Other[Music][Music][Music] thank you so much as always for being here we're incredibly grateful and uh let's get started if you're ready
Warrenwell uh irwin it's a pleasure to be here with you i always look forward to uh to this this particular session uh every year and actually uh uh you know the best way to learn is to teach and uh i always come away slightly wiser at the end not so much because of what i said but because what some of the interactions and such so i'm very grateful and uh so i'll i'll go through some prepared remarks i mean they're not really prepared but they're uh let's say a monologue and uh i have a few slides and uh and then uh then i think we can open up for questions which is the fun part for me and and we can focus on what i talked about or we can focus on pretty much anything under the sun maybe other than you know specific portfolio positions
Questioneryou know specific portfolio positions and such and uh and uh we can take it from there is uh and uh we can take it from there is uh and uh we can take it from there is that good
Otheroh yeah here it is okay all right so uh oh yeah here it is okay all right so uh oh yeah here it is okay all right so uh in the in the early 2000s uh in the in the early 2000s uh in the in the early 2000s uh this book came out uh by maggie maher this book came out uh by maggie maher this book came out uh by maggie maher and actually and actually and actually uh uh buffett had recommended this book uh uh buffett had recommended this book uh uh buffett had recommended this book it's a it's a great book to read it's a it's a great book to read it's a it's a great book to read and uh basically baggy pointed out and uh basically baggy pointed out and uh basically baggy pointed out that even though we have these uh that even though we have these uh that even though we have these uh like if you look at the s p over a like if you look at the s p over a like if you look at the s p over a hundred year period you know nine odd hundred year period you know nine odd hundred year period you know nine odd percent a year percent a year percent a year uh that's not the full truth uh that's not the full truth uh that's not the full truth uh if you will and uh there's uh if you will and uh there's uh if you will and uh there's there's more to that than just that just there's more to that than just that just there's more to that than just that just that nine percent that nine percent that nine percent and um and so uh this is a chart and um and so uh this is a chart and um and so uh this is a chart of the dow from uh of the dow from uh of the dow from uh 1896 till now so it's covering about 1896 till now so it's covering about 1896 till now so it's covering about 124 years and and you can see that there have been and you can see that there have been and you can see that there have been very long periods uh where end to end very long periods uh where end to end very long periods uh where end to end the result has been zero for investors the result has been zero for investors the result has been zero for investors uh uh uh so like for example a famous one is so like for example a famous one is so like for example a famous one is after after the crash of 29 it took after after the crash of 29 it took
Warrenafter the crash of 29 it took a good quarter century uh to get back to the same levels and uh and more recently uh you know if you look at the period from 65 to 82 uh the dow was like i think 870 or 865 or so at that time in 65 and that's approximately where it ended in 81.82 so 17-year period when the u.s economy grew quite a bit but the dow was uh was flat and then 82 to 99 uh which is also probably before the time of most of the people uh attending uh the dow was turbocharged you know it went from less than a thousand to more than twelve thousand and then uh more recently uh you know from 99 to 2011 uh was flat and then since 2011 we've been on the rise so um and then you know if i just uh if i uh i'll show you a few more charts uh like this but but this particular one uh has some symmetry so the symmetry is that we had a 17-year period
Questionerperiod period uh you know 65 to 82 uh you know 65 to 82 uh you know 65 to 82 where the dow was flat and we had where the dow was flat and we had where the dow was flat and we had another exact 17-year period another exact 17-year period another exact 17-year period when the dao uh you know did when the dao uh you know did when the dao uh you know did incredible things and and the reason we incredible things and and the reason we incredible things and and the reason we get these get these get these um these periods and especially i think um these periods and especially i think um these periods and especially i think 17 years is an important number 17 years is an important number 17 years is an important number in general human memory does not in general human memory does not in general human memory does not go past 17 years and the reason we see go past 17 years and the reason we see go past 17 years and the reason we see these these these kind of long periods of flat markets and kind of long periods of flat markets and kind of long periods of flat markets and then then then you know similar periods of you know uh you know similar periods of you know uh you know similar periods of you know uh very very very uh very euphoric rises in prices if you uh very euphoric rises in prices if you uh very euphoric rises in prices if you will or just rise in prices will or just rise in prices will or just rise in prices uh is usually um uh is usually um uh is usually um like for example in 1965 like for example in 1965 like for example in 1965 stocks were quite overheated um you know stocks were quite overheated um you know stocks were quite overheated um you know very high p e ratios uh high multiples very high p e ratios uh high multiples very high p e ratios uh high multiples and in 81 82 they were and in 81 82 they were and in 81 82 they were extremely undervalued and one could extremely undervalued and one could extremely undervalued and one could argue whether it's undervalued because argue whether it's undervalued because argue whether it's undervalued because at that at that at that time in 81 or so time in 81 or so time in 81 or so treasuries were yielding 18 um treasuries were yielding 18 um treasuries were yielding 18 um and uh and so in the 8182 time frame and uh and so in the 8182 time frame and uh and so in the 8182 time frame you could have bought a lot of blue you could have bought a lot of blue you could have bought a lot of blue chips at single-digit multiples you know
Questionerchips at single-digit multiples you know coke and mcdonald's and you know all kinds of great businesses were available very very cheap and then when you got to 1999 2000 those same businesses were priced for perfection so so for example in the year 2000 microsoft became for some time the most valued company on the planet cisco was right up there both these companies were about 600 billion or so in value and microsoft i think was making less than 10 billion and such it was a pretty i think it was at a 70 plus uh trailing earnings uh multiple and uh so so these these charts are very relevant to me because um i always have great timing in life and i started my fund in 1990 1999 and what a beautiful time to start a fund uh i actually knew uh pretty soon after i started that i was i was going to be i i assumed at that time that there was uh poetry and symmetry and
Questionerpoetry and symmetry and history did not just rhyme but history repeats itself so i just assumed that till 2016 um we were going to be flat uh i assumed we were going to be flat on the doubt of 2016 and i assume we won't be flat on the dow on the s p till 2016 or so and the nasdaq i didn't even know when that would uh come back because that had crashed and burned from five thousand down to one thousand um uh so i thought that was just done for a very long time um and uh and so uh so i started my my journey as an investor in 94. uh that was the first time i heard about warren buffett and uh it opened up a whole big world for me and 1994 was a one of the uh you know one of the years of maximized learning and growth for me i i was i was it was a completely new area for me and i was just like a sponge i was just you know uh drinking from a fire hydrant and it
Questioneruh drinking from a fire hydrant and ituh drinking from a fire hydrant and it was greatwas greatwas great and uh and at that time umand uh and at that time umand uh and at that time um you know uh life was really good becauseyou know uh life was really good becauseyou know uh life was really good because uhuhuh pretty much anything you did went up youpretty much anything you did went up youpretty much anything you did went up you knowknowknow things and i i was a i was running anthings and i i was a i was running anthings and i i was a i was running an i.t businessi.t businessi.t business uh i was uh kind of you know around theuh i was uh kind of you know around theuh i was uh kind of you know around the software business and so onsoftware business and so onsoftware business and so on and so i had uhand so i had uhand so i had uh some some of the investments uh weresome some of the investments uh weresome some of the investments uh were tech investmentstech investmentstech investments uh at that time and uh in that perioduh at that time and uh in that perioduh at that time and uh in that period uh and i was only running my personaluh and i was only running my personaluh and i was only running my personal money at that time there was no fundmoney at that time there was no fundmoney at that time there was no fund and in that period um iand in that period um iand in that period um i uh captured uh twouh captured uh twouh captured uh two more than 100 baggersunfortunatelythere wasn't much of a net worth andthere wasn't much of a net worth andthere wasn't much of a net worth and so for example one one business iso for example one one business iso for example one one business i uh business in india i did i put aboutuh business in india i did i put aboutuh business in india i did i put about 10 or 12 00010 or 12 00010 or 12 000 and i cashed out about 1.5 million andand i cashed out about 1.5 million andand i cashed out about 1.5 million and of course i should notof course i should notof course i should not uh you know have any regrets about thatuh you know have any regrets about thatuh you know have any regrets about that that's pretty goodthat's pretty goodthat's pretty good um and and then there was anotherum and and then there was anotherum and and then there was another businessbusinessbusiness here in the u.s so the india businesshere in the u.s so the india business
Otherhere in the u.s so the india business was satyamwas satyamwas satyam satyam computers and the one the u.ssatyam computers and the one the u.ssatyam computers and the one the u.s which was a way to you knowwhich was a way to you knowwhich was a way to you know kind of ride the internet wave and so onkind of ride the internet wave and so onkind of ride the internet wave and so on upside the downsideupside the downsideupside the downside a company called cmgi actually which wasa company called cmgi actually which wasa company called cmgi actually which was i actually visited them in massachusettsi actually visited them in massachusettsi actually visited them in massachusetts around that periodaround that periodaround that period um and that was uh that was about aum and that was uh that was about aum and that was uh that was about a hundred baggerhundred baggerhundred bagger which i captured and there i actuallywhich i captured and there i actuallywhich i captured and there i actually put in more money i put in about aput in more money i put in about aput in more money i put in about a hundred thousandhundred thousandhundred thousand and uh so that is also pretty good thereand uh so that is also pretty good thereand uh so that is also pretty good there about 10 millionabout 10 millionabout 10 million so uh but but then when i was startingso uh but but then when i was startingso uh but but then when i was starting the funds inthe funds inthe funds in uh 99 and 2000 and so onuh 99 and 2000 and so onuh 99 and 2000 and so on i knew i was gonna be facing these hugei knew i was gonna be facing these hugei knew i was gonna be facing these huge headwindsheadwindsheadwinds and uh and i knew that uhand uh and i knew that uhand uh and i knew that uh that pretty much anything you looked atthat pretty much anything you looked atthat pretty much anything you looked at uh didn't look uh i mean theuh didn't look uh i mean theuh didn't look uh i mean the uh i think all the all the popular stuffuh i think all the all the popular stuffuh i think all the all the popular stuff waswaswas was euphoric but actually the day thewas euphoric but actually the day thewas euphoric but actually the day the nasdaq peaked in march 2000nasdaq peaked in march 2000nasdaq peaked in march 2000 march 9th or something 2000 was the daymarch 9th or something 2000 was the daymarch 9th or something 2000 was the day that berkshire hit a
Questionerthat berkshire hit a multi-year low uh so basically what was happening is that money was going from berkshire hathaway into pets.com you know there was a transfer going on so a lot of stuff actually which was very basic stuff was undervalued in 99 2000 but if you were trying to play any kind of momentum game or you know flavor of the day or any of that stuff you very quickly got your head handed to you um and because then then the nasdaq went from like five thousand to one thousand next couple of years uh two three years uh so i i knew that the uh so the modus operandi i i um took on when i started my fund was i really didn't care about the market much i knew the market was going to give me a headwind but i said how does it matter what these market levels and all that are or whether it's euphoric or not if all i do is i focus on buying a dollar for 50
Questionerdo is i focus on buying a dollar for 50 cents and when that dollar gets to 90 cents or more i sell it and uh and so that became the the cornerstone of how i invested is i looked for dollar bills that were uh trading for 50 cents or less and then as they get tonight got to 90 cents or more i was uh unloading them which was different from the previous five years where like for example the company i bought in india i just took those shares and i actually got physical chairs stuck them in a drawer and my mental model was to never open that drawer i wasn't even concerned with you know what the multiple i knew that they had so much tailwinds in terms of growth uh that i didn't want to really mess with any calculations i just said you know set it and forget it kind of thing and the same thing uh with cmgi i could not tell kind of what the
Questionerwhat the upper limits of cmgi were it was kind of very nebulous but i was buying at a pretty floor price uh because cmj i was spawning.coms so you know harmony.com they're going to spawn i have no idea uh what valuations are the ones those gonna have no idea but it all looks like wild and crazy so we'll just keep the mother ship that keeps producing these eggs and uh see where it goes and and you know eventually it got to a ridiculous valuation thankfully i was smart enough to sell and move on uh but in in the in the last 20 years or 21 years i took this buy it 50 or less or less and sell it 90 or more and uh that that that actually works quite well in this environment from 1999 to 2011. it it so what i'm what i'm trying to say is that if i look at my 25 year or 26 year journey i was using two different models for two different periods okay and
Questionerfor two different periods okay and for two different periods okay and and one of the things i forgot you know and one of the things i forgot you know and one of the things i forgot you know because it had been so long that i've because it had been so long that i've because it had been so long that i've been doing the been doing the been doing the buying at 50 and 70 buying at 50 and 70 buying at 50 and 70 that it completely left my mind that it completely left my mind that it completely left my mind that i'm supposed to at some point that i'm supposed to at some point that i'm supposed to at some point switch back switch back switch back okay and and i never really i just okay and and i never really i just okay and and i never really i just thought this buyer 50 seller 90 is kind thought this buyer 50 seller 90 is kind thought this buyer 50 seller 90 is kind of the way of the way of the way i go through permanently and uh let me i go through permanently and uh let me i go through permanently and uh let me just go through some of these slides and just go through some of these slides and just go through some of these slides and then i'll continue then i'll continue then i'll continue uh with kind of because uh the year 20 uh with kind of because uh the year 20 uh with kind of because uh the year 20 20 20 20 20 20 you know most humans want to go from the you know most humans want to go from the you know most humans want to go from the year 2019 straight to 2021. year 2019 straight to 2021. year 2019 straight to 2021. they want to purge 2020 they want to purge 2020 they want to purge 2020 that they want to behave like 2020 never that they want to behave like 2020 never that they want to behave like 2020 never happened happened happened you know that's how they would like to you know that's how they would like to you know that's how they would like to go through life um go through life um go through life um in my case 2020 in my case 2020 in my case 2020 i would say has been probably the second i would say has been probably the second i would say has been probably the second highest uh year of learning highest uh year of learning highest uh year of learning after 94. uh and so after 94. uh and so after 94. uh and so i've had incredible learning and growth i've had incredible learning and growth i've had incredible learning and growth this year this year this year i'm very grateful for the learning and
Questioneri'm very grateful for the learning and growth who knows if the pandemic had anything to do with it maybe it did because i got so much time to stare at my navel and uh you know when i contemplate my naval good things happen so i had a lot of contemplation of the naval this year um and anyway so this is the dao and you look at the s p and uh you know it's uh it's somewhat similar it didn't have the exact 1717 but you know recently until 2013 it was completely flat and uh and then you look at the nasdaq and uh what a beautiful chart uh so you look at the nasdaq and from 1980 to 2000 you know 20 a year awesome great and and then of course you can see the head handed to you uh from 2000 till 2003 or something when it you know gets close to a thousand and then it takes uh 16 years to get back to the 5000 level and then more recently it's you know been doing that 21 or so
Questionerit's you know been doing that 21 or soit's you know been doing that 21 or so uh so the nasdaq is kind of interestinguh so the nasdaq is kind of interestinguh so the nasdaq is kind of interesting because it's actually uhbecause it's actually uhbecause it's actually uh gone through this uh and and actually ifgone through this uh and and actually ifgone through this uh and and actually if you think about the nasdaq yes from 1980you think about the nasdaq yes from 1980you think about the nasdaq yes from 1980 to 2000to 2000to 2000 there was incredible technologicalthere was incredible technologicalthere was incredible technological innovationsinnovationsinnovations in tech and software and and hardwarein tech and software and and hardwarein tech and software and and hardware and so on but so was the caseand so on but so was the caseand so on but so was the case from 2000 to 2016. i mean even till nowfrom 2000 to 2016. i mean even till nowfrom 2000 to 2016. i mean even till now i mean the you know there's been uhi mean the you know there's been uhi mean the you know there's been uh incredibleincredibleincredible uh changes but what happened is that theuh changes but what happened is that theuh changes but what happened is that the valuations in 2000valuations in 2000valuations in 2000 was so high thatwas so high thatwas so high that all the all the growth andall the all the growth andall the all the growth and growth and uh you know growth andgrowth and uh you know growth andgrowth and uh you know growth and profits and all of thatprofits and all of thatprofits and all of that were not enough uh towere not enough uh towere not enough uh to uh get the index back to where it was souh get the index back to where it was souh get the index back to where it was so for example a good example is microsofti remember in 2000i remember in 2000i remember in 2000 i just started the fund there was a guyi just started the fund there was a guyi just started the fund there was a guy who waswho waswho was one of the early early employees atone of the early early employees atone of the early early employees at microsoft pretty high up andmicrosoft pretty high up andmicrosoft pretty high up and he'd retired and he said you know hehe'd retired and he said you know hehe'd retired and he said you know he joined my friend he said monitoring ifjoined my friend he said monitoring ifjoined my friend he said monitoring if you're ever in seattle
Questioneryou're ever in seattle i could introduce you to some of my former colleagues and and some people have left and they may have an interest in your fund and so on uh so i told him hey you know i'm gonna be in seattle day after tomorrow you know what a coincidence and uh so he said oh that's great so uh we spent a day where he took me to microsoft headquarters and i went from one office to the other and he was trying to he was a great sales guy for me trying to convince these guys to give me money and i i got a lot of commitments uh and a lot of investors uh from microsoft uh or for all former microsoft people some current some former it was great but i told them all at that time when we were just talking that uh i said look you guys have in many cases 90 of your net worth in microsoft stock and options and your livelihood comes from the same
Otherand your livelihood comes from the same place and i said i hate to burst your bubble and i said i hate to burst your bubble and i said i hate to burst your bubble but this but this but this is not going to end well um is not going to end well um is not going to end well um and and they all told me oh you don't and and they all told me oh you don't and and they all told me oh you don't understand our business understand our business understand our business uh the companies never it you know the uh the companies never it you know the uh the companies never it you know the stock just goes up like clockwork stock just goes up like clockwork stock just goes up like clockwork and we get our options and we hang on to and we get our options and we hang on to and we get our options and we hang on to them and life is great them and life is great them and life is great and uh i told them that was not going to and uh i told them that was not going to and uh i told them that was not going to be the case be the case be the case uh but none of them actually even wanted uh but none of them actually even wanted uh but none of them actually even wanted to hear the math about to hear the math about to hear the math about the 70 times trading earnings whatever the 70 times trading earnings whatever the 70 times trading earnings whatever else and else and else and until 2015 or 16 until 2015 or 16 until 2015 or 16 microsoft was zero returns uh and microsoft was zero returns uh and microsoft was zero returns uh and it wasn't just zero returns uh it was a it wasn't just zero returns uh it was a it wasn't just zero returns uh it was a very violent ride uh with a with a huge very violent ride uh with a with a huge very violent ride uh with a with a huge drop in the next two or three years drop in the next two or three years drop in the next two or three years and then another huge drop during the and then another huge drop during the and then another huge drop during the financial crisis it was financial crisis it was financial crisis it was uh it had been very very hard to hold uh it had been very very hard to hold uh it had been very very hard to hold the stock the stock the stock uh over that period and of course uh over that period and of course uh over that period and of course finally finally finally uh they've kind of uh digested that and uh they've kind of uh digested that and uh they've kind of uh digested that and now we're
Questionernow we're back on the upswing and then then we get to the nikkei um which peaked in 1990 and has not yet come back and so it's been 30 or 31 years of uh minus two percent a year and uh so uh the more fun the party the more extreme the hangover and this was a very fun party uh this was a party like no other uh so at that time i think in 1990 uh you know and this was anecdotal evidence i looked it up the um they said the imperial palace in tokyo uh was valued more than all the real estate i mean the entire state of california in terms of real estate and i actually found that statistic pretty hard to believe so i actually researched it and it was absolutely true actually if you looked at the the transaction prices of uh the properties right around the uh around the imperial palace and then you extrapolated to the you know square footage
Questionerknow square footageknow square footage and acreage of the imperial palace youand acreage of the imperial palace youand acreage of the imperial palace you would get towould get towould get to a valuation that would exceed state ofa valuation that would exceed state ofa valuation that would exceed state of californiacaliforniacalifornia and uh and of course that's a ridiculousand uh and of course that's a ridiculousand uh and of course that's a ridiculous valuationvaluationvaluation uh we have beautiful coastline foruh we have beautiful coastline foruh we have beautiful coastline for thousands of milesthousands of milesthousands of miles here in california and uh and there'shere in california and uh and there'shere in california and uh and there's some very verysome very verysome very very very very um uh valuable real estatevery very um uh valuable real estatevery very um uh valuable real estate and so um so that bubble poppedand so um so that bubble poppedand so um so that bubble popped and uh we haven't come back yet and uhand uh we haven't come back yet and uhand uh we haven't come back yet and uh we'll have to see when we come backand then you know you look at the koreanand then you know you look at the koreanand then you know you look at the korean cosby and this is another one wherecosby and this is another one wherecosby and this is another one where you know if you if you ignore that 2009you know if you if you ignore that 2009you know if you if you ignore that 2009 tototo 2011 period it's pretty similar to japan2011 period it's pretty similar to japan2011 period it's pretty similar to japan you know it's basically been about 30you know it's basically been about 30you know it's basically been about 30 plus yearsplus yearsplus years of pretty much nothing you know andof pretty much nothing you know andof pretty much nothing you know and especiallyespeciallyespecially uh the last few years uh anduh the last few years uh anduh the last few years uh and korea i mean if you look at korea in 89korea i mean if you look at korea in 89korea i mean if you look at korea in 89 i mean the korean economy as we know iti mean the korean economy as we know iti mean the korean economy as we know it doesn't exist at that timedoesn't exist at that timedoesn't exist at that time uh i mean it's it's an incredibleuh i mean it's it's an incredibleuh i mean it's it's an incredible miracle growth economy
Othermiracle growth economy uh i mean japan was already an advanced uh advanced civilization korea was yet to have its run and in spite of all that run the the cosby hasn't moved and actually korea has a quite a cheap market it's a it's a place i'm actually interested and excited to invest in so anyway so that's the those are the slides i wanted to share and uh so if we uh if we if we look at all of this so in the year in the year 2000 and i told you that i had this this really terrific growth and learning and and you know when i tell you about what i learned you're gonna say what a dummy you know like it took him 26 years to learn this stupid stuff and uh yeah well you know some of us are dense and uh it takes uh it takes some time to uh learn these lessons so uh you know charlie munger says we are old too soon and why is too late and um but i still feel it's not too
Questionerand um but i still feel it's not too late you know i mean i'm 56 hopefully there is uh a good three decades of compounding ahead so that's that's uh if i can get uh two and a half or three decades of compounding life is great
Questionerum so one of the things that monger has mentioned is he said that there's no intellectual way a intellectual way to defend it but he does not sell businesses he owns when they get above intrinsic value and he won't buy them above intrinsic value but he won't sell them if they are you know somewhat above intrinsic value or even even reasonably above intrinsic value
Questionerum i think i think uh if it gets too egregious egregiously above intrinsic value i think he would look at it but the berkshire history is that even uh even when they looked at for example if you look at coke for example which in the year 2000 was at you know 40 plus times earnings
Questioner40 plus times earnings and it didn't do anything for a long time because it was quite overvalued uh they haven't touched their core position in 32 years and my guess would be they wouldn't should they won't touch it for another few decades um so so it'll go on for a while so the one uh so when munger says that he's willing to hold uh whole businesses above intrinsic value uh that kind of goes against what i'm trying to do with the you know 50 cents to 90 cents right because the two are different uh frameworks and but when i when i studied that some more i realized that the the key and this is especially true i believe in the in this period which is i mean so if we look at this period you know i wish i had made this change ideally if i made this change in thinking about two or three years ago that would have been actually i would have hit the
Questionerhave been actually i would have hit the nail on the head perfectly if i had made this because by till 2016 or so the markets really were you know they hadn't done a whole lot and actually the the previous approach uh worked really well uh in terms of returns and so on so i was kind of i think i'm probably two or two years or so behind but in a in a 26 year history uh we can we can be forgiven for being a couple of years behind on something so that's okay
Questionerso um a few things uh kind of uh came together for me this year some of you may have looked at a company called nvr and nvr is a home builder i think in virginia um mid-atlantic and so on and uh they they have had religion related to buybacks which has been very intense so from 1994 till now other than for a couple of years in 2008 or 2009 when their business was upside down they pretty much brought
Questionerupside down they pretty much brought back their stock every year and and over this period they have spent at least 100 percent of owner earnings on buybacks and probably over 100 you know they were they were actually even willing to spend uh beyond their own earnings on buybacks and the nvr business itself if i look at it from 2000 like in the last 20 years you know the the top line's gone up maybe three four times it hasn't it's it's not a company that has any intellectual property it's a home builder um so the top line has gone up three four times they bought back in the last 20 years 56 of their shares outstanding over the last 26 years i haven't looked at it exactly but it's over 80 it may be approaching 90 of the shares outstanding have been bought back but in the last 20 years the 56 reduction in share count uh the stock is up 55 times so
Questioneris up 55 times sois up 55 times so the company delivered a 55 x returnthe company delivered a 55 x returnthe company delivered a 55 x return in the last 20 years against thein the last 20 years against thein the last 20 years against the headwindheadwindheadwind of over overheated indexof over overheated indexof over overheated index and you know that didn't even matter forand you know that didn't even matter forand you know that didn't even matter for a company like nvra company like nvra company like nvr and uh so i looked at nvr and then youand uh so i looked at nvr and then youand uh so i looked at nvr and then you knowknowknow uh i have a i have auh i have a i have auh i have a i have a friend nick sleep uh who'sfriend nick sleep uh who'sfriend nick sleep uh who's who's in the uk and you know nickwho's in the uk and you know nickwho's in the uk and you know nick nick had most of his money uh i believenick had most of his money uh i believenick had most of his money uh i believe when he was running his fund in threewhen he was running his fund in threewhen he was running his fund in three stocks you know it wasstocks you know it wasstocks you know it was amazon costco and berkshire andamazon costco and berkshire andamazon costco and berkshire and uh i think it was in 2015 or so he hunguh i think it was in 2015 or so he hunguh i think it was in 2015 or so he hung up his boots and returned all theup his boots and returned all theup his boots and returned all the capital he was running i think hecapital he was running i think hecapital he was running i think he returned probably three billion dollarsreturned probably three billion dollarsreturned probably three billion dollars or soor soor so to his investors and basically told themto his investors and basically told themto his investors and basically told them thatthatthat in effect i have three stocks uh tenin effect i have three stocks uh tenin effect i have three stocks uh ten years from now i'm going to have theseyears from now i'm going to have theseyears from now i'm going to have these three stocksthree stocksthree stocks uh there's no need for you to pay meuh there's no need for you to pay meuh there's no need for you to pay me ridiculous fees just go buy these threeridiculous fees just go buy these threeridiculous fees just go buy these three stocksstocksstocks um and of course is institutionalum and of course is institutional
Otherum and of course is institutional investors freaked out when they got the money back i got some calls asking hey we gotta mark this money back what should we do i said he told you what to do you know and then they'd say oh our mandate doesn't allow us to buy stocks so then i said would you like me to set up a vehicle where i buy those three stocks for you and then you can pay me a carry you know so uh i mean the life life is kind of funny that way um but uh but anyway so if you look at if you look at nick nick also like like charlie you know once he finds these great compounders um and he's got a number of models he's using he's he he's looking to let them run and looking to let them run for decades and and actually in in next portfolio it didn't even matter what he owned as long as he owned amazon so what i'm saying is that the the error rate he didn't have much of a
Questionererror rate he didn't have much of a error rate but even if you're wrong on a few of these but you end up with a few compounders in the mix over a long period of time or a die-hard cannibal which has a very stable business the results are very non-linear so i operated in a very linear fashion for the last two decades and what i learned this year is two or three things one as i said one one thing i learned is hey monish uh we're back to that curve going up the flat curve period is over okay and and the second is that you can look at the berkshire examples or the next leaf examples a number of other examples you can look at chuck acree you can look at number of uh investors and you'll see that if they've held these compounders for long periods of time uh uh the the results are really good i mean it it works out well it does it it would not have worked out
Todd Combsit does it it would not have worked outit does it it would not have worked out wellwellwell from 2000 to 2015 2016 i think what ifrom 2000 to 2015 2016 i think what ifrom 2000 to 2015 2016 i think what i was doingwas doingwas doing worked a lot better in that periodworked a lot better in that periodworked a lot better in that period becausebecausebecause if you're buying these compounders at 50if you're buying these compounders at 50if you're buying these compounders at 50 times earningstimes earningstimes earnings uh not very many good things are goinguh not very many good things are goinguh not very many good things are going to happen toto happen toto happen to you probably um so so soyou probably um so so soyou probably um so so so valuation and price matters and it wasvaluation and price matters and it wasvaluation and price matters and it was hard to findhard to findhard to find a lot of compounders in 2000. you knowa lot of compounders in 2000. you knowa lot of compounders in 2000. you know you could have bought berkshire foryou could have bought berkshire foryou could have bought berkshire for exampleexampleexample you'd run fairly well for a few for foryou'd run fairly well for a few for foryou'd run fairly well for a few for for at least 10 yearsat least 10 yearsat least 10 years uh but but but for the most part uhuh but but but for the most part uhuh but but but for the most part uh it was what worked in that period wasit was what worked in that period wasit was what worked in that period was this buy and sell buy and sellthis buy and sell buy and sellthis buy and sell buy and sell which is tax inefficient uh but umwhich is tax inefficient uh but umwhich is tax inefficient uh but um but it it definitely was better thanbut it it definitely was better thanbut it it definitely was better than holding microsoftholding microsoftholding microsoft uh from 2000 2016 for example butuh from 2000 2016 for example butuh from 2000 2016 for example but so so the period we're in right nowso so the period we're in right nowso so the period we're in right now right soright soright so i'm assuming even though i don't usei'm assuming even though i don't usei'm assuming even though i don't use macromacromacro or anything but what i'm assuming willor anything but what i'm assuming willor anything but what i'm assuming will end up happening is what has happened inend up happening is what has happened in
Questionerend up happening is what has happened in the pastthe pastthe past and what what what with this partyand what what what with this partyand what what what with this party this party that's underway right nowthis party that's underway right nowthis party that's underway right now will end when we get to extreme euphoriawill end when we get to extreme euphoriawill end when we get to extreme euphoria and at some point we will get to extremeand at some point we will get to extremeand at some point we will get to extreme euphoriaeuphoriaeuphoria so i don't know if that extreme euphoriaso i don't know if that extreme euphoriaso i don't know if that extreme euphoria comes in 2025 or 2030comes in 2025 or 2030comes in 2025 or 2030 uh but let's say somewhere between myuh but let's say somewhere between myuh but let's say somewhere between my guess is somewhere betweenguess is somewhere betweenguess is somewhere between the late 2020s and maybe the early 2030sthe late 2020s and maybe the early 2030sthe late 2020s and maybe the early 2030s is my best guess is when we would get tois my best guess is when we would get tois my best guess is when we would get to ridiculous valuations again because theridiculous valuations again because theridiculous valuations again because the human memory doesn't gohuman memory doesn't gohuman memory doesn't go back that far and people always say ohback that far and people always say ohback that far and people always say oh these companies are differentthese companies are differentthese companies are different they don't have anything to thethey don't have anything to thethey don't have anything to the companies in the past so there's no realcompanies in the past so there's no realcompanies in the past so there's no real correlationcorrelationcorrelation but there are correlations so as long asbut there are correlations so as long asbut there are correlations so as long as humans arehumans arehumans are involved in markets we will go frominvolved in markets we will go frominvolved in markets we will go from extreme underextreme underextreme under undervaluation to extreme overvaluationundervaluation to extreme overvaluationundervaluation to extreme overvaluation so if you look at the periodso if you look at the periodso if you look at the period from 82 to 99from 82 to 99from 82 to 99 extreme undervaluation to extremeextreme undervaluation to extreme
Otherextreme undervaluation to extreme overvaluationovervaluationovervaluation and then 99 to again 2015 2016and then 99 to again 2015 2016and then 99 to again 2015 2016 extreme overvaluation to undervalued andextreme overvaluation to undervalued andextreme overvaluation to undervalued and then you againthen you againthen you again start going so we we will we will notstart going so we we will we will notstart going so we we will we will not have i don't believe we will havehave i don't believe we will havehave i don't believe we will have these boom and bust periodsthese boom and bust periodsthese boom and bust periods go away i don't know whether they'll bego away i don't know whether they'll bego away i don't know whether they'll be you know 17 years long or 30 years longyou know 17 years long or 30 years longyou know 17 years long or 30 years long or 10 years long we've seen a fewor 10 years long we've seen a fewor 10 years long we've seen a few examples where they go on for differentexamples where they go on for differentexamples where they go on for different periodsperiodsperiods um i mean if you get to extreme bingesum i mean if you get to extreme bingesum i mean if you get to extreme binges uh you will go for longer periods uh inuh you will go for longer periods uh inuh you will go for longer periods uh in general i think that's truegeneral i think that's truegeneral i think that's true uh so i think for me theuh so i think for me theuh so i think for me the the learnings have been thatthe learnings have been thatthe learnings have been that umis focus on the compounders umis focus on the compounders umis focus on the compounders um the wiring of monish doesn't allow himthe wiring of monish doesn't allow himthe wiring of monish doesn't allow him to pay up i'm too cheap to pay upto pay up i'm too cheap to pay upto pay up i'm too cheap to pay up right so so i'm i'm stuck in a worldright so so i'm i'm stuck in a worldright so so i'm i'm stuck in a world where i have to buy things fairly cheapwhere i have to buy things fairly cheapwhere i have to buy things fairly cheap but but there are you know there's 50but but there are you know there's 50but but there are you know there's 50 000 stocks in the world000 stocks in the world000 stocks in the world there are stocks from time to time whichthere are stocks from time to time whichthere are stocks from time to time which are great compounders or great cannibals
Todd Combsare great compounders or great cannibals and which do get cheap uh periodically so we don't need too many of them i mean for the most part great compounders are well recognized by the world and they typically trade at premium valuations like they should but that's not always the case and so if if we can find two or three things uh or even even one idea a year which is a great compounder or a great cannibal or both and uh and you know we can get it at a reasonable price and then you know set it and forget it um it's great and so when i look at my portfolio today it it needs some work to get positioned where it needs to be but it's on its way i'm actually very happy with the way it looks i would i will make a few more changes over the next few years to get it more aligned to where i wanted to be as as these ideas show up but the framework is is very simple
Otherbut the framework is is very simple that i'm not looking for a 50 cent dollar bill uh that's not what i'm looking for anymore uh what i'm looking for is very long runways at very reasonable prices with a lot of stability so uh with that i think we can open up for questions comments on this subject or whatever else you'd like to talk about
Questionerhi sir i want to ask a question um can you talk about one example of the failure of your investment experience that give you the most divisive impression i mean the figure in your investment experience there are a lot of failures and there's a lot of investing mistakes i think that's just par for the course uh you're not going to be able to go through an investing career without a number of things that don't work out i mean in general uh what we're trying to do is we're trying to extrapolate deep into the future
Todd Combsfuture and businesses are kind of living and businesses are kind of living and businesses are kind of living breathing things and breathing things and breathing things and they've you know capitalism is brutal they've you know capitalism is brutal they've you know capitalism is brutal so there's a lot of competitive forces so there's a lot of competitive forces so there's a lot of competitive forces acting on a lot of businesses acting on a lot of businesses acting on a lot of businesses so there's a number of reasons why uh so there's a number of reasons why uh so there's a number of reasons why uh things may not work out so if i go back things may not work out so if i go back things may not work out so if i go back and look at and look at and look at the the failures or the the the failures or the the the failures or the businesses that i've invested in that businesses that i've invested in that businesses that i've invested in that did not work out did not work out did not work out um probably the number one reason why um probably the number one reason why um probably the number one reason why a number of investments didn't work out a number of investments didn't work out a number of investments didn't work out was leverage was leverage was leverage so i i had a few zeros so i i had a few zeros so i i had a few zeros and a few near zeros uh because and a few near zeros uh because and a few near zeros uh because businesses were uh businesses were uh businesses were uh over leveraged and they couldn't handle over leveraged and they couldn't handle over leveraged and they couldn't handle the leverage they had the leverage they had the leverage they had so so uh so so uh so so uh i've had a difficult time in financials i've had a difficult time in financials i've had a difficult time in financials for example for example for example so in the financial crisis so in the financial crisis so in the financial crisis in 2008 09 there was a company i owned in 2008 09 there was a company i owned in 2008 09 there was a company i owned called delta financial called delta financial called delta financial which was a mortgage lender which was a mortgage lender which was a mortgage lender uh went bankrupt went to zero uh went bankrupt went to zero uh went bankrupt went to zero i used to own another company called i used to own another company called i used to own another company called compucredit uh compucredit uh compucredit uh that didn't go to zero but we had a
Questionerthat didn't go to zero but we had a significant loss there so i would say that probably the area that stands out and it's not just me when i built my checklist and i looked at you know what were the business businesses that great investors invested in and where they didn't work out well uh the number one reason for the investment not working out was leverage and uh so um i've become a lot more cautious uh but i'm still not there in the sense that i think there are businesses in my portfolio which uh which have leverage and i wish they had less of it but that's definitely a lesson that has has been well received question um so i'm just wondering when you're when you're valuing valuing a company what are the most important criteria or metrics you use in determining its intrinsic value
Questionerit bends um it depends on the business uh so it's
Questionerit depends on the business uh so it's you know i think different industriesyou know i think different industriesyou know i think different industries and different companiesand different companiesand different companies uh you you have to use uhuh you you have to use uhuh you you have to use uh different different yardsticks sodifferent different yardsticks sodifferent different yardsticks so like for example you knowlike for example you knowlike for example you know i used to own a company in chinai used to own a company in chinai used to own a company in china uh called maotai which makes auh called maotai which makes auh called maotai which makes a premium liquor and umpremium liquor and umpremium liquor and um it's a business i should have held on toit's a business i should have held on toit's a business i should have held on to but in my infinite wisdom i soldbut in my infinite wisdom i soldbut in my infinite wisdom i sold because of the 50 90 uh and such but uhbecause of the 50 90 uh and such but uhbecause of the 50 90 uh and such but uh i think mao tai went up over ai think mao tai went up over ai think mao tai went up over a four or five year period about six sevenfour or five year period about six sevenfour or five year period about six seven timestimestimes um and uh you know that's a businessum and uh you know that's a businessum and uh you know that's a business wherewherewhere the cost of the product is i mean thethe cost of the product is i mean thethe cost of the product is i mean the bottle a bottle ofbottle a bottle ofbottle a bottle of the amount i buy you is maybe their costthe amount i buy you is maybe their costthe amount i buy you is maybe their cost isisis three four dollars and it goes for likethree four dollars and it goes for likethree four dollars and it goes for like 150 dollars150 dollars150 dollars you know anytime you have a businessyou know anytime you have a businessyou know anytime you have a business like that you're going to do really welllike that you're going to do really welllike that you're going to do really well and the 150 dollars in a few years canand the 150 dollars in a few years canand the 150 dollars in a few years can be 300be 300be 300 um because they've they've got thisum because they've they've got thisum because they've they've got this incredible brand andincredible brand andincredible brand and um you know there's
Questionerum you know there's a massive growth of china backdrop and a massive growth of china backdrop and a massive growth of china backdrop and it's a it's a status symbol to be able to serve maokai and so on to serve maokai and so on to serve maokai and so on so so when you're val when you're so so when you're val when you're so so when you're val when you're looking at a business like that looking at a business like that looking at a business like that uh it's going to be quite a different uh it's going to be quite a different uh it's going to be quite a different analysis than for example when i looked at uhat uhat uh another business we owned i think in another business we owned i think in another business we owned i think in 2012 we bought fiat chrysler 2012 we bought fiat chrysler 2012 we bought fiat chrysler uh and so there uh the calculus was uh and so there uh the calculus was uh and so there uh the calculus was very different you know so there we had very different you know so there we had very different you know so there we had a a uh star manager uh you know the business uh star manager uh you know the business uh star manager uh you know the business that was doing 130 plus billion in that was doing 130 plus billion in that was doing 130 plus billion in revenue revenue revenue and a five six billion dollar market cap and a five six billion dollar market cap and a five six billion dollar market cap and uh and uh and uh you know pretty much um you know pretty much um you know pretty much um if they were able to just even slightly if they were able to just even slightly if they were able to just even slightly right the ship right the ship right the ship uh and even you know uh and even you know uh and even you know eek out two three percent four percent eek out two three percent four percent eek out two three percent four percent in profits in profits in profits that stock was going to be a that stock was going to be a that stock was going to be a multi-bagger multibagger multi-bagger multibagger multi-bagger multibagger so you know the it just depends each so you know the it just depends each so you know the it just depends each each business and each industry each business and each industry each business and each industry um i think you have to just and and the
Questionerum i think you have to just and and theum i think you have to just and and the key is that you have to get tokey is that you have to get tokey is that you have to get to you have to get to the factors thatyou have to get to the factors thatyou have to get to the factors that matteryou know like i would say that if youyou know like i would say that if youyou know like i would say that if you look at alook at alook at a if you look at a company like nvr andif you look at a company like nvr andif you look at a company like nvr and every year they areevery year they areevery year they are taking 100 of owner earnings and puttingtaking 100 of owner earnings and puttingtaking 100 of owner earnings and putting it into buybacksit into buybacksit into buybacks um and you you continue to own the stockum and you you continue to own the stockum and you you continue to own the stock those earnings are not coming to youthose earnings are not coming to youthose earnings are not coming to you okayokayokay you're you're you're owning a bigger andyou're you're you're owning a bigger andyou're you're you're owning a bigger and bigger portion of the piebigger portion of the piebigger portion of the pie but you're not seeing any cash come tobut you're not seeing any cash come tobut you're not seeing any cash come to you rightyou rightyou right and so in that case the theand so in that case the theand so in that case the the the thing that matters uh all thatthe thing that matters uh all thatthe thing that matters uh all that matters when you own a business likematters when you own a business likematters when you own a business like thatthatthat is that whatever endpoint you want tois that whatever endpoint you want tois that whatever endpoint you want to look atlook atlook at the question is what are the sharesthe question is what are the sharesthe question is what are the shares outstandingoutstandingoutstanding at that end point and what are the whatat that end point and what are the whatat that end point and what are the what is the stability and cash flow of theis the stability and cash flow of theis the stability and cash flow of the business at that pointbusiness at that pointbusiness at that point uh because that's how the market woulduh because that's how the market woulduh because that's how the market would value it right so sovalue it right so sovalue it right so so um so it's a different
Questionerum so it's a different it's a very different catalyst for multi it's a very different catalyst for multi it's a very different catalyst for multi it's a very it's a very it's a very different calculus from fiat chrysler so different calculus from fiat chrysler so different calculus from fiat chrysler so each business that you're looking at i each business that you're looking at i each business that you're looking at i think you you need to look at think you you need to look at think you you need to look at so the first question even when you get so the first question even when you get so the first question even when you get before you get to all those things is before you get to all those things is before you get to all those things is is um do i understand the business is um do i understand the business is um do i understand the business is it within my circle of competence can is it within my circle of competence can is it within my circle of competence can i figure out the two or three variables i figure out the two or three variables i figure out the two or three variables that really matter so for example one of that really matter so for example one of that really matter so for example one of the things about the the things about the the things about the nvr home building business is nvr home building business is nvr home building business is they don't start building a home they don't start building a home they don't start building a home till there's already a person who's till there's already a person who's till there's already a person who's bought it bought it bought it okay so they don't build any speculative okay so they don't build any speculative okay so they don't build any speculative homes so homes so homes so i go to them and say i look at the model i go to them and say i look at the model i go to them and say i look at the model and say yeah that's great and say yeah that's great and say yeah that's great i'll buy the home we sign a contract i'll buy the home we sign a contract i'll buy the home we sign a contract they see i have a bank loan they see i have a bank loan they see i have a bank loan and that's when they start building the and that's when they start building the and that's when they start building the that home that home that home so which means that they're so which means that they're so which means that they're they do not put any capital in they do not put any capital in
Todd Combsthey do not put any capital in till there's a confirmed sale right and the second thing about nvr is nvr does not own land which is the biggest investment for a lot of builders they have options on land so they typically basically believe in just in time manufacturing where they're saying all the factors of production that i need to build this home i want to be bringing those together as close to the sale point as possible so when you when you look at a business like that what that means is that if the business ebbs and flows which is the number of homes they build goes up and down with the economy and so on it doesn't really matter as long as their core overheads are low okay so let's say for example their you know their corporate overhead whatever if they built zero homes in a year is 25 million dollars for example right um so if they didn't build any
Questionerright um so if they didn't build any homes they would lose 25 million for example and if you can see that the balance sheet can handle that for several years uh then you're fine then you know that and you know that if they build more than a thousand homes they'll make money more than 500 homes they'll make money you know you figure out the metric at what point they break even and maybe they're building 5000 homes a year and you know the number of homes they build typically uh fluctuates between five thousand i'm just pulling these numbers out and i'm not uh nvr is a train according to me that left that station uh but who knows maybe in the next 20 years they'll prove me wrong where they'll buy back another nine percent of their talk and be one percent shares outstanding um so uh anyway what i'm trying to say is that
Todd Combsuh anyway what i'm trying to say is that each business uh is completely different and so the uh is completely different and so the uh is completely different and so the key is can you understand the two or key is can you understand the two or key is can you understand the two or three variables three variables three variables that are going to drive the outcome and that are going to drive the outcome and that are going to drive the outcome and it's very important that you've honed in it's very important that you've honed in it's very important that you've honed in on those on those on those key variables then usually key variables then usually key variables then usually the entrepreneur or the ceo running the the entrepreneur or the ceo running the the entrepreneur or the ceo running the businesses businesses businesses needs to be honed in on the same needs to be honed in on the same needs to be honed in on the same variables so if variables so if variables so if you have gotten to the point where you you have gotten to the point where you you have gotten to the point where you can can can see the business and visualize it the see the business and visualize it the see the business and visualize it the way the ceo does way the ceo does way the ceo does then it's typically that you've got the then it's typically that you've got the then it's typically that you've got the right variables so much for being here right variables so much for being here right variables so much for being here um in dondo investor you advise the um in dondo investor you advise the um in dondo investor you advise the reader to look for reader to look for reader to look for low risk high uncertainty businesses and low risk high uncertainty businesses and low risk high uncertainty businesses and i thought that was a i thought that was a i thought that was a fascinating construct but also last year in this class watch but also last year in this class watch but also last year in this class watch the recording and you mentioned that you the recording and you mentioned that you the recording and you mentioned that you hate retail hate retail hate retail i'd be curious if you could go a little i'd be curious if you could go a little i'd be curious if you could go a little bit more into that bit more into that bit more into that analysis and kind of how you see the analysis and kind of how you see the analysis and kind of how you see the retail landscape
Questionerretail landscape let's say over the next decade or two and then maybe if you could tie that in with your observation about this period that you see going until perhaps the late uh 2020s early 2030s but specifically you know how that low risk high uncertainty formulation links to how you see retail right now
Questioneryou know um i hate retail and arvind loves retail so if you ever want the other point of view on why retail is awesome uh you should talk to arvind um but uh yeah i've never i've never liked i've never liked retail and one of the things about investing is this morning i was on a bike ride with uh another money manager uh and uh you know he was saying to me that he really doesn't get these restaurants like he doesn't get burger king he doesn't get um you know dominoes and so on and i try to explain some of those businesses to him
Questionerbusinesses to him you know makes the bike ride go quicklyyou know makes the bike ride go quicklyyou know makes the bike ride go quickly but i also told himbut i also told himbut i also told him i said you can have a very very happyi said you can have a very very happyi said you can have a very very happy lifelifelife never ever understandingnever ever understandingnever ever understanding what makes these like like he was hiswhat makes these like like he was hiswhat makes these like like he was his complaint to me wascomplaint to me wascomplaint to me was that he can understand starbucks reallythat he can understand starbucks reallythat he can understand starbucks really wellwellwell okay and he he understands that theokay and he he understands that theokay and he he understands that the substitutionsubstitutionsubstitution options on starbucks for most humansoptions on starbucks for most humansoptions on starbucks for most humans is pretty limited like if you get to ais pretty limited like if you get to ais pretty limited like if you get to a routine you know nowadays we don't go toroutine you know nowadays we don't go toroutine you know nowadays we don't go to work or whatever we get to a routinework or whatever we get to a routinework or whatever we get to a routine you know you're not going to beyou know you're not going to beyou know you're not going to be switching your coffeeswitching your coffeeswitching your coffee uh every day to a different place oruh every day to a different place oruh every day to a different place or whatever right you get to a routinewhatever right you get to a routinewhatever right you get to a routine but you may change the place you havebut you may change the place you havebut you may change the place you have lunch every daylunch every daylunch every day okay so the recurrence of starbucksokay so the recurrence of starbucksokay so the recurrence of starbucks and the recurrence of chipotle are notand the recurrence of chipotle are notand the recurrence of chipotle are not the samethe samethe same so that's i'm just telling you what soso that's i'm just telling you what soso that's i'm just telling you what so his perspective was that if i look athis perspective was that if i look athis perspective was that if i look at wendy'swendy'swendy's you know there's so many options besidesyou know there's so many options besidesyou know there's so many options besides wendy's when you go to eat
Questionerwendy's when you go to eat right and so so i told him listen whether that framework is correct or wrong in terms of taking about pass on wendy's it doesn't matter all that matters is what you do invest in so if you unfairly get rid of wendy's because it might be a good business because 90 plus percent franchise and all that stuff and they just introduced breakfast and so on um no issues so we're in a business of no call strikes okay so you can take entire industries and say i'm not interested and no there's no penalty so i have taken this entire industry of retail and in one big lump just dumped it on the side um and we have arvind on the other hand who's pouring through each one okay and i don't even want to pour through each one i don't think the whole chunk can just get rid of it as quickly as possible in fact even now i don't understand amazon's
Questionereven now i don't understand amazon's retail business retail business retail business i don't understand because i say that i don't understand because i say that i don't understand because i say that the last mile is so expensive the last mile is so expensive the last mile is so expensive you know like if i order like a seven you know like if i order like a seven you know like if i order like a seven dollar item dollar item dollar item they deliver to my doorstep the cost of they deliver to my doorstep the cost of they deliver to my doorstep the cost of that has to be like that has to be like that has to be like 10 bucks 15 bucks just to get it to my 10 bucks 15 bucks just to get it to my 10 bucks 15 bucks just to get it to my door i mean door i mean door i mean all the things you have to go through um all the things you have to go through um all the things you have to go through um but somehow amazon makes money and and but somehow amazon makes money and and but somehow amazon makes money and and it probably works because not everything it probably works because not everything it probably works because not everything i order will be seven dollars and so on i order will be seven dollars and so on i order will be seven dollars and so on and so and so and so statistically probably works out but the statistically probably works out but the statistically probably works out but the thing is that i don't get it right thing is that i don't get it right thing is that i don't get it right and so if i don't get it it doesn't and so if i don't get it it doesn't and so if i don't get it it doesn't matter just let it go matter just let it go matter just let it go so retail the problem with retail so retail the problem with retail so retail the problem with retail traditional retail you know brick and traditional retail you know brick and traditional retail you know brick and mortar retail is it's the most transparent of businesses it's the most transparent of businesses it's the most transparent of businesses and sam walton took advantage of that and sam walton took advantage of that and sam walton took advantage of that so sam walton spent an incredible amount so sam walton spent an incredible amount so sam walton spent an incredible amount of time of time of time in his competitor's stores and in his competitor's stores and in his competitor's stores and he would constantly i mean he would go
Otherhe would constantly i mean he would go to any town any place he was going he'd always take his team into and it didn't even need to be the big guys he would go to little stores big stores he was going all over the world right so one time uh in brazil there's a supermarket and some old guys flat on the ground and they call the paramedics okay and then they find out it's sam walton and he wanted to measure the the space between aisles and he didn't have a tape measure so he said i'll use my body because i know how tall i am and so but what i'm saying he was fanatical about the inches between the aisles okay so every minor thing and so the problem in retail is that there are no trade secrets okay every single thing that you're doing your competitors can just walk in and get everything the second problem is so if i look at a business like
Questionerso if i look at a business like let's say business like adp you knowlet's say business like adp you knowlet's say business like adp you know payroll processingpayroll processingpayroll processing how frequently do businesses changehow frequently do businesses changehow frequently do businesses change their payroll processor
Questionerlet me just telltheir payroll processor let me just telltheir payroll processor let me just tell youyouyou i hate adp i use adpi hate adp i use adpi hate adp i use adp i hate them why do i hate them i look ati hate them why do i hate them i look ati hate them why do i hate them i look at all the costs i'm payingall the costs i'm payingall the costs i'm paying and i'm saying it's ridiculous you knowand i'm saying it's ridiculous you knowand i'm saying it's ridiculous you know it's a bunch of digital stuff they'reit's a bunch of digital stuff they'reit's a bunch of digital stuff they're doingdoingdoing and why do they charge me so much so iand why do they charge me so much so iand why do they charge me so much so i every few years ievery few years ievery few years i look to get out of adplook to get out of adplook to get out of adp okay and then i figure out that yeah iokay and then i figure out that yeah iokay and then i figure out that yeah i can do it middle of the yearcan do it middle of the yearcan do it middle of the year and whatever they'll give to w-2s andand whatever they'll give to w-2s andand whatever they'll give to w-2s and all thatall thatall that but really for the employees what isbut really for the employees what isbut really for the employees what is seamless is to do it just onceseamless is to do it just onceseamless is to do it just once at the end of the year right so it'sat the end of the year right so it'sat the end of the year right so it's it's simplerit's simplerit's simpler so your switching is limited like oneso your switching is limited like oneso your switching is limited like one daydayday okay and then the other guy i talked tookay and then the other guy i talked tookay and then the other guy i talked to paycheckspaycheckspaychecks there's no difference i i talk to thethere's no difference i i talk to thethere's no difference i i talk to the paychecks guy and i'm not getting anypaychecks guy and i'm not getting anypaychecks guy and i'm not getting any special deal then i go to likespecial deal then i go to like
Questionerspecial deal then i go to like you know smaller guys and then so in the end i'm back to ed okay and uh adp has something very important in my opinion one of the most important things in business is rrs rrs recurring revenue streams okay so recurring revenue streams rrs by the way i made up okay it's an acronym i just made up okay so recurring revenue streams is the holy grail what we want in a business we want franchises which are just pounding the reason retail is such a massive graveyard of all these companies going under is because the customer has no contract with you okay so i go to a kmart and if for whatever reason i'm not very happy with something or the other or someone else offers something on sale i don't need any obligation to go to them i can go to someone else it's totally different from adp i mean adp they've got you they've got another
Questioneradp they've got you they've got another business there which isbusiness there which isbusiness there which is uh automating these uh auto dealershipsuh automating these uh auto dealershipsuh automating these uh auto dealerships you know every time you go to autoyou know every time you go to autoyou know every time you go to auto dealerdealerdealer and they pull up and they give you yourand they pull up and they give you yourand they pull up and they give you your uh you know yours either your saleuh you know yours either your saleuh you know yours either your sale contractcontractcontract or your maintenance stuff all that isor your maintenance stuff all that isor your maintenance stuff all that is running on arunning on arunning on a i think it's fun of that company buti think it's fun of that company buti think it's fun of that company but they're all based on adb all of thesethey're all based on adb all of thesethey're all based on adb all of these businessesbusinessesbusinesses that adp had with these recurringthat adp had with these recurringthat adp had with these recurring revenue businessesrevenue businessesrevenue businesses and so those businesses have another oneand so those businesses have another oneand so those businesses have another one that they spun outthat they spun outthat they spun out uh broadridge uh you know which sent outuh broadridge uh you know which sent outuh broadridge uh you know which sent out all the filings uhall the filings uhall the filings uh all these companies the public companiesall these companies the public companiesall these companies the public companies that we send out to the investors andthat we send out to the investors andthat we send out to the investors and all thatall thatall that so broadridge gets paidso broadridge gets paidso broadridge gets paid x per investor whether they send itx per investor whether they send itx per investor whether they send it digitally ondigitally ondigitally on in the mail okay what does it cost themin the mail okay what does it cost themin the mail okay what does it cost them to send some digitallyto send some digitallyto send some digitally zero okay approaching zero but theyzero okay approaching zero but theyzero okay approaching zero but they still charge it's a great businessstill charge it's a great businessstill charge it's a great business so what i'm trying to say is that retail
Questionerso what i'm trying to say is that retail most retail doesn't have those attributes okay now there are retailers so for example when i take this whole industry and dump it what happens is when i dump the industry part of the dumping includes costco okay and part of the dumping includes amazon okay and then you look or even walmart i dump all of them right and then i look at the stock chart on these and it looks great you know and so but you know the thing is i just find that even look at walmart i say it's it's a business that does well but they need to be so good costco needs to be so good now costco has so much goodwill with its customers and so much that they do for their customers that that mode is very solid you know finally i i think i understand costco's mode but i understand it at 40 times earnings i did not understand it at eight times
Questionernot understand it at eight times earnings or whatever earnings or whatever earnings or whatever right so it's okay that train has left right so it's okay that train has left right so it's okay that train has left the station the station the station no problem there are a million trains no problem there are a million trains no problem there are a million trains yet to come yet to come yet to come so what i find is that when i look at so what i find is that when i look at so what i find is that when i look at these businesses home depot and costco these businesses home depot and costco these businesses home depot and costco and and and walmart and all this stuff they are very walmart and all this stuff they are very walmart and all this stuff they are very good businesses good businesses good businesses but what is hidden beneath the surface but what is hidden beneath the surface but what is hidden beneath the surface is these businesses require incredible is these businesses require incredible is these businesses require incredible execution execution execution and they have to every day win back and they have to every day win back and they have to every day win back the loyalty of their customers uh the loyalty of their customers uh the loyalty of their customers uh because you know there's constant because you know there's constant because you know there's constant erosion taking place erosion taking place erosion taking place from new entrants right i mean amazon from new entrants right i mean amazon from new entrants right i mean amazon comes in and no matter how well walmart comes in and no matter how well walmart comes in and no matter how well walmart executes executes executes they've got it's a paradigm shift and they've got it's a paradigm shift and they've got it's a paradigm shift and and it's difficult so walmart has to and it's difficult so walmart has to and it's difficult so walmart has to kind of kind of kind of change the way it is so i think i think change the way it is so i think i think change the way it is so i think i think retail is retail is retail is is i find very hard and is i find very hard and is i find very hard and so in general i'm not interested and and so in general i'm not interested and and so in general i'm not interested and and actually you know one of the things is actually you know one of the things is actually you know one of the things is if you look at
Questionerif you look at if you look at if you look at someone like buffett andif you look at someone like buffett andif you look at someone like buffett and look at something like berkshirelook at something like berkshirelook at something like berkshire hathawayhathawayhathaway berkshire hathaway has made lots ofberkshire hathaway has made lots ofberkshire hathaway has made lots of retail investmentsretail investmentsretail investments okay they bought many many jewelersokay they bought many many jewelersokay they bought many many jewelers and they bought many many furniture guysand they bought many many furniture guysand they bought many many furniture guys okay now if you look at warren's trackokay now if you look at warren's trackokay now if you look at warren's track record when he invests in financialsrecord when he invests in financialsrecord when he invests in financials or when you invest in banks or anythingor when you invest in banks or anythingor when you invest in banks or anything like that it's alike that it's alike that it's a it's he's batting a thousand it's ait's he's batting a thousand it's ait's he's batting a thousand it's a flawless record heflawless record heflawless record he just i don't i've never seen him losejust i don't i've never seen him losejust i don't i've never seen him lose moneymoneymoney investing in a bank he's really reallyinvesting in a bank he's really reallyinvesting in a bank he's really really good at itgood at itgood at it uh but uh in retailuh but uh in retailuh but uh in retail uh berkshire i mean they don't talkuh berkshire i mean they don't talkuh berkshire i mean they don't talk about it becauseabout it becauseabout it because he doesn't want to you knowhe doesn't want to you knowhe doesn't want to you know have the managers loot or lose allhave the managers loot or lose allhave the managers loot or lose all motivation uhmotivation uhmotivation uh but it's a graveyard basically i thinkbut it's a graveyard basically i thinkbut it's a graveyard basically i think everyeveryevery furniture operation they bought otherfurniture operation they bought otherfurniture operation they bought other than nebraska furniture martthan nebraska furniture martthan nebraska furniture mart did not work every jewelry operationdid not work every jewelry operationdid not work every jewelry operation they boughtthey boughtthey bought other than borsheims did not work and on
Warrenother than borsheims did not work and on and on so they made they made a lot of forays into retail and by and large they didn't work now it didn't matter to berkshire because by and large they've been small relative to the size of berkshire and they carry a lot of those businesses and it's okay uh but it didn't work so well to clarify manisha's reference to my retail love is really a costco love so i don't want oh i think irwin that goes beyond costco costco costco is like a torrid affair okay costco is not just an affair to costco has like gone off the charts but the others are still there costco there's still some love with the others costco is more like my wife there's just my wife and i make sure she can't hear that i don't know i don't know i do not appreciate that being inflated to costco
Other[Laughter]
Warreni think she may love costco
Questionerthank you for being here um as a south asian immigrant obviously i enjoyed
Questionerasian immigrant obviously i enjoyed uh the dundo investor so thanks again uh the dundo investor so thanks again uh the dundo investor so thanks again i was curious you mentioned earlier in your remarks you know 50 your remarks you know 50 your remarks you know 50 000 stocks you clearly have breadth 000 stocks you clearly have breadth 000 stocks you clearly have breadth across geography and industries and across geography and industries and across geography and industries and business models business models business models where do you start so what is top of where do you start so what is top of where do you start so what is top of funnel for you funnel for you funnel for you especially since it seems like with the especially since it seems like with the especially since it seems like with the 50 cent and exited 90 cent strategy 50 cent and exited 90 cent strategy 50 cent and exited 90 cent strategy you have far more velocity and sort of you have far more velocity and sort of you have far more velocity and sort of your portfolio your portfolio your portfolio than many other value investors i've than many other value investors i've than many other value investors i've sort of read about and sort of read about and sort of read about and spoken with
Questionerwell hopefully that velocity spoken with well hopefully that velocity spoken with well hopefully that velocity is going to zero soon is going to zero soon is going to zero soon um that's where we want to get to uh um that's where we want to get to uh um that's where we want to get to uh you know so when buffett is asked that you know so when buffett is asked that you know so when buffett is asked that question question question he says start with the a's he says start with the a's he says start with the a's okay but i'll try to give you a better okay but i'll try to give you a better okay but i'll try to give you a better answer than warren answer than warren answer than warren um so uh there are some hacks um so uh there are some hacks um so uh there are some hacks so 50 000 stocks is a lot and and so 50 000 stocks is a lot and and so 50 000 stocks is a lot and and actually when warren says start with the actually when warren says start with the actually when warren says start with the a's he's not kidding a's he's not kidding a's he's not kidding because he went through the moody's
Questionerbecause he went through the moody's manual you know every page and you know the movies manual they stopped publishing that several decades ago so i bought a few of those on ebay just to get a feel for you know what the messiah used and yeah it's pretty dense stuff i mean got like four or five businesses per page a very small fine print and he went through all that um and and so his and uh lilu's done the same thing so definitely uh you can put your nose to the grindstone and you can start pounding through these businesses uh and you know i tried to get warren interested in capital iq you know i said warren you know you one time i was in his office and he was going through the japan company handbook and i said warren you know if we if we get you to splurge on capital iq you can run screens and this and that and i even got to showing
Questioneri even got to showing uh one of his assistants kind of you know how to do all that and everything and he's not going to spend that money he wants his 50 book and that's what all he wants um so anyway and it's worked just fine for him but but you can hack this a little bit so one one way i hack it is you can look at what other great investors have bought okay so you can make a list of uh investors and it's interesting to actually uh categorize them so if you look at someone like chuck akri you'll see a certain pattern to what he buys you look at david tepper you see some different patterns or you look at you know you know jeff urban and so on so you can you can find different patterns with the different investors and you know dataroma does a good job of giving you a whole bunch of investors and what they own such pretty easily the price is right
Questionersuch pretty easily the price is right it's zero um so that can take that fifty thousand share uh the the 50 000 stocks down by more than 90 maybe even 98 okay and and then the the second the second hack you can do is uh you know the first question i ask myself when i look at a business is is it within circular competence you know so you can winnow that list down different ways um you could run screens for you know low p's or whatever but i think that looking at what other great investors are one of the good is a good filter um because already gone through one filter especially if they're larger holdings uh then the second question you ask to ask yourself is is it within circle of competence and that will take out quite a few businesses as well so and then you know if you do if you're like me like you know anything retail gone you know anything
Questioneranything retail gone you know anything financial is gonefinancial is gonefinancial is gone right you just have these um you knowright you just have these um you knowright you just have these um you know anything pharma gone healthcare gone youanything pharma gone healthcare gone youanything pharma gone healthcare gone you know all of that so iknow all of that so iknow all of that so i i can take out um a lot of stuffi can take out um a lot of stuffi can take out um a lot of stuff relatively quicklyrelatively quicklyrelatively quickly and it doesn't matter if i'm doing thisand it doesn't matter if i'm doing thisand it doesn't matter if i'm doing this massmassmass stuff and there's good stuff going awaystuff and there's good stuff going awaystuff and there's good stuff going away there's not there's no penalty for thatthere's not there's no penalty for thatthere's not there's no penalty for that uh this infinite amount of good stuff souh this infinite amount of good stuff souh this infinite amount of good stuff so you can keep throwing away a lot ofyou can keep throwing away a lot ofyou can keep throwing away a lot of stuffstuffstuff and and then you get down to uhand and then you get down to uhand and then you get down to uh some things that you know strike yoursome things that you know strike yoursome things that you know strike your fancy orfancy orfancy or you get interested in and then you goyou get interested in and then you goyou get interested in and then you go deepdeepdeep feel free to jump in i saw vishal rustyfeel free to jump in i saw vishal rustyfeel free to jump in i saw vishal rusty samsamsam all had questions um sorry to take usall had questions um sorry to take usall had questions um sorry to take us back a coupleback a coupleback a couple questions but uh to kind of piggybackquestions but uh to kind of piggybackquestions but uh to kind of piggyback off whatoff whatoff what frank had mentioned as far as valuationsfrank had mentioned as far as valuationsfrank had mentioned as far as valuations a lot of your investmentsa lot of your investmentsa lot of your investments are emerging markets overseas whereare emerging markets overseas whereare emerging markets overseas where accounting standards aren't exactlyaccounting standards aren't exactlyaccounting standards aren't exactly aren't exactly a thingaren't exactly a thingaren't exactly a thing management may be a little bit more
Questionermanagement may be a little bit more difficult to get in touch with so what sort of extra legwork do you have to go through in order to make your investments and arrive at an investment decision
Todd Combsi think most of the international stuff i've usually had to go see the business and kick the tires and assess the management and so on so it's uh it's definitely involved more work but it's a lot of fun work actually i enjoy that so yeah you you do have a few more layers to peel as you go from i mean one of the things i don't have to worry too much about is that um i think the odds that i would lose money in the u.s on an investment because of fraud uh approach zero we you know they make the headlines here and there the enrons and stuff but the odds that something like that enters your portfolio is very low especially if you're then
Todd Combsespecially if you're then doing research and work on it and you understand the business you know i think something like enron would be just beyond my understanding you know so a pretty easy pass you know if i can understand amazon you know enron is very far from that so so basically i think uh yeah you you have a little more work to do but you also have more rewards in the sense that sometimes the tailwinds can be a lot stronger uh and and i think i think that uh you know i think in general entrepreneurs around the world um you know most of them are trying to uh you know make a go at it fairly honestly um i think that's a that's a general trade across and uh and yeah you do have to kind of check that box and test it a little carefully but you can get there not a problem i can go um
Questionermanish thank you so much for doing this this is so much fun
Questionerthis is so much fun so far um my uh i have two quick questions for you uh you mentioned earlier that you've learned a lot during this pandemic i was just curious to um learn more about like how you managed your portfolio during the pandemic or managing your portfolio and what have you learned so far uh and my second question is um so we had someone from fidelity last week and uh um the portfolio manager told us that a lot of people currently are investing in growth um um i'm just wondering if value investing is dead uh or is it that uh like do you still believe that uh value investing has uh a place uh today i think uh yeah i think
Questioneruh regarding the pandemic so a couple of things i mean i think in the march time frame when this data was kind of coming out about you know kind of how big this was going to be and the shutdowns were starting and so
Otherand the shutdowns were starting and so ononon uh i was trying to understand kind ofuh i was trying to understand kind ofuh i was trying to understand kind of you knowyou knowyou know what kind of impacts it would have onwhat kind of impacts it would have onwhat kind of impacts it would have on the existing portfoliothe existing portfoliothe existing portfolio so the thing is that capitalism is veryso the thing is that capitalism is veryso the thing is that capitalism is very brutalbrutalbrutal and in the best of timesand in the best of timesand in the best of times most businesses are very fragile ummost businesses are very fragile ummost businesses are very fragile um so they most businesses cannot withstandso they most businesses cannot withstandso they most businesses cannot withstand uh the kind of shock uh ofuh the kind of shock uh ofuh the kind of shock uh of these shutdowns and stuff mostthese shutdowns and stuff mostthese shutdowns and stuff most businesses cannot handle thatbusinesses cannot handle thatbusinesses cannot handle that it's um it's it's really hardit's um it's it's really hardit's um it's it's really hard and so for example but i think when iand so for example but i think when iand so for example but i think when i looked atlooked atlooked at my portfolio ummy portfolio ummy portfolio um you know like for example i i own someyou know like for example i i own someyou know like for example i i own some real estate companies in india so thesereal estate companies in india so thesereal estate companies in india so these businesses they don't have much leveragebusinesses they don't have much leveragebusinesses they don't have much leverage their sales velocity was going to gotheir sales velocity was going to gotheir sales velocity was going to go down but i didn't have any concern aboutdown but i didn't have any concern aboutdown but i didn't have any concern about stability of the business i said yeahstability of the business i said yeahstability of the business i said yeah you know they'll have less sales andyou know they'll have less sales andyou know they'll have less sales and they've got somethey've got somethey've got some like explained nvr they've got somelike explained nvr they've got somelike explained nvr they've got some corporate overheadcorporate overheadcorporate overhead and can they handle that i said yeah
Questionerand can they handle that i said yeah
Questionerthat's not a problem for them to handle
Questionerthe overhead
Questionerso i was not concerned about those businesses
Questionerum i uh i i got quite concerned about one of our companies you know fiat chrysler
Questioneruh because the the car business is so much operating leverage
Questionerand uh and and when you shut down a car plant
Questioneruh i mean it's you've taken that whole thing in reverse
Questionerso i actually could not see i was very concerned about how this is going to affect them how long it's going to last etc
Questionerand so we completely exited the position um and i exited at a significant discount to where it was trading
Questionerbefore uh the pandemic and even now i mean it's it's come back in a manner that was different from the way i expected so if i had done nothing i would have been better off but i couldn't see it it was the uncertainty levels are way too high
Questionerthe uncertainty levels are way too high and i had seen that business have trouble uh in the past so we didn't take a lot of actions in the portfolio we took some actions um but on the flip side what also happened at that time was there were great opportunities uh so especially in march you know towards the end of march when the markets were tanking um we were able to put money to work and uh so i made two investments and uh they done very well so and i'm very happy that we made those so uh so the pandemic i think is uh is now i think we it's a little bit more there's more clarity about it and it's still going to last for quite a while i think that it'll take a while because uh we need to get to the point where um in effect people have some kind of certificate or passport or something which says i'm vaccinated and whatever and and such and and you know for business
Otherand such and and you know for business to come back and business to come back and business to come back and business people to have meetings everyone needs people to have meetings everyone needs people to have meetings everyone needs to have that sort of thing to have that sort of thing to have that sort of thing uh in place so that will take a while uh in place so that will take a while uh in place so that will take a while and so i think uh and so i think uh and so i think uh but we are already finding in california but we are already finding in california but we are already finding in california for example the for example the for example the the freeways are getting clogged up and the freeways are getting clogged up and the freeways are getting clogged up and you know so things things are coming you know so things things are coming you know so things things are coming if they have nots um i mean this is this if they have nots um i mean this is this if they have nots um i mean this is this is really stressed they have not since is really stressed they have not since is really stressed they have not since really really really unfortunately widened the gap between unfortunately widened the gap between unfortunately widened the gap between the haves and have-nots it's a very the haves and have-nots it's a very the haves and have-nots it's a very uh sad thing in terms of what's happened uh sad thing in terms of what's happened uh sad thing in terms of what's happened with the pandemic in terms of with the pandemic in terms of with the pandemic in terms of who it's impacted uh growth and value who it's impacted uh growth and value who it's impacted uh growth and value are joined at the hip are joined at the hip are joined at the hip there's no difference all there's no difference all there's no difference all intelligent investing is value investing intelligent investing is value investing intelligent investing is value investing so so so if a company is growing all that means if a company is growing all that means if a company is growing all that means is that you've got more is that you've got more is that you've got more coupons in the future and they've got coupons in the future and they've got coupons in the future and they've got higher coupons and then you discount higher coupons and then you discount higher coupons and then you discount them them them to whatever rate so it doesn't matter
Otherto whatever rate so it doesn't matter whether those coupons are growing at 20 a year or they're growing at zero percent a year or they're declining five percent a year all three cases will give you a valuation on which uh you can invest you're better off having high return on equity and high growth in general that's really what's gonna uh and long runways with that but i don't particularly see it as one is different from the other i think if you if i have a choice i want to invest in growth and and anyway i i told you that you know the 50 to 90 cents is not of as much interest i want to get to the long runways and such so um but i want to get to the wrong runways without paying up too much so thank you for uh for joining us today um my question for you uh relates to one of the points that you made in your book that when i read it a couple years ago i thought was really
Questionercouple years ago i thought was really brilliant which is that embedded options tend to be mispriced um since i read that you know it's something i've been on the lookout for uh for a few years now and one of the things that i've observed is that uh actually these things tend to be understood at least in the businesses that i've looked at so i'm wondering whether you think um that's a concept that now tends to be more widely understood by the markets or whether you still find options that are in fact mispriced
Warrenyou're you're talking of the optionality in a business in a business right
Questionerexactly i mean i think i think that that persists um always i mean uh markets markets uh don't like um these kind of wide outcome ranges you know i i think what what markets are really good as they want to see a cookie cutter and they want to be able to see uh you
Todd Combsand they want to be able to see uh you know what that cookie cutter can do over a long period of time and they want a straight line right so if i have a business like costco uh you know that gets as much as like a cookie cutter as you can imagine right they they have a pretty well-defined model they do innovate within that model but they know the path they're going down and i mean i would say um optionality on costco would be like you know they're in such a small number of countries uh they could expand that quite dramatically china just started for them um and so on but you know uh it's also richly priced so uh i think that i find that what markets don't appreciate because most markets participants did not run businesses or have not run businesses is they don't appreciate the messiness of the real world and they don't like the messiness of the real world and so that actually gives
Questionerreal world and so that actually gives an advantage to an investor who appreciates that so the reality we know in businesses is that things don't go in a straight line and that you're going to have ups and downs and that businesses will open up brand new things that you never imagined you know was not part of the model like starbucks starts reserve right so they're going to go higher end on the coffee or even starts uh serving alcohol for example you know so those if those kind of tangents work it changes the paradigm but the market's not willing to recognize those typically uh because they see a lot of uncertainty with those so yes uh if you can if you can figure out uh optionality of the business and you can handicap the probabilities uh of the optionality or you're not paying for it at all you know you're paying for the core business
Questioneryou're paying for the core business you're not paying for the optionality
Otheruh then those those can be really good
Questionerabsolutely
Otherum like one of the things i didn't i didn't appreciate but came out later was that like when we bought fiat chrysler for example in 2012 i was just looking at this as a a car business with a great ceo who was going to right the ship and if you right to the ship they would make a few billion dollars a year and the market cap would go to four or five times what it was what i did not appreciate about about fear chrysler was that i knew that for example ferrari was embedded inside the company but at that time when i made the investment ferrari was making less than 150 million a year and i said okay you know well you know you can give this a 15 multiple or something and you know it's it's got maybe a couple of billion of value or something but
Questionerbillion of value or something but it's not going to what i was looking at is that can this 5 6 billion get to 30 billion for example right and i could see that the core business could get to that right but i just dis missed ferrari and uh and as it turned out i mean uh that that ferrari portion uh that we we in effect paid um when i bought the thing we paid about 16 a share for ferrari inside fiat chrysler and it went to 200 you know 190 or 200 right and uh so and and it was one third eventually got one third of the value so uh it it did way better than the rest of the other pieces and then they had a they had a parts that they had several parts businesses which they got rid of and spun out and so on so there was a lot of stuff that came out of fiat chrysler which was not part of my original analysis and i just said okay you know we've got
Questionerand i just said okay you know we've got a gifted manager and he's going to make sure that we get good value from these pieces so the optionality there was not even something i was focused on but then i after a few years i realized there's a lot of different pieces here that i haven't accounted for and that worked out very good so i was wondering um you've talked about long runways and i was just wondering how do you find long runways and where do you see long runways
Otherforward on long runways is arvind that's what you need to do you need to put your arms around irvine then ask him uh he's hard to do that in a coveted world
Questionerhe's he's a mr long runway guy it's his full name is arvind long runway navaratram you know it's a middle name um i mean i think that it's a really good question and i think the best way i can answer that is that um if you
Questionerum if youum if you if you make 10 betsif you make 10 betsif you make 10 bets or you know carefully selected all withor you know carefully selected all withor you know carefully selected all with long runway that leads your perceptionlong runway that leads your perceptionlong runway that leads your perception that they have long runway so one of thethat they have long runway so one of thethat they have long runway so one of the problems with long runways is thatproblems with long runways is thatproblems with long runways is that you know i already told you capitalismyou know i already told you capitalismyou know i already told you capitalism is very brutal you know i mean there'sis very brutal you know i mean there'sis very brutal you know i mean there's all these forcesall these forcesall these forces coming from left field and center andcoming from left field and center andcoming from left field and center and everywhere elseeverywhere elseeverywhere else trying to chip away at any competitivetrying to chip away at any competitivetrying to chip away at any competitive advantage rightadvantage rightadvantage right so people look at people look at adpso people look at people look at adpso people look at people look at adp and they look at that incredible moatand they look at that incredible moatand they look at that incredible moat and they want to constantly hammerand they want to constantly hammerand they want to constantly hammer against that moveagainst that moveagainst that move or people look at visa and mastercardor people look at visa and mastercardor people look at visa and mastercard and look at that mode and they want toand look at that mode and they want toand look at that mode and they want to gogogo keep going against that mode andkeep going against that mode andkeep going against that mode and many times they will succeed they willmany times they will succeed they willmany times they will succeed they will succeed atsucceed atsucceed at collapsing that mode that's the naturecollapsing that mode that's the naturecollapsing that mode that's the nature of i meanof i meanof i mean if you look at you know dominantif you look at you know dominantif you look at you know dominant businesses 50 years agobusinesses 50 years agobusinesses 50 years ago 100 years ago even 30 years ago100 years ago even 30 years ago100 years ago even 30 years ago how many of those are dominant today you
Questionerhow many of those are dominant today you know i mean
Questionermost most have gone by the wayside uh because capitalism is really hard but
Questionerif you if you if you make eight or ten bets and you know you're careful on the valuation what you're willing to pay and you are convinced that the modes are quite resilient even if you're wrong 40 of the time you will still end up very wealthy um so you're not going to bat a hundred percent on the long run way a game
Questioneri mean look at look at uh warren and charlie all they're doing is trying to buy long runways but if you looked at every acquisition berkshire has made and you equal weight every acquisition i would say easily a third have not worked right now if you dollar weight probably 80 90 percent have worked but if you equal weighted a lot of the decisions didn't work and these are the gods of investing right so so we're gonna have mistakes
Questionerright so so we're gonna have mistakes right so so we're gonna have mistakes we're going to have we're going to have we're going to have things that we think are going to work things that we think are going to work things that we think are going to work and they won't work and they won't work and they won't work but if you i mean bottom line is that but if you i mean bottom line is that but if you i mean bottom line is that if you make 10 bets and if you make 10 bets and if you make 10 bets and each one is 10 percent and each one is 10 percent and each one is 10 percent and one of them becomes a thirty bagger one of them becomes a thirty bagger one of them becomes a thirty bagger and you know three or four go by the and you know three or four go by the and you know three or four go by the wayside and some of them are you know wayside and some of them are you know wayside and some of them are you know five or ten baggers over a five or ten baggers over a five or ten baggers over a 20 30 year period you'll do just fine 20 30 year period you'll do just fine 20 30 year period you'll do just fine so i have a question uh kind of on that so i have a question uh kind of on that so i have a question uh kind of on that topic about moats topic about moats topic about moats um when you're assessing moats is it um when you're assessing moats is it um when you're assessing moats is it more more more uh conceptually or do you do it um more uh conceptually or do you do it um more uh conceptually or do you do it um more analytically and how confident in uh in analytically and how confident in uh in analytically and how confident in uh in a moat a moat a moat do you have to be to ultimately invest do you have to be to ultimately invest do you have to be to ultimately invest in that company in that company in that company
Otherit should be very obvious to you it should be very obvious to you it should be very obvious to you i think you should be able to look at it i think you should be able to look at it i think you should be able to look at it and and you should have very high degree and and you should have very high degree and and you should have very high degree so so so i mean let's say let's say we look at a i mean let's say let's say we look at a i mean let's say let's say we look at a business business business like starbucks right so i mean if you like starbucks right so i mean if you like starbucks right so i mean if you were investing in starbucks the big
Questionerwere investing in starbucks the big question is that you know what does this company look like 20 years from now or 10 years from now you know is the mote intact are people still going in who are their competitors at that point i mean these are the questions you need to answer you know how big the runway is how far they can go what can happen and there's a you know there's a range of outcomes but you need to be convinced probabilistically that most of that is skewed towards a great answer um and if you look at if you look at a business like chipotle for example you know a lot of people will look at chipotle and say you know you know what's the difference between chipotle and some you know taco stand somewhere and i think there's a difference i think there's a big difference between most almost all mexican restaurants and chipotle
Todd Combschipotlechipotle uh and they've in my opinion they'veuh and they've in my opinion they'veuh and they've in my opinion they've widened and deepened the moat i meanwidened and deepened the moat i meanwidened and deepened the moat i mean in their app is great they'vein their app is great they'vein their app is great they've in the pandemic done a really good jobin the pandemic done a really good jobin the pandemic done a really good job withwithwith keeping the business profitable withkeeping the business profitable withkeeping the business profitable with deliveries anddeliveries anddeliveries and you know all of that i mean the diningyou know all of that i mean the diningyou know all of that i mean the dining rooms are shut down but they've beenrooms are shut down but they've beenrooms are shut down but they've been able to survive all thatable to survive all thatable to survive all that and and the infiniteand and the infiniteand and the infinite customization you can do on it socustomization you can do on it socustomization you can do on it so there's a number of things there butthere's a number of things there butthere's a number of things there but again the question would be you knowagain the question would be you knowagain the question would be you know when you look out 10 yearswhen you look out 10 yearswhen you look out 10 years 15 years what does that business look15 years what does that business look15 years what does that business look like you knowlike you knowlike you know does it it does it become chipotle's alldoes it it does it become chipotle's alldoes it it does it become chipotle's all over europeover europeover europe all over asia all over latin america isall over asia all over latin america isall over asia all over latin america is that does that happenthat does that happenthat does that happen what are the probabilities that arewhat are the probabilities that arewhat are the probabilities that are happening who else havehappening who else havehappening who else have entered the space will they keepentered the space will they keepentered the space will they keep executing you knowexecuting you knowexecuting you know what will be their ros in the future orwhat will be their ros in the future orwhat will be their ros in the future or there's a whole bunch of things thatthere's a whole bunch of things thatthere's a whole bunch of things that come up so i think what i'm saying is
Todd Combscome up so i think what i'm saying is that you've got to start out with admiring the business and the more like you've got to intrinsically know that like even before i look at any adp numbers i know it's a great business okay even before i look at any visa numbers i know it's a great business right uh so first thing is you've got to mentally have a kind of framework in your head that tells you yes i i like this business and i think it's great um uh i think that businesses like chipotle are harder because they don't have recurring revenue and all these things i think some businesses like adp may have more resilience because even if there's a disrupter businesses are not going to be wanting to change payroll quickly because it's such a small portion of their costs like i mean for me that you know messing around with payroll makes no economic sense okay
Questionermakes no economic sense okay it just irritates me so i go down these you know irrational paths but basically for most businesses it's not worth the time of day it's payroll is running fine leave it alone right and so so those businesses have a much higher degree of resilience in my opinion than a chipotle right because there you've got to keep earning the customers uh confidence and trust every day and and so on so i think uh mods come in so many wide widely different shapes and sizes and you know all kinds of things happen you know boeing what an incredible moat and then all hell breaks loose you know so um i mean if you looked at boeing three or four years ago you would say this is unbelievable they've got this huge pipeline they don't produce a white tail i mean just like nvr doesn't produce a home that's not already sold
Warrenalready sold already sold boeing doesn't produce an airplane that boeing doesn't produce an airplane that boeing doesn't produce an airplane that isn't already sold isn't already sold isn't already sold right so there's no whitetails and right so there's no whitetails and right so there's no whitetails and they've got a big order book they've got a big order book they've got a big order book and they're a duopoly and they're a duopoly and they're a duopoly and you know and they've got a great and you know and they've got a great and you know and they've got a great defense business and all that it's just defense business and all that it's just defense business and all that it's just it's an incredible business but it's an incredible business but it's an incredible business but look where we are you know so such is look where we are you know so such is look where we are you know so such is life life life so thanks for being here too it's it's so thanks for being here too it's it's so thanks for being here too it's it's really great to have you here really great to have you here really great to have you here
Questionerum my question is more on the um my question is more on the um my question is more on the on the selling side um on the selling side um on the selling side um you talk about you talked earlier about you talk about you talked earlier about you talk about you talked earlier about uh the fifty to ninety percent uh the fifty to ninety percent uh the fifty to ninety percent and you sell at ninety percent and you sell at ninety percent and you sell at ninety percent interesting value now we're talking interesting value now we're talking interesting value now we're talking about long about long about long runways but you keep on looking for new runways but you keep on looking for new runways but you keep on looking for new business opportunities i'm sure as well business opportunities i'm sure as well business opportunities i'm sure as well at one point do you say you know what i at one point do you say you know what i at one point do you say you know what i thought this was a good business thought this was a good business thought this was a good business i think it has has good growth i think it has has good growth i think it has has good growth opportunities but you know i got this opportunities but you know i got this opportunities but you know i got this business here that i'm looking at it
Questionerbusiness here that i'm looking at it looks like it's more valuable how do you how do you go about this part it's probably selling off i don't know how you do it but do you sell good good positions for what you think might be even better
Warrenyeah it's all it's all opportunity cost i think those are those are why you get paid the big bucks i think that's you have to continuously do that uh but you but you know it's a it's a difficult exercise because the the mistress always looks harder than the wife you know and actually the wife may be hotter but you think the mistress is harder you know so you've got to make sure that the mistress is actually harder not just that you think it's that way so anything that we know really well we also know all the blemishes really well right and this new shiny thing on the side we don't know all the blemishes yet you
Todd Combswe don't know all the blemishes yet you know so that's one of the things is that the greater your familiarity with the business um the greater your familiarity is going to be with all the like like you know arvin's probably really really familiar with all the negative issues with costco okay he knows those really well uh even i mean i don't even i can't believe costco has anything negative but whatever negative there is are winds away uh i'm sorry what long lines oh yeah long lines yeah yeah you know like every time i pass a costco gas station i think i'm in some socialist country you know i think i'm in russia 30 years ago or something you know i think why in a capitalist society do we have these long lines for gas you know but that's the way it is such as life um yeah so i think you have to be careful that you don't fall into the mistress trap
Questionertraptrap and uh as long as uh you are genuinelyand uh as long as uh you are genuinelyand uh as long as uh you are genuinely looking at something that is better thanlooking at something that is better thanlooking at something that is better than what you ownwhat you ownwhat you own better value than what you own and andbetter value than what you own and andbetter value than what you own and and you know you consider the taxyou know you consider the taxyou know you consider the tax implications and all of thatimplications and all of thatimplications and all of that uh you know my i have a good frienduh you know my i have a good frienduh you know my i have a good friend guy spear andguy spear andguy spear and [Music][Music][Music] another friend of mine the way heanother friend of mine the way heanother friend of mine the way he describes guy is he says he has thedescribes guy is he says he has thedescribes guy is he says he has the highest return of any investor on thehighest return of any investor on thehighest return of any investor on the planetplanetplanet based on effort expendedbased on effort expendedbased on effort expended okay on on on every hourokay on on on every hourokay on on on every hour of effort expended guy is off the chartsof effort expended guy is off the chartsof effort expended guy is off the charts okay uh so the thing with guyokay uh so the thing with guyokay uh so the thing with guy is that any time and i bounce a lot ofis that any time and i bounce a lot ofis that any time and i bounce a lot of ideas off him anytime i bring upideas off him anytime i bring upideas off him anytime i bring up any new idea to himany new idea to himany new idea to him it doesn't matter how good it isit doesn't matter how good it isit doesn't matter how good it is he is not changing anythinghe is not changing anythinghe is not changing anything so i tell him guy listen you've gotso i tell him guy listen you've gotso i tell him guy listen you've got nestle okay nestle is donenestle okay nestle is donenestle okay nestle is done okay 30 40 times earnings whatever doneokay 30 40 times earnings whatever doneokay 30 40 times earnings whatever done okay we've got this thing at three timesokay we've got this thing at three timesokay we've got this thing at three times earnings which has got this massiveearnings which has got this massiveearnings which has got this massive runway
Questionerrunway can we please sell nestle please and i can we please sell nestle please and i can we please sell nestle please and i get nowhere get nowhere get nowhere he's not willing to make he's not willing to make he's not willing to make any changes okay and then after i keep any changes okay and then after i keep any changes okay and then after i keep badgering him over and over and over badgering him over and over and over badgering him over and over and over uh he'll buy two percent okay and uh uh he'll buy two percent okay and uh uh he'll buy two percent okay and uh and and that's it you know and uh uh and and that's it you know and uh uh and and that's it you know and uh uh like you know uh i mean he loves like you know uh i mean he loves like you know uh i mean he loves long runways okay he loves deep modes long runways okay he loves deep modes long runways okay he loves deep modes he loves all these things so he loves all these things so he loves all these things so i told him about mao tai i told him about mao tai i told him about mao tai okay i mean great brand blah blah blah okay i mean great brand blah blah blah okay i mean great brand blah blah blah also i said this is it guy i know you also i said this is it guy i know you also i said this is it guy i know you don't like all the i bring to you don't like all the i bring to you don't like all the i bring to you but this is like a real runway but this is like a real runway but this is like a real runway he says i'm not buying any chinese he says i'm not buying any chinese he says i'm not buying any chinese company company company i'm not going i said it's fine there's i'm not going i said it's fine there's i'm not going i said it's fine there's no issues there no issues there no issues there fifty percent payout all this stuff good fifty percent payout all this stuff good fifty percent payout all this stuff good governance blah blah okay governance blah blah okay governance blah blah okay he's i'm not going there okay and then i he's i'm not going there okay and then i he's i'm not going there okay and then i kept badgering him kept badgering him kept badgering him and i think he put like a hundred and i think he put like a hundred and i think he put like a hundred thousand dollars into it just to get me thousand dollars into it just to get me thousand dollars into it just to get me off off off his back and then after a few years his back and then after a few years
Charliehis back and then after a few years we went to china together and we visited maotai headquarters and then he says and you know by that time it's now gone up about five times and then the whole trip was oh i missed this oh i should have bought this i said do you remember do you remember all the calls i made and i was pounding pounding and i couldn't get through oh yeah i don't know what it was happening this is such a no-brainer this is so easy blah blah blah you know so but what but you know actually in action in action is what saves sky so the best thing that you can do is don't make switches if it's 60 40. don't make switches if it's you know this is a little bit better and i'll make the switch no make the switch hurdle really high like the mistress has to be really really hot okay not just better than the wife okay they're all better than the wife
Otherall better than the wife
Otherbut really hot and then you're fine
Otherabout competitive advantages um so you have a role of only investing in copycats as opposed to innovators um so my question is do you believe that there's a first mover advantage
Questionerthat's a really good question um
Questionerso i think that one of the mental models which has served me really well and it's a weird it's a weird uh nuance of humans and i still don't understand why humans are this way but they are this way humans are bad at cloning and copying most humans and most companies almost think that it's beneath them um they somehow think it's kind of uh you know so and so what that does is it opens up a significant window of opportunities that would not exist without it so obviously we are right on the innovators and the innovators you know grow and scale and whatever we do really well i mean you know uh uh
Questionerwe do really well i mean you know uh uh butbutbut but if you if you uhbut if you if you uhbut if you if you uh so if we look at a company like uhso if we look at a company like uhso if we look at a company like uh microsoft for example ummicrosoft for example ummicrosoft for example um microsoft is the ultimate cloner okaymicrosoft is the ultimate cloner okaymicrosoft is the ultimate cloner okay um after they came up with the basicum after they came up with the basicum after they came up with the basic compiler compiler in 1976 incompiler compiler in 1976 incompiler compiler in 1976 in new mexico everything has been copied ornew mexico everything has been copied ornew mexico everything has been copied or stolenstolenstolen from then on and they're not even veryfrom then on and they're not even veryfrom then on and they're not even very good at cloninggood at cloninggood at cloning like you know uh when they try to clonelike you know uh when they try to clonelike you know uh when they try to clone the macthe macthe mac it took them like 15 years and 10it took them like 15 years and 10it took them like 15 years and 10 versions to getversions to getversions to get get there you know and uh so umget there you know and uh so umget there you know and uh so um excel was copied from lotusexcel was copied from lotusexcel was copied from lotus and word was copied from word perfect uhand word was copied from word perfect uhand word was copied from word perfect uh powerpoint was acquiredyou know access copied oracle andyou know access copied oracle andyou know access copied oracle and sybase and uh you knowsybase and uh you knowsybase and uh you know um umyou know they finally gave up onyou know they finally gave up onyou know they finally gave up on search and they kind of you know wentsearch and they kind of you know wentsearch and they kind of you know went with google butwith google butwith google but you know the acronym uh for bingyou know the acronym uh for bingyou know the acronym uh for bing is but it's not google you knowis but it's not google you knowis but it's not google you know so they they not only they're they'reso they they not only they're they'reso they they not only they're they're not a good cloner theynot a good cloner theynot a good cloner they many times they fail like forever theymany times they fail like forever theymany times they fail like forever they tried to
Othertried totried to clone quicken and they came out withclone quicken and they came out withclone quicken and they came out with moneymoneymoney and they were never able to get tractionand they were never able to get tractionand they were never able to get traction there they put a lot of effort intothere they put a lot of effort intothere they put a lot of effort into searchsearchsearch they could never get traction there umthey could never get traction there umthey could never get traction there um sososo even with being a bad cloner you knoweven with being a bad cloner you knoweven with being a bad cloner you know like for example nowlike for example nowlike for example now uh microsoft has teams rightuh microsoft has teams rightuh microsoft has teams right and teams copied uh slate rightand teams copied uh slate rightand teams copied uh slate right and uh and uh and they willand uh and uh and they willand uh and uh and they will probably you know kill slate uh becauseprobably you know kill slate uh becauseprobably you know kill slate uh because they're such good they're so good atthey're such good they're so good atthey're such good they're so good at uh eventually getting these thingsuh eventually getting these thingsuh eventually getting these things working and then eventually theworking and then eventually theworking and then eventually the incumbent uh has a problem uhincumbent uh has a problem uhincumbent uh has a problem uh if you look at something about someoneif you look at something about someoneif you look at something about someone like uh walmartlike uh walmartlike uh walmart um for more than 10 or 15 years afterum for more than 10 or 15 years afterum for more than 10 or 15 years after after sam walton founded walmartafter sam walton founded walmartafter sam walton founded walmart for at least the first 15 years therefor at least the first 15 years therefor at least the first 15 years there was no innovationwas no innovationwas no innovation every single thing about walmart wasevery single thing about walmart wasevery single thing about walmart was copiedcopiedcopied from kmart and and sears they just theyfrom kmart and and sears they just theyfrom kmart and and sears they just they just lifted that modeljust lifted that modeljust lifted that model and the reason why sam walton spent alland the reason why sam walton spent alland the reason why sam walton spent all this time
Questionerthis timethis time in all the comparative stores is becausein all the comparative stores is becausein all the comparative stores is because he had no ideas of his ownhe had no ideas of his ownhe had no ideas of his own he just looked at what other people arehe just looked at what other people arehe just looked at what other people are doing and hedoing and hedoing and he copied the best of what he could findcopied the best of what he could findcopied the best of what he could find andandand and that's what so if you look atand that's what so if you look atand that's what so if you look at walmart i meanwalmart i meanwalmart i mean what is the intellectual property ofwhat is the intellectual property ofwhat is the intellectual property of walmart now after 15 20 years they gotwalmart now after 15 20 years they gotwalmart now after 15 20 years they got you know a bunch of competitiveyou know a bunch of competitiveyou know a bunch of competitive advantage with scale and logistics andadvantage with scale and logistics andadvantage with scale and logistics and all of thatall of thatall of that but in the first 10 or 15 years there'sbut in the first 10 or 15 years there'sbut in the first 10 or 15 years there's no advantageno advantageno advantage all they're doing is it's execution it'sall they're doing is it's execution it'sall they're doing is it's execution it's great executiongreat executiongreat execution on a on a base model if you look aton a on a base model if you look aton a on a base model if you look at costcocostcocostco uh everything about costco was copieduh everything about costco was copieduh everything about costco was copied from pricefrom pricefrom price price club so sold price uhprice club so sold price uhprice club so sold price uh so if we talk to jim senegalso if we talk to jim senegalso if we talk to jim senegal someone asked jim senegal what did yousomeone asked jim senegal what did yousomeone asked jim senegal what did you learnlearnlearn from soul price he said it'sfrom soul price he said it'sfrom soul price he said it's the wrong question there's nothing ithe wrong question there's nothing ithe wrong question there's nothing i know that i didn't learn from sole priceknow that i didn't learn from sole priceknow that i didn't learn from sole price okay so the whole costco modelokay so the whole costco modelokay so the whole costco model everything about it
Questionereverything about it and actually the cloner became better than the original you know like walmart became better than kmart and microsoft became better than so many other companies so i think that yes you can invest in the innovators but i think that's much harder to get right um if if if some businesses are consistent cloners and they're good at it and i don't think markets recognize the power of great cloning so if you can if you can identify you know i think even even at some level if you look at something someone like starbucks you know he looked at what was happening in italy and he said i think this will play in peoria and he took that italian cafe and brought it to period the funny thing is now starbucks is scaling in italy you know who would have thought that they can scale scale italy but they're scaling in italy um so i always feel that
Questionerum so i always feel that if you can identify a business that is good at cloning and has kind of embraced it the way nbr nvr embraced the buybacks that's a great mental model and advantage to have in your arsenal really appreciate it i was curious if you could talk a little bit about how you document your investing process um earlier you mentioned a bit of a checklist and uh you mentioned a little bit about focusing and really honing in on those two or three variables that you really have to understand so maybe just talk about that checklist you know do you write things down do you do excel models or you know what gets put to paper and what's the output along the way from idea to purchase for for most
Otherfor most of my career i functioned alone and now now because uh i had another entity and i've got uh horsepower so i've got two guys who
Warrenhorsepower so i've got two guys who uh help me and work with me i have not i think almost never built i have not i think almost never built i have not i think almost never built excel models or anything like that excel models or anything like that excel models or anything like that they they they will do that sometimes they they they will do that sometimes they they they will do that sometimes and and and and such but the precision can be and such but the precision can be and such but the precision can be uh can lead you astray uh because uh can lead you astray uh because uh can lead you astray uh because businesses are not businesses are not businesses are not they're not linear and they don't you they're not linear and they don't you they're not linear and they don't you know grow 15 a year know grow 15 a year know grow 15 a year every year and so on um so i think model in your head where you're able to model in your head where you're able to model in your head where you're able to figure out figure out figure out uh kind of what um uh kind of what um uh kind of what um uh what is going on and how this uh what is going on and how this uh what is going on and how this business works and how it makes money business works and how it makes money business works and how it makes money and and then you know you go deeper and and and then you know you go deeper and and and then you know you go deeper and see if see if see if all the facts uh check out all the facts uh check out all the facts uh check out the the checklist comes in before the the the checklist comes in before the the the checklist comes in before the investment investment investment and the main the main benefit the and the main the main benefit the and the main the main benefit the checklist has checklist has checklist has is that you know we are we are driven is that you know we are we are driven is that you know we are we are driven by greed so when we when we encounter by greed so when we when we encounter by greed so when we when we encounter some new shiny new investment ideas we some new shiny new investment ideas we some new shiny new investment ideas we can be enamored by it can be enamored by it can be enamored by it and the checklist kind of puts a lot of and the checklist kind of puts a lot of and the checklist kind of puts a lot of cold water a lot of stuff cold water a lot of stuff cold water a lot of stuff so it asks a bunch of questions that
Todd Combsso it asks a bunch of questions that the big advantage it has is that many times i've not even thought about those questions so i think i've thought about every side of it but when i actually go through the individual questions uh like i think our checklist has about 160 questions on it and i'll find that i don't know the answers to 10 questions and which means that i have more work to do and so that's the big advantage is like it identifies holes in the analysis um and then i go back and you know do the work to be able to uh answer those ten questions so that's where the the checklist comes in it's really just trying to make sure you've thought about things uh in a complete in a complete manner and also what it also shows you is there are no businesses maybe other than costco that go through a checklist with no blemishes like everything is fine every business
Todd Combslike everything is fine every business has issues uh and those issues will get highlighted by the checklist and the question you gotta decide is is this issue going to be the one that does them in right and so you've got to make a judgment call um on on that so there are i mean i think that it's part art part science uh so you you can look at the areas where the business has vulnerabilities and issues and then you've got to just see hey can i does it still make sense when i know these are the areas where the business may have difficulty um does it still make sense
Questionerhi sir thank you thank you for your time i saw a speech of you and you mentioned that you invested in one skill company that is unvalued and you made over 100 return and just have and one year i want what to use to find out a company that is unvalued you read the balance sheet or
Ted Weschlerunvalued you read the balance sheet or you have other tools you have other tools we made a 4x on that company in a couple we made a 4x on that company in a couple we made a 4x on that company in a couple of years of years of years there was a company called ipsco uh the there was a company called ipsco uh the there was a company called ipsco uh the canadian steel company and there i think canadian steel company and there i think canadian steel company and there i think it was a relatively simple thesis where it was a relatively simple thesis where it was a relatively simple thesis where the stock was in the low 40s and they the stock was in the low 40s and they the stock was in the low 40s and they had no debt they had about 15 had no debt they had about 15 had no debt they had about 15 a share in cash and the next two years a share in cash and the next two years a share in cash and the next two years of of of contracts that they had on their books contracts that they had on their books contracts that they had on their books was going to give them was going to give them was going to give them about 15 a year in in about 15 a year in in about 15 a year in in earnings and so my take was and and earnings and so my take was and and earnings and so my take was and and it's it's a very high uncertainty it's it's a very high uncertainty it's it's a very high uncertainty business with a lot of business with a lot of business with a lot of fluctuation in earnings because they fluctuation in earnings because they fluctuation in earnings because they made uh made uh made uh tubular steel which went into pipelines tubular steel which went into pipelines tubular steel which went into pipelines so if a big pipeline is being built then so if a big pipeline is being built then so if a big pipeline is being built then they have contracts and they have contracts and they have contracts and there could be no contracts after a there could be no contracts after a there could be no contracts after a couple of years right couple of years right couple of years right so so the uh the situation was so so the uh the situation was so so the uh the situation was you know i'm paying 45 a share and i you know i'm paying 45 a share and i you know i'm paying 45 a share and i fast forward two years fast forward two years fast forward two years i have 45 on the balance sheet and all i have 45 on the balance sheet and all i have 45 on the balance sheet and all the plants and equipment and
Otherthe plants and equipment and inventory is free so i said that that doesn't make sense the business has to have a value over 45 dollars because all those things can be liquidated for some price if you're not a going concern and if you're a going concern it has even more value than a liquidation uh scenario so i said you know what i'm going to do is i'm just going to buy this company and own it for two years and just see what the market does the price you know because i said let the 30 come in and let's see what the market does and i think about eight or ten months after i bought it the company said that they have one more year of fifteen dollars a share in earnings and so i said oh so now we are at sixty dollars right because we've got three years of fifteen dollars and the stock went to by that time it had gone to
Questionerhad gone to seventy eighty dollars a share at that time and then uh it was inching up to maybe about 90 and then a swedish company came and offered to buy them for 160 a share in 2006 and i didn't even wait for the deal to close the stock went to like 150 something and five minutes after that i was out of there um and uh so that that was fine and um so if you um if you look at uh value investors club um and you read you know write-ups there that's a good place to uh understand and find businesses uh if you have a subscription to sum zero or you're a member of sum zero that's another area where you can get uh some some of this and then you know sometimes there are articles and seeking alpha and so on so there's a few different places and then you know you can look at data aroma and then you can try to reverse engineer
Questionerengineer why does david pepper own this or whywhy does david pepper own this or whywhy does david pepper own this or why does uhdoes uhdoes uh you know apple known something and so onyou know apple known something and so onyou know apple known something and so on so you can try to reverse engineerso you can try to reverse engineerso you can try to reverse engineer some of those and take it from theresome of those and take it from theresome of those and take it from there um so and you know the different thingsum so and you know the different thingsum so and you know the different things happen like you knowhappen like you knowhappen like you know last year i was i visited a company inlast year i was i visited a company inlast year i was i visited a company in turkeyturkeyturkey in istanbul and uhin istanbul and uhin istanbul and uh you know they they they have a fewyou know they they they have a fewyou know they they they have a few different businesses but they have adifferent businesses but they have adifferent businesses but they have a bunch of warehousesbunch of warehousesbunch of warehouses uh they have like 12 million square feetuh they have like 12 million square feetuh they have like 12 million square feet of warehousesof warehousesof warehouses and uh they're the largest warehouseand uh they're the largest warehouseand uh they're the largest warehouse operator in turkey and they'reoperator in turkey and they'reoperator in turkey and they're they're their tenants are all like ikeathey're their tenants are all like ikeathey're their tenants are all like ikea car for amazon and so on and they've gotcar for amazon and so on and they've gotcar for amazon and so on and they've got really really blue chip tenantsreally really blue chip tenantsreally really blue chip tenants and the market cap of the company wasand the market cap of the company wasand the market cap of the company was likelikelike less than 30 million dollarsless than 30 million dollarsless than 30 million dollars and the liquidation value was somewhereand the liquidation value was somewhereand the liquidation value was somewhere betweenbetweenbetween maybe three four hundred million to amaybe three four hundred million to amaybe three four hundred million to a billion dollarsbillion dollarsbillion dollars okay andokay andokay and once i had you know kicked the tiresonce i had you know kicked the tires
Ted Weschleronce i had you know kicked the tires enough to know that all those things were real you know and you know we spent an afternoon going to all the warehouses and so on um you know we loaded up even better than ipsco right if i can buy a asset for 30 million that on a bad day is worth 300 million um you know turkey has a lot of challenges but uh in many cases micro will trump macro and at at some price uh your your risk levels go down that that business has gone up uh about seven eight times in value in the last 13 14 months in spite of the pandemic and all that so anyway so what i'm saying is that uh you keep poking around and once in a while things hit you in the head like a two by four and when they hit you in a headband when they say what what is that like you know when you're like really like shocked and surprised that's when you act it was like if
Questionerthat's when you act it was like if you're just saying ah yeah okay whatever you're just saying ah yeah okay whatever you're just saying ah yeah okay whatever just ignore all of those look at the just ignore all of those look at the just ignore all of those look at the ones that totally blow you away ones that totally blow you away ones that totally blow you away and then go for those shock at all in your book a lot about shock at all in your book a lot about shock at all in your book a lot about the kelly criterion but you kind of say the kelly criterion but you kind of say the kelly criterion but you kind of say you you you you think you never go for kelly or you think you never go for kelly or you think you never go for kelly or anything like that so how much of a role anything like that so how much of a role anything like that so how much of a role does it play in your capital asset does it play in your capital asset does it play in your capital asset allocation decisions is it more of like allocation decisions is it more of like allocation decisions is it more of like a guideline a guideline a guideline um and do you or you know hard and fast um and do you or you know hard and fast um and do you or you know hard and fast like do the math out like do the math out like do the math out kind of thing and then you know a kind of thing and then you know a kind of thing and then you know a follow-up would be like do you follow-up would be like do you follow-up would be like do you apply it to your entire portfolio or apply it to your entire portfolio or apply it to your entire portfolio or just your dry powder if i ever do a just your dry powder if i ever do a just your dry powder if i ever do a revision to the dhandu investor i will revision to the dhandu investor i will revision to the dhandu investor i will take out the kelly take out the kelly take out the kelly discussion entirely and in fact i will discussion entirely and in fact i will discussion entirely and in fact i will even say that even say that even say that it doesn't apply to investing so i don't it doesn't apply to investing so i don't it doesn't apply to investing so i don't use the kelly and it was a mistake to use the kelly and it was a mistake to use the kelly and it was a mistake to put in the book put in the book put in the book the main issue with the kelly criteria the main issue with the kelly criteria
Questionerthe main issue with the kelly criteria is that it worksis that it worksis that it works really well if we get to make a bunch ofreally well if we get to make a bunch ofreally well if we get to make a bunch of similar bets like if we do 100 coinsimilar bets like if we do 100 coinsimilar bets like if we do 100 coin tossestossestosses where heads is 51 percent and tails iswhere heads is 51 percent and tails iswhere heads is 51 percent and tails is 494949 and i keep betting heads you can useand i keep betting heads you can useand i keep betting heads you can use that formula to figure outthat formula to figure outthat formula to figure out if you have 100 how much you should putif you have 100 how much you should putif you have 100 how much you should put on each beton each beton each bet so it's good for when you get aso it's good for when you get aso it's good for when you get a opportunity to make many betsopportunity to make many betsopportunity to make many bets which are very similar in odds uhwhich are very similar in odds uhwhich are very similar in odds uh but it doesn't apply like when i talkedbut it doesn't apply like when i talkedbut it doesn't apply like when i talked about the company inabout the company inabout the company in in turkey or the steel company whateverin turkey or the steel company whateverin turkey or the steel company whatever else i mean those areelse i mean those areelse i mean those are investing we're making one bet at a timeinvesting we're making one bet at a timeinvesting we're making one bet at a time and we don't have theand we don't have theand we don't have the have the luxury of making a second orhave the luxury of making a second orhave the luxury of making a second or third bet like thatthird bet like thatthird bet like that so i would just ignore kelly completelyso i would just ignore kelly completelyso i would just ignore kelly completely i know it sounds exciting and everythingi know it sounds exciting and everythingi know it sounds exciting and everything but it's not relevantbut it's not relevantbut it's not relevant um so how do you manage the balanceum so how do you manage the balanceum so how do you manage the balance between say diversification and thenbetween say diversification and thenbetween say diversification and then also you talked about about stayingalso you talked about about stayingalso you talked about about staying within your circle of confidence so
Questionerwithin your circle of confidence so how do you like manage those things without like throwing away everything
Warrenyou can throw away nearly everything and that's fine so uh arvind stall heard me talk many times about charlie's friend john ryega in northern california who's a billionaire and all he's done in his career is invest in real estate within a couple of miles of the stanford campus so john ariega's circular competences is like this small it's really tiny it's not even real estate it's not even real estate in california it's not even real estate in northern california it's real estate in a very narrow geography if you showed him a deal in sacramento it would take him a femtosecond to say i'm not interested because he he doesn't want to go there so and with being with being in a very very narrow circle of competence it did not prevent him from becoming
Questionerit did not prevent him from becoming extremely wealthy so the good thing about investing is that it doesn't matter how big your circular competence is uh what is really important is to not step out of it and what is even more important is just try to play in the epicenter of that circle so if you look at a business and you say i'm not sure about this or i don't understand this or whatever be a harsh grader and get rid of it and you know focus on the most obvious stuff and some of the most obvious stuff is things that we are consumers of so if you're using a certain brand or you're using some service or whatever else you know like uh like you know i like to bike and uh a lot of the biking parts come from a company called shimano in japan and i know from biking that shimano has very strong brand recognition and they've got pricing power and all these
Ted Weschlerthey've got pricing power and all these things i've never looked at a balance sheet i just know this from the way they dominate in cycling and then i looked at them i also found they dominated in fishing and that's even in the fishing area they've got and they've innovated a lot uh in that area so i looked at shimano and it didn't look obviously cheap like i was hoping that no one else would understand shimano and it would be a two times earnings and the rest would be history but it wasn't that easy so i said oh you know it's like a double digit earnings whatever forget about it you know move on you know if it was really cheap i would spend more time on it you know so um and i only looked at that because i was just familiar with it from cycling right so it can come at you from different places you uh you mentioned sergio from uh from
Questioneryou uh you mentioned sergio from uh from fiat then obviously howard schultz starbucks sam walton um obviously all very uh you know great leaders um i'm curious kind of what you look for you know certain traits that you look for in a board or a ceo management team you know when you're making those investments how you kind of judge a management team and then if there's any specific uh your other specific leaders that have really stuck out
Todd Combsin today's market good question so the way to figure out the quality of the leader is to not focus on what they're saying but to focus on what they've done so typically these guys have track records and you can look back at the track record i mean you know it would have been hard to invest in walmart in 1970 or whatever if you were really unless you were really familiar with sam but if you're investing in 1980 or
Questionerinvesting in 1980 or 1990 you got quite a quite a track record to look at
Questionerum sergio it was very obvious to me in 2012 what i was a very unusual and good leader and i was very excited that we were able to actually and it actually as that investment progressed uh my my assessment of him kept getting better
Questioneryou know like i had underestimated how good he was he just kept getting better and better and uh and such and uh uh so i think the the the sim one thing we have is as public market investors which venture investors don't have is we do have trend marks that we can look at and we do have relatively long histories uh that you can look at and uh so i think that that is really helpful and that's really important
Questionerit's really important to get a mental model in your mind about the nature of the leader and the quality of the leader
Questionerquality of the leader and you know their nuances and you don't need to you don't need to always get this right i mean there's an error rate you know when i bought when i bought fiat i also bought gm and uh gm basically we made some money i think we made 40 50 on what we invested after several years but eventually i sold it because i just saw differences very big differences so that was a good example because i i felt like gm had competent leadership but it was nothing nothing like sergio and then you know if you look at uh someone like elon you know i mean he's on a different planet you know i mean i i i don't know if you guys saw battery day um you know the the when he had the battery day and the annual meeting uh recently i mean i i if i was a competitor of elon any any oem car manufacturer i'd be very afraid because those guys every other ceo has no
Questionerthose guys every other ceo has no understanding of first principles of physics and and so i think they're gonna have a very very hard time uh and he's increasing the distance so uh so we don't know how that works out but i would just say that um you know uh extremely impressive guy and uh and kind of strange you know somewhat weird you know so uh i i'm in the charlie munger boat which is saying you know don't go long or don't go short elon um it's hard to go long elon because just so expensive uh but i i would not want to short a guy who lands two rockets simultaneously backwards uh i mean i don't know why anyone would own a shorter guy like that so um so anyway i mean i think that uh you study the the history and the trademarks so monash you've been so generous with your time that you know thank you so much i guess maybe i would
Questioneri would end with one last question which is you know on this zoom call there are students who are graduating from business school from college um just that you know the world has shifted dramatically they may feel for their opportunities that um are there any thoughts that you have or that you any advice that you would give over the decades to come and also the short term you know a couple of thoughts
Warrenum so one is that in in an advanced civilization like the united states um the odds that any of you will be homeless or you know not have enough food to eat or you know can't pay your rent or any of that is those odds approach zero um so basically the bottom line is that the society has enough safety nets and has enough opportunities that none of you will ever face those circumstances so given that reality uh what i would what i would focus on if i were you is
Otherwhat i would focus on if i were you is i would focus on the pursuit of passion so i would really try to figure out what is really exciting for you and what you really like to do and you know one of the things buffett talks about is people will say oh you know i'm going to um do banking for three years then i'm going to get my mba then i'm going to do xyz and then you know after 10 years i'm gonna do my own thing uh you don't need to take these long circuits paths um think about what you want to do and just go for it you know get there uh without making a 20-year plan to get there and one of the i think one of the problems that comes up when you when you graduate from elite institutions so the problem you have when you graduate from boston college or harvard is the opportunity cost so what happens is that the world is willing to pay
Otherwilling to pay quite a bit for your services and many times they willing the world is willing to pay more for your services than you would make if you pursued your passion and and if you pursue your passion you are giving up a lot of certainty but given that i told you that you're not going to end up homeless and you're not going to end up with no food on your table i would say that stretch a bit and uh and try to uh try to try to understand internally what uh what you love to do and um and then uh and and the the other thing is that um even if you take the the easy path which is some guy's giving you a great offer and you still have plenty of time evenings weekends etc to try to think about what else might be your passion or interest and to try to build something like my first business i got off the ground part
Questioneroff the ground part time while i was working full time and then when it got enough traction i resigned and i didn't have any money or anything i actually was on credit cards and so on to try to get it up and running um so that's what i would say is that uh the younger you are when you do that uh it's easier when you don't have kids and do that it's easier and when you're single and you do that it's easier so for many of you all of those are true and uh and so i that's what i would suggest is if you really want to go down a certain path uh i think you should uh really think about you know we we humans are driven by peers and we like to compare ourselves to peers and you have a lot of peers uh in the in the institutions you're at uh and so it can be uh it can be difficult to do something i i remember that the uh the founder of i think it was staples
Questioneruh the founder of i think it was staples um uh went to went to harvard businessum uh went to went to harvard businessum uh went to went to harvard business schoolschoolschool and then after that he uhand then after that he uhand then after that he uh joined some grocer and i think while hejoined some grocer and i think while hejoined some grocer and i think while he was in school he waswas in school he waswas in school he was working um in a grocery storeworking um in a grocery storeworking um in a grocery store you know kind of doing the shelves andyou know kind of doing the shelves andyou know kind of doing the shelves and whatever elsewhatever elsewhatever else you know and he said that some harvardyou know and he said that some harvardyou know and he said that some harvard professor walked into the storeprofessor walked into the storeprofessor walked into the store saw him doing that and didn't want tosaw him doing that and didn't want tosaw him doing that and didn't want to embarrass him and just kind ofembarrass him and just kind ofembarrass him and just kind of went the other way and he wentwent the other way and he wentwent the other way and he went out and you know reached out to theout and you know reached out to theout and you know reached out to the professor and said how are you doingprofessor and said how are you doingprofessor and said how are you doing whateverwhateverwhatever he was not at all concerned and so umhe was not at all concerned and so umhe was not at all concerned and so um so that guy wanted to go into retailso that guy wanted to go into retailso that guy wanted to go into retail in spite of all the things i've saidin spite of all the things i've saidin spite of all the things i've said and he was passionate about itand he was passionate about itand he was passionate about it and he turned down a lot of other offersand he turned down a lot of other offersand he turned down a lot of other offers which werewhich werewhich were probably higher paying and he went intoprobably higher paying and he went intoprobably higher paying and he went into that area and eventuallythat area and eventuallythat area and eventually uh founded stables and went from thereuh founded stables and went from thereuh founded stables and went from there you know so so you have to be willing toyou know so so you have to be willing toyou know so so you have to be willing to uh to get off the beaten path you know
Otheruh to get off the beaten path you know andandand that's what i would suggest is uh be bethat's what i would suggest is uh be bethat's what i would suggest is uh be be willing and bold to do thatwilling and bold to do thatwilling and bold to do that
Questionerwhat a great note to end on money thankwhat a great note to end on money thankwhat a great note to end on money thank youyouyou so much this is fantastic as alwaysso much this is fantastic as alwaysso much this is fantastic as always thank you arvind it was athank you arvind it was athank you arvind it was a pleasure thank you thank you