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I'm going with just water as my beverage this time and no peanut brittle. Well, I do have a little heart attack last time after a lot of sugar. Yeah. I think you could hear it in my voice. I think I was a little... Like, manic. I'm going with a vitamin water zero because we're going to need the electrolytes for this marathon. Is vitamin water owned by Coca-Cola, baby? Coke, that's right. I was on my run this morning and I was listening to the Adam Mead book that I referenced and I ran by a Berkshire Hathaway properties like House for Sale. And I was just like, it's pretty hard to go through your day without using a Berkshire product or service. I'm so excited. I literally like woke up in the middle of the night last night and couldn't go back to sleep. I'm so excited. Really? Yeah. Welcome to season eight, episode seven of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert and I am the co-founder and managing director of Seattle based Pioneer Square Labs in our venture fund, PSL Ventures. I'm David Rosenthal and I am an angel investor based in San Francisco. And we are your hosts. Well David, here we are, the final episode in our Berkshire Trilogy. I feel like we were texting about this. I feel like we're like bungee developing the Halo franchise. Halo two was supposed to be the end. We're going to finish the fight. Last time was supposed to be the end. We're back for number three and Halo three was so good. It was so good. And this is 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, swarving through regulators and coming out unscathed. Question Mark. Yeah, when we last left off Warren and Charlie were in 1992 finishing up an absolutely monster run of returning over 27% per year for 22 years. Woo, spoiler alert. Not going to be the case this time. No, those were no doubt Berkshire's glory days. So today we will tell quite a different story, a story of what happens when a time tested investment philosophy gets confronted with systemic changes in the world like the PC and the internet and concurrently well the world was changing. So was Berkshire by virtue of their own success. So when you now need to write billion dollar checks to move the needle, there's only so many places you can go knocking and all those places are quite visible to other investors too. So today on part three, we will tell the story of the large and mature Berkshire Hathaway and examine what the future may hold with the next generation. Well listeners, are you an acquired Slack member? If not, come join us. 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 great discussion going on there. It's also great for beginners. So as always, come join us acquired.fm slash Slack. Our presenting sponsor for this episode is not a sponsor, but another podcast that we love and want to recommend called the founders podcast. We have seen dozens of tweets that say something like my favorite podcast is acquired and founders. So we knew there's a natural fit. We know the host of founders. Well, David Senra. Hi David. Hey, Ben. Hey, David. Thank you for joining us. Thank you for having me. Like how they group us together and then they say it's like the best curriculum for founders and executives. It really is. We use your show for research a lot. I listened to your episode of the story of Akio Maria before we did our Sony episodes this incredible primer. You know, he's actually a good example of why people listen to founders into acquired because all of history's greatest entrepreneurs and investors. They had deep historical knowledge about the work that came before them. So like the founder of Sony, who did he influence? Steve Jobs talked about him over and over again if you do the research. But I think this is one of the reasons why people love both of our shows and they're such good compliments is on acquired. We focus on company histories. You tell the histories of the individual people. You're the people version of acquired and where the company version of founders. Listeners, the other fun thing to note is David will hit a topic from a bunch of different angles. So I just listened to an episode on Edwin Land from a biography that David did. David, it was the third, fourth time you've done Polaroid. I've read five biographies of Edwin Land and I think I've made eight episodes of them because in my opinion, the greatest such a printer to ever do it, my favorite entrepreneur personally is Steve Jobs. And if you go back and listen to like a 20 year old Steve Jobs, he's talking about Edwin Land's my hero. So the reason I did that is because I want to find out like I have my heroes who were their heroes and the beauty of this is the people may die, but the ideas never do. And so Edwin Land had passed away way before the apex of Apple, but Steve was still able to use those ideas and now he's gone and we can use those ideas. And so I think what requires doing what a founder trying to do as well is find the best ideas in history and push them down to generations. Make sure they're not lost history. I love that. Well listeners, go check out the founders podcast after this episode. You can search for it in any podcast player. Lots of companies that David covers that we have yet to dive into here on acquired. So for more indulgence on companies and founders, go check it out. And lastly, to keep it short and sweet, if you are not an acquired LP, you should become one. Click the link in the show notes or go to acquired.fm slash LP. We can't wait to see you there. Well David, before you take us in listeners, as always, this show is not investment advice. David and I may, and I think have already told you some of us do have investments in the companies we discuss. And this show is for informational and entertainment purposes. Only David Rosenthal tell us a story. All right. Well, as you said at the top of the show, last we left Warren and Charlie in 1982. They and in particular, Warren are heroes. Times have never been better. I mean, it's great. Warren is a legend. Like he literally single handedly reversed a federal government decision and saved Solomon brothers. It's crazy. I mean, his stature is unparalleled. Like nothing that the finance world or the corporate world or the investing world or the business world has ever seen. He's the oracle of Omaha. People are flocking to the annual meetings. Literally the annual shareholder meetings. Of course, Woodstock for capitalism. Woodstock for capitalists are attracting thousands of people. And it grew. Of course, there was like a handful of people that would gather in a basement and then there was at a hotel and then it was at a larger venue. And by this point, he's entering arena territory. He's literally filling arenas like a rock star. And Berkshire Stock, the A, because they're only, well, it's not the A, because there is no A and B yet. Just Berkshire Stock passes $10,000 a share, foreign away the highest, surprised, 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. Oh, man. So we left on the Solomon Brothers saga and we're riding in with Bill Gates. Is that what you're telling me, David? We're riding in with BG3 Bill Gates. And he has been in the news a lot lately. Yep. Well, that's another topic for another day. So back in the previous summer of 1991 before Solomon, which would start going down in the fall of 1991 and wrap up in 1992. But before everything really kind of hits the fan, K Graham arranges for a 4th of July weekend bash on Bainbridge Island in Seattle. No way. What a wonderful place. Bainbridge is like one of the best places in the world. Yeah, it's a mere ferry ride from Seattle and then you feel like you're millions of miles away from civilization. Totally. Chey. You know, it bites 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, the second, better known as senior. And potentially their son Bill Gates, the third might drop by. That's a point during the day. And this is where Bill Gates, the third, I mean, this is like famously his sort of family home growing up. He learns to swim out there. His father is a very prominent lawyer and angel investor and sort of galvanizer of the Seattle startup community from the early days. His mom's on the board of the United Way. Yep. Yep. So, you know, this is long before Microsoft, but already sort of a prominent family in the area. Warren is a little reluctant to go on this trip. You know, this is not sort of his thing, but as he puts it, quote, anything for Kay. So he goes out. He joins Kay and a few others at this weekend. Similarly, Bill Gates, the third 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, well, meeting a guy who just invests in money and picks stocks. Of course, he's talking about meeting Warren. His parents are saying, 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. Quick side note, watching these old videos of Gates, I mean, we're so used to his polished image now. But when you go and you watch sort of videos of him from this time frame, especially in the early 90s, he's obviously so brilliant, but he's mad awkward. Yeah, and he's vigorous in the way that he sort of attacks lines of questioning and engages with challenges and it's assuming you are not the subject of his eye or it is a really fascinating thing to watch and totally different than the Gates you're sort of familiar with now. Yeah, that's a good fight. So Mary, though, forces Bill to come out. She still is mom. But what he's going to do, he's going to come later in the day. He's going to fly in on a helicopter so that he can, you know, get a good like half to three quarters of a day work in. This is July 5th at Microsoft. I mean, you know, we've talked about this on the show, but like Microsoft in 1991, all throughout the 90s until the DOJ case, it was intense. Like they were killers there. Yeah, you should think about it like Uber in 2016 totally. So Bill's plan is he's going to fly in on the helicopter and then he's going to make the helicopter wait there, he'll eat dinner and then he's going to fly out and escape, go back to work. So he's introduced to Warren and Warren immediately asks Bill what Bill thinks of IBM and whether they're going to do well in the future. I cannot believe we're going to get to this much later in the episode, but Warren is already obsessed with IBM. Like 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 it'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. 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. Totally brilliant business strategy. So Gates then, he's probably pretty annoyed by this first question given that he doesn't care about stocks. He's like, there's two. He's buy these. Don't do anything else. He's probably just listening to Bill Gates here. Gates turns around and asks Buffet about newspapers because Gates is probably already starting to think about coming after newspapers as part of I think, I don't know if like, Incarda existed already at this point, but Microsoft's spinning up all sorts of stuff. Incarda was thinking Encyclopedia, but then they would launch live and with the coming of the internet and all sorts of stuff. They were launching these things interestingly enough in like the 93 to 96 timeframe and there's this unbelievable interview that Bill Gates does with wire. I'll look it up and see if I can link it in the show notes where he's basically combatively arguing that content clubs could never be Microsoft's next business that they're just not big enough. You don't understand how big Windows is. These are multi-billion dollar businesses and unless we become Disney or something, content clubs are just never going to cut it. It's fascinating looking at that aggressive reaction by Gates and how he feels versus the market cap of say a Netflix today or how important it is to Amazon Prime Strategy to have a content club as we talked about with Brad on the last episode. Gates is at this point thinking, oh, we got a tiger bite of tail with this Windows thing. There are a few other businesses as big as this one. Let's just go for the 10 plus billion dollar opportunities. So here's where Buffett sort of surprises Gates. Buffett is like American newspaper man number one. Like, he started as the vapor boy. It's the canonical franchise business. He owns it based on the board of the Washington Post, owns the Buffalo evening news, all this stuff. He's like, look, today newspapers are the best business out there. I'm thrilled to own them. But I got to be honest with you, I am starting to worry about their future. He doesn't know anything about the internet. He's actually not worried from that front. But he says, you know, I'm worried about the encouragement of TV and in particular cable television and people's news habits shifting to television, encouraging on newspapers. And Bill is like, hmm, okay, well, interesting. That's not quite the answer I expected from Mr. Buffett. So they start talking and they sort of fall into conversation and knowing the two of them a little bit, not personally, but through the show. You could imagine that they just sort of spend all day talking and like other people are there, Kays there, Bill's parents are there, a bunch of other, you know, Seattle area, sort of dignitaries stopped by two of the future founders of Madrona stopped by Bill Ruckles House who was an amazing man. Part of the Saturday night massacre in the Nixon administration, the first head of the EPA, Jerry Grinstein who was CEO of Burlington, Northern. At the time. No idea. Oh wow. Drops, he just drops by, lives in Seattle. Didn't he go on to become the CEO of Delta Airlines? He would. He would. Another, first while later in life, we're an investment. Yep. We'll get there. But Warren and Bill just totally ignore them. They're like super engrossed with one another. So at dinner, they're all there. I guess they're forced to like sit down and join the group for dinner. Bill Gates senior asked this August group assembled there. What factor, he asked the question to the table, he says, what factor does everybody think has been most important in achieving, you know, where you've gotten in life and their people at this table, we've gotten very far in life. And Bill and Warren both immediately reply with one word, which is focus. So these guys are like, they are two peas in a pod. After dinner, the sun goes down, the helicopter leaves, Bill Gates, the third stays. Wow. At least, Ben, today. Yep. Warren has drawn him away from his work. Amazing. So they become fast friends. Buffet 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 or whatever the first trading day is after that. He makes another of his fateful, immediate split second gut stock purchases. Tell us about Microsoft, David. He did buy Microsoft just like he did with Geico. Oh, I actually didn't realize he did. He bought 100 shares of Microsoft for his personal account so that he could keep up with his friend Bill Gates. Oh, isn't that ridiculous? And he buys zero Intel shares again, even giving his history with Intel and noise, which is in retrospect, that feels like such a fraught strategy because not only are you losing out on the benefit of all the upside of actually being a shareholder in your vehicle, Berkshire Hathaway, you now want to spend a lot of time and dive deep with this person. And he's an insider. And now you personally own shares in his company and you're 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, completely confounding. But he does invite Bill to join the Graham group, which is, you know, by now the bottom of group, his group of cronies. And at the next meeting, which I think is in Vancouver, one of the sessions, they're all kicking around, you know, their favorite stock ideas and Bill Ruin from the SCOA fund throws out Kodak as a name he's thinking about and barely gates immediately responds, Kodak is toast. I love it. It's so great, so great. And of course Tom Murphy, Murph is there and Kays there as well, both television, you know, media magnets. And they ask Bill whether he thinks television is toast to and Bill responds, this is a quote from the snowball. No, it's not that simple. The way networks create and expose shows is different than camera film like Kodak and nothing is going to come in and fundamentally change that. You'll see some fall off as people move toward variety, but the networks own the content and they can repurpose it. The networks face an interesting challenge as we move from the transport of TV onto the internet, 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 1990 really a depression and gates just described like the next 30 years of media in the internet like right there. Wow. Isn't that unbelievable? Yeah. I think it's actually a Buffett quote predicting rain doesn't count building the arc does. 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. 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. The DJ they were going to extend their advantage to media. Yeah, exactly. They weren't going to embrace and extend there. Okay. So we're going to come back to Bill in a minute and there's a very, very important reason why a it's just like he has such an impact on Warren's life in so many ways as we'll see throughout this episode. But I think this is also a really good lens to view this part three of like let's contrast Bill Gates and Warren Buffett as we go along here. So there is one more than one but one in particular other very famous Warren Buffett, Berkshire Classic investment that we have not yet covered in our two parts thus far. Yeah, you talked about it in the cold opener in the last episode. Well, you actually haven't touched it in the real story. I know. I know. Of course we are talking about Coke and Warren's investment in it, which is just classic classic Buffett in so many ways. It's just unbelievable. So 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 like all of his great investments come from his neighbors in Omaha and their kids played together at this neighbor is named Don Kio and they both live on Pharnam Street in Omaha. Side note, which is why Pharnam Street is a and the knowledge project and Shane and everything he does over there is called an amazing name. Pharnam Street. So Kio was a salesman for the Butternut coffee company at the time and he had six kids and the story goes that as Warren is starting up his partnerships, he asked on how he's planning to save for college for all of his kids. He's thinking like, hey, I'm going to get down 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 Suzy and how he and Peter, he's there and he doesn't like bother us, but he's at home. So Don is like, well, this guy clearly doesn't work very hard. He's always at home during the day. I'm not giving him my money. I'm not giving him my money. Su'd after that though, in 1961, Butternut gets acquired by the Duncan Coffee Company. Don moves to Houston, leaves Omaha with that. And then shortly after, in 64, Duncan gets acquired by Coca-Cola and Don moves to Atlanta. So fast forward to the mid-80s. By this point in time, Don is president and COO of Coke. To the Tom Murphy of the legendary Coke CEO at the time, Roberto Guizetta, who is incredible CEO, Cuban immigrant, ran Coke through all of the great ascendancy of the company. At this point, now Warren is a man about Washington, thanks to the Post in K. And one night, he gets invited to dinner at the White House. I assume I do thanks to K or as her date pair or something. And Lone Behold, who shows up at the White House, but Don. His neighbor from... That's crazy. Yeah, they reconnect at the White House. His neighbor from far industry. And Don's like, oh yeah, like I'm COO of Coke now. And I take it that Warren has fully switched from Pepsi to drinking Coca-Cola at this point. No, not yet. Oh. No. Don converts it. Warren is like, hey, you know, really great to reconnect. I remember you didn't give me the money back in the day. How you feeling about that now? I don't know what he said now. Warren says, no, you know, hey, like that's great. I'm happy for you. I'm kind of a Pepsi guy, though. And really what I like to do, I have Pepsi all day, every day, I put cherry syrup in, and it's great. And 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. Oh, that's incredible. They just launched. I think they launched it in like 83. I want to say maybe sometime around then. So I didn't realize the fact that the coffee company got rolled up into Coke and I presumed the 70s, they were conglomerating earlier than I thought. I mean, I knew obviously Coca-Cola is a multi-hundred year old brand, but they were single product for the majority of their life. I assumed it was like the 90s and 2000s when they started becoming this big portfolio of beverage brands, but it sounds like it was much earlier. It was. Yeah, no, they were buying other stuff. I don't know how big it was versus the Cola business. But anyway, with cherry coke, Don convinces Warren to switch and that of course causes Warren to start thinking, well, maybe I should take a look at investing in Coke. He becomes intrigued. As he digs in, I think this was like 85 or so. Maybe it was in 83, I think. A couple years earlier, they had launched Diet Coke. Diet Coke was like a monster. Coke, Cola, now classic as we will get into in a second. It's great, but Diet Coke is huge. Maybe the most successful beverage product launch of all time. It's a blockbuster. Warren's intrigued, but he thinks, hey, stock prices kind of high. I'll just keep an eye on it. And then New Coke happens, which I knew about Night Red About, but do you remember this been, how do you mess this up? Like if you're a company like Coca Cola and you got all these big brains around the table and you basically have like a thing that's a trade secret. You don't have any IP protection around it, but you have the magic formula and you have the brand, not yet world renowned, but sort of nation renowned brand that is synonymous with like your sense of patriotism. That's associated with one particular very odd, very well balanced flavor. How on earth do you replace that? What are you thinking? I think we will, to preview a bit of it here, Warren would always say that the, just get everybody in trouble in a minute. But thing he'd like to about Coke is that the business could be run by a ham sandwich. Like, you know, literally just like you know, do it. I haven't had it yet, I think they're probably just so bored that they're like- At least the ham sandwich wouldn't mess with the golden goose. Totally. You know, to be fair, this is a story is they ran all these blind taste tests and Pepsi had been, you know, making headway with market share. That delicious, lemony, weird, sweet thing they had going on. They try new flavors and one of them tests really well. People like it better than the old Coke recipe. They literally pull the old Coke recipe off the shelves and introduce new Coke and it is a 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 rumors starts going around that Ron Pearlman, same dude from Solomon, is circling. The Revlon gone activist investor, how could we have forgotten about this in the last episode? He was the villain in Marvel. That's right. I remember way back in the day our Marvel episode, I forget that he owned it for a while and ran it into the ground and yeah, Pearlman, what a guy. So rumors ago around and he's targeting Coke now in the wake of the new Coke disaster. Hunter, 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 friend and Solomon, Goisetta and Kio asked him to join the board, which of course he does. The side note, the Coca-Cola board is where Warren meets Herb Allen from Allen in company. And starts going to Sun Valley every year. So this is really, everything is coming up roses for Warren here. Man, to like a company and be sort of prospecting it and just to watch them go through the new Coke thing and just be sitting there grinning like an idiot like this is my chance. The trick is knowing how to feel those in the moment. You know, when you're not catching a knife that is falling, but rather buying the dip, as they say. Warren Buffett, the OG by the dip investor. And to add a little more nuance to that, I mean, he does have this great strategy of an identifying an opportunity where a company has its back against a wall because there are activist shareholders or there's a deal that was on the table that's fallen through and suddenly they need cash fast. And he like very much uses this lack of necessary approval by committees and red tape to just come in with cash, making offer he feels good about. It's sort of that better to be approximately right than precisely wrong kind of that approximately right eye eyeballed it. It looked good. I came in. I bought it and now I'm a big shareholder and it was a pretty good price. Yeah. Man, I hope at some point that Warren and Charlie send a case of wine over to Ron Pearlman because like man, they got some deals because of that guy. So in the 1988 Berkshire letter to shareholders, Buffett announces the Coke investment saying of it, we expect to hold these securities that securities in Coke for a long time. In fact, when we own portions of outstanding businesses without standing management, our favorite holding period is forever. And by the mid 90s, a few years later, Coke of course has 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 like everybody in the world drank Coke. And this was part of the investment thesis too, that there was this sort of 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. It's a good work if you can get it for ham sandwich. So Coke is printing money within a decade, Berkshire is up over 10X on Coke. And since then, so that was from like mid 80s to mid 90s, since then Berkshire is only up less than 4X on Coke from that point in time over the next. Really? Yeah, what is that? 30, you know, 25 plus years? Oh, that's wild. Yeah. So Terrence in the first decade and 3.5X in the next 25, which would sort of pressage things to come. Man, compounding large numbers, David, sure is hard. It turns out it is. Well, while we're on this Coke thing, before we sort of leave it, I do think this is a good moment to address the value of brand. We haven't, we've sort of alluded to moats, especially in the Seven Powers discussion in our previous episode. We haven't actually described how Warren thinks about moats and sort of brand as a moat. In the 95 annual meeting, he has this great quote where he just lays it out for investors. And it's one of these rare moments where he describes the investment strategy. I think more than he necessarily intended to, but he's off the cuff. He's answering a question and he says, what we're trying to find is a business that for one reason or another, it can be because it's the low cost producer in some area. It can be because it has a natural franchise because of surface capabilities. It could be because of its position and the consumer's mind. It could be because of a technological advantage or any kind of reason at all that it has this moat around it. And I just always thought this is like 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. Yep, totally. Like the moat exists to clear how it works. It's straight over tackle. You're taking this international run in the same playbook. Yep. Great timing coming in in the new Coke disaster right before international expansion. Well done, Warren. Okay, David, you did mention that Coca-Cola is only up another three and a half X after that initial 10X. When we look at that sort of late 2000s time, looking at maybe 2009, Coca-Cola did represent close to 20% of Berkshire's equity portfolio construction. So like that, what 35X on their initial investment of the stuff that they own that are public markets before they wait in the Apple, which we'll talk about later, Coca-Cola is their biggest single holding of stock that they don't wholly own into business. Yeah, it of course no longer is, but yeah, it's, I mean, this is huge. I mean, this is one of the key legs of the Berkshire Stool is Coke and also to speak to how different the company is now. You can barely see the Coke equity value in there. Yep. Okay. So back to the meeting of these two businesses here. So in 1997, there is this amazingly perfect moment. I think this moment kind of marks a major transition point in business and the industry in the world and the rise of tech and the rise of the internet and how much the world is going to change. And it reminds me of, there's the famous quote in history. I think it's about Germany in like 1850s where the quote is that German history reached its turning point and Germany failed to turn. This applies to Warren here. Investing in corporate history reached its turning point and Warren fails to turn. So summer 1997, we are at of course the Allen and Company Sun Valley conference and there is a panel discussion hosted by Don Kioh with the participants, three participants being one Warren, two Roberto, Guazetta, the CEO of Coke and three Bill Gates. And so here it is. Old school like the consumer brand, Coke and 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, you know, gentile 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. The moderator of the panel is the president of Coke and you've got the CEO of Coke as one of the participants. Yeah. And then the other participant is like the largest shareholder and Coke. Right. And Gates is friend. And so Gates says that like, oh, you guys got it easy. You have 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. Like indeed, he says well before he gets to age 60 because you need a young person in charge who can adapt and navigate the constant change in the technology business. So the other panel is Roberto is 65 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. And Roberto sort of has the sort of stereotypical like fiery Cuban temper here. He is hugely offended by this. And 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, like bills my friend like I just, you know, he's billy. He's kind of like a wild animal. He can't like bring him in public too much. But the thing is like, you know, this is a major social faux pas on Gates's part, but like he's totally freaking right. Well, I mean, he's right. And it is clearly this seminal moment for Warren where he's sort of like looking left and he's seeing the past. He's seeing the things he already owns. He's seeing these cash flowing, profitable, durable businesses and he looks right and he's seeing something he doesn't understand with Microsoft and it's outside a circle of confidence. So it's in Charlie's too hard pile to use a Charlie ism there. And so he's team coke, he's team durable, understandable, old world businesses. In this era, there's so many opportunities for him to run toward the fire in technology. He just chooses not to. He just runs away. Alice has a great quote in the snowball. She says, Buffett avoided technology stocks partly because these fast moving businesses could never be run by a ham sandwich. He thought it no shame to have a business that could be run by a ham sandwich. He wanted to get Berkshire Hathaway to the point where it could be run by a ham sandwich too. So now we are today. He was gone. And like I get it, right? Like he thinks, you know, I used to think this too, actually. I was like, oh man, I really want to find businesses that like a monkey could run them. The thing is though those businesses don't exist anymore. You know, they exist like coke still exists and it's fine and plenty of these other businesses, but Gates is so right here. The future is change and the most valuable companies of the future and the most value that's going to be created are going to be created by companies and by leaders and entrepreneurs who are able to navigate change. Like you mentioned what you just had Brad on in our last episode, Brad's down to talk about Amazon on bound. Like you read that book and you like, you're just kind of like an odd like 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. 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 me me in our culture today that that he sort of is not a tech investor that it's worth unpacking it a little bit and he did have this interesting observation. I think it was in the late 90s that we're going to talk about the dot com bubble here, but that there aren't any internet companies that have ever hit a hundred million in a year in profits. So 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. It's speculating in a risk-managed way by putting your money in great people going after markets with promising futures, the sort of secular tailwind argument. In fact, Buffett has a very particular way that he thinks about valuation that is highly sensitive to how certain the future is. He's willing to pay up for very certain futures, which is why he values brands so much. And if you think about this as like an expected value equation where you have two components, the value of something, if it happens and then the probability that it will happen, 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 board's constantly rearranging and you sort of need to make a bunch of high beta bets. Yeah, totally. I think the problem is that now we'll get to now later in the episode, but the world is just evolved to the point where like, that's the way the world works. There's so much change and it's such constant that even Amazon, even Apple, even Microsoft need to be thinking that way. And if you don't think that way, right, you can be Coke, but like, Coke's value has only 3.5 X in 25 years. Those are the businesses you're going to get. So our friend, Andrew Marx, who's a great VC at TQ Ventures, he's actually known Warren and studied him for basically his whole life. He told me that I think the best way to put this about Warren that I've ever heard, which is that Warren was the world's greatest status quo investor. Like as long as the future was mostly going to look like the present, Warren is a savant at that type of investing. Like the future for Coke is mostly going to look like the present for Coke. He knows how to value that. He knows that they're going to recover from new Coke. He knows that there's an opportunity internationally. He can invest in that. He can see that. Right, so you're saying that of course the business will change and evolve and grow, but the chessboard, the world is the test world is reasonably stat is reasonably static. Yeah. And that makes sense. Like for most of his life, that's been the case. Right. You hear comments like people are always going to love candy. People are always going to like Coke. Like it's not a bet on the world changing. It's a bet on someone operating a business really well in the world. Yeah, he used to say that he was absolutely certain as long as Cola doesn't cause cancer, that bored people are going to swallow Coke tomorrow than they did today. Well, it turns out sugar is kind of linked to cancer and that's kind of not a good thing. The world changes. I don't think this is the thing where now this is what this moment to me represents this panel at Sun Valley in 97 is like this is the transition to a world where more change is happening than not. Yeah. It's like that 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 fifties in the early nineties. It was that the rate of change hadn't compounded at the point where it was suddenly like the whole world is changing all at once. You have the arrival of the internet, the cycles of innovation are getting wildly compressed. I mean, we live in this world today where there's huge changes on the sentiment of the future, like multiple news cycles per day in a super high fidelity high frequency way. That was just not. I didn't want to say it. You said it. That was not the not at all the world that he invested in for the first 30 plus years of his career. Totally. So Warren definitely doesn't see this yet, if ever. But for the moment, Gates gets this certainly some other people in tech and in Silicon Valley and in Seattle, I get this, that this is the world that we're moving into. But most of the world doesn't. So for Warren, he's just like, OK, back to business as usual. He is though concerned about the tech bubble that is forming that he had somebody other see. And by this time by certain late nineties, the Berkshire share price has gone to from about $10,000 a share to 34,000 dollars a share over how many years from 92 to this is probably like 98 or so. Six years, three and a half X not bad. Yeah, not bad. Forty billion dollar market cap for Berkshire, but they've never split the stock. So people in this sort of, you know, part of the tech bubble craze was like day trading and people are now internet trading and like e-shares. I don't know if his e-share. E-trade, yeah, is happening. People are setting up publicly traded investment trusts that like mirror Berkshire's equity portfolio, like have like a shadow Berkshire. This is so brutal. I mean, this is like for the person that wanted to carefully control investment in the company, someone says, oh, well, if you can't buy an actual share of Berkshire, you can buy a fraction of share from me and I'll own a bunch of Berkshire underneath and I'll be like you own it. That's like Warren's absolute worst nightmare. Total labor. I think both these things are happening. So I think obviously there's demand from all this new retail investing to own Berkshire shares, but most people can't afford a $34,000 share than or now. I think two things are happening. One is what you're saying, which is people are buying Berkshire shares, putting them in a trust and then selling shares in that trust. The other thing people are doing is they're just like reading every, every, you know, 13F that comes out and 10K and 10K. Oh, and buying the same securities that Berkshire is buying and doing the same thing. What a ham-fisted way to do it. Totally. So you don't have the benefit of the insurance flow and you don't have the Holy Oasis. Totally. And the lag, it's going to be this thing where people feel like they're buying Berkshire, Berkshire associated, but they're actually buying well after Berkshire's already moved to the price of that stock. Oh, wait a minute. So Warren finally comes around. He really thinks like, okay, people are getting swindled. It's like, we, I got to find some way to put a stop to this. I don't want to split the stock. And this was a meme at the annual meeting. Every single year someone asked a question, are you going to split the stock so that more people can invest in? He would always respond to something like, no, I love our current investor base. Why would I do anything that would change the great set of people that we already have as shareholders in this wonderful company? Yep. So he comes up with a brilliant idea. He decides that he is going to do a stock offering for a new class of shares. He's going to call the baby bee class of shares versus the newly recrysened Berkshire A shares. And these are going to be tracking shares that are going to track one-thirtyth, one divided by three zero of the A shares in terms of value, massively diminished voting rights. And he's going to sell this in a new offering that is actually open ended. So there's no fixed amount. It's not like I'm offering X number of shares. He doesn't want to supply demand thing to happen. He doesn't want basically like micro economic forces to happen and drive up the price of the bee 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. As people want him by. Even if you hoard him, it won't benefit you at all. Totally. Which also means however much demand there is because it's an offering, Berkshire is going to get the cash. This is like even better than float. You'd ever have to get the cash back. They're raising their series C. Yeah. I bet Buffett would go to the mat with you on. It's even better than float. He probably would. I mean, he is deleting the value. Yes. As a quick aside, I think this bee shares 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 they can issue and dilute the company. So Buffett notoriously likes using cash versus shares since he thinks the existing portfolio of Berkshire businesses are far better than pretty much every other business he could buy. Given that, why would he trade shares of these amazing businesses for something that who knows what it is? Maybe good, but it's not as good as my treasure trove that I already have here. They use cash, obviously, whatever they can, except when their shares have been richly valued by the market. Plus, our phenomenal currency to use after it crosses a certain point. So in 96 when he does the bee shares offering, normally Berkshire shares trade the A shares trade somewhere between like one to 1.5 x book value of all Berkshire's holdings. Well in this case, the moment they decided, okay, it's worth it for us to dilute our shareholders and do this new financing event and do the bee shares thing. It was trading in almost twice book value, was like nearly an all time high. And so he gets all the credit. It's almost like the Bentom's and 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. And they are wonderfully transparent about this as well because they know there's going to be crazy demand for the bee shares kind of no matter what. So they write all these hilarious disclaimers. I'll just read my favorite one. Mr. Buffett and Mr. Munger believe that Berkshire's class A common stock is not undervalued at the market price stated above. 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. Yes. It's like Eric Yuan going on Bloomberg and saying it's too high. The price is too high. Price is too high. Oh my gosh. Wow. This is great. And of course, you know what we're going to transition to next. Let's see. Out of 96, I think we're talking about 98. 98. Are you keying off my buying something with shares? Yes I am. Are we going insurance? We're going insurance. Tell me about January, David. Let's talk January. So yeah, we're in hated issuing stock, but he's like, the stock is so overpriced. I said it not him. Note that he didn't say it's overpriced. He said it's not underpriced. Exactly. So in 1998, it makes another shocking announcement. Berkshire is going to buy January, one of the world's largest reinsures for $22 billion. Remember just a few years ago, it was like huge news when Buffett would put $1.2 billion into Coke or, you know, I think buying the rest of Geico for $2 billion. That was huge. That was the biggest deal they'd done before. Yes, so this general reinsurance purchased by further largest acquisition ever. Yep. It is the elephant gun hunting phase of Horan's acquisition career. So yeah, it's literally the largest deal Berkshire has ever done by a factor of 10. And he does it with all stock. Not a dollar of cash goes out the door. He trades 20% of Berkshire's market cap for January. Wow, spoiler alert does not go well. Famously, when Charlie is asked about the deal when it gets announced, Charlie is like the bluntest character as we have seen. And as we will see at the end of this episode, Charlie's response of the deal when asked about it is that Warren only called him, quote, very late in the game on this one. So he's just kind of like, I'm washing my hands of this. And I think if there's one lesson in this series among many, it is that if Charlie Munger is your business partner, you should probably always call Charlie early in the game, not in the game. See, Solomon Brothers. And so what was the really alluring thing about buying January? Because it massively multiplied the amount of float at their disposal by buying. Yeah, they got a bunch of float. To be honest, the alluring thing about buying January was that Warren thought that Berkshire Stock was overvalued and he wanted to take advantage of this moment in time and use it to do a big acquisition. And he also, this is a core analysis in the snowball. Most of not like all of Jenries investments, because as we talked about insurance companies, with their float, they invest the float in securities and Warren and Berkshire prefer to do that in equities. Most of Jenries investments were in debt and relatively conservative bonds and the like. And so Warren's worried about a equities crash coming along here because of the tech bubble, he wants to essentially delete Berkshire's security holdings. He doesn't want to sell security hold 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? And so, I think that's what I'm going to do, this all stock equity deal by Jenry and essentially get a portfolio of $20 billion of bonds that are going to be insulated from equity prices. Boy, that is some financial jujitsu engineering right there. He definitely overthought this one because Jenries sucked to be blunt. I will say that's funny. You said that I just pulled up the historical price to book ratio of Berkshire. I think the only two times that it was meaningfully above 2x that the stock was trading above twice book was right around 96 when they did the b-shares and then right around 98. So I think he definitely felt like those were great times to be using Berkshire's stock for. Use the currency. Yep. So, yeah, Jenry. So 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 see. He hired a jeet jane to run Berkshire's insurance businesses. A jeet is like, this dude is a monster. You have no idea how unbelievably great a jeet is. He's an underwriting savant. Like this guy can like hear a crazy story that you tell him like, what if I'm going to strap this guy to this rocket and then we're going to shoot it at a hurricane and you know, I want insurance that bypasses the force measure and that can he'll give you a price for it. He's like, I know exactly how to price this. He is jet-jackering role reincarnate. So a jeet group in India, he went to IIT in India and then he worked for IBM. Maybe this explains Buffett's fascination with IBM. A jeet came out of there. It's got to be good. Then he goes to Harvard Business School and then he goes to McKinsey and then he joins Berkshire. You were talking about him. He's an insurance pricing savant. That is true. There's probably never been anybody better than a jeet at pricing insurance. He is also hyper aggressive. If a jeet had decided to be a venture capitalist, he would have been Bill Gerylley times ten. Hyper smart, hyper aggressive for basically his whole career. I doubt this is still going on. Probably a Warren's request not a jeet. But for decades, every night, I don't know if it's every weeknight or every night of the week, they would do a call, a nightly call at 10 p.m. to go over the insurance portfolio and all the deals that a jeet was doing. He's just a monster. So when he joins, he takes over all of Berkshire's other insurance businesses besides Geico to start. And then he starts a new re-insurance business within Berkshire, like himself. This is the great entrepreneurial story within Berkshire. And famously, he takes out an ad in Business Insurance Magazine, the full page ad when he starts this saying, we are looking for more, more casualty risks where the premium exceeds $1 million. Nobody does, this is the insurance business. This is crazy. Nobody does this. So he's basically saying, I will ensure things that other people won't ensure because I'm more confident in my ability to price these weird, crazy expensive policies. Yes. And the value of the premium for the policy, I want everything. I want the craziest, highest value premiums in the world that other insurers, like a jeanry and Swissry and they're like, would never do. They're just like, that's way too much money at risk. Right. They're factories. They're looking to identify the same thing over and over and over again and ensure it. These actually have a very fun name too. These are called supercats. Yes. Supercatistrophic insurance policies. Supercat is a really cool name for a pretty boring thing. Totally. I mean, this is stuff like, I think the story goes that after 9-11, where jeanry would take huge losses in 9-11 and Berkshire and a Jeep would be fine. But after 9-11, a jeet starts going around the world and like, writing terrorism insurance policies left and right because like, everybody wants them now. Everybody's scared. And he's like, oh, great. This is actually not that risky. I'm going to make a killing on these super high premiums, ten to millions of dollar policies. Yeah. The crazy thing is like that January was basically mismanaged and they had these policies written in 9-11 that had holes in them that they shouldn't have where they took on risk that they basically weren't being paid for and then just got destroyed. Yes. So here's what happens. The obvious thing to do in 98 when they buy jeanry would be to just give jeanry to a jeet. Like, a jeet is the greatest of all time. Give him more. Instead, Buffett runs the white knight acquireer playbook even though he has no reason to now. You keep running your own business. Tells management. Even though they're not the founders of the company, he's like, we love you. You keep running your own business. You do what you do. You know, I'm going to be, this is a quote from Warren, strictly hands off. Yikes. So immediately after Berkshire Buyers' jeanry, news hits that jeanry is a counterparty on a massive insurance fraud scheme called Unicover that I believe it was residential insurance. They immediately take a $300 million underwriting loss. This is like within the first week after Berkshire Buyers, the company. Remember Buffett's Rule Number One, which is never lose money. Never lose money. Rule Number Two, see Rule Number One. Yeah. Well, first week on the job, you'll lose $300 million. Great. Then they do a bunch of bad deals, ensuring Hollywood box office receipts for movies. That loses them. I think about another billion dollars. It's rough. Then 9-11 happens. They lose all told close to another $2 billion in 9-11. And then finally, and probably the worst offense given the Solomon history in the early 2000s. So a couple of years after the acquisition, jeanry gets involved in a major accounting scandal with AIG, propping up AIG's balance sheet. Nobody ended up going to jail on this one, but basically massively hurt jeanry's reputation and brought the regulators all over them. And this is the one thing Warren wants less than anything. Eventually, Warren would house the old management fire them and bring in Joe Brandon and Ted Montross to fix it. They do a good job. And then eventually, Warren does hand the whole thing over to a G in 2016. So as he does now, running jeanry in addition to everything else, wild saga here. What a mess. What a mess. All right, David, take us on from jeanry. Where else we going? All right. We can't move on fast enough for Warren's perspective. So before the tech bubble pops, he does one more surprising to outside watchers move, which is in 1999, he buys a utility company. For sure, buying a utility company. This is what Warren has come to. Like the light company that provides electricity. He buys mid-American energy holdings. And people want to know why is Warren buying a utility, Alice writes in the snowball. Warren was already being ridiculed for his refusal to buy technology stocks. Now he had bought the light company. How dull. The energy business, I think, ends up being fine for Berkshire. Like, it's another fine investment. He doesn't lose money. They're fine. It does come, though, with two managers that Warren seems to greatly admire. By the way, we talked about this in the pre-show, but we haven't yet talked about it on the episodes. Now you see Berkshire Hathaway real estate agents all over the place. Oh yeah. That came with mid-American energy holdings. They also had a real estate brokerage. So weird. How does that work? Like, my understanding of the electric company is that it's like a public utility. It's market by market, then, where some of them must be private companies. Yeah. I don't know exactly. I mean, there are lots, obviously, lots of utilities, separate utilities in different geographies all across the country. But yeah, somehow they had a real estate brokerage in there as well. So there is CEO of the company, one David Sokol, and the number two. Remember that name? Remember that name. His number two guy named Greg Abel, the just announced. You need to remember that name. Future CEO of Berkshire Hathaway. Yeah, that's how they come into the company. We're going to hear much more about them later. So finally, all this tech bubble stuff comes to a head in the 2000 annual meeting where Warren and Charlie are just getting pummeled by questions from shareholders on stage in the arena asking, what on earth they are doing? Why do they not own technology stocks? Everyone else is getting these five X's in a year. What are you doing here trying to make me 15 percent? You're making me poor. Warren says, quote, I don't want to speculate. About high tech. And then of course, he goes on to speculate and he compares the whole thing to a Ponzi scheme. And then Charlie jumps in. This is my favorite. This might be my favorite Charlie moment of all time. He jumps in and he says, the reason we use the phrase, wretched excess is because it produces wretched consequences. It's irrational. If you mix raisins with turds, they're still turds. This is all time great, mother of a quote. I don't know if there is a video of this, if there is a haven't seen it, but I can just imagine like the entire arena just being like, shocks like, did Charlie Munger just say turds? Like what? I think Alice actually says that lie to the snowball. But if you think about what each of them is saying, it's telling and it's actually quite different. Warren is saying, I don't understand this stuff. I refuse to engage. No, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no. It's like, you know, the whole tech bubble thing pops and it will, you know, the splatter from the turds is going to get all over your raisins too and drag it down. And when Warren says that, you know, I don't understand this thing, it's a Ponzi scheme. He's 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 it a few more levels. Often revenues don't exist for companies that are going public, which that you only see in space or battery technologies or something now. But then even further, some of these companies are selling products, but they have upside down unit economics. And so they're not even gross profit positive. So there is all sorts of, you could sort of understand why you would look over to Charlie and have him saying there's turds in here, because truly there were. I mean, it's crazy some of the stuff going public. Then you look over to Warren and he understands all the financial infrastructure around it that the banks are incentivized to do it, that the earlier shareholders are incentivized to get marked up and get it public and then sell to get it off their books. You know, there was Ponzi scheme like things going on because there was so much rampant speculation about raisins and turds. Yup. And so actually I was curious about this. So 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, the A, if you could buy a fractional share of the A for a dollar, that dollar even today in May 2021, so 21 years later, invested in Berkshire would outperform the NASDAQ, it would definitely outperform the S&P, and it would very slightly outperform Microsoft. So if you would invested a dollar in Microsoft in, you know, call it the first half of 2000 and held it to today and you'd invested a dollar in Berkshire, you would be doing better in Berkshire than Microsoft. So like Charlie's right here, like the splatter from the turds is gonna get over the raisins, all over the raisins, including Microsoft. But if you would invested a dollar in Microsoft versus Berkshire at almost literally any other point in time, either before back in like 97, when the famous Sun Valley panel happened with Coaghan Ham sandwich and Bill Gates, Microsoft would be crushing Berkshire if you had put dollars in at that point in time. Hello fascinating. If you were to invest a dollar in each just a year later in 2001, you would still be doing better on Microsoft and then of course, the farther you go along. Obviously, anytime since. Anytime since you're gonna be doing much better. Does this dynamic play out earlier too? Or like what did it IPO in like 80 to 83 somewhere in there? Yeah, somewhere, I mean, they're obviously like, we put a dollar in Microsoft early. In the early days, right. Man, it's funny that the dynamic exists twice where if you're super early on Microsoft and of course it's gonna multiply it in say number of times and now, but the run up in the last five years has also been so crazy that if you invested any time after the.com recovery, which only really was like a year. Yeah. Then yeah, it's gonna outperform Berkshire. It is, it's both like Charlie is right here that like yes. In that exact moment. The bubble popping is going to drag everything that is good down with it. But we're almost really at the point where like it doesn't even matter anymore if you had invested at the top of the market in the tech bubble, you'd still be doing better than Berkshire except for like a very narrow window of time. Yeah, another point that they're both 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 you know, the hardware makers, though as like 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's gonna burst, he doesn't say he's calling it top but he sort of beats around it a little bit and says he's not interested in buying right now. I think is 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. And today, you know, there are only a few. And so just because... He's this analogy at the annual meeting this year too, I think, right? Yep, just because there is innovation, sure, that's great for the innovator in the short term but for the investor, for the shareholder, that doesn't mean you're going to be able to capture value. You have to be able to create a mode. You have to be able to figure out what about the business creates that durable competitive advantage so all the profits don't get arbitraged away. And I think he actually finishes the article citing the most perfect example of arbitraging profits away by over a hundred year period going from pure innovation to sheer commodity, which is the airline industry. And 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 of you add up all the profits and subtract all the losses from the whole airline industry since the inception of airlines, it was a loss. Yep, 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 at Kitty Hawk when the right brothers flew that he would do capitalists a favor and shoot them down. Yep, which is a insane way to put it but the point that he's making is just so stark and I'm sure it's not something I had really thought about and it's certainly not something that was on people's minds in 99, which is the proliferation of innovation does not necessarily imply that there is value to be captured in a durable way by a single firm. Yep, not necessarily. It also doesn't necessarily imply that it won't be and of course Warren is hugely wrong about technology and the internet on this front but it also everybody, remember what Warren says here about the airlines and what must be going on in his mind later in life when he buys every airline stock in the industry twice. Twice, yeah. Oh, okay. For the moment though, tech bubble bursts as we all know Warren and he's still top of his game. Oh, Oracle Omaha, everybody's raining trays on him. He saw it all come in. All true. The early 2000s are more greatness for Warren but then in July 2004, Susie passes away and 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. And they're technically married, right? Even though they live here. They're still technically married even though they don't live together. He lives in San Francisco, he lives in Omaha. Like we said last time, we're not gonna cover it on acquired here but his personal life is complicated. Let's just say he, I do not think at all that Warren is or was ever like a womanizer but it is true that he had many women in his life and I think it was all a buttboard. Anyway, it's all in the snowball you can go read about it but he's devastated when Susie passes away. Outside of his personal grief though which is acute. The most pressing issue is what's gonna happen to the Buffett fortune and to Berkshire because in typical Warren fashion until this point in his life, he never thought about it. He always assumed that Susie was gonna outlive him and the plan for the now 40 plus billion dollars of net worth that the Buffett family has, the plan was always that after Warren would die, Susie would set up a foundation there. She already had the Susan Buffett foundation and give it all away. That was the plan but well, obviously that's not gonna happen. Yeah, I mean Warren has been thinking about the conundrum of what to do with his wealth since long before he was wealthy. I mean in his teenage years, he was already thinking about, well when I really rich, what do I do with it all? And he is like immensely frustrated by any attempt that he has at philanthropy which has to be why he basically says, that's a Susie problem. She'll figure it out and set it up when I'm done. His frustrations largely come from the fact that he does have things that he really cares about and that he cares about promoting. I think he's very worried about an impending human societal problem of 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 he used up all the energy on Earth, but are we gonna use up all the food and will famine be an issue? And so he had tried to 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 privity to the investment return. He couldn't sort of choose the investment manager that it really wasn't used to compound in the way that he was used to his investments, compounding in a way that you could sort of see a dollar return on that it was just immensely frustrating and he'd really thrown his hands up in the air and kind of just donated here and there but had a big fortune. Yep. And I think as we chronicle it in part one, there is this element of his psychology where he just kind of cares about the scoreboard. He just wants the money to have as big a number as possible. He doesn't want to buy stuff, giving it away like certainly eventually he'll do that. But like he just wants to get the number as high as possible by the day he dies. That's what he cares about. 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. I mean, he throws himself a festival once a year for everyone to fly in and visit. Like nowhere in securities law does it say that your shareholder meeting must be like this? Is not, this is a Warren Buffett creation to bring this upon himself. He wants to be a beloved sort of figure and teacher on top of being the wealthiest person on earth. And you know, you could see how those things could come to a head. Yep. So you could accuse him of not being innovative in his investment philosophies. Never accuse him of not being innovative in finding ways to get what he wants. So after Susie dies, the wheels start turning. He invites Bill Gates to join the Berkshire board. Which up into this point, the board was basically 100% his family and close business associates that he actually worked with like Charlie, Tom Murphy, Ron Olson from MTO, Don Kios on the board, David Gattisman from New York back in the days, even though Gates is a close friend, I think he's the first real like outsider who Warren's never done actual business with. Berkshire's done business with that joins the board. So it's something, something is a foot here. And then we all find out probably the reason why this was happening. In 2006, Warren makes what was almost certainly the biggest decision and perhaps the most impactful decision in philanthropic history. And I totally remember when this happened, he calls press conference and he announces that he is going to give away 85% of his Berkshire stock, which was worth $37 billion at the time. And five, six of it is going to go to the bill and Melinda Gates foundation for them to manage. And the other one, six is going to go to his children's foundations and Susan Buffett foundation. So this is crazy. There's no Warren Buffett foundation. He's not going to give the money away. He's not going to have to make any of these decisions. He offloads all of it to the Gates foundation. Which really is remarkable. It's like, he's like, boy, it's really hard to give money away. I don't know the first thing about it. I don't, there's a lot of infrastructure required to do this. Actually, that guy's already built the infrastructure and I very much trust him. And this is what's so amazing. Everybody is like, this is like win, win, win for Warren. Everybody is like, Warren, you are the most amazing, most generous person to give. This is the biggest gift in history. You have done such an amazing thing for a humanity. This of course leads to the giving pledge that Gates is at Warren treat in 2010 and it becomes the coolest thing in the world for billionaires to give their money away. Warren is setting me like a status symbol here. And meanwhile, Warren is getting exactly what he wants. He never has to deal with any of this. Yeah, the one drawback for him has to be the fact that the Gates foundation legacy will long outlive Microsoft's legacy in terms of the way that people remember Bill and Melinda. Microsoft will still be a successful company 50 years from now but I don't think people will remember it as Bill Gates' legacy. The foundation absolutely. And so with Warren, it has to be for someone who is very concerned with his ego. It had to be a big trade-off to not have a gigantic endowment with his name on it. Yeah, I get it. Who knows how much he planned this out but like him doing this and then creating the giving pledge and driving all of the philanthropy that that does by making it like the ultimate status symbol to give your money away? Should have called it the Buffett Giving Pledge. Totally. That's, you know, going to go down in history as like the number of billions, tens hundreds. I don't know how many billions are going to be given away because of this. Yeah, pretty cool. It's pretty cool. It is pretty cool. I mean, it's amazing. It's wonderful. It's great for society. It's also like Warren must just be so pleased with himself with this. So that all happens in the mid to late 2000s. Which is an interesting turning point for Berkshire Hathaway's strategy. I mean, if you think about this period of like 1990 to 2005, maybe extended to 2010, you know, they're going after buying these good businesses where the operators still care about the businesses after they sell it. That's sort of like the secret to success. You leave the management in place, except for January, those bad decisions, and maybe even mid-American energy. Well, Sokol was a good manager. He just sees a little too good, as we'll see. You know, they could do this thing where they would like underpay versus private equity. They were the better option for these companies that were, you know, anywhere from the hundreds of millions to low billions in value. But it does get to the point pretty quickly with just the cash on hand that the amount of money they needed to play just got too large. And there's not enough furniture stores and family owned jewelry chains in America to go buy. Yep. And this is real. I mean, like one thing that becomes clear in that is, you know, Warren keeps harping on. We're so big, it's hard to move the needle. And like, that's really true. Right. He has been forecasting this for 25 years. Yeah. That's really true at this point. Like the law of gravity tying Berkshire to the S&P 500 is like, there's a lot of gravity. Yep. So the giving pledge, of course, you know, it's like 2006 when Warren makes his major gift to the Gates Foundation, but it's not until 2010 that they all launched the giving pledge. Why did it take so long? I assume it took so long because not too many people wanted to give away a lot of money in the intervening years between 2006 and 2010. Because a little thing called the financial crisis happened. Dun, dun, dun. As discussed, so many times on this show, beginnings of Airbnb and Uber and cryptocurrency and on and on and on. What's that article embedded into the Genesis block of Bitcoin? Yes, it was Chancellor on Brink of Second bailout for banks, which allegedly is mocking the fractional reserve banking system. But yes, it is a very deep reference in the midst of the financial crisis. Indeed, indeed. So here's Warren 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 and Charlie have seen this movie before. They were there. They were leading players in the dress rehearsal of Solomon in the early 90s. So they're like, all right. Well, I think we know what to do here. The whole thing kicks off. I remember this so well in March of 2008 when Bear Stearns, the storied investment bank, failed. Just like Solomon, the problem at Bear was, you know, nominally it failed because they had two in-house hedge funds that were mortgage-backed security hedge funds and those had huge losses. That wasn't what it failed. It failed because Bear's counter parties stopped trusting their paper and stopped being willing to trade with them and like we saw with Solomon, you know, a huge amount of their capital base turns over overnight because you're settling trades and you have counter parties on those trades. And if your counter parties no longer trusted you're good for the money, they're going to stop trading with you and then it all vicious cycle comes to a screeching halt. That's what happened with Bear. So during the course of one week in March from March 10th through, which was Monday through the end of the week, which would have been, what I guess, the 14th of Friday. So Bear Stearns stock had started the week trading at $63 a share and by Friday, they're toast, they're bankrupt. And over the weekend, the Fed engineers an asset sale to JP Morgan for $2 a share. So the old 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. So like if anything goes wrong, JP Morgan's not on the hook. It's like, it's bad. Never seen anything like that. Berkshire, of course, I don't know if they got a call. If I assume Warren probably got a call from somebody about Bear Stearns that week decided not to save them or bail them out, but Berkshire has $37 billion of cash sitting on its books at this point, which today seems kind of quaint compared to Apple and Microsoft and the like, but back then, nobody else had that kind of cash anywhere. The only people who had that were governments. Right, I have to assume the most valuable company in the world at that point probably was an oil company and probably was in the neighborhood of two to three hundred billion dollars. Yeah, but probably didn't keep a lot of cash on their books because you're an oil-key or an operating company. You got all tied up in capital. Oh, for sure. But just making the point that things are almost an order of magnitude smaller at the largest company in the world level. Totally, both things. The companies are smaller and nobody's piling up cash like internet companies are today except for Berkshire. So they have all this cash. It's a great climate to invest. But one of the lessons that I think Warren and Charlie took away from the solid-minute debacle was you don't necessarily want to be like the major primary equity holder during a crisis in case things really go right. You don't want to be that guy that's called up in front of Congress. You really don't. So instead of making a lot of equity investments at this time, they decide instead to pursue a different strategy, they're going to make debt and preferred equity fixed income investments in companies that need capital. Can you simplify that for us? Is it like, hey, we're going to loan you money and if we want to, then we might exercise some warrants. Exactly. And we're going to own loan you money at a very high interest rate. And yeah, maybe we won't make equity type returns, but we're going to have a whole bunch of downside protection. A whole bunch of downside protection and some more upside. And we don't have governance over the company. Yeah, and you're not going to call us in front of Congress. So the first one of these that they do is 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, wriggly, the chewing gum and other candy manufacturer. It's like the seized candy coming back to Roost here for $23 billion, but it's kind of hard to get financing from banks right now. That's a lot of gum. I don't know what else, Wrigley, how to think they own the cubs. I was going to say there's no way there's even $2 billion of gum a year purchased. Yeah. Well, you know, hey, Warren started by selling gum, right? You know, buying and bulk and breaking up the packs. All right, keep talking. I'm looking up what else Wrigley does. So Mars is going to put up $11 billion of equity for the deal. Goldman and TPMorgan are going to do a little over $5.5 billion debt, but they still got a $6.5 billion to hold they need to fill. Well, in steps Warren and Berkshire. So 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 on the debt. That's a real, like Mars is a great, very stable company. This must really be their only option. I remember seeing in the last couple of months that Amazon or Apple or somebody priced a debt offering recently at like something absurd, like a 0.3% interest rate or something like that. Yeah, times are very different and lots of options available for corporations. Lots of options available for capital. 11.5% interest rate. That is unreal. The other $2 billion Berkshire invests as preferred equity with a 5% interest rate. They get some warrant coverage on it. All in, they end up realizing a 14% IRR on this deal, which is pretty good, because there's not a lot of risk here. No, and as Warren would say, you know, people chew a lot of gum in the past. We had a chew lot of gum in the future. Oh, Warren. And David, it really is pretty much all gum. Like this is crazy or at least a majority. So in 2007, they did over 5 billion in revenue. And they own, you know, juicy fruits, beer mint, double mint, big red extra orbit. There's some other candies. So they own like all the gum brands. They do, yeah. Exactly. There's some candies too. There's, but this may have been after the combination with Mars, but now under this subsidiary, under the, uh, weekly subsidiaries, there's Skittles, Starburst, Altoids, Gummy Savers, Life Savers, that sort of stuff too. I'm having a heart attack just hearing all these names. But yeah, so like there's, you know, as I was saying, there's a huge arbitrage here, because I think this is also what Warren and Charlie realize, the government is bringing the bazooka's out. They're slashing interest rates. They're throwing money into the system. Everything that we just saw them do during COVID, they first did during the financial crisis. Is this the start of quantitative easing? This is like the bazooka of quantitative easing. So you've got this crazy situation where government is making capital available for free, basically. And Berkshire can come into these situations and make capital available in fixed income, you know, guaranteed return with 10 to 15% yields. So why is that? Is it just that like there's no way to get the fear of the Mars corporation? There's no way to get your hands on that free money? I think in this case, yes. I think there's also a reputational element to this too, right? Like if people are worried, especially in the financial sector, which we'll get to in a minute, people are worried about counterparty risk and trust and due to the effective, you know, runs on the bank and the investment bank sense. Well, bringing Berkshire and Warren in is gonna do a lot to shore up trust here. And I guess another way of saying to get your hands on the money from cheap government, you know, cheap money from the government, that's a bailout. Yeah, that's a bailout. You don't want to be the company that got a government bailout, what others didn't. I'm probably doesn't help with trust too much. Yeah. So that's in April. And then Berkshire's fairly quiet for the next few months. And I remember these few months in between March and September, are like the eye of the hurricane, you know, everybody's like, oh, it's got everything gonna be okay here. Like, you know, it's a weird moment. But then of course, September rolls around and 2000, David. It's funny because you have this memory of the spring. This was after my freshman year of college, that spring or it was like the spring quarter, I was completely oblivious. I was getting ready to go do my first internship at Cisco. And I just remember like preparing for it and going. And there was not like a concern in my mind that like maybe my internship will get canceled or maybe these companies will go under. I do however remember what you're about to tell. Like last few weeks my internship just watching, like being glued to the news and refreshing every day comes September. Yeah. Wow. That's so funny. Yeah, we had, even though like we're so close in age, we had such different experiences just like me being out of college and in the workforce. Yep. And sector, like I just not that convinced that, you know, if you were outside of finance or if you were in tech at that point that you would have seen it that early, you would have heard the news about our stirons, but it wouldn't be this sort of daily obsession. Yeah, I'm feeling oh, base turn or whatever, you know, yeah. Interesting. Until the fall. Until the fall. Yeah, I mean, the fall was just like the nuclear bomb goes off. And September 2008, of course, we're talking about Lehman. So here's a fun story. This story is great. So the Lehman weekend, Warren is, of course, on vacation. I think he's in Canada with Astrid, his by then wife, I think they were married at that point. Certainly partner that lived together in Omaha. Yep. So he gets a call about Lehman. And rumors have been circling that Lehman was in trouble in counter parties where it's starting to not trust them. And like Warren's about to go see a show, like some sort of performance in the theater. And he says, all right, well, I gotta go see this show. Send me a facts to the hotel that I'm staying at with the details of exactly what's going on and exactly what you want me to do. Send me a facts. So great. He doesn't even have blackberry. And he says this to Lehman brothers? I don't know if it was a banker who was calling about, I assume it was probably. But it's about helping out Lehman brothers. Yeah, he knows Dick Fold, who is the CEO of Lehman. It's about bailing out Lehman. Because Lehman's getting worried that like the Fed might not bail him out of here. Like this might be the end. So after the show, Warren gets back to the hotel. There's no facts. So he's like, all right, well, I guess they didn't, they didn't want me that bad. Must be good. A year later in summer 2009, he's at Sun Valley, of course, with little Suzy. And he's licks at his phone. He has like a flip phone. And she says, dad, there's a text message on your phone. No way. Yes, yes. And he's like, he's like, what's a text message? And it's from Lehman. And apparently, like, wires got crossed. And it was asking for maybe like the facts number for the hotel. Or something like what hotel are you staying at or something? Oh my God. Isn't that amazing? How Warren Buffett could have saved Lehman brothers if he was a little more text savvy. Totally. It's a funny story. Of course, though, there's more to it. Like Warren could have gotten ahold of them and Lehman could, if everybody really wanted them. But turns out, the actual story is, I think that did really happen. Warren tells it in a video, I think it might be a well-street journal video, kind of a retrospective about the graces. In March, right after the bear collapse, Dick Fold had called Warren about a capital injection then. And Warren had studied it then. It is in a well-street journal video, because there's this great moment. He goes in 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. So he was thinking about it. He went Solomon Brothers once. He could have done it again. He was thinking about it, but he decided there was too much risk. And maybe he's probably a little gun shy from Solomon Brothers. So he didn't invest in March and he wasn't. I think he says he wasn't going to do it again anyway in September. So on September 15th, of course, famously, Lehman Brothers declares bankruptcy, goes under. Of course, everybody remembers Lehman and talks about Lehman. 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. So 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. You wouldn't think of GE as a financial firm, but they had GE Capital, which is a large, very active financial player. And they were in trouble. Did you know that GE's consumer facing savings bank was sold to Goldman Sachs? This is like maybe seven, eight years ago. And Goldman Sachs rebranded it in a sloppy rebrand. It's kind of a quick one, GS bank. And it's sad as GS bank for like two or three years. And then that became the underpinnings of Marcus. Oh, no way. I did not know that. It was originally a GE financial product. No way. And they're both Warren Buffett bailouts. 2008 Swoopups. Yeah. 2008 Swoopups. The very next week after the Lehman bankruptcy, Goldman must have called probably during that weekend too, or shortly thereafter, Berkshire invests five billion dollars for preferred equity in Goldman with a 10% annual dividend. So essentially, it's like, it's not preferred equity, preferred equity that you would get investing in a startup. It's a more debt-like instrument. So 10% keep on. The Solomon keep on, I think, was only 9%. So, man, this is worse in Goldman. With a call option for Goldman to call the preferred equity back for five and a half billion dollars, plus Berkshire got another $5 billion of common stock warrants at a strike price of $115 share. Those warrants end up becoming, they got really negotiated, I think, once with Goldman, but become quite valuable. Of course they did. It's Goldman. All told on that deal, Berkshire ends up making about $3 billion. So they get about $8 billion back on the $5 billion that they invested in Goldman. They're pretty good for fixed income. That happens within like two years. And how long did that last? Did they end up completely out of Goldman shortly thereafter? I think they held the equity that they exercised from the warrants for a while, but they don't end up making too much more than the $8 billion. So still, good deal. GE went slightly less well the week after Goldman on October 1st, Berkshire invests $3 billion in GE for basically the same deal, 10% coupon warrants to buy $3 billion of common stock at $22 a share. Unfortunately, unlike Goldman, who's stock has of today is trading at $364 a share versus the $115 strike price that Berkshire got. GE, the strike price was $22.25. GE did very, very briefly trade above that mark in 2016, but its share price today is $13. Ooh, not so good. That was not the last deal that Berkshire would do with GE. Do you know about the 2015 thing? Oh, no, I don't. They bought some rail cars from GE, which I think is now viewed as sort of a mistake in retrospect. Interesting. Like actual rail cars are a rail car manufacturing business. I think actual rail cars, it was like a fleet, like managed by GE, so there's like a business umbrella associated with it. But it was, let's see, yeah, the subsidiary of Berkshire was Marmon Holdings Inc. And they acquired these assets. All the GE rail cars services fleet. Boom, wow. Yeah, I think for a billion dollars. Wow, small world. So I'll told in 2008 during the crisis, Berkshire would deploy about $18 billion of the $37 billion cash that it had on hand. The six and a half into Riggly, five into Goldman, three into GE, 2.7 billion into Swissry, Genre's major competitor, which was odd, interesting. Hey, where I'll make money, that was at a 12% keep on rate. Not bad. This is my personal favorite, $300 million loan to Harley Davidson. Ah, the 15% interest rate. Wow. Dang, 250 million to Tiffany's at 10% and 150 million into sealed air at 12%. I don't know what that was. That was like an airline or like air manufacturer. I don't know, something. Well, so this is, I mean, honestly, since like 95 when they bought the second half of Geico, this is probably one of the top two moves. All the shopping spree that they do in the fallout of 2008 and buying Apple, which I'm sure we'll talk about next. Oh, well, well, we will get to that. But I mean, truly, like what else has been this sort of like big win in the last 25 years? Nothing. And just in terms of capital deployment, this is the most capital that Berkshire has deployed since, if you could call the January deal capital deployment, even though it was all with stock. But this is legitimately like, this is a very impressive move. I mean, this is your classic Buffett, like I'm gonna wait until prices are rational again and I'm gonna do all my research and then I'm gonna be so prepared that when the moment presents itself, I can act in mere minutes and that he did. Now, here's some interesting stuff about this. So all of these deals, the $18 billion deployed in 2008. Actually, the net returns at the end of the day that Berkshire gets back from that capital turns out to be about $25 billion. So you are right Ben, but from the actual 2008 investing, it's like, that's good. And it's, he didn't lose money on any of this stuff during 2008. So like, roll number one, don't lose money. This is all fixed income. Right, if this were a venture fund, you'd say boy, for the vintage, you must top 1%. Right, right, right, exactly, exactly. So good, but this is not like amazing. But there's a Coda to this. And would you say 16 deployed to get 25 back? 18 deployed to get 25 back. Over what time period? Probably all told five years, maybe less. Yeah, pretty good, pretty good. Yeah. Warren gets one last bite at the Apple, not that Apple, different at the financial crisis Apple in 2011, which dwarfs all of this, which is amazingly, I thought that this happened in 2008, but no, it was in 2011, Bank of America. Oh yeah, how have we not talked about that? Yeah. It was not 2008, it was 2011. Bank of America gets caught up in that, remember the Euro debt crisis that happened in 2011? And everybody's like, oh no, financial crisis again. And at least in the US, it ended up not being a big thing. I don't know how Bank of America got caught up in this, but they did. Berkshire stepped in, did the playbook, $5 billion of preferred equity with a 5% coupon on it. So not as much as the 10% that they got from Goldman, but they got warrant coverage to buy $5 billion of common stock in Bank of America had a $7.14 strike price. Today, Bank of America is trading at a $42 stock price. That's a cool 6X. Cool 6X. Are they still B of A shareholders? 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, wow, the $7 billion that they made from everything else during the financial crisis combined. And I think more, significantly more, than any other investment that Warren made in his entire career up to that point. It has to be. I mean, they're playing with so many bigger dollars at this point that, okay, so let's call this three great moves then you're pretty good ones from the financial crisis. You're buying a VAPL and of course, then the B of A one, which there's no way that he's done anything more better than this on an absolute dollar magnet to this point. I'm sure Rodden, you know, return on into the invested capital. Sure, but this B of A deal is a grants lamb. And a very important grants lamb because we mentioned Wells Fargo right around this time. Wells Fargo is literally driving into the ditch with all of their scandals. Purchase started buying Wells Fargo in 1989. So I don't think they ultimately lost money on it, but like they had big gains and then those gains evaporated. Right, it's like buying, yeah, you start buying Bitcoin around like 15K and you keep buying all the way out through 60 then you're probably about breaking it and like you're kind of feels like that. Yep. And just gonna Warren is now in his 80s at this point. And yeah, 15 years ago he got the question, when are you gonna retire? To which he always responds what like about five years after I'm dead? Five years after I die, yep, that's his line. So to be frank, like this is his last hurrah. Like if you include B of A, you know, which was a grants lamb 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 Andrew Ossockin, you know, asking the journalists asking the questions and moderating, he starts getting hammered he and Charlie on just like, what is the succession plan? What are you doing? Like you are 80 years old. How many more of these wild rives can you go on? And you know, he gives his trademark sort of like evasive answers. He says that the most important qualification for his successor as CEO is running a large operating business experience doing that. Right, because Warren has so much experience running a large operating business. But the one part of the plan that does make a ton of sense is that he says he's going to split up his job into the CEO business side. That's going to be handled separately from the investing side, which will be run by one or more chief investment officers after he is no longer in charge. And to put a finer point on that, there's someone who, you know, he's going to manage the equities portfolio, the stocks that they own where they don't own the business 100% and then the stuff that they actually do own 100%. Yep. And this is something that they'd actually been laying the groundwork for for a long time. I vaguely remembered this, but going back and studying this, this is amazing. So all the way back in 2006 in the annual report, Warren and Charlie had been talking about this and they come up with this idea. They're like, well, what if we just put an open call for candidates in the annual report? No way. So in 2006, in the annual report, they introduced this idea, Warren writes, quote, I intend to hire a younger man or a woman with the potential to manage a very large portfolio who we hope will succeed me as Berkshire's chief investment officer when the need for someone to do that arises. So this is for the equities portfolio. This is for the equities portfolio. As part of the selection process, we may in fact take on several candidates. So this is going on. And I think shareholders knew this, but people had forgotten by 2009. Those three years ago, if the financial crisis happened, there's no progress. Nobody's been hired. Finally then, in 2010, they make a hire, a surprising hire. 39-year-old Todd Coombs, a completely and totally unknown manager of a small hedge fund based in Connecticut called Castle Point Capital. And Todd had started his career working for the state of Florida's bank regulator, and then gone on to work at progressive insurance. Guy goes big competitor before becoming a hedge fund manager. And here's the thing, like, you know, he's tired, he's 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. Whoa. 34% total. This is not like a... How long have you been investing? Five years. Huh. This is not like a incredibly distinguished track record here. Buffett did almost that well every year for 12 years in the Buffett partnerships. Yes. So everybody's a little puzzled. And the plot thickens a little more. So the Wall Street Journal, I think Todd's hiring was announced in like August or September. I want to say sometimes towards the latter part of the year. In July, the Wall Street Journal ran a front page piece saying that the search for Warren Buffett's successor was almost done. And they had the candidate. They knew who it was. David, when you sent me this article, I about lost it. This is crazy. I had never heard of this. Me neither. I can't believe I didn't see this when it happened. Unbelievably, the candidate, the chosen candidate that the Wall Street Journal reported on was Lee Liu, who has an amazing story himself. Group in China was part of the Tiananmen Square protests, and we're going to the US, and eventually gets into investing, had an incredible track record. Has an incredible track record, founded Himalaya Capital, mostly invested in China, and became close friends with Charlie Munger. He introduced Charlie to the BYD investment, which is how that happened for Berkshire. And if you're wondering, hey, this name doesn't sound super familiar. I didn't know he worked at Berkshire. That's because he never did. He never did. And this is unbelievable. Even at the beginning of the article, front page Wall Street Journal, they get the money quote from Charlie. Charlie is quoted as saying, it is a quote foregone conclusion that Lee would join Berkshire. And they even have a picture with him. Like there's a picture of Buffett with, it's crazy. Totally, totally crazy. So what happened, like how did this blow up? The world may never know, exactly. But the scuttle butt is that it all came down to comp to compensation. And the thing is, you know, Lee was and is incredibly successful on his own, running his own fund, where he's keeping two in 20, you know, two percent management fees and 20% of the profits. And yes, it would be like this amazing honor to go work at Berkshire, be Buffett's successor, but kind of like Warren back in the day with the Graham Neuben partnership, where they offered him the keys. And he was like, wait, why would I run your firm where you're keeping a piece of it? I'll just go do my own thing. And I'll keep all the profits. I think that's what happened with Lee. So he didn't join, he still runs him alliance, been incredibly successful. By all accounts still has a Warren relationship with Charlie and Warren, but yeah, that's through a reds in the process, I think. I'll bet. And I did read about what the investment managers, and we'll get to the second one here in a minute, how they're compensated. And Warren does kind of let it slip in an interview that they basically are compensated for their performance above the S&P every year. And there's some kind of like three year characteristic to it where they're paid on a three year basis. And there's an opportunity for basically Berkshire to have a clawback if they underperform. And in the sort of latter years of the three year rolling basis. Yeah. So you can see for somebody like Lee, or this is total speculation of rumors that is online. This has 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, like it's not a attractive value proposition, really, to go work at Berkshire. Not for Todd, who's running a small like a $100 million hedge fund. Right. This is the chance of a lifetime. When this interview came out, I don't know, a few years ago, maybe more, the capital pull for each investment manager is $13 billion. So like even on its own, it's a very large hedge fund, even your little sliver that you're managing. Yep. So huge opportunity for Todd. He joins at the end of 2010. It turns out though that Warren and Charlie didn't know it at the time, they weren't actually done hiring. They were going to bring on, as they referenced in 2006, they were going to bring on several candidates. You know how we talked about on the, we haven't talked about on this series yet, but we talked about this on the Pincoo duo episode that Warren does these annual charity lunches that he auctions off. Yeah. And the auctions actually happen on eBay, which is amazing. That's awesome. And I didn't realize the charity is the glide memorial church here in San Francisco. Great, great organization been involved in many great things over the years. In 2010, the same year where this is all going down, an anonymous bidder pays a record $2.6 million for lunch with Warren. And the next year in 2011, it turns out it's announced that the same bidder paid $2.6 million again. So one person has paid $5.2 million for two lunches with Warren. Ted gets the job because he paid for lunches with him twice. Millions of dollars. Yes. $5.2 million for a job of a butcher. Oh my God. Yes, listers. Of course, we are talking about Ted. Ted Wechler, the other investment manager at Berkshire today was before Berkshire running a fairly large $2 billion hedge fund called Peninsula Capital Advisors that he had been running for 12 years. He'd been immensely successful over those 12 years. He had over 12x the capital in the fund. So done very, very well. Ranna concentrated portfolio. His top holdings were like DeVita and Direct TV. And he for two years Narrow buys the lunch with Warren. And he impresses Warren so much in these lunches that they reach a deal to bring Ted on. That's crazy. Isn't that crazy? And so the wheels have to start turning at this point for listeners out there like, OK, so Ben, you said they're each running $13 billion. Do they get to run their own hedge funds? This is something that I don't think we totally know what the decision making process is. How much are they there to execute the sort of buffet and monger style versus how much are they there to say, look, we have a risk profile that we're comfortable with. Here's how we've been doing it. Go to town. Yeah. I think the answer is it's somewhere in between in terms of how much autonomy Todd and Ted have versus Warren and Charlie. So it turns out in 2011, the same year as Ted joins, there's a little bit of a scandal. Remember we told you to remember the name David Sokol. Well, in 2011, Berkshire acquires, fully acquires, a chemical company named LubeRzall for $9 billion. It turns out that the person that first got interested in acquiring said LubeRzall company was David Sokol, then running the energy business within Berkshire Hathaway. And everybody widely assumed and buffet had basically implied that the name on the envelope to be the CEO of the business of that side when Warren stepped down was David, like it was his job to lose. Well, it turns out that for some literally unfathomable reason because it's not like he needed the money, I would assume. David front ran the trade with the acquisition of LubeRzall. So it was a publicly traded company before? 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. Okay, that in and of itself isn't that bad. It's like, oh, hey, like I'm personally investing in this company, I think it's great. The problem was that after they started negotiating to buy the company and David, I think was involved in the negotiations, he kept buying, knowing that this was going on. Definitely, oh no, no. Yeah, he didn't end up being prosecuted or going to jail or anything, but once all this comes out, Buffett fires him, or he leaves Berkshire and Buffett makes statements that he can't believe that this happened and he can't understand why David did it. So that leaves the new name in the envelope, so to speak, as David's former number two, now number one in the energy business, Greg Abel, who also came over in the Mid-America Energy Acquisition. And as we now know, Greg is indeed going to be the next CEO of Berkshire, the way. So we've got the chest pieces here. We now know a jeet's name for insurance. We know Greg's name as sort of the non-insurance businesses. He's gonna be the CEO and we've got Ted and Todd, each managing their pool of money, probably close to $20 billion now, each on the public equity side. Warren has said, I think when they started, it was about one billion each that they were managing and then kind of as they proved themselves, he gave them more rope. But in the early days here, Warren is still managing, we thought we were talking to Charlie, but really Warren is still managing most of the investing for Berkshire. And to be honest, he sort of just giving it to Ted and Todd right away, because he does a pretty terrible job. Like we can't miss words here. In retrospect, these years between 2011 and 2016, I think we're probably some of the worst decisions that Buffett ever made and worst errors of his career. He has admitted publicly, I mean, not necessarily the way that you just phrased it, but he definitely has admitted publicly that Ted and Todd outperformed him. Yeah, that they did. I think he made that comment in 2019 and he said, yeah, they both beat the S&P by a little bit, but they've smoked me. They definitely smoked him. So in November 2011 was a weird year for Warren. Lubrizol's perfchish. Yeah. You know, hiring Ted, which was great, but because of those charity launches, like it's just weird. So in November 2011, for some, God knows why reason. Warren finally pulls the trigger on the trade that he has been itching to make for 30 years. He puts $10.7 billion into IBM in 2011. Let's just take a quick refresher here. 2011, four years after the App Store is launched. Yeah. Seven years after Facebook is launched. Yeah. This is not way back in time when it might have made sense. Three years after the famous Jeff Bezos talk at startup school. It's exactly what I was gonna say. About AWS. AWS is already a thing. That is the default for startups. It has been for years to go and be the cloud provider. So what on earth? What kind of thesis does he have on IBM? Well, here's his thesis. He says, this is what he says publicly. He says he has been quote, hit between the eyes by how great IBM is and how strong and defensible its client relationships are. Oh, brutal. Okay, Boomer. If this is the first technology investment that Warren Buffett is gonna make, maybe it's a good thing he didn't make any technology investment. Maybe it's a half a century too late. Yeah, seriously. He holds this thing until 2018 when he finally sells it. All told, he loses $2 billion in total sales of fur. I'm like, ever around a little over $8 billion. Well, but just like the opportunity cost of $10 billion of capital in 2011. You put that into IBM, my God. I mean, if think about it, if he bought any other big tech company, just pick one. Don't even, I just pick one. You would have done great. Warren, go back to the monkey throw in the darts. Then in 2013, he partners with the private equity firm, 3G Capital to take craft private and then merge it with Hines. Warren, you're partnering with a private equity firm. Like there you're enemy, you know what they do, right? Like, anyway, Berkshire puts $10 billion into that deal. Their equity stake in craft hines today is worth about $11 billion. So, you know, they haven't lost money. But like, again, opportunity cost of capital here. That was 2013. Anyway, 2015, Berkshire acquires the aircraft parts manufacturer precision cast parts for $37 billion in Berkshire's largest deal ever. Bigger even, oh, he skipped over the railroad in 2009. They bought, they finally, they bought the railroad. Good for it. That was a good deal. That was, yep. That has done well for Berkshire. Warren Buffett from 2008 to 2011. He was good. He was good in those years. But precision cast parts, man, bought it for $37 billion. Last year, they took a $10 billion right down on that deal. So that's a dog. And then the worst though we alluded to. Oh my God, in 2016, he starts investing in the airlines. This is the man who said that he was gonna shoot down Orville and Wilbur. What was he thinking? Well, the interesting thing is, so he sold the airlines in a panic sale right when the pandemic dips started. And we all know, of course, there was about five days where you could actually buy the dip before it came skyrocketing back. And somehow we didn't endure a real market crash in this global pandemic, cause a monetary policy. Anyway. Thank you, Jerome Powell. Yeah. Buffett basically sells at the bottom with these airlines. And it's interesting, cause 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 sort of make it through that period. So I don't even know he sold it, I think right around the worst at the bottom. I blame the buy. Yeah, the buy. He knew that he even had a comment years before that he had sort of like a, is it like a romantic fascination or like a dirty habit about owning airlines or something like that? Like he knew and he still did it. It's like that he can't have newspapers anymore so he wants the airlines. Now, okay, to be fair to Warren. Again, the scuttle butt 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, you know, and then Warren. So, okay, you know, it's just kind of funny to me. You can't not make fun of Warren for this one. Like, right, it's bad. You can chalk this up to you shouldn't know better. IBM precision caspires, like, dude, those are bad. Those are bad. Well, and honestly, in this same time period, like J and J wasn't great, the 2008 investment he did there. The real cards that I mentioned was around 2015, not that great. Not great. Well, and those are all the sins of commission, not to mention the sins of omission of Google, woof, Facebook, woof, Amazon, woof. And on top of all this, like you own AMEX. You understand AMEX. You understand the brilliance behind what became the credit card interchange business. And you let a 2006 IPO by Mastercard and a 2008 IPO by Visa go right by you. These are crazy old companies that have been locked up inside the bank, you know, federations or however they were owned before. They're finally available for the public to buy. These stocks have gone, like these were criminally undervalued initial issuances. And Buffett just watches them go right by knowing the AMEX business. It's crazy. That's such a good one. I hadn't thought about that. Like, yes, you're right to be allocating all this capital to these just dog businesses when Visa and Mastercard put the tech companies aside or just sitting there. Oh, 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 are redeems everything by buying Apple Inc. Amazing. Amazing. This story, okay, so here's the story. In May of 2016, as Warren puts it in the quote, quote, one of the fellows in the office who manage money. AKA Ted. Yep. 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 a billion dollars, let's assume it was Ted, into Apple shares in May of 2016. That goes well and amazingly, Ted Todd, 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 convinced his Warren that they should really back up the truck here in Apple. So over the next two years, Berkshire Hathaway would ultimately put $36 billion to work buying Apple stock just under the total price that they paid for persists and cast parts, which was the largest acquisition in Berkshire's history. To say it goes phenomenally well, that is the understatement of the century. Yeah. This is unreal. And I'm sure there's lots of people out there who have been Apple shareholders from 2016 to 2021. So, you know, your brokerage accounts know what we're talking about here. And yeah, lots of people doing this. Not a lot of people doing this with $36 billion in initial principle. As of the annual report of last year, the market value of Berkshire shares in Apple is worth $120 billion. That is $89 billion of gains in five years. So I think, I think, I can't figure this out exactly, but I think that is either more or close to more absolute dollar returns than the entire rest of Warren Buffett's career investing, even including the partnerships. Whoa. Let's just say that again, more or close to more dollar returns than the entire rest of Warren Buffett's career that has come in the last five years with one stock. I mean, there's two angles to this. One, the irony is just dripping. Dripping. Warren, no tech stocks, Buffett and Apple is approximately 50% of the dollars ever returned. Yep. The other side of it is interesting because it basically is just a math problem. Yeah. Like, 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 in, assuming that you're continuing to find a reasonable rate of return because that's how compounding works. But holy crap. Micah, yeah. The position was initiated when the man was 86 years old. And 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. That we got to talk about this. Yeah, the biggest piece of positioning from what I've heard is that it's a consumer product with a powerful brand name, very low propensity for people to switch. There's sort of high lock in. There's a strong moat there. And in fact, it may even be the most valuable brand in the world. Now that we've planted that seed, I would like to go and once again, read the quote from the 1995 annual meeting. What we're trying to find is a business that for one reason or another, it can be because of the low cost producer in some area. It can be because it has a natural franchise because of surface capabilities. It could be because of its position in the consumer's mind. It can be because of a technological advantage. Oh, he's nice. He's at all. Interesting. Then 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 than that exact quote from him 21 years before. So great. Here's the thing. This is all nepicking because at the end of the day, investing, it doesn't matter. I played baseball growing up and my dad used to say to me, if you're listening, hi, dad, when I'm learning who's learning mechanics and how to swing properly, I love this guy. He used to say, look, if you could hit 300 in the big leagues, nobody would care if you stood on your head when you swung. All the matters is you hit 300. But until you learn how to hit 300, you should probably do it the right way. In investing, it's the same way. 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 and 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 like why and all of this works. He says he has a quote at the 2018 annual meeting. He says, I didn't go into Apple because it was a tech stock. I don't think that it required me to take apart an iPhone or something and figure out what all the components were or anything. I think it's much more the nature of consumer behavior. Oh, yeah, he's in it for the M1. He's really impressed by the architecture. He feels that this sort of... He's locked into I-N-S-E's. Strategy is the right one. Yeah. Oh, how funny is that? Yeah. Yeah. At the end of the day though, it doesn't matter. It doesn't matter. There was Ted's idea. It doesn't matter. That Warren hated technology stocks. All the matters is that he was in a position to be right and 89 billion dollars of gains later. Here we are. Yeah, that has to be up there with the single greatest investment return in history in terms of absolute dollars. I think it is. I think the... Let's see, NASPR's tension. The software's tension and the soft bank Alibaba investments I think are still better. But like, we're splitting hairs here. Well, they bought those companies in the first five years of their life. Remarkably Warren and Ted achieved this performance by buying Apple 35 years into its life. Yeah. That just says a lot about how... No, 45 years into its life. The Fang stocks in the last few years. Wow, it does. Okay, so that is the big beat that we're gonna end on. But let's bring it all home. January of 2018, Berkshire officially appoints Greg and a Jeep to Vice Chairman roles in the company. Greg for Vice Chairman of Non-Insurance Businesses, a Jeep for Insurance Businesses. The pandemic, of course, happens in March of 2020. Warren, you know, reaches his faith in America, but he dumps the headlines at the bottom. Which, you know, I agree with you. I thought that's fun. Berkshire mostly misses out on the enormous bull run that happens when Jerome Powell and the Fed and Janet Yellen inject literally more money than God into the economy. Warren and Charlie continue to say that they think that crypto is rat poison squared. But as far as I can tell, at least, I don't think they've made any attempt to actually study or understand what Bitcoin or Ethereum or any of crypto actually is. And then the kicker, the big moment that we all, if not saw heard about the day after. Hilarious slip. Hilarious slip at the 2021 annual meeting where Charlie lets it slip that Shacker Greg Able is the name in the envelope. This clip is so funny for, we'll link to it in the show notes, but it's, Warren and Charlie are like onstage sort of bickering about Berkshire's culture and about preserving the culture. And Charlie just goes, Greg will preserve the culture. Yep. And then the look on Warren's face is priceless. He's, yeah, he's stammer. He's like, um, um, uh, Derek Charlie, you know, they have like, hopefully we've pointed out in the now like God, what 10 hours we've been doing this series. Nine David, don't get ridiculous. The, um, so we say dichotomy between how Warren is perceived and wants to be perceived and how he actually is. And you know, he's got that line about Charlie and I have never had an argument, you know, it's like, yeah, bullshit. You've never had an argument. I bet you had one after that. Uh, but, uh, but yeah, of course, they still love each other and Greg will be the CEO of Berkshire Hathaway. We should say too that a thing that's been happening quietly sort of in the background, well, two things, you know, Ted and Todd have been running their portfolios in a very different way than Warren has over the years. So I think Todd, and I don't know this for sure, but it was really buying Amazon snowflake. I mean, some of these, these tech stocks, um, other than Apple. So you sort of have a non-warren approved strategy going on there, especially, you know, the snowflake deal, buying those sort of pre IPO shares and, you know, benefiting from that part was very interesting. And 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. And so they'd rather just take everybody's shares and concentrate their positions in the existing Berkshire portfolio. And I thought Christopher Bloomstrom had a great quote in, uh, in the Semper Augustus investments group letter that he writes that is epic. It is a full analysis of the accounting practices and valuation model for Berkshire. And he is this great quote. As long as capital markets remain overvalued and private investors flush with cash persist in investing at low yields, sharey purchases are a magnificent use of capital. And it really is such a good point that like, you pick your head up, you look around, everything's got a sky high multiple on it. And, you know, Berkshire shares, at least, the way that warren sees it, don't. Yeah, they don't. Now, it's a little bit tricky to sort of think about it this way because the quote unquote intrinsic value of their equities holdings are marked to market. So, you know, whatever, if you say, oh, gosh, Berkshire is not trading at a crazy valuation. Well, I mean, a big portion of what they hold is publicly traded equities that are at a higher than ever multiple, however you want to mention it. So there is sort of this interesting thing whereby doing stock buybacks, sure, they're not buying into any new companies that have crazy valuations. But they are buying more of the companies they already own at market prices. Yeah. All right, David, I wrote up a little like bear and bull case. So as we start to translate a little bit to like, there is a playbook that we should enter here, but like now that we're sitting in present day, why don't we reflect a little bit on sort of present day and in the future? Well, what bull case that I don't think we've really talked about is a lot of people sort of think, oh, Berkshire's toast when Buffett retires, and I don't know if he's gonna retire, so it passes away. And the stock's gonna plummet and the performance is gonna go away. I think if you've been listening to our episode, you probably don't think that. You might think the opposite. Right. So the bull case is like, they actually could do better under Gregg. Like they might be less conservative. They could run the business by keeping less cash on hand, which is of course a drag on returns. And frankly, there's an argument that Warren has gotten really gun shy in buying stuff after a lot of the sort of sins of omission and commission that we mentioned above that it's not clear that these sort of trusts is instinct in this environment. The only thing that he clearly trusts is to just do the stuff that has worked in the past. And I'm not sure that's well suited for this environment. So... And not to mention Todd and Ted are pretty good. No matter what else they've done, they did Apple. So like that, everything else arounding air. And especially when they're only managing 40 billion between them, I mean, that what did she say, $85 billion gain? It's something like that. $89. $89, unbelievable. So there's certainly that element. Just to like... One more piece of context on that. That's a whole Zoom of gains. Like they literally created a Zoom market cap worth of gains. It's totally wild. Now the flip side, the sort of bear case is... Look, Warren has been successful in a lot of environments. And the thing you kind of should 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. So... Well, I think the case that Dave and I've been making to you here for this whole episode is that the internet change things so fundamentally that his style doesn't really work anymore and that you do have to make bets based on the earth changing underneath you rather than just the earth staying the same and businesses being well run. The bear case on Berkshire would be... It actually is the opposite. At some point, they Buffett way of investing, world changing or not will actually be great. And we're just in sort of a season right now that is just making him look foolish. And yeah, maybe it's been 10 or 15 years of largely foolish decisions, but... So I'm not sure this is where I come down, but that would be sort of the future bear case on if Berkshire changes too much from the long time-tested Buffett strategy. I would also add another part to the bear case, which is warranted or not, right or not or whatever. Like there is no question that Berkshire Hathaway and Berkshire Hathaway shareholders benefit from the warrant Buffett halo effect. Absolutely. And there are some real tangible benefits to that like during the financial crisis where like, my God, there's deals he was getting on debt and preferred equity coupons. Nobody was getting that. And the calls he was getting, like that is real tangible benefits. And there's some intangible benefit. Like I definitely, lots of people, I think ourselves, myself at least included now, having done all this work is like, all right, warrant, you're kind of past the hill on investing. But lots of people give them the pass. And people still show up to the shareholders meeting and people still hold Berkshire Hathaway shares because they believe in the warrant. And if the warrant's no longer there, then what? Yeah, Berkshire Hathaway is a religion and an investment and the bear case is that at some point it just becomes an investment. A little bit more bear case stuff. If you think about capital allocation, if you think about maybe the way Jeff Bezos does it, ideally there are lots of potential growth engines inside your company to invest in, to allocate your capital to otherwise you have to go and fight it out with every other investor for every publicly available investment vehicle. The only growth engine that Berkshire really has, like meaningful growth engine, is Geico. And that's not a real growth engine. So it's really hard for them to consume capital internally in a way that would meet any hurdle rate that would be exciting. Like they kind of have to keep going shopping to deploy capital at this point. There's an element there that's a little bit scary if you're thinking about investing in a tech company versus Berkshire, which of course you never really should be thinking about one or the other. They're completely different buckets. 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 sort of a sum of parts analysis on Berkshire, then you have to look at everything that's currently marked to market, which is eye-popping. You know, there's definitely a lot of people out there that think that the stock is trading to a discount of the intrinsic book value of the holdings. And that of course would be the case if you fully valued the cash that's on their balance sheet. But if you think about the multiples of the stocks that they own, I mean, Apple has gone from being valued at something like seven X earnings to now like 30 X earnings. And to believe that Berkshire is under price argument, it's fundamentally based on agreeing that Apple is worth what it's trading for, which maybe is true with Apple. But you're also agreeing that like BNSF is sort of worth industry multiples for railroads, which if you look around, are also meaningfully expanded recently. I just think asset prices are really high. So there's definitely this element of like, if you believe Berkshire is under value, then I think you're being pretty generous with how you value the sum of all the parts. Yep. I think that's true. But there's the capital allocation question of like, well, all assets are overvalued right now. So if you're going to take capital out of Berkshire, where you're going to put it. Right. Everything is only worth talking about when you compare it to its next best option. Yep. If anybody has any really good options for really solid assets that are under price right now, the acquired Slack, you know acquired.fmslashslack, go, go, go, let folks. Hang out in the Investance Channel. Love it. Yep. Hang out in the Digital Assets Channel. That is where stuff is going on. That's where it's at. Playbook. Playbook. Let's do it. You want to kick it off? Yeah. I mean, the biggest one that's just so clear to me is that you need different strategies at different scales. And the same playbook clearly didn't work as they gained more capital. You know, there was that great thing that they were doing forever of hiring great managers that were family owned businesses, that, you know, they bought for hundreds of millions of dollars and let them run and those things compound and you could be management light. It just doesn't work anymore. So you need a completely completely different playbook. And the interesting sort of point that I want to make on that. Just like the original cigar bet playbook stopped working and they had to go to... Exactly. The point that I want to make on that is that they have set themselves up well where they have a remarkably flexible structure to do that. So it's not a fund. It's an operating company. They have an infinite time horizon. The goal is to never sell. And there's no drag of fees. And there's no drag of fees. As a shareholder, you can feel pretty good about the sticker performance is actually the performance you're going to get. You're not getting that less 20%. And incentives are aligned. If they are not investing, they're not just sitting there collecting fees. You know, they are itching too because they think that the best option for that capital right now is to sit in cash. So even though we were knocking Warren for like, oh, he's out of touch and he doesn't understand the internet. He doesn't understand internet businesses. And the world changed from underneath him. And we spilled a lot of words on that. What he did get right is this operating company flexible structure and probably set it up for success. I say probably because we're, I 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 is coming, even if it's not in the Warren style. So that was a big one that I had. Say more about politics, unless you're saving it for later. No, I'm not. So this is something that concerns me. So you went from having one person making all decisions where if capital was best used on acquisitions that we could use there, if capital was best used plow away into an internal growth engine when they had meaningful internal growth engines, you know, you can use it there. Like a jeet's business. Yep. Yep. If they wanted to go by stock and companies, they could go do that. Now each of those are independent fiefdoms. And so I'm sure there's ways they can sort of do horse trading. But people's comp largely is tied directly to their own portfolio. And so who kind of gets to say 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. And when you have a non-founder who doesn't quite have the same sort of influence and purview over all of those things, I think decision making, especially when you need to be able to do it in like an hour for a really big deal, could get really thorny. Not to mention a CEO who doesn't have the investing mind that Warren does. Greg is like, 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 speed in conviction? Right. I mean, would the right thing to do here have been to go try like crazy? It might be very hard if not impossible to go find a Warren Buffet and just give it all to them. And sure they have these other guys as employees, but like you need a one-headed monster. This is the funny thing about the number one criteria for the next CEO being operating experience at a large company. Well, that's not Warren. Right. So I'll be very, I mean, we may never know it may be 20 years before a book comes out, but I'll be very curious to see how contentious decisions get made between that new group of four that is sort of coming in. And if just Warren or just Charlie is left at some point with the four, what does that look like? That'll be weird for a little bit. I imagine if one of them leaves, they both leave at the same time. I would imagine too. The other thing I'll say on culture, and this is borrowed from some great research that some listeners sent us. Their culture, they sort of talk about it like it's this virtuous thing. And if it's truly this like virtuous thing, then it's something that you can sort of codify and protect. I think the cultures are really sort of like independent inside each of these operating companies. Like I don't think if you're an employee at Borsheim's, like I don't really think you think about Lubrizol's culture or like they're completely, they have nailed it on the decentralization thing. So I think the only real sort of like shared cultural elements inside the hundreds of thousands of people that work inside or or for Berkshire Hathaway are one don't put Berkshire's reputation at risk to bend over backwards to avoid paying tax, which takes money out of the business. Like just don't take money out of the business. Leave it all in, keep compounding it deferred however you can. And three funnel all cash back to Berkshire for reallocation. And I mean that's the culture. Like those are the things that are really important to the head office for managers at their subsidiaries to follow. Yep. Well, should we go to grading? Yeah. Let's do this. I know you have a whole slate of ways that we could grade this one. So kick us off. Here we are. This is it. Man, the whole story. Nine, ten hours in. Okay. So I was thinking before we recorded about how to grade this. I don't usually write down any thoughts on grading before episodes, but I thought this is so momentous. You guys know David Rosenthal. He just wings it. He isn't really proud. Well, I do in grading. Okay. So I think there are four topics to discussing grading here. First, we've been through this whole thing. I think we got a grade. Warren's entire career. Like hopefully there's still a little bit more time. I don't know. Maybe not. Probably I hope not that there's not more time. I hope there's more time in his life, but not in his investment decision making career. I think we're basically at the end here. One way or another. The man is 91 years old. Either way, dude, we're shipping this episode. So like create the cutoff. Yeah. Okay. We grade the career. I think we grade performance since we left off the last episode, which was in 1992. So like I did an IRR calc of January 93 through today. Oh, great. Then I think we should grade recent years performance. And then the final question. I am a Berkshire Hathaway shareholder. Have been for a long time. I don't know if you are, but whether you are or not, you could pretend you are. If you are, what are you doing with your stock? Are you holding? Are you selling? Or are you buying more? Interesting. David, do you have a rate of return calculation on that the entire Buffett career? As a matter of fact, I do. I did some analysis on this. The entire Buffett career. So if you emalgamate 13 years in the partnership years at a 29.5% IRR during those years. And you emalgamate that with then 50 years since the partnership through 2025's year of year is incredible. In the Berkshire time frame, Berkshire over that time period has had a 20% IRR. You get a blended IRR of 22.3% across 63 years of active money management for Warren. Guys, consistent. 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. Millions, but the compounding math breaks my brain. I don't know. 26.2 million dollars. Not bad for a Hyundai. Wow. Take a $100 flyer in, would you say 65? 59. 59. I mean, that's a long time. And that was a lot more money than, but inflation hasn't moved this fast. Yeah. That's a great stat. $100 at the beginning of Warren Buffett's career following him all the way through is over $26 million. Yeah. Remarkable. And that's a 22.0% IRR. So it's not over his whole career. You know, he flagged. Like it's not the same as the BPL, the Buffett partnership limited days. But that is mighty good. Yeah. Mighty, mighty good indeed. All right. So A plus, what do you have? Has anyone else been investing over this period of time? Like I don't even know how to compare it to anything similar. No, I don't think so. He outlasted everyone. Yeah, he outlasted everybody. I think. Huh. So, okay, I wrote down a. Maybe doing a, okay, here's my, 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. And I think that's just a natural consequence of the numbers getting bigger over time. And the world moving faster and they're being more change. It depends what you mean better investors because I actually don't think so depending on how you think about this. So I'm not sure that you could do what Warren did over his career with a career starting today without taking on a lot more risk or a lot more leverage. Like it's just so competitive to be an investor now. Yeah. So I suspect if someone, if we go set a million people free over the next 70 years, there will be someone who outperforms Warren, but they will have done it with a lot more risk involved. And so there's a lot more sort of luck in being the one of those million that does better than him. Okay. So here was my thinking on that. I tried to think of like, I did not run the numbers. So I made this be way off. We can debate. I tried to think of a tangible example. And the tangible example I thought of is Sequoia Capital as a whole. So when was it? 72? They're coming up on 50 years next year. And we don't have their aggregate returns across all their funds. But I suspect they might be as good or better than Berkshire. Interesting. Now, not a single person. Right. It's a firm. But it's an institutionalized culture. And if you can do something consistently, you sort of deserve to be in the same conversation. And here was my thought process on it. Well, you know, Apple aside, which we can't really put Apple aside. Like Warren deserves credit for that 100%. But absolutely he's lost a step in recent years, whereas I feel like Sequoia has only gotten better or stayed at the top of its game. Yeah, I mean, it feels like they adjust to the climate that they're in a year before the climate changes. And it feels like Buffett adjusts 30 to 40 years after. Just on IBM. Maybe 10 to 15 years after it. Yep. That's a good question though. It's interesting. But remember that thing I mentioned earlier with the expected value calculation of the probability something could happen and the outcome it happens. Sequoia is doing the exact opposite of the Buffett thing. It's a shots on goal where each shot could be absolutely huge. So it's obviously an extremely different asset class. But it is a approach that is, I think, more suited to, if you believe the hypothesis that the world today is more about change than Buffett's world when he was in his prime, the Sequoia approaches is the better approach in today's world, I think. Fascinating. I mean, we're going to like, rye a lot, ball the growth versus value people out there. I love it. Yeah. What do you think? I'll put the gun in your hands, A or A plus. Oh, it's an A. I mean, if he had finished strong, it would be an A plus. And you could argue Apple is finishing strong, but it's just the numbers that I ran for this last period, 1993 through today is a 13.5% IRR. And like, that's 28 and a half years. It's not like this is like a quick cycle. This is like two or three cycles. And so it's not like, oh, well, you can't just say his 13.5% IRR was during a down cycle for Buffett's style. Like no, it's been, we've been through some stuff. And like, it's just not been a remarkable last 30 years. And that number, by the way, it's just based on their stock price. It's the coming in at 11,800 January 1st, 93. Their stock just closed at $435,000 in A. Oh, so great. Okay, so this is good. This is the next set of grading criteria. Maybe we can jump back to then an overall view at the end. And let's compare that 13.5%. Remember the Buffett partnership limited? That was 29.5%. And then the last episode where we talked about the heyday of Berkshire Hathaway ending in the Solomon. 27% IRR in the late 70s through the mid 90s. So it is diminished considerably, which they told us it would because of the amount of capital they're managing, but still. Yep. So what do we think? Is this a B for this period? Yeah, it's a B. It's a B. Yep. You know, we still definitely beat the S&P, like beating the market for sure, but just not to his previous standards. Yep. So then recent years. So I did a slightly different. What does recent years mean? Let's take the last five years starting from the Apple investment, which is almost exactly five years ago. What's your analysis? So this I think was interesting and telling to me, like we've been saying, the Apple investment so amazing in the running for one of the best single investments of all time. Yet, Berkshire is so big in this law of gravity around the capital is so meaningful. And Warren's other investments were so bad that in aggregate Berkshire's stock price performance over the last five years on a multiple basis is almost exactly the same as the S&P. Even including Apple, 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 from the market. So Ted and Todd are making money, but Warren's not getting paid out of any of his carry. Warren is literally doing worse than the market in the last five years. Right. Oh, that's so interesting to think about. Yeah, because he's necessarily underperforming the S&P because he said Ted and Todd were overperforming it. Yep. Yep. And Berkshire as a whole is just simply tracking. Even. That's pretty bad. It's not worth seeing to me. And it's not worse than a C because it's not like it's a head fund where they're taking two and twenty. Like, you're just, it's the exact same thing as being in an index fund. Yep. I think that's right. A C. Yeah. Okay. So now the money question, literally the money. What are you doing with the money? Are we keeping it in Berkshire? Are we buying? Are we selling? Are we holding? So this is the moment I reveal for everyone 10 hours in that I actually have never held Berkshire halfway. No way. We've done all of this work. Yeah. This is not investment advice. This is especially this part is not investment advice and we really do urge you to talk to someone who knows about this stuff when considering making a purchase. But I've never owned, I've thought about it a lot and especially in this research I considered buying it many times and the place I basically arrived is it's very conservatively managed as a Berkshire expert quoted to me. It's a good widow's and orphans stock. And frankly, I think it's a good way for someone who's rich to stay rich because of the way that they manage capital. I mean, they don't dividend out. So if you make a bunch of money every year, then you don't have the high taxes on the dividends. You know, it will continue to compound. You can sort of sell shares when you want to sell shares to free up some cash. It's not going to have a really big down year. Maybe if there's an extreme hurricane event, but you know, it's not going to have five really big down years. So I think that question comes down to like, where are you in your investing cycle in your life? And I'm not sure that it makes sense for young people to buy Berkshire or at least people that are young in their wealth. Yeah. I differ from you in answer, but 100% agree with you in spirit and rationale. So my answer, I am a Berkshire's hair holder as I said at the top of the series have been for many years. So I'm going to continue to hold partially due to nostalgia for that and the way to ward, Halo effect and I get my free tickets to the shareholder meetings should they ever resume in person. But no, the real reason I'm going to continue to hold is actually just a portfolio management strategy. It's not a large allocation of my portfolio. Almost all of the rest of my portfolio is literally the rest of my portfolio is heavy growth, text, docs, digital assets, et cetera, say for the sister real estate. So this is like in your safety. This is in my quote unquote safety portfolio. The way I think about it is just like, this is should I need emergency liquidity for something in the near term, you know, I don't know what that would be. That's what my Berkshire is. It's exactly what you're saying. It's my bad term, but the equivalent of a widow's Norfolk fund of like terrible term, terrible term. But the capital that I can feel good about, I actually thought a lot about this over the past year. I used to keep an allocation in just like a fairly sizable allocation in cash for this purpose. And then I was like, well, that's just stupid today. Like, you know, to keep cash is just dumb again, not investment. Not investment advice. But when you know, when yields on 10 year treasuries are like basically negative, right, just sitting there getting devalued in my bank account, it's literally every day that goes by you're getting poorer and poorer, you know, hold a cash again, not investment advice. That's when I decided you know what I'm going to rework this and I'm going to have my liquidity allocation be to Berkshire because I can feel pretty confident. It's not going to waste money and I'll at least get some return on the capital. So I don't know that's kind of sad. I think for Berkshire that I think of it as like an alternative to cash, but I kind of think that's where the stock is at at this point. Fascinating. 10 hours in and this is where we arrive. Not with a bang, but a wiper. I will say the journey is the reward. And I do want to sort of sum up this grading, this series, you know, of course, we'll get to carve out here in a second, but the completion of this with possibly the best take on Warren Buffett of anyone, Hone from Altaus, which is an investment firm that we very much respect recently tweeted that he is the only investor to build a company worth over half a trillion dollars. And as Ho puts it, a few amazing founders have done it, but no investor comes close. Absolutely. A great way to leave it. However, if you will indulge me, I will spoil it with a less eloquent parting thought that I wanted to add to after you know, God, we've spent hundreds of hours of research on this. This is we've read six books. So this is the most like quicksatic thing that we've ever done. Hopefully you all have enjoyed this as much as we have because it has been an absolutely freaking blast. It's changed the way I think too. Yeah, truly. We have learned so much from doing this. And I was trying to really reflect on like, okay, what have I learned from this? What can I take away? What are my feelings? There's what I'm doing about my stock, you know, that's one thing. Like the real value is in the learning. And here's my take. It's related to this Warren was the greatest status quo investor of all time idea for Manchu Marks and that the world we live in is different today. But I think Warren was right about another concept all throughout his career. He's preached believe in America. America is undefeated, you know, in terms of capital growth and a place to invest your money. And I think that, you know, may or may not be true to some extent today. But I think that concept is absolutely true for the internet. And the future ahead for the internet today to me is like Los Angeles in 19, you know, 50 or whatever it was that when Charlie was looking for a city. So what was it that was large enough to have an impact, but still small and growing enough that he could become somebody there? Yeah. That's the internet. And if there's one thing I've taken from this, it's that, you know, that may change some day. But for the period that we're in and going forward and despite all the ups and downs and you know, like, oh, yeah, you know, Bitcoin and Ethereum, you know, and defy all crash to like, you know, 50% this past weekend, it's all noise. Like the internet is still the future. Some listener out there and please drop this in the Slack or tweet at us if you do this. We need a meme of with Warren and his slides saying never bet against America. We need David Rosenthal never bet against the internet. That's right. Never bet against the internet. That's my takeaway. I love it. Carvouts? Carvouts. Let's do it. I've got two. One very related and the other very unrelated except to my joke at the beginning of the episode. The related episode is a book, Phil Fisher's Common Stocks and Uncommon Profits are classic. The counterpoint to the Buffett philosophy and the value investing tribe Phil is the father of growth investing. 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'm riveted. The only reason I haven't finished is because we had to finish this episode. It's amazing. Phil basically saw the future of what tech company dynamics were going to be way back in the day. He writes about the value of corporate R&D and this sort of paradox that you can't measure the value on a 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. Really great, but highly recommended. Also I believe recommended to me by Ho Nam, who you were just talking about. Oh my gosh. He's everywhere. He's everywhere. And then my second carve out is the Xbox Series S. I finally got one. I was specifically looking for the S because I don't need, you know, 36 years old. I don't need the X. I need like, I get 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 $2.99, which is not that cheap, but the S in Game Pass, it works out to like, I don't know what is it like $400 or something like that all in for a year. And you get access to hundreds of games and all the best ones that I've been playing Halo Master Chief Collection. And it's like Netflix for gaming. It's for Halo reference gaming. I see. It literally is like Netflix for gaming and it's so great. I haven't touched my switch since I got it. Highly recommend if you can find a Series X or a Series S Game Pass just rocks. And I think it's on the Xbox One too. You can use it on the previous generation hardware. Sweet. All right, I have two because you have two, but they're the most connected my two carve out of our event. The first is I somehow never saw good fellas until this week. And that movie is just so choice on so many levels. I mean, it probably came just because I listeners will know I just finished the sopranos. That was my previous carve out and wanted more. And the cast has like 25 overlapping people. It's the same freaking people. It's amazing. But it's it's a freaking work of art for anyone who hasn't seen it. I mean, it's like Scorsese it is best. It's amazing direction. It's amazing cinematography, the dialogue is exceptional. It's just a just a tremendous story of this person's life. I've never been like a gangster movie person. And I never thought I was, but this is so good. Then the OG this I have not seen it. I have to watch it. It's great. It's great. And it's not like, you know, like obviously there's the Godfather and I've got a long rabbit hole to go down of like truly OG. Just watch one and two. Don't do that. That's what I hear. My second one is the good fellow's soundtrack. It is like hit after hit after hit. I mean, George Harrison, Eric Clapton, and Aretha Franklin and the film sort of finishes with Layla by Derek and the Domino's. And that is just like the best way to wrap up any epic story. I think if we had the right, well, which Layla the electric version or the acoustic version? Yeah, the electric, although the acoustic is also great. It's great. I'm an electric fan. Yeah. Yeah. The electric creates more of a the sort of like epic conclusion mood that is sort of appropriate for that. Well, right, Eric Clapton and see if we can get the rights to use that on the fade out of this episode. Great. Great. Actually, we probably won't. I'm sure he's listening. For sure. But whether or not you're a fan of the movie or have seen it, go listen to the soundtrack on Spotify. It's so great. When do you know when good fellows came out? In early 90s, I want to say like 91, something like that. Shortly before the Sullivan Brothers scandal. Yeah. Well, Warren was still in his real heyday. Exactly. Exactly. All right, listeners, we are going to leave it there with that. Thank you so much to our sponsors. They've been wonderful. We have a slack. You know this. Come hang out with us. You'll like it. We have an LP program for people who want to be closer to the show. You get to hang out on the Zoom's live with us or with people like Brad Stone. When we're recording a book club episode with them, it's super fun. And frankly, all that stuff is great. And if you want to engage more deeply in the show with you, 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. And thank you for joining us on this journey. We're so lucky that we get to do this. It's so much fun. But like, this has been a whole new level of fun. At least for me. I don't know about you. I was sitting around with 11 p.m. like a trapped in this room for four hours. It has truly been awesome. All right, listeners. Thank you so much. See you next time. ivey.