TIP298: Part II - Warren Buffett & the 2020 Berkshire Hathaway Shareholders Meeting (Business Podcast)
You're listening to t I P. Hey everyone welcome back to our second part discussion of the Berkshire Hathaway shareholders meeting. Like last week stigma. I have collected the best questions and answers from Warren Buffett's annual meeting and we add some commentary to help the audience learn the tips and tricks for financial valuation so without further delay. Here's our second part episode of the meeting listening to the investors podcast well. 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. Hey everyone welcome to the investors podcast. I'm your host Preston Fish and is always accompanied by my co host. Stig Bryson and here. We are part to Berkshire. Hathaway always excited to go through these. You ready to do this thing I am so. Let's go ahead and play the first question. Here we go. I got a number of variations on this next question. Some more polite than others. This one's right down. The middle is like many. I'm proud Berkshire hathaway shareholder however and comparing the performance of Berkshire with the S. and P. Five hundred of the last five ten or fifteen years. I've been disappointed in Berkshires underperformance. Even year today Berkshires trailing the S&P five hundred by eight percent to. What would you attribute berkshires under while? I can't imagine ever selling my Berkshire stock at some point. Money is money. The truth is I recommend the five hundred. Two people and I happen to believe Berkshire Abbado sowed any single investment can be in terms of earning reasonable returns over time. But I I would not want bet my life on whether we think the S. and P. Five hundred over the next ten years. I think there's a reasonable chance of doing it. And we've had periods. I don't know how many out of the five years we've been doing a comedy. We've beaten or not. I mentioned earlier. That nineteen fifty. Four was my best year but but I was working with absolutely with peanuts. Unfortunately and I think if you work with small sums money I think there is some chances some chance of a few of people really do bring something to the game but I think it's very very hard. It certainly gotten tougher with for us with larger funds and I would make no promised anybody that we will do. Better than the S. and P. Five hundred but I I will promising is that I've got ninety nine percent of my money in Berkshire and most members of my family are and not be quite that extreme. But they're close to it and I do care about what happens to over the long period about as much as anybody could care about carrying doesn't guarantee results it does guarantee attention done greg. I I would agree one that there's never guarantees but when I I look at the assets we have in place and the teams that are in place. I you're committed to Berkshire but we have dedicated teams that Equally are dedicated to Berkshire in their sure. GonNa give it their their best effort every day when I look at the assets and the people I think we have a as you said You can't guarantee a but we have a great chance of of of giving a good effort del performance. It's hard to imagine getting a terrible result but anything can happen and what I do now is it would be easier to be running five million than our book net worth at. Berkshire at the quarter. And I think was three hundred and seventy some billion which is down but it's still greater than the network of any corporation in the United States by been maybe there's some federal corporation that has more but in terms of it. May it may be the greatest in the world. I'm not sure that makes life difficult in some ways to right and the potential of our operating businesses are substantial. When you think we've talked about energy you touched on it that that infrastructure is continuing to change. There's it were ready for one hundred billion dollars of investment opportunities there if we just look at the business over the next ten years in the infrastructure that's required and how it's changing substantial substantial investments. So that just tell me. We have very good prospects. It's it's And we're well positioned to to pursue them Which again to me. When you look at our core businesses you touched on Burlington. The insurance and energy are downside is very nicely protected. We have three really core great. Yeah and we're better position than anybody in the energy business shut down just because we don't have requirements we retain twenty eight billion of earnings over twenty years that you can't do it if you run a normal public company and we've got huge appetite and the country needs the world needs it and we are a very very logical well-structured well managed. I would say because it doesn't involve me company. They'll participate in just huge requirements around the world now a slow and they involve governments and state governments. And it's not anything that happens. Dramatically it will happen and Berkshire should participate in a huge way. We can do things in insurance. Nobody else can do. That doesn't mean much many times but occasionally it may be important So so there are some advantages the size and strength but there are disadvantaged decides to if we find some great opportunity that for a billion dollars to double Armani that's a billion pre-tax and this seven hundred ninety million after tax and on a market value of four hundred and fifty billion or whatever it may be at the doesn't amount to much. Unfortunately we'll still try and do it if we can so for me. This conversation is really a great question first of all but when I go and I look at the chart and I love using trading view and stig. I'm sharing my screen with you. So you can see what the chart that I kind created while I was listening to the audio clip and with Trading View. You can go in and you can look at a company but you can also denominate the company in whatever currency you want or basically whatever ratio you want to compare it to. So what I did is I went to trading view I typed in Berkshire hathaway which is be arcade bought a and then you put a division symbol there and then you put what you want comparative. So I put the S. and P. Five hundred. And when you do that you see this really really interesting chart where you can see Berkshire hathaway and I put it in a weekly view so I can look out twenty years on the chart and you can see that before quantitative easing started. And Stig you can see. I put quantitative easing there with the Blue Line. You can see. Berkshire is just crushing the S. and P. Five hundred and then from one of easing till now it's completely just gone sideways. It hasn't beat. It hasn't really done that much worse. I guess you could say from the top or from the bottom of the two thousand eight period that it has bit in general looking at the chart. It's really flatten. I'M GONNA take a screen capture of the chart. We're looking at right now as we're talking about this and we're going to put it into our show notes that people can look at this chart that we're talking about. I wonder if some of these macro factors the central banking factors are actually making their ability to compound that much harder and they don't even realize it or it's just such a nuance thing that maybe nobody can understand why that's playing out. But I just I find the chart fascinating I find it really interesting. That from that point four. They've had a difficulty to outperform and stick. I'm kind of curious to hear your thoughts. The way that I was thinking about. This was not so much in terms of quantitative easing then yet again we previously talked about how value is really being cross during the corona crisis which is also a part of the question like how performance this year and we just seen like the Fang stocks performing really really well compared to more traditional companies like Berkshire hathaway and those also what buffy was getting and before when he talked about you know having the highest value and clearly book value is not the same as the actual value in. Buffet has talked a lot about that but a company like Berkshire hathaway. It's just very heavy in those companies railroad for instance like together with insurance like two biggest companies within Berkshire hathaway so they haven't been performing as well and you can compare it to a company like Apple in all fairness Warren. Buffet actually took seventy billion dollar stake into apple but generally looking at Halloway. That's not the type of company so just from that alone and also knowing that the N. p. five hundred is so much driven by Fang stocks and have been for a long time around the same time as qe with this to some extent coincidental. I think that also plays a huge factor. We just seen that really play out but I actually really liked this question because I think a lot of investors are thinking they have the SNP five hundred as the benchmark and they want to know whether or not the S P five hundred up on that. So that's talk about devaluation whenever I look at the validation of two let's just I take the before four hundred well right now. It's trading a CPA of twenty six. So we talked about the SHILPA quite a few times here on the but it's the average inflation adjusted earnings from the previous ten years. And then the cost of the crisis that we're seeing right now. We can definitely make the argument that the companies in the index general will have a hard time sustained earnings at least in the very near future. So I would even say that Sheila of twenty six is sort of low compared to what it really is and then whenever you factor in that fifteen percent unemployment and then the stock market almost being expensive as before to me the S P. Five hundred actually still looks very very expensive especially if you think about the underlying assets so instead. Let's look at Berkshire Hathaway. I know. I'm talking about position. S You know out there. Berkshire-hathaway is my biggest equity position. So take it for what it is but if you look at Berkshire hathaway's cash and equity positions it's roughly three hundred billion dollars and the mob cap is roughly four hundred billion dollars so you basically getting burke says businesses for one hundred billion dollars so how will has the businesses performed. Well it's round twenty four billion dollars over the past few years and clearly won't be the same say the next twelve months but those eighty companies like they're very very strong companies and buying them for hundred billion dollars all the in companies of how the way I think. That's the steel so again. Depending on your assumptions I would say that. For Halloween's probably worth anywhere between two hundred and ten to fifty dollars even with whenever you factor in the crisis and here. I would really like to also give a hand off to the interview. Diptych Taylor the O Orphan Street investments in two hundred and eighty nine shorts linked to that in the show notes and he also gives his take on valuation. If anyone is then asking so stay assuming that we are then Berkshire hathaway a think. They of the recording. It's trading around hundred and seventy two. So let's say you're doing a twenty or thirty percent discount. Does that mean that. I want to jump into books. How THE WAY COPS? I'll add to it. Perhaps not but I think most important thing is to go away from the premise of the question because the premise of the question was really. Should I invest in Berkshire how the way or the S&P five hundred? I don't think that's the right question to ask. I can easily understand if people are asking that question but I think you might want to think what should benchmark be. And what are your turn really so sorry I I saw. You had a remark there now. So I'm looking at the charter. Even more. And there's two periods on the chart that are really quite drastic in the drop of Berkshire Hathaway compared to the S. and P. Five hundred. Both of those major drops occurred at the same time that the government was conducting massive amounts of stimulus. I can't say that there's a correlation there. I just find it interesting. That that's the case. And so let's just say that there is a correlation there in you have an expectation that there's going to be a lot more stimulus moving forward wool than that might be a concern for older of Berkshire Hathaway. But there's nothing that I could do in order to show that that correlation is there based on the number of data points that we have. But there's definitely something interesting going on with the church. I highly encourage people to take a look at the chart. It'll be in our show notes. I think just to basically sum this up there might be some sort of correlation with what the Fed is doing. I think last time I talked a lot about sound money. I think that if we do compare the five hundred to Berkshire. We're looking at someone that performance. Let's just call it sound business and I think one of the really really good things to say about books to how the way regardless of the valuation is that it's a very very sound business and when you look the discounted cash flows shelter and long-term. I just I like Berkshire hathaway banner for mean terms performance over the next decade. It just makes a lot more sense to me to make one bit and not the other okay. So let's go ahead and go onto the next question here. This question comes from Adam. Schwarz at Miami Florida. He says Berkshire is the largest holding in his partnership which also houses most of their net worth berkshires invested in many capital intensive businesses through the years railroads as an example. How do you think about the inflationary or even deflationary risks for all of the capital intensive businesses and could prove to be an ex essential problem for businesses? Referencing what you were just talking about that. Eventually the bill for the deaths being issued comes do will eventually come from all businesses through some combination of higher tax rates on corporations increased wages for for the lower middle class size certainly think that increased corporate taxes are much higher probability then having lower corporate taxes so I I think that we got handed as a corporation. A big chunk. What used to be the government's profits from our business a couple of years ago and it would depend on to some extent which party is like a then and whether they have control of both houses while as the president say and who knows what else we could very easily have higher corporate income tax and perhaps much higher corporate income taxes at some point and in terms of capital intensive businesses. They're just not as good if you can find equally good. I mean in terms of operations that doesn't require capital. I mean they're you know the Seized never sees never required Kabul. Didn't grow but it's it's just doesn't didn't take money to expand and it was delivered enormous sums to us and because we own it within Berkshire to redeploy. Elsewhere didn't require a lot of tax expense either at the corporate level or at the personal level. So you really WANNA business and everybody wants a business. The doesn't take any capital to speak of and keeps growing doesn't take more capitals at groves now. Are you totally business? Ability Energy business requires more capital as it grows are railroad businesses. Some extent requires more capital. If it doesn't grow even so capital-intensive businesses by their nature can are not as good as something where people pay in advance and you don't need the capital. I mean if you look if you look at where the top market value is thirty million dollar market and now if you take the top four or five companies that account for maybe three four trillion of her saw that thirty trillion basically. They don't take much capital that's why they're worth a lot of money because they make a lot of money and they don't require the money to any great extent in the business we own some businesses like that but it certainly not the railroad. And it's not it's not the energy business or good businesses. We love him but if they didn't take any capital they'd be unbelievable. GonNa but that's just a that's what we've learned from fifty or sixty years of operating businesses that you can find a great business that doesn't require capital when it grows. You've really got something. And to a certain extent because insurance uses the kind of assets we would like to own anyway. Our insurance business doesn't really take capital and requires having capital available but were able to invest that money largely and things we'd like to own anyway so we're particularly well suited for the insurance business and it's really the most important factor in our growth over the years. Although a lot of other things contribute GREG YOUTH ERNA THE CAPITAL. You were in the capital of business. Tell us about it well. I think there's no question obviously prefer to be in a less capital intensive business but there are unique opportunities are not the one I would touch on when I think of inflation or even potentially As we go through this crisis and maybe a prolonged wonder how depending on how long it takes for cover. I mean. We are a unique. When we're looking at energy or rail we do have a certain amount of pricing power. And it's through our regulatory formulas or how arrangements our with our customer. So if we then were to move into deflationary period It's not perfect protection. But those businesses generally can recover a significant portion. Their costs even in an inflationary environment. Stiller a reasonable return. They're not gonNA be great returns as you highlight warm. But they're still gonNA earn a return on their capital. Even in inflationary period there may be some lag. Some things like that but they're still going to be very sound investment. So yeah if there was ten for one inflation. Make it extreme. Yeah we'd be happy. We own the Railroad Berry happy. Well we've investing a lot of capital in it but that businesses in my view is a very very solid business for many many. Many many decades is that originally. We bought it with one hundred year time horizon. I've extended that so it it will earn more dollars. If there's a lot of inflation in real terms who knows but but it would. It would earn a lot more dollars and a lot of the energy projects within the but it's better if we don't have inflation and it's better if we don't have capital if we can find the same sort of businesses aren't as apple denser. We've got capital. I mean eh we. We're ideally positioned for capital intensive businesses. That other people have trouble raising capital for but they've still got a promise decent returns so I think this question is really kind of the heart of everything that's going on right now. This is a phenomenal question. It's something that I read in warns shareholder. Letters back in the early eighties. Was this idea of owning assets that are intangible verses assets that are tangible because they have inflationary impacts. I think I might be misquoting this. I think it was his. Nineteen eighty-three shareholder. Letter may be that I read this I. It was in the early eighties. I do know that be talks about this idea that if you own intangible assets and inflation is happening or there's these currency moves that are happening. You can just adjust the price of your product. Because it's an intangible product or the the goodwill is naturally carried into that change in the inflationary impact. So when you look at how. He has positioned himself in the last twenty years a lot of the businesses that he's been forced to buy because he has so much money and he has these value. Investing principles are capital intensive businesses. Because you're going to buy Google or some of these other businesses that have lot of intangible assets for a discount you just weren't you're paying a premium for them and then they just continue to devour everything technological in the world and so I can see how he's got himself into the position that he's at based on the core values that he holds dear to him but he was basically answering the question. Saying Yeah we've got a lot of capital intensive businesses and that's not good is really the essence of his response in my opinion. So Stig what are you got? I'm kind of curious to hear your thoughts. Let's take a quick break and hear from today sponsor Preston. I often asked wits podcast. Listen to one of very best. Is the Jordan hubbing show? Which isn't apple two fifty podcast just like we do here on the investors podcast. John Hubbing studies very successful people. And teach you how you can do the same. One of my favorite episodes is episode. Two hundred and seventy where billionaire BIN HORWITZ CO FOUNDER? Engine will partner at the venture capital firm and recent. Horowitz talks about building. The Right Business Culture. You'll learn why he's finally everyone in his own organization including himself ten dollars for every minute there late for meaning and why he's actually doing it out of respect you also talk about why and how. The culture of Amazon and apple is so different and why the business culture was at the very core of everything. They went wrong with Uber. We really enjoy your show. And we sure that you will as well search for the Jordan having a show on apple. Podcast spotify or wherever. You listen to podcasts. That is the Jordan hopping show on apple podcasts. Spotify or ever. You listen to podcasts. I love discussions about inflation especially when it comes from Warren Buffett. He's written some amazing articles about inflation. And what that means for start investing in general and you can learn a lot from that and we'll make sure to link to some of those writings to Boffa talked about before you know about the book value and how that was the highest in America. If not in the entire world you talked about the Google or apple. You mentioned company like that. They have so many intangibles. That don't have a book value. That's just not how you measure companies. Today I mean Book Value Still Important for a company at Easter some extent for company Berkshire hathaway more traditional companies for intangible companies. It's more or less irrelevant in has a very very different implication. Whenever you're making your evaluations now I love that. I have a chance to talk about inflation again. It's very interesting press. I've been starting that a lot and we talked jeff booth. You're not too long ago. Who talked about the major deflationary pressures that we may be saying? I just want to clarify a few things when we do talk about inflation. Whenever we're talking about this during crisis what would typically see in the time of crisis is that they will be deflationary pressures because so much credit is pulled out of the system. Now that is not the same as saying. Oh now we're just in the time generally off deflation. That's very very different when credit freeze. You have this deflationary pressures and it might be in. A few quarters. Might be a few years. But it's typically something that's very short live we have talked a lot about Dahlia. And we have done that for good reason his like our recommend for everyone to not just read his previous books but also like the he's doing. Lyndon right now and my is always teases me whenever we go to bed be reading her fun books and Alvis sitting there rebellious writing and one thing that underlying disl- as nerd you total nerd on Supsa nerd. I read about inflation and currency before go to bat. I mean who wants to sit next to a nerd like that right and then you dream about it when you go to bed and dream about it when I go to bed. It's horrible. I'm laughing because I'm right there with you but you know I. I remember the last time we were hanging out with a wife. Took them out for ice cream. The first thing I remember was I was very impressed because you knew how to order ice cream in Korean and I had no clue how to do that so I do remember that but also remember that every chance we had to like go away from the conversation was probably about ice cream or something. You know like normal people talk about pure like this talk about go or it was around that time that I was very popular and we're talking about inflation we're talking about. Oh my God. It's lucky that we are married pressed Preston. We could never anyways going back to red L. You so he done this. Study of seven hundred and fifty currencies. They have existed since seventeen hundred since then only twenty percent of those currencies remain and they all been heavily devalued including the US dollar. I don't see that changing so I just think that's very important to put into the mix like show term. We might see few changes a few quarters. No long-term will just continue. See that happening but if you see how. Inflation has moved like over the past centuries. It typically doesn't go like that two percent a year. You know whatever you hear about in the news whenever you go in to see some of those graphs like it's like major major moves like and then it's sort of stabilize and then there is a major move again typically because of something like war or going off into a new munshar system. Whatever the reason is. But that's how going willman make shorts elites at least shown though it's it's probably easier to visualize than actually for me just to sit and talk about how think that is so important understand what you're talking about inflation whenever you hear one two three percent. Whatever in the news so sorry for aggressing talked about Ice Cream. How big nerds were rich? I'll try to bring the point. Baco two books. How the way berkshire-hathaway does have a business that is somewhat inflation protected and they were talking about that but it's definitely in not nearly as protected as it could be even though the do have pricing power which help mitigate some that inflation the fact all right. Let's go to the next one here. All right. This question comes from Charlie laying. He's a shareholder in San Francisco. He says given the unprecedented time of the economy and the debt level. Could there be any risks and consequences of the US? Government defaulting on its bonds if you print bonds in your old currency what happens with the currency is can be a question but you don't default. The United States has been smart enough and people have trusted US enough to issue which dead in its own currency and Argentina's now having a problem because the debt isn't in the their own currency and lots of countries have had that problem and lots of countries. We'll have that problem in the future. It is very painful. Oman in somebody else's currency but listen if I could issue a currency buffet box and I had a printing press and borrow money and that I would never default so what you end up getting in terms of purchasing power doubt but in terms of the US government when standard and Poor's downgraded the United States government. I think Stan reported some years back to me. Other did not make sense in the end in the end how you regard any corporation as other than personal can print the money to pay. I just don't understand so. Don't worry about the government him. I think it's Kinda crazy. Incidentally the should be said to have these limits on the debt and all that sort of thing and then stopped government arguing about whether it's going to increase limits. We're GONNA increase that limits on the debt. The debt isn't going to be paid. It's gotTa be refunded and anybody. That thinks they're going to bring down the national debt. I mean that that have been brief periods I think in the late night. Easier their butts on the desk. Come down but the country is gonNA print more the country's GonNa grow in terms of its. Its debt pain capacity and the trick is to keep borrowing on your own currency so I have never disliked a Warren Buffett comment more than this one I mean I really really dislike his response on this but let me put it this way right in what he said. It's just the way that he said it. Bright so is the. Us going to default on their money or on their debt. Nope they sure as heck aren't they're gonNA print it and they're going to fulfill all of those debt obligations and boy the people owning that are GonNa really hate that experience. He had a really key phrase in there. He said what you get in purchasing power can be in doubt and he said it real fast and he said like it was a nothing burger but it was the crux of the entire response. Right so let me just this question. If you're purchasing power goes from one hundred zero. Was that a default in phraseology. Yes that's a freaking default man like lost everything right. If you're purchasing power goes from one hundred down the one you lost all your purchasing power. It's worthless but in terms. Did you default nope? You sure didn't so that's why I don't like the way. He responded to this question because he almost comes across as a lawyer and he doesn't really explain the essence of the question. The intention of the question is a good intended question and I think he gave a really slimy response to it. So warn you get an F for me on this so I found the response really interesting and I found interesting in the sense that all dead is not created equal I think that's one takeaway and he also debunked the meth that all public debt should be paid back often. We tend to confuse government debt. Too much with private their definite a lot of overlaps but it's also different basically all nations have death one way or the other. There are a few exceptions now the US clear has to service the debt and the wonderful thing at least in the short term is that the dominant restore currency. You can only do that as long as the world trust you. And that was sorta like what he was getting at there and yet where he was saying you have to borrow and print in the same currency. Otherwise it doesn't make any sense and the. Us is an in situation where they can do that. And then he mentioned on there and they can also mean that can print all the currency that they want it just won't be valuable if their own currency and the bar in USD now. I'll like to talk about. Can you pay off public debt and you can? It's very rare that it happens but to do that. You have to grow the economy faster than your current account deficit now. The current account deficit primarily comes from trade deficit at least in the case of the US and then the interest payment of the already high debt and the main issue is really that the US is a very rich country. And that's great but whenever you're talking about the dead it's the drawback because everyone rich countries cleaning ourselves they want to consume and we also want cheap goods so in reality it is just very very difficult to pay that off so either you basically have to consume like a much poorer country or you had to accept that. The prices of all domestic produce goods would be significantly higher. Because that's what happens when you start trading less so you have to sacrifice standard of living and BUFFA clearly realized. That won't be possible. Now partitions talk about it a lot but no one really wants to make the sacrifice so this second or affected that is that you need to maintain the dollar as the global reserve currency and you need to maintain that trust as long as you don't have that anymore that's whenever it's going to be really really ugly all right. Let's go to the next question. This question I was looking for one of these got. Several questions came in similar to this. I was looking for one of these a moment ago. This one's from Andrew Lanky. He says genus foreign why he didn't purchase Repurchase Berkshire shares in March when they dropped to a price that was thirty six thirty percent lower than the price that he had repurchased shares for in January and February. It was very very very short berry where there were thirty percent less but we. I don't think Berkshire Cherish relative to present value are at a significantly different a discount than they were when we were paying higher prices. I mean it And I was like Kane said or whoever was the facts change change I I. What are you sure you know? We always think about it but I don't feel that it's more far more compelling to by Berkshire shares now than I would've felt dreary monster. Six months sir. Nine months ago. It's always. It's always a possibility and we'll see what happens. Greg Youth you think about repurchasing shares generally no I I think our approach warns the right. Approach me always. I can't really add anything other than the the approaches. The right approach way prochet when we see it's the right thing for our shareholders to be repurchasing in that doesn't mean we're repurchasing all the timer or the view doesn't change there could be a price relative value at the time not what it was worth a year ago the value of certain things decreased. Our airline position was a mistake. Berkshire is worth less today. Because I took that position than if I hadn't and there are other decisions like that it is not more compelling to buy the shares now than it was when we were buying them it's not it's not less compelling as wash but we didn't do any we got the price is not gotten to a level or not been at a level where it really feels way better to us than other things including the option value of money to stop up in a big big way so. I JUST WANT TO START OFF. By saying as we've played all the questions we're gonNA play for both episodes. I think becky quick should be the only person it's allowed to ask questions at these meetings are now on like having gone to my fair share of these meetings and sat through them like dude. Becky crushed it with her questions. She was asking really good questions. And when you go to the meeting. I'm always highly annoyed at half the questions that come up. Because they're just so just nonsensical and of no value add. I think becky crushed this. So becky quick. I'm sure you're not listening. But in the very odd chance. It's your Bravo Great Yup. I don't really have much to add on his response because I think he just totally sidestepped it and I don't think that he even provided a good response. I think they're wanting him to get into a wire. You seeing the valuation different now than you were when you purchase it thirty percent higher. And he just didn't want to even broach the subject so I can't really comment on it. It seemed to me like they might be interested in conducting repurchases here in the future and so he was fighting the question but stig. I'm kind of curious to hear what you think he always get. How do you value stocks question? And he also gets the widest berkshire-hathaway worth now. Could you please save me a lot of time? So you know I don't I don't have to do the valuation. He just give me a number and I can just put him a limit or and so. It's interesting reading through buffets latest filing. He bought most of his stocks back at two hundred and forty dollars so the person asking the question would be thinking. Why not just buying a ton back right now? You know. There's a lot of focus on that cash. Position has and a lot of people wants us to pay a dividend interesting enough not to many of the actually shareholders. But a lot of people want him to pay dividends or buybacks. Yes so especially in recent years. You've seen more questions. Popping up. With spiky quick was also referring to the amount of she s that he's buying back is around one percent on annual basis. That's a buyback yield right now Kim. The current market cap now buffet sold of ended a few different things that the fact has changed. And what I put into. That was that you can't really use the buyback price of Satan fourteen two months as a benchmark because even though that Berkshire is now trading at coal tournaments and lower the value of the business also changed because the value of the discounted cash flows in the next few years have changed. And that's just basically what makes the biggest difference like whenever you start this kind of those cash flows and try to figure out what is the intrinsic value days from a mathematical perspective. That is why something like a crisis actually has a somewhat significant impact even an accompanying that has been assistant for Long berkshire-hathaway but clearly it's not anywhere near twenty percent whenever that happens but what also read into this was he talked about opportunity costs and it's just very important to understand like yes. Berkshire is cheaper but if all other stocks and universal also cheaper you know that's whenever you need to figure out what you should do with your cast pile so I think that was one key takeaway. I have and then the last thing was that. It's a very thinly traded stock even in a time like this so when they were the stock plants like percents but looks like it's more or less or night. It really wasn't but for a company the size of Berkshire Hathaway. It was almost like overnight. Can't just go in and buy like all start at whenever it hit one hundred. Sixty two wasp before bounceback back. Let's take a quick break and hear from today sponsor. You know how it feels when you find extra cash in your pocket now. Imagine you found five times that surprise money. That's the feeling with capital one. We're new savings account earns five times the national average savings rate on any balance. That means you earn more every day. Just for saving this hassle-free hardworking savings. This is banking reimagined. What's in your Wallet Capital One? Na member FDIC or right that was the four questions that we selected from the Berkshire Halloway annual shareholders meeting. We always thoroughly enjoy him these discussions and share them with you but at this point in time the show we'll play question from the audience and this question comes from Jeff. Here we go. Hi Stieg High Preston. My Name's Jeff Mason. An investor in Victoria British Columbia Canada. I wanted to thank you both for all of the knowledge that you've shared all the great guests you've had on your show. It's really improved my confidence as an investor. My question relates to some advice that I've heard from guests on your show and I've also heard it in some of the great trading books. The advice is don't sell your winners. I've tried to follow this advice in my own trading and investing and I found him often disappointed. It doesn't seem like very good advice. So my question to both of you is. Do you follow this advice. Do you sell your winners. And in what situations would you definitely hold onto your winners as long as you can? In what situations would you definitely sell the thanks so much and have a great day? Jeff great question. I think first of all I look at a sell order as a point where I'm going to have liquidity and then I have to have some other opportunities. That's going to perform what I think the previous holding is going to do. So if let's just say I own something I have a mass of gain and if I sell it. I'm going to have a massive capital attacks. A capital gains associated with it. And so let's just say that. That was a long-term holding so whatever principle I get from the sale. I now have fifteen percent less of that. That's lost due to capital gains tax when I employ that new capital. What kind of return am I expecting to get out of that? And then when's IT GONNA basically exceed the previous holding previous valuation? That I had for the business as far as return goes so. That's kind of like the mathematics behind my thinking. Whenever I do exercise a sell order another time that I'll sell that doesn't follow. That model is if I think. There's something fundamentally wrong with the business and I think there is some type of issues and I just want to liquidate the position. So that's typically because impairment on their balance sheet for one of their major assets that I think there's some competitor that's come in is going to basically take all the market share and going to cause a lot of punishment for the pick so those are kind of the two main ways that I look at it now. How do I manage some of that risk? If you ask me ten years ago I would tell you that what I just described. His was exclusively how I look at selling positions today. I would tell you that. I also incorporate the momentum status of our we have a momentum to want or finance one of the Nice things about this momentum tool is it looks statistical volatility ranges of a pick any pick and it's tailored towards that pick so like let's say the S. and P. Five hundred going up it's going within a certain volatility range and then whenever it steps outside of that volatility range the momentum says something's different this is most likely going lower because it's outside of this trading volatility range and then it turns into a red status so the way that the tools working is it's basically selecting a stop limit for that underlying pick and that stop limit is dynamic and so as the price goes higher and higher. The Stop Limit keeps adjusting higher and higher. And so I use that tool especially for indexes by use that tool. Because it's really hard to come up with an intrinsic value for the S P five hundred outside of just looking at the price to earnings and so my opinion is that if the price goes through that volatility range in hits that stop limit on an index. It's more macro related than it is earnings-related functioning of the business. So I use that to also assist me in knowing when to stop holding winner and so for example like the S&P five hundred momentum told the thing has been green for a very long period of time and recently went red and then it just went back into a green status. So there's a tax realization to that but there's also the implication that I'm protecting my downside risk because if the market would crash forty percent in a day which you had in one thousand nine hundred seven or some other events. That were very deep. You're protecting yourself from those types of events so I would add that in there as well as a way that I also protect downside risk in that I continue to hold winners that. Just keep on running really like the Christian too and actually I would like to put into the mix if you funds about buffets before I go into my own strategy was very similar to what you also described there before Preston but I think buffet is one of the best example of not selling your winners. The vast majority of buffets portfolio is concentrated in just a few companies including American Express Apple Bank of America and Core Cola. Very famous example of a position has worked really really well and all the investments that adjustments before have been very profitable and side from the application that was initiated. Back in two thousand sixteen is all socks that he has health for very long time. Now I really agree with that sentiment because in the sense that I really Sell winners to generally jumping out of windows heart and if you find relief good stocks. That are compounders. You don't want to jump in out of it too often part of is tax as precedence before you live in the US that's fifty percent so in that sense you just have to be more right than wrong so really to sell you. A it has to trade a lot higher than intrinsic values to say a company like in Berkshire Hathaway trading one hundred and seventy two today. If there was going to three hundred tomorrow yeah I would take the tax loss out. Take the tax on that and sell my position but the more capital gain that you have earned the Harvard simply becomes you know. Colby example like you mentioned before buffet build that position for one point three billion dollars in the last time I looked it up. He was trading and around eighteen billion dollars. So it's a lot of taxi has to pay. Even though the cocoa at times have been quite expensive. It just doesn't make any sense stig. I have something I want to add onto what you were saying there real fast so with the example that you provided with Berkshire Hathaway's priceless assay doubled in the past. Ten years ago I would've said Yep let's sell it. Let's move it into the other undervalued picks that I have and then if the price comes back down to where I think the valuation is. Then start accumulating it today I would tell you if the price doubled. Continue to hold it until I would see the price. Volatility go below the stop limit just because maybe the market is going to continue to. I mean you saw this with Tesla where the price just went crazy. You went up to like six hundred bucks and I'm like this is maddening. Right like this prices nuts and then it ran to one thousand so if you're using a momentum indicator for your point where you're going to exit the position that just keeps running. You would continued to hold Tesla it would up two thousand and then when it started to drop back down call it eight hundred or seven hundred or whatever it was your stop limit hits. That's when I would sell is I allow to keep running because I have no idea how much fear of missing out. The market's GONNA price into that run. But then I rely on that volatility range to help me know when it's time to pull out of that and then go into the other. Undervalued picks that finding on the market is really unfortunate that you talked about tesla us a really had like interesting segment about the inefficiency of the stock market and when we now have primed their to thinking about Tesla. I don't know if I could really bring my point back home with that but I guess my point is that the market is relatively efficient at least over time is proven to be and so whenever I say this and using that as my premise please get everything about tesla. The just mentioned whenever I'm doing this segment here but sometimes whenever you do invest in stock and go south like really really south that momentum can really save you because guess what you can be wrong like you can't be wrong and sometimes whenever it drops fifty or sixty percent that's not because the market is terribly inefficient desk just because you're wrong you're just analysis your fact just wrong. And that's why I think it's so valuable looking way from tax here that you have some sort of tool that can go in and say. Hey you might be right. The whole world might be wrong but you might WanNa take two seconds and reconsidered. Perhaps you are wrong. And perhaps that's the time where you need to get out of that stock. This is a really simple math exercise that I think many investors don't understand if the price goes down fifty percent. Now you need one hundred percent gain in order to get back to neutral to where you were and the way markets work is. It's almost like if you went. And you had to destroy building you can push a button and then the whole thing just falls apart really fast but if you're going to reconstruct it and build it back up like you see these stadiums at they explode that they get rid of it happens in an instant you can destroy things in an instant but then there rebuild it it takes forever and so that's one of the reasons why. I really like the Stop. Limits on momentum is because it takes a lot of the emotional piece out of it that you naturally have when you buy a company and it's just saying hey statistically there's something that's different right at this point in time there's something that's different so you can either keep all on your emotions or you can just look at it from a mathematical standpoint and protect your downside. So that you're not having to rebuild in the event that you're wrong and that rebuilding might take five years in order to get back neutral right or you can. Just you can take a systematic loss and move out on your next pick and protect your downside risk so when buffet has his rules of. Rwanda won't lose money in rule to refer back to rule number one. I think the essence of that statement. Is this idea that when you have a fifty percent downturn it takes one hundred to get it back or if you have a thirty percent down there and it takes X. to get it back which is way higher than thirty percent. So that's important for new investors. I think many new investors don't understand the implications of that especially if you've never lived through a significant downturn all right so jeff. I'm really excited to tell you this. Because you're going to get a yearlong subscription to ti finance where we have this momentum tool and we have these stop limits that are published right there on the chart for every single. Pick that you'd look up and we're just really excited to be able to give this to you so anybody else out there. If you want to get a question plan show good asked the investors dot com. You just click a little button. You can record your question if it gets played on the show you get a one year subscription to our T. I p. finance tool so for anybody else out there. If you want to check out our tool just go to Google and type in. Ti P finance. And it'll be the first thing that comes up and you guys can check out the tool there if you guys want to look at it all right guys. This was a lot of fun and we would love to gun to Omaha. Meet up with in person. That's definite the plan to do that. And Twenty Twenty One and buffet actually mentioned during the meeting that it was still challenges. Plan to go there. He was just a bit too painful for him to go to be in front of cameras and not doing the event. No then go all the way back to La. But guess what? The biggest news at all that I learned from this annual shareholders meeting was that Charlie. Munger is using soom every single day. And I'm like if chalmers using zoom every single day can count on anymore. Like what the world to but guys surf goofing out there and this was all the president. I had for this week's episode of the podcast all 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 written permission must be granted before syndication casting.