VALUE: After Hours (S03 E18): Warren Buffett’s Berkshire Hathaway Annual Meeting And Transformers

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In this episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle chat about:

  • Key Takeaways From The Berkshire Annual Meeting
  • How Many Of The Top Companies Will Be Around In 30 Years?
  • Which Berkshire Business Would You Sell Off Assuming No Tax Hits?
  • Should You Get Paid For Holding $BRK.A?
  • Everyone’s Talking About Macro, Crypto & Gold
  • Investing Lessons From Electrical Transformers
  • Buffett’s Take On Airlines & Business Travel
  • Inflation Everywhere
  • $AAPL Fairly Priced
  • Munger On Bitcoin
  • Can Warren Buffett’s Energy Company Save Texas
  • Fed Overlords Pulling Levers
  • The MMT Conundrum
  • Berkshire Chooses Greg Abel as Warren Buffett’s Successor
  • Studying Human Folly
  • Narrative Load-Tap Changer

You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:

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Full Transcript

Jake: I missed you, guys.

Tobias: Loved having Ian on.

Bill: I don’t know, Jake. People said that you looked real happy.


Jake: Get out of here with that.

Bill: This is what people say. Many people are saying it.

Jake: [laughs]

Tobias: One message says, connection has timed up, please try again, and the other one says this is now streaming live.

Bill: Oh, I have [crosstalk] now streaming live. I say, we’re live. We’re live.

Tobias: Can you check it on YouTube?

Bill: Yeah, I’ll check.

Jake: I think people they said they missed me making faces about when you would make comments about things and then I have– [crosstalk]

Bill: Cringey faces.

Jake: Yeah. [laughs] All part of the show.

Bill: We’re good, man. We’re live.

Tobias: All right. Well.

Jake: We’ll do it live.

Tobias: What’s up, everybody? Fun to be back after the LA Berkshire Hathaway meeting. That’s the subject today. Jake might have some– he’s also prepared some veggies.

Jake: Yeah, always.

Tobias: It’s the kind of guy he is.

Jake: We’ve got to stay healthy.

Bill: Do you want to start with your veggies, then we’ll just roll into riffing on Berk?

Jake: Yeah, we can do that. If you want. That works.

Bill: I think it makes some sense.

Investing Lessons From Electrical Transformers

Jake: All right, well, so I’m going to try to poorly explain to you guys how an electrical transformer works.

Tobias: [giggles]

Jake: It’s a miracle actually, if you understand some of it, how these things work. It almost boggles the mind that it actually works this way. Let’s get a little bit of some background just to set the mood. There are two types of electrical systems. You have AC and DC, so alternating current and direct current. In direct current, which is the more simpler version, electrons flow along a wire from a positive to a negative charge. In an alternating current, they also flow from positive to negative, but that positive and negative is changing back and forth. The way that it does that is that in a generator, whether its steam powered, a nuclear plant, or natural gas fired, or you are burning dung, or whatever, garbage, or a hydro plant, the turbine is spinning such that it passes through– a magnet is spinning inside past these points, and they’re triggering an electrical impulse within it. The amount of times that it triggers that impulse in a given minute or given second is Hertz. So, we run on a 60 Hertz system in the US, which means that 60 times per second, it’s triggering this impulse.

Now, electric transformers that we’re going to be talking about, they actually only work in an alternating current system like we have. If you take an AC generator and you connect it in a loop, you end up with– the electrons are basically flowing back and forth within on the– that first hit is going one direction, and then it’s pushing it back the other direction, so it’s alternating back and forth. As a current flows through a cable outside of it, it emits a magnetic field. If you take that cable and you coil it up a bunch, you create a bigger and bigger magnetic field from that coil. If you were to take that coil, and you set it next to another coil, even though they’re not touching at all physically, and you ran alternating current through one of the cables, that magnetic field would basically jump and induce electrons to move on that other cable that’s coiled up. They’re not touching at all– and this is kind of a magical thing to me, they’re not touching, but yet they have an influence on it through what’s called electromotive force.

Tobias: Is there any energy lost through that?

Jake: There can be, yeah. We’ll get into that a little bit. It’s usually lost to heat. By the way, that EMF that I just said, electromotive force, is not quite the same thing as electromagnetic radiation, which is sometimes called EMF out of your Wi-Fi. It’s a little bit different of a concept just to clear that up. A lot of the magnetic field is wasted, because it’s not within range of this other coil, if you’re trying to maximize the amount of transfer between these two things. Engineers came up with this really creative solution where they take an iron core, so just imagine a doughnut made out of iron, and that helps magnify the electric field to go from one coil to the other coil. You still end up having losses within this system, and they’re called eddy currents. It’s actually these little currents of electrons swirling around inside the iron core that turn into heat. But it becomes much more effective at focusing that force from one side to the other of the coil.

The way that a transformer works is, is that system except the number of coils on one side versus the other will change the voltage coming in and going out. The more coils that you have wrapped up in that secondary coil, will create more voltage on the way out. That’s called a step-up transformer. If you wanted to bring the power voltage down, you would actually have less coils on the outgoing side–

Tobias: Just remind us. What’s voltage?

Jake: Voltage is the potential basically. One analogy might be the pressure inside of a pipe with water. It’s like how much can it do? Well, let’s zoom out now and think about the bigger power grid, how does it work? If you have typically a generator– and these are massive plants, they’re huge things. They’re typically run at 11,000 volts, like 11 kV will be the local voltage that’s used. Now, obviously, we can’t use, or we don’t use 11,000 volts in our house like, we’re down to 120 volts. How do we get there? Well, paradoxically, we actually step up the voltage first before it comes to our house. The reason for that is if you move power over a long distance, the longer the wire, the more losses that you have for the lower the voltage. If the higher the voltage, actually the less current that’s required, and current is where the losses come from. Current is what creates the heat that leads to losses.

That’s why we step up from– the plant that’s 500 miles away is at 11,000 volts. We’ll step it up to 500,000 volts to move it a really long distance before finally, locally, moving it back down to maybe 4000 volts at maybe a bigger substation in your neighborhood, all the way down till the transformer that’s outside your house. We’ll keep stepping it down until you get down to 120 volts that you plug your laptop into.

One of the other interesting things that’s cool about the way that a transformer works is that it’s actually– because you want it to be insulated as much as you can, so that electrons aren’t jumping around as much, and you want the electrons to stay where you want them, but you want the magnetic field to go where you want that to go. How we do that actually is like baby oil, like mineral oil, is what is in most transformers. It’s a really good insulation. It’s nonconductive. The other way they’re– if you have a lot of money to spend, especially actually for underground electrical things, they have this stuff called sulfur hexafluoride, SF6. It’s this gas that’s incredibly inert and it does a tremendous job of insulating electrical systems. Anyway–

Tobias: Welcome to Electrical Engineering: After Hours, everybody?

Jake: Yeah, no doubt.

Tobias: Just in case you just tuned in.

Jake: [laughs] Okay, so, let’s take some of these concepts that we’ve painted in broad strokes, and draw maybe some interesting conclusions. Let’s go back to– We’ve talked before about how Munger views the market as, sometimes it trades based on the use value of the cash flows of a business, the fundamentals of the business. Sometimes, it trades like a Rembrandt. Depending on what the market is, you can have a use flow of the cash type of market, and you can have a Rembrandt market. Well, I would convert that also into– Damodaran has talked about this as narrative versus numbers. It’s the same idea. Sometimes, it’s driven by numbers, sometimes it’s driven by narrative.

Well, you could think about the current flowing through the generator way out there is the company, and the voltage that they’re creating based on either the numbers that they’re creating, or maybe the narrative that they’re spinning. They’re creating a certain voltage, and now, that voltage can be stepped up or stepped down depending upon where does it go. The media, for instance, likes to blow things bigger out of proportion. They’ll step up the voltage.

Then, where are you in that system, as far as how far away are you from the generator, and are the windings inside of you the coils, are they such that you’re more of a step-up transformer or a step-down transformer? Do you take things up a level and over-extrapolate maybe and get too excited? Or, do you step things down? And are you driven then by the narrative or more by the numbers? You can start to see that you have– these different narratives or numbers will induce flows within you as well as being the secondary coil, if you will, in this system. I don’t know, what do you guys think about that one? Is this way too far off base and insane, or did I land one?

Tobias: Well, I like the analogy. I think it’s an interesting analogy. I think you’re drawing upon [unintelligible [00:11:17] I need to think about it a little bit more. [laughs]

Jake: Yeah.

Bill: I like it. I’m with Toby. I might need to put a little more real thought. It’s tough to follow the– it’s a very complicated analogy, right?

Jake: Yeah, it’s all clear up here, but sometimes the process from brain to mouth doesn’t always fully form it.

Bill: No, man, I dig. Part of what you’re saying today is an interesting day to have the conversation with some of these more Rembrandty stocks selling off. You see how people react when they get punched in the mouth a little bit. Do they focus on the long term? Is narrative driving decision making? I could see that. I like that idea whether or not you’re able to cool down everything or whether or not you heat up. I like that.

Narrative Step-Down

Tobias: Where do you want to be? Where do you think you want to be, JT? Do you want to be stepping things up when it comes through, or do you want to be stepping it down?

Tobias: Ah, well, I think it depends a lot on how far are you away from the prime mover, the business or whatever it is that the asset that you’re evaluating. The closer you are to it, the less that you probably need to change the voltage to adjust for other people’s change in voltage. For instance, if you’re only reading headlines, news headlines about a business, and that’s how you’re driving your investment decisions, well, I’m guessing you probably want to be more of a step-down transformer, because they want sensational headlines.

Tobias: They’re trying to cut through, so they need to step it up.

Jake: I would also say that the quality of the generator makes a big difference. If your particular generator tends to run hot, then maybe you want to step down a little bit to reality. I don’t want to name any names, but some management teams are a little bit more promotional [crosstalk] and promissory than others, and maybe don’t always deliver on those. Then, maybe there’s other ones that are more sandbaggy of actual what they say versus how much they deliver, and maybe you want to be a little bit more of a step-up transformer there.

Tobias: Yeah, now I get it. I like that. It’s about assessing the intensity of the information that you’re getting and its relationship to the intensity of the underlying message, or the intensity of the narrative over the intensity of the underlying message.

Jake: Yeah, the other thing to recognize is that you probably have a natural number of coils in you as that secondary in the transformer and recognize, “I probably lean too pessimistic,” or “I’m a little bit too much of a step down.” They actually have these– there’s this cool thing they invented called a load tap changer and what it does is, you can actually change the number of coils easily within like, mechanically with inside a transformer, depending on do you need to boost the voltage or not. So, maybe you should be cognizant of doing your own load tap changer within your own transformer.

Tobias: Yeah, so if anybody needs some consulting on electrical engineering, Jake is available.

Jake: Incorrect.

Tobias: No, it’s not.

Bill: Will you offer to be other people’s load tap changer?

Tobias: [giggles]

Jake: That is effectively what we’re trying to do. [laughs]

Bill: Anyway.

Jake: That is our job right on this show sometimes, is to get the voltage maybe to the right level, either to positively or negatively depending on what’s swirling around in the world.

Tobias: Well, I like that. Have you extracted all of the current from that analogy?

Jake: And then some. [laughs]

Bill: No, well done. That’s a pro’s pro right there.

Tobias: Well, should we move on to the to the dessert portion of the podcast?

Bill: Yeah.

The Berkshire Annual Meeting

Tobias: Did anybody catch the Berkshire Hathaway meeting on the weekend?

Bill: Yeah, sorry, if I’m getting louder to people listening. I’d have to adjust my gain. Yeah, I did. It was good, but then I’ve got to be honest. I listened to it a second time getting ready for the show, and Warren confused me a lot.

Tobias: How, which part?

Jake: Let’s dig into that.

Bill: I don’t know, man. Not expressing a view on taxes. I thought that was a dancy answer. He said something about he’s bought businesses recently that he doesn’t have real insight into, unique insight into–

Tobias: Is that Verizon? What was he talking about there?

Bill: I think it was. He could have been talking about the Japanese trading companies. I’m not really sure which one he was talking about. There were just some things that had me scratching my head a little bit.

Jake: I had to catch a replay, because my boys had a bunch of baseball on Saturday. So, I didn’t get to watch it live. So, I watched it on Sunday morning, and I set it to one and a half times speed, and it was basically putting them back into 1998.

Bill: Yeah.

Tobias: Interesting.

Jake: It’s quite good actually. It really made a big difference.

Bill: Yeah. I like that Charlie brought the heat, but I don’t know how I feel about– I’m not sure I got real insight into how the business is running or much comfort that [crosstalk] and Warren have systematized insurance.

Tobias: I think he said they were running pretty hot, didn’t he? I got that impression.

Bill: What do you mean?

Tobias: Just that the businesses were running pretty hot.

Bill: Yeah.

Tobias: In that context of he was talking about inflation, and he said that Berkshire was doing very well. Most of the economy was doing pretty well.

Jake: 85% of the economy is running in super high gear.

Tobias and Bill: Yeah.

Tobias: And international air travel is not–

Jake: Not one of them. [laughs]

Buffett’s Take On Airlines & Business Travel

Bill: That was one. I can argue this both ways, because what we went through is such a unique instance. But if you’re worried about the headline risk of owning a business that needs to get a bailout, then why are you over 10% in Bank of America and why were you over 10% in Delta? Then, he’s like, “I don’t make macro calls,” but I feel like that was a macro call. There’s just a lot of things that I am like, “Huh?”

Tobias: It’s also he could have just been being polite about the prospects for airlines. He knows that everybody’s looking at him as a business analyst, and he sort of told everybody what he’s doing by selling out of them. He doesn’t really need to go and dance on their grave afterwards. He sold out. Buffett’s given his view on airlines. Now, ask him a question about airlines, and he’s going to be polite and not trying to hurt anybody’s feelings, rather than by coming in with a tomahawk down from the top of the quay, just to really rub it in.

Bill: The thing is I think that would have made sense last May, but this May, you can talk about what you were thinking. I don’t know why his view is any more right than everybody else’s on that. I agree with him–

Tobias: He is a 92-year-old man. He has been investing, beating in the market for the last 60 something years. Is that-

Bill: I mean, I don’t–

Tobias: What have you done for me lately, Warren?

Jake: Yeah.

Bill: Sort of. Well, not fully, but I’d be interested to hear how he thought through the probabilities. I think he let slip and maybe it’s because it’s what I wanted to hear that he thinks that business travel could really be impaired going forward.

Jake: Yeah.

Bill: That’s what I think. Maybe that’s why [crosstalk]

Tobias: As a result of Zoom, did you interpret that? Like Zoom–[crosstalk]

Bill: I don’t know about Zoom, but I think in general, the willingness of businesses to engage remotely and to have installations remotely, yeah, I think that’s going to be a massive shift. I don’t think anybody that is following anything that’s going on thinks that humans will not leisure travel. I think the entire equation rests on business travel.

Tobias: Does business travel subsidize leisure travel a little bit do you think?

Bill: Oh, dude in the Big Three, it’s massive.

Tobias: So, that would make leisure travel a little bit more expensive which will necessarily mean there’s less of it.

Bill: You could just have shittier economics for the airlines, because leisure is not going to– Spirit doesn’t care if business travels impaired. You get a couple small business owners on Spirit, but that’s almost all leisure. You’re never going to hold down pricing.

Jake: If you take a very price-insensitive buyer out of the demand curve, that’s probably going to hurt your producer surplus.

Bill: Yeah, which there wasn’t much anyway.

Jake: It wasn’t a whole lot to be found anyway.

Tobias: I think he’s a little bit gun shy with the airlines too. For the number of times that he’s lost money in it and the number of times he’s spoken about it publicly as being a huge mistake, and then– you’ve got to give him credit for having the mental flexibility to actually go and buy a basket of them. But he must have been like you know what– he’s doesn’t believe it deep in his bone, so the first sign of trouble is grab the parachute and hit the ejector seat. Let’s get out.

Jake: You guys got me one more time already.


Bill: Well, [crosstalk]

Jake: It’s the last time, I swear.

Bill: I do think this is outside of the realm of what you underwrite. I understand that. I just don’t fully understand the idea of, well, if we had owned them, they might not have gotten bailed out. I don’t know.

Tobias: That might have been him being polite, or maybe it’s just worried about the optics because he was sensitive to the criticism from 2007, 2008, 2009 when the banks got the bailouts and he seemed to be a beneficiary of it.

Jake: Yeah.

Bill: Yeah, but that to me as a shareholder, I don’t know that I really like a world where he’s nervous about the optics of what he buys. This a hard enough game anyway, and then he’s playing it with all the cash that he’s playing it with.

Tobias: It’s a marginal business though. I’m saying that’s the excuse that he’s giving, the real excuse is that he’s not totally sold on the airlines, and so first opportunity that he gets, he’s out.

Bill: Yeah, so then why not buy something that maybe you’re a little more sold on, but has less yield?

Jake: The same thing happened a little bit to them in the 70s with inflation, where litigation and the amount that insurances had to cover increased quite a bit. They didn’t underwrite enough for that. You have juries basically giving huge awards and these insurance companies that did not have that as part of their risk profile at that time. So, they underpriced it. I think that same kind of dynamic might be explained for him. Boy, if there’s deep pockets on the other side of this, there’s bigger risks then for that company.

Tobias: It’s that rise in punitive damages.

Jake: Yeah, right. So, they’re going to punish him as a big shareholder, rather than if it’s a bunch of small guys that own it, they’re not going to come looking to you and I to bail out in that way.

Bill: I guess, but there’s still 90% of the shares outstanding that are owned by pension funds and stuff. It’s not like it’s a wholly owned subsidiary.

Jake: Yeah.

How Many Of The Top Companies Will Be Around In 30 Years?

Tobias: So, the thing that stood out for me, the thing that I enjoyed the most was– because I’m in this project where I’m thinking about how can you identify stuff that’s going to work very long periods of time? So, I put up that list of companies. He started with the 31 March 2021 list of the biggest companies in the world, pointed out that five of the top six were American. Apple was number one, Saudi Aramco was number two, and then it was Google, Microsoft, and a couple of others in there.

Then, he said, how many of these companies in 30 years’ time will be still here? Then, he went back to 1989, and he said, “Here’s a list of the top 30,” and it was overrepresented by Japan, because Japan was at the very peak of its stock market bubble at the time. None of the companies from that list showed up 30 years later, which I thought was interesting. I haven’t looked over a 30-year period in my practice. I’ve been looking back about 20 years. And at 20 years, it’s almost impossible to identify. I think out of about 40 companies that get pulled up, about four or five survive through to the present day, which is extraordinary because these are companies that– they’ve got returns on equity over 20% average over the last five years. They’ve got margins that are greater than 40% average over the last five years. These are definitionally good companies. I thought it was a very interesting comment.

It’s something that he keeps on hitting me that this is, you have to be very careful, the longevity. I think he said that of the top 20 in 2021, he thought that a few of those might survive on but he didn’t think it was going to be zero. But he was also like it’s hard but not many are going to make it. I think he was hoping that Berkshire might be one.

Jake: I was told, never sell.

Tobias: [giggles] It’s potentially more of a philosophy than sort of an approach to– [crosstalk]

Jake: Oh, okay, don’t take that [unintelligible [00:25:46] [laughs]

Tobias: Perhaps, don’t sell for valuation reasons might be the takeaway– from never sell, not from what Buffett said.

Jake: Yeah, maybe.

Bill: Yeah, well, you have to think about what’s the total current enterprise value versus what it possibly could be. That’s how you handicap selling.

Tobias: That’s hard, though.

Bill: Nothing is easy, bro. It’s fucking hard to make money in the market.

Tobias: When you look back in 1989, biggest company was $104 billion, was a Japanese company. That just seems like an insanely– Even today, it seems like a very big business. Then, you look at today, it’s a $2 trillion company. So, that’s 20 times bigger. So, 20 times bigger is a $40 trillion company. That’s hard. It’s just hard to visualize in 30 years’ time a $40 trillion company, but it’s probably going to exist. It’s probably going to be Google or something like that, but it just illustrates how difficult it is to conceive of those numbers given what we’re used to know.

Bill: Yeah. I think that’s why never sell has won for now.

Waiting For The Full Cycle

Tobias: We’ve got to look at it full cycle, and I still don’t think that March 2020 counts as the end of the cycle. I don’t think you’d bounce like that.

Bill: How long you’re going to wait?

Jake: [laughs]

Tobias: As long as it takes. I’m a very patient man.

Bill: I will say a cycle until I see a damn cycle, and I’m the one that calls the cycle.

Jake: Yeah. [laughs]

Bill: Dude, I don’t necessarily disagree with you. I think just like you can’t look at that lesson and say, “Well, none of the companies were there before, so none of them will be there in the future.” All this stuff is very, very difficult.

Tobias: The answer is not–

Bill: Yeah, no, it’s hard.

Tobias: It’s impossible for any of these companies to get through. The answer is just that it’s extremely difficult and you should be just careful about how you don’t go and buy– you might have thought a pretty safe bet would just be to go and buy the largest 20 companies in the world in 1989, and I’ll just surf this one all the way to the beach and then you know it’s a bad case in 2021.

Bill: Yeah, well, I think that means that active managers can’t fall asleep. You’ve got to remain active. The other side of it is, it’s super hard to have thought about Facebook growing at 29% over the past 12 months on–

Tobias: Amazon, 47% on a $100 billion base.

Jake: Let me push back on that a little bit, though, that the narrative in ‘89 was just as strong and just as convincing and just as logical as all the narratives today.

Tobias: That’s true.

Bill: Okay, but I think what I’m saying is the fundamentals are impressive right now. That’s not narrative. We’re talking about turning down the heat, turning up the heat. 29% growth on a $94 billion base–

Jake: It’s insane.

Bill: That’s crazy. What’s that worth? I don’t know. 10 times sales doesn’t seem too nuts.

Jake: He said something like March 22nd of last year, Berkshire couldn’t sell a bond. March 23rd, Carnival Cruise Lines could. [laughs]

Bill: Yeah, that was wild.

Jake: I liked that he actually called them out by name.

Tobias: What was the difference between the two?

Bill: What, the two dates?

Tobias: Yeah.

Bill: The Fed.

Jake: Jaypal.

Tobias: Oh, okay. All right.

Bill: [crosstalk] I flipped my TransDigm bonds too. Shoutout to you, Jaypal.

Jake: [laughs]

Bill: I should have just bought the equity, though.

Inflation Everywhere

Tobias: What about their comments on inflation?

Bill: When have they been right on inflation?

Tobias: Why do you think that they’ve–

Bill: Like for 10 years– I’m not saying just them, I’m saying everybody. I think this is why Charlie’s like it’s really fucking hard. Rates haven’t gone up, and inflation right now is everywhere in the system. Guess what happens when you shut the entire supply chain down for an entire year and people keep spending money? You get huge shortages and guess what you can’t just turn on again? A supply chain. So, it’s not really shocking to me that there’s a lot of price explosion right now. I think the harder [crosstalk]

Tobias: Well, see, they have put a lot of money on the other side. There’s two sides of that equation. There’s the constriction in supply, but there’s also you dump a whole lot of money on the other side. [crosstalk] somewhere.

Bill: Yeah. Well, this is why I think people that want to see inflation everywhere are seeing it. This is why I think people that don’t want to see inflation are saying, “Well, this is just a supply chain issue.”

Jake: Transitory.

Tobias: [crosstalk]

Bill: I have no idea. None.

Fed Overlords Pulling Levers

Jake: It’s so complicated. You would almost think it’d be better to let a market figure out the right answer than to have an overlord to think that they know the exact right levers to pull. It almost like it’d be a fatal conceit to think that you could do that.

Tobias: [laughs]

Bill: I don’t know how you undo it. As Buffett said a long time ago, “It’s easier to buy things than to sell them.” Once you implement a strategy or a policy like this, I don’t know how you get out of it. But I definitely think– he said, “Bailing out the airlines was the right policy decision.” I think he and I align from a policy standpoint. I don’t think just hands-off was the right approach. How do you unwind it? Who knows? I just don’t buy tech stocks. That’s the answer.

Jake: I did like Buffett channeling his inner Henry Hazlitt and saying. “In economics you could never do just one thing.” You always have to ask, “And then what?”

Bill: Yeah.

Tobias: Do you expand it a little.

Bill: I just think that people are too predisposed to think “and then what” is negative? I’m not sure that that’s true.

The MMT Conundrum

Jake: Hmm. That’s fair. I think Munger was balanced on that. He was saying like, “The people who think that MMT is right are insane, but also that it’s worked probably way better than most people would have ever imagined and has had less consequences than we would have imagined.”

Tobias: That’s my view.

Bill: Maybe [unintelligible [00:32:15] lot longer.

Jake: Yeah, maybe.

Tobias: It’s insane that it clearly– I can’t point out it’s not working.

Jake: [laughs] That is a conundrum.

Tobias: Maybe, it is the answer. I don’t know. I don’t think so but maybe.

Bill: I think that the answer if you believe in MMT is to own Costco, because more people will be spending more money at Costco. Just own the businesses that people will be spending money at is always the answer that I just come back to. Even bitcoin. Say, bitcoin takes over the world. People are going to have to pay for Disney experiences in bitcoin, you will end up owning the bitcoin.

Jake: Hmm, shark teeth doesn’t matter.

Bill: I don’t care what the transactional method is. I just want to own shit that people have to pay for. I know that’s not a fun thing to say because it’s not great for clickbait, but I have thought about turning my own podcast into one big macro bitcoin show, because I know that the ratings would be fantastic. On the other hand, I’m not all that interested in it.

Tobias: You get a lot of attention when you do bitcoin stuff?

Bill: Oh, yeah. People love it.

Tobias: Maybe I’ve got to get on that train.

Bill: Well, macro too, man. Look at the entity, SPAC Whitney Tilson’s newsletter. They have a bunch of macro newsletters that they go with, it dwarfs Whitney’s stuff, and Whitney makes pretty good money on his stuff. It’s all public. Check it out.

Tobias: Why is macro so much more alluring than micro?

Bill: Because it’s disprovable and you can always throw some world is ending thesis in the middle of it.

Tobias: Micro is disprovable or macro is disprovable?

Bill: Macro.

Tobias: Is disprovable?

Bill: I think a lot of these theses like, there’s so many– It’s so complex-

Jake: Disprovable or unprovable?

Tobias: Unprovable.

Bill: -and you can usually end with Fed is trying to screw you.

Tobias: Unprovable.

Bill: Yeah, that’s fair. That’s fair. Yes. You can’t prove that somebody is wrong.

Tobias: Yeah.

Bill: Or, even right.

Tobias: Yeah, I think macro is more politics really. Just an expression of your politics than it is really a scientific approach to anything.

Bill: Yeah.

Tobias: The fact that– I find micro is pretty intuitive. You can understand it when you learn it whenever high school or college or uni wherever you get it. Then, macro comes in and you’re just like, “What is going on here? Try and read some Keynes or some–” I find the Austrians pretty easy to read but Keynes is impenetrable to me. [unintelligible [00:34:58]

Bill: I don’t fully understand– [crosstalk]

Tobias: General theory is fun.

Bill: I don’t understand why Charlie still has this big beef with bitcoin as opposed to just being agnostic on it.

Tobias: He’s very anti, isn’t he? Because I think Charlie’s got that– He likes Lee Kuan Yew. He likes Singapore. He likes authoritarian dictators.

Bill: Yeah, he likes China.

Tobias: And China.

Bill: So, you’re going to come at people that believe in the decentralized system–

Tobias: That would conflict with that, right?

Bill: I know but that I have a problem with some of his views on authoritarianism.

Tobias: Yeah.

Bill: I understand saying like, “It’s not for me, it’s not an asset I want to invest in. I don’t own any.” That’s fine, but I’m very dispassionate. After the bitcoin podcast, somebody was like, “You’ve got to have a bitcoin naysayer on.” I was like, “I’m not the fucking arbiter of bitcoin truth. You go, get your own naysayer. I don’t want to have this conversation.” I wanted to talk to Preston, that’s it.

Tobias: I’m probably a naysayer but you don’t want to be defined in the negatives to something that you’re, “What’s your thing? I’m [unintelligible [00:36:06] bitcoin, fancy bitcoin.

Jake: That’s no way to go through life.

Bill: Yeah, well, I guess it would be like a gold bug. I guess Peter Schiff is anti-bitcoin. I don’t know. I don’t care.

Tobias: But then, he’s a gold bug. Gold bugs are just as bad.

Bill: Good business, though.

Tobias: It is good business.

Bill: Again, you can sell, the Fed is out to screw you, the world is ending. Buy gold.

Tobias: Good for clicks.

Bill: Yeah, [crosstalk].

Tobias: Why do you think that is? Why is it so good for clicks?

Bill: Because of fear.

Jake: It’s the same reason that it’s religion. We can’t explain this, but I need it explained to me. That’s why Thunder is some guy up there like throwing bolts around.

Tobias: Yeah, it’s Thor.

Jake: Yeah, it helps me feel like I have a sense of control.

Tobias: Yeah.

Bill: Well, then you start to see why the media runs with it when you start to see some of the numbers behind this stuff.

Tobias: Yeah.

Everyone’s Talking About Macro, Crypto & Gold

Bill: You are like, “Oh, okay, so if I ran an advertising-based business and I saw the numbers,” again pull up this SPAC, that SPAC Whitney Tilson stuff. You start to look at it, and you’re like,” Oh, this makes 100% sense why the news is constantly macro and crypto and gold,” I get it.

Tobias: Yeah.

Bill: That doesn’t mean it’s true. It just means a bunch of people that are paid on advertising are running stuff that people can’t help but turn away from.

Tobias: You could be out here talking about microcap. No one cares. Mention bitcoin. [giggles]

Bill: Yeah.

Jake: Unit economics, transformers, nobody gives a shit.


Bill: No, that’s the truth, though. That’s important to understand if you’re consuming financial entertainment, I think that’s an important dynamic to see the world through.

Tobias: It is funny that he’s so anti. To call it disgusting– Disgust is a pretty– That’s about as far as it gets, isn’t it?

Bill: Yeah. I have much more disgust for some of the promotional stuff that I see going on in bitcoin. You could argue, well, bitcoin is just one big promotion, but I’m glad I talked to Preston. I hope that guy is either right or gets out in time or whatever. I think he did good work, I think he had a thesis, I think he made money. If people want to hate on me for it, then I say, “Go look in the mirror.” But I don’t have a hatred towards it. I don’t care. I don’t know why people have to care about it.

Jake: Well, if your thesis, which I think maybe this is not fair, was that the more the people use this, the more acceptance that it gets, the more powerful it gets. If you’re anticipating that’s the magnetic force radiating from that wire, increasing and therefore moving the current for you, if that’s how you think about the world– I’ve given up on wanting people who have a different frequency than me, wanting them to fail. I don’t think that’s a good way to go through life. I hope they succeed, and I want to succeed in the way that makes sense to me, and it feels like I can do well without taking stupid risks. But if that’s how they are wired and that’s what the current that resonates with them, then why should I have opinions about that? I’m actually trying to go the other direction and be happy for them, genuinely happy that it’s working for them.

Tobias: If bitcoin makes it to this point that it’s just accepted everywhere and it’s a totally banal part of the landscape, hasn’t it succeeded at that point? Does not then–

Jake: Except for trashing the environment with all the electricity that it takes.

Tobias: Cathie Wood says that it’s all renewables that it’s consuming.

Jake: Mm. All good then.

Tobias: Case closed.

Jake: There’s no environmental damage to creating a wind turbine and solar panel or anything.

Tobias: Well, I don’t know, but that’s stuff I can’t comment– I’m not going to comment is what I’m saying.

Bill: The only thing that I am sure of is that I haven’t done enough work to have an opinion. I don’t think Charlie really has either. I do understand why he would not like the idea of just imagining a currency and marketing it and getting a bunch of billions of dollars off that. I also don’t know that if you create people’s perception of a store of value and gain value out of that, I would argue that’s a pretty good economics thing to solve. It shocks me that the [unintelligible [00:40:43] were able to do this.

Tobias: Good for them.

Bill: That’s pretty damn impressive. I think it’s a hell of a marketing to come from where it came from to where it is today. That’s an incredible feat in marketing.

Tobias: Is it marketing, or is it just the nature of the thing? Why get upset about bitcoin and not get upset about frequent flyer miles?

Bill: This is one pen. This pen will never be recreated. It’s something I could tell you. This is the only pen of its kind. Unless people believe in that notion, this pen has no value.

Tobias: It’s built into the protocol. I believe that part.

Bill: Fundamentally, it’s a bunch of nothing.

Tobias: It’s sort of frequent flyer miles.

Jake: Put that on a t-shirt.

Bill: I understand. Nobody is–[crosstalk]

Jake: Bitcoin.

Tobias: So are US dollars.

Munger On Bitcoin

Bill: I think that’s my point, is like people now believe in the value of it because someone created something that people believe in the value, and I don’t have a huge problem with that person gaining a lot of wealth. That seems like a form of capitalism. I just think that it doesn’t have underlying cash flow and Charlie finds that fundamentally offensive, but to me, that’s just a currency. I don’t understand–

Tobias: I don’t think he’s thinking about it as an investment product. I think he’s thinking about it– I think he’s got that chain letter scam view of it. I’ve seen– It’s a common scam to have these multilevel marketing types– not the ones that are listed. I’ve seen lots of these types of things with guys like, “I’ve got this credit card, and you get some benefit to signing up your downstream on the credit card.” I think that’s the way he views it, and I don’t think it is that. It’s something else. I think it’s a perfectly legitimate currency, but I just don’t think that I’d speculate in other currencies. So, I don’t know why I’d speculate on that one.

Bill: Yeah, I don’t understand why he’s so nuanced about authoritarianism, and not about bitcoin. That’s fundamentally– [crosstalk]

Tobias: Well, I don’t know if [unintelligible [00:42:41] and I think he’s for it.

Bill: Yeah, that to me is really tough to stomach. That’s bothered me for a while.

Tobias: Charlie thinks that clearly, there are people out there who are smart, and who have these whatever character type– that they have super intelligent and character, and they should be in charge of everything. So, when he finds a Lee Kuan Yew, and look what he’s done with Singapore, he says, “There’s no reason why we can’t have more of them.”

Bill: Yeah, it would [crosstalk].

Studying Human Folly

Jake: I think that’s the right observation. If you’ve been studying human folly your entire life, what are the chances that you come down on the side of, well, we just have to give people freedom, and they’re smart enough to figure it out for themselves and do the right thing?

Bill: Oh, I think quite high. Because the alternative is we should centralize power and what are the chances that people are going to do good for people when they have centralized power?

Tobias: That’s where I get too.

Jake: Well, I’m not saying that I was coming down on either one of those. I’m saying like if you’re Charlie and that’s how you like to view the world, looking for folly, I think that the average person maybe needs a little paternalistic nudge.

Bill: Yeah, but I would be really worried about what the power would do to the people that have it.

Tobias: We’re going to come up in the question time.

Bill: Wait, one thing real quick.

Jake: No historical incidents of that happened.

Can Warren Buffett’s Energy Company Save Texas

Bill: One thing that I really liked that they said was when they were talking about the proposal of BHE for Texas, and Buffett was like, “Yo, if we can’t do this, if we miss our timeline, we’ll give $4 billion, and we’re down to lose on this bid, but whoever gets it should have skin in the game.”

Jake: And we can actually deliver–

Bill: Yeah.

Jake: –when we say we will. [laughs]

Bill: Yeah, that’s dope. That’s how business should be done. I admire that. Despite the fact that Robin Hood wants to say that they were lambasted by truthtellers. What a joke Robin Hood is.

Tobias: Ian Cassel had a question.

Bill: Hey, Ian.

Jake: Invite him on.

Tobias: Come on the pod, man.

Tobias: [laughs]

Bill: Let’s do a four-way.

Should You Get Paid For Holding $BRK.A?

Tobias: Ian’s question was should you get paid for holding Berkshire Hathaway as an investment manager? I think that in the way that he asked the question, he felt that you should not.

Jake: Ian, why are you coming out me like that, bro?

Tobias: [laughs] Well, I said to Ian, I’d be happy to take the other side, and I genuinely think you can take the other side. I don’t currently hold it. I should tell everybody in the interest of full disclosure. But we all think of Buffett as an investor, but Buffett, I think he’s an industrialist. He’s running a business. If I could find 10 blokes who were investor-industrialists like Warren Buffett running businesses that look like Berkshire Hathaway, that would be the portfolio, and that would be everything. I’d be done. You’d be paying me to not buy anything else.

Jake: I would also say that the timing of buying it, and when you add to it, and how much position sizing and why do you hold, all of those things are important. It’s not just like, “Oh, you just buy this one thing, and you’re done.” It’s a continuing evaluation of do I like the next guys that are going to be running this, and do I have a good valuation of them? Because that’s going to be a big part of the future cash flow, and that’s not an obvious thing to answer necessarily. You have a view on that to own it today actuarily speaking with these two guys. Why should you get paid to own anything?

Tobias: At the very beginning of the meeting, they said something like they shifted it to Los Angeles, because everybody wanted to do it with Munger. What was that referring to?

Bill: He is not very mobile.

Tobias: I mean he’s flying private, right?

Bill: Yeah, but you’ve got to get up on the jet. That’s a pain in the ass.

Tobias: You’ve still got to get from home to wherever they filmed that, because it wasn’t over Zoom between those guys that were– [crosstalk]

Bill: Yeah, it’s easier to hop into his Rolls than it is to walk up– I’m sure he’s flying something nice. He’s not in a Learjet. Those’ve got big steps. I don’t know, man. It’s a pain. He doesn’t want to move. Guy might even poop himself, just let him be home.


Bill: I don’t mean that as a joke. I’m watching my grandma age, it’s not pleasant. So, if he doesn’t want to move, I would do anything that I could possibly do to help my friend in that situation.

Berkshire Chooses Greg Abel as Warren Buffett’s Successor

Tobias: They’ve all gone to LA to make sure that Munger is there, because presumably, Buffett looks at those actuarial tables pretty closely, and so he’s got an idea about how many more annual meetings he’s got in him. So, then that does raise a pertinent question, and I think they addressed a little bit by having Greg Abel and Ajit Jain on the podium with those other two guys. Were you satisfied with their answer?

Bill: Well, Munger said Greg is going to be the CEO.

Tobias: But that’s what I meant, are you satisfied with that answer?

Bill: Yeah, it makes sense to me to have– Greg does a lot of capital allocation in the big industrial businesses, and I think that’s going to be where the majority of the capital allocation needs to happen on a go forward basis. So, it makes sense to me to have the guy that has the best sense of those businesses making the capital allocation choice.

Tobias: How old is he?

Bill: Greg? I don’t know, late 50s?

Tobias: They say he has eight-year-old. Did I mishear– [crosstalk]

Bill: Yeah, maybe I’m wrong. Maybe he’s younger.

Tobias: He’s going to hockey games, and he’s playing hockey or his son’s playing hockey. I think he said he was eight at the start.

Bill: Guy’s got time for hockey games?

Tobias: Well, maybe not– [crosstalk]

Bill: Come on, Greg, give up your family.

Jake: [laughs] Do the right thing by shareholders–[crosstalk]

Bill: Yeah, do the right thing so asset managers can get paid to hold the stock. Come on.

Jake: Do nothing. [laughs]

Bill: Yeah. A bunch of people that talk about reading books all day can get paid. You give up your family. This makes sense.

Jake: I’m very attacked on this show today.

Bill: I feel a bit like–[crosstalk]

Tobias: 58, thanks, guys.

Bill: There you go, boom. I think that– why should people get paid to hold Constellation, or TransDigm, or any of these capital allocation machines? I think Berkshire– I mean, it’s very big, it’s probably not going to outperform, they would say that themselves, but we’ll see. I don’t know how you hold that tactically, that stuff matters.

Jake: I have a better answer actually now.

Bill: So, if you’re honest with your clients, you deserve to be paid. I just don’t think that you can tell your clients like, “I run a tech fund and I’m long Berkshire.”

Jake: I’m in the business of building little empires, and part of my empire is outsourced to the decision maker of the guys in Omaha. That little part of my kingdom that I own is allocated to that particular business situation. But I have an entire other portfolio full of kingdoms that are part of my empire. That’s how I think about it.

Tobias: Yeah, I like that.

Bill: [crosstalk] [unintelligible [00:50:16] meme stocks.

Tobias: You also get to identify–

Jake: Oh, yeah.

Tobias: Not everybody holds it. You’ve got to identify them in the first instance. You’ve got to understand the opportunity. You’ve got to understand what’s special about it. So, you have to understand that and understand those other conglomerate-type businesses and why they’re worth holding and not. There’s a lot of people listening to this, and there’s a lot of different views here, but we don’t hold all of those things. Identifying and holding it, that says something about the investor.

Jake: Let’s ask the question too, the amount of work and understanding that Chris Bloomstran has in Berkshire. Does he deserve to have been paid for his understanding of owning it the last 20 years?

Bill: I don’t know that I buy that. I don’t think that you don’t deserve to get paid because you’ve done deep work on something. You deserve to get paid because your work is right. Now, I happen to think that he is a very smart analyst. I’m not trying– But I don’t like drawing the line at this person did a lot of work on something, therefore they deserve to be paid.

Jake: Okay, I agree but how about being right has a better chance of happening if you’ve done the deep work?

Bill: Well, Preston Pysh would say, “He’s pretty wrong.”

Jake: Who’s wrong?

Tobias: Because he didn’t hold bitcoin.

Bill: I mean Preston did deep work. Preston’s up like 200 times on his buy and people tell me that he’s selling snake oil and he’s wrong. So, I don’t know where to draw the distinction. I think people deserve to get paid if they outperform. I think that if they underperform, they deserve to get paid if they’ve conveyed and can demonstrate that they’re taking less risk on their client’s behalf. I think that people get paid to get their clients to the finish line and that’s the most important thing.

Jake: It’s fair.

Bill: Because a lot of clients can’t get to the finish line without the manager. Chris, he’s a big boy, if he’s right, he’s going to get paid and he’s going to outperform by a ton, and that’ll be– people figure that out in 10 years. The thing that sucks in the meantime is watching these meme stocks explode.

Jake: [laughs]

Bill: Although now they’re actually exploding to the downside [crosstalk].

Jake: Literally exploding on the launchpad.

Bill: Yeah. Meanwhile, I’m taking on water on my beloved Twitter. That’s a shame after I mocked Buffett for not buying tech and then I go out buy it. That’s that what the Gods will do. I see you Gods.

Tobias: Yeah, you become a bitcoin maximalist.

Bill: Have I?

Tobias: And a Berkshire minimalist.

Bill: Ah, that’s funny because Berkshire’s my biggest holding–

Jake: Portfolio says otherwise. [laughs]

Bill: -and [crosstalk] bitcoin. Yeah, but okay.

Tobias: On the podcast.

Bill: Don’t let facts get in the way of a good narrative.

Jake: This is what you’re doing wrong, Bill. You’re talking your book in the opposite direction. [laughs]

Bill: Yeah.

Tobias: You’ve got the narrative hedge.

Jake: Yeah, you are at cross–

Bill: That’s fair. Well, all for the likes.

What Berkshire Business Would You Sell Off Assuming No Tax Hits?

Tobias: All right, I’ve got a question. What Berkshire business would you sell off assuming no tax hits?

Jake: Oof.

Bill: Think Fruit of the Loom could go.

Tobias: [giggles]

Bill: I think there’s a lot of them that I wouldn’t mind carving. I’ll tell you what I wouldn’t sell, Oriental Trading Company. That’s a fucking business. [Whistles]

Jake: Mm.

Bill: It’s just not big enough.

Jake: Odd, poor choice there. I like it.

Bill: Yeah, came from inside [crosstalk]

$AAPL Fairly Priced

Jake: If they were me, and this is how wrong and out of tune I am, but I would probably be trimming more Apple, if it was me.

Bill: It’s because you’re a hater.

Jake: No, it’s–[crosstalk]

Bill: Let’s just go to the market cap.

Jake: [laughs]

Bill: Check it out, folks.

Tobias: That’s the biggest company in the world right there. I think Meb Faber would say that basically, the biggest company in the world almost always underperforms for the obvious reason that to become the biggest company in the world, you tend to be pretty stretched.

Jake: Things had to go right.

Tobias: Some things had to go right. A lot of things had to go right and you had to get the multiple expansion too.

Bill: It’s not trading at that crazy of a multiple, man.

Tobias: I don’t disagree. I was just going to say this is one of the unusual periods in time where it’s not Exxon is the biggest company in the world or some oil producer is the biggest company in the world. It’s a company that potentially has a little bit– It’s a better-quality company.

Bill: It’s trading at a 4.5% free cash flow yield.

Tobias: Yeah.

Bill: That’s not that crazy for the best business ever? Now, yeah, you’ve got some hardware risk for sure, but it also just generated $90 billion in TTM free cash, like straight cash on me, like Randy Moss cash. Not like, “Oh, we got adjusted EBITDA shit.” It’s crazy.

Jake: Adjusted, yeah. No doubt. It’s an absolute– I mean it’s a money printer like, it would almost make Jaypal jealous.

Tobias: [laughs]

Bill: I’m interested to watch the suit. I want to actually read the documents. I’ve going to get those because that the suit about the app store, this is going to be interesting.

Tobias: What are they saying? It’s anti-competitive or they saying that they take it to–[crosstalk]

Bill: Yeah, this is the narrative or not the narrative. But this is what developers are saying about Apple. Like you think about Roblox, Roblox is a pretty incredible product. Apple’s just going to get to rake like–

Jake: 20% off the top.

Bill: In perpetuity?

Tobias: You create the ecosystem.

Bill: Yeah, no doubt.

Tobias: So, into the ecosystem. That’s football. That’s the way the game is played.

Bill: Yeah, well, this is–

Tobias: I created the customers for you. You get to roll out on my platform, and I had to do all the hard work. I had to go and build those bloody phones, you just get to sell to them.

Bill: This is why Buff Diggy is smarter than me when he said that it was the most valuable real estate in the world, and I heard what he said and still didn’t understand it.

Jake: [laughs]

Tobias: I still think Google’s a better business.

Bill: Yeah, they had nice earnings. So, did Facebook. That was crazy to see those prints.

Tobias: They are the most direct beneficiaries for the last 12 months though, that could– And Amazon as well. Amazon, nobody’s going to mention Amazon? It’s like 47% on a $100 billion base but then you lock everybody in their houses for a year, that’s probably what’s going to happen.

Jake: Yeah.

Bill: Yeah, I think big tech generally, it’s pretty incredible.

Jake: But is it a pull forward or not? Was that a secular trend that just keeps going?

Tobias: Should you get paid as a manager to hold FAMG?

Bill: I think a lot of managers have kept their job doing it.

Jake: Oof, amen.

Tobias: They’re probably the most widely held stocks run.

Bill: Yeah, I’m not sure they don’t deserve to be more bought.

Tobias: I think we’re coming up on time, amigos. Any closing words?

Bill: That’s the face, Jake.

Jake: [laughs] Yeah, there it is.

Tobias: What do I do? Do I have a closed face? [crosstalk]

Bill: I gave Jake something to cringe at.

Jake: You didn’t bail the world. Didn’t– [laughs] [crosstalk]

Bill: Apple, at a 4.5% free cash flow yield? That’s just not that rich relative to history or anything. These things–

Jake: Wow. Come on, not history, but relative to–

Bill: Well, you’re not. Yes, we are where we are in the world.

Jake: Don’t. You can’t give me T-bill at 6% as a–

Bill: Yes. Okay, you are correct on that.

Jake: But relative opportunity set today than your comment stance.

Bill: Google’s at 4% free cash flow yield, but these things are not that rich.

Tobias: All right, amigos. That’s full time. Whistles blown. Thanks very much, guys. We’ll see you next week.

Jake: [crosstalk] everyone.

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