During their recent episode, Tobias Carlisle and Jake Taylor discussed:
- Buffett Meets Sun Tzu: The Spark Behind the Book
- Apple as Buffett’s Greatest Trade
- The Meaning of ‘Soldier of Fortune’
- Via Negativa: Winning by Avoiding Mistakes
- General Re: Defensive Strategy in Action
- BNSF: Buffett’s Coup d’Œil Moment
- The Japan Trading Houses Bet
- The Moral Law and Daoist Principles in Business
- Wu Wei: Flowing With Events, Not Against Them
- Charlie Munger: Architect of Via Negativa and Wu Wei
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TRASNCRIPT
Jake: This is Value: After Hours. I am your special guest, host today, Jake Taylor. And we’re going to be interviewing our dear friend, Toby, about his new book that he has coming out. So, Toby, welcome to the show. Happy to have you on here. [laughs]
Tobias: Thanks, Jake. It’s good to be here.
Jake: Yeah. [chuckles] I’m sure it’s quite the relief to not have to carry the show as a host and putting that on me. So, let’s just jump right into it and get after it. I think it’s going to be a fun conversation.
What sparked the idea to bring together Warren Buffett and Sun Tzu, and really this concept of risk taking all into one cohesive narrative?
Buffett Meets Sun Tzu: The Spark Behind the Book
Tobias: So, first of all, fellas, I apologize for this, the live chat’s still not working. I reached out to YouTube.
Jake: They told you to pound sand.
Tobias: They said, “Come back when you’re 100 times bigger, and we’ll talk to you.” [Jake chuckles] I have a new book. It’s really hard to see the cover here, but that’s what it looks like. I’m very proud of the cover. I think it’s a fun cover.
So, I’ve told this story a little bit before, but this is what happened. During COVID, during the pandemic, I’ve read Sun Tzu. I read a few versions of Sun Tzu. I think I read the first one when I was in grade 12, and 100% did not get it. And then, I had another go at it, because it’s one of those books that I always say it’s like The Emperor’s New Clothes, like everybody says that they’ve read it and they love it and it was impactful. I totally didn’t get it. I probably tried to have a go at it every five years or so since then, which is, I don’t want to tell you how many times that is. I’ve probably gone back to it six or seven times, something like that.
During COVID, during the pandemic, for whatever reason, it clicked for me the first time. The main reason that it clicked is as I was reading through it, I thought, how much the Giles– So, Giles was the original translator who did the 1910 version. He was the first guy to translate it into English. Somebody had a go before then. That’s not true. Someone had a go, but he said. “They didn’t do a very good clean translation.” It had been previously translated into French. There’s a suggestion that Napoleon read it, although we don’t know, for sure, but there’s a possibility that he read it.
So, I read it, having read a whole lot of Buffett equally since I was about 17 years old, and I thought how much it sounded like Buffet. That was the first idea that I had to try to show why Buffett sounds so much like Sun Tzu. And so, that was really the beginning of the effort to write the book. It was a struggle to find the best way to illustrate it without going back over a whole lot of stuff that I’ve done in the past, because I do think that a lot of Buffett’s career really does–
From when he gets control of Berkshire Hathaway as a net-net sub-liquidation value with a whole lot of busted assets that aren’t worth much, and then transforming that into where Berkshire Hathaway is today as the most valuable company in the planet by net worth. Extraordinary performance. He’s maintained control the whole way through. It’s one man’s canvas, with some assistance from Charlie Munger, I understand. But he’s the guy.
I wanted to illustrate those things. So, I struggled a little bit, but I think I found a way to do it. I’ve used his more modern transactions, because I think that everybody had– He was well known enough and his philosophy was well known enough that it’s more of an example of skill than it is of luck.
Apple as Buffett’s Greatest Trade
One of the opening stories in the book, is talking about Apple, and contrasting Einhorn and Icahn, and their activist campaign against Apple with Buffett’s subsequent investment in Apple to show the difference between the two approaches. And I say that Buffett’s approach is a better example of a Sun Tzu style strategy, which I think a lot of people will not expect, because I think that a lot of people think of Sun Tzu. The book is called The Art of War. It sounds like this very martial, aggressive philosophy.
When I think in actual fact, it’s not really that philosophy. They say, it’s a book of peace. This is part of the philosophical tradition that it comes from, but I think that illustration– I think that when I say that I think that Apple is the greatest trade ever, because Buffett puts so much capital to work in absolute terms. It was such a large portion of Berkshire Hathaway or Berkshire Hathaway’s investable assets. The downside was minimal and the upside was extraordinary, and then it was a four bagger plus. And at some point, it was more impactful to Berkshire Hathaway’s returns than any other investment in very short order.
Jake: And it was out there for anybody to have done it, right?
Tobias: Anybody could have put that on because it was publicly traded. Everybody owned an iPhone, or an iPad, or a laptop or knew who Steve Jobs was or had an iPod. It was in the public consciousness. Everybody knew about it. Anybody could have done it. As opposed to the–
Jake: I caught this biotech when it was, you know, [chuckles] no one had ever.
Tobias: What’s the South African investment into the Chinese company that–
Jake: Yeah. Into Tencent.
Tobias: Tencent.
Jake: It’s Naspers.
Tobias: Naspers. Thank you. I think that’s also a very, very impressive deal. You’ve got to go to the South African stock market to find a Chinese investment. Nobody knew who Naspers was before they did that, whereas Buffett was very well known before he did the Apple deal. And so, I think that that’s really the best example of something where it really was skill rather than–
There is some luck, of course, to get the return that he did, but it was skill to put that all together. And so, I wanted to go through, and describe why and what qualities Sun Tzu talks about for his generals and for strategy and how that was exemplified in the Apple deal and other things that he did.
The Meaning of ‘Soldier of Fortune’
Jake: Yeah. And then, as far as the name of the book, Soldier of Fortune. What does that really mean in your context, and do you mean it in a mercenary sense of the phrase?
Tobias: Yeah. So, not a mercenary.
Jake: Yeah.
Tobias: That’s the common usage of the term. Not a mercenary. I meant it in the sense that fortune has the representation of Fortuna, the goddess Fortuna, which is luck and risk.
Jake: She’s hot.
Tobias: [chuckles] When she’s with you, she’s hot. When she’s against you, she’s mean.
Jake: Real cold. Yeah.
Tobias: I just thought that people who were at war with fortune, at war with luck, were soldiers of fortune. I really had to shoehorn it in there, because I wanted the title for the book. The book could have–
Jake: It started with the title and then I was like, “How the hell do I write a book that has–” [chuckles]
Tobias: That’s basically it.
Jake: And then, any surprising parallels between, say, Chinese military philosophy and then the Buffett’s letters that maybe you didn’t expect when you first started out on this project?
Tobias: I think at a very broad level, there are some really great ideas in The Art of War. When you’re thinking about strategy and you’re thinking about achieving something, it is in some way to look for the simplest, easiest path, to not try to– Buffett talks about this all the time, which is one of the reasons why– I think there are so many parallels between the way Buffett talks.
It’s not that I think that Buffett’s read Sun Tzu or that he’s based his investment strategy on Sun Tzu. It’s nothing like that. I’m sure he has read it, but I doubt that he’s consciously basing his strategy on it. I really do think that there’s–
Jake: Deeper truth of the universe.
Tobias: Exactly. I think that there’s a single way to do many of these things, and every other way is the wrong way. And it’s like the Anna Karenina.
Jake: This is the way.
Tobias: Yeah. Well, it’s the Anna Karenina. Happy families like this.
Jake: Oh, yeah.
Via Negativa: Winning by Avoiding Mistakes
Tobias: Happy families are all the same. Unhappy families are all unhappy in their own way. It’s because there’s one way to get it right, and there’s a million ways to get it wrong. Part of the way that you go about getting it right– That sounds really stressful, because it sounds like, well, you’ve got to figure out the single way to do it and all of these other ways that don’t work. I think that the Via Negativa idea–
So, all of Sun Tzu is written– I didn’t really realize this until I went to try to write the book and transcribe The Art of War precepts. But a lot of it is written in the negative. So, it says, “Don’t do this. Do not.” It’s all framed up like that. I think that the significance of that framing is because it’s approaching it from this Via Negativa idea, which is you get to where you’re going by not making mistakes, basically. By the way of the negative is what it means.
You try to not make obvious errors. And then, if you remove all of the ways that are obviously wrong, if anything remains, then what remains is the only path that you can take. I think that for me that simplifies a lot of ideas you can take out. So, in an investment context.
Jake: Real quick. I learned a new version of that I hadn’t seen before, which is Japanese zoning laws. They will often express it in things that you can’t do in that area, but otherwise it’s open. Whereas we in the US, it tend to be like, “Well, this is commercially zoned, or this is residentially zoned. You just can’t do this here, but figure it out otherwise.”
Tobias: I think that’s a good approach. I think it’s a simplifying approach, because you think about in terms of investment. I know that lots of investors like Mohnish Pabrai– I know that Guy Spier does this. Lots of guys have a checklist which is, “Here are all the ways that I’ve died in the past, so let me go and not do this 102 things that led to falling apart.” In an investment context, it might be, “Don’t take on things that have got too much debt. Don’t take on cyclicals with too much debt. Lots of ways that you can avoid falling over.” I love– [crosstalk]
Jake: Life is really cheap, Toby.
[laughter]Tobias: Well, maybe. There are exceptions to the rule, but you can deal with that in a sizing context, which I talk about sizing a little bit. That was one of the really unusual things too that–
Sun Tzu understood probabilities and he writes about probabilities. He does it in a funny way. He does it in a different way that’s a little bit counterintuitive when you first read it, but it’s really clever. He calls it balancing the chances of life and death.
Jake: This is, what, 1,500 years before Fermat and Pascal?
Tobias: Right. 2,500 years ago, something like that. He has a process, not an investment process, but he has a process which involves– He spells this out a number of different ways. He says, “You do the measurement–” So, you go and measure, figure out the quantities, do an analysis, reach a conclusion. And then, if you have this overwhelming advantage– He uses this archaic, which might be from Giles, but he says, “A grain to a pound,” which is like 1:6,000. So, he’s saying, “If you’re 6,000 times better than the other side, then– If your chances of life and death are that much, then you act.”
Jake: So, that’s a margin of safety, then.
Tobias: Huge margin of safety. Yeah. So, I tried to find three transformative transactions for Berkshire that were later. So, Berkshire was well known, Buffett was well known. They’re reasonably modern transactions. And each of them, I think, illustrates some big themes in The Art of War and in strategy generally.
Jake: Let’s unpack those then. What was the first one?
General Re: Defensive Strategy in Action
Tobias: So, the first one was General Re. I think General Re was really interesting, because it came– Buffett had made the Coca-Cola investment, and he’d put about a third of Berkshire’s capital into Coca-Cola and then inside three years, it had tripled, and so it had become a very serious part of Berkshire Hathaway. That was still in the early 1990s. And then, they went into a large growth market where Coca-Cola absolutely ripped. I think it got to 40 times earnings, something like that.
Jake: Might have been 60, if I remember right.
Tobias: 60? 60 times earnings?
Jake: Yeah.
Tobias: And Berkshire itself.
Jake: Either way, it’s fully priced.
Tobias: It made up a big chunk of their investable assets and then they were overvalued to three times book value, something like that, around that time as well. So, it was very, very expensive on what was clearly elevated assets.
Jake: Yeah. So, an elevated internal mark on Coke, probably and then the container holding that is at 3x book value.
Tobias: And if you sell your Coke, you pay tax at the marginal rate of 35%. So, selling’s not really an option. And in addition to that, you might never get back into Coke again, because there’s no guarantee that Coke trades cheaply. I don’t think that Coke has really ever got cheap since he bought it. I think it’s got less overvalued, but I don’t think you could ever say that he would have been able to get back in.
All the time during that holding period, he’s been getting very substantial dividends and they’re now 50% of what he invested into Coke on annual basis. So, even though the price got well ahead as an investment, it’s been an extraordinary success. But that was 25 years ago that it got to that level of overvaluation that still hasn’t worked off and so, he had some–
That creates a problem. And that’s a really good problem to have, but it’s still a problem where if Berkshire Hathaway– And now, we know, because there was a collapse in 2000. If Berkshire Hathaway follows, the rest of the market probably gets cut in half at least and maybe more than that, because Coke was down by 50%, Berkshire was overvalued relative to the Coke. Berkshire would have come down a lot too. And so, one of the principles of The Art of War of Sun Tzu’s is that you defend first. So, you have to be defensively minded and you have to try to avoid ruining.
We’ve had lots of discussions about this in the past, but avoiding ruin is like– If you go to zero, it doesn’t matter how well you’ve compounded before you get to zero. There’s no coming back.
Jake: These are all ergodicity lessons that we had.
Tobias: Exactly right. What’s his name?
Jake: Luca-
Tobias: Luca. Yeah.
Jake: Dell’Anna. Yeah.
Tobias: Thank you. Yeah, Luca Dell’Anna’s got that great. Luca Dell’Anna has explained ergodicity really well in his book. And it’s a great concept. We should get him back on again to discuss again in the future. But the whole idea of Sun Tzu is avoiding rule and avoiding this zero. So, the way that you do that is you’re defensively minded, you defend first. He has lots of these little principles for defending that are great and that apply to equity investment in business and so on.
And so, Buffett’s solution for it is to merge with Gen Re. There had been discussions beforehand, they had worked together on deals, they knew each other really well, they had discussed merging previously, but the valuation wasn’t attractive from Berkshire’s perspective. And so, finally, they came to terms and they were able to do that deal. They achieved it by issuing stock in Berkshire. So, they diluted their Coke problem and substituted this overvalued equity with probably undervalued bond portfolio, because Gen Re was heavily invested in bonds.
Gen Re had some restrictions on it as well. It wanted to expand internationally and it was on a quarter by quarter. It was reporting quarterly. They were unwilling to invest, because then that would show up as a bad quarter. And so, they were constrained a little bit. Whereas Berkshire doesn’t have those constraints. They still have to report. They just ignore those constraints, which you’re allowed to do evidently.
Jake: Well, plus the capital. The balance sheet behind it allows them to turn what was debt holdings into eventual equity holdings.
Tobias: And so, they do that deal. They dilute down the Coke, the bonds replace the Coke overvaluation. And then, in 2000, when the rest of the market collapses, all of those bonds rally, which bonds sometimes do in a collapse. It’s no guarantee that they do that in the future. But they did on that occasion and Berkshire did extraordinarily well. They had all of this investment capital right at the bottom of the market, where everybody else was really struggling, which set them up for a huge 2010 and into the future.
I think that it’s an example of how being defensively minded, and defending and avoiding ruin is actually a huge positive, and it helps you gain and be offensive at a subsequent time. So, that’s why I think it’s a really powerful example of using those sort of principles in an investment context.
Jake: Just to think about the mindset at that time, for Buffett, four years before that, he had just nuked $400 million on a Dexter Shoes deal that he did with stock. And so, you would think like, that was a bit of a cat that sat on the hot stove, and yet he was cognizant enough to– that it’s still a good idea to do it, even though he’d been hurt by it. Is there anything in Sun Tzu about keeping an open mind about these things and maybe not fighting the last war, necessarily?
Tobias: It’s a great line. Its possibly there, [chuckles] but I can’t take off the top of my head. It’s a good line. It’s a good idea. There should be, if there’s not.
Jake: Yeah. We’ll put it in there.
[laughter]Tobias: In the second edition?
Jake: Yeah, second edition. The Carlisle translation.
Tobias: One of the things that I love about all of the deals in the book, really, is how heavily criticized they are at the time that he does the deals. It’s funny, they’re criticized for often for reasons that have nothing to do with what actually eventually happens. But one thing that everybody missed that Buffett missed too that now is the thing that everybody remembers about that deal, funnily enough, it’s not the fact that he did very well out of the bonds. Everybody remembers the weapons of mass destruction, derivatives exposure which–
One of the criticisms of Berkshire, is that they don’t do that very deep diligence. I was a corporate lawyer. That’s pretty standard form to do these incredibly deep diligences. I don’t know, perhaps that did happen. But it doesn’t matter. They didn’t uncover this issue until down the track and they discovered that they had written these incredibly complex contracts, where really neither side knew [chuckles] if they were ahead or behind or if they owed money or if they were owed money, or they both assumed that they were owed money, or it was–
Jake: Yeah. Both sides are marking.
Tobias: Both sides are winning.
Jake: Yeah. [chuckles] Yeah. It cost them how much to get unwind those?
Tobias: I think it’s significant, but still not particularly material in the context of the entire transaction, even though he devoted lots of pages to saying why he had made a mistake and why it was a huge mistake and flagellating himself, which is classic Buffett, to do that, even though it was a hugely successful deal. But I think now, if you ask most folks about Gen Re, they would say, “Well, it’s weapons of mass destruction and derivatives rather than a really positive outcome.”
Jake: [crosstalk] mistake. Not a–
Tobias: Yeah, it was a mistake.
Jake: Not a masterstroke of strategy.
Tobias: And one that he compounded by issuing stock for, even though– Really, that’s what made it such a great transaction that he issued stock, got back debt, got back bonds that rallied into a crash and diluted out the Coke. So, it was a masterful transaction. So, one of the things that Sun Tzu says is, “You keep all of your plans silent. You don’t let people know what you’re doing.”
Jake: So, Gen Re shareholders don’t want to feel like they got fleeced, right?
Tobias: Right. And you might want to do that transaction again in the future. You might want to do something similar in the future.
Jake: Or, maybe Bank of America is sitting there, and you might want to give them a call from the bathroom.
[laughter]BNSF: Buffett’s Coup d’Œil Moment
Jake: So, how about the second transaction?
Tobias: So, the second transaction that I wrote about was the BNSF, the railway deal. I think there’s a nice parallel to Graham. I introduced Graham a little bit, and I talk about Graham and I use that more as the mechanics of making an investment, which Sun Tzu also talks about–
Sun Tzu goes through how you conduct analysis. He doesn’t do it all in one place. It’s spread throughout the book. But I’ve put it all together into one place, so you can see that he has this quite systematic approach. So, he tells you how to analyze a situation for a strategy and what you should be looking at. He breaks down, basically, it’s the people and the territory and the conditions. He has nice, lyrical, so the conditions are heaven, the territory’s earth and then the commander. He goes through these things.
And then, he talks in a separate part about the way that you actually go. I mentioned that earlier, you do the measurement. You do the measurement quantity analysis and then balancing of chances. And then, when you have an overwhelming advantage, then you act.
Jake: If Sun Tzu was in the public markets right now, what strategy would he be running? Is he a quant guy? Is he running a pod shop? What do you think?
Tobias: I think he’s Buffett.
Jake: Okay.
Tobias: I think he could only be Buffett.
Jake: That’s too easy answer.
[laughter]Tobias: Yeah, it is. That was obvious, wasn’t it?
Jake: Yeah, I stepped right into that one.
Tobias: But I like the BNSF deal for a number of reasons. One, is that I think it’s a geography story. It’s geographical, as well as it’s related to Graham. I think Graham is also very Sun Tzu.
Graham goes through and he has the same sort of, “You’ve got to conduct this. It’s a business-like operation. You go and undertake evaluation, you look at the quantitative stuff, you look at all of the factors that influence the outcome and then you come to a decision and you look for this margin of safety and then you assume even though you’ve done all these things, it’s still going to fail, so you don’t become too concentrated, you don’t over commit.”
All these ideas, I think are good ones. But BNSF is a particularly interesting transaction, again, because it was criticized at the time because it’s very unlike Buffett. He’s been talking about don’t–
Jake: Capital light compounders.
Tobias: Yeah, capital light compounders. Here, he’s investing in a railroad, which is the antithesis of a capital light compounder. It requires enormous amounts of capital.
Jake: Old’s man has lost the plot, huh?
Tobias: I think that was the criticism at the time. The opportunity set is just so barren. There’s so little to do. This is during a period of zero interest rates too. So, everything’s fully valued, there’s nothing to do. There’s nothing for a company the size of Berkshire Hathaway to deploy capital into and here he is, he’s taken BNSF, which is a railroad capital intensive. So, he’s panicked. He’s suffered from FOMO and he’s done this deal that looks terrible.
But he had understood lots of different things that were not obvious to people who didn’t follow that stuff as closely as he does. There’s a lot of elements to it which is this complexity. It shows the strategic genius of Buffett in doing this transaction. One of them is its geography is more to the Pacific, more to the West Coast. And so, he had perceived that America’s relationship was moving from Europe to Asia, doing more business across the Pacific. And so, BNSF is well positioned for that.
He also understood that there were some changes to the tax code that were going to allow them to accelerate depreciation on some of their investments. And so, they were going to require a lot of money going into this thing. But all of it would depreciate very quickly. And so, even though the after-tax earnings might not look that great, the after-tax cash flow was extraordinary on all of these investments. It was regulated. [crosstalk]
Jake: Right. You could take the pain early. That’s something that they’ve always been willing to do, is take the accounting pain for the cash flow tomorrow.
Tobias: Right. You can transport goods. As America starts transporting more and more goods around, because we’re all buying online and doing stuff like that, railways are still the cheapest way of moving stuff. It’s cheaper than moving it by truck on the road and cheaper in terms of carbon intensity too. I use it to illustrate the method, which is that process of doing the analysis and making the investment. But also, this idea of coup d’œil which is this– It’s not spelled that way. This is a very funny pronunciation of this thing.
Jake: It’s a French term, right? Yeah.
Tobias: It’s a French term that means stroke of the eye. They say that Napoleon talks about it. And von Clausewitz, who wrote Vom Kriege, which is On War, he was the Prussian general who wrote– He saw Napoleon fight against, I think, the Russians or the Prussians as a young officer. And then, when he was older, he wrote this book. And so, he talked about this a little bit.
But the idea was that these great commanders have this, what they call, the coup d’œil, which is the ability to take in all of these different ideas, like the geography and the changes in the tax code and the cheapness of moving it and the movement from Europe to Asia, all of these things and just filter it down into one single transaction, which was– And to identify BNSF as the right thing to do.
And so, I talk about coup d’œil as being something that I want to develop for myself. And so, I think it’s an interesting idea. Sun Tzu talks about a little bit too, when they get into the later parts of the book, which are a little bit more wu, a little bit– I still think they’re interesting ideas and– [crosstalk]
Jake: Wu or wu wei?
Tobias: Both.
Jake: Yeah. [laughs] Yeah. It sounds like that’s what Buffett’s talked about before of that apperceptive mass, which is you have all of this constellation of patterns and ideas in your head, and then something you see just makes it click into place.
Tobias: Yeah. Great term. I hadn’t heard him talk about that, but that’s a–
Jake: Toby, we did this whole veggie segment on apperceptive mass.
Tobias: I think we’ve done 400 of these now.
[laughter]Jake: It’s hard to keep track.
Tobias: So, I used BNSF to illustrate those ideas. I think that does capture the method and analysis and the coup d’œil idea, which is– I think coup d’œil is the result of doing the method over and over and over again until you get to the point where it’s really second nature, and then you get the coup d’œil after you’ve done these analysis enough, you expect things to be where they are and then when you find them there, then the coup d’œil is functioning properly.
Jake: Back up the truck.
Tobias: Yeah.
Jake: Yeah. Maybe you can speak a little bit about the righteousness path that is– Maybe even the environmental impact of railroads being that– You can do, like, one ton can be transported– How far is it? Is it 500 miles one gallon of fuel?
Tobias: Yeah. So, it’s more efficient in terms of fuel. It’s more efficient in terms of carbon intensity than anything else. So, there’s a lot of good reasons why– It’s good for the environment. And it’s efficient. That’s one of Sun Tzu’s ideas as well, that you’re looking for efficiency, which– I could torture that into analogy for return on invested capital or something like that. [Jake chuckles] I didn’t do that, but I could have got there. But I think that the idea of the righteousness is really something that came in the third part of the book.
The Japan Trading Houses Bet
Jake: Okay, let’s talk about that then, and the third deal.
Tobias: So, when he was 90, he announced this deal. So, this is only five years ago now. They’d never really invested materially. Meaningfully, this is a little bit of a weasel word, I get, but they’d never invested materially outside of the US. I know they had done transactions at the inside the US. But Japan, they bought and famously made the announcement that they’d taken very significant positions in all of the sogo shosha, the Japanese conglomerates.
Jake: Yeah, trading houses.
Tobias: The trading houses. And so, they were all set up in the Meiji period to be Japan’s conduit to the rest of the world in terms of trading, because Japan is resource poor, and so they needed to find a way. And the way that they achieved it was by vertically integrating a lot of these things, so they buy the mine, buy the processor and so on. And so, they have these things touch every single aspect of a lot of the stuff that they’re involved in.
They do it very, very well, pretty efficiently. The criticism of Japan has always been that the corporate governance wasn’t very good and that they had all these cross shareholdings which made them way too complicated to value. You couldn’t exert any pressure externally if they weren’t performing the way that you would hope that they should.
Jake: And you get terrible ROEs.
Tobias: Terrible ROEs. As a result, the valuations are discounted to that extent. And so, Buffett takes these positions in five years ago. So, 2020 was when the announcement was made, 2019, 2020. What really stands out is that, again, using the coup d’œil, he had perceived that there was this move towards better corporate governance and they were becoming increasingly shareholder friendly. And also, that they were–
The Moral Law and Daoist Principles in Business
I think they’re similar in some respects to Berkshire Hathaway. They’re not identical, but they’re similar ideas in their conglomerates that touch many different aspects of the global economy. And so, you’re not really exposed to Japan or any single thing. It’s a reasonable portfolio bet on these things where the valuations were very, very low. I outlined them in some detail in the book.
But what really stands out? There’s this idea in Sun Tzu that in some places, it’s called The Moral Law. In some places, it’s called The Way. And so, that’s this Daoist idea. And so, Daoism, sometimes it’s described as a religion, sometimes it’s described as a philosophy. I use it more as a philosophy. I’m not really sure how it becomes a religion, but I describe it as a philosophy and it’s outlined in a series of foundational texts.
Da’o DeˋJing, the Zhuangzi and The Art of War is the third foundational text from that period. They talk about some of these principles. I use that as an opportunity to discuss those principles. Several of them are very important, I think, and I really are exemplified in Buffett. One of them is this idea of The Moral Law.
So, Buffett calls it character or– You show the
business with people you want to be and you like and admire, and you’ve got to conduct yourself in a way that will make people who you like and admire I want to do business with you. To find a good partner, you have to be a good partner, and you behave honestly and fairly, and you do all of these things.
Buffett has written about it and talked about it quite a lot. I’ve captured a lot of that. I’ve also tried to capture what the Daoists and The Art of War says about this. The Art of War, it’s one of the very first things that Sun Tzu discusses, and it’s one of the five elements that he says when you’re assessing which of the two– You do this analysis at the beginning. You ask five questions to determine which of the two sides is likely to prevail in a conflict.
One of the questions is, which of the two sides follows The Moral Law or which of the two sides follows The Way? Which of the two sides are the people more likely to follow the leader without being dismayed by danger? The idea is that if you have some totalitarian state where people are forced to fight, they won’t do as well against people who are fighting for their own freedom probably. And so, they’re looking at are the leaders moral and just and doing the right things, looking after the people that are they despots and oppressing the people. The idea is that the moral and just people should prevail. And so, I think that applies just as well in business.
I remember when I was getting started, I had this impression that business was very cutthroat, was ruthless and that in order to survive, you had to be smarter than everybody else. I remember reading Buffett and feeling like there was some hope that you could do business in a good way.
Jake: Be a good person also.
Tobias: Yeah, yeah. You didn’t have to destroy everybody along the way. You could still do well by behaving well. And so, I love Buffett for that. That was one of the main things that I was surprised when I read The Art of War, that I thought, well, that’s actually sensible– That’s a good approach. There’s some basis in decency for doing this stuff. So, I try to make that one of the most important ideas in the book.
Jake: Outside of Buffett, where might you be able to find that in– If you were looking at a company, does that live in the proxy statement?
Tobias: That’s a good question. I think you probably have to listen to what people say in totality.
Jake: Yeah.
Tobias: I think there are a lot of people out there who behave very well. I think most people in a Fortune 500 type context are pretty good moral– Most people are behaving pretty well. I would say everybody. But I think most people are doing a pretty good job, but I think the Buffett does better than everybody else.
Jake: I wonder about the relativity though sometimes. Like, well, isn’t it the most common excuse, well, everyone else was doing it? Buffett’s always said that like, “That’s one excuse that we’ll never fly at Berkshire.”
Tobias: [chuckles] Again, it’s a strategic type argument too. With the AI CapEx investments that we’re looking at now, how can you not throw a whole lot of money at this problem?
Jake: How can you. [laughs] yeah.
Tobias: I’ve made that decision, I’m not participating in it, but it’s one of the things that perhaps you could forgive somebody. If you’re in the Mag-7, can you not do it? That’s not really a question of morality. That’s more of a question of strategy that’s mutually assured destruction or something like that.
Jake: Right. Yeah, it’s a prisoner’s dilemma kind of thing.
Wu Wei: Flowing With Events, Not Against Them
Tobias: Yeah. Yeah. The other thing that I discuss in the context of that Moral Law and The Way, there are some other ideas in the Daoist literature that I think are really interesting, and one of them you mentioned earlier, is that wu wei idea. I think when people hear this idea, it does sound very kind of– It’s very wu wu. It sounds like you’ve gone a little bit soft.
Jake: Yeah. In the head.
[laughter]Tobias: Yeah, that’s right. But I think that properly understood, it’s one of my favorite ideas in the book. It’s become increasingly important and a powerful idea. I think there’s some great lines in there that illustrate this idea. So, the idea of wu wei is, there is a natural flow to most events that most events are going to go. We all know how they’re going to play out. You either play out alongside them or with them and take advantage of them, or you stand in their way and you’re utterly destroyed by them. And so, it’s better to be in the flow of the way that these things are going to go.
I think while that does sound a little bit soft– There’s a great line in there where they say– I’m going to mangle the quote a little bit. One of the philosophers talks about wu wei as, “It’s great to be a good farmer, but you don’t have to be a great farmer in the spring.”
Jake: Anyone can grow in spring. Yeah.
Tobias: So, when you take advantage of the spring, just take advantage of the natural flow of events. Don’t stand in the way. That’s basically the idea. To me, it’s probably obvious and it’s probably trite to say it, but it’s good to just have that reminder that, particularly if you’re a contrarian, like part of what we’re trying to do is to find things where everybody is not in agreement, because that’s how you get. If everybody thinks that something’s going to happen, then the bet is–
Jake: Fully priced for that.
Tobias: Exactly right. And so, the other side is the one that’s underpriced. And so, you have to find the underpriced bet and you have to factor that into your assessment of wu wei.
Jake: Maybe talk about Buffett’s approach to the trading company’s management as a wu wei insight.
Tobias: I think that he was open about what his intentions were. He told them very early on that he was going to buy up to a certain level, and that they would look for a way to participate alongside them if they had any deals that they wanted to do. I think he sent Greg to deepen the relationship. Greg Abel, who’ll be CEO at the end of the year. That’s right. Isn’t He formally steps in at the end of the year.
Jake: Yeah.
Tobias: I think that that where previously they might have viewed a foreign investor as an interloper or an aggressor, they were more prepared to welcome him also, because he had this great reputation that he developed over an entire lifetime or business career of treating everybody fairly and investing the way that he has. And so, I think all of that stuff that he had done beforehand, all of the writing that he had done previously set him up to be the right person.
They were prepared to believe what he was saying, which was that he would buy up to a certain level. He was just going to be a passive investor. He’d provide advice or talk to them if they wanted that. And then, he was asking to take those positions up, which they have done subsequently. Td they’ve continued to invest in the equity and invest in projects alongside some of these businesses. So, I think it’s been an incredibly successful investment in what’s been a tough investment landscape for a company’s biggest Berkshire. They’ve done extremely well applying some of these principles that I think are Sun Tzu’s in origin.
Jake: Maybe this is a little bit more of an oddball question, but how do you address this contradiction that I often feel, actually– This is asking for myself. [laughs] This contradiction between compounding that comes from owning great assets for really long periods of time, and letting them flourish and being that favorite holding period of forever versus timing the market, for instance, with a big cash pile, which Berkshire has also done. It feels like they’ve done both of these. Can Sun Tzu help us square that seeming contradiction?
Tobias: No.
Jake: Damn it.
[laughter]Jake: All right, I’m out of here.
Tobias: Maybe. One of the things that I talked about in relation to the Apple investment at the start is to contrast, because I’ve written about Icahn and Einhorn and Apple in previous books. And so, I think it’s a signal transaction that anybody could have seen coming. I contrast his approach to it or their approach to it first, which was Apple essentially didn’t change much in between Einhorn and Icahn doing their-
Jake: Saber rattling.
Tobias: -campaign and Buffett taking his position. The difference really was that they both persuaded Apple to pay out some of its cash holding to do some buyback and to take care of some of the cash on the balance sheet. But there was really not much that happened operationally. There wasn’t any great leap that changed nature of the company. It just perfected itself where it had that one imperfection that they both focused on that was a fairly simple one to eliminate. But Buffett didn’t invest while it was imperfect to that extent.
And then, once that imperfection was taken away, then he was able to see that it was a perfected investment. They were a management team that looked after the balance sheet, obviously a great business consumer franchise, all of those other things that were now lined up. And so, all of the impediments to making that investment were removed.
If you’re a Via Negativa investor and it’s got that problem that precludes you making the investment, you don’t. When the obstacle is taken away, then you make that investment and then it works out. I think thaty that’s how he approaches everything. In many different things in UNH, UnitedHealthcare more recently, clearly, it’s a business that he has liked for a long time, because the business hasn’t really changed in complexion much over the last few. But the valuation improved pretty dramatically over the last 12 months until about a month or so ago.
He was probably the catalyst for that turnaround in that event too, where it was in free fall. This is UNH was in free fall until they announced that Buffett had taken a big position, in which case it bounced. So, the only impediment for UNH was the valuation. When I say the only impediment, I guess that’s a pretty big impediment. But the case remains that that was true, that it was too expensive and he didn’t invest. And then when it got cheaper, he did invest.
And so, I think he knows all of the businesses that are sizable enough and listed, and he’s identified the imperfection that prevents him from investing in them. When the imperfection is removed, then he takes the position. And to the extent that the imperfection exists, it sits as cash at Berkshire Hathaway. And so, I like that. I think it’s an incredibly–
I think one of the things that makes investing hard, is that you do have this incredible FOMO. You do have this desire to do things. It’s hard to sit there and not do anything. But I think if you take that Via Negativa approach, which I think was Charlie Munger’s idea. I do discuss Munger in the book and give him credit for that idea and give him credit for some of the other ideas towards the end of the book as well. I discussed their partnership in the last chapter, in the epilogue.
Jake: Yeah, let’s talk about that a little bit as Charlie’s role there as architect.
Charlie Munger: Architect of Via Negativa and Wu Wei
Tobias: Well, I think that Charlie’s responsible for articulating the Via Negativa idea. Buffett credits him as providing the blueprint, and he says that he was the general contractor who built to the blueprint. But I think that Charlie really is the font of the idea of wu wei of that you want to be– don’t be in little things that are dying that are too cheap. Be in things are going to grow. Perhaps, the growth does bail you out if you make a valuation mistake when you’re investing.
Not that Buffett’s making a valuation mistake, but he’s looking for these things that can grow and compound and be bigger in the future. And so, it just changed the way that he approached the investment. So, I call that the wu wei, the Daoist part of the philosophy towards the end of the book. But I think that you got to give credit to Munger for that idea.
Jake: Imagine the wu wei of Charlie’s own personal net worth and identifying Buffett just like, “Well, this guy is clearly obsessed about doing this.” Like, “He’s quite good at it. I’m just going to let him do what he’s going to do and I’ll cheer him on.” [chuckles]
Tobias: Give him credit. He did it with BYD, he did it with Li Lu. All the same idea, just find someone who’s extraordinary and put some capital behind them and then leave them alone, basically.
Jake: [crosstalk] cheer him on.
Tobias: I think that Munger is also a good example of that Moral Law, possibly even more–More forcefully, maybe. Forcefully might be the wrong word, but more explicitly perhaps than Buffett is, where he talks about investing with people who Buffett calls it like and admire. But Munger’s a little bit more fire and brimstone than that.
Jake: Or, Old Testament. Yeah. [chuckles]
Tobias: Clearly, they’ve rubbed off on each other, and they’ve got fairly similar moralities and moral judgments about the world, which I also subscribe to. So, I like that philosophy. And so, all I try to do in the book is to discuss the ideas where they’re found in The Art of War and then show really how Buffett and Munger and Berkshire Hathaway have implemented them in a business context.
And so, I say you take what is an ancient martial philosophy and apply it in a modern business context. It still works surprisingly well. Really, the amazing thing is how flexible The Art of War is and some of the ideas in The Art of War. Some of the ideas in The Art of War are fairly– I’ve joked about them before. Like, if you’re crossing a salt marsh and you’re attacked to get your back up against the woods, I get that that’s not something that you can apply in your day-to-day life and I don’t–
Jake: Well, hold on, I think [Tobias laughs] we could do some analogy.
Tobias: [crosstalk] could be analogy.
Jake: Yeah, let’s go.
Tobias: Land that plane.
Jake: I don’t think I can. Not on short notice.
Tobias: So, that was the book.
It took me a long time to write the book, because I felt like the—The first time I told it, I told it starting with Berkshire Hathaway when Buffett took it over through to today. It just felt too much like everything else that I’d written in the past and it was a little bit boring, because everybody knows that story and it’s been told over and over again. I do tell it at the end of the book, in passing to give some due credit to what they had achieved there. But I wanted to do the book in these three modern, transformative deals that I think are a little bit underappreciated or even negatively viewed in some respects, even though they were massively successful because of the way Buffett talks about them and because the genius of what was achieved there was difficult to identify.
I didn’t identify them. I think you told me initially. I think that Christ Bloomstran was the one who figured out Gen Re in particular. So, I give full credit to Chris Bloomstran for that. Chris wrote about it in his letters. Chris reviewed the manuscript for me. So, to the best of my ability, it’s a recapitulation of what Chris told me. So, credit to Chris for that, and I thank him very much for that. But I had a lot of fun writing it and I’m proud of what has finally emerged. In particular, I love this cover too. It’s a little bit hard to see. Hang on. What if I do that?
Jake: Put it over your face. [laughs] There we go. Yeah. Well, as I got to watch behind the scenes for the last few years as you’ve been working through this project, and so just as your friend, I’m quite pleased for you to get it over the finish line.
Tobias: Relieved. [chuckles] That you don’t have to discuss it anymore.
Jake: No, no. no. Not for you to just to have it dislodged from your guts, which is always the making of a good book. It’s something that you have to get out of you.
Tobias: It’s funny. In general terms, it’s easier to conceptualize. I hope that when people read this, they go and have a look at the Giles translation of Sun Tzu as well, which I found– I’ve read through it many, many times.
Jake: No one’s going to do that. But okay.
Tobias: But I find it magical. It’s not all magical. There’s lots of parts of it that are unreadable. I wouldn’t worry about those too much. But I think when he talks about stratagem and when he talks about some of his approaches, I think it really is an incredible work. It’s hard to fathom that it’s as old as it actually is, because some of the ideas are so powerful.
He talks about developing the sensitivity to conditions and timing and understanding what’s happening in terms of territory and knowing yourself, knowing your own emotional state, which is something that I’ve written about a lot in Quantitative Value and other and it’s something that I think is very important that you– Rudyard Kipling’s, if you can keep your head and all about you’re losing theirs. I really do think that that is the thing that separates good performers from bad performers. In sport, in business, in lots of different contexts, where just remaining emotionally detached when everybody else is. Inevitably, we’ll go through this in the stock market.
Jake: To the upside as well? is that–
Tobias: Yeah, both ways.
Jake: Everyone thinks about downside.
Tobias: We’re going through a period of unusual FOMO at the moment. I think there’s lots of indications of how much speculation there is in the market. This is one of those times where it looks very easy, everything’s going up a lot, people are showing their $10 million personal portfolios from like a standing start in 2020.
Jake: Yeah, those victory laps usually don’t age well, do they? [chuckles]
Tobias: For some of them, it will. For some of them, it won’t. But whatever the way that they have done it, it’s not going to be the same way that you can achieve it from here. Because those opportunities were available in 2020, and it’s 2025. That’s the nature of this, that you have to find the opportunity that’s going to work to 2030 or 2035 and not blow you up along the way. I hope that that’s what this book does, is it gives people some emotional distance, or at least it makes the argument for keeping some emotional distance to the upside and the downside to find something– [crosstalk]
Jake: I know that some of the John Boyd material ended up on the cutting room floor for this book. Maybe just give us two minutes on how that fits in.
Tobias: I ended up cutting it, because it was a little bit too much of a stretch. So, I think I have to write a separate book to discuss this stuff.
Jake: I think that’s 2028.
Tobias: I don’t know if I’m the person to write it. I don’t know if I have the qualifications to write it, but that wouldn’t necessarily hold me back.
Jake: [crosstalk] say it didn’t stop you from this one, so it should be fine.
[laughter]Tobias: It’s never stopped me from anything. But yeah, I might do that. But the Boyd stuff, I think is extraordinary, because Boyd talks about psychological warfare.
Jake: And just a little context. Boyd was a fighter pilot for the US Air Force.
Tobias: Boyd’s a fighter pilot who became a philosopher of strategy. He bought lots of copies of Sun Tzu and he regarded Sun Tzu as his Rosetta Stone. He filled them full of marginality and underlined them. Though this is all told in lots of different– There’s a book about Boyd, which I don’t want you to go and buy. [chuckles] Buy my book first and then go buy-
Jake: [chuckles] Yeah.
Tobias: -the Boyd book. He’s also produced these slides that are very, very hard to read, which is why I think they should be turned into a book. Someone should go through and make these into a more conversational, easily understood.
But to the extent that he talks about psychological warfare, I found that very powerful, because the modern world, in particular, because of the way that we engage with the modern world through social media and through the news, is just updated so quickly. There’s this assault on your mind all the time from foreign governments, from businesses trying to sell you stuff, from your friends, inadvertently, creating FOMO and trying to get you to behave and trying to influence the way you think.
And just being aware that it’s happening, I think is a huge advantage that you can step back. I’m just blanking on whose idea it is, but why am I being shown this now? Like, why am I seeing this now? It’s Ben’s. Epsilon Theory.
Jake: Oh, Ben Hunt.
Tobias: Ben Hunt. Yeah.
Jake: Yeah.
Tobias: He’s definitely thought about this stuff. But Sun Tzu talks about that idea of– Victory without battle is this idea of Sun Tzu’s where you don’t engage until you know you’re going to win and you figure out how you’re going to win before you engage. That’s really all investment too. I see people all day long. Like, OPEN is a stock that’s out there, that there’s a hedge fund manager trying to stampede people into OPEN, which is this–
Jake: Is that the one hanging out in front of Drake’s house?
Tobias: Yeah. That’s a psychological– It’s a psyop.
Jake: It’s one way to do it, I suppose.
Tobias: There’s no fundamental value to this thing. It probably was going to be a donut before this little kerfuffle has happened in the stock, but it’s a 10 bagger since, or it was at one point, maybe more so maybe because I think it might have got down to 50 cents or 60 cents and I think it topped out above $10. So, maybe it was a 20 bag of peak to trough.
Jake: Yeah.
Tobias: I doubt that there’s anybody who’s got 20 bags in it. That’s one of those things that you should be able to see that for what it is. They’re just bringing attention to it to get a run out of it in the short-term. But fundamentally, it’s still broken and that will go back to where it was eventually. I think you need to be able to recognize these things for what they are and avoid them.
Jake: Zero sum games.
Tobias: Yeah, zero sum games. It’s an attempt to mean this thing into reality the way all of these other attempts have been made. I don’t think it’s particularly honorable work, honestly.
Jake: Yeah, there’s a lot of that now, isn’t there? It’s quite–
Tobias: I saw it at some point–
Jake: Even though all the facilitating gambling so easily now, I don’t think is the moral high ground.
Tobias: Evidently, we’re limited in California a little bit. I didn’t even realize that, because it doesn’t– [crosstalk]
Jake: Because that would happen when you try to download Kalshi or whatever. [laughs]
Tobias: I learned over the weekend.
Jake: Yeah.
Tobias: Yeah. I don’t think it’s good. I don’t think it’s good to be able to. I don’t think it probably doesn’t really matter, but there are people who are vulnerable to this stuff. They shouldn’t be doing it.
I think people are in a mindset where they’re gambling, where I hope for the most part people are doing it with sums of money that they can afford to lose. You find it in Robinhood and other things like that, where it’s a different mindset, like this is where you can improve your life and make money. I think that there’s a problem with people doing it with significant sums of money in Robinhood. So, I think Robinhood might be worse than the gamblers, because it’s gamified, gamblified investing.
Jake: Yeah.
Tobias: There’s 50 times leverage in-
Jake: Oh, my God.
Tobias: -Coinbase. Zero DTE options. We’re in the golden age, brother.
Jake: The golden age of graft.
Tobias: Golden age of blowing yourself up.
Jake: We’re coming up on time. If people want to follow along and get in touch with you– [crosstalk]
Tobias: Very good.
Jake: [laughs]
Tobias: I say that so much though.
Jake: I know. Where can they get the book?
Tobias: So, the book is available for presale on Amazon. The Kindle version is up. There is a hardcover and a paperback coming and the audio is in the process of being recorded.
Jake: Did you read it yourself?
Tobias: I don’t. [chuckles]
Jake: Oh, come on. You got the voice for it. Yeah, man.
Tobias: I got a pro. I got somebody who knows what they’re doing. It’s the guy who did the last book, Scott Pollock. I love his voice. He’s got this nice– He did NPR in Atlanta. He’s got smooth tones.
Jake: Fair enough.
Tobias: He does a better job than I do. He’s got a nice voice. I’m an amateur in this stuff.
Jake: Fair enough. All right, everybody, make sure you go pick up that book. We have done this show now for a long time without– We don’t ask for very much very often. [laughs] YouTube takes all the money that is ever made on this thing. [laughs]
Tobias: One thing that I would say, is if you really enjoy the book, a five-star review is really helpful. If you really didn’t like the book, send me an email and tell me why you hated it.
Jake: Yeah.
Tobias: Thanks, folks.
Jake: [crosstalk] Toby’s burner email.
Tobias: Thanks, JT.
Jake: Yeah.
Tobias: Thanks, folks. We’ll be back next week with a guest.
Jake: Yeah, it’ll be back to normal next week.
Tobias: Us talking to somebody instead of us talking the whole way through or me talking the whole way through. I appreciate everybody. See you then. And hopefully, we’ll get the chat fixed. I don’t know what’s going on in the chat. Impossible.
Jake: Oh, geez. All right, cheers, everyone.
Tobias: Peace.
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