OtherHello, and welcome to The Art of Investing.
OtherI'm Paul Buser.
OtherAnd I'm Rick Berman.
OtherWe're your hosts.
OtherArt of Investing is a series of discussions devoted to exploring the joys of compoundingin all its forms.
OtherIn each episode, our guests will be some of the world's most compelling people from acrossthe vast range of human achievement.
OtherThis show is brought to you by Pine Grove Studios in collaboration with Colossus.
OtherThe hosts of the show, Rick Berman and Paul Buser, are the co-founders and co-CEOs ofSata Grove Holdings and co-CEOs of Sata Grove Management Company.
OtherAll opinions expressed by any of Rick, Paul, or their podcast guests are solely their ownand do not reflect the opinion of either Sata Grove Holdings or Sata Grove Management Company.
OtherThis podcast is intended for informational purposes only and should not be relied uponas the basis for investment decisions.
OtherSata Grove Holdings or clients of Sata Grove Management Company may maintain positionsand securities discussed in this podcast.
OtherOur guest today is Todd Combs, Investment Officer at Berkshire Hathaway.
OtherIn this episode, Todd will share lessons learned across the full arc of his career, beginningin the halls of the Florida State Regulator and all the way through to the Great Plainsof Omaha, Nebraska, home of the Eternal Compounder.
OtherWarren Buffett and Charlie Munger are two of the greatest business minds in historyand also some of the best judges of talent and character.
OtherIf I were to sum up this class into a single topic, it would be exploring what these twoinvesting giants saw in Todd to select him out of the almost eight billion other peoplein the world.
OtherTodd is a compounding machine and a terrific storyteller, full of insights and advice thatall of us can benefit from.
OtherHe's also just such an authentic guy, which made this class especially energizing.
OtherA special thanks to our friend Andrew Carion of Emmeth Value Partners for his help preppingwith this session.
OtherAndrew's a gifted value investor in his own right, and it was really fun to have him standin as our TA for this session.
OtherTodd, welcome back to The Art of Investing.
OtherProbably the question that preoccupies me the most is, how did someone in their late30s gather enough experience and know-how for two of the greatest investors, two ofthe greatest company builders in history, and Charlie and Warren, to come to you andsay, Todd, please come join us.
OtherWe're going to leave everyone on a cliffhanger.
[2:16]
QuestionerWe're not going there just yet. We need to actually unpack your story, Todd. There's a lot that we like to do in The Art of Investing to think about, and when we think about the joys of compounding, to go as far back as we can go. For you, we'll get into the Florida State years at some point here, but even before college, there's this story of a young man born in the heartland of Peoria, Illinois, who then, like Rick and me, becomes a Sunshine State transplant, and then finds himself in Sarasota. Pre-college, what were some of those formative experiences or sliding door moments that you think helped to form who you are today?
Todd CombsWell, thanks for having me, by the way. This is always fun. It's a great question, but it's a tough one because there's always so many things. It's always comes down to your parents, to some degree. I have great, great parents, and they got divorced when I was 12, and they were both always very, very driven on education, my mother especially, because my mother could have been a CEO in her own right, didn't go to college because she didn't have an opportunity back then, as it wasn't the same as it is today. So I think she wanted to channel all those missed opportunities in her life, in many ways into mine. So I never forget coming home one time with an A-minus, and I think I got grounded and all kinds of stuff. So she was very, very militant. Now it's called Tiger Mom or whatever. So she was the original Tiger Mom. I was always really good with math and science and history. I didn't know I wanted to go into investing when I was 11 or 12 or whatever. I stumbled across it because I was always above average at a lot of things, but not great, great at any one thing. So that's where investing is actually called the last social science and last real art. So you have to be pretty good at a lot of things because you're only as good as your weakest link in your blind spot. So certainly my parents were very formative in that. When my first job was a regulator at the State of Florida Bank Stewards Finance, I had friends that at that point in time it was the big eight, now it's the big four. And those were more prestigious jobs, but I actually got a lot more experience and critical experiences working with the SEC and the FBI and things like that. In that two and a half years investigating fraud, there's so much serendipity that comes into it. One of the last things I worked on there was a huge insurance fraud where we did end up
[4:39]
Questionerseveral federal judges were involved and went to prison and so forth.And I unraveled the thing.I just thought it was absolutely fascinating in that I was telling a couple of friendsafter all that had happened and several of them worked at Progressive Insurance and reallyloved their jobs.And I was like, who loves your job, especially in insurance?So then I applied to Progressive and most are claims jobs and they give you this mathexam and they're like, no, no, no, you need to go over here and what would today be calleddata science.Back then that term really didn't exist.And so one thing just led to another, led to another.And then I slowly got more and more interested in investing over time as you find your way.So always very big, I was a nerd, that's all I'm saying.
OtherA couple of things that stand out to me about that, we had David Senra of the Founders Podcastreally studying some of history's greats, including entrepreneurs, but also world leaders,et cetera.And when he was with us in class, we talked a lot about the notion of accustoming yourselfto hard work.And it sounds like the role that your parents played and your mom maybe in particular thatinstilled that discipline.The other element we spoke a lot about that seems to play such an important role and particularlyfor investors is cultivating a curiosity.And just curious, when you were younger, do you have any reflections on that curiositystarting to run wild?Or you said you weren't looking for city service preference by yet, but how was that curiositybeing directed?
QuestionerYeah.Again, I would say it comes back to my parents, a lot of credit here because it was very much,and I was first person in my family to go to college.So my father didn't go either, even though he would have had the opportunity.He went in the military.And so it was always, well, why does that exist?So it's that question of don't take anything for granted.I can remember being two or three or whatever, they'd be like, well, why is the sky blue?Why is this?Why is that?And so that constant curiosity, and then, yeah, you're right.That's a great answer actually combined with very, very hard work.If you have a lot of curiosity and you're a hard worker and you have moderately decentjudgment and intelligence and clarity of thought and those things, you'll go a long, long waybecause that's how you get the compounding over time.People usually rise to their level of complacency and that's pretty generally true.
[6:43]
QuestionerThat doesn't matter whether it's investing or in a big company or whatever.If your dream is to make it to manager and you're perfectly fine there, that's prettymuch where you're going to stop.That doesn't mean the opposite is true.That doesn't mean if you got 10,000 people who all want to be CEO or whatever, that they'reall going to achieve it.But people create their own limiting factors.You hear that in sports, you hear that in business and so forth.I think people don't appreciate that enough.You hear it in sports a lot where people, and you see it whether it's Tom Brady orSepp Kuss, famous cyclist, and so forth.People underestimate how far you can push yourself.That is absolutely true and a lot of it's mental, 90 plus percent.The earlier you start on those aspects, curiosity and hard work and so forth, you're not goingto figure it out overnight.There's no easy path, there's no shortcut, there's no backdoor, but I do feel like youcan figure it out over time where you just keep pushing yourself, even if it's 1% more.Like Charlie says, if everybody just went to bed a little bit smarter every day, thinkabout that compounding effect over time.For sure, my parents, you get lucky with a couple of teachers here and there who seesomething.Yeah, those are two very, very good points.You can't have enough curiosity and enough grit, I would say.Before we get into the insurance time of your life and past, and while it verges on sacrilegeto talk about Florida State here on Notre Dame's campus, we'll keep it narrow too.We can't skip this chapter because before Warren and Charlie came and said, come joinus, there was somebody else who you found, your wife April, at Florida State.Can you talk about what that was like and then any other formative experiences duringthat critical time?Because we're here with a group of college students nearing the end of that time, butwhat was it about the undergrad years that was so special for you?
OtherWell, look, there's nothing better than undergrad.When you're 52, like me, and you look back, most people I know, most of my friends willsay that was the best time of their life, regardless whether they went to Florida State,University of Florida, Miami, Notre Dame, et cetera, et cetera.It is just the best time of your life.So I still have a lot of friends that I stay in touch with from FSU.As you mentioned, I met my wife there.It was the best time of my life for sure, and I've had a damn good life, but a lot of
[8:54]
Otherfriends, a lot of fun.We had a great football team then.We won the national championship my senior year.I was friends with several of the football players, and the psychology professors wereabsolutely phenomenal.I actually thought they tried to recruit me into the PhD program at the time, and I seriouslyconsidered it.I really thought that that was something that I wanted to pursue.But there's a lot of psychology that you actually apply because you're trying to decipher humanbehavior and so forth in investing.The finance programs didn't really, really resonate with me at the time.I took them because I wanted to make money, and it wasn't out of a passion.I did have a passion for investing, but it not really fully blossomed yet.But I didn't have a passion for finance.I liked international business better, but I like psychology even better than that.There's a lot of serendipity.
QuestionerOne of the tensions that we've been exploring a bit and focusing in on that 20-somethingera where, on the one hand, you clearly had these multiple interests, and you were, atleast in hindsight, developing yourself as this multidisciplinary.
OtherYeah, I didn't realize it at the time.And yet at the same time, there does seem to be often this tension of a requisite tofocus.I think more and more, you can look at education systems, particularly those overseas, butI think even more and more in the U.S., there's this pressure, I think, that a lot of us feelthat we need to start pretty early in life to extract the things that are not numberone.
QuestionerBut maybe if you have any observations on that and just how you navigate continuingto round yourself out and hold on to these different interests, start to connect dots,and yet also experience depth of expertise.
OtherYeah, that's a really, really great question to show how all over the place I was, justto extend to your thought.For a while, I thought I wanted to be an astrophysicist, and Florida State actually has a really goodastronomy program, too.So I took all these astronomy courses, and I was in the planetarium, I remember, at midnighton a Friday or something like that.So I was a little bit all over the place.I thought I wanted to be an architect, so I took architectural classes.I wasn't, to be clear, good at any of this.I was just 19 or 20 trying to figure my way out.But there's this absolutely phenomenal book.I think it should be mandatory reading, actually.It's called Range by David Epstein, and there's lots of podcasts.
[11:09]
QuestionerBut basically, the giant takeaway from the entire book is that specialists, you're absolutely right that society and capitalism, quite frankly, has pushed people to specialize earlier and earlier and earlier. And whether it's sports, whether it's pretty much any field, I've gone and they can measure all this now, specialists start out faster. So there's this immediate gratification that you get, and this goes back a little bit maybe to the tiger mom stuff, where it's like, oh, specialize, specialize, specialize, because you come out of the gate really quick, but you also plateau much earlier. And generalists start off much slower, as you'd expect, but there's a later, it's like delayed gratification. And almost in every scenario, and he goes through some really interesting examples of great athletes who didn't start in that particular sport because they were better for having been in these other sports. And I think that there's no better case, even though he doesn't give an investing example, given the nature of investing and how it requires all this multidisciplinary, I think it's the perfect example, actually. And that goes hand in hand with curiosity, because I think if you're super curious, and again, it's not raw IQ points or anything else, it's just if you're really, really curious, you're going to have a lot of different interests. Now the balance there, obviously, and I'm sure we'll get to this, is your circles of competence and not being all over the place. When you actually act on those things, you have to know, think in terms of confidence intervals. Okay, well, I can be curious in astronomy, it doesn't mean I know what the hell I'm doing. I'd be curious in these things, but you got to recognize whether you're in a learning phase or an action phase. One of the things that strikes me too, and we will come back to this because, by the way, you've already said the magic word compounding once, we're going to come back and bow the ring every time, we're obsessed with the equation. You start with a principle of something. And by the way, it extends, as we've talked about, well beyond just compounding capital, but there's something that you want to build upon that you find, something you're really curious about. And then there's a velocity vector, some growth rate that you're attempting to obviously enhance, and then there's a duration piece. We're going to talk more about that. But what strikes me with a lot of those great athletes examples, Roger Federer, I think,
[13:20]
Questionerstarted out playing as much soccer as he did tennis.A lot of Gretzky's early hockey was done in very unconventional form, not actually onproper rinks, but almost more like alleyway type hockey, shitty.And it strikes me that time horizon comes into play.Somebody who's trying to be number one in the next three years at something probablycan't afford to focus on range, but if it's 20 or 30 years that your time horizon is,that's when the synthesis of a lot of these things that don't seem connected start tocome together in a form of alchemy, at least it seems that way with great athletes, certainlyseems that way with some of your friends and mentors that we'll eventually get to,and Warren Charlie, and I'm hearing that same thing.There is a sense of urgency in the lives of these people.They do want to get somewhere, but there's also balancing that, a patience that whereI want to go is going to take some time, and to achieve any level of true greatness reallyrequires a degree of patience to let that formation occur.Yeah, I think Charlie has this way of boiling all this, another great point, life, investing,all these things are simple, but not easy, and it's not supposed to be easy.Anything worth doing is not supposed to be easy, and I do feel like sometimes peoplewant that.In fact, most people want that short-term gratification, and they want the reveal, like,oh, what's the code, or the loophole, or whatever, and it just doesn't work that way.And it works differently for everyone, too.There's no magic formula per se, but if Peter Bernstein, who he wrote Against the Gods,and he's really this big risk guru, always said, it's much easier, actually, to predictthe long-term than the short-term.So if you've got that North Star that's 20, 30, 40, 50 years out, you can miss a lot onthe way.You don't have to get the trajectory exactly correct.As long as you're two steps forward, one step back most of the time, it'll all be perfectlyfine.It's much, much harder to hit the short-term with precision.You've almost got to, like, invert that thought process that is, again, a little bit embeddedus in society.As you think about that next phase after the late nights in the planetarium, and then drawingyour architectural masterpiece, why business school?Why did you end up choosing Columbia?What was it there, if you go back to Rick's description of the compounding equation, whatinputs were you looking for there on your growth to some sort of master?
[15:42]
Todd CombsI'd slowly started to figure things out a little bit by the time I was 26 or 27.I was way behind you guys, to be clear.So I was at Progressive at that point.I'd been there, well, when I decided to apply to business schools.I was there probably about three years at that point, and we had become Progressive.We were enormously successful.I was responsible for 40% or so of the company's premium as, again, what you would call todaya data scientist.We had brought in a lot of general managers as we became a Fortune 500 company and legitimateand so forth from Harvard Business School and Chicago and Kellogg and so forth.So I would work with them hand in hand on the P&Ls.So I started figuring out, and I was investing also on the side myself.People laugh at this fact that it was all in the mail.The internet had just kind of come around to public use of AOL and everything.This was late 90s, dial-up and all that stuff.So you would get these mutual fund prospectuses, and I'd immediately go to the back actuallyand see who ran it and what their background was.And invariably, they always went to some Ivy League, NBA, et cetera.So I was like, okay.And I was interested in insurance, but I was always looking at other stuff too.So I was getting more and more interested in investing, and I was doing it myself becauseI knew insurance, and insurance was arcane and Byzantine.So I was like, I think I've got an edge on some of this because I would see what othercompanies were doing just in the depths of what I was doing at Progressive.And then I'd look at their stock, and I'd be like, that seems like it didn't reallynecessarily know what a short was at that point, but that seems like I would bet againstthat company insurance.So you'd start to triangulate and figure stuff out, and maybe I could be okay at this.And I thought, okay, well, I was married to April in 98, and I went to Columbia in 2000.I back-solved because I was making pretty good money at Progressive, and I was movingup quite well.Glenn Renwick went on to become the CEO, and we were three doors down from each other.He was a general manager at Florida at the time.This is when a company grows rapidly, you get sucked along.So anyway, long story short, I back-solved and said, well, I do actually really loveProgressive and insurance.I think it's interesting.I know I can do well at that, but I'd like to also try my hand at this other.
[18:03]
Todd CombsSo that's how my mind works, is it's a lot like investing.How do I protect my downside and then take a shot at this upside to see if I, A, couldbe good at it, B, if I like it.And normally those two things are correlated, obviously.It's hard to love something you're not good at.So anyway, long story short, I got into a handful or so of the business schools I wanted,and I thought, okay, well, Columbia had the best investing program then, and I think stillnow.So I said, okay, this is where we want to go.Talked to April, talked to her into moving to New York.And then I talked to Progressive and I said, this is what I'm thinking I want to do, butI had an open ticket to come back.So that was protecting my downside, and I would have come back as a product managerand I would have missed out on two years of fixing, but not the end of the world.So it all worked out.And then to make a long story short, talking about serendipity, Progressive didn't do calls,which everybody did calls back then and guidance and everything else.So a couple of these general managers who wrote my recommendations and I had becomequite close with said, how do you turn a negative into a positive?There should be a whole book on that actually, because Progressive doesn't do these calls.You should talk to these people on Wall Street about Progressive because they're dying forthis information.So this guy Weston Hicks was the number one II insurance analyst at the time coveringall these insurance companies.They put me in touch with him and he was absolutely fascinated.I thought, why is this guy so interested in my little pissant job?And it was about Progressive.And he says, so what are you doing?Why'd you leave?And I said, I want to be an investor.And he says, oh, there's these guys at these tiger cubs that are really doing a lot ofwork on the insurance industry right now.They would be fascinated in your experience.I'm like, really?I find this incredibly hard to believe anyone would be fascinated in this, but brain newinvesting inside and out, they were phenomenal.So Julian Robertson started Tiger and then all these guys spun out, they're all calledTiger Cubs.So there were four big ones, Blue Ridge Viking, Maverick and Lone Pine, and they all had theirown specialties.And these guys, so he said, I'm going to put you in touch.I knew insurance, I could tear apart, they're called stat, statutory blanks and yellow books
[20:11]
Todd Combsand all this geeky, nerdy stuff.And they knew investing, but not this stuff.And they were short.These companies like Conceicao and Reliance that then they were right, obviously theydid all go bankrupt.But they couldn't really prove it to supersize the positions.And so I get in there and I'm like, where are the stat blanks?And where are these things?And they're like, what?What are you even talking about?So I'm like, no, you got to pull this and this and this and this.And so I'm like the detectives that could show them the map and the terrain and tearit all apart.And I'm like, oh, yeah, this is a total fraud and I'm triangulating all this stuff, puttingthe puzzle pieces together.They were right.They just come out of from a completely different vector that their intuition and experiencebecause they were such good investors and figured out that was the first week at Columbiatalk about complete and utter block.And then Weston went on to become CFO of Chubb and then CEO of Allegheny, which we just acquiredweaving Berkshire last year.So talk about full circle and small world and everything.And I still talk to Weston and we're friends.And then these guys, I ended up working with Blue Ridge Capital and Pete Daniker was theirFIG specialist.He went to Princeton and he was a Morgan Stanley banking analyst for a couple of years.He became a real, real mentor of mine, just a truly, truly phenomenal person who tookso much time with me.It was a complete one way door.I was getting everything from Pete, giving basically nothing back.After these stat blanks, they could have just ditched me on the side of the road, whichis probably maybe what I would have done, but no, they took me out of their way.And then that led again, one thing after another, after another.And then I graduated Columbia at 02 and they literally said, here are five places thatneed a FIG person.So I knew at that point for my regulatory days, I knew banking and I knew insurance.I didn't know specialty finance.So then I went and took, there's a whole specialty finance series of courses at NYU at the time,which I took at nights and on weekends to get the certificate, to be able to tear apartcredit card securitization.So you could literally do it.The course was really built for people who are going to work in an investment bank actuallydoing these things.But I wanted to be able to do it as an investor and they couldn't believe it.
[22:23]
QuestionerAnd I was the only person that was an investor there.And I was like, I can't believe all these investors aren't in this course.So there's just that meritant diligence is what I would call it.I do want to take a couple minutes for the benefit of the class to unpack the tiger story,the blue ridge story a little more detail because it contextualizes really the historyof long-term equity hedge funds over the last 30, 40 years.One of the things though that strikes me about that story, and of course, if tiger is knownfor anything, it starts with this insatiable desire to draw talent to the organizationand then to support that talent in other aspects.So it doesn't surprise me that they were probably looking for forms of talent of numerous kinds,but the minute they saw that you had this expertise in insurance, rather than say, oh,you didn't go to this investment bank and you didn't work at this private equity fund,they latched onto that.They knew you could be helpful to them in that context.And we often talk, perhaps it's incorrect, but it's a bias that we have about the valuethat can accrue to a young person who does eventually want to become an investor to beginin some sort of an operator's capacity to actually work for a business of some kind.And again, I think it comes back to this dynamic of time horizon.If you're in a rush, you just want to go immediately to work for private equity orpublic markets.And I'm a product of that.My first job was going directly into the buy side, but time and time and time again, weunearth these stories of people who, because their path waxed and waned through variousoperator roles, you began working for the state regulator of Florida and then progressive,you actually, again, all in hindsight, you had something very powerful to bring to oneof the world's best investors.And I think it's just, particularly as we're in a tight job market right now, and thereare certain aspects of the investing world that are actually contracting from a laborstandpoint, I think students should be encouraged to appreciate that there are lots of avenueshere that you can explore, particularly across working for corporations.That's a very, very good point.I was very jealous of my friends who were getting hired by Accenture and Anderson Consultingand BWC, et cetera, et cetera.They didn't make me offers.And I was jealous.Now, as it ended up, as we'd sit around talking about our jobs or whatever, I got far, far
[24:30]
Questionermore experience from where it doesn't look good on a resume or anything like that.Their jobs looked far better on the resume, and they made slightly more than I did.But you can find ways to compound even in non-ideal situations.And I learned a lot more, again, how do you turn a negative into a positive?I would go into American General Finance, which ended up being owned by AIG or Prudentialor Barnett Banks, which was the biggest bank in Florida.It got acquired by Bank of America, Raymond James, et cetera, et cetera.Here I am.You're the regulator.You're the boss, actually.So I would be able to sit down with the CFO of these huge, huge companies as a 21, 22-year-oldliterally know-nothing kid and literally just fire away with questions for hours and hoursand hours on end until this CFO is like, where is this going?I'm just learning.But you've got full privy.And my friends at the big eight weren't able to do that.They were in very, very siloed niches.So it looks great on the resume, but here they were looking at the accounts payableor the accounts receivable collections, rooms to go.Really?I spent the day with the CFO of Raymond James.They're like, what?Yeah, that's not fair.And same thing at Progressive.I was not dreaming of working in an insurance company or anything like that.And then it ends up being this data science field.And I had one small little state, and we ended up rolling out credit for the industry, telematics.I have my name on patents.So one thing just kind of leads to another, leads to another.I think people try to back solve sometimes, and obviously the McKinsey's and the Goldman'sof the world want you to perpetuate those thoughts.But often it's like being, it's a bad example here, but you could use Alabama football.I am not an Alabama football fan, to be clear.Of course, their goal is to get five, five-star offensive linemen, five deep, but that doesn'tmean that's the right thing for them.It's a GPLP problem, as I call it, the general partner or limited partner.What's good for the GP is sometimes not good for the LP.Of course, that's what Alabama wants.That's what every football team wants.It doesn't mean it's good for the fifth string offensive linemen.You might be far better off going to somewhere else you can start, and you don't have tobe five deep and et cetera, et cetera.So there's trade-offs there too.I think too oftentimes people just say, oh, I want that because it's going to look good.
[26:46]
QuestionerAnd it's a short-term, long-term thing again, right? What looks good on the resume is a short-term thing, but what actual experience are you getting at the end of the day and how tangible is it? Because that's what matters.
QuestionerOkay, let's geek out for a few minutes on Blue Ridge and Tiger because we spent a lot of time collectively back in our prior jobs writing these case studies on what we called forces, investors who had compounded in high rates for at least 15 years. And Paul authored a case on Tiger. We spent a lot of time with Julian, with members of Julian's family, with all the Cubs. I wrote a case on Steve Mandel and Lone Pine. I was just starting a case on Blue Ridge, working with John on that just as our little R&D project was shut down. But this is an extraordinary snapshot of history into the investing world. And as I said before, Tiger today is known more for the Cubs that it produced and the Cubs that the Cubs produced, and there's probably like a third or fourth generation of that. And we spent some time in preparation, talking with some of our friends out of Blue Ridge, Pete, of course, David Greenspan, and Roberto Mignone, who probably was just setting a bridge raround when you interned. I think he was the first Blue Ridge. He was. Yeah, he was the first hire of John's and Pete was the second. And he spot out like a year before I started working with them. They're all great guys. Amazing guys. Amazing guys. Yeah. Chris Hansen is another one of Alliant Capital that have all become mentors of ours and have shaped us as investors. So but let's go back to Tiger. Okay. Tiger was founded in 1980. Prior to that, Julian served in the Navy for a long time, and I think when he first transitioned out of the Navy, he worked for Kidder Peabody, the brokerage services, for a very long time. And there's a lot of interesting tidbits. Again, we talk about range. Before starting Tiger, but after leaving Kidder Peabody, Julian moved his family to New Zealand for a year or two and actually wrote a novel during that time. Clearly an individual who was interested in a variety of subjects and a variety of disciplines. Another fascinating thread that maybe we can pull on as we get a little bit more into the Berkshire story is the Tiger model is sort of, if we were going to simplify it, is known to have looked for these investments to buy to go long on that were a quality management, great business models, good valuations, and then sort of short the opposite.
[28:59]
QuestionerThat's an oversimplification.One of the things that was interesting to us in our research with Julian is when weasked Julian, and God rest his soul, he passed away a number of years ago, but when we askedJulian where his investment philosophy took shape, he actually, like Warren, started asa cigar bud investor.Maybe some of that was a product of the times, but I do find it interesting that time andtime again, it seems like there is this natural arc for the investor who sticks with it enoughtoward quality and toward situations, companies that are more likely to endure.He said another thing, which was that his investment philosophy evolved immensely overthat time, but it was probably mostly shaped by his mentees, by the talent that he attracted,like Steve Mandel, like John Griffin.John served for a long time as the president of Tiger Management before starting Blue Ridge.Certainly, one of the key elements that John carried forward in Blue Ridge was this sortof insatiable desire to draw talent to the organization and then to empower that talentin a variety of ways, and you see that where there was always some level of specialization,like you said, with Pete in financials and Chris.My very first trip to India, gosh, almost 20 years ago, was chaperoned by Chris Hansenbecause he and Ford Blue Ridge had cultivated a real edge in investing in India, and yetthese people were all evolving and focused on numerous fronts.By the way, I just want to talk for a second about the track record because we talk aboutthe power of compounding.For 20 years, Tiger was around, and there's a lot of talk about how and why Tiger shutdown literally the same month that the NASDAQ bubble burst in March of 2000, but for 20years, they compounded at 30 percent, which obviously sounds exciting, but if you do themath on that, I think the rough math on the multiple on capital is well over 200x.So this is an extraordinary, extraordinary track record that is very much worthy to bestudied.Blue Ridge went on to, I think, have almost another similar in duration 20-year legacy.When we spoke with David and Pete about you coming in and teaching, they both had a similarquestion.It was really directed at, of course, at Berkshire, you're not very focused on short selling,but you did hone that craft and you were quite good at it, and just curious how, as you lookback on the way that you invest today and the way that maybe even you operate yourself
[31:16]
Questioneras an executive, what that tradition of short selling and that experience, how that shapedyou as an investor today?
Todd CombsThis is one of the few things Warren and I disagree on.I think we probably agree on 99 or 99.9 percent.He and Charlie both had such a miserable experience short selling.In fact, this is a great story.First time I met Warren, in his office, got a certificate from Obama with the Medal ofHonor, and he's got his certificate from Dale Carnegie class, but then he's got this WesternUnion certificate, and I'm looking at these, some of them are obvious.What is this?And he laughs and he says, oh, that's when I quit short selling.And he and Charlie had figured out in 1956 or whatever it was that Western Union wascompletely and absolutely insolvent, that basically the pension hole was greater thanthe market cap, their enterprise value, et cetera, et cetera.So they short it and the stock goes up.And so then they actually do a report and send it out to friends.Stock goes up.They send it out broader.Stock goes up, et cetera, et cetera.And from even where it is from then to today, it's probably been a thousand bag or a hundredbag or something like that.So he's just like, I don't understand that that was not the only unsuccessful short.That was the final straw.So that's one take on it.My take on it to your question is, I think that it's absolutely, for me, again, everybody'sdifferent, absolutely positively fundamental to my being and how I think about investingtoday.So even though we don't short at Berkshire, it doesn't keep me from thinking about, oh,this thing is a short.You're looking at a name.I look at over 200 acquisitions a year that come into Berkshire.A lot of them, I would say, I'll tell bankers half the time, half flippantly just to giveit back to them, I'd short that.So when I look at names, there's absolutely nothing wrong with saying, if you think it'sworth more, you think it's most of the time and most things are roughly approximatelyfairly valued.I don't know if it's 10, depends on the market, 10, 20% of the time, you're like, oh, I'dshort that.And having that, to me, that is what I told Warren, so we've talked about this before,you don't look at half of a balance sheet.I'm on the board of JP Morgan, and so you could look at that balance sheet, and if you'reonly looking at the asset side, it's two and a half trillion dollars, and you say, oh,my God, this is amazing, it's two and a half trillion dollars of assets, et cetera.
[33:39]
QuestionerSame thing if you just look at the liability side, there's two and a half trillion of liabilities in equity, and you'd say, oh, my God, this thing's a catastrophe. How could you possibly own this, et cetera? Well, you have to look at both, and that's how I view short selling. Now, it's no different than long investing, in my humble opinion, is very, very, very few people know what they're doing. You don't have a primary care physician go do brain surgery, so it's very hard. There's no question about that. There's no question that it's, quote, unquote, easier to compound your capital on the long side. You can go buy the S&P index and do perfectly fine and never have to analyze a stock or become an expert, and there is no equivalent on the short side because it is that much harder. I always felt you had to be about 85% correct on the short side to make money, and I think that's pretty fair. You have to be damn, damn good, but that helps you if you don't become myopic or dogmatic or solve for the lazy narrative or any of that stuff. It very, very much helps you on the long side, both to identify compounders, to identify weaknesses and moats, because the same thing you're looking for in a short, a broken balance sheet, a collapsing moat, a CEO who's pulled forward all the benefits to the short term, all of those things you should be looking for on the long side, too, but you're not looking for it as a short. You're just looking at it for intellectual honesty, and then wherever the answer falls out is where the answer falls out. That's how I think about it, and it's no more or less. Warren wouldn't disagree with that. He'd just say that's not his expertise, which is also one of his superpowers, is to say that's not my core competency. I was like, yeah, but you don't realize you are doing that, because when we talk about companies or acquisitions or whatever, we'll say, well, it's not worth anywhere close to that. The difference is he would say, I wouldn't necessarily take action to short that, and I would say, well, then you could look for precipitating events. He just doesn't care about that, which is fine. One of the things that I continue to hear from great short sellers is how it naturally keeps you intellectually flexible. How often you go into evaluating a company, and you initially are leaning toward thinking it's a short or thinking it's a long, and actually you come out on the other side, but
[35:50]
Questionerjust that you have that aperture to look at both tends to generate this continual opennessto whatever you find.One other dynamic that sacks the deck against short sellers is that your upside's capped.The stock can only go to zero, although I do remember when we did the case on Lone Pine,there was a couple of years as a NASDAQ burst that literally the Lone Pines of the worldand the Blue Ridge of the world had short these way overpriced tech stocks, and theywere reinvesting into the short and doubling down, and their ROIC was actually above 100%for a few years.It was just an extraordinary time.But curious on that point, do you happen to recall the first time that you came into contactwith Buffett or Munger in their teachings?
Todd CombsOh, sure.Well, it would have been, let's see, I graduated Florida State in 93.It would have been, I think it was probably one of my last finance courses at FloridaState, and Berkshire was not well known at that point.The professor, it was a value investing type course, and they showed Warren's track record,Berkshire's track record, and then they had us read a couple, it was probably the lastfive years of letters or something like that.And I remember distinctly, obviously, Coca-Cola and et cetera, those names.So I was not familiar with it at all up until that point, to be completely honest.I was, what, 22 at that point.And then really the lesson, it wasn't so focused on how to replicate that.It was really about the magic of compounding and that eighth one to the world and all ofthat.That's the first time I remember.And then my first two stocks that I ever bought were that year as well, and it wasPepsi and Plum Creek Timber.And I do remember thinking, oh, this Plum Creek Timber would be a name that that Berkshirecompany would probably be.But I really like, oh, just a little seed.Of course, Warren had Coke, and this was Pepsi.And Pepsi had a higher dividend than Coke at the time, I remember that too.So I remember already drawing a compare and contrast.So 93.
QuestionerTodd, I recall Warren saying, and I think it was in the 2021 Berkshire letter, thatevery college student should focus their career search on their area of greatest interestand aim only to work with high quality people while putting money aside as a motivatingfactor.What other advice would you have for young people in their careers?
Todd CombsWell, it's a great question.Again, there's no formula.I just go back to my experiences.
[38:20]
OtherI thought, what the hell am I doing working as a regulator?I thought I should have gone to a better undergrad.At the time, this banking crisis had rolled through Florida late.So talk about a bad economy.In 89, nobody was hiring.And sorry, 93.89 was my high school, but 93.And it was the S&L crisis is generally listed as 89 and 92, but Florida got it late.But same thing I mentioned earlier with insurance or whatever.You find, if you're intellectually curious and you're hardworking, you will find plentyand plenty and plenty of opportunities.But I think the mistake that people make is trying to back solve for it and say, oh, Iwant to work and I don't want to pick on McKinsey, but I want to work at McKinsey because I'llmake a lot of money and I'll look great on a resume, etc.That's the antithesis of what Warren means with that quote.I always told our kids, if you want to be a painter in Paris, if you want to try andtake the extreme, and Warren, this is my favorite part of his letters, where he always takesthe extreme.If people think this is true, then if you take it to the extreme, is it still true?And oftentimes it falls apart, which means this actually isn't true.So that's what we always tell our kids.Literally, whatever you want to do in life, you don't solve for money, you don't solvefor prestige or adulation or anything like that.And that takes time and maturity and growth and also changes over time, too, because weall evolve.Nothing is static.So then again, if you invert the concept, I think people tend to think very statically.Oh, I'm this and this is what I'm going to solve for.But then there's a lot of research.Obviously, every single person, it's probably innate in us somewhere in our DNA, massivelyunderestimates how much their life is going to change going forward.Every single person at every age of your life.I would be doing it now and you do it when you're 40, 50, 60, 70.It doesn't get better or anything.You constantly think, oh, I recognize that there's been a lot of change and I realizethat I'm different than I was.But now I'm set.People don't realize that it's constantly wet cement.They think that the cement is dried and it doesn't.And that's a freeing concept.Neil deGrasse Tyson talks about the universe.There's some people who think about the enormity of the universe and they find it depressing.And then there's other people who think about the enormity of the universe.
[40:35]
Todd CombsIt's very freeing and liberating and optimistic. I tend to be in that latter category. Certainly Warren is. So I don't know. I think there's no magic for you. You just have to be open. It goes back to Rick's comment. You have to be open to experiences and curiosity because you literally may not know. I remember taking, people would find this actually surprising probably. I remember sitting at Columbia where I said earlier that I knew I wanted to be an investor taking one of these personality tests and I'm an INTJ. What does that fit best with in terms of prevailing? Because I thought, well, public. I'd been working with the Blue Ridge guys. Maybe I should think about private. Maybe I should think about venture. So going through all this stuff, you have to remain open to the fact that you can be wrong, the fact that things can change because they do. We talked about LPGP dynamics, short selling, being willing to be optimistic and take a risk. What was it like building Castle Point, the next phase? That might have been. It's very different than the beauty of undergrad in a lot of different ways because it was hell in some ways too, but there's something about baking your own cake and you guys are living it now. The adrenaline and the sheer joy and the fact that you may absolutely make mistakes, but they're your mistakes. When I think of Castle Point, and there's a great story with Steve Friedman who used to run Goldman Sachs and when we met and we can get into that if you want, but how it actually came to be. But when I think of it, and this is the purity maybe that I try and maintain, I ended up with five analysts. We're over half a billion, which was a big fund back then. And now it's peanuts. But I had five analysts, a CFO and an admin. That happens to me exactly. It's a gross balance sheet. So all right. It's not peanuts, it's raw peanuts. But it's all peanuts. Yeah, that's right. That's exactly right. The purity of it, my favorite, where my mind immediately goes when anyone mentions it, it's the first six months, it was just me. And I printed off 24 securitization documents that are hundreds and hundreds of pages long. So Countrywide and Washington Mutual had Long Beach Mortgage. And I literally had them all over my office. And I would sit there until late hours of the night going through these things, back to my NYU securitization course in an Excel spreadsheet, figuring out which tranche of these securitizations was going to get blown through.
[43:05]
Todd CombsAnd it's called the fulcrum class.So you want to find the fulcrum.And then you assign a confidence interval, or I did, to which I thought would be thefulcrum class for these securitizations.And that's a weird duck.That's a weird individual that wants to go do something like that.So that's where my mind immediately goes.It wasn't to the first big investor that we got, who was phenomenal, who's great.That was exciting too.But those were just consequences that in my mind felt were outcomes of that process.So I always, always, always love the process.That's where my mind goes.It wasn't the first big investor, which was 60 million.It wasn't the one that got us over half a billion.We had all these European fund to funds.We could have been a billion, billion and a half.It wasn't all of that adulation.It wasn't the first hire that I made.It was going through those securitization documents and finding not only the fulcrumclass, but then finding, oh my God, these financial guarantors are wrapping this stuff.And first time I found AIG was buying this stuff in the back door and doing negativebasis trades.So it's the puzzle.It's figuring out the puzzle.That's where I get giddy thinking about Castle Point.And I figured it out.And not a lot of people had at that point.Fun story, actually, that maybe 10 people know.So now a lot more.So the big short, I'm friendly with Michael Lewis, the author.We have dinner when I got to Berkeley and stuff.He's literally one of the five smartest people I've ever met in my life.He is unbelievably brilliant.So there was a call that we had.We being, there was Seth Klarman and there were 22 of us on the call when there was asecuritization group, a hedge fund within Bear Stearns that was going under in 07.And they were going to screw us.And we were Seth and 21 others.We were on the other side of this thing being short.So Seth called me one day.We didn't know each other super well at the time.And he says, I hear you're in this.I was like, what are we talking about?Anyway, long story short, we had a call with the SEC that we organized to say, this isabsolutely illegal what Bear Stearns is trying to do.And if you allow this, we're going to take it all the way to the Supreme Court if wehave to.This is extremely bad precedent.The punchline of the story is that Michael Lewis got that list somehow.I don't know how.I didn't ask him.I don't want to know.
[45:32]
Todd CombsBut he calls me one day randomly.I had never spoken to Michael and my assistant, Michael Lewis.So anyway, we talk and he says, you were on this call and dah, dah, dah, dah.Where is this going?He said, I'm writing a book.This is a big short.And he says, I'm writing this book about this stuff.And so we talked for about probably 45 minutes about all this stuff.I didn't talk to reporters or anything like this.This is all off the record.So we get to the other guy.He says, OK, this is great.He says, you seem really great.I'd love to meet you sometime, et cetera.I said, I do not want to be in this book.I don't want any attention, et cetera.He says, oh, don't worry.You're not going to be.He says, you seem too normal.You seem like a really nice guy.You're really normal.Anyway, this is really interesting backstory, actually, to be like one small little pieceof that.So it's fun.It's funny.Todd, you mentioned Steve Freeman.I'm just curious for everyone who thinks that someday they might want to take thatentrepreneurial leap.Just tell us more about that decision.Like, did you feel ready?No, I wasn't ready at all.I've never really been ready for anything in my life.That's probably one takeaway everybody should write down.When people see things in you that you don't see in yourself, that's amazing.And that was true with Steve.That was certainly true with Charlie.That was true with Warren.Multiple times with Warren.For Berkshire, I started as an investor with Lou's portfolio at two, two and a half billion.Then he comes down one day, like six months into the job, and he says, why don't we doubleit?And I was like, whoa, whoa, whoa.And he's like, no, you're fine.And I wasn't ready for that.I wasn't ready for Haven.I wasn't ready to then go into looking at 200 acquisitions a year.I sure as hell wasn't ready to run a 40,000 person company.But I met Steve Friedman.Just super quick story.So would they know the name Elliot Spitzer?Probably not.So he did this whole investigation.And Marsh McLennan's the biggest insurance brokerage firm in the world.They had their huge private equity firms.Then they go over and start this private equity firm that was part of Marsh.And it was all based on financial services.So anyway, Spitzer comes in.Holt Greenberg was running AIG.His son was running Marsh.Spitzer thinks he finds all kind of collusion.He ousts basically the CEOs of these companies and says, I'm going to indict you.
[47:45]
Todd CombsYou can't have that.The boards kick him out.So they went to Steve to say, we want you to run Marsh.So he calls this insurance guru and says, who knows more about Marsh McLennan?And this is a good short story, actually, too.I've been short Marsh for two years, two years waiting for all this to happen.And I had uncovered it through a whole bunch of stuff that's a longer story.So it finally happens.And I was short AIG, too.So these things happen.And this insurance guru knew that I was short.So he tells Steve, you've got to talk to Todd.He's the so-called axe on all of this stuff.So I get a call one day from Steve Friedman.He's a legend, etc.And he says, can we have breakfast?I don't know what the breakfast is for.I show up.He asked me all about Marsh McLennan.If I take this job, what am I getting myself into?So I walk him through what I know.So that's not even the punchline, though.We get to the end.Steve is on the board of Fannie Mae.So he says, OK, this is great.We talked about Marsh for two hours.We're leaving.He says, by the way, are you short anything else?I was so naive.I didn't know that Steve was on the board of Fannie Mae.And I said, oh, Fannie Mae is 10 times worse than Marsh.He turns, he almost fell over.He's chairman of the board.Turns three sheets of white.He grabs the table because he thinks I'm messing with him.He's like, what?And I said, oh, Fannie Mae is a complete accounting fraud.I was like, there's going to be people to go to jail, prison over this.He's like, you know, I'm on the board.And I was like, no, I didn't know that.I said, I would get the hell off that board like tomorrow.So he's like, can we have breakfast tomorrow?I said, yeah, we'll do it again.Sure.So we talked for like 30 hours.I walk him through all of this derivatives accounting and all this arcane Byzantine stuff.He has to excuse himself.He's a lawyer.He's excused himself from the meeting.And he left the board that night at five.Then he comes back, called me the next day and said, we want you to start a fund.And we've been looking for somebody for seven or eight years.And so it's funny how things work out.
QuestionerThat's an amazing story.And we are gradually inching closer to those faithful conversations, first with Charlieand then Warren that led you to your migration all the way to the Great Plains of Nebraskafrom New York.But let's come back one more time to that compound interest equation, because I think
[50:12]
Questionerwe've hit on some really important tips for finding your P, which obviously traditionally stands for principle. But I think what we're saying is that it can really be considered your passion or your purpose, whatever that thing is that you're trying to compound. And that process of discovering your P for all of us is just such an important part of our personal journeys. And you've given us some great ideas there. I think the main message I'm taking away is just let your curiosity go, let it run free and just try to keep up. And then we have the R, the rate of return or the velocity vector, the growth rate. How do you actually get better at something? How do you, over the course of time, speed up your growth? And I've heard you in the past advocate for active learning versus passive learning. Today, we've talked a lot about developing your aperture for a strong work ethic. And now this idea of cultivating range, I think that's just such a killer insight. OK, so now let's turn to that third critical variable. And I think, again, we could be completely off on this, but I think Paul and I tend to feel this is both the most important and also the hardest one to harness. And that is the T exponent, the time horizon or the duration of compounding. Now, the world is full of people, particularly in investing, I think, that just seem to find their thing or something, at least do well for five, six, seven years. But then for whatever reason, things just drop off. And on the other hand, we talk about Berkshire as being the eternal compounder. It's like a company that just continues to grow, thrive. It's like a Redwood that just defies the traditional laws of nature. I'd love it, Todd, if you just have any reflections, whether it applies to Berkshire or even just in your own life. How do you keep it going? How do you extend the T in order to get to those out years where I think it was back in the 60s when when Warren first wrote about this, where the joys of compounding are really unleashed?
Todd CombsWell, it comes back to purpose. There's a reason Tom Brady kept wanting to play because you're good at it, but you're good at it because you love it. And I'm not comparing myself, Tom Brady, with that. I just thought about how that might sound. But you could take anyone who's really, really good. Federer didn't want to retire. Djokovic didn't want to retire. They want to keep doing it because they love it. Like Novak, he's just won his 24th Grand Slam.
[52:45]
QuestionerHe's breaking every record there is.And I recall, I think it was actually just before he won the US Open, where he was askedabout how he continues to keep it going.And his answer basically came down to the fact that he really just loves hitting a tennisball.Like he just doesn't want to stop the fundamental act of hitting a fuzzy yellow ball becauseit brings him too much joy.And actually, I think there's a lot of professional tennis players out there who just don'tlove that fundamental act of hitting the tennis ball like he does.When you see it with any sport, you hear the stories about Larry Bird or Steph Curry beingin the gym, the first one in, the last one out, etc., etc.You can only drive yourself or push yourself so much if you don't love it.Because it's a super, super, super competitive world.There's a million people that want to be Djokovic or Tom Brady or Steph Curry or WarrenBuffett or whatever.So yeah, grit and pushing yourself can go a long way.But in a world where a million people are trying to do this, if 0.1% of them just absolutelylove it so passionately that they're going to bed about it, thinking about it, they'rewaking up thinking about it, etc., etc., etc.You're never going to be able to compete with that if you don't love it to your core.And so that comes back to your question about why it's so important to fight.If you're back solving for the narrative of I want to be rich or famous or have adulationor these things, it's totally short term, it's ephemeral, it's transitory.You may be able to fool yourself for some period of time.It's more linear.You're never going to get the log scale to compete with the people who really, really,truly love it.So that's why it's so important to find your passion.And I think in that vein, I'd say it's super, super important to take a lot of riskwhen you're young.I think that's really, really important.I did because I had nothing to lose, to be clear.I think that the hardest thing to do actually is to force yourself to take that risk whenyou either come from privilege or if you have a foundation that's much higher, you havedownside.So that's why it's important to take risk when you're young, because as you get older,you have more downside risk.So you've got nothing to lose at your age.You take the risk and you can massively screw up and nobody's going to hold it reallyagainst you unless it's fraud or something like that.
[55:21]
OtherI mean, you take intelligent risk. Don't take stupid risk. It comes back to the specialist versus generalist thing. Society, no one tells anyone that. They all want you to take the safe path. And it's, again, a GPLP problem. If you could think about it, Charlie and I have talked, Warren and I have talked a lot. If you had a million mistakes to make in your life, what would you do? You pull them all forward to like yesterday. Get them all out of the way when you're 19, 20, 21. And in theory, you'd never make another mistake if you could. So how do you do that? Well, you've got to widen the aperture massively at the beginning. And then as you learn, you bring it in. That's how I think about it. And then that's also, by the way, not coincidentally, a great way to find your passion too. I always tell folks at Geico, what do you do with a jigsaw puzzle? You dump out all the pieces and you start with the edges and the corners. You don't start in the middle and build your way out. So that's another way to think about it. And I think too many people, I just see it day in, day out with 40,000 employees. Everyone wants to start in the middle. And it's like, well, wait, what are the facts? What are the assumptions? You start here and work your way in. So you go outside in, not inside out.
QuestionerWith the time we have left, we've finally arrived at that moment, the cold call to Charlie. Again, one of the things that just strikes me as so unusual about your story here is how so few entrepreneurs ever leave the entrepreneurial life and go, what would be perceived as backwards to working for someone else and particularly go to work for such a large organization. My guess is that there was some kind of Berkshire clause hidden, at least in your own subconscious, contract with yourself. And so maybe we'll have a few minutes to unpack that. But I know you've talked about the original motivation for reaching out to Charlie. Initially, you would come through the GFC, you had done very well for your LPs, but it was just a really difficult, just a very intense period. And you were looking to make a pivot, to begin investing with a more permanent capital structure. Do you mind just elaborating a bit on that?
OtherWell, I always wanted to make money to be clear, but I had done that. And so I'm very much about what you want is nuclear fusion. You want to be putting in less units in and getting more units out. So I felt like I had done that or some version of what I was comfortable with, with Castle Point.
[57:45]
Ted WeschlerI wanted to run a fund that was over half a billion.I wanted a track record that generated a lot of alpha, etc, etc, etc.So we had done all that.And I was, quite frankly, burned out because the joy was slowly decaying.And I had great LPs, I had great partners, I had a great team.So it was just 80, 100-hour weeks.And monthly reporting is not fun, even when you're doing well.And so I knew insurance and I thought, this is crazy.I made more money than April and I were ever going to spend, etc.Why not buy an insurance company and have the permanent capital and do exactly what I loveand eliminate, keep the assets, essentially, philosophically speaking, and get rid of the liabilities?And so that's what I was going to do.And I thought, well, I'm going to do this regardless.Oh, by the way, Charlie's 90 or he was probably 86 at that point.And so he's not going to be around much longer.And so in my mind, I'm thinking this at the time.Yeah, exactly.And so I'll give him a call and I was going to be out in LA anyway.And I thought, no way in hell I'm going to meet him.But why not try?So I called him up and long story short, I talked to his assistant for a little while.And it was funny.She said, what do you want?Because everyone always wants something.And I said, I really don't want anything.There's no ask, there's no reveal.I just want to meet him.And so she's like, well, there's a bunch of other stuff that happened.It ended up we knew a common person, which I didn't know.She didn't know.We had never talked before.And then she checked with that individual.And oh, yeah, Todd's great, et cetera, et cetera.We had a mutual investor.And so we had presented after each other at this investors investor day, which I never did.It's the only time I've ever done that.And so talk about, again, total serendipity.And he told me his name is Mark Nelson of Caledonia in Australia.So his presentation was right after mine.And he was really pissed because ours were so similar.And he said, you remind me of the young Charlie Munger.And I said, well, that's a hell of a compliment.So he said, I'm actually flying out there.He'd been friends with Charlie for a long time.April was pregnant with our second child, Connor.And so I couldn't go.And so I said, I'll take a rain check.So that was actually the seed that had planted it of why even call him to begin with.So anyway, ends up Charlie emailed me the next day and said,
[1:00:05]
OtherI can have breakfast with you at 7 a.m. at California Club.
QuestionerSo we ended up talking for like six hours,which was exhausting to try and keep up with someone like that the first time.For him, it was like just hitting tennis balls or whatever.But for me, I was obviously very, very nervous.
OtherYeah, I imagine it felt like trying to return an erotic serve or something.
QuestionerYeah, I was just whiffing constantly, but I'll never forget it.And that at the end, he said, we'll talk again sometime.And I thought, yeah, sure.And he called me a week later.And we talked on the phone for a couple hours.And they said, next time you're out here.So obviously, I found a reason to get out there again.And one thing led to another.We talked probably a dozen times before.We really didn't get into investing that much early on.That evolved.And then finally, he's like, what are you going to do?And so I told him and he said, well, you should talk to Warren.And I was like, oh, yeah, well, that'd be great.And I figured at that point, I still had no idea that he was vetting me or anything like that.I thought it was over one of these names that I owned in my portfolio that they were going toacquire.And I thought that's why I was flying out to meet Warren.I had no idea, which is a great way to interview people, actually, because then you have no air.You have no false pretense or anything.It's just a conversation.Using your framing of being scared to start your own thing and feeling like that,maybe in this situation, too, eventually accepting the job.You said that it's really fascinating when people see something in you that you don'tsee in yourself.What did Warren and Charlie see in you?Oh, I don't know.That's a tough one to answer because anything I say is going to sound, I would say a coupleof things.Maybe anecdotes, maybe are always better.Charlie and I, at one point, this is the first meeting we had, the BP oil spill horizon,I think it was called.It just happened.And somehow or another, we got on that topic.We've been talking about the universe and we're talking about, I just read this book,Just Six Numbers, and it's how these six numbers have to be exactly the way they are for theuniverse to even exist.I remember this, gravity goes out like 60 digits and the last digit is a six.This is all I remember.And if that digit's a seven or a five, the universe doesn't exist.Can't get out of its own way or it blows apart.
[1:02:21]
Todd CombsAnd Charlie, he's like, oh, I just read that book, too.And I'm like, what?Who knows about this book?It's probably sold like 100 copies.And so we sat there and talked about that for a while.Anyway, we're all over the place.Somehow or another, we come to Deepwater Horizon.And I said, yeah, well, the issue there is you could talk about mismatched time horizonsbecause CEOs are only in the seat for four years.So why are you going to spend this money when it's a one in 100 probability?So I was talking in insurance terms.And I said, essentially, what they did was they sold a really cheap out of the moneyput.It's one of a thousand things I said.And Charlie's like, what did you just say?And I thought, oh, shit.I said, they essentially sold a deep out of the money put.And he's like, huh, that's brilliant.I'm like, really?I don't think it's that brilliant.And he's like, no, it really is.He's like, that's exactly what they did.And I said, it's like the Ford Pinto, Ford Pinto.They didn't want to spend two cents for this thing that kept the car from exploding.And so then every time these cars got rear ended, they basically exploded and they couldhave fixed the problem with a two cent part.And the Deepwater Horizon part was two dollars or something ridiculous like that.It's just utterly ridiculous that a company wouldn't do that.And not only is that the right thing to do, I'm not saying that that's a unique insight,necessarily, but the way that I phrased it and the thought of insurance and frequencyand severity.And then we ended up talking about this book, Ubiquity, by Mark Buchanan, which talks aboutits power laws and the tradeoff between frequency and severity and yada, yada, yada.So I would say a little bit of that is just the way that you think.And then with Warren, he was right into stocks from the beginning.And my portfolio was not dissimilar.I owned a lot of U.S.Bancorp, he owned Wells Fargo, and I owned MasterCard and Visa and he owned Amex.We got right into it.It's like, why MasterCard instead of American Express?And so I laid it on him.I have my opinions when it comes to that stuff.And I said, well, I think MasterCard is better for these reasons and da, da, da, da, da.And then Warren was great.He's very intellectually honest, obviously.And so he'd say, well, under what scenarios would that be wrong?And under what scenarios would Amex be better?And so there's a scenario where that's the case.
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Todd CombsNone of this is absolute.And same thing with U.S.Bancorp and Wells and on and on and on.Where Charlie and I hit it off on science and principles and philosophy, Warren andI really hit it off on just capital allocation, like risk assessment and upside downsidesand things like that.So, and insurance too.We talked about Progressive.We talked about Geico.Warren asked me, is Progressive better than Geico or vice versa?And I said, yeah, they are.And he pushed back a little bit.And I said, Geico is better at marketing and branding, but Progressive is a data companyand data is going to win in the long run.And I said, neither one are super great at technology.And obviously I didn't know the tech stack at Geico like I do now.But I said, here are the weaknesses and here's what I would be doing.And this is what Progressive has done better, et cetera, et cetera.So, I think he appreciated the candidness because when your CEO or especially Warrenor whatever, everybody kisses your ass and everybody tells you what they think you wantto hear, et cetera, et cetera.And I just didn't care really.I'm irreverent in that regard.This is my opinion.Take it or leave it.I don't care.I don't have to agree with you.I'm not here to agree with you.And you're not going to agree with me.That's just my opinion.I could be wrong, but it is what it is.So, that honesty, I guess, it's at least genuine and authentic.
QuestionerIt's really interesting you say irreverent because I think I've heard Charlie say thatone of the things that he appreciates the most about Warren is his irreverence.Some people probably view that term as like more of a negative trait, but I see how itcan really reinforce being an independent thinker and how that can make you a reallygood thought partner for somebody and also just a great investor.All right.Unfortunately, I think this is going to have to be our closing question.And it actually comes from our mutual friend, Pete Daneker.Now, Todd, when you joined Berkshire, you had the opportunity to not necessarily moveto Omaha, but you chose to.So, I'm just curious, reflecting back on that more than decade that you've now beenthere, what's it been like just being down the hall from Warren Buffett daily and maybemore importantly to have him and Charlie Munger not just as your mentors to keep learningfrom, but also just to have them as your friends?
Todd CombsWell, that's a great one to finish on because you almost can't put it in words.
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Todd CombsMost people would maybe have a hard time understanding because they just think ofWarren as Warren or whatever.And Pete deserves almost all the credit here, along with my wife, obviously, theserendipity of just being there.You can't script it.You can't pre-solve for it.So, you really want to see, it's the old saying about, you find out a lot about peoplein the worst of times.And so, most of the time, things are fine and there's the day-to-day, but what happenswhen the rubber hits the road and it's tough?And so, when the Sokal situation happened, and I'm the only one there.It was a very small office.We didn't even have any other investors.I'm the only investor there.Everyone else is back office, treasury controls, et cetera, and internal audit.And so, Warren comes down and we talk about that situation.We would talk five, six times a day.Sometimes he'd shuffle down and I'd be like, oh, what's going on?Well, we got these three deals came through this morning and they're all shit and here'swhy.And this one, can you believe they're trying to sell this company that sells radiationand da-da-da-da-da or this or that or the other.You just have fun talking through that.And then Warren, of course, tell a story.I was looking at, I owned DirecTV at the time and I was looking at Charter was coming outof bankruptcy and there's a million stories like this.This one's just fun.And he says, oh, and I just read Cable Cowboy and I said, cable, boy, that's a super toughbusiness.And I said, yeah, I view it.And we had talked a lot about the railroads.Now the railroads have been a really shitty business for a hundred plus years.And then boom, this one thing changed.Uber's all been a really terrible business for a long, long time.And then this one thing just flipped and the whole dynamic flipped.And I said, I think that might be the case with cable.So he says, I did some work on the cable in the sixties, all these files, rows and rowsand rows of files.He said, you should go and look.So I did, went through all that stuff.So then we go to lunch, we talk about it.And that helps give you a historical perspective.I was born in 71.So I didn't even know this stuff in the sixties.And so it's just one more data point, one more context to the whole thing.So all of that, a million stories like that, but it's like a three-dimensional hologram.It wouldn't even really be the same if I weren't.It would be like, there's the noise in the signal.
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QuestionerIt'd all be noise.And so you get a very, very clear signal when you're right there next to the person.Well, Todd, this has been just amazing spending time with you.If we think about the compounding equation, finding your purpose,growing as fast as you can and doing it for a long time,you are the embodiment of this in so many ways.And you are a human compounding machine.You're still so early on.And so it's just going to be so fun to see how this progresses over time.And thanks for spending this time with us.
Todd CombsI appreciate you guys having me in.Notre Dame's a special place.Thanks so much for showing up to class today.
QuestionerFor more Art of Investing episodes,and to explore all of the resources we mentioned today,and more, check out staygrovey.com.That's stay-g-r-o-v-e-y.com.That's it for now.And we'll see you next week.