TIP289: Intrinsic Value Assessment of Berkshire Hathaway by Jake Taylor (Business Podcast)
You're listening to Ti on today's show. We have Jake Taylor from Farnam street investments to talk to us about the intrinsic value for Berkshire Hathaway although this conversation was recorded prior to the aggressive market selloff today at the end of March Berkshire hathaway currently has one of the top twenty enterprise values relative to its earnings power for the entire. Us Equity Market during the show. Jake talks about buffets recently released shareholder letters in. He also gets into all the reasons why Berkshire is currently trading at an attractive price relative to all their stocks on the market so without further delay. Here's our conversation with Jake Taylor. Listening to the investors podcast. We studied the financial markets and read the books that influenced self made billionaires the most. We keep you informed and prepared for the unexpected guys. Welcome to the PODCAST. I'm your host brought us. Ns always accompanied by my co host Preston Pysche. We are here today with Jake Taylor. Ceo of Farnam Street investments. Jake thank you so much for joining us here today. Thanks for having me on the show guys so jake on today's show you'll be pitching. Berkshire hathaway and you will provide you a summation of the intrinsic value of the company. But before you pitch. That's your more. Bot your investment framework. Could you please elaborate on your stock selection process and how has or hasn't been influenced by Warren Buffett and Talamante her. My investment process is kind of difficult to explain because it tends to be just looking for things that makes sense to me and that there's no real morningstar style box that you can check. That says you know buying things that make sense to me so I ended up being very opportunistic and going into a lot of different places whether it's just buying outright cheap assets when they're available like a net net all the way up to hang up a little bit more for a good company that has good cap allocation and along runway to redeploy capital at essentially high return. So obviously buffet early on was very quantitative based investor and off only very cheap things and for most of my career. I've been more that way and it's only until recently that I felt a little bit more comfortable paying up for a good culture. And what am I thinking is evolved in that is one. I think you have to read a lot and been in the game for quite a while to have the trust in yourself that you can recognize those kinds of opportunities. The other problem is that it's very difficult to get to that point in this particular market for me because it seems like that's kind of whatever one is realizing recently compounders have become very popular and for good reason it makes business and investing sense is just the price is. I feel like maybe have gotten the little out in front of what might project into good returns for a lot of these businesses so while I recognize it I've been pretty slowed actually implemented because the price I felt like hasn't quite been there yet. Another interesting thing I've been thinking about lately on that Front. Is Everyone's looking for companies that have really high returns on invested capital and? I've been wondering if perhaps that you might be better off looking for ones. That are more moderate. Maybe like the ten to fifteen percent range. My thinking of that is that few have extraordinarily high returns on capital that is a signal that other entrepreneurs may WanNa come and compete those away from you and or at least share in some of that high return maybe at the ten percent range your side of flying under the radar and you're able to compound for a really long time at ten percent as opposed to a short period of time. Let's say fifty percent and the better bet is to take the longer duration ten percent one most likely so it's Kinda like I've heard Peter. Thiel talk about how companies who are actually monopolies. They don't advertise it. They're trying to hide it. Google will talk about how they're only a certain percentage of the entire advertising industry. They won't frame it as online advertising or search even worse right so in the same vein maybe the editor bet is to look for more mid range kind of Roi. See and see what you can find there. As opposed to like the highest flyer ones so jake on February twenty-second buffet sent out his annual shareholder letter. And I'm just curious what your key takeaways. Where from the letters this year? I thought it was interesting that he removed the Book Value Column. For the first time. Which kind of tells you how much value maybe as a metric for Berkshire has decayed in buffets mine. He's been talking about it for a while but he finally stopped reporting on that. I mean you just look at that. Market value though from nineteen sixty five to twenty nineteen at twenty point three percent return versus the SMP's ten percent and it's like it's such an amazing testament to doing something right for a really long time and the just the obscene compounding that can take place. It's just truly incredible to actually see it. Spelled out look at the float number nineteen seventy thirty nine million dollars today. Hundred Twenty nine billion dollars absolutely unreal. How Big Berkshire has got? And then my last one was interesting to see him. Say That g chain and Greg able will be more involved in the meeting this year which I think gives some hints about succession. Planning and I thought it was actually a little bit odd that todd and Ted wouldn't be included as much. He didn't mention them. At least so those were my takeaways from this year's letter but in general I would have probably given it an average rating other ones. I've liked more but anytime you can hear what's on buffets mind is worth taking a few minutes to Rita for someone like you have been reading all his letters. It is interesting to see how especially the last safe ten letters. I think he's giving away less and less. I guess that's how I look at it. They're still good lessons to learn but it seems like he's a different mode. It seems like he's a bit more in legacy mode than he is in the. Let me educate you about business mode. But it's definitely worth a read and we'll make sure she'll linked to that later in the show notes but jake. Could you talk to us about Berkshire Hathaway and no? We're going to talk about the evaluation the end. So we'll get to that but talk to us about berkshire-hathaway how would you outline the for someone who is not too familiar with the company in my mind? It's a supercharged S. and P. Five hundred it's very. Us centric Bat. They insurance operations are way above average the industry and then you have somewhat doing cap allocation. That's the greatest of all time. And typically you're buying it for less than the markets typical price due to some kind of a conglomerate discount so in my mind. It's not a bad plug in or an S. and P. five hundred exposure. If you wanted that instead could you talk to us about the five major segments of the business? Sure Yeah I mean you have the insurance operations which are big you have a railroad inside of their Burlington northern you have Berkshire hathaway energy. Which is we used to be mid American and now is growing quite a bit. They put a lot of money to work in both energy and railroads and earned that interesting ten percent regulatory return. Likely we're talking about return on capital and then you have a marketable securities portfolio of a lot of blue chip companies. That are baked inside of there. Then you have what's called the MSN. Which is the manufacturing service and retail and those are a bunch of grab bag of different businesses. Some bigger some smaller all the way down from precision cast parts which is making high tech aircraft manufacturing all the way down to shakes and Burgers at dairy queen. And everything in between so you have the whole swath of the US economy. So let's specifically talk about the Insurance Division. So the property casualty insurance business has really been the engine. Propelling Brooks Halloway growth since nineteen sixty seven year that the both the national indemnity and the the sister company National Fire and marine now today berkshire-hathaway hold six point four percent macchia and they're only trailing state farm is the biggest underwriter in the country. The Florida's you mentioned before stands one hundred twenty nine billion dollars. How do you see Burke Chef perform when it comes to macchia and profitability in the next day Kate specifically for the Insurance Division? I do recognize that. They are very disciplined in their underwriting. And the data point that I use to back that up as that. They've underwritten profitably in sixteen of the last seventeen years. That's a pretty good track record. If you know the insurance industry I found it very interesting that it seems like Geico's been the little slow to adopt telematics which things like snapshot that progressive has which is basically trying to figure out like. How much risk do you actually take while you're driving? Are you speeding or are you accelerating or slamming on your brakes all the time which is surprising to me given? Geico's history Of targeting originally government employees. That's the GE part of GE ICO so they were looking for operations that had lower risk profiles and one way of ascertaining that would be to keep track of how people actually drive and then base their insurance rates on this telematics idea but in the plus side of the category for them is that they've always had such a bulletproof balance sheet that they've been able to underwrite that no one else would really be able to take on. They've always operated at like one less deal than they could've been doing all along or one less big insurance underwriting thing and other companies even insurance industry I've seen their operating much closer to the full deals that they could do or even sometimes taking on leverage to do one more deal than they could've done and then they're always kind of digesting that deal so what it allows Berkshire to do is to use a lot of that float and invested into equities which earned quite a bit more than what most people were earning in their floats all the other insurance companies because they've stayed so far away from the edge of being bold deal maximize irs and full underwriting capabilities so they're conservative. Nature in a paradoxical way has allowed them to actually take more risk with their float. Better security portfolio. I've noticed the thing too about underwriting with prophet sixteen seventeen years and buffet has been very upfront by saying that he does not expect that to continue happening and you can put a lot of different things into not comment. Obviously wanted us that. Buffet always likes to play. Whatever he's saying. I mean giving the low interest red level. You would expect for this to continue at least for quite some time. The reason why I'm saying that as given the low interest rate you supposed to underwrite with the Prophet because the risk return you can get elsewhere. A lot of that goes into equity due to different regulations on all that can be put into equities. There was this matching principle so depending on the length of the claim You have to buy even long bonds which might seem a bit weird. These states interest rate. But that's just the way it is. It's not something we can do too much about. I'm sure buffet would if he could. But unfortunately that's not the case but the other thing that I found really interesting about how buffet has been addressing. The insurance business is also that concern shareholder Hussein with global warming with everything. That's been going on. What can we expect in terms of claims to Berkshire and he says you know most of these things by definition of renewed so like he can set new premiums and what he's saying is as much as it might seem bad one year. A lot of things happening from an insurance perspective. He's actually a good thing. Because the premiums would just go up and the mole uncertainty though are the better ensure because so many companies have to have insurance now Jig. Let's talk about the growing cast pile. It has been heavily debated for years among the shareholders off burks Halloway and today cast and chiltern investments are one hundred twenty eight billion dollars whenever I say. Today don't mean today much nine after the stock market has been tumbling for weeks. Now I mean that's the latest filing that have cast pile similar to what it was in Q. Three Twenty nineteen so as far as we know it's not growing but it stagnated at very high level. Well you know. I woke up this morning. And the market was down five percent plus and we had circuit breakers going so on days like today. You kind of have to love that cash pile right. I mean it's the optionality on it is growing with every tick down. I love the anti fragility of that cash pile when you combine that with Warren Buffett's cap allocation skills. He's proven that he can put up. Great numbers especially when the opportunities come along. I should say the only thing that I don't like about it is that it makes me a little bit sad that it's possible that he could be waiting for this one last chance to do some big deals that. Sorta cement his legacy. I've seen this before where grandparents are holding on to see that oldest kid graduate from college or something and then once it happens then they kind of let go a little bit and it'd be sad to think that longer that we can delay a crash and him putting money to work. Maybe the more time we get with him. I would be a little bit sad if he was able to bag that last elephant and now he's like I've done everything I need to do in this lifetime and I'm ready to move on but people typically do is look at decisive his portfolio and the thing here the year end it was around two hundred and forty odd billion dollars and then the look at the cast position and say wow he is a lot in cash that's not how buffet looks at it. He said actually just two weeks ago. I'm approximately twin percent cash right now and I'm that because I'm including the three hundred plus billion dollars in upbringing businesses plus we have multiple secure. It is and then we have cash if you do. The numbers is a different way of looking at it. He's looking had eight. Percent Equity is twenty percent cash. Who knows perhaps with everything that's been happening? He's not so much in passing anymore and the real ties into my next Christian. Warren Buffett kicked his stock buyback procam into high gear. Here lately spending two point two billion dollars on share purchase in the last three months of two thousand nineteen. And that's the most ever. He's done in a single quarter now. This is not significant. Pets the my cup of more than five hundred billion dollars and a lot of investors. See this estimate tunes. It's loading up on shares. It should also be noted here that the trading volume berkshire-hathaway is exceptionally low. So in that sense of buybacks yeahs. Buffet is restricted differently than other. Ceo's if he wants to repurchase a high numbers yes because he's so easily moves surprise he's been talking about how he look within the at the Osa who could buy back three four five percent without moving price but because of the volume of Berkshire hathaway she asked that is just Solo. He's been talking about or at least he's been hinting. He doesn't talk too much about it but he's been hinting of. Just one percent can actually move the needle in terms of influencing the price. But as much as we'll talk about later. What do you read into the stock buyback here? Siphon the obvious fact that buffet at times have found the shares modestly undervalued as. He puts his in his letter a lot of people. I talked to like to think that this buyback program puts a floor under the Stock. And he's talked before about in the one point two to one point three times book value ranges aware. Berkshire will kind of quote unquote defend the Stock Price. But not sure if I think that that's true or not. I think Mr Market can do a lot of crazy. Things in that can still apply to Berkshire. They'd spent five billion dollars over the last year to buy back one percent of the company. Roughly so that's in like two hundred dollars. A share for the B shares on the other side is selling. That's something that I always like to ask myself. And when it comes to Berkshire shares most of them are locked up in families who own the company. It's not the typical company that's owned by institutions or even like index funds. It's very under represented in indexes. Because of that so. I don't think that you may be get as much panic. Selling either there so maybe it's unlikely to go on crazy sale as much as other companies. I think I personally think that he would be better off looking for that next deal than buying out partners within. Berkshire itself and I don't think that there's a lot of willing sellers that will part with their shares at the prices. That are really mouth watering from a buyback perspective. It's just not the dynamics that I see in the company ownership structure. I think you bring up a good point because if you look at the ownership manual what he wants to do the least is to repurchase yash he wants to buy wonderful businesses and even before that he wants to build a widen the mortar round the assistant businesses. You wants to buy gas and other companies before he wants to buy out his own partners as he puts it is interesting especially at these prices ride now at the time of courting bricks hell awaits trading at one hundred ninety five and it would be interesting to see how much he loads up on his own. Yes in Q. Four if you look at the numbers the average spying price just for that quarter was two hundred fifteen so it might be well he would be buying back then but keep in mind that s the price of Berkshire hathaway's now trading much more appealing prices. So as more or less all the stocks on the planet you bring up a good point good. Cap Allocation is thinking of your shareholders as your business partners. And if you're buying back from them at breezy low prices you're benefiting one group of your shareholders at the expense of another and you're neglecting your duty as a captain of industry and as an allocated capital and a steward of capitalism by taking advantage of one party over another. I think you almost have a moral duty to try to keep your stock price. Trading close to the intrinsic value so that If some partner of Yours Aka shareholder needs liquidity for something. Perhaps they have to pay for a surgery. Or there's a charitable thing that there's really important to them that they need the liquidity. You should do what you can to help them. Get the liquidity that they need to run their lives. I think that there's a lot of good that can be done. The no one really talks about in capitalism by a CEO who keeps one shareholder group from taking advantage of the other too much. So that's really interesting. So buffet has mentioned in his letter to shareholders that ninety eight percent of his shareholders going into the year are the same shareholders. Going out at the end of the year and I think it's kind of an interesting metric because it shows you how strong his share by can be if he decided to use his significant cash position to conduct the buybacks. So something else I want to ask you about. Jake is your opinions on Warren. And Charlie's age There are many people that will argue that they're the true competitive advantage or at least significant portion of of the Companies Competitive Advantage. But as we all know Warren is going to be ninety. Charlie's ninety five ninety six years old. So what are your thoughts about the company with them eventually? Going TO BE REPLACED. Yeah I mean you really kind of have to get comfortable with answering. The question is Berkshire a man or is Berkshire a culture or is Berkshire and ethos or even maybe like an operating system for a business super high integrity decentralized to the point of abdication as Munger said capital Allocation Stock Selection Insurance underwriting king abandoned opportunities all these things are in the ethos of the company. I personally believe that there will generally be okay. It's hard to imagine that there isn't some impact so if I kind of go through each of the businesses like the insurance operations I think those don't change a ton thick. They've got plenty of brainpower with G to still manage that part I know. Buffet helps jeep but deal flow. I think absolutely has to be impacted. How many business founders sell their business for less than they could probably get somewhere else to sell to buffet specifically that I think is a very real advantage that he's built as a way of cashing in on his reputational capital that he's built over the last fifty years of doing business the right way. He deserves to pay less than market because he has done such a good job with his reputation. I also think the performance of any CEOS in the subsidiaries of all these different companies. It could go down. I mean when you are having to send a letter to Warren Buffett about your operations for that year and report to local Warren. Like how you did and you WANNA make him proud. He's not around. It could slip a little bit. I mean I think that's just sort of natural human nature. I think the portfolio management side of things will be just fine with Ted and todd. I think both those guys are really sharp but target imagine it. There isn't less remote host worn and Charlie just mostly probably because of the deal flow aspects. They have to get in line and pay. Whatever else is paying for acquisitions? You're just not going to get the same kind of deals and therefore the same kind of returns on the businesses that you're buying because you're probably GONNA have to pay a little bit higher price for everything so on net. It won't be as good but the ethos still makes it one of the better companies in the world as far as how clean they are and how they do business. Suject rule simply. What's the biggest threat to Berkshire Hathaway or opinion? I would probably say complacency and that can come in different ways. I think that this management team. That's been around since nineteen sixty five deserves the benefit of the doubt on all things they've earned it however is a shareholder you can get complacent about when things start slipping a little bit for instance picking the book value out of the report. It's a little bit of changing the goalposts somewhat. I mean the timing of when he's done it and there've been a few other changes. I won't go into them because they're they're down in the weeds for most investors. But if you want to read a deep dive on that I would suggest checking out semper. Augusta's letter I don't know if you've ever read that one. But Chris Bloom Strand I think is one of the best analysts on the planet and he does a call it. A fifty page write up of Berkshire every year. He's a true true expert at this company. But anyway I think he's highlighted some of the places where they will change a little bit of things in reporting or move parts of the business and it'll be a little bit less clear how that business did or what the returns on equity were for that segment of the business mostly in the name of trying to make the numbers easier for the average person to understand but for the very very deep dive analyst. It clouds some of what we used to be able to know about the company so those little things can slip here and there that the disclosures part of things because the management has earned such a reputation. You can get complacent about just assuming that they're always doing the right thing all the time and that can get you into a dangerous place. Let's take a quick break and hear from today sponsor brought to you by capital one. You know how it feels when you've saved enough for that long awaited home edition now. Imagine saving enough for an addition on that addition. That's the feeling with capital one. Where new savings account earns five times? The national average capital one is helping you earn more towards your savings goals. This is banking reimagined. What's in your Wallet Capital One? 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Bowes all right back to the show interesting speaking of those analysts and those people who are really into it. I have a very nerdy. Gigi questions for you here now. Jake how do you value the earnings retained by burks? Non Controlling investments in public companies game that only dividends are reflected in operating income. And perhaps you can just explain the framework behind. Why is that even a topic worth discussing sure? So if you imagine these companies that are owned by Berkshire inside of Berkshire but they're publicly traded companies and they're doing their own business they're generating their own cash flows and sometimes they're paying dividends to Berkshire and so last year there. Ten largest holdings in their securities portfolio delivered three point eight billion dollars in dividends. They got sent to Omaha. Checks that showed up in the Berkshire checking account while those companies had another eight point. Three billion dollars in retained earnings last year. So that's money that's created inside of the companies that they own but that Berkshire doesn't really have control over it. It's still within the company and when I say that eight point three billion dollars that's figured out by taking the percentage that Berkshire owns of the company and then applying that percentage to what the total amount was so just to make the math easier. Like let's say that. Let's say ten percent of Apple. An apple earned one hundred billion. Will inside of that you could imagine that Berkshire Kinda earn ten billion through their ownership of Apple. I think you can't assign a dollar for dollar valuation to those earnings is that it could very likely be that company. That is making the decisions on that dollar. Where does it go to could be making bad cap allocation decisions and even making that dollar worth zero like we've seen that before with companies that make stupid choices with the money that's generated? It does not accrue as shareholder value. It ends up disappearing so the first kind of metric that we have to look at is. What do they do with the money? And I think buffets obviously trying to choose companies that have the ability to invest in projects that will generate further returns on capital. And keep this engine running and even growing and so you start to see why he's such a big fan of buybacks is because that instead of that dollar inside of that portfolio company going off into maybe a project that is destroying value. Maybe it gets bought back now. And His share of the company now increases. Obviously the price paid matters for that as well. So if they're overpaying for their buybacks than they are destroying value for the remaining shareholders including Berkshire and then the other part that. I think you should think about there. Is that money stays within apple or wells Fargo or wherever it is that Berkshire owns berkshires. Not Having to pay taxes on it at the moment so there's already call it a fifteen to twenty percent. Maybe even twenty one savings by not sending that money to Berkshire to them control. So there's no easy answer there because it's very fluid on like what do they end up doing with the money that determines the future value of what that retained earning was worth but those are some of the parameters that I think about I look at the retained earnings inside of the portfolio companies. You know it's fascinating. This is a topic that Buffett has been talking about a lot lately. I think this is a great accounting discussion. And it's something that many young investors don't understand. I Know Stig and I have talked about look through earnings for the non operational subsidiaries numerous times on the show and it's really neat to see him bringing up more more and. I think it's important because there's a lot of value there. That's not immediately evident if you're simply looking at the income statement the consolidated income statement for Berkshire Hathaway Okay so with all of that said talk to us about your intrinsic value for Berkshire hathaway today. Well I think their different ways of doing it. I tend to be more on the simplistic side of my investment stuff. Like if I can't write it on the back of an envelope or on a short piece of paper and a few sentences then it's probably too complicated for me to take a swing at so for Berkshire. The first passed a look at it. And this will sound a little bit Glib because the answer is going to be kind of silly but if you imagine Berkshire as a bond that yielded ten percent and I think that's a reasonable actual approximation because their return on equity has been ten percent for quite a while and it's likely to be around ten percent for a long time just based on the projects that they're putting money into thinking specifically regulatory yield of NSF and be h energy. So if you imagine a bond that yielded ten percent and you could reinvest the coupons in the business at a continuing ten percent. What would you pay for that bond? Today how much would the market pay for bond? That yielded ten percent in my mind. Safer than Treasury's Today's rates right now. I mean it's like approaching it goes towards infinity right. I mean that's why I said this is sort of like the Glib answer. It's a ridiculously high number. Which I think is more a reflection of today's rates being in my mind kind of ridiculous and not so much a reflection of Berkshire so let's go to a more real answer than some of the parts is away a very popular way of analyzing Berkshire which is basically. Just take all the different little business lines. Add them up and come up with some kind of a number so my back of the envelope. Math for some of the parts is yeah. Let's call energy worth about fifty billion the railroad worth about one hundred billion the. Ms Are the manufacturing service retail is calling one hundred fifty billion insurance call at a thirty billion and then an investment or folio. Three hundred seventy billion ish. You add all those up and you totals up to about seven hundred billion which implies about two hundred eighty dollars per share for the B shares. Quite a bit north of where we are right now so another way of looking at it the business would be. Let's just do a simple? What has Berkshire typically traded around as far as price to book goes into the answer. There is roughly. Let's call it one point. Seven five times price-to-book-value. Today's book value. Let's call it. Four hundred twenty five billion that gets us to a seven hundred and forty billion dollar range of potential valuation. Okay that's in the Ballpark of r sum of the parts. That makes sense. All of these things are all just triangulation. Data points like anyone is not better than the other but if there are all kinds of telling you the same story then maybe you're onto something that's how I think about this. And then maybe the last one would be called like a two pronged approach. And that's basically like add up all of the investments and then try to put some multiple on the actual earning businesses and then add those together. And what does that number tell you in my rough calculations? Let's call it. Two hundred sixty billion for Equity Securities and other one hundred thirty billion for cash. That gives us a three hundred. Ninety billion dollar for Prong One and impromptu will take twenty four billion dollars of operating earnings and multiply that by ten that gives us two hundred forty billion. Add those two numbers together and you end up with six hundred thirty billion as another mark so all of them. In the seven hundred ish billion dollar valuation range so just to recap that. You're saying that the price of the BCS that's right now trading around one hundred ninety five we'll looking at around two hundred and eighty plus minus very interesting. Thank you for breaking that down for us. It is interesting what you would mention there about the potential discount because it is a conglomerate. I guess you would even have. People say that is actually the competitive advantage offer that is a conglomerate to the money would go where it's best used. I guess there's also a discount to Berkshire hathaway because it has not been performing as well. He'll the pastor. Yes it's actually been trading this p five hundred. I think that's probably also one of the reasons why whenever I talk about being good price and all that and I think most listeners were already know I am long. Berkshire Hathaway Cynthia take it for what it is whenever I'm complimenting Jag about why that's a great investment I am obviously biased and it kind of leads me into the next question which is something that which is about position sizing but it's just always such a interesting topic to discuss especially for company like Berkshire Hathaway many investors have different rules from cells when it comes to assisting sizing for example invest might have ruled that he or she won't bill position in a single stock would more than ten percent of their portfolio now. Warren Buffett is previously in his letters to shareholders commented on how many investors holding to how the way as their biggest position in the portfolio most notable himself with more than ninety nine percent of his net worth estimated that more than ninety percent of the shareholders has books. Halloway ask by far the biggest position. Please elaborate on how you see position sizing and if Berkshire Hathaway is an exception to the rules that we may have imposed ourselves giving that is such a diversified company already and may have the downside protection that you mentioned before it very much comes down to your own personal preferences at risk tolerance of how much exposure you're willing to take on any one facet of business or economy or anyone person so the first thing you have to ask yourself is about the opportunity cost. Do you have anything else that might do better than a relatively safe. Call at ten percent or Anam type of return profile if you do then Burke Shire may be sort of an anchor in your portfolio and maybe you don't want too much of it. I don't think that Berkshire is terrible. As a bond proxy maybe especially for someone who's a little bit younger relative to the prices of bonds today? So how much are you willing to do you want as a bond allocation for? Shire may fit the bill of that a little bit like we just talked about you know if it was a ten percent on a lot of portfolio managers who I've talked to and respect. They often will use Berkshire as a cache proxy so if they don't have anything else to invest in rather than whole cash they'll just stick it in Berkshire. I don't think that's a terrible strategy. However the whole point of cash that it doesn't move around at all and Berkshire definitely moves around. I mean in one thousand nine hundred eighty eight or was trading at three times price to book value. Right and typically. It's been one point seven but we've seen a below book value also so to think that it's just this like solid anchor that never moves around provides the liquidity that you want when you need it and I'm not so sure about that. The last thing I would say is that because it is so. Us centric it could form a bit of a home country bias. That is common for a lot of shareholders. People tend to own more whatever country that they live in because they feel like they know it better and if so if you are a US investor and you already own a lot of other US based securities and things that are tied to the US economy then being long Berkshire is just more of that same thing and so you may not have as much diversification geographically speaking when you may end up suffering even stronger to a home country bias but all in all I mean. It's pretty hard to imagine that. Berkshire in Penn. Twenty years is not worth more than five hundred billion dollars so if you have the stomach for long term. You could sleep comfortably at night. Earning probably a ten percent. Roughly return on equity over a long period of time and there are definitely scarier and harder ways of making money. I think you bring up a really interesting point and a good point so jake thank you for your thoughts about burkes. Halloway is always a pleasure to hear how people think about that business that we've been following since the very first episodes here and the masters podcast now. Speaking of that I wanted to end the interview on the slightly more abstract note. Because not only are you a great investor self you also one of the thought leaders in the value investing community or like to relate this to whenever I first started become interested in value investing. I think my motivation was like any other. I wanted to replicate if possible. Howard Buffett pick stocks and that was why but interest in the first place then after starting value investing for years and reading and rereading buffets wisdom. I slowly realize that it really wasn't just about the money. It's really the community around Brooks to how the way and Warren Buffett. It's not so much about business but Justice Matz about investing in a life. Well lived so in your amazing learn that you send out to your clients you talk about. How much of the human actions we've seen the world can be explained by deeply embedded scripts designed to source into hurricanes and. I know that we are going to bit APP. Start here just from talking specific numbers about Brexit Halloway. But I think it's a really good way of rounding off the into you to talk about value investing very specific and then to look at more the grand scheme of things. Could you please elaborate on that specific quote? And how you see this. Yeah no I think you're right to highlight that these guys are heroes for a lot of us but I think the amazing thing is that they're such good teachers and we benefited from them. Being willing to share all that they've learned it would have been very easy for them to just hide out. Never talk about any of this kind of stuff and share with us and just make all the money that they ever wanted to make in the world And but we'd all be much poor spiritually than than otherwise. I tried to reflect back that same thoughtfulness when I can and that same spirit of sharing and being kind others and back that these heroes have been so intellectually generous whether I'm successful or not could be debated but you mentioned one of the client letters that I wrote and in that letter I looked at what lobsters and Warren. Buffet have in common and then actually Buddhism as well so those three very weird things. And here's the punchline of that letter lobsters will fight each other for space and mates and territory and when they're able to win in a fight and get that space they have a bump in serotonin inside of the lobster so this chemical that makes them feel good. When they win and the lobster who loses has a decrease in Serotonin and ends up often retreating and then dying not that long after and so- nature has created this system where we have these chemicals that make us feel good. When we're at the top of the hierarchy. And we have that exact same serotonin molecule floating around in our brains when we sort ourselves into hierarchies that the lobsters do and lobsters are really old. They're older than dinosaurs. So like this serotonin mechanism has been with us and Ben with biology for a very long time and we're just as subject to it as other creatures are so. What does that have to do with Warren Buffett? Well I think one of the key insights about Warren Buffett is that he's always been willing to follow his own inner scorecard and not be holding to certain hierarchy sorting and trying to show off and be more than he is like he is very true to himself and including thinking for himself when it comes to investing and his personal life to at that are very colorful. I think what the takeaway for all of us is to try to recognize when we are in a hierarchical situation and can feel ourselves being drawn towards sorting and instead trying to opt out of that. I think Buddhism has some interesting principles. In it that are really about opting out of that. Serotonin Matrix that a lot of us live so. I all those things together for your investment portfolio that thinking for yourself knowing Mr Market are taking advantage of Mr Market. When you can all these things all tie back together and hopefully they also lead to a life. Well lived on your own terms that at the end of the day. You've minimized your regret. And you feel like you did things your way. Let's take a quick break and hear from today. Sponsor transfer wise is the smartest way to send and receive money internationally the MS podcast network has used transfer wise since two thousand sixteen. We can station of fifteen people and counting where most of US international transfers spin the service that we solely relied upon. If you ever had to move money across borders you know how expensive it can be. And how difficult is we changed? How we do payments internationally for exactly those reasons transfers is cheap and Matz issue that anything we found transfer is over six million customers who save nearly four million dollars every day back rates and hidden bank fees or even better is that you can even get your own bank details for the US UK euro-zone an Australia. Meaning you receive money from those countries for free. It's great for freelancers and anyone who works internationally. Try them out today. Get your first transfer free by visiting transfer vice dot com slash T I P that's transfer wise dot com slash CI. Ip fundraise is revolutionizing the investment world fundraise enables you to have a portfolio of high quality high potential private market real estate projects that are carefully vetted actively managed by team of real estate pros. All these without having to break the bank fundraisers rises cutting edge. Low cost model eliminates. The bloated costs and middle men have traditionally weighed down real estate investing saving investors. Time and money when you add fundraise real estate into your investing strategy you get to have a deeper sort of diversification beyond public stocks bonds and even other kinds of real estate like publicly traded. Reit's and one of the secrets that many of the country's wealthiest investors understand. Is that when you diversify your portfolio's not just resilient it's actually position to earn more overall no matter what kind of investor you are? Fundraise makes it simple to build a more perfect portfolio visit fund rise DOT COM SLASH BILLIONAIRE? That's F. U. N. D. R. I S. E. DOT COM slash billionaire to have your first three months of fees. Waived all right back to the show so jake. This is a great segue into your book. The rubble alligator In fact we have another show on our network that's hosted by Sean Murray. And it's called the good life and he interviews you about all the different aspects of your of your book and we'll have a link to that in the show notes if people want to check that out and I would encourage you to check that out. talk to us a little bit about the book and also talked to us about this idea of sorting and how it's demonstrated in the book. A lot of the impetus of the book came from having studied a lot of different managers in the decisions that they make around cap allocation and seeing a lot of what to me seemed like unforced errors by people who were plenty smart to make the right decision under the math is hard but the emotional quotient part of the equation and really following your own inner scorecard and doing what you think is right was ignored. And that's how the errors ended up coming together. People wanting to show off about some big merger and acquisition that was destructive for most of the shareholders. But they got to feel like they were the big man on campus because of it that is a hierarchical sorting kind of thing bragging. About how much revenue have but not being profitable. We see that a lot so I wanted to write a book that hopefully would give those managers and then also through other proxies investors who recognize managers. Who are doing that a little bit of a playbook on how to think for themselves to have the confidence to do it and so crazy enough. I ended up deciding to it in a fictional story. Format that only baked the lessons in and we're able to resonate with the reader a little bit more than just a dry nonfiction explanation of all of these cap allocation principles. So if you look at what the book really is. It's the karate kid if Mr Miyagi was like a Warren Buffett character. So that's the kind of spoiler for the story press definitely huge fans of your book and another person who is a big. Fan of your book. That is Charlie monger. So if you listen to the episode that Sean Murray did with you jake to actually have a chance to hear what you and China among talked about for twenty minutes after he called you more or less out of the blue to talk about the book. We'll definite short linked to that in the show notes. This has been absolutely amazing. Jake can the Audience l'amour about you you book and Following Street investments yet I write quarterly letters for my clients and but they're publicly available and those are at Farnam street dot com. It's pretty easy to sign up there. I go on twitter probably more than I should. It is a very fun place to be a lot of times in the financial space. So my handle there is at Farnam. Jake one pretty easy to find. I do a podcast with a couple of friends who you are. Well familiar with Tobias Carlisle and Bill Brewster this value after hours. It's like if three buddies got together after work. Long Day at the office buying companies and then kind of. We're talking about the inside part of baseball for investing. That's what the the show is approximating. It's a lot of fun to do. We do it once a week but yeah otherwise if you know anyone wants to reach out to me. My email is five good questions at g mail all spelled out. Fiv. So I'm not too hard to find. And as far as the rebel allocated goes it's available on Amazon in print digital and audio. So you can check it out there. That sounds amazing and again we'll Michio to link to all of that in the show notes. Jake thank you so much for taking the time to speak with Preston me here today. Thanks for having me guys all right guys so this show. We play Chris from the audience. And this question's very timely. It's from Nathan and Christian is about berkshire-hathaway high presidents take. My question is about Berkshire Hathaway in stock. It owns in his portfolio. Berkshire already owns a specific stock in its portfolio. How do you think about considering a by more than individually taking into account the fact that you already have some exposure to the stock through charts for Photo Nathan thing? That's a great question. I don't think that there are any issues. But you getting a bit more exposure to any of the stocks in buffets portfolio. Because when you do the math you have very little exposure to almost all stocks in his portfolio. Keep in mind. The Buffett's stock portfolio is less than half of the value of books. How the win the first place? They have a lot of operating companies to none even apple. You have two months exposure to now is the biggest position in Berkshire hathaway portfolio which is more than ten percent of the market cap off Berkshire hathaway in the first place and is almost a third of the entire public trade portfolio. But even so consider if you have ten percent Berkshire and then ten percent of that are made up of apple she s you still only have one percent exposure in your portfolio to apple. Now Bill is a little more. It might be closer to one point. Five one point seven in this example if you have ten percent in Berkshire hathaway but any case. It is very little. So even for buffets portfolio that is very top heavy and just an example if you look away from the top ten holdings the eleventh biggest holding is just a bit more than one percent above its entire public trade portfolio. So it's really not significant. It's really my way of saying that you shouldn't think of Buffett's stock picks at all whenever you consider your own portfolio unless you only hold berkshire-hathaway in your portfolio or very close to only hold on that one stock but where do think that. You should pay attention. Is THAT BUFFET. Like all the money. Managers with more than one hundred million dollars on the mennesman has to disclose with surprise the buy stocks. And that may give you good indication of with stocks that are currently undervalued. You can find those prices and those picks at guerrillas for free and we even have a resource Academy where can check out of its picks together with all the super invest us like spear Mona's pop rai and take a closer look at their portfolio. We'll make sure to linked both of those resources in the show notes and then four times a year. The stock picks become available. It's February fifteen may fifteen August fifteen and November fifteen. That doesn't mean that I'll do the same thing as they do but I do. Use Office picks and other supermassive specs ask inspiration and perhaps put a few on them on mental. What's List for further investigation? So Nathan great question. But I really can't add much value beyond Stig's response because I pretty much agree with exactly what he said. So with that Nathan for asking such a great question we're going to give you free access to our intrinsic value course for anyone wanting the checkout the course go to t I P intrinsic value dot com that's T- IP INTRINSIC VALUE DOT com. The course also comes with access to our T. I. P. Finance tool which helps you find and filter. Undervalued stock picks if anyone else wants to get a question played on the show go to ask the investors DOT com. And you can record your question there. If it gets played on the show you get a bunch of free invaluable stuff. All right guys knows all the press down. I had for this week's episode of the PODCAST. We see till again next week. Thank you for listening to ti to access our show notes causes or forums go to the investors. Podcast don't come. This show is for entertainment purposes only before making any decisions. Consult a professional. This show is copyrighted by the investors. Podcast NETWORK. 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