want to say ’91 or something like that. Shortly before the Solomon brothers scandal.

David: Yeah. While Warren was still in his real heyday?

Ben: Exactly. Alright listeners, we're going to leave it there. With that, thank you so much to our sponsors. They've been wonderful, Tiny, Capchase, Vouch. Go check them all out. We have 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. Frankly, all that stuff is great and if you want to engage more deeply in the show, you should, but 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 getting to share these stories with new people.

David: Thank you for joining us on this journey. We're so lucky that we get to do this and it's so much fun. This has been a whole new level of fun, at least. I don’t know about you.

Ben: As we sit here at about 11:00 PM. We’re trapped in this room for four hours.

David: So funny.

Ben: It has truly been awesome. Alright listeners, thank you so much. See you next time.

David: We’ll see you next time.

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