During their latest episode of the VALUE: After Hours Podcast, Brewster, Taylor, and Carlisle discuss Warren Buffett’s Uncanny Ability To Predict The Future. Here’s an excerpt from the episode:
Tobias: When you look at what is predictive, there’s a lot of luck and beta just in holding pretty good stocks, enough of them over a long enough period of time. But if you’re looking for predictive stuff, it’s very hard to find anything that’s predictive outside of five years. Moats get crossed, valuations don’t matter. Inside of five years, it’s value and it becomes increasingly less relevant as you get to the end of the five years. But there’s nothing really predictive as a metric that goes on much further than that.
I find the work that they do, in some ways, it’s unfathomable how Buffet is getting it so right other than the fact that he has studied the economy so closely and he’s so aware of what’s happening at that. He’s got a better overview than almost anybody else, and by virtue of the fact that he’s getting data from the railways and all of the other businesses too. I don’t know if it’s– I wouldn’t call it inside information, but he’s just aware of it and filing it away.
Jake: I don’t think it’s macro stuff, actually. I think it’s been much more understanding unit economics and microeconomics of businesses and looking at this point, probably tens of thousands of businesses over this entire thing and identifying a handful of them that have something about this business that allows them to earn more than they should, theoretically, in a hypercompetitive world for a long period of time and recognizing this tiny, tiny vanishingly small sliver of them have these advantages, and then just being willing to hold those for a really long time, and earning what the business earns, which Buffett would call investing, and then the other side he would call speculation, which would be hoping to get a higher price for it later from someone else.
Tobias: To be fair though, he’s often buying these things– I agree with that. But he’s also buying these things– say, BNSF, he buys that when it’s just primed to return a whole lot of capital. So, he buys it and de-risks it almost immediately over two or three years. So, he’s got a lot of his cash back and then he just earns what it earns. He brings it up as a mistake. They saw what Geico was playing for clicks on Google. And so, that should have given them a heads-up that Google was a real business that was earning real money.
Jake: Yeah. Worse than that, for years, they said that the most impenetrable moat, if they had to pick any business, would have been a single-newspaper-town newspaper.
Jake: In a lot of ways, Google represents a-
Tobias: Classifieds. Yeah.
Jake: -newspaper for the internet. So, this single town called the internet with a single newspaper in many ways, so it was teed up for them.
Tobias: Even though they didn’t act on that, you can clearly see that he’s thinking. So, he can see how one part of something is happening somewhere and how that’s impacting something else.
Jake: 100%. No, I think you’re right. He recognizes the industry dynamics like you said with the railroad, the consolidation that was happening, less competition, probably prices firming up, better returns on capital likely inbound, all that stuff, I think he’s pretty aware of the cycles and competitive nature of the places where he operates. That’s the key thing too, is that he never goes outside of where he thinks he can understand what the game is.
Tobias: BNSF is another good example of it. Railways were hated for a long time before Buffett did that.
Jake: Oh, they were airlines before airlines.
Tobias: Yeah. Tech stocks in the whenever it was. Was it 20 something? Is that too late? Is it earlier than that? [crosstalk]
Jake: That’s too late. Railroads were like 1880s, 1890s, I think.
Tobias: So, tech stocks then, and then they were fallen angels or there were people buying them as distressed enterprises. Yeah, that’s right. There were tech stocks in Commodore Vanderbilt times, and then they were unpacking the problems from that familiar overbuilding for years and years afterwards, and it was like a distress play. I think that’s why Graham has so much on railway bonds in the first edition of Security Analysis, because that was what was trading then. But until Buffett bought them, they were regarded as being high capex, low-return businesses.
Jake: Yeah. Basically, you had to put money and just stay in place. kind of red queen effect type of businesses.
Tobias: But something evidently has changed. How did he determine that it made that change? He was right. That trade was very similar to the one that he did with– I’m just blanking on it now. Chevron. What’s that?
Tobias: OXY. Well, a lot of the capital came out immediately after he bought it.
Bill: Well, he got to control the capital at BNSF.
Bill: OXY didn’t. Said that they wouldn’t–
Tobias: But he was aware that they were overcapitalized. He was aware the cash was going to come back out.
Tobias: He had made that assessment that whatever he was putting into it, he was getting some very substantial portion back. There was a blog post that somebody wrote. This is a while ago now. It could be– I don’t even know, quite a long time ago now, where they looked at how much had come out initially. It was just jaw dropping how much he’d actually managed to extract from it in the first five years. It was de-risk in the first– [crosstalk]
Jake: Is that right? And then, he was just free rolling after that?
Tobias: I think OXY’s the same. right? He doesn’t control the capital allocation, but–
Jake: He doesn’t directly– [crosstalk]
Tobias: He’s [crosstalk] to the–
Jake: Yeah. [laughs] Here’s a public proclamation of what you’re going to be doing with that capital for the next 10 years. [crosstalk]
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