TIP297: Warren Buffett & the 2020 Berkshire Hathaway Shareholders Meeting Part 1 (Business Podcast)

Automatic TRANSCRIPT

You're listening to t I ip. Hey everyone welcome to our show every year sticking. I do a roll up of the best questions and answers that Warren Buffett has from the Berkshire Hathaway shareholders meeting. We thoroughly enjoyed doing these episodes in this year was no different. I think we cover a whole lot of different topics and without further delay. Here's our first part episode of the Berkshire Hathaway Shareholders. Meeting listening to the investors podcast. Well we study the financial markets and read the books that influenced self made billionaires the most. We keep you informed and prepared for the unexpected. Hey everyone welcome to the investors podcast. I'm your host. Preston patient is always accompanied by Stig Brockton. And we really liked doing this episode. We've been doing this since the inception of our show and we pick out some of the best questions and answers that we saw from the Berkshire hathaway shareholders meeting. And then we play them here on the show and we have a little discussion after each one of them. Q. And A. With Warren Buffett and China monger a stable. The main attraction of the event. First of all Manga wasn't there so you're going to hear what primarily Warren Buffett has to save but also the CEO of Berkshire Hathaway Energy. Greg able who's sitting instead of Challen Manga this year so I think that in itself is actually interesting. That Shali didn't made or the way a buffet said it was that it just didn't make any sense. In terms of the one event that would make the flat out to Omaha the planners still that he will be back next year but before the actual Q. And A. There's always a segment where it won't buffet talks about books. How the way? And he does that in this annual meeting to and he talked a lot about airlines which was very interesting and the very first question from big a quick. That's about airlines to and why Warren Buffett sold his airline stocks. And so what we've done just for this question is that we just gonNA play. Warren Buffett said in the second about Brexit Halloway about airlines and then transitioning into the first question and then what born buffet has to say. So it's just GonNa be for the very first question but yeah let's see what he has to say. I just decided that I'd made a mistake. Valuing an understandable mistake so probability weighted decision when we bought that we were getting unattractive amount for our money when investing across the Airlines Christmas. So we bought. Roughly ten percent of the four largest airlines is not one hundred percent of what we did neighbor but we probably. Baid seven or eight billion. We were getting a billion dollars. Roughly earnings now getting a billion dollars of dividends but the our share of the underlying earnings was a billion dollars and we felt that number was more likely to go up than down over a period of time. That would be cyclical. Obviously it was as if we bought the whole company but we bought it through New York Stock Exchange and we can only actively I ten percent roughly of the four and we treated mentally exactly as if we were buying a business. The companies we bought or well managed a lot of things right. It's a buried very very difficult business because you're dealing with millions of people everyday and if something goes wrong for one percent of them are very unhappy they're line business and I may be wrong and I hope I'm but changed in a very major way and it's obviously changed in the fact that there for companies are each going to borrow perhaps an average of at least ten twelve billion h way. You have to pay that back out of earnings over some period of time of year. Ten twelve billion dollars off if that happens. And of course in some cases they're having to sell stock so the right the bias stock prices and that takes away from the upside down and I don't know whether two or three years from now that as many people will fly as many passenger miles they did last year they may they may not but the future is much less clear to me how they doesn't turn out through absolutely no fall their lines themselves. Something that was a low probability event happened and it happened to Ert particularly the Travel Business Hotel Business cruise business but the airline business in particular and of course the airline business has the problem that if the business comes back seventy percent or eighty percent the aircraft don't disappear got too many planes but didn't look that way on. The orders were placed a few months ago and the world changed which well but it's one of the businesses we have. We HAVE BUSINESSES. We own directly the are going to be hurt significantly. The virus will cost Berkshire. Monday doesn't cost money because her stock and various other businesses moves around the X Y Z. Which is say is one of our holdings we own it. A business and like the business stock goes down twenty or thirty or forty percent. We don't feel were poor and that situation. We felt we were poor in terms. Of what actually happened to those airline businesses? Just as if we don't hundred percent of them so that explains those sales which are relatively minor but I wanna make sure that nobody thinks that on Balza Market Prediction. We were not disappointed at all. In the businesses they were being run and the management but we did come to a different opinion on then. There are the four largest. Us Airlines American Airlines and Dell Airlines and Southwest Airlines United Continental and I think collectively they least eighty percent of the revenue passenger miles flown in the United States and the significant international lying to excluding South West. So we like those airlines but the world has changed for the airlines. And I don't know how it's changing. I hope it corrects itself in a reasonably prompt way. I don't know whether the Americans have now changed their habits or will change their habits because of an extended period. If it happens we're semi shut down and the economy who knows how come out of this but I think that there certain industries and unfortunately I think SAN airline industry among others. That are really hurt. A forced in fact shutdown by events that were far beyond our control really. Nothing add okay if we got another. Charlie intend to use that as a lime. But you've covered a well. We would have bought other airlines to incidental but those were the four bay once those ones that we could put some money into and put whatever was seven or eight billion into it and we did not take out anything like some billion. That was my mistake but it was. It's always a problem if there are things on the more levels or probabilities that happens. Sometimes it happened to their lines and I'm the one who made the decision. I really liked this conversation. I think Warren Buffett has or sometimes can have a habit of not talking too much about his positions and why he just bought and sold I guess is also to shield himself from too much information bias but really liked this discussion and the think that one of the key learning outcomes for me was when he talked about probable mistake. And what means by that? Is that if you played this scenario an infinite amount of time decision to buy airlines. You probably would be a good decision. So what you mentioned that what she pay between seven and eight billion dollars for around one billion dollars in profits and he expected that to increase so yeah it probably would be a good idea in most scenarios but then because of Cohen Nineteen happening. This situation completely changed the Intrinsic Value Office Ellen stocks and. I think it's very important to then say that. You cannot control the outcome but you can always control your decision so I found that inciteful and I think it's very interesting to note that Buffett bought Delta stocks back in February forty four dollars and ride now straining at twenty two dollars and he actually two sets of Big Creek at the time that he didn't intend to sell any of those stocks due to Kobe. Nineteen and not long before that. They'll tell us actually trading at sixty dollars now within laid happened was the buffet. I sold Delta also position in southwest airlines back in March but the way that that was conducted was just bid weird because he basically just took his position Dow to a little less than ten percent and it looked like it was really just for legal regulation purposes that that because the reason why we even had information about what to didn't February was because he held more than ten percent stake so it just kind looked like a trimming and then we just saw that out completely of his position so to me. That was quite interesting and the other thing was that Buffett said that interview with Becky quick back in February that only three out of those four major airline positions that was his. The fourth was either tat. Didn't say which one on the force that was not his but what is told us here was that he made the decision for the entire budget. Folio that all of them should be sold off and I kind of felt that was very interesting because I was quite certain up to today. Really that Ted talk would completely men's their own portfolio so that was kind of interesting or perhaps he was just his way of saying that he talked to them about it and then they met decision. Who knows but I'm curious to hear about your thoughts Preston. It's fascinating to see how he was talking about this. So the big points that I had was the one he talked about. The borrowing was can be between ten billion dollars per company that he owned in order to just offset what they were going through. So it when you're looking at something from an enterprise to earnings level so we mentioned enterprise value a lot so for people that are listening to the show they might hear the term they might not understand the term but stig and I and some other value investors really liked to look at the earnings accompany makes relative to that enterprise value. So when you're looking at that proportion. Let's just say that the enterprise value of company ten dollars and makes one dollar of earnings? Therefore we think that just in really rough estimates that the company should probably yield about ten percent annual return based on those kind of metrics came so the reason we like enterprise value is because it also accounts for the debt of the company. So let's say a company has no debt going back to the example of ten dollars. We'd say that the enterprise value the company's ten dollars but if the company had let's say another ten dollars of debt in its market cap was ten dollars. You'd add those two numbers together in order to get your enterprise value. There's also a little bit of a cash calculation in there but I'm just gonNA act like that doesn't exist for this easy example bill. Let's say the company had ten dollars a debt. Ten dollars of market cap for a enterprise value of twenty so that companies still has one dollar earnings. You're not getting a ten percent return. You're getting a five percent return because your accounting for the debt in the valuation the enterprise value of the company. So that's the easiest way I can break it down so when I hear buffet. Talking about each one of these companies are going to have to take on additional ten billion dollars of debt to be able to sustain. What's happening in my mind? I'm saying Yep he's doing an enterprise value calculation he's adding that into the market cap of the company and he's having a reduction in percent that he's expecting to get back from that company because of the debt implications the burden that those companies now have so. I think that's an important point for people to think about the. He'll never get into and explain that way but he says it real casually like Oh yeah. Each one of the companies are gonNA have to take on ten billion dollars of debt. He's onto the next comment. That's a gem of a comment for people to understand how he's thinking about valuations thing estate out to me was that Buffett said or at least between the lines have a hard time value in these companies so this was not buffet. Necessarily saying airlines will be a bad investment. The next five ten years he was more saying I can't own and because it's too difficult for me to value to me. That was just something. I think there was really worth noting and he knew how to do that. Before airline traveling it's such monetize business and there was so easy to make so many projections. Least if you look at historically a lot of good things happening low all price. That would be really good if you on an ally which is the major expense. But if you don't know that your top line anymore it used to be so that you had reasonably good idea at the top line it typically also followed some sort of function of GDP. That's just not the case in more and buffet just didn't know how to make relation. How can you own something? But you don't know what's worth. I totally agree with that. He's looking at it and saying this is too hard for me to come up with future value. You saying I think there's a major change in buying habits for the consumer of this. I mean come. Let's face the facts. I think most business travel can be done. Virtually the impact is very minimal right. I think this is his concern. He's looking at. Oh the next six months businesses are going to realize how invaluable all that travel that they've been doing is and I think that's going to result in a business. Habit changes what I think. He's seeing this as the final thing that I think is really important is. He wasn't deep in the money on these positions right. And when you're not deepen the money and you're having trouble calculating what you think the future value is going to be and you think there's going to be a change in the consumer habits. It's a perfect time to offload and go somewhere else where you think that you do have an advantage because there's no tax implications to that so. I think those are the big points on that one so we're GONNA go and play the next question here. The next question from Robert Thomas from Toronto Canada and he says Warren. Why are you recommending listeners? To buy now yet. You're not comfortable buying now as evidenced by your huge cash position. Well as I explained the position. Isn't that huge? When I look worst case possibilities I would say that there are things that I hope. They don't happen but that doesn't mean they won't happen. I mean for example. Our insurance business. We could have the world's or the country's number one hurricane that it's ever had but that doesn't preclude the fact we've got to have the big earthquake a month later so we don't prepare ourselves for a single problem. We prepare for problems sometimes create their own momentum in two thousand eight the nine. She didn't see all the problems the first day when really what really kicked it off was one the Freddie and Fannie the GSEE's when in the conservative ship in early September and then when money market funds broke the Buckeye. Mehta there are. There are things to trip other things and and we take a very much a worst case scenario in mind that probably is considerably worse case than most people do saw. I don't look at it as huge and I'm not recommending that people buy socks today or tomorrow or next week or next month. I think it all depends on your circumstances but you shouldn't buy stocks unless you expect in my view. Expect to hold them for a very extended period and you're prepared financially and psychologically to hold them the same way you would older farm and never look at a quota number. You don't need to pay attention to them. I mean the main thing to do. And you're not gonNA pick the bottom. Nobody else can pick it for your and think of a short. You've got to be prepared when you buy a stock have been down fifty percent or more and be comfortable with it as long as you're comfortable with the holding. I pointed out a year maybe two years ago in the annual report. I pointed out that there have been three times and Berkshire's history when the price of Berkshire stock went down fifty percent free. Different Times voted on borrowed money. You could have been cleaned out. That wasn't the thing wrong with Berkshire. When those three times occurred. Some people are more subject to fairer than others like the virus strikes. Some people with much greater ferocity than others in fear is some people can handle a psychological again handled. Psychologically then you really shouldn't known socks because you're a bind solemn wrong don. I love this response. I think that what he saying here is so counter to Wall Street thinking and make a quick buck. This guy is running a business when I hear somebody talk like this. He's running a business and he's thinking about the employees that work for him so that they will continue to have a business the walk into or to work from. He's mitigating risks. That other people don't see he's mitigating risk. That could be hundred year. Storms could be five hundred year storms through his actions. Now a lot of people might not like the amount of risk that he's calculating and then he's preparing for and the fact that the stock price might not be keeping up with other companies that are levering and doing all these things in order to produce results that outperform. But when I hear that my God I know I think about my own business through a very similar light. I could give two craps whether I'm outpacing this or outpacing that and I just love this response. I really like this in you. Know as a person that has thrown a lot of rocks at Warren for having such a large cash positioning in telling people to buy the S. and P. Five hundred and not buying it with his massive cash position. I think that this response talks to how he views insurance how he views. I think his comment there with the I could have a hurricane and then I have another major hundred year event back to back and then they're going to be looking at Berkshire Hathaway to cough up some money in order to take care of this so I think that's how he's doing world right now. I think he's looking at the lens of their some interesting things happening in market and he feels like he needs to be prepared for a very very rainy day here in the future. The other thing is that he is sitting one hundred and thirty plus billion dollars in cash but a SPA has just set repeatedly. People always compare it to his equity holding. Potisk think the in the last quarter of one hundred eighty probably more than two hundred billion. Now it's like that's not the right equation. 'cause he has for hundreds of billions in operating companies so does not feel. He has as much cash as people tell him that he has so. I think that's one thing but I really wanted to play this question because buffet is so often misunderstood when it comes to whether or not you should be invested in the stock market. I've seen hundreds of interviews with Warren Buffett over the years and he's so often asked this question. You have this journalist. Who was like? Oh is now the time to invest in the Stock Mangat and I kind of feel that question is unfair and really what it is talking about. He spent I think almost an hour before Q. and A. Session where he talked about bending on America. Like why if you bought an index just hill onto with how much money you have made and. I think that it's so unfair because the headline after interview is typically like Baba's that now is the time to buy stocks. And that's just the complete opposite of buffets you like buffets view is bets and hold on. Don't try and time the market for the vast vast vast majority of people Louis but I definitely understand why the question was asked because especially for retail investors and even for many institutional investors. It can mentally be very hard to sit on cash and you really always look for the right time to be fully end. Asked to say that you're sitting on ten attempts cast and you're like is now the time to go into the stock market but that's not at all buff looks at it because he doesn't buy that brought. World Market Index. That's not what he's looking into doing for his own portfolio doesn't really make any sense. He's looking at specific businesses. And I think one of the biases that we have and I think that might also have been but the person who asked the question might be prone to that bias that we tend to think very short term right now look back at the peaks February just before cord nineteen and it really looked like buffet. Tests missed out on this major opportunity in March and so listening to this in. May It might be easy to look at office like. Oh my God you should have acted but there are a few things that we need to factor into this just like the stocks we talked about before it took months for him to build up that position. Seven eight billion dollars. It takes time to build a position in public stocks. Especially whenever you have that type of money. I think that whenever I sold the financial statements I was like oh I thought you would have put intensive billions of dollars but after listening to his responses. I think makes a lot more sense why he still cautious of what's happening right now. Let's take a quick break and hear from today sponsor. Although we're value-based investors at heart it has long been known among investors around the world that systematic or quantity strategies have become a highly successful way for professional investors to extract returns from the market. In fact most of the top ten hedge funds in the world today like bridgewater associates and renaissance technologies discovered this decades ago. And there's one podcast that covers this area and finance in great detail in its top. Traders UNPLUGGED DOT com. And Right. Now you can get a free book explaining how to systematically identify follow market trends as well as a comprehensive guide to one hundred of the best investment books of all time. Just go to top traders unplugged DOT COM SLASH T. I P to get your books today again. Just head over to top traders unplugged dot com slash T ip. You'll be glad you did all right back to the show. The only other thing that I would add. Stick it why I think it was a very fair question is when you look at how he's been allocating his free cash flow over the last two years. A significant portion of that free cash flow has been going to cash or into really short duration bonds which are cash equivalents and so I think a lot of people including myself has been screaming. Hey He's going on TV and saying you should be an owner of equities yet. You look at how he's allocating free cash flow in the last two years and seventy percent of its going to cash so I think it was a very fair question. I think it was a very fair response. And how he's looking at it and I think to be quite honest with you. I think he's looking at GEICO has a huge vulnerability to how he's positioned going into this and rightfully so. I think that when you look at Geiko and in the past you used invest the float and make decent returns on the float. And now you can't do that. But as the parent company which is a fully owned operational subsidiary. That's what Gyco is to Berkshire hathaway the fact that he fully owns a thing. He's fully responsible for any missteps or any issues that the thing has at this point. I think the insurance industry is not a place I would. I would not wanNA own gyco today. Based on where interest rates are at right I mean what's the advantage to him other than the liabilities talked about in that response. I think it's a big concern. And IT'S AMAZING. How this kind of how things go in phases. It used to be his biggest set. Go and how. He could invest that float. But now that you got interest rates pegged at zero percent in hell going negative right that becomes a liability at that point. Especially if you're talking about being a parent company and you fool you own the thing so I don't know I think it's very very interesting conversation and I'm sure there's Blair's deeper than were even talking about right now that I think if you got worn in the room and had no cameras on. I think he would say Geico is a little scary form right now. I think that looking at Geiko specifically there are a lot of different moving parts. That will make that interesting. One thing is the interest rate is you said it. Think that the still make a decent margin underwriting still and the other thing is the way that their position the way that these deals have renewed. I not too concerned about that. You can even make the arguments that some extent least forward-looking when something like covert nineteen happens. Whenever there's fear there's a lot of money to be made in insurance and like very very short term you can even say especially gyco with their business model a lot of those claims that they would typically have. The probably won't have at the moment but I think much more serious issue for not just GYCO but the insurance industry's that that industries really looking to be disrupted like heavily and it just in so many ways in the way that file claims in the way that you make new risk evaluations of people who are on the other end of that underwriting. We'd all new technology that's coming. It's already changed in the major way of over the last decade I. The insurance industry would be almost unrecognizable in the next decade or two. So I guess that's more my issue and if you really really interested in learning more about that I would actually highly highly recommend that you would listen to the future fast than you think where there's a long segment about how the insurance industry will be disrupted the last thing. I just WanNa say to this is I think really interesting deals coming up. A lot of this depends on the fat too but there is definitely a lack on the real economy if you put like that. And that can lead to some fire sale prices for some of the major companies and thing. That's also one of the reasons why buffet might be looking like he's sitting on his hands right now. I just want to add. I agree with you. I think that there's a lot of margin still laugh by owning gyco. Please don't take my comment as being that. It's a bad company because it's not a bad company that makes a ton of profit. I think relatively speaking compared to where it was ten fifteen twenty years ago. It's a way different companies in his portfolio than it used to be. Okay we're going to go out and play the next question here all right. This next question comes from Louisiana. Dr Mun. His question is in the last financial crisis. Berkshire acted as a lender of support for eight different deals. Despite the injection of expensive capital through preferred stocks and securing warrants. These companies were in fact paying for the sign of confidence from Berkshire in the midst of a crisis and that was invaluable today we have Qa. Infinity low interest rates and hungry hedge funds even though the economy has deteriorated rapidly over the last few months. Why have we not acted as a lender of support? We haven't seen anything attractive. Frankly wasn't predicated on this. But the Federal Reserve did the right thing and it entered very promptly so should have and I salute them for but that means that a lot of companies that needed money and probably should have done their financing a little earlier. But they're perfectly decent companies. Got The chance to finance in huge ways in the last five weeks or thereabouts set records. Some companies have come back twice the number very big companies. That didn't bother to extend out there. Borrowings came a couple times Berkshire actually raised some more money. We donate a but I think still a good idea overtime and then there are some pretty marginal companies have also had access to money so there is no shortage of funds at brace which way would not invest out so we have not done anything because we don't say anything that attractive to do now that could change very quickly or may not change but in two thousand eight nine. The truth is we weren't buying those things to make a statement to the world. They may have made a statement of the world to some extent and I'm glad that they did if they did but we made them because they seemed intelligent things to do and markets were such that we didn't really have much competition now. It turned out that we would have been a lot better off if we'd waited for five months to do similar things so my timing was actually terrible. Who Thousand Eight or nine. What was available so attracted that even like timing was terrible. We came out a little bit better than okay. What we did was not designed to make a statement it was designed to take advantage of what we thought were very attractive terms but they were terms that nobody else was willing to offer at that time because the market was in a state of panic and the market in equities was in a state of panic per short period of time why rece- Brokaw became apparent and debt market was frozen are in the process of freezing and that changed dramatically when the Fed added. But who knows what happens next week or next month there next year. The Fed doesn't know I don't know and nobody knows is a lot of different scenarios that can play out and under. Some scenarios will spend a lot of money and other scenarios. We won't Greg Yuban watching what's been happening. Yeah well I think your comment on the Fed. Warn his you know. Interestingly when it was first occurring there were calls coming in not the size of transactions. Were interested in nor companies. We were inclined to act upon but there was a general interest out there as people were in a difficult point in time. I look at their balance sheet and deciding what they were GonNa do but the reality is those companies were not of interest in post. Basically effectively March twenty third. The companies have been able to act and and Warren touched on it at Berkshire hathaway energy post the Fed action we actually issued four billion dollars of securities that was associated with debts or obligations we had maturing some short term obligations we wanted to clearly lengthened out and we pre funded one of our capital program that facific core with the thought. This was the time to get the funds in place. Shall we could proceed with what is really an excellent opportunity both for Pacific or per customers and ultimately for the Berkshire shareholders. So we've taken action within Berkshire has worn noted. This is a very good time to borrow money. Which made him happy. Such a great time to lend money. It's good for the country that it's a good time to borrow money for Berkshire or deeply although we borrowed money. But we put our money where our bothers stig what. I found interesting about how they responded to this. So becky's asked a great question and they're able to basically take a question of like. Why are you guys not lending money into the market and taking advantage of this like you didn't know eight or nine and they just smoothly? Say Well not only. Are we not doing that? Were also issuing debt in raising cash because rates are zero percent. But they did it in this like really smooth and slow way of I mean all my God. I looked into one of the that Berkshire did back in February and the race. Two billion euros five year notes four zero percent because it might come in handy at some point in time to have cast lying around. I think that was very very interesting. But you know I really liked this question because it was comparing two thousand and eight today and it really gave us a chance to talk about why. It's a different situation but obviously also some of the things that we can learn from that time and the one example of that the person asking that question might have been thinking of would be the famous deal that he may with Goldman Sachs for five billion dollars by two thousand eight and buffet. More or less dictated those terms and he just made billions and billions of dollars in that deal in a very short period of time because Goldman Sachs so much in the pig at the time. And I can't help but noticing that two thousand eight also wasn't an election year and selection year now too but it's also very different in so many ways because back then the tiffany word strong support from the voters of. Hey let's bailout Goldman Sachs not why people were talking about back then and it was just very different in terms of supporting the system. It was still heavily subsidized even though not nearly to the same extended is today and you can even cue that we're just getting started with that and also think that. Buffett was a very very humble and we talked about that he should have weighed it back in two thousand eight that he was too early to tell the deals and yes it is very very difficult to time but I think there was a few different factors that placing here definitely. Don't think that he's saying this. Because he's thinking about two thousand and eight but I think that he has changed his perception or he's changed his opinion the house of your covert nineteen us and we just talked about before buying Delta in February and then selling much much lower prices in March and even lower prices later so I think it was just like this is just more severe than I thought. Now we need to act on that and the other thing to mention. Is that one deal. That really goes under the radar compared to the Goldman Sachs deal is what happened in two thousand and eleven whenever he made a fantastic deal with bank of America so this was the six percent preferred she deal and he came with warrants that he could purchase at a fixed price of seven dollars and fourteen cents and to me. That was very interesting and he had the right to do that. The next ten years and so in a very depressed price where buffet made more than three x plus dividends. So I guess. That's my way of saying that sometimes to make the good deals even if you have a huge crisis it just takes time and you listening. Braid my screen to that. You should act now in the case of Bank of America. You should wait for years to make that deal in talking about the Goldman deal so yeah. He's supplied five billion dollars to Goldman in a time of need back. Then but there was convertibility clauses to common stock on these deals and I think that's something that people lose sight of and I think something that that question is for person who doesn't know the history on it would hear all he was providing cash to the market back then he was but he was also orchestrating the conversion of that into common stock and I think the the strike on that Goldman Sachs was like one hundred fifteen and back then. Goldman was trading like seventy or eighty dollars when he did that deal and so when he eventually exercise it. I think the price of Goldman was well over two hundred dollars a share so his one hundred and fifteen dollars strike was an immediate hundred percent gain as soon as he exercised that option. And so those are important pieces to this especially when you get into how he does prefer deals are typically a lot more complex than just. Are you issuing dad or are you buying that? I mean it's there's a lot more to it than that and I think it's hard to extract some of that information out of some of the questions all right so we're going to go ahead and play the next question here and here it goes that gets kind of to another question that came in from Mark Nicholas in Chicago Illinois. He says Berkshire itself has a Fort. Knox like balance sheet but some of its operating companies may be tight on cash during the pandemic would Berkshire considered sending cash to its operating companies to one ensure that they can get through the pandemic and to allow them to increase market share while their competitors struggle. We've set money to a few and we're in a position to do that. We're not going to send money indefinitely. Anything where it looks like. Their future is changed dramatically from what it wasn't the years ago or even six months ago. We made that decision in terms of the airline business. We took money out of the business basically even at a substantial loss and we will not fund the Company. The where we think that. It's going to chew up money in the future. We started out with a company like that in our textile business at Berkshire hathaway in nineteen sixty five and we went for twenty years trying to think we could solve something. That wasn't that solvable. Also we're not in the business of subsidizing Andy companies with shareholders. Money IF PEOPLE WANNA do that with their money but we're not going to do it on their behalf but we have advanced money or in too. That's my gaining market share. And all that that may happen but the companies that need mommy probably market sure is not their number one problem. I'll put it that way. Yeah it's interesting when we look at our different companies as we went into the pandemic or addressing the in nineteen crisis obviously the first focus by our Management Team. Inappropriately was our employees infective. Making sure they're safe in the business environment. We're in that they could continue to operate then. We quickly move to looking at where our customers were in the cycle. What was the underlying demand within the business into great credit to our managers they very much have adjusted their businesses consistent with the underlying needs and demands of our customer so effectively. They're moving with the customer meaning. Very few of our businesses of actually required on some have warned said we've advanced the funds to him but the businesses of really reacted in a way where they're managing consistent with where the market's at either the demand for their products Berkshire it's almost certain to generate cash. Nothing's honored for certain. But as Greg mentioned Berkshire hathaway energy we had some short-term financier with we don't have short-term financing at any degree will never get ourselves in a position where we have a lot of money that can come due tomorrow and people that were financing heavily with commercial paper and then found their business. Stop on. You've seen what's happened to the airlines. I mean they need money. Cruise lines need money some businesses that just the nature of what they're in. Berkshire will never get a position where it dates. We've actor and some things that are not ridiculously unlikely and I'm not going to spell out scenarios because to some extent who starts spelling out scenario hubay increase the chance of them happening so it's not something that really want to talk about a lot but our position will be the be the stay for notch. But we don't need one hundred thirty or thirty five billion but we need a Lotta money always available and that means we own nothing but treasury bills. I mean we've never owned. We never by commercial paper. We don't count on bank lines. Feel subsidiaries happened but we basically want to beat a position to get through anything and we hope that doesn't happen but you can't rule out the possibility any more than nineteen twenty nine. You could rule out the possibility that it would be waiting until nineteen fifty five earn the end of nineteen fifty four to get even anything can happen and we want to be prepared for anything but we also WANNA do big things that the prices are attractive is. Greg said there was a period right before the Fed acted. We were starting to get calls. They weren't attractive calls but we were getting calls and the companies we were getting calls from after the. Fed acted a number of them. Were able to get money in the public market. Frankly in terms. We wouldn't have him so. I really like this question. Unlikely question because the person asking really gives buffet a chance to highlight the advantages of books. Halloway to be able to freely move tax free. Move around Pash in the organization whereas put best to us. And that's really whenever it pays off to be a conglomerate where you have a great capital educator in charge which is surely the case. Halloway like even more about. This is how Warren Buffet talks about that. He doesn't want to subsidize. Companies needs cash. Because they're in a difficult situation in he mentioned airlines. Airlines are in a tricky spot. So He's selling his position in airlines. He doesn't want to subsidize them for the sake of doing that because they are now part of the Berkshire family and it's very interesting because in the way you could even say that. Buff is being penalized for being capitalist. And what I mean by. That is that there's so many people especially the Goldman they have a strong incentive for good reason to why Major Airlines for company like Boeing so important to infrastructure as so important for so many parts of the US. But you don't have to think like that whenever you are a businessman. You're just thinking what makes sense to quote unquote subsidize. What makes sense to invest in? Where do I get the best return? Not wits companies. Shoot I say for the sake of saving them. And if those companies haven't been bailed out by the Fed I'll be very interested to see what would have happened and perhaps that will happen. I do think for the record. Though that will continue to see a lot of companies being saved for the time to come not just this year perhaps also going to next year but America curious to see what happens then when that credit truly freezes how will buffet act nothing. That's whenever we're going to see him bring back that elephant gun that he talked about for so long making those huge acquisitions and that's the time whenever we're GONNA see a new Bank of America deal or Goldman Sachs deal. Buffet is basically thinking like he owns insurance company which is coincident also does but he cookies thinking that at the right price he can more or less ensure and invest in anything. But it's just not attractive right now not the way. Things are with the fat and the current conditions. Let's take a quick break and hear from today sponsor this free podcast episode is brought to you by Radius Bank. The Best Online Bank in two thousand twenty according to bankrate dot com as a forward thinking digital bank radius has always been prepared to handle all of your banking needs with their interest. Earning rewards checking account you get to enjoy unlimited one percent cashback on all of your purchases and right now you can earn one point five percent cashback and categories important to you from groceries. Pharmacies restaurants and entertainment rewards checking has no monthly or hidden fees free worldwide. Atm Rebates and a friendly US based customer service team that can be reached by phone email or chat seven days a week plus their award. Winning MOBILE APP allows you to track spending view transactions. Pay Bills and manage all of your banking needs at anytime from anywhere. It's like having the benefits of a community bank available to you anytime you want it. You can apply online in less than three minutes and start banking from anywhere. Just go to go dot radius bank dot com slash and earn a fifty dollars sign on bonus with Promo Code. That's go dot radio bank dot com slash. Ti with the Promo Code Ti for a fifty dollars. Sign on bonus. Yeah I don't really have too much to add on this one. I think he's just an effect he saying. If we think that the business will continue to have viability into the future we own it. As a wholly operational subsidiary will will supply them some cash to help them get through that so that they don't have to borrow but for the most part in this is how he's always treated his businesses. Hey Run your business and update me on how things are progressing and if you get in a world of hurt and we think that you're still viable we'll help you out but for companies like the airlines. I think for a person. Who's listening to this? That's not intimately familiar. With all the assets. On their balance sheet the airlines were a nonoperational subsidiary ten percent holdings right. It's real simple for them to say we're done with us and we don't have any type of obligations to you in the future when we all your stock but when he has I don't know how many operational subsidiaries they have. What is it? Like eighty or seventy completely fully owned operational subsidiaries. They've got a treat. Those businesses a little bit differently than they treat a Delta or some type of just equity position that they bought off the open market so that might be lost a little bit in the response as well but I think those were the businesses that they were talking about in their response and if they felt like I know that they own encyclopedia Britannica or at least they had they might have sold it by now. But I've seen that on their display at the shareholders meeting and for me it's like I don't know how that businesses still possibly making money so if to you are saying we need cash. I'm sure they're saying sorry. We're not gonNA provide it as I think they're just trying to. His comment is pretty straightforward as far as where they're providing capital and where they're not all right at this point. We're going to continue this conversation next week. We've got another four questions. The play we this thoroughly enjoyed doing this. I don't if the audience enjoys it but I know sticking. I really enjoy doing these all right. So we're going to play question from the audience. And this question comes from Morris. Hey precedent stake love the podcast. Today my question is regarding inflation. Relatively new investor donor send the phrase cast is trash when I think about it. In inflationary period security prices are bound to drop and while the value might dollar is decreasing the ratio between the value of my dollar on the value of securities is higher than ever before that makes me think is this phrase referring to gold and other commodities types. Please explain where my reasoning may be wrong. Thanks this one could go on for awhile. I just knew you would say that Preston. In you know the phrase cash trash that you're referring to for people that are familiar with where that came from so this was ray value at Davos. He was sitting there talking to the squawk box crew. And he made the comment cash trash and it just happened to coincide with like market highs. And then you had the big cove in nineteen meltdown in everybody. Everybody in all of finance has been just beating ray value over the head with that quote and I think when Ray said it he was saying it so he has a linked in profile and he posts a lot of great articles on how he seeing the market. I'm seeing the market from a very similar. Heck I think you could say that. I'm copying a lot of the stuff that ray value is stating as far as how he seeing the currencies today and what he's really getting out as far as cash is trash is true monetary policy the dollar every Fiat currency around the world is being devalued in a major and massive way unprecedented way k the reason. You're not seeing that happen. The reason that you're not seeing nineteen twenties scenario at least not today. You haven't seen this scenario of the Fiat currency. Just debasing itself in an unprecedented as because the way that the money. That's being freshly printed is nesting itself into the economy. So if you would follow a new freshly printed and when I say printed I mean key stroked dollar bill. That's been added into the system and you could follow the path of where it ends up almost like. You're following water in a stream going downstream. Where does it end up? Well I think what you would find. Is that this freshly printed dollars as freshly printed euros. All these Fiat currencies that are being debased are nesting themselves into securities. There either ending up in the bond market or they're ending up in the stock market and then they dwell there and they don't move and so when ray says caches trash what he's referring to any very simple couple. Words statement is actually hundreds if not thousands of words deep in understanding and for anybody. That really really truly wants to understand. Ray Dallas thoughts on all of this. I would tell you pick up his book big debt crises and it goes into excruciating detail talking about all of these dynamics and so when you see that and a person who saying well how is cash trash when the stock market is keeps on going up while five own bond since nineteen eighty-one they keep going up how is cash trash in those environments. And if you're talking relatively speaking and you're talking about the timeframe of nineteen eighty one until now it's not on a relative basis. It's those other securities have gone up and they had been a way better position than cash. But I think ray is talking about and the drumbeat that he's beating if you're viewing it from a lens ten twenty years from now on. You're looking back at when he was saying this. And he was saying that. Fiat currencies that. We're going to have to have a new monetary system a new currency system in the coming years. It's GonNa look like total brilliance when it's viewed from that spot in the future back to now and so it's really really difficult for somebody to wrap their head around all these nuances. Especially when they're said in a shoot blurb that is really easy to say in in really easy to integrate but without the understanding of where it's coming from. I think it can be lost. A massive amount of confusion so stupid kind of curious to hear your thoughts. Yeah I think you bring up a good point with that into you with rebel. You come off like a bitter grumpy old man and I think the answer. You was like five or seven minutes. And the think the interviewers probably interrupted him ten times something like that and I just remember it was so frustrating listening to because I wanted to hear about this monetary system. What's about like what's going to happen. Why is cast trash? Sometimes in live there are so complicated topics including current systems. That just can't explain on. Cnbc for thirty five seconds. I would have loved to have that conversation just drag on but I like that question for a bunch of different reasons. I think you can look at it from different angles. One thing is the typical Warren Buffett way of looking at this piece saying if you bought the Dow in one thousand nine hundred at sixty six dollars now it would be trading at Twenty eight thousand five hundred thirty eight at the end of twenty nineteen so in that sense yes cast is truly trash and then there's the component of inflation so obviously you can't get the same four hundred dollars today as you could nineteen hundred so that's definitely one part of it. The other part of the is to understand that cast is fantastic in many ways because it is basically a call option on all asset classes. Because you have the flexibility to immediate go into different investment opportunities so in that way. It's a good thing you can also say it's a good thing to have as a hatch for instance for those of us who cast position going into this drawdown in the Magi. We don't experience the same drown simply cast more or less maintained the same value if you just discount that for inflation so you can look at it for different angles but generally if we look at this historically definite you can say Casas trash that opportunity costs for having cast lying around. We were talking about a minor allocation of your portfolio. Feel thing I want to say about this. As going back to this inflation and going back to value he has been talking during this interview where he had thirty five seconds and whatnot. Kiss one of those questions actually. So what should you invest in? And then he said you should buy gold and he had well at least twelve seconds to explain. Why wants to cold? Sorry I will stop passing that soon but goal has historically been a good hats especially for unexpected inflation. It's very important fusion. Stand the difference between expected and unexpected inflation if there's expected inflation it's already priced into the price of gold which is also while your soul whenever Nixon took the US effectively the world off the gold. Standard in seventy one. You saw that shoot spike. Almost right away so I think that's important to understand another authority in this that I would like to bring up is Democrats are friends rickards. Who interview he on the PODCAST Multiple Times just retinas book aftermath. You're a few weeks ago and he talks a lot about. What would you do whenever there is a crisis? Kim On this bookings from twenty thousand nineteen and he's talked about how to position yourself if you don't know if you see massive inflation or perhaps even deflation and the thing. A lot of people are sitting right now in thinking We have this massive Monte printing that should mean higher inflation even though the might not see those numbers in the official numbers and they're thinking about deflation that might be listening to the episode with Jeff Booth. You're a few weeks ago. And the might be thinking about the impact of technology all the deflationary precious that you see in society right now because of the massive unemployment and what Jim rickards set that he would recommend someone to do and just wanted to add that into the Max. Is that if you are in the world with high inflation you would want to buy real assets like real estate commodities hot currencies gold however if you WanNa work with deflation you would rather consider investing utility stocks safe fixed income and currency might actually also be interesting because just being in cash will improve your purchasing power. And he said if you really didn't know what to do you can diversify into both categories always maintain a positioning castle whenever you know which direction you're going inflation deflation. That's when we want to size up your bets so I just want to add that into the discussion. Stig brought up a good point about Ray's comment in the context of his comments. So when he said cash trash he's also out there beating the drum on owning gold. And if you look at how caches performed relative to gold since that interview gold has drastically outperformed in it's also outperformed the S. and P. Five hundred or any other stock index. You want to bring maybe not the Nasdaq. I don't know if it's outperformed the Nasdaq. But it's close so that was where ray is coming from with the comment. Something else that I just want to briefly talk about is how currencies fail. What does that look like? A currency fails and for people who have never experienced this myself included. I've never experienced a currency failure in any kind of market. I know that they've happened since I've been alive in other countries but I've never gone through it. I don't know exactly what that's GonNa feel like look like but I've read enough books to hopefully understand the nuances of that and I've been beating the drum on social media for people to study this thing called the effect we can have a link to that idea in the show notes bit read up on how the control in effect works and it goes back to what I was describing earlier were freshly printed. Money Ness itself into securities into financial assets because of how that money's being inserted into the system through quantitative easing today. All of those things are important for a person to know and understand that when a currency ultimately fails to the person who's experiencing it it feels like it happens all at once. There's all these events leading up to it that just don't feel right. That don't seem right. Like for instance unemployment being fifteen percent but yet the stock markets China make new all-time highs those two being together make any sense whatsoever. Those are kind of accused that there's cracks in the dam. And that's how I would probably describe a currency failure. Is You have a damn. That's built for a certain water. Level and the water level is going higher and higher and higher to that it's exceeding the capacity of the dam to hold it. And you're starting to see these cracks in the dam but then when the dam breaks it happens all at once and it happens abruptly and that's where. I think people that are looking at the government bonds right now. Then they're saying well you know there's not a lot of volatility in the yield. They're pretty calm there at fifty basis points and they're not jumping all over the place but if people could see why that's happening it's because there's massive selling and then there's massive government buying on the other side of that providing more and more liquidity into the system so the way I would describe that as you're getting bigger cracks in the dam. The damage is covered with cracks. All over it and yet you have people still living in the town down below dancing all around thinking that things are perfectly fine when in fact you're about to have a catastrophic meltdown of that system. I personally believe. That's what ray values saying with his quote caches trash. He suggesting that we are upon a time where there is going to be a new currency a new system. That is built. And you don't know if it's going to happen tomorrow. You don't know if it's going to happen a year from now two years from now because it's so hard to know when the strength of that dam is gonNA break but based on how the government is responding to this. They're not taking water out of that water level. They're raising the water level. They're chipping away at the damn. They're actually making it more unstable through their interactions and the manipulation that they're doing and so I think it's just making that situation all the more inevitable and so I know this was a super super long response to a really simple statement. But there's a lot behind that a lot behind that okay. So Morris loved the question. We're going to give you a free annual subscription to TI P finance. This is the tool that stigma I developed helps people find undervalued picks in the market. It also helps. People manage some of that risk of buying undervalued companies with our momentum tool. That's really super simple to use. It either has green status. That has a red status to indicate long-term momentum trends. And we're really excited to give that to you for free. So thank you for asking such a great question and for anybody else out there and check out our T. I p. Finance told us go straight onto our website and click on finance in the navigation bar and you can check it out there also if you WANNA ask a question and get a plate on the show good ask the investors dot COM. And if you get your question played on the show you get free subscription the. The finance awry guys. That was all the press on for. This week's episode of the PODCAST. We see each other again next week. Thank you for listening to T. Ip to access our show notes causes or forums go to the investors put Cox Dot Com. This show is for entertainment purposes only before making any decisions a professional. This show is copyrighted by the investors. Podcast network missions must be granted before syndication over forecasting.

Coming up next