During their latest episode of the VALUE: After Hours Podcast, Rotonti, Taylor, and Carlisle discuss Warren Buffett Buys Wonderful Companies Cheap. Here’s an excerpt from the episode:
John: JT was saying, Buffett buys cheap and ends up looking smart. That is what happens when you buy cheap, by the way. I think one of the misunderstandings about Warren Buffett is that it’s better to buy a wonderful company at a fair price than a fair company at a wonderful price. It’s true he wants to buy wonderful companies. It’s true that Munger got him to shift away from cigar butts and towards higher quality businesses. That’s all true. I can’t find any evidence that he wants to pay a fair price though. I really can’t.
John: I can’t. If you look at Occidental and Chevron, he bought those at double digit free cash flow yields. He bought the five Japanese trading houses at seven times earnings or 14% free cash flow yields. HPQ is a top holding. Right now, it’s at 8 times. So, he was buying that under 10 times earnings. I think he added to that one this quarter, by the way. When he started buying Apple in 2016, Apple’s average PE for the year in 2016 was 12, and it traded under 10 at points of the year. So, once again, 10% free cash flow yield. Taiwan semi, I know he busted out of this one, but it was a $4 billion investment at one point. Well, when he bought Taiwan semi, it’s 12.5- or 13-times earnings.
The quintessential example of Buffett paying up– I’m going to source your book now, Tobias. The quintessential example of Buffett paying up is See’s Candies, because See’s Candies, Buffett has always described it as this. It’s got a lot of brand equity. Therefore, it has pricing power. It earns extremely high returns on invested capital and it requires almost no capital to grow. He paid 12.5 times earnings. I got that from your book, Tobias. 12.5 times earnings per– [crosstalk]
Tobias: Because it was a private transaction too. That’s expensive for a private transaction.
John: Exactly. The average market multiple is 15 or 16. I don’t know what it was back then. 12.5 half times for his ideal business that he uses as his textbook example of paying up. He even tells a story. We almost didn’t pay the last $5 million or whatever it was, because he thought he was paying up so much. Last thing I’ll say about this is, he almost never talks about valuations of stocks he’s buying or business he’s buying in his investor letters. Almost never. But he did twice and I have these here.
So, in his 1995 letter, when he first became interested in Disney stock, he said, “Disney had net cash–” So, this was in 1966. This is 1995 letter, but he’s telling the story about when he first became interested in Disney stock in 1966. He said, “It had net cash and it was trading at five times pretax earnings.” Five. And then in his 1990 letter, he talks about buying 10% of Wells Fargo at a PE of five, or three times pretax earnings. There’s no proof that I can find-
John: -that he’s paying a fair price for anything. He’s paying double digit free cash flow yields.
Tobias: Wonderful companies at wonderful prices.
John: Yeah, at wonderful prices. That should be the quote.
Tobias: That’s the innovation.
Jake: [laughs] Six-minute abs. [laughs]
John: Yeah, exactly.
Tobias: What do you think about the TSM position getting into it and then blowing out? He did talk about that a little bit at the meeting. What do you think, JT?
Jake: Well, he said that he felt like the geopolitics had shifted and that it just felt riskier to him, which kind of a weird– That’s not a normal– I wouldn’t say Buffett’s done a whole lot for geopolitical reasons ever, at least in my estimation.
Tobias: But he’s stays inside the States a lot too.
Jake: True. He hasn’t exposed himself too much.
Tobias: You can see some of those early meetings, he was talking about not going much outside the States. And then he justified there was something– I forget now what it was. One of the early positions outside. I think it was Guinness. It’s as late as Guinness when he said Guinness is like Coke. It just happens to be situated in Ireland.
Jake: That was probably like early mid-90s?
Tobias: It is as far back as that. Yeah.
Tobias: Sorry, dude. I cut you off. Keep going. [laughs]
Jake: I don’t have anything else.
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