Berkshire Hathaway Part III

It's time. We wrap our Berkshire Hathaway trilogy with Warren and Charlie entering a new era: the age of the internet. Can they and Berkshire adapt to this brave new world? We find out. And, after 9+ hours, we render our final judgments on Berkshire and Warren's career. Is "Never bet against America" still the right longterm approach? Or is there another, even bigger Snowball out there that Warren may be missing? Sponsors: Vanta: https://bit.ly/acquiredvantaServiceNow: https://bit.ly/acquiredservicenow26Legora: https://bit.ly/acquiredlegoraStatsig: https://bit.ly/acquiredstatsig26 More Acquired! Get email updates https://www.acquired.fm/email with hints on next episode and follow-ups from recent episodesJoin the Slack http://acquired.fm/slackSubscribe to ACQ2 https://pod.link/acquiredlpMerch Store https://www.acquired.fm/store! © Copyright 2015-2026 ACQ, LLC The Berkshire Hathaway Playbook is available on our website at https://www.acquired.fm/episodes/berkshire-hathaway-part-iii Links: Bill Gates 1996 Wired interview: https://youtu.be/VFFlO7yBIBM?t=1056Jeff Bezos's 2008 AWS == electricity talk at YC Startup School: https://www.youtube.com/watch?v=6nKfFHuouzACharlie's 2021 Shareholder Meeting "slip-up": https://www.youtube.com/watch?v=6gyqElEG6Uo Carve Outs: Common Stocks and Uncommon Profits: https://www.amazon.com/Common-Stocks-Uncommon-Profits-Writings/dp/0471445509Xbox Game Pass: http://xbox.com/gamepassGoodfellas: https://www.imdb.com/title/tt0099685/The Goodfellas soundtrack: https://open.spotify.com/playlist/0xVpgEngjrg6FOw5vEFHRp

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00David Rosenthal?

  I'm going with just water as my beverage this time and no peanut brittle.

• 0:06Ben Gilbert?

  Well, did you have a little heart attack last time after all that sugar?

• 0:08David Rosenthal?

  Yeah, I think you could hear it in my voice. I think I was a little manic.

• 0:14Ben Gilbert?

  I'm going with a vitamin water zero because we are going to need the electrolytes for this marathon.

• 0:20David Rosenthal?

  Is vitamin water owned by?

• 0:22Ben Gilbert?

  Coca-Cola, baby.

• 0:23David Rosenthal?

  Coke. That's right.

• 0:25Ben Gilbert?

  I was on my run this morning and I was listening to the Adam Mead book that I referenced and I ran by Berkshire Hathaway properties, like house for sale. And I was just like, it's pretty hard to go through your day without using a Berkshire product or service.

• 0:42David Rosenthal?

  I'm so excited. I literally like woke up in the middle of the night last night, like, and couldn't go back to sleep. I was so excited.

• 0:47Ben Gilbert?

  Really?

• 0:48David Rosenthal?

  Yeah.

• 0:49Ben Gilbert?

  I love it.

• 1:00Ben Gilbert?

  Welcome to season eight, episode seven of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert and I am the co-founder and managing director of Seattle-based Pioneer Square Labs and our venture fund, PSL Ventures.

• 1:16David Rosenthal?

  And I'm David Rosenthal and I am an angel investor based in San Francisco.

• 1:22Ben Gilbert?

  And we are your hosts. Well, David, here we are, the final episode in our Berkshire trilogy.

• 1:29David Rosenthal?

  I feel like we were texting about this. I feel like we're like Bungie developing the Halo franchise, you know, Halo two was supposed to be the end. We're going to finish the fight, you know, last time was supposed to be the end. We're back for number three and Halo three was so good, man. Like, that was the best.

• 1:46Ben Gilbert?

  See, now we have a lot to live up to. Well, listeners, we told you about Warren's literally perfect record with the Buffett partnerships in the 60s, where he generated a positive return and beat the stock market every single year for 12 years. We then wandered the path with Warren of consolidating his investments into Berkshire Hathaway, joining forces with Charlie, swerving through regulators and coming out unscathed.

• 2:13David Rosenthal?

  Question mark?

• 2:14Ben Gilbert?

  Yeah. When we last left off, Warren and Charlie were in 1992, finishing up an absolutely monster run of returning over 27% per year for 22 years.

• 2:27David Rosenthal?

  Woo. Spoiler alert, not going to be the case this time.

• 2:31Ben Gilbert?

  No, those were, no doubt Berkshire's glory days. So today, we will tell quite a different story, a story of what happens when a time-tested investment philosophy gets confronted with systemic changes in the world, like the PC and the internet. And concurrently, while the world was changing, so was Berkshire by virtue of their own success. So when you now need to write billion-dollar checks to move the needle, there's only so many places you can go knocking. And all those places are quite visible to other investors, too. So today, on part three, we will tell the story of the large and mature Berkshire Hathaway and examine what the future may hold with

• 3:13Ben Gilbert?

  the next generation. Well, listeners, are you an acquired Slack member? If not, come join us. The most recent thing that I want to highlight is the Digital Assets channel. It is one of the best entry points I've seen on the web for people to discuss everything going on in the crypto landscape. Yes, I just said crypto on the Berkshire episode, in a very thoughtful and nuanced way, just great discussion going on there. It's also great for beginners. So as always, come join us, acquired.fm/slash/Slack. All right, listeners, now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF, then everyone

• 3:57Ben Gilbert?

  would nod and you're done. But in an AI-first world, that doesn't hold up anymore.

• 4:02David Rosenthal?

  Yep. Your risk surface changes every week now. A vendor turns on an AI feature, or someone writes in a new model without telling IT, and your posture is different than it was last week, let alone at your last audit. Vanta's own research found that around 70% of companies have this quote-unquote "shadow AI" running with no security Review at all.

• 4:23Ben Gilbert?

  Right. And that's where Vanta comes in. They're the leading agentic trust platform, meaning they've built the thing that closes the gap. And the way that they close that gap is Vanta Agent. Think of it as a GRC engineer, that's Governance, Risk and Compliance, except that it's software and it doesn't sleep. It finds the issues, drafts the fixes, and cuts the time that you'd spend on vendor assessments in half.

• 4:45David Rosenthal?

  In half, which is exactly why more than 16,000 companies today run on Vanta. Companies like Ramp, Cursor, and Snowflake all stay audit ready and catch the risks that crop up between audits across every vendor, every AI tool, the whole environment.

• 5:03Ben Gilbert?

  And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance, and the work to earn and prove trust. We're huge fans of Vanta over here, and literally hundreds of acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at vanta.com/acquired. That's V A N T A dot com slash acquired for $1,000 off, and just tell them that Ben and David sent you. And lastly, to keep it short and sweet, if you are not an acquired LP, you should become one. Click the link in the show notes or go to acquired.fm slash LP. We can't wait to see you there. Well, David, before you take us in, listeners, as always, this show is not investment advice.

• 5:46Ben Gilbert?

  David and I may, and I think have already told you, some of us do have investments in the companies we discuss, and this show is for informational and entertainment purposes only. David Rosenthal, tell us a story.

• 6:01David Rosenthal?

  All right. Well, as you said at the top of the show, last we left Warren and Charlie in 1982. They, and in particular Warren, are heroes. Times have never been better. I mean, it's great. Warren is a legend. Like, he literally, single-handedly reversed a federal government decision and saved Solomon Brothers. It's crazy. I mean, his stature.

• 6:27David Rosenthal?

  Is unparalleled, like nothing that the finance world or the corporate world or the investing world or the business world has ever seen. He's the oracle of Omaha. People are flocking to the annual meetings, literally the annual shareholder meetings.

• 6:43Ben Gilbert?

  Of course, Woodstock for capitalism.

• 6:44David Rosenthal?

  Woodstock for capitalists are attracting thousands of people.

• 6:48Ben Gilbert?

  And it grew, of course, there was like a handful of people that would gather in a basement and then there was at a hotel and then it was at a larger venue. And by this point, he's entering arena territory.

• 6:58David Rosenthal?

  He's literally filling arenas like a rock star. And Berkshire stock, the A, because they're only, well, it's not the A, because there is no A and B yet, just Berkshire stock passes $10,000 a share, far and away the highest priced single share of stock in history. Buffett himself is worth over $5 billion. He's rocketing up the Forbes list. But there is one person out there in America and the world who is moving up that

• 7:37David Rosenthal?

  list faster than Warren. And fate is about to bring these two gentlemen together.

• 7:45Ben Gilbert?

  Oh, man. So we, we left on the Solomon Brothers saga and we're riding in with Bill Gates. Is that what you're telling me, David?

• 7:51David Rosenthal?

  We're riding in with BG3, Bill Gates, man who has been in the news a lot lately.

• 7:58Ben Gilbert?

  Yep.

• 7:59David Rosenthal?

  Well, that's another topic for another day. So back in the previous summer of 1991, before Solomon, which would start going down in the fall of 1991 and wrap up in 1992. But before everything really kind of hits the fan, K. Graham arranges for a 4th of July weekend bash on Bainbridge Island in Seattle.

• 8:27Ben Gilbert?

  No way.

• 8:27David Rosenthal?

  What a wonderful place. Bainbridge is like one of the best places in the world.

• 8:31Ben Gilbert?

  Yeah, it's a mere ferry ride from Seattle and then you feel like you're millions of miles away from civilization.

• 8:37David Rosenthal?

  Totally. She invites Warren along, of course. Part of the festivities that are planned is that on the 5th of July of 1991, they're going to go over to the Hood Canal and spend all day with a very prominent Seattle area family, Mary and Bill Gates II, better known as Senior, and potentially their son, Bill Gates III, might drop by at some point during the day.

• 9:06Ben Gilbert?

  And this is where Bill Gates III, I mean, this is like famously his sort of family home growing up. He learns to swim out there. His father is a very prominent lawyer and angel investor and sort of galvanizer of the Seattle startup community from the early days.

• 9:19David Rosenthal?

  His mom's on the board of the United Way.

• 9:22Ben Gilbert?

  Yep, yep. So, you know, this is long before Microsoft, but already sort of a prominent family in the area.

• 9:27David Rosenthal?

  Warren is a little reluctant to go on this trip. This is not sort of his thing, but as he puts it, quote, "anything for Kay." So he goes out, he joins Kay and a few others this weekend. Similarly, Bill Gates III does not have a lot of interest in going out on the 5th for this all-day event. He's super busy. He's running Microsoft. It's a public company. He wants to stay in Redmond and work, work, work. But Mary, his mom, forces him to come out. Bill would say later, "As I told my mom, I don't know about meeting a guy who just invests in money and picks stocks." Of course, he's talking about meeting Warren. His parents are saying, "You gotta come meet Warren." Bill continues, "I don't have many good questions for him. That's not my thing."

• 10:11David Rosenthal?

  I love how Gates judges the quality of his social time by the quality of questions that he can have for somebody.

• 10:17Ben Gilbert?

  Quick side note, watching these old videos of Gates, I mean, we're so used to his polished image now, but when you go and you watch sort of videos of him from this timeframe, especially in the early 90s, he's obviously so brilliant, but he's-

• 10:30David Rosenthal?

  He's mad awkward.

• 10:32Ben Gilbert?

  Yeah, and he's vigorous in the way that he sort of attacks lines of questioning and engages with challenges. And it's, assuming you are not the subject of his ire, it is a really fascinating thing to watch and totally different than the Gates you're sort of familiar with now.

• 10:46David Rosenthal?

  Yeah, that's a good point.

• 10:47Ben Gilbert?

  Yep.

• 10:48David Rosenthal?

  So Mary, though, forces Bill to come out. She's still his mom. But what he's gonna do, he's gonna come later in the day. He's gonna fly in on a helicopter so that he can, you know, get a good like half to three quarters of a day work in. This is July 5th at Microsoft. I mean, you gotta remember, we've talked about this on the show, but like Microsoft in 1991, all throughout the 90s until the DOJ case, it was intense. Like they were killers there.

• 11:14Ben Gilbert?

  Yeah, you should think about it like Uber in 2016.

• 11:17David Rosenthal?

  Totally. So Bill's plan is he's gonna fly in on the helicopter and then he's gonna make the helicopter wait there. He'll eat dinner and then he's gonna fly out and escape, go back to work. So he's introduced to Warren and Warren immediately asks Bill what Bill thinks of IBM and whether they're gonna do well in the future. I cannot believe, we're gonna get to this much later in the episode, but Warren is already obsessed with IBM. Like, my God, Warren, don't buy IBM. Previewing that, like, don't do it. Don't do it. Gates, of course, agrees with me here and is like, no, you should absolutely not buy IBM. You should buy two stocks and two

• 11:59David Rosenthal?

  stocks only, Microsoft and Intel, and you should buy nothing else and you should just hold them. This is 1991. So Microsoft at this point has about a $10 billion market cap and Intel has a $3 billion market cap.

• 12:11Ben Gilbert?

  Oh, my God. Gates is so deep in it. So obviously, he's right here. But it is incredible that IBM, even though they made the computers, the value in the value chain did not accrue to them in any way, shape or form. They became completely, you know, dumb terminals and all of the value was captured by the chipmaker and by the operating system maker, which blindsided everyone. Just a brilliant business strategy.

• 12:35David Rosenthal?

  Totally brilliant business strategy. So Gates then, he's probably like pretty annoyed by this first question, given that he doesn't care about stocks. He's like, look, there's two. You should buy these. Don't do anything else. You should probably just listen to Bill Gates here. Gates turns around and asks Buffett about newspapers because Gates is probably already starting to think about coming after newspapers as part of, I think, I don't know if like Incarta existed already at this point, but Microsoft spinning up all sorts of stuff. Incarta was like, it's like Wikipedia, but then they would launch live and with the coming of the internet and all sorts of stuff.

• 13:13Ben Gilbert?

  They were launching these things, interestingly enough, in like the 93 to 96 timeframe. And there's this unbelievable interview that Bill Gates does with Wired. I'll look it up and see if I can link it in the show notes where he's basically combatively arguing that content clubs could never be Microsoft's next business, that they're just not big enough. Like you don't understand how big Windows is. These are multi-billion dollar businesses. And unless we become Disney or something, content clubs are just never going to cut it. And it's fascinating looking at that aggressive reaction by Gates and how he feels versus the market cap of say a Netflix today, or how important it is to Amazon Prime's strategy to have a content club, as we talked about with Brad on the last episode.

• 13:55Ben Gilbert?

  So Gates is at this point thinking, oh, we got a tiger by the tail with this Windows thing. There are a few other businesses as big as this one. Let's just go for the 10 plus billion dollar opportunities.

• 14:08David Rosenthal?

  Yep. So here's where Buffett sort of surprises Gates. You know, Buffett is like American newspaper man number one, like started as the paper boy, thinks it's the canonical franchise business. He owns, based on the board of the Washington Post, owns the Buffalo Evening News, all this stuff. He's like, look, today newspapers are the best business out there. I'm thrilled to own them, but I gotta be honest with you. I am starting to worry about their future. He doesn't know anything about the internet. He's, he's actually not worried from that front. But he says, you know, I'm worried about the encroachment of TV and in particular cable

• 14:48David Rosenthal?

  television and people's news habits shifting to television, encroaching on newspapers. And Bill is like, hmm, okay. Well, interesting. That's not. Quite the answer I expected from Mr. Buffett. So they start talking and they sort of fall into conversation and knowing the two of them a little bit, not personally, but through the show, you could imagine that they just sort of spend all day talking and like other people are there, Kay's there, Bill's parents are there, a bunch of other, you know, Seattle area sort of dignitaries stopped by, two of the future founders of Madrona stopped by, Bill Ruckles' house, who was an amazing man, part of the Saturday Night Massacre and the Nixon administration, the first head of the

• 15:29David Rosenthal?

  EPA, Jerry Grinstein, who was CEO of Burlington Northern at the time.

• 15:36Ben Gilbert?

  Oh, I had no idea. Oh, wow.

• 15:38David Rosenthal?

  Drops, he just drops by, lives in Seattle.

• 15:40Ben Gilbert?

  Didn't he go on to become the CEO of Delta Airlines?

• 15:43David Rosenthal?

  He would, he would. Another erstwhile later in life, Warren investment.

• 15:48Ben Gilbert?

  Yep.

• 15:48David Rosenthal?

  We'll get there. But Warren and Bill just totally ignore them. They're like super engrossed with one another. So at dinner, they're all there, I guess they're forced to like sit down and join the group for dinner. Bill Gates, senior, asked this august group assembled there, what factor, he asked a question to the table, he says, what factor does everybody think has been most important in achieving, you know, where you've gotten in life? And there are people at this table who've gotten very far in life. And Bill and Warren both immediately reply with one word, which is focus. So these guys are like, they are two peas in a pod. After dinner, the sun goes down, the helicopter leaves, Bill Gates III stays.

• 16:30Ben Gilbert?

  Whoa.

• 16:32David Rosenthal?

  Yeah. Warren has drawn him away from his work. Amazing. So they become fast friends. Buffett goes back to Omaha after the holiday and on the first day, I don't know when the fourth, the fifth fell, but on Monday, whatever the first trading day is after that. He makes another of his fateful, immediate, split-second gut stock purchases.

• 16:59Ben Gilbert?

  Tell us he bought Microsoft, David.

• 17:00David Rosenthal?

  He did buy Microsoft, just like he did with Geico.

• 17:03Ben Gilbert?

  Oh, I actually didn't realize he did.

• 17:05David Rosenthal?

  He bought 100 shares of Microsoft for his personal account so that he could keep up with his friend, Bill Gates.

• 17:17David Rosenthal?

  Oh, isn't that ridiculous? And he buys zero Intel shares. Again, even giving his history with Intel and noise.

• 17:25Ben Gilbert?

  Which is, in retrospect, that feels like such a fraught strategy because not only are you losing out on the benefit of all the upside of actually being a shareholder in your vehicle, Berkshire Hathaway, you now want to spend a lot of time and dive deep with this person. And he's an insider and now you personally own shares in his company and you're, so you can't actually get a lot of the information that you want to talk about with him because it's too sensitive because you're a shareholder in a super meaningless way. This decision is confounding to me.

• 17:54David Rosenthal?

  Completely confounding. But he does invite Bill to join the Graham Group, which is, you know, by now the Buffett Group, his group of cronies. And at the next meeting, which I think is in Vancouver, one of the sessions, they're all kicking around, you know, their favorite stock ideas. And Bill Ruane from the Skoye Fund throws out Kodak as a name he's thinking about. And Barry Gates immediately responds, Kodak is toast.

• 18:25Ben Gilbert?

  I love it.

• 18:26David Rosenthal?

  So great, so great. And of course, Tom Murphy, Murph, is there and Kay's there as well, both television, you know, media magnets. And they ask Bill whether he thinks television is toast too. And Bill responds, this is a quote from the Snowball, "No, it's not that simple. The way networks create and expose shows is different than camera film like Kodak. And nothing is going to come in and fundamentally change that. You'll see some falloff as people move toward variety, but the networks own the content and they can repurpose it. The networks face an interesting challenge as we move from the transport of TV onto the internet, but it's not like photography where you get rid of film.

• 19:10David Rosenthal?

  So knowing how to make film becomes absolutely irrelevant." This is crazy. This is 1992.

• 19:16David Rosenthal?

  And Gates just described like the next 30 years of media and the internet like right there.

• 19:22Ben Gilbert?

  Wow.

• 19:23David Rosenthal?

  Isn't that unbelievable?

• 19:24Ben Gilbert?

  Yeah, I think it's actually a Buffett quote predicting rain doesn't count. Building the ark does.

• 19:30David Rosenthal?

  Ooh.

• 19:32Ben Gilbert?

  I love this one so much because there are so many of these. Look at Steve Jobs describing the cloud in 1995 or whatever it is, or look at Bill Gates predicting how the media landscape would evolve based on technology. And yet neither of those actually came to fruition where they became the market leader in that given thing that they clearly articulated in that, you know, captured and quoted video.

• 19:55David Rosenthal?

  Yeah, it's interesting. Personal life aside, I'll give Gates the benefit of the doubt here. I bet Microsoft would have made plays here if not for the antitrust case.

• 20:07Ben Gilbert?

  Hmm.

• 20:07David Rosenthal?

  DOJ.

• 20:08Ben Gilbert?

  They weren't going to extend their advantage to media.

• 20:10David Rosenthal?

  Yeah, exactly. They weren't going to embrace and extend there. Okay, so we're going to come back to Bill in a minute and there's a very, very important reason why A, it's just like he has such an impact on Warren's life in so many ways, as we'll see throughout this episode, but I think this is also a really great lens to view this part three of like, let's contrast Bill Gates and Warren Buffett as we go along here. So there is one, more than one, but one in particular, other very famous Warren Buffett, Berkshire classic investment that we have not yet covered in our two parts thus far.

• 20:47Ben Gilbert?

  Yeah, you talked about it in the cold opener of the last episode, but we actually haven't touched it in the real story.

• 20:51David Rosenthal?

  I know, I know. Of course, we are talking about Coke and Warren's investment in it, which is just classic, classic Buffett in so many ways. It's just unbelievable. So back when Warren was starting up his partnerships way back, we're going back to part one of the episodes in the late 50s, he got to know one of his neighbors in Omaha. I can't believe that like all of his great investments come from his neighbors in Omaha. And their kids played together. This neighbor is named Don Keough and they both live on Farnham Street in Omaha.

• 21:29David Rosenthal?

  Side note, which is why Farnham Street is, and the Knowledge Project and Shane and everything he does over there is called

• 21:35Ben Gilbert?

  It's an amazing name.

• 21:35David Rosenthal?

  Farnham Street. So Kio was a salesman for the Butternut Coffee Company at the time, and he had six kids. And the story goes that as Warren is starting up his partnerships, he asked Don how he's planning to save for college for all of his kids. He's thinking like, hey, I'm gonna get Don, you know, hit on this partnership, then get some money out of him. Don is pretty sharp, though. He asks his kids what they think of Mr. Buffett. And his kids are like, oh, we love Mr. Buffett. He's great. He's always at home. Whenever we're playing with little Suzie and Howie and Peter, you know, he's there and he doesn't really bother us, but, uh, but he's at home. So Don is like, well, this guy clearly doesn't

• 22:16David Rosenthal?

  work very hard. Like, he's always at home during the day. I'm not giving him my money. Soon after that, though, in 1961, Butternut gets acquired by the Dunkin Coffee Company. Don moves to Houston, leaves Omaha with that. And then shortly after, in 64, Dunkin gets acquired by Coca-Cola and Don moves to Atlanta. So fast forward to the mid 80s. By this point in time, Don is president and COO of Coke. He is the Dan Burke, one might say, to the Tom Murphy of the legendary Coke CEO at the time, Roberto Guisetta, who was incredible CEO, Cuban immigrant, ran Coke through all of the great ascendancy of, of the company.

• 23:00David Rosenthal?

  At this point now, Warren is a man about Washington, thanks to the Post and Kay. And one night, he gets invited to dinner at the White House. I assume either thanks to Kay or has her date there or something. And lo and behold, who shows up at the White House? But Don.

• 23:17Ben Gilbert?

  His neighbor from, that's crazy.

• 23:19David Rosenthal?

  Yeah, they reconnect at the White House, his neighbor from Farnham Street. And Don's like, oh, yeah, like I'm COO at Coke now.

• 23:27Ben Gilbert?

  And I take it that Warren has fully switched from Pepsi to drinking Coca-Cola at this point?

• 23:31David Rosenthal?

  No, not yet.

• 23:31Ben Gilbert?

  Oh.

• 23:32David Rosenthal?

  No. Don converts it. Warren is like, hey, you know, really great to reconnect. I remember you didn't give me the money back in the day. How you feeling about that now? I don't know that he said that. Warren says, no, you know, hey, like, that's great, Don. I'm happy for you. I'm kind of a Pepsi guy, though. And really what I, you know, I like to do, I have Pepsi all day, every day. I put cherry syrup in and it's great. And Don's like, Warren, we just launched a new product. We've got the product for you. You don't have to put the syrup in your Pepsi anymore. We've got cherry Coke.

• 24:02Ben Gilbert?

  Oh, that's incredible.

• 24:03David Rosenthal?

  Just launched. This is, I think they launched in like 83, I want to say, maybe sometime around then.

• 24:09Ben Gilbert?

  Also, I didn't realize that the fact that the coffee company got rolled up into Coke, and I presume the seventies, they were conglomerating earlier than I thought. I mean, I knew, obviously Coca-Cola is a multi hundred year old brand, but they were single product for the majority of their life. I assumed it was like the nineties and 2000s when they started becoming this big portfolio of beverage brands, but it sounds like it was much earlier.

• 24:32David Rosenthal?

  It was. Yeah, no, they were buying other stuff. I don't know how big it was versus the cola business. But anyway, with Cherry Coke, Don convinces Warren to switch. And that of course causes Warren to start thinking like, oh, well, maybe I should take a look at investing in Coke. And he becomes intrigued. And as he digs in, I think this was like 85 or so, and maybe, and it was in 83, I think, a couple of years earlier, they had launched Diet Coke. And Diet Coke was like, a monster. You know, Coca-Cola, now classic, as we will get into in a second, you know, it's great, but like, Diet Coke is huge. Well, maybe

• 25:12David Rosenthal?

  the most successful beverage product launch of all time. It's a blockbuster. So Warren's intrigued, but he thinks, you know, hey, you know, stock price is kind of high. I'll just keep an eye on it. And then, New Coke happens, which, you know, I knew about and I'd read about, but do you remember this, Ben?

• 25:33Ben Gilbert?

  How do you mess this up? Like, if you're a company like Coca-Cola, and you got all these big brains around the table, and you basically have like, a thing that's a trade secret. You don't have any IP protection around it, but you have the magic formula, and you have the brand, the not yet world renowned, but sort of nation renowned brand that is synonymous with like, your sense of patriotism, and it's associated with one particular, very odd, very well balanced flavor. How on earth do you replace that? What are you thinking?

• 26:09David Rosenthal?

  I think we, to preview a minute here, Warren would always say that the Get everybody in trouble in a minute, but the thing you liked about Coke is that the business could be run by a ham sandwich. Like, you know, literally just like you don't do it. Evidently not. I think they were probably just so bored.

• 26:27Ben Gilbert?

  At least the ham sandwich wouldn't mess with the golden goose.

• 26:30David Rosenthal?

  Totally. You know, to be fair, that's the story is they ran all these blind taste tests and Pepsi had been, you know, making headway with market share.

• 26:39Ben Gilbert?

  That delicious lemony, weird, sweet thing they had going on.

• 26:43David Rosenthal?

  They try new flavors and one of them tests really well. People like it better than the old Coke recipe. So they literally pulled the old Coke recipe off the shelves and introduced new Coke, and it is a unmitigated disaster. Pepsi's like, oh my God, this is the greatest unforced error in history. They start a price war. Coke gets into a huge fight with its bottlers. The stock plunges. And the rumor starts going around that Ron Perlman, same dude from Solomon, is circling.

• 27:15Ben Gilbert?

  The Revlon gone activist investor shareholder guy.

• 27:19David Rosenthal?

  How could we have forgotten about this in the last episode? He was the villain in Marvel.

• 27:25Ben Gilbert?

  That's right.

• 27:26David Rosenthal?

  Remember way back in the day, our Marvel episode? I forget that he like owned it for a while and ran it into the ground. And yeah, Perlman, what a guy. So rumors that go around that he's targeting Coke now in the wake of the new Coke disaster. Enter White Knight Warren to save the day as always. He rides in, he buys 1.2 billion worth of stock on the open market in 1987, which equates to 6% of the company. And then just like good friend and Solomon, Goizetta and Kio ask him to join the board, which of course he does. Side note, the Coca-Cola

• 28:06David Rosenthal?

  board is where Warren meets Herb Allen from Allen and Company and starts going to Sun Valley every year. So this is really, everything is coming up roses for Warren here.

• 28:19Ben Gilbert?

  Man, to like a company and be sort of prospecting it and just to watch them go through the new Coke thing and just be sitting there grinning like an idiot, like this is my chance. The trick is knowing how to feel those in the moment, you know, when you're not catching a knife that is falling, but rather buying the dip, as they say.

• 28:40David Rosenthal?

  Warren Buffett, the OG buy the dip investor.

• 28:43Ben Gilbert?

  And to add a little more nuance to that, I mean, he does have this great strategy of identifying an opportunity where a company has its back against a wall because there are activist shareholders, or there's a deal that was on the table that's fallen through and suddenly they need cash fast. And he like very much uses this lack of necessary approval by committees and red tape to just come in with cash, make an offer he feels good about. It's sort of that better to be approximately right than precisely wrong. Kind of that approximately right. I eyeballed it. It looked good. I came in, I bought it and now I'm a big shareholder and it was a pretty good price.

• 29:26David Rosenthal?

  Yep. Man, I hope at some point that Warren and Charlie send a case of wine over to Ron Perlman because like, man, they got some deals because of that guy. So in the 1988 Berkshire Letter to Shareholders, Buffett announces the Coke investment, saying of it, "We expect to hold these securities, the securities in Coke, for a long time. In fact, when we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever." And by the mid 90s, a few years later, Coke, of course, has recovered from the new Coke disaster. They have massively expanded internationally. The late 80s, you know, and then through the 90s

• 30:08David Rosenthal?

  were when Coke went from being still associated with Americana, but like everybody in America drank it to like everybody in the world drank Coke.

• 30:17Ben Gilbert?

  And this was part of the investment thesis too, that there was sort of this like unexplored massive opportunity to bring Coca-Cola to the rest of the world, particularly through this brilliant innovative strategy that they have of just selling the syrup, whether they're selling it to the restaurants that are putting it in the fountains, or whether they're selling it to the bottlers who have to figure out water and carbonation, everything locally. They just are shipping the concentrate around the world. So it's reasonably cost effective to have, you know, just a few places that need to know the secret formula and make this stuff. It really can be a globally addressable market.

• 30:51David Rosenthal?

  It's good work if you can get it for a ham sandwich. So Coke is printing money. Within a decade Berkshire is up over 10x on Coke. And since then, so that was from like mid 80s to mid 90s. Since then Berkshire is only up less than 4x on Coke from that point in time over the next. Yeah. What is that? 30, 25 plus years?

• 31:18Ben Gilbert?

  Oh, that's wild.

• 31:19David Rosenthal?

  Yeah. So 10x returns in the first decade and three and a half x in the next 25, which would sort of presage things to come.

• 31:27Ben Gilbert?

  Man, compounding large numbers, David, sure is hard.

• 31:30David Rosenthal?

  It turns out it is.

• 31:32Ben Gilbert?

  Well, while we're on this Coke thing, before we sort of leave it, I do think this is a good moment to address the value of brand. We haven't, we've sort of alluded to moats, especially in the seven powers discussion in our previous episode. But we haven't actually described how Warren thinks about moats and sort of brand as a moat. In the 95 annual meeting, he has this great quote where he just lays it out for investors. And it's one of these rare moments where he describes the investment strategy, I think more than he necessarily intended to. But he's off the cuff, he's answering a question and he says, what we're trying to find is a business that for one reason or another, it can be because it's the low cost producer in some area. It can be because it has a natural franchise because of surface capabilities.

• 32:15Ben Gilbert?

  It could be because of its position in the consumer's mind. It could be because of a technological advantage or any kind of reason at all that it has this moat around it. And I just always thought this is like the clearest articulation of his view of, you know, sustainable competitive advantage. What makes a business durable and able to generate outsized profits over time? And boy, did they nail it with Coke. I mean, this is just one of these classic examples of the brand moat is really real and it's a global brand moat.

• 32:44David Rosenthal?

  Yep, totally. Like the moat exists, clear how it works.

• 32:49David Rosenthal?

  It's straight over tackle. You're taking this international, running the same playbook. Yeah. Great timing coming in in the New Coke disaster right before international expansion. Well done, Warren.

• 33:00Ben Gilbert?

  Okay, David, you did mention that Coca-Cola is only up another three and a half X after that initial 10 X. When we look at, you know, that sort of late 2000s time, looking at maybe 2009, Coca-Cola did represent close to 20% of Berkshire's equity portfolio construction. So like that, what 35 X on their initial investment of the stuff that they own that are public markets before they weighed into Apple, which we'll talk about later, Coca-Cola is their biggest single holding of stock that they don't wholly own in a business.

• 33:32David Rosenthal?

  Yeah. And of course, no longer is, but yeah, it's, I mean, this is huge. I mean, this is one of the key legs of the Berkshire stool is Coke. And also just speaks to how different the company is now. Like you can barely see the Coke equity value in there.

• 33:49Ben Gilbert?

  Yep.

• 33:50David Rosenthal?

  Okay. So back to the meeting of these two businesses here. So in 1997, there is this amazingly perfect moment. I think this moment kind of marks a major transition point in business and the industry in the world. And it's the rise of tech and the rise of the internet and how much the world is going to change. And it reminds me of, there's the famous quote in history, I think it's about Germany in the like 1850s, where the quote is the German history reached its turning point and Germany failed to turn. This applies to Warren here. Investing in corporate history reached its turning point and Warren fails to turn.

• 34:34David Rosenthal?

  So summer 1997, we are at, of course, the Allen and Company Sun Valley Conference. And there is a panel discussion hosted by Don Keough.

• 34:46David Rosenthal?

  With the participants, three participants being one Warren, two Roberto Guisetta, the CEO of Coke, and three, Bill Gates. And so here it is, old school, like the consumer brand Coke, and Bill Gates and Microsoft and Warren on the same stage. Everybody thinks this is going to be like a back patting affair, you know, maybe sort of a, you know, genteel changing of the guard or you know, maybe something like that. But Bill kind of goes off script here. So Bill would later say that he meant this as a compliment, but he trots out Warren's ham sandwich phrase when talking about Roberto and Don on stage.

• 35:27Ben Gilbert?

  Oh, wow. Wait, so you have the moderator of the panel is the president of Coke and you've got the CEO of Coke as one of the participants?

• 35:35David Rosenthal?

  Yeah. And then the other participant is like the largest shareholder in Coke.

• 35:38Ben Gilbert?

  Right.

• 35:40David Rosenthal?

  And Gates's friend. And so Gates says that like, oh, you guys got it easy. You ham sandwich could run your business. And he compares that to Microsoft. He contrasts that with Microsoft where he says, running Microsoft is such a high wire act that he suspects he's going to have to retire before he gets too old. Like indeed, he says, well, before he gets to age 60, because you need a young person in charge who can adapt and navigate the constant change in the technology business. So the other panelist, Roberto is 65 and tragically later that year would die unexpectedly and very quickly of lung cancer. Don is 71 and Warren is 67. So Gates is literally just slapping them all in the face here.

• 36:23David Rosenthal?

  And Roberto sort of has the sort of stereotypical like fiery Cuban temper here. He is hugely offended by this and I don't think he walks off stage, but he never talks to Gates again for the rest of his life after this episode. I don't know how Don reacted to it. Warren kind of shrugs it off like he does like, hey, like Bill's my friend. Like, you know, he's Bill. He's kind of like, he's like a wild animal. You can't like bring him in public too much. But the thing is like, you know, this is a major social faux pas on Gates's part, but like, he's totally freaking right.

• 36:56Ben Gilbert?

  Well, I mean, he's right. And it is clearly this seminal moment for Warren where he's sort of like, looking left and he's seeing the past. He's seeing the things he already owns. He's seeing these cash flowing, profitable, durable businesses. And he looks right. And he's seeing something he doesn't understand with Microsoft. And it's outside his circle of confidence. So it's in Charlie's too hard pile, to use a Charlieism there. And so he's team Coke. He's team durable, understandable, old world businesses. In this era, there's so many opportunities for him to run toward the fire in technology. And he just chooses not to.

• 37:33David Rosenthal?

  He just runs away. Alice has this great quote in the Snowball. She says, Buffett avoided technology stocks, partly because these fast moving businesses could never be run by a ham sandwich. He thought it no shame to have a business that could be run by a ham sandwich. He wanted to get Berkshire Hathaway to the point where it could be run by a ham sandwich, too.

• 37:54Ben Gilbert?

  Is that where we are today?

• 37:55David Rosenthal?

  He was gone.

• 37:58David Rosenthal?

  I'd like, I get it, right? Like, he thinks, you know, I used to think this too, actually. I was like, oh, man, I really want to find businesses that like a monkey could run them. The thing is, though, those businesses don't exist anymore. You know, they exist, like Coke still exists and it's fine. And plenty of these other businesses, but Gates is so right here. The future is change. And the most valuable companies of the future and the most value that's going to be created are going to be created by companies and by leaders and entrepreneurs who are able to navigate change. Like you mentioned, we just had Brad on in our last episode, Brad Stone, to talk about Amazon Unbound. Like, you read that book and you like, you just get kind of like in awe. Like Bezos is the world's richest person, and he is still bringing

• 38:42David Rosenthal?

  such intensity. We cannot rest on our laurels. We have to change. We have to innovate every single day. This is not Coke.

• 38:51Ben Gilbert?

  Yeah, well, okay, let's take this as the moment to dive a little bit deeper into why Buffett doesn't like tech stocks because it's so meme-y in our culture today that that he sort of is not a tech investor, that it's worth unpacking it a little bit. And he did have this interesting observation, I think it was in the the late 90s that we're going to talk about the dot com bubble here, but that there aren't any internet companies that have ever hit 100 million in a year in profits. And so I have no proof that it could possibly exist. And so Warren is investing, not speculating. And a lot of people will take offense to me saying that a lot of technology investing, especially in the early stages, is speculating. But the fact is, very early on, there's no revenue and there's certainly no profit.

• 39:36Ben Gilbert?

  So you can't possibly do investing in the classic sense of valuing the business today, add a discount to its future cash flows. It's speculating in a risk managed way by putting your money in great people, going after markets with promising futures, the sort of secular tailwind argument. In fact, Buffett has a very particular way that he thinks about valuation that is highly sensitive to how certain the future is. He's willing to pay up for very certain futures, which is why he values brands so much. And if you think about this as like an expected value equation, where you have two components, the value of something if it happens, and then the probability that it will happen. Buffett is happy to pay for things with a modest value, but a high probability of it happening.

• 40:20Ben Gilbert?

  But it's not his style at all to make bets on low probability, very high potential value plays, like would be an Amazon or something that you're sort of talking about, David, when you reference this incredibly nimble, rapidly adapting world where the chessboard's constantly rearranging and you sort of need to, you know, make a bunch of high beta bets.

• 40:40David Rosenthal?

  Yep, totally. I think the problem is that now, we'll get to now later in the episode, but the world has just evolved to the point where like, that's the way the world works. Like, there's so much change and it's such constant that even Amazon, even Apple, even Microsoft need to be thinking that way. And if you don't think that way, Right. You can be Coke, but like Coke's value has only 3.5 x'd in 25 years. Those are the businesses you're going to get. So our friend Andrew Marks, who's a great VC at TQ Ventures, he's actually known Warren and studied him for basically his whole life. He told me that I think the best way to put this about Warren that I've ever heard,

• 41:22David Rosenthal?

  which is that Warren was the world's greatest status quo investor. Like as long as the future was mostly going to look like the present, Warren is a savant at that type of investing. Like the future for Coke is mostly going to look like the present for Coke. He knows how to value that. He knows that they're going to recover from New Coke. He knows that there's an opportunity internationally. He can invest in that. He can see that.

• 41:51Ben Gilbert?

  Right. So you're saying that of course the business will change and evolve and grow, but the chessboard.

• 41:56David Rosenthal?

  The world is the chess.

• 41:58Ben Gilbert?

  The world is reasonably static.

• 41:59David Rosenthal?

  Is reasonably static. Yeah. And that makes sense. Like for most of his life, that's been the case.

• 42:06Ben Gilbert?

  Right. You hear comments like people are always going to love candy. People are always going to like Coke. Like it's not a bet on the world changing. It's a bet on someone operating a business really well in the world.

• 42:16David Rosenthal?

  Yeah. He used to say that he was absolutely certain as long as cola doesn't cause cancer, that more people are going to swallow Coke tomorrow than they did today. Well, it turns out, you know, sugar is kind of linked to cancer and like, that's kind of not a good thing. Like the world changes, you know? And I think this is the thing where now this is what this moment to me represents this panel at Sun Valley in 97. It's like, this is the transition to a world where more change is happening than not.

• 42:46Ben Gilbert?

  Yeah, it's like that. There's a great weight, but why graphic where the little stick figure is standing on the inflection point of an exponential curve. And it's not that the world wasn't changing quickly between, you know, the mid 50s and the early 90s. It was that. The rate of change hadn't compounded to the point where it was suddenly like the whole world is changing all at once. You have the arrival of the internet. The cycles of innovation are getting wildly compressed. I mean, we live in this world today where there's huge changes on the sentiment of the future, like multiple news cycles per day in a super high fidelity, high frequency way.

• 43:24David Rosenthal?

  Crypto.

• 43:25Ben Gilbert?

  That was not, I didn't want to say it, you said it. That was not the, not at all the world that he invested in for the first 30 plus years of his career.

• 43:32David Rosenthal?

  Totally. So Warren definitely doesn't see this yet, if ever, but for the moment, Gates gets this. Certainly some other people in tech and in Silicon Valley and in Seattle get this, that this is the world that we're moving into, but most of the world doesn't. So for Warren, he's just like, okay, back to business as usual. He is though concerned about the tech bubble that is forming that he and so many others see. And by the, this time by sort of in the late 90s, the Berkshire share price has gone to, from about $10,000 a share to $34,000 a share.

• 44:13Ben Gilbert?

  Over how many years? From 92 to?

• 44:16David Rosenthal?

  To, this is probably like 98 or so.

• 44:19Ben Gilbert?

  Six years, three and a half X, not bad.

• 44:21David Rosenthal?

  Yeah, not bad. $40 billion market cap for Berkshire, but they've never split the stock. So people in this sort of, you know, part of the tech bubble craze was like day trading and people are now internet trading and like e shares. I don't know if it's e shares.

• 44:37Ben Gilbert?

  E trade.

• 44:38David Rosenthal?

  E trade, yeah, is happening. People are setting up publicly traded investment trusts that like mirror Berkshire's equity portfolio, like have like a shadow Berkshire.

• 44:50Ben Gilbert?

  This is so brutal. I mean, this is like for the person that wanted to carefully control investment in the company, someone says, oh, well, if you can't buy an actual share of Berkshire, you can buy a fractional share from me and I'll own a bunch of Berkshire underneath and I'll be like you own it. And it's like Warren's absolute work.

• 45:08David Rosenthal?

  Total labor. I think both these things are happening. So I think, obviously. There's demand from all this new retail investing to own Berkshire shares, but most people can't afford a $34,000 share then or now. I think two things are happening. One is what you're saying, which is people are buying Berkshire shares, putting them in a trust and then selling shares in that trust. The other thing people are doing is they're just like reading every, every, you know, 13F that comes out and 10Q and 10K.

• 45:34Ben Gilbert?

  Oh, and buying the same.

• 45:35David Rosenthal?

  Buying the same securities that Berkshire is buying and doing the same thing.

• 45:39Ben Gilbert?

  What a ham-fisted way to do it.

• 45:41David Rosenthal?

  Totally.

• 45:41Ben Gilbert?

  You don't have the benefit of the insurance float and you don't have the wholly owned businesses. And, and the lag, it's going to be this thing where people feel like they're buying Berkshire, Berkshire associated, but they're actually buying well after Berkshire's already moved the price of that stock.

• 45:55David Rosenthal?

  Way less. So Warren finally comes around. He, he really, he thinks like, okay, people are getting swindled. Like we, I gotta find some way to put a stop to this. I don't want to split the stock.

• 46:04Ben Gilbert?

  And this was a meme at the annual meeting. Every single year, someone would ask the question, are you going to split the stock so that more people can invest? And he would always respond to something like, no, I love our current investor base. Why would I do anything that would change the great set of people that we already have as shareholders in this wonderful company?

• 46:18David Rosenthal?

  Yep. So he comes up with a brilliant idea. He decides that he is going to do a stock offering for a new class of shares, what he's going to call the baby B class of shares versus the newly rechristened Berkshire A shares. And these are going to be tracking shares that are going to track 1/30th, one divided by three, zero of the A shares in terms of value, massively diminished voting rights. And he's going to sell this in a new offering that is actually open-ended. So there's no fixed amount. It's not like I'm offering X number of shares.

• 47:01Ben Gilbert?

  He doesn't want a supply demand thing to happen. He doesn't want basically like microeconomic forces to happen and drive up the price of the B shares. So he's like, here's the price and we're going to make as many of them as we need to at that price.

• 47:14David Rosenthal?

  As people want to buy.

• 47:16Ben Gilbert?

  Even if you hoard them, it won't benefit you at all.

• 47:18David Rosenthal?

  Totally. Which also means however much demand there is, because it's an offering, Berkshire is going to get the cash. This is like even better than float. You'd never have to give the cash back.

• 47:31Ben Gilbert?

  They're raising their Series C.

• 47:32David Rosenthal?

  Yeah.

• 47:33Ben Gilbert?

  I bet Buffett would go to the mat with you on it's even better than float.

• 47:36David Rosenthal?

  He probably would. I mean, he is diluting the value.

• 47:39Ben Gilbert?

  Yes. As a quick aside, I think this B shares offering is a really good place to talk about when they are buying things with cash versus shares, sort of how they think about the two currencies they have at their disposal, the balance sheet cash and the shares they could issue and dilute the company. So Buffett notoriously likes using cash versus shares since he thinks the existing portfolio of Berkshire businesses are far better than pretty much every other business he could buy. So given that, why would he trade shares of these amazing businesses for something that who knows what it is? It may be good, but it's not as good as my treasure trove that I already have here. So they use cash, obviously, whatever they can, except

• 48:19Ben Gilbert?

  when their shares have been richly valued by the market and thus are a phenomenal currency to use after it crosses a certain point. So in 96, when he does the B shares offering, normally Berkshire shares trade, the A shares trade somewhere between like 1 to 1.5x book value of all of Berkshire's holdings. Well, in this case, the moment they decided, okay, it's worth it for us to dilute our shareholders and do this new financing event and do the B shares thing, it was trading at almost twice book value.

• 48:50David Rosenthal?

  Wow.

• 48:51Ben Gilbert?

  It was like merely an all time high. And so he gets all the credit. It's almost like the Ben Thompson strategy credit thing. Like he gets all the credit for doing this, but it was a huge windfall for Berkshire to do it at the moment that they did. And they are wonderfully transparent about this as well, because they know there's going to be crazy demand for the B shares, kind of no matter what. So they write all these hilarious disclaimers. And I'll just read my favorite one. Mr. Buffett and Mr. Munger believe that Berkshire's Class A common stock is not undervalued at the market price stated above. Neither Mr. Buffett nor Mr. Munger would currently buy Berkshire shares at that price, nor would they recommend that their friends or families do so.

• 49:31David Rosenthal?

  Yes.

• 49:33Ben Gilbert?

  It's like Eric Yuan going on Bloomberg and saying, it's too high.

• 49:37David Rosenthal?

  The price is too high. Price is too high. Oh my gosh. Well, this is great. And of course, you know what we're going to transition to next.

• 49:45Ben Gilbert?

  Let's see, out of 96, I think we're talking about.

• 49:49David Rosenthal?

  We're now 98.

• 49:51Ben Gilbert?

  98. Are you keying off my buying something with shares?

• 49:54David Rosenthal?

  Yes, I am.

• 49:56Ben Gilbert?

  Are we going insurance?

• 49:57David Rosenthal?

  We're going insurance.

• 49:58Ben Gilbert?

  Tell me about Gen Re, David.

• 50:00David Rosenthal?

  Let's talk Gen Re. So yeah, Warren hated issuing stock, but he's like, stock is so overpriced. I said it, not him.

• 50:10Ben Gilbert?

  Note that he didn't say it's overpriced. He said it's not underpriced.

• 50:13David Rosenthal?

  Exactly, exactly. So in 1998, he makes another shocking announcement. Berkshire is gonna buy Gen Re, one of the world's largest reinsurers, for $22 billion. Remember just a few years ago, it was like huge news when Buffett would put $1.2 billion into Coke or, you know, I think buying the rest of Geico for $2 billion. Like, that was huge. That was, I think that was the biggest deal they'd done before.

• 50:41Ben Gilbert?

  Yeah, so this general reinsurance purchase, by far their largest acquisition ever.

• 50:45David Rosenthal?

  Yep, it is the elephant gun hunting phase of Warren's acquisition career. So yeah, it's literally the largest deal Berkshire's ever done by a factor of 10, and he does it with all stock. Not a dollar of cash goes out the door. He trades 20% of Berkshire's market cap for Gen Re.

• 51:10Ben Gilbert?

  Wow.

• 51:11David Rosenthal?

  Spoiler alert, does not go well. Famously, when Charlie is asked about the deal when it gets announced, Charlie is like the bluntest character as we have seen and as we will see at the end of this episode. Charlie's response on the deal when asked about it is that Warren only called him, quote, "very late in the game on this one." So he's just kind of like, "I'm washing my hands of this." And I think if there's one lesson in this series among many, it is that if Charlie Munger is your business partner, you should probably always call Charlie "early in the game," not "late in the game." See Solomon Brothers?

• 51:48Ben Gilbert?

  And so what, what was the really alluring thing about buying Gen Re? Cause it massively multiplied the amount of float at their disposal by buying it, right?

• 51:56David Rosenthal?

  Yeah, they got a bunch of float. To be honest, the alluring thing about buying Gen Re was that Warren thought that Berkshire stock was overvalued and he wanted to take advantage of this moment in time and use it to do a big acquisition. And he also, this is according to Alice in the Snowball, most if not like all of Gen Re's investments, cause as we've talked about insurance companies with their float, they invest the float in securities and Warren and Berkshire prefer to do that in equities. Most of Gen Re's investments were in debt and relatively conservative bonds and the like, and so Warren's worried about a equities crash coming along here because of the tech bubble.

• 52:37David Rosenthal?

  He wants to essentially dilute Berkshire's security holdings. He doesn't want to sell security because that would be a signal to the market. Like Warren Buffett is selling stocks. That might tip everything over into the crash. He's like, how can I change the mix of securities that we have at Berkshire without me doing something like that? I can do this all stock equity deal by Gen Re and essentially get a portfolio of 20-ish billion dollars of bonds that are going to be insulated from equity prices.

• 53:09Ben Gilbert?

  Boy, that is some financial jujitsu engineering right there.

• 53:13David Rosenthal?

  He definitely overthought this one because Gen Re sucked, to be blunt.

• 53:18Ben Gilbert?

  I will say that it's funny, you said that, I just pulled up the historical price to book ratio of Berkshire. I think the only two times that it was meaningfully above 2X, that the stock was trading above twice book was right around 96, when they did the B shares and then right around 98. So I think he definitely felt like those were great times to be using Berkshire's stock.

• 53:42David Rosenthal?

  Use the currency.

• 53:43Ben Gilbert?

  Yep.

• 53:45David Rosenthal?

  So, uh, yeah, January. So we didn't cover this, uh, last time because it didn't fit with the story, but back in 1985, Warren made almost undoubtedly the best hire that he ever made in his career. Uh, and he makes very few hires, as we shall see. He hired Ajit Jain to run Berkshire's insurance businesses. Ajit is like, this dude is a monster. You have no idea how unbelievably great Ajit is.

• 54:15Ben Gilbert?

  He's an underwriting savant. Like this guy can like, hear a crazy story that you tell him like, what if I'm going to strap this guy to this rocket and then we're going to shoot it at a hurricane? And, you know, I want insurance that bypasses the force majeure and that, and he'll give you a price for it. He's like, oh, I know exactly how to price this policy.

• 54:34David Rosenthal?

  He is jet, jack, ring roll reincarnate. So Ajit, he grew up in India. He went to IIT in India, and then he worked for IBM. Maybe this explains Buffett's fascination with IBM. He's like, Ajit came out of there. It's gotta be good. Then he goes to Harvard Business School and then he goes to McKinsey and then he joins Berkshire. We're talking about him like he's an insurance pricing savant. That is true. There's probably never been anybody better than Ajit at pricing insurance. He is also like, hyper aggressive. Like if Ajit had decided to be a venture capitalist, he would have been like Bill Gurley times 10, like hyper smart, hyper aggressive for basically

• 55:16David Rosenthal?

  his whole career. I doubt this is still going on probably at Warren's request, not Ajit's, but for like decades, every night, I don't know if it was every weeknight or every night of the week, they would do a call, a nightly call at 10:00 PM to go over the insurance portfolio and all the deals that Ajit was doing. Like, he is just a monster. So when he joins, he takes over all of Berkshire's other insurance businesses besides GEICO to start. And then he starts a new reinsurance business within Berkshire, like himself, like this is the great entrepreneurial story within Berkshire. And famously, he takes out an ad in Business Insurance Magazine, the full page ad when he starts

• 56:01David Rosenthal?

  this, saying, "We are looking for more, more casualty risks where the premium exceeds $1 million." They're like, "Nobody does, this is the insurance business. Like, this is crazy. Nobody does this."

• 56:14Ben Gilbert?

  So he's basically saying, like, "I will insure things that other people won't insure because I'm more confident in my ability to price these weird, crazy, expensive policies."

• 56:23David Rosenthal?

  Yes. And the value of the premium for the policy, I want everything. I want the craziest, highest value premiums in the world that other insurers, like a Gen Re and Swiss Re and the like,

• 56:33Ben Gilbert?

  Would never do.

• 56:34David Rosenthal?

  Would never do. They're just like, "That's way too much money at risk."

• 56:38Ben Gilbert?

  Right. They're, they're factories. They're looking to identify the same thing over and over and over again and insure it. These actually have a very fun name, too. These are called Supercats.

• 56:46David Rosenthal?

  Yes.

• 56:47Ben Gilbert?

  Or super catastrophic insurance policies. Supercat is a really cool name for a pretty boring thing.

• 56:52David Rosenthal?

  Totally. I mean, this is stuff like, I think the story goes that after 9/11, where Gen Re would take huge losses in 9/11 and Berkshire and Ajit would be fine. But after 9/11, Ajit starts going around the world and like, writing terrorism insurance policies left and right. Cause like, everybody wants them now. Everybody's scared. And he's like, "Oh, great. Like, this is actually not that risky. I'm going to make a killing on these super high premium, tens of millions of dollar policies."

• 57:22Ben Gilbert?

  Yeah. The crazy thing is like, that Gen Re was basically mismanaged and they had these policies written in 9/11 that had holes in them that they shouldn't have, where they took on risk that they basically weren't being paid for and then just got destroyed.

• 57:35David Rosenthal?

  Yeah. So here's what happens. The obvious thing to do in 98, when they buy Gen Re, would be to just give Gen Re to Ajit. Like, Ajit is the greatest of all time. Give him more. Instead, Buffett runs the, you know, the White Knight acquirer playbook, even though he has no reason to now.

• 57:54Ben Gilbert?

  You keep running your own business.

• 57:55David Rosenthal?

  Tells management, even though they're not the founders of the company, he's like, "We love you. You keep running your own business. You do what you do. You know, I'm going to be", this is a quote from Warren, "strictly hands off." Yikes. So immediately after Berkshire buys Gen Re, news hits that Gen Re is a counterparty on a massive insurance fraud scheme called Unicover that I believe it was residential insurance. They immediately take a $300 million underwriting loss. This is like within the first week after Berkshire buys the company. Remember Buffett's rule number one, which is never lose money?

• 58:31Ben Gilbert?

  Never lose money.

• 58:32David Rosenthal?

  Rule number two, see rule number one. Yeah. First week on the job, you lost $300 million. Great. Then they do a bunch of bad deals, insuring Hollywood box office receipts for movies. That loses them, I think about another billion dollars. It's rough. Then 9/11 happens. They lose all told close to another $2 billion in 9/11. And then finally, and probably the worst offense, given the Solomon history, in the early 2000s, so a couple of years after the acquisition, Gen Re gets involved in a major accounting scandal with AIG, propping up AIG's balance sheet. Nobody ended up going to jail on this

• 59:10David Rosenthal?

  one, but like, basically like massively hurt Gen Re's reputation and brought the regulators all over them. And like, this is the one thing Warren wants less than anything. Eventually, Warren would oust the old management, fire them, and bring in Joe Brandon and Tad Montross to fix it. They do a good job. And then eventually Warren does hand the whole thing over to AIG in 2016. So AIG is now running Gen Re in addition to everything else. Wild saga here.

• 59:43Ben Gilbert?

  What a mess.

• 59:43David Rosenthal?

  What a mess.

• 59:45Ben Gilbert?

  All right, listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team, and deploying them is no longer the hard part.

• 59:59David Rosenthal?

  Yeah. The hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. Like, the risks are real.

• 1:00:13Ben Gilbert?

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• 1:00:23David Rosenthal?

  Yep. AI Control Tower gives enterprises a single place to see, manage, govern, and optimize AI across the entire business. And it works with any AI, not just theirs. Every device on your network, every permission across every system, every AI agent, visible and secure in one place.

• 1:00:40Ben Gilbert?

  And ServiceNow can do this because they've spent more than 20 years building the operational backbone of the enterprise. The workflows, governance, approvals, security controls, and institutional knowledge that power how work actually gets done across IT, HR, customer service, finance, and security.

• 1:00:56David Rosenthal?

  ServiceNow already runs more than 100 billion workflows annually and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates.

• 1:01:13Ben Gilbert?

  And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all?

• 1:01:22David Rosenthal?

  So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely, at scale, go check out servicenow.com/acquired and tell them that Ben and David sent you.

• 1:01:33Ben Gilbert?

  All right, David, take us on from Jen Re. Where else are we going?

• 1:01:36David Rosenthal?

  All right. We can't move on fast enough from Warren's perspective. So before the tech bubble pops, he does one more surprising to outside watchers move, which is in 1999, he buys a utility company. Very sure, buying a utility company. This is what Warren has come to. It's like the light company that provides your electricity. He buys Mid-American Energy Holdings. And people want to know, why is Warren buying a utility? Alice writes in the Snowball, Warren was already being ridiculed for his refusal to buy technology stocks. Now he had bought the light company. How dull.

• 1:02:16David Rosenthal?

  The energy business, I think, ends up being, you know, fine for Berkshire. Like, it's another fine investment. He doesn't lose money. They're fine. It does come, though, with two managers that Warren seems to greatly admire. By the way, we talked about this in the pre-show, but we haven't yet talked about it on the episodes. You know how you see Berkshire Hathaway real estate agents all over the place?

• 1:02:38Ben Gilbert?

  Oh, yeah.

• 1:02:39David Rosenthal?

  That came with Mid-American Energy Holdings. They also had a real estate brokerage.

• 1:02:44Ben Gilbert?

  So weird. How does that work? Like, my understanding of the electric company is that it's like a public utility. It's market by market, then, that where some of them must be private companies?

• 1:02:55David Rosenthal?

  Yeah, I don't know exactly. I mean, there are lots, obviously lots of utilities, separate utilities in different geographies all across the country. But yeah, somehow they had a real estate brokerage in there as well. So there is CEO of the company, one, David Sokol, and the number two.

• 1:03:14Ben Gilbert?

  Remember that name?

• 1:03:15David Rosenthal?

  Yeah, remember that name. His number two, a guy named Greg Abel, the just-announced-

• 1:03:22Ben Gilbert?

  Easy to remember that name.

• 1:03:23David Rosenthal?

  -future CEO of Berkshire Hathaway. Yeah, that's how they come into the company. We're going to hear much more about them later. So, okay, finally, all this tech bubble stuff comes to a head in the 2000 annual meeting, where Warren and Charlie are just getting pummeled by questions from shareholders onstage in the arena, asking what on earth they are doing. Why do they not own technology stocks?

• 1:03:50Ben Gilbert?

  Everyone else is getting these five Xs in a year. What are you doing here, trying to make me 15%?

• 1:03:57David Rosenthal?

  You're making me poor. Warren says, quote, "I don't want to speculate about high tech." And then, of course, he goes on to speculate, and he compares the whole thing to a Ponzi scheme. And then Charlie jumps in. This is my favorite. This might be my favorite Charlie moment of all time. He jumps in, and he says, "The reason we use the phrase 'wretched excess' is because it produces wretched consequences. It's irrational. If you mix raisins with turds, they're still turds."

• 1:04:29Ben Gilbert?

  It's an all time great Munger quote.

• 1:04:31David Rosenthal?

  I don't know if there is a video of this, if there is, I haven't seen it, but I can just imagine like the entire arena just being like shocked, like, did Charlie Munger just say turds? Like, what? I think Alice actually says that line in the snowball. But if you think about what each of them is saying, it's telling and it's actually quite different. Warren is saying, I don't understand this stuff. I refuse to engage. No, no, no, no, no, no, no, no, it's a Ponzi scheme. Charlie is saying something different here. He gets that there are raisins in the tech stocks, like Microsoft and the like. And, you know, there, there are real companies in there, but there are also turds and Microsoft may be doing great, but if and when this whole tech bubble thing pops, and it will,

• 1:05:15David Rosenthal?

  you know, the splatter from the turds is going to get all over your raisins too, and drag it down.

• 1:05:20Ben Gilbert?

  And when Warren says, you know, I don't understand this thing. It's a Ponzi scheme. He's referring to like the crazy multiples that people are paying on top of revenue. Cause of course profits don't exist, much like today, but like, let's even walk in a few more levels. Often revenues don't exist for companies that are going public, which like that you only see in like space or like, you know, battery technologies or something now. But then even further, like some of these companies are selling products, but they have upside down unit economics. And so they're not even like gross profit positive. So there is all sorts of, you could sort of understand why you would look over to Charlie and have him saying there's turds in here because truly there were, I mean, it's crazy. Some of the stuff go in public.

• 1:06:05Ben Gilbert?

  Then you look over to Warren and he understands all the financial infrastructure around it, that the banks are incentivized to do it, that the earlier shareholders are incentivized to get marked up and get it public and then sell to get it off their books. You know, there, there was Ponzi scheme like things going on because there was so much rampant speculation about. Raisins and turds.

• 1:06:24David Rosenthal?

  Yep. And so actually, I was curious about this. So I did some analysis. This is flash forwarding maybe too much, but yes, at the absolute height of the tech bubble, when this shareholder meeting is happening, if you were to put a dollar into Berkshire Hathaway stock, the A, if you could buy a fractional share of the A for a dollar, that dollar, even today in May 2021, so 21 years later, invested in Berkshire would outperform the NASDAQ. It would definitely outperform the S and P, and it would very slightly outperform Microsoft. So if you had invested a dollar in Microsoft in, you know, call it the first half of 2000

• 1:07:07David Rosenthal?

  and held it to today, and you'd invested a dollar in Berkshire, you would be doing better in Berkshire than Microsoft. So like Charlie's right here, like the splatter from the turds is going to get over the raisins, all over the raisins, including Microsoft. But if you had invested a dollar in Microsoft versus Berkshire at almost literally any other point in time, either, you know, before, back in like 97, when the famous Sun Valley Panel happened with Coke and the ham sandwich and Bill Gates, Microsoft would be crushing Berkshire if you had put dollars in at that point in time.

• 1:07:41Ben Gilbert?

  Fascinating.

• 1:07:42David Rosenthal?

  If you were to invest a dollar in each, just a year later, in 2001, you would still be doing better on Microsoft. And then of course, the farther you go along.

• 1:07:52Ben Gilbert?

  Obviously anytime since.

• 1:07:53David Rosenthal?

  Anytime since, you're going to be doing much better.

• 1:07:54Ben Gilbert?

  Does this dynamic play out earlier too? Or like, what did it IPO in like 80 to 83, somewhere in there?

• 1:07:59David Rosenthal?

  Somewhere. I mean, there obviously, like if you put a dollar into Microsoft early.

• 1:08:03Ben Gilbert?

  In the early days. Right. Man, it's funny that the dynamic exists twice where if you're super early at Microsoft, then of course it's going to multiply an insane number of times to now. But the run up in the last five years has also been so crazy that if you invested anytime after the, the dot com recovery, which only really was like a year.

• 1:08:21David Rosenthal?

  Yeah.

• 1:08:22Ben Gilbert?

  Then yeah, it's going to outperform Berkshire.

• 1:08:23David Rosenthal?

  It is. It's just, you know, it's both like Charlie is right here that like, yes.

• 1:08:28Ben Gilbert?

  In that exact moment.

• 1:08:29David Rosenthal?

  The bubble popping is going to drag everything that is good down with it. But we're almost really at the point where like, it doesn't even matter anymore. If you had invested at the top of the market in the tech bubble, you'd still be doing better than Berkshire, except for like a very narrow window of time.

• 1:08:46Ben Gilbert?

  Yeah. Another point that they're both making here is that.

• 1:08:51Ben Gilbert?

  There's a lot of innovation going on, for sure. You look around, there's for sure all these incredible things going on with the internet, but the underlying stuff that's going on with Microsoft and the hardware makers, the whole ecosystem, there's a dramatic amount of innovation. The reason that they don't invest, and this comes out in a 1999 Fortune article that Warren writes, sort of warning about the dot com bubble. Of course, he doesn't say the bubble's going to burst. He doesn't say he's calling it top, but he sort of beats around it a little bit and says he's not interested in buying right now, I think is sort of the way he positions it. He talks about how in the early days of making cars, there were hundreds and hundreds and hundreds of car manufacturers, lots and lots

• 1:09:34Ben Gilbert?

  of innovation going on. And today, there are only a few. And so just because-

• 1:09:39David Rosenthal?

  He used this analogy at the annual meeting this year, too, I think, right?

• 1:09:42Ben Gilbert?

  Yep. Just because there is innovation, sure, that's great for the innovator in the short term, but for the investor, for the shareholder, that doesn't mean you're going to be able to capture value. You have to be able to create a moat. You have to be able to figure out what about the business creates that durable competitive advantage so all the profits don't get arbitrage away. And I think he actually finishes the article citing the most perfect example of arbitraging profits away by over 100-year period going from pure innovation to sheer commodity, which is the airline industry. And he highlights, I don't think this is exactly true anymore, but it was true at the point in 99 when he

• 1:10:23Ben Gilbert?

  wrote it, that the sum total, if you add up all the profits and subtract all the losses from the whole airline industry since the inception of airlines, it was a loss.

• 1:10:32David Rosenthal?

  Yeah. And then he says, this is sort of gruesome, but I think he ends the article, right, with saying that he'd like to think that if he could go back in time to, was it 1903, Kitty Hawk, when the Wright brothers flew, that he would do capitalists a favor and shoot them down?

• 1:10:51Ben Gilbert?

  Yep. Which is a insane way to put it, but the point that he's making is just so stark. And I'm sure it's not something I had really thought about, and it's certainly not something that was on people's minds in 99, which is the proliferation of innovation does not necessarily imply that there is value to be captured in a durable way by a single firm.

• 1:11:15David Rosenthal?

  Yep. Not necessarily. It also doesn't necessarily imply that it won't be. And of course, Warren is hugely wrong about technology and the internet on this front. But and also, everybody, remember what Warren says here about the airlines and what must be going on in his mind later in life when he buys every airline stock in the industry.

• 1:11:37Ben Gilbert?

  Twice.

• 1:11:38David Rosenthal?

  Twice. Yeah. Okay. For the moment, though, tech bubble bursts, as we all know. Warren, and he's still top of his game. Oracle Omaha, everybody's raining praise on him. He saw it all come in. All true. The early 2000s are, you know, more greatness for Warren. But then in July 2004, Suzie passes away, and this is devastating to Warren, even though they haven't actually lived together for like 25 years at this point. He still loves her hugely and depends on her.

• 1:12:18Ben Gilbert?

  And they're technically married, right? Even though they live on.

• 1:12:20David Rosenthal?

  They're still technically married, even though they don't live together.

• 1:12:23Ben Gilbert?

  Thousand miles away.

• 1:12:23David Rosenthal?

  She lives in San Francisco. He lives in Omaha. Like we said last time, we're not going to cover it on acquired here, but his personal life is complicated. Let's just say he, I do not think at all that Warren is or was ever like a womanizer, but it is true that he had many women in his life. And I think it was all above board. Anyway, it's all in the snowball. You can go read about it. But he's devastated when Suzie passes away. Outside of his personal grief, though, which is.

• 1:12:54David Rosenthal?

  Acute. The most pressing issue is what's going to happen to the Buffett fortune and to Berkshire? Because in typical Warren fashion, until this point in his life, he never thought about it. He always assumed that Suzy was going to outlive him. And the plan for the now 40 plus billion dollars of net worth that the Buffett family has, the plan was always that after Warren would die, Suzy would set up a foundation there. She already had the Susan Buffett Foundation and give it all away. That was the plan, but well, obviously that's not going to happen.

• 1:13:31Ben Gilbert?

  Yeah, I mean, Warren has been thinking about the conundrum of what to do with his wealth since long before he was wealthy. I mean, in his teenage years, he was already thinking about, well, when I'm really rich, what do I do with it all? And he is like immensely frustrated by any attempt that he has at philanthropy, which has to be why he basically says, that's a Suzy problem. She'll figure it out and set it up when I'm done. His frustrations largely come from the fact that he does have things that he really cares about and that he cares about promoting. I think he's very worried about an impending human societal problem of overpopulation, which interestingly enough, didn't end up happening, that the world has sort of slowed and I believe maybe even stopped the global population growth.

• 1:14:15Ben Gilbert?

  He was very worried about not only are we going to use up all the energy on earth, but are we going to use up all the food and will famine be an issue? And so he had tried to give to various charities over the years, but he was so obsessed with performance and metrics and that kind of money was a scoreboard, that when he would give it and he couldn't sort of understand the investment return, he wasn't privy to the investment return, he couldn't sort of choose the investment manager, that it really wasn't used to compound in the way that he was used to his investments compounding in a way that you could sort of see a dollar return on. And it was just immensely frustrating and he'd really thrown his hands up in the air and kind of just donated here and there, but had a big fortune.

• 1:14:56David Rosenthal?

  Yep. And I think as we chronicled in part one, like there is this element of his psychology where like, He just kind of cares about the scoreboard. He just wants the money to have as big a number as possible. He doesn't want to buy stuff, giving it away. Like, sure, like eventually he'll do that. But like, he just wants to get the number as high as possible by the day he dies. That's what he cares about.

• 1:15:15Ben Gilbert?

  Which is of course, competing with the fact that he wants people to like him. Not only does he want to be very wealthy, he wants the world's adoration. I mean, he throws himself a festival once a year for everyone to fly in and visit. Like nowhere in securities law does it say that your shareholder meeting must be like this. It is not, this is a Warren Buffett creation to bring this upon himself. He wants to be a beloved sort of figure and teacher on top of being the wealthiest person on earth. And, you know, you could see how those things could come to a head.

• 1:15:45David Rosenthal?

  Yep. So you could accuse him of not being innovative in his investment philosophies. Never accuse him of not being innovative in finding ways to get what he wants. So after Suzy dies, the wheels start turning. He invites Bill Gates to join the Berkshire board, which up until this point, the board was basically 100% his family and close business associates that he actually worked with, like Charlie, Tom Murphy, Ron Olson from MTO, Don Keough is on the board, David Gottesman from New York back in the days. Even though Gates is a close friend, I think he's the first real like outsider

• 1:16:27David Rosenthal?

  who Warren's never done actual business with, Berkshire's done business with, that joins the board. So it's like, there's something, something is afoot here. And then we all find out, probably the reason why this was happening. In 2006, Warren makes what was almost certainly the biggest decision and perhaps the most impactful decision in philanthropic history. And I totally remember when this happened. He calls a press conference and he announces that he is going to give away 85% of his Berkshire stock, which was worth $37 billion at the time.

• 1:17:08David Rosenthal?

  And five sixths of it is going to go to the Bill and Melinda Gates Foundation for them to manage. And the other one sixth is going to go to his children's foundations and Susan Buffett Foundation. So this is crazy. There's no Warren Buffett Foundation. He's not going to give the money away. He's not going to have to make any of these decisions. He offloads all of it to the Gates Foundation.

• 1:17:32Ben Gilbert?

  Which really is remarkable. It's like, he's like, boy, it's really hard to give money away. I don't know the first thing about her. I don't, there's a lot of infrastructure required to do this. Actually, that guy's already built the infrastructure and I very much trust him.

• 1:17:44David Rosenthal?

  And this is what's so amazing. Everybody is like, this is like win, win, win for Warren. Everybody is like, Warren, you are the most amazing, most generous person to give. This is the biggest gift in history. You have done such an amazing thing for humanity. This of course leads to the Giving Pledge that the Gateses and Warren create in 2010. And it becomes like the coolest thing in the world for billionaires to give their money away. Like Warren is like setting like a status symbol here. And meanwhile, Warren is getting exactly what he wants. He never has to deal with any of this.

• 1:18:20Ben Gilbert?

  Yeah, the one drawback for him has to be the fact that the Gates Foundation legacy will long outlive Microsoft's legacy in terms of the way that people remember Bill and Melinda. Microsoft will still be a successful company 50 years from now, but I don't think people will remember it as Bill Gates's legacy. The foundation, absolutely. And so with Warren, you know, it has to be for someone who is very concerned with his ego. It had to be a big trade off to not have a gigantic endowment with his name on it.

• 1:18:54David Rosenthal?

  Yep. I get it. Who knows how much he planned this out, but like him doing this and then creating the Giving Pledge. And driving all of the philanthropy that that does by making it like the ultimate status symbol to give your money away.

• 1:19:12Ben Gilbert?

  Should have called it the Buffett Giving Blood.

• 1:19:13David Rosenthal?

  Totally. Like, that's, you know, gonna go down in history as like the number of billions, tens, hundreds. I did, God knows how many billions are gonna be given away because of this. Like,

• 1:19:25Ben Gilbert?

  Yeah, it's pretty cool.

• 1:19:26David Rosenthal?

  It's pretty cool. It is pretty cool. I mean, it's amazing. It's wonderful. It's great for society. It's also like Warren must just be so pleased with himself with this.

• 1:19:37David Rosenthal?

  So that all happens in the mid to late 2000s.

• 1:19:42Ben Gilbert?

  Which is an interesting turning point for Berkshire Hathaway's strategy. I mean, if you think about this period of like 1990 to 2005, maybe extended to 2010, you know, they're, they're going after buying these good businesses where the operators still care about the businesses after they sell it. That's sort of like the secret to success. You leave the management in place, except for January, that was a bad decision. And maybe even Mid-America Energy.

• 1:20:08David Rosenthal?

  Well, Sokol was a good manager. He's just, he was a little too good, as we'll see.

• 1:20:13Ben Gilbert?

  You know, they, they could do this thing where they would like underpay versus private equity. They were the better option for these companies that were, you know, anywhere from the hundreds of millions to low billions in, in value. But it does get to the point pretty quickly with just the cash on hand, that the amount of money they need to deploy just got too large. And there's not enough furniture stores and family-owned jewelry chains in America to go buy.

• 1:20:34David Rosenthal?

  Yep. And this is real. I mean, like, one thing that becomes clear in that is, you know, Warren keeps harping on, we're so big, it's hard to move the needle. And like, that's really true.

• 1:20:43Ben Gilbert?

  Right. He has been forecasting this for 25 years.

• 1:20:45David Rosenthal?

  Yeah, that's really true at this point. Like, the law of gravity tying Berkshire to the S and P 500 is like. There's a lot of gravity.

• 1:20:56Ben Gilbert?

  Yep.

• 1:20:57David Rosenthal?

  So the Giving Pledge, of course, you know, it's like 2006 when Warren makes his major gift to the Gates Foundation, but it's not until 2010 that they all launched the Giving Pledge. Why did it take so long? I assume it took so long because not too many people wanted to give away a lot of money in the intervening years between 2006 and 2010 because a little thing called the financial crisis happened.

• 1:21:26Ben Gilbert?

  Dun, dun, dun. As discussed so many times on this show, beginnings of Airbnb and Uber and cryptocurrency and on and on and on.

• 1:21:35David Rosenthal?

  What's that article embedded into the genesis block of Bitcoin?

• 1:21:42Ben Gilbert?

  Yes, it was Chancellor on Brink of Second Bailout for Banks, which allegedly is mocking the fractional reserve banking system. But yes, it is a very deep reference in the midst of the financial crisis.

• 1:21:57David Rosenthal?

  Indeed, indeed. So here's Warren and Charlie too. He's freshly unencumbered by the weight of having to deal with his wealth. He's back in the saddle. He's not literally unretired, but like figuratively unretired again for the third time, ready to go to work. And he and Charlie have seen this movie before. They were there. They were leading players in the dress rehearsal of Solomon in the early 90s. So they're like, all right, well, I think we know what to do here. The whole thing kicks off, I remember this so well, in March of 2008, when Bear Stearns, the storied investment bank, failed.

• 1:22:38David Rosenthal?

  Just like Solomon, the problem at Bear was nominally it failed because they had two in-house hedge funds that were mortgage-backed security hedge funds and those had huge losses. That wasn't why it failed. It failed because Bear's counterparties stopped trusting their paper and stopped being willing to trade with them. And like we saw with Solomon. You know, a huge amount of their capital base turns over overnight because you're settling trades and you have counterparties on those trades. And if your counterparties no longer trust that you're good for the money, they're going to stop trading with you and then it all vicious cycle comes to a screeching halt. That's what happened with Bear. So during the course of one week in March, from March 10th through, which was Monday through the

• 1:23:23David Rosenthal?

  end of the week, which would have been, what, I guess the 14th, the Friday. So Bear Stearns stock had started the week trading at $63 a share. And by Friday, they're toast. They're bankrupt. And over the weekend,

• 1:23:40Ben Gilbert?

  Wow.

• 1:23:40David Rosenthal?

  the Fed engineers an asset sale to JP Morgan for $2 a share. So the old Bear Stearns entity is completely bankrupt. The good assets, the non-toxic assets get put into an LLC that the government creates and JP Morgan buys it for $2 a share, backstopped by government money. So like, if anything goes wrong, JP Morgan's not on the hook. It's like, it's bad. Never seen anything like that. Berkshire, of course, I don't know if they got a call. If I assume Warren probably got a call from somebody about Bear Stearns that week, decided not to save them or bail them out. But Berkshire has $37 billion of cash sitting on its books

• 1:24:22David Rosenthal?

  at this point, which today seems kind of quaint compared to Apple and Microsoft and the like. But, you know, back then, nobody else had that kind of cash anywhere. The only people who had that were governments.

• 1:24:32Ben Gilbert?

  Right. I have to assume the most valuable company in the world at that point probably was an oil company and probably was in the neighborhood of $200 billion to $300 billion.

• 1:24:40David Rosenthal?

  Yeah, but probably didn't keep a lot of cash on their books because, you know, you're an oil company, an operating company, you got all, you know, tied up in capital.

• 1:24:47Ben Gilbert?

  Oh, for sure. But just making the point that like, things are almost an order of magnitude smaller at the largest company in the world level.

• 1:24:54David Rosenthal?

  Totally. Both things. Like, the companies are smaller and nobody's piling up cash like internet companies are today, except for Berkshire. So they have all this cash. It's a great climate to invest. But one of the lessons that I think Warren and Charlie took away from the Solomon debacle was you don't necessarily want to be like the major primary equity holder during a crisis in case things really go wrong. You don't want to be that guy that's called up in front of Congress. You know, you really don't. So instead of making a lot of equity investments at this time, they decided instead to pursue a different strategy.

• 1:25:34David Rosenthal?

  They're going to make debt and preferred equity fixed income investments in companies that need capital.

• 1:25:42Ben Gilbert?

  Can you simplify that for us? Is it like, hey, we're going to loan you money? And if we want to, then we might exercise some warrants.

• 1:25:47David Rosenthal?

  Exactly. And we're going to loan you money at a, at a very high interest rate. And yeah, maybe we won't make equity type returns, but we're going to have.

• 1:25:55Ben Gilbert?

  Whole bunch of downside protection.

• 1:25:57David Rosenthal?

  A whole bunch of downside protection and some more upside.

• 1:26:00Ben Gilbert?

  And we don't have governance over the company.

• 1:26:02David Rosenthal?

  Yeah. And you're not going to call us in front of Congress.

• 1:26:06David Rosenthal?

  So the first one of these that they do is in April of 2008, right after the bear blow up. Mars, the candy company diversified conglomerate, one of the largest private companies in the world, announces that it is acquiring Wrigley, the chewing gum and other candy manufacturer. It's like the C's candy coming back to roost here for $23 billion. But it's kind of hard to get financing from banks right now.

• 1:26:35Ben Gilbert?

  That's a lot of gum.

• 1:26:36David Rosenthal?

  That's a lot of gum. I don't know what else Wrigley had. I think they owned the Cubs and.

• 1:26:40Ben Gilbert?

  I was going to say, there's no way there's even $2 billion of gum a year purchased. So.

• 1:26:45David Rosenthal?

  Well, you know, hey, Warren started by selling gum, right? You know, buying in bulk and breaking up the packs.

• 1:26:50Ben Gilbert?

  All right. Keep talking. I'm looking up what else Wrigley does.

• 1:26:53David Rosenthal?

  So Mars is going to put up $11 billion of equity for the deal. Goldman and JP Morgan are going to do a little over $5.5 billion debt, but they still got a $6.5 billion hole they need to fill. Well. In steps Warren and Berkshire. So they invest $6.5 billion to fund this deal of Mars, not Berkshire, buying Wrigley and they do it with $4.4 billion of debt that Mars buys from Berkshire with an 11.45% interest rate on the debt.

• 1:27:32Ben Gilbert?

  Whoa.

• 1:27:32David Rosenthal?

  That's unreal. Like Mars is a great, very stable company.

• 1:27:37Ben Gilbert?

  This must really be their only option.

• 1:27:39David Rosenthal?

  I remember seeing in the last couple of months that Amazon or Apple or, you know, somebody priced a debt offering recently at like a, something absurd, like a 0.3% interest rate or something like that.

• 1:27:54Ben Gilbert?

  Yeah. Times are very different and lots of options available for corporations.

• 1:27:58David Rosenthal?

  Lots of options available for capital. 11 and a half percent interest rate. That is unreal. The other $2 billion Berkshire invests as preferred equity with a 5% interest rate. They get some warrant coverage on it. All in, they end up realizing a 14% IRR on this deal, which is pretty good because there's not a lot of risk here.

• 1:28:20Ben Gilbert?

  No. And as Warren would say, you know, people chew a lot of gum in the past. We're going to chew a lot of gum in the future.

• 1:28:25David Rosenthal?

  Oh, Warren.

• 1:28:27Ben Gilbert?

  David, it really is pretty much all gum. Like this is crazy or at least a majority. So in 2007, they did over $5 billion in revenue and they own, you know, juicy fruit, spearmint, double mint, big red, extra orbit. There's some other candies.

• 1:28:41David Rosenthal?

  So they own like all the gum brands.

• 1:28:42Ben Gilbert?

  They do. Yeah, exactly. There's some candies too. There's, uh, and but this may have been after the combination with Mars, but now under the, this subsidiary, under the Wrigley subsidiaries, there's Skittles, Starburst, Altoids, Gummy Savers, Life Savers, that sort of stuff too.

• 1:29:01David Rosenthal?

  I'm having a heart attack just hearing all these names. But yeah, so like there's, you know, as I was saying, there's a huge arbitrage here because I think this is also what Warren and Charlie realize. The government is bringing the bazookas out. They're slashing interest rates. They're throwing money into the system, everything that we just saw them do during COVID. They first did during the financial crisis.

• 1:29:25Ben Gilbert?

  Is this the start of quantitative easing?

• 1:29:27David Rosenthal?

  This is like the bazooka of quantitative easing. So you've got this crazy situation where government is making capital available for free, basically. And Berkshire can come into these situations and make capital available in fixed income, you know, guaranteed return with 10 to 15% yields.

• 1:29:49Ben Gilbert?

  So why is that? Is it just that like there's no way to get the fear of the Mars Corporation? There's no way to get your hands on that free money?

• 1:29:55David Rosenthal?

  I think in this case, yes. I think there's also a reputational element to this too, right? Like if people are worried, especially in the financial sector, which we'll get to in a minute. People are worried about counterparty risk and trust and the effective runs on the bank and the investment bank sense. Well, bringing Berkshire and Warren in is gonna do a lot to shore up trust here.

• 1:30:18Ben Gilbert?

  And I guess another way of saying to get your hands on the money from cheap government, you know, cheap money from the government, that's a bailout.

• 1:30:25David Rosenthal?

  Yeah, that's a bailout.

• 1:30:27Ben Gilbert?

  You don't want to be the company that got a government bailout when others didn't.

• 1:30:30David Rosenthal?

  And probably doesn't help with trust too much.

• 1:30:33Ben Gilbert?

  Yeah.

• 1:30:34David Rosenthal?

  So that's in April. And then Berkshire's fairly quiet for the next few months. And I remember these few months in between March and September are like the eye of the hurricane. You know, everybody's like, oh, it's gonna, everything gonna be okay here. Like, you know, it's a weird moment. But then of course, September rolls around and 2018.

• 1:30:55Ben Gilbert?

  It's funny because you have this memory of the spring. This was after my freshman year of college. That spring, or it was like the spring quarter, I was completely oblivious. I was getting ready to go do my first internship at Cisco. And I just remember like preparing for it and going. And there was not like a concern in my mind that like, maybe my internship will get canceled, or maybe these companies will go under. I do, however, remember what you're about to tell. Like last few weeks, my internship, just watching, like being glued to the news and refreshing every day come September.

• 1:31:23David Rosenthal?

  Yeah. Wow. That's so funny. Yeah, we had, even though like we're so close in age, we had such different experiences, just like me being out of college and in the workforce.

• 1:31:32Ben Gilbert?

  Yep. And sector, like I'm just not that convinced that, you know, if you were outside of finance, or if you were in tech at that point, that you would have seen it that early. You would have heard the news about Bear Stearns, but it wouldn't be the sort of daily obsession.

• 1:31:43David Rosenthal?

  Yeah, you'd be like, oh, Bear Stearns, all right, whatever, you know? Yeah.

• 1:31:46Ben Gilbert?

  Interesting. Until the fall.

• 1:31:48David Rosenthal?

  Until the fall. Yeah, I mean, the fall was just like the nuclear bomb goes off. And September 2008, of course, we're talking about Lehman. So here's a fun story. This story is great. So the Lehman weekend, Warren is, of course, on vacation. I think he's in Canada with Astrid, his by then wife. I think they were married at that point.

• 1:32:09Ben Gilbert?

  Certainly partner that lived together in Omaha.

• 1:32:12David Rosenthal?

  Yep. So he gets a call about Lehman. And rumors have been circling that Lehman was in trouble and counterparties were starting to not trust them. And like Warren's about to go see a show, like some sort of performance in the theater. And he says, all right, well, I gotta go see this show. Send me a fax to the hotel that I'm staying at with the details of exactly what's going on and exactly what you want me to do. Send me a fax. So great. He doesn't even have BlackBerry.

• 1:32:47Ben Gilbert?

  And he says this to Lehman Brothers?

• 1:32:48David Rosenthal?

  I don't know if it was a banker who was calling about, I assume it was probably Lehman.

• 1:32:53Ben Gilbert?

  Helping out Lehman Brothers.

• 1:32:54David Rosenthal?

  Yeah, he knows Dick Fuld, who is the CEO of Lehman. It's about bailing out Lehman. Because Lehman's getting worried that like the Fed might not bail him out of here. Like this might be the end. So after the show, Warren gets back to the hotel. There's no fax. So he's like, all right, well, I guess they didn't, they didn't want me that bad.

• 1:33:13Ben Gilbert?

  Must be good.

• 1:33:15David Rosenthal?

  A year later in summer 2009, he's at Sun Valley, of course, with little Suzie. And she's looks at his phone. He has like a flip phone and she says, Dad, there's a text message on your phone.

• 1:33:30Ben Gilbert?

  No way.

• 1:33:31David Rosenthal?

  Yes, yes. And he's like,

• 1:33:33Ben Gilbert?

  You have got to be kidding me.

• 1:33:35David Rosenthal?

  What's a text message?

• 1:33:39David Rosenthal?

  And it's from Lehman and apparently like wires got crossed and it was asking for maybe like the fax number for the hotel or something like what hotel are you staying at or something?

• 1:33:49Ben Gilbert?

  Oh my God.

• 1:33:51David Rosenthal?

  Isn't that amazing?

• 1:33:53Ben Gilbert?

  How Warren Buffett could have saved Lehman Brothers if he was a little more tech savvy.

• 1:33:59David Rosenthal?

  Totally. It's a funny story. Of course, though, there's more to it. Like Warren could have gotten ahold of them and Lehman could, if everybody really wanted it. But yeah, turns out the actual story is, I think that did really happen. Warren tells it in a video. I think it might be a Wall Street Journal video, kind of a retrospective about the crisis. In March, right after the bear collapse, Dick Fold had called Warren about a capital injection then. And Warren had studied it then. It is in a Wall Street Journal video because there's this great moment. He goes in his office, he brings out the printed out Lehman Brothers 10K from 2007 that he had studied in March with all of his handwritten notes all over it. Amazing.

• 1:34:42Ben Gilbert?

  So he was thinking about it.

• 1:34:43David Rosenthal?

  He was thinking about it.

• 1:34:44Ben Gilbert?

  He went Solomon Brothers once, he could have done it again.

• 1:34:46David Rosenthal?

  He was thinking about it, but he decided there was too much risk. And maybe he's probably a little gun shy from Solomon Brothers. So he didn't invest in March. And like he wasn't, I think he says he wasn't going to do it again anyway, in September. So on September 15th, of course, famously Lehman Brothers declares bankruptcy, goes under. Of course, everybody remembers Lehman and talks about Lehman. People forget that AIG also had a crisis that weekend. The Fed ultimately did bail out AIG and not Lehman. Warren got a call about AIG too. He, he passed on AIG. So. He did not invest in those financial firms in September 2008. However, he did get two other calls that he was slightly more receptive to,

• 1:35:31David Rosenthal?

  specifically Goldman Sachs and GE. You wouldn't think of GE as a financial firm, but they had GE Capital, which is a large, very active financial player, and they were in trouble.

• 1:35:45Ben Gilbert?

  Did you know that GE's consumer-facing savings bank was sold to Goldman Sachs? This is like maybe seven, eight years ago and Goldman Sachs rebranded it in a sloppy rebrand. It's kind of a quick one, GS Bank. And it sat as GS Bank for like two or three years, and then that became the underpinnings of Marcus.

• 1:36:06David Rosenthal?

  Oh, no way. I did not know that.

• 1:36:09Ben Gilbert?

  That was originally a GE financial product.

• 1:36:11David Rosenthal?

  No way. And they're both Warren Buffett bailouts.

• 1:36:16Ben Gilbert?

  2008 swoop ups.

• 1:36:17David Rosenthal?

  2008 swoop ups. The very next week after the Lehman bankruptcy, Goldman must've called probably during that weekend too, or shortly thereafter. Berkshire invests $5 billion for preferred equity in Goldman with a 10% annual dividend. So essentially this is, you know, it's like, it's like debt. It's not preferred equity, like preferred equity that you would get investing in a startup. It's a more debt-like instrument. So 10%, coupon, the Solomon coupon, I think was only 9%. So man, this is worse in Goldman.

• 1:36:57David Rosenthal?

  With a call option for Goldman to call the preferred equity back for $5.5 billion, plus Berkshire got another $5 billion of common stock warrants at a strike price of $115 a share. Those warrants end up becoming, they got renegotiated, I think, once with Goldman, but become quite valuable.

• 1:37:20Ben Gilbert?

  Of course they did. It's Goldman.

• 1:37:21David Rosenthal?

  All told, on that deal, Berkshire ends up making about $3 billion. So they get about $8 billion back on the $5 billion that they invested in Goldman. They're pretty good for fixed income. That happens within like two years.

• 1:37:37Ben Gilbert?

  And how long did that last? Did they end up completely out of Goldman shortly thereafter?

• 1:37:42David Rosenthal?

  I think they held the Equity that they exercised from the warrants for a while, but they don't end up making too much more than $8 billion. So still good deal. GE went slightly less well. The week after Goldman on October 1st, Berkshire invests $3 billion in GE for basically the same deal, 10% coupon warrants to buy $3 billion of common stock at $22 a share. Unfortunately, unlike Goldman, whose stock as of today is trading at $364 a share versus the 115 strike price that Berkshire

• 1:38:21David Rosenthal?

  got GE, the strike price was $22.25. GE did briefly, very, very briefly trade above that mark in 2016, but its share price today is $13. Oof, not so good.

• 1:38:39Ben Gilbert?

  That was not the last deal that Berkshire would do with GE. Do you know about the 2015 thing?

• 1:38:43David Rosenthal?

  Oh, no, I don't.

• 1:38:44Ben Gilbert?

  They bought some rail cars from GE, which I think is now viewed as sort of a mistake in retrospect.

• 1:38:52David Rosenthal?

  Interesting. Like actual rail cars or a rail car manufacturing business?

• 1:38:56Ben Gilbert?

  I think actual rail cars. It was like a fleet, like managed by GE. So there's like a business umbrella associated with it. But it was, uh, let's see. Yeah. The, the subsidiary of Berkshire was Marmon Holdings, Inc.

• 1:39:11David Rosenthal?

  Oh, that's gonna come up.

• 1:39:12Ben Gilbert?

  And they acquired these, these assets, you know, it's all the GE rail car services fleet.

• 1:39:17David Rosenthal?

  Boom. Wow.

• 1:39:19Ben Gilbert?

  Yeah, I think for a billion dollars.

• 1:39:21David Rosenthal?

  Wow. Small world. So all told, in 2008, during the crisis, Berkshire would deploy about $18 billion of the $37 billion of cash that it had on hand. The six and a half into Wrigley, five into Goldman, three into GE, 2.7 billion into Swiss Re, Gen Re's major competitor, which was odd.

• 1:39:49Ben Gilbert?

  Interesting.

• 1:39:50David Rosenthal?

  Hey, Warren will make money. That was at a 12% coupon rate. Not bad. This is my personal favorite. $300 million loan to Harley Davidson at a 15% interest rate.

• 1:40:04Ben Gilbert?

  Wow.

• 1:40:04David Rosenthal?

  Dang. 250 million to Tiffany's at 10% and 150 million into sealed air at 12%. I don't know what that was. That was like a airline or like air manufacturer. I don't know. Something.

• 1:40:19Ben Gilbert?

  Well, so this is, I mean, honestly, since like 95, when they bought the second half of GEICO, this is probably one of the top two moves. All the shopping spree that they do in the fallout of 2008 and buying Apple, which well, I'm sure we'll talk about next.

• 1:40:34David Rosenthal?

  Oh, we will get to that.

• 1:40:36Ben Gilbert?

  But I mean, truly like what else has been this sort of like big win in the last 25 years?

• 1:40:43David Rosenthal?

  Nothing. And just in terms of capital deployment, this is the most capital that Berkshire has deployed since, if you could call the Gen Re deal, capital deployment, even though it was all with, with stock.

• 1:40:57Ben Gilbert?

  But this is legitimately like, this is a very impressive move. I mean, this is your classic Buffett. Like I'm gonna wait until prices are rational again, and I'm going to do all my research. And then I'm going to be so prepared that when the moment presents itself, I can act in mere minutes. And that he did.

• 1:41:13David Rosenthal?

  Now, here's some interesting stuff about this. So all of these deals, the $18 billion deployed in 2008, actually the net returns at the end of the day that Berkshire gets back from that capital turns out to be about $25 billion. So you are right, Ben, but from the actual 2008 investing, it's like, that's good. And it's, and he didn't lose money on any of this stuff during 2008. So like rule number one, don't lose money. This is all fixed income.

• 1:41:45Ben Gilbert?

  Right. If this were a venture fund, you'd say, boy, for the vintage, he was top 1%.

• 1:41:49David Rosenthal?

  Right, right, right. Exactly. Exactly. So good, but this is not like amazing. But there's a coda to this.

• 1:41:58Ben Gilbert?

  And would you say 16 deployed to get 25 back?

• 1:42:00David Rosenthal?

  18 deployed to get 25 back.

• 1:42:03Ben Gilbert?

  Over what time period?

• 1:42:04David Rosenthal?

  Uh, probably all told, five years, maybe less. It's like, yeah, pretty good. Pretty good.

• 1:42:10Ben Gilbert?

  Yeah.

• 1:42:10David Rosenthal?

  But.

• 1:42:13David Rosenthal?

  Warren gets one last bite at the Apple, not, not that Apple, different at the financial crisis Apple in 2011, which dwarfs all of this, which is amazingly, I thought that this happened in 2008, but no, it was in 2011, Bank of America.

• 1:42:34Ben Gilbert?

  Oh yeah. How have we not talked about them?

• 1:42:35David Rosenthal?

  Yeah. It was not 2008. It was 2011. Bank of America gets caught up in that, uh, remember the euro debt crisis that happened in 2011 and everybody's like, oh no, financial crisis again. And at least in the U S, it ended up not being a big thing. I don't know how Bank of America got caught up in this, but they did. Berkshire stepped in, did the playbook, $5 billion of preferred equity with a 5% coupon on it. So not as much as the 10% that they got from Goldman, but they got warrant coverage to buy $5 billion of common stock in Bank of America at a $7.14 strike price. Today, Bank of America is trading at a $42 stock price.

• 1:43:20Ben Gilbert?

  It's a cool 6X.

• 1:43:21David Rosenthal?

  Cool 6X.

• 1:43:23Ben Gilbert?

  Are they still B of A shareholders?

• 1:43:25David Rosenthal?

  Still B of A shareholders. They all in to date, Berkshire has made about $26 billion in profits on the B of A deal, way more than

• 1:43:38Ben Gilbert?

  Wow.

• 1:43:39David Rosenthal?

  the $7 billion that they made from everything else during the financial crisis combined. And I think more, significantly more than any other investment that Warren made in his entire career up to that point.

• 1:43:57Ben Gilbert?

  Ah, it has to be. I mean, they're playing with so many bigger dollars at this point that, okay. So let's call this three great moves. Then you're, you're pretty good ones from the financial crisis, you're buying of Apple and of course then the B of A one, which. There's no way that he's done anything more better than this on an absolute dollar magnitude

• 1:44:15David Rosenthal?

  Totally.

• 1:44:16Ben Gilbert?

  To this point. I'm sure on, you know, return on invested capital for sure.

• 1:44:19David Rosenthal?

  Yeah.

• 1:44:19Ben Gilbert?

  But this

• 1:44:20David Rosenthal?

  B of A deal is a grand slam and a very important grand slam because we mentioned Wells Fargo. Right around this time, Wells Fargo is literally driving into the ditch with all of their scandals. Berkshire started buying Wells Fargo in 1989, so I don't think they ultimately lost money on it. But like they had big gains and then those gains evaporated.

• 1:44:44Ben Gilbert?

  Right. It's like buying, uh, yeah, you start buying Bitcoin around like 15K then, uh, and you keep buying all the way out through 60, then you're probably about break even.

• 1:44:53David Rosenthal?

  Yeah.

• 1:44:53Ben Gilbert?

  You're, it kind of feels like that.

• 1:44:55David Rosenthal?

  Yep. It's just, you know, Warren is now in his eighties at this point and, uh,

• 1:45:02Ben Gilbert?

  Yeah. 15 years ago, he got the question, when are you going to retire? To which he always responds, what, like about five years after I'm dead?

• 1:45:09David Rosenthal?

  Five years after I die. Yep. That's his line. So to be frank, like this is his last hurrah. Like, uh, if you include B of A, you know, which was a grand slam great investment.

• 1:45:22David Rosenthal?

  This is it. He's done after this in practice, although he doesn't know it. Starting in 2009, right after the financial crisis, that's when they changed the format of the annual meetings where it's no longer people approaching the microphone. It's Becky Quick and Andrew Ross Sorkin, you know, asking the journalists, asking the questions and moderating. He starts getting hammered, he and Charlie on just like, what is the succession plan? What are you doing? Like you are 80 years old. How many more of these wild rides can you go on? And, you know, he gives his trademark sort of like evasive answers. He says that, uh, the most important qualification for his successor as CEO is running a large operating business experience doing that.

• 1:46:05David Rosenthal?

  Right. Cause Warren has so much experience running a large operating business. But the one part of the plan that does make a ton of sense is that he says he's going to split up his job into the CEO business side. That's going to be handled separately from the investing side, which will be run by one or more chief investment officers after he is no longer in charge.

• 1:46:30Ben Gilbert?

  And to put a finer point on that, there's someone who is going to manage the equities portfolio, the stocks that they own, where they don't own the business 100%, and then the stuff that they actually do own 100%.

• 1:46:39David Rosenthal?

  Yep. And this is something that they'd actually been laying the groundwork for for a long time. I vaguely knew, remembered this, but going back and studying this, this is amazing. So all the way back in 2006, in the annual report, Warren and Charlie had been talking about this. And they come up with this idea, like, well, what if we just put an open call for candidates in the annual report?

• 1:47:03Ben Gilbert?

  No way.

• 1:47:04David Rosenthal?

  So in the 2006 annual report, they introduced this idea. Warren writes, quote, "I intend to hire a younger man or a woman with the potential to manage a very large portfolio, who we hope will succeed me as Berkshire's chief investment officer when the need for someone to do that arises."

• 1:47:24Ben Gilbert?

  So this is for the equities portfolio?

• 1:47:26David Rosenthal?

  For the equities portfolio. "As part of the selection process, we may in fact take on several candidates." So this is going on. And I think shareholders knew this, but people had forgotten by 2009, that was three years ago, the financial crisis happened, there's no progress, nobody's been hired. Finally, then, in 2010, they make a hire, a surprising hire. 39-year-old Todd Coombs, a completely and totally unknown manager of a small hedge fund based in Connecticut called Castle Point Capital. And Todd had

• 1:48:08David Rosenthal?

  started his career working for the state of Florida's bank regulator, and then gone on to work at Progressive Insurance, Geico's big competitor, before becoming a hedge fund manager. And here's the thing, like, you know, he's died, he's great. Like, this was a good hire. But he ran Castle Point, his hedge fund, for five years, during which time he amassed cumulative returns of 34%. Not annual, not IRR.

• 1:48:39Ben Gilbert?

  Whoa.

• 1:48:39David Rosenthal?

  34% total. This is not like-

• 1:48:42Ben Gilbert?

  How long had he been investing?

• 1:48:43David Rosenthal?

  Five years.

• 1:48:44Ben Gilbert?

  Huh.

• 1:48:45David Rosenthal?

  This is not like a incredibly distinguished track record here.

• 1:48:48Ben Gilbert?

  Buffett did almost that well every year for 12 years in the Buffett partnerships.

• 1:48:53David Rosenthal?

  Yes. So everybody's a little puzzled and the plot thickens a little more. So the Wall Street Journal, I think Todd's hiring was announced in like August or September, I want to say sometime towards the latter part of the year. In July, the Wall Street Journal ran a front page piece saying that the search for Warren Buffett's successor was almost done and they had the candidate. They knew who it was.

• 1:49:28Ben Gilbert?

  David, when you sent me this article, I about lost it. This is crazy. I had never heard of this.

• 1:49:33David Rosenthal?

  Me neither. I can't believe I didn't see this when it happened. Unbelievably, the candidate, the chosen candidate that the Wall Street Journal reported on was Li Liu, who has an amazing story himself, grew up in China, was part of the Tiananmen Square protests, immigrated to the US and eventually gets into investing, had an incredible track record, has an incredible track record, founded Himalaya Capital, mostly invested in China, and became close friends with Charlie Munger. He introduced Charlie to the BYD investment, which is how that happened for Berkshire.

• 1:50:13Ben Gilbert?

  And if you're wondering, hey, this name doesn't sound super familiar. I didn't know he worked at Berkshire. That's because he never did.

• 1:50:20David Rosenthal?

  He never did. And this is unbelievable. Even at the beginning of the article, front page, Wall Street Journal. They get the money quote from Charlie. Charlie is quoted as saying it is a quote foregone conclusion that Lee would join Berkshire.

• 1:50:38Ben Gilbert?

  And they even have a picture with him, like there's a picture of Buffett with, it's crazy.

• 1:50:43David Rosenthal?

  Totally, totally crazy.

• 1:50:46Ben Gilbert?

  So what happened? Like, how did this blow up?

• 1:50:49David Rosenthal?

  The world may never know exactly, but the scuttlebutt is that it all came down to comp, to compensation. And the thing is, you know, Lee was and is incredibly successful on his own, running his own fund, where he's keeping two and 20, you know, 2% management fees and 20% of the profits. And yes, it would be like this amazing honor to go work at Berkshire, be Buffett's successor, but kind of like Warren back in the day with the Graham Newbin partnership, where they offered him the keys and he was like, wait, why would I run your firm where you're keeping a piece of it? I'll just go do my own thing and I'll keep all the profits.

• 1:51:33David Rosenthal?

  I think that's what happened with Lee. So he didn't join, he still runs Himalaya, it's been incredibly successful. By all accounts, still has a warm relationship with Charlie and Warren. But yeah, that threw a wrench in the process, I think.

• 1:51:46Ben Gilbert?

  I'll bet. And I did read about what the investment managers, and we'll get to the second one here in a minute, how they're compensated. And Warren does kind of let it slip in an interview that they basically are compensated for their performance above the S and P every year. And there's some kind of like three year characteristic to it where they're, they're paid on a three year basis. And there's an opportunity for basically Berkshire to have a clawback if they underperform in, in the sort of latter years of the three year rolling basis.

• 1:52:14David Rosenthal?

  Yep. So you can see for somebody like Lee, or this is total speculation and rumors that is online. It's never been confirmed one way or the other, but supposedly the other candidate, according to rumors, was David Einhorn from, is it Greenlight Capital, I think, the famous hedge fund manager. But for folks like that, like it's not an attractive value proposition really to go work at Berkshire. But for Todd, who's running a small, like a hundred million dollar hedge fund.

• 1:52:44Ben Gilbert?

  Right.

• 1:52:44David Rosenthal?

  This is. The chance of a lifetime.

• 1:52:48Ben Gilbert?

  When this interview came out, I don't know, a few years ago, maybe more, the capital pool for each investment manager is $13 billion. So like even on its own, it's a very large hedge fund, even your little sliver that you're managing.

• 1:53:00David Rosenthal?

  Yep. So huge opportunity for Todd. He joins at the end of 2010. It turns out though, that Warren and Charlie didn't know it at the time, but they weren't actually done hiring. They were going to bring on, as they referenced in 2006, they were going to bring on several candidates. You know how we talked about on the, we haven't talked about on this series yet, but we talked about this on the Pinduoduo episode that Warren does these annual charity lunches that he auctions off?

• 1:53:27Ben Gilbert?

  Yeah.

• 1:53:28David Rosenthal?

  And they actually, the auctions actually happen on eBay, which is amazing.

• 1:53:31Ben Gilbert?

  That's awesome.

• 1:53:32David Rosenthal?

  And I didn't realize, uh, the charity is the Glide Memorial Church here in San Francisco. Great, great organization. Been involved in many great things over the years. In 2010, the same year where this is all going down, an anonymous bidder pays a record $2.6 million for lunch with Warren. And the next year in 2011, it turns out, it's announced that the same bidder paid $2.6 million again. So one person has paid $5.2 million for two lunches with Warren.

• 1:54:08Ben Gilbert?

  Ted gets the job because he paid for lunches with him twice?

• 1:54:13David Rosenthal?

  Yes.

• 1:54:13Ben Gilbert?

  Millions of dollars?

• 1:54:14David Rosenthal?

  Yes. $5.2 million for a job at Berkshire.

• 1:54:18Ben Gilbert?

  Oh my God.

• 1:54:21David Rosenthal?

  Yes, listeners, of course, we are talking about Ted. Ted Wesler, the other investment manager at Berkshire today was before Berkshire, running a fairly large, a $2 billion hedge fund called Peninsula Capital Advisors, uh, that he'd been running for 12 years. He'd been immensely successful. Over those 12 years, he had over 12x'd the capital in the fund. So done very, very well. Ran a concentrated portfolio. His top holdings were like Davida and DirecTV. And he, for two years in a row, buys the lunch with Warren and he impresses Warren so much in these lunches that they reach a deal to bring Ted on.

• 1:55:06Ben Gilbert?

  That's crazy.

• 1:55:06David Rosenthal?

  Isn't that crazy?

• 1:55:08Ben Gilbert?

  And so the wheels have to start turning at this point for listeners out there like, okay, so Ben, you said they're each running $13 billion. Do they get to run their own hedge funds? This is something that I don't think we totally know what the decision making process is. You know, how much are they there to execute the sort of Buffett and Munger style versus how much are they there to say, look, we, we have a risk profile that we're comfortable with. Here's how we've been doing it. Go to town.

• 1:55:36David Rosenthal?

  Yeah, I think the answer is it's somewhere in between in terms of how much autonomy Todd and Ted have versus Warren and Charlie. So it turns out in 2011, the same year as Ted joins, there's a little bit of a scandal. Remember, we told you to remember the name David Sokol. Well, in 2011 Berkshire acquires, fully acquires a chemical company named Lubrizol for $9 billion. It turns out that the person that first got interested in acquiring said

• 1:56:16David Rosenthal?

  Lubrizol company was David Sokol, then running the energy business within Berkshire Hathaway. And everybody widely assumed and Buffett had basically implied that the name on the envelope to be the CEO of the business of that side, when Warren stepped down was David. Like it was his job to lose. Well, it turns out that for some literally unfathomable reason, because it's not like he needed the money, I would assume, David front ran the trade with the acquisition of Lubrizol.

• 1:56:53Ben Gilbert?

  So it was a publicly traded company before?

• 1:56:55David Rosenthal?

  It was a publicly traded company before Berkshire acquired it. He personally bought shares in the company and then suggested to Warren that Warren look into buying the company as a whole. Okay, that in and of itself isn't that bad. It's like, oh, hey, like, I'm personally invested in this company. I think it's great. The problem was that after they started negotiating to buy the company, and David, I think, was involved in the negotiations, he kept buying, knowing that this was going on. Definitely a no-no. Yeah, he didn't end up being prosecuted or going to jail or anything. But once all this comes out, Buffett fires him. Or he leaves Berkshire and Buffett makes statements that he can't believe that this happened.

• 1:57:39David Rosenthal?

  And he can't understand why David did it. So that leaves the new name in the envelope, so to speak, as David's former number two, now number one in the energy business, Greg Abel.

• 1:57:52Ben Gilbert?

  Who also came over in the Mid-America Energy acquisition.

• 1:57:55David Rosenthal?

  And as we now know, Greg is indeed going to be the next CEO of Berkshire Hathaway.

• 1:57:59Ben Gilbert?

  So we've got the chess pieces here. We now know Ajit's name for insurance. We know Greg's name as sort of the non-insurance businesses. He's going to be the CEO. And we've got Ted and Todd each managing their pool of money, probably close to $20 billion now each.

• 1:58:14David Rosenthal?

  Yep.

• 1:58:14Ben Gilbert?

  On the public equity side.

• 1:58:16David Rosenthal?

  Warren has said, I think when they started, it was about $1 billion each that they were managing. And then kind of as they proved themselves, he gave them more rope. But in the early days here, Warren is still managing. We know with talking to Charlie, but really Warren is still managing most of the investing for Berkshire. And to be honest, he should have just given it to Ted and Todd right away because he does a pretty terrible job. Like, we can't mince words here. In retrospect, these years between 2011 and 2016, I think we're probably some of the worst decisions that Buffett ever made and worst errors of his career.

• 1:58:57Ben Gilbert?

  He has admitted publicly, I mean, not necessarily the way that you just phrased it, but he definitely has admitted publicly that Ted and Todd outperformed him.

• 1:59:06David Rosenthal?

  Yeah, that they did.

• 1:59:09Ben Gilbert?

  I think he made that comment in 2019. He said, yeah, they both beat the S and P by a little bit, but they've smoked me.

• 1:59:18David Rosenthal?

  They definitely spoke to him. So in November 2011, 2011 was a weird year for Warren.

• 1:59:24Ben Gilbert?

  Lou Brizol's purchase.

• 1:59:26David Rosenthal?

  Yeah.

• 1:59:26Ben Gilbert?

  Yeah.

• 1:59:27David Rosenthal?

  You know, hiring Ted, which was great, but because of the charity lunches, like it's just weird. So in November 2011, for some god knows why reason, Warren finally pulls the trigger on the trade that he has been itching to make for 30 years. He puts $10.7 billion into IBM in 2011.

• 1:59:52Ben Gilbert?

  Let's just take a quick refresher here. 2011, four years after the App Store is launched.

• 1:59:57David Rosenthal?

  Yep.

• 1:59:58Ben Gilbert?

  Seven years after Facebook is launched.

• 2:00:01David Rosenthal?

  Yep.

• 2:00:02Ben Gilbert?

  Like this is not like way back in time when it might've made sense.

• 2:00:06David Rosenthal?

  Three years after the famous Jeff Bezos talk at Startup School.

• 2:00:11Ben Gilbert?

  Exactly what I was gonna say.

• 2:00:12David Rosenthal?

  About AWS.

• 2:00:14Ben Gilbert?

  AWS is already a thing. That is the default for startups. It has been for years to go and be the cloud provider. So what on earth, what kind of thesis does he have on IBM?

• 2:00:23David Rosenthal?

  Well, here's his thesis. He said, this is what he says publicly. He says, he has been, quote, "hit between the eyes by how great IBM is and how strong and defensible its client relationships are." Ooh, brutal.

• 2:00:40Ben Gilbert?

  Okay, boomer.

• 2:00:42David Rosenthal?

  If this is the first technology investment that Warren Buffett is gonna make, maybe it's a good thing. He didn't make any technology investments.

• 2:00:48Ben Gilbert?

  Maybe it's half a century too late.

• 2:00:51David Rosenthal?

  Yeah, seriously. He holds this thing until 2018, when he finally sells it. All told, he loses $2 billion in total, sells it for like a little over $8 billion.

• 2:01:04David Rosenthal?

  Oh, but just like the opportunity cost of $10 billion of capital in 2011, you put that into IBM, my God.

• 2:01:13Ben Gilbert?

  I mean, think about if you bought any other big tech company, just pick one. Don't even, just pick one. You would have done great.

• 2:01:19David Rosenthal?

  Warren, go back to the monkey throwing the darts. Then in 2013, he partners with the private equity firm 3G Capital to take Kraft private and then merge it with Heinz. Warren, you're partnering with a private equity firm like they're your enemy? You know what they do, right? Like, anyway, Berkshire puts $10 billion into that deal. Their equity stake in Kraft Heinz today is worth about $11 billion. So, you know, they haven't lost money, but like, again, opportunity cost of capital here. That was 2013. Anyway, 2015 Berkshire acquires the aircraft parts manufacturer,

• 2:02:03David Rosenthal?

  Precision Cast Parts for $37 billion in Berkshire's largest deal ever. Bigger even, oh, we skipped over the railroad in 2009. They bought, they finally, they bought the railroad. Good for it. That was a good deal. That was, that has done well for Berkshire. Warren Buffett from 2008 to 2011, he was good. He was good in those years. But Precision Cast Parts, man, bought it for $37 billion. Last year, they took a $10 billion write down on that deal. So that's a dog. And then the worst that we alluded to. Oh my God, in 2016, he starts investing in the airlines.

• 2:02:45David Rosenthal?

  This is the man who said that he was going to shoot down Orville and Wilbur. What was he thinking?

• 2:02:52Ben Gilbert?

  Well, the interesting thing is, so he sold the airlines in a panic sale right when the pandemic dip started. And we all know, of course, there was about five days where you could actually buy the dip before it came skyrocketing back. And somehow we didn't endure a real market crash in this global pandemic. Cause monetary policy, anyway.

• 2:03:11David Rosenthal?

  Thank you, Jerome Powell.

• 2:03:13Ben Gilbert?

  Yeah, Buffett basically sells at the bottom with these airlines. And it's interesting because I don't fault him for the sale. It is a very reasonable thing to sell the airlines then because if the government didn't bail them out, they could have all gone to zero. I mean, the government was paying some airlines payroll to sort of make it through that period. So I don't, even though he sold it, I think right around the worst, the bottom. I blame the buy.

• 2:03:38David Rosenthal?

  Yeah.

• 2:03:39Ben Gilbert?

  He knew that he even had a comment years before that he had sort of like a, is it like a romantic fascination or like a dirty habit about, about owning airlines or something like that? Like he knew and he still did it.

• 2:03:54David Rosenthal?

  It's like the, he can't have newspapers anymore. So he wants the airlines. Now, okay, to be fair to Warren, again, the scuttlebutt here is, and there's some comments to this effect, that it actually was, I think Ted, who first got interested in the airlines and they talked about it, you know, and then Warren. So, okay, you know, it's just kind of funny. You can't not make fun of Warren for this one. Like.

• 2:04:17Ben Gilbert?

  Right.

• 2:04:17David Rosenthal?

  It's, it's bad.

• 2:04:19Ben Gilbert?

  You can chalk this up to you should have known better.

• 2:04:21David Rosenthal?

  IBM Precision Cast Parts, like dude, those were, those were bad. Those were bad.

• 2:04:26Ben Gilbert?

  Well, and honestly, in this same time period, like J and J wasn't great. The 2008 investment he did there.

• 2:04:32David Rosenthal?

  Yep.

• 2:04:32Ben Gilbert?

  The rail cars that I mentioned was around 2015, not that great.

• 2:04:36David Rosenthal?

  Not great.

• 2:04:37Ben Gilbert?

  Well, and those are all the sins of commission, not to mention the sins of omission of Google, whoosh, Facebook, whoosh, Amazon, whoosh. And on top of all this, like you own Amex, you understand Amex, you understand the brilliance behind what became the credit card interchange business. And you let a 2006 IPO by Mastercard and a 2008 IPO by Visa go right by you. These are crazy old companies that have been locked up inside the bank, you know, federations or however they were owned before, they're finally available for the public to buy. These stocks have gone, like these were criminally undervalued initial issuances. And Buffett just watches them go right by knowing the Amex business.

• 2:05:22Ben Gilbert?

  It's crazy.

• 2:05:23David Rosenthal?

  That's such a good, I hadn't thought about that. Like, yes, you're right to be allocating all this capital to these just dog businesses when. Visa and Mastercard, put the tech companies aside are just sitting there. Oh, brutal. Okay, so we're hammering on Warren here, rightly so. But there is one shining, saving, all sin absolving addition to Berkshire's portfolio during this time. That's right. We are talking about the very same company that was Sequoia Capital's worst mistake ever.

• 2:06:00David Rosenthal?

  By selling before the IPO Berkshire and Warren redeems everything by buying Apple Inc.

• 2:06:11Ben Gilbert?

  Amazing.

• 2:06:11David Rosenthal?

  Amazing. This story, okay, so here's the story.

• 2:06:15David Rosenthal?

  In May of 2016, as Warren puts it in the quote, quote, "One of the fellows in the office who manage money."

• 2:06:21Ben Gilbert?

  AKA Ted.

• 2:06:23David Rosenthal?

  Yep. It's never been said whether it was Todd or Ted, but I, I think it was Ted here because Todd really focuses on financial stocks and Ted does everything else. As Warren puts it, had put some money into Apple and indeed had put about a billion dollars. Let's assume it was Ted into Apple shares in May of 2016. That goes well. And amazingly Ted, Todd, whomever manages to convince Warren that this is a good idea. I guess, you know, he's broken the seal with investing in IBM in technology stocks. And he convinces Warren that they should really back up the truck here in Apple.

• 2:07:04David Rosenthal?

  So over the next two years Berkshire Hathaway would ultimately put $36 billion to work. Buying Apple stock just under the total price that they paid for precision cast parts, which was the largest acquisition in Berkshire's history. To say it goes phenomenally well, that is the understatement of the century.

• 2:07:27Ben Gilbert?

  Yeah.

• 2:07:28David Rosenthal?

  This is unreal.

• 2:07:31Ben Gilbert?

  And I'm sure there's lots of people out there who have been Apple shareholders from 2016 to 2021. So, you know, your brokerage accounts know what we're talking about here.

• 2:07:40David Rosenthal?

  And yeah, lots of people doing this, not a lot of people doing this with $36 billion in initial principal. As of the annual report of last year, the market value of Berkshire shares in Apple is worth $120 billion. That is $89 billion of gains in five years. So I think, I think, I can't figure this out exactly, but I think that is either more or close to more absolute dollar returns than the entire rest of Warren Buffett's career investing, even including the partnerships.

• 2:08:23Ben Gilbert?

  Whoa.

• 2:08:24David Rosenthal?

  Let's just say that again. More or close to more dollar returns than the entire rest of Warren Buffett's career that has come in the last five years with one stock.

• 2:08:37Ben Gilbert?

  I mean, there's two angles to this. One, the irony is just dripping.

• 2:08:41David Rosenthal?

  Dripping.

• 2:08:43Ben Gilbert?

  Warren, no tech stocks, Buffett and Apple is approximately 50% of the dollars ever returned.

• 2:08:51David Rosenthal?

  Yep.

• 2:08:51Ben Gilbert?

  The other side of it is interesting because it basically is just a math problem.

• 2:08:57David Rosenthal?

  Yeah.

• 2:08:57Ben Gilbert?

  Like, of course, the last five years of something that's been compounding for 70 years, 50, 65 years. Of course, the dramatic amount of the value is going to show up in the last five, whatever you're investing in, assuming that you're continuing to find a reasonable rate of return, because that's how compounding works. But holy crap.

• 2:09:19David Rosenthal?

  My God. The position was initiated when the man was 86 years old.

• 2:09:24Ben Gilbert?

  And from some conversations I had, when Ted brought it up and sold Warren on the idea, the angle was not that it was a technology company, but more in spite of the fact that it was a technology company.

• 2:09:37David Rosenthal?

  We got to talk about this.

• 2:09:39Ben Gilbert?

  Yeah, the biggest piece of positioning, from what I've heard, is that it's a consumer product with a powerful brand name, very low propensity for people to switch. There's sort of high lock-in, there's a strong moat there. And in fact, it may even be the most valuable brand in the world. Now that we've planted that seed, I would like to go and once again, read the quote from the 1995 annual meeting. What we're trying to find is a business that for one reason or another, it can be because of the low cost producer in some area. It can be because it has a natural franchise because of surface capabilities. It could be because of its position in the consumer's mind. It can be because of a technological advantage.

• 2:10:24David Rosenthal?

  Oh, he says it.

• 2:10:25Ben Gilbert?

  At all.

• 2:10:25David Rosenthal?

  Interesting.

• 2:10:26Ben Gilbert?

  That it has this mode around it. I don't think that there is any better description of why you would want to buy and hold Apple than that exact quote from him 21 years before.

• 2:10:39David Rosenthal?

  So great. Here's the thing. This is all nitpicking because like at the end of the day, like investing, it doesn't matter. You know, I played baseball growing up and my dad used to say to me, if you're listening, hi dad, when I'm learning, you know, who was learning mechanics of how to swing properly. I love this guy. He used to say, look, if you could hit 300 in the big leagues, nobody would care if you stood on your head when you swung. All that matters is you hit 300, but until you learn how to hit 300, you know, you should probably do it the right way. In investing, it's the same way. Like, nobody cares what your thesis is. Nobody cares if you're right or wrong. Nobody cares why you bought the stock. At the end of the day, you just want to be in a position to be right. And Warren got himself in a position to be right.

• 2:11:21David Rosenthal?

  That said, I don't think he understands anything about how Apple works or what it does, or like why all of this works, you know? He says, he has a quote at the 2018 annual meeting. He says, I didn't go into Apple because it was a tech stock. I don't think that it required me to take apart an iPhone or something and figure out what all the components were or anything. I think it's much more the nature of consumer behavior.

• 2:11:47Ben Gilbert?

  Oh yeah, he's in it for the M1. He's really impressed by the, uh, the architecture. He feels that this sort of, uh,

• 2:11:54David Rosenthal?

  He's locked into iMessage.

• 2:11:56Ben Gilbert?

  Strategy is the right one.

• 2:11:58David Rosenthal?

  Yep.

• 2:12:00David Rosenthal?

  Oh, how funny is that? Uh, yeah. At the end of the day, though, like, it doesn't matter. It doesn't matter that it was Ted's idea. It doesn't matter that Warren hated technology stocks. All that matters is that he was in a position to be right. And $89 billion of gains later, here we are.

• 2:12:18Ben Gilbert?

  Yeah, that has to be up there with the single greatest investment return in history in terms of absolute dollars.

• 2:12:24David Rosenthal?

  I think it is. I think the

• 2:12:27Ben Gilbert?

  Let's see, Nasdaq's 10 cent.

• 2:12:28David Rosenthal?

  Nasdaq's 10 cent and the SoftBank, Alibaba investments, I think, are still better. But like, we're splitting hairs here.

• 2:12:36Ben Gilbert?

  Well, they, they bought those companies in the first five years of their life. Remarkably, Warren and Ted achieved this performance by buying Apple 35 years into its life?

• 2:12:48David Rosenthal?

  Yeah.

• 2:12:51Ben Gilbert?

  That just says a lot about how, uh,

• 2:12:53David Rosenthal?

  No, 45 years into its life.

• 2:12:55Ben Gilbert?

  The FAANG stocks in the last few years.

• 2:12:57David Rosenthal?

  Wow, it does. Okay, so that is the big beat that we're going to end on, but let's bring it all home. January of 2018, Berkshire officially appoints Greg and Ajit to vice chairman roles in the company. Greg for vice chairman of non-insurance businesses, Ajit for insurance businesses. The pandemic, of course, happens in March of 2020. Warren, you know, preaches his faith in America, but he dumps the airlines at the bottom, which, you know, I agree with you. That's fine. Berkshire mostly misses out on the enormous bull run that happens when Jerome Powell and the Fed and Janet Yellen inject literally more money than God into the economy.

• 2:13:38David Rosenthal?

  Warren and Charlie continue to say that they think that crypto is rat poison squared. But as far as I can tell, at least I don't think they've made any attempt to actually study or understand what Bitcoin or Ethereum or any of crypto actually is. And then the

• 2:13:57David Rosenthal?

  Kick out of the big moment that we all, if not saw, heard about the day after.

• 2:14:03Ben Gilbert?

  Hilarious.

• 2:14:04David Rosenthal?

  Hilarious slip at the 2021 annual meeting where Charlie lets it slip that shocker Greg Abel is the name in the envelope.

• 2:14:14Ben Gilbert?

  This clip is so funny for, we'll, we'll link to it in the show notes, but it's Warren and Charlie are like onstage sort of bickering about Berkshire's culture and about preserving the culture. And Charlie just goes, Greg will preserve the culture.

• 2:14:27David Rosenthal?

  Yup. And then the look on Warren's face is priceless.

• 2:14:32Ben Gilbert?

  He's, yeah, he stammers. He's like, um, um, uh, dare it Charlie.

• 2:14:38David Rosenthal?

  You know, they have like, hopefully we've pointed out in the now like, God, what 10 hours we've been doing this series.

• 2:14:45Ben Gilbert?

  Nine, David. Don't get ridiculous.

• 2:14:47David Rosenthal?

  The, um, so we saw dichotomy between how Warren is perceived and wants to be perceived and how he actually is. And you know, he's got that line about Charlie and I have never had an argument. You know, it was like, yeah, bullshit. You've never had an argument. I bet you had one after that. Uh, but, uh, but yeah, of course they still love each other and Greg will be the CEO of Berkshire Hathaway.

• 2:15:12Ben Gilbert?

  We should say too, that a thing that's been happening quietly, sort of in the background, well, two things, you know, Ted and Todd have been running their portfolios in a very different way than Warren has over the years. So I think Todd, and I don't know this for sure, but was really buying Amazon, Snowflake, I mean, some of these, these tech stocks other than Apple. So you sort of have a non Warren approved strategy going on there, especially, you know, the Snowflake deal, buying those sort of pre IPO shares and, you know, benefiting from that pop is very interesting. And then also stock buybacks. It's very clear that what's happening is that they don't see a better opportunity out there in the market

• 2:15:53Ben Gilbert?

  to deploy capital than the businesses they already own. And so they'd rather just take everybody's shares and concentrate their positions in the existing Berkshire portfolio. And I thought Christopher Blumstrom had a great quote. In the Semper Augustus Investments Group letter that he writes that is epic, it is a full analysis of the accounting practices and valuation model for Berkshire, and he has this great quote, "As long as capital markets remain overvalued and private investors flush with cash persist in investing at low yields, share repurchases are a magnificent use of capital." And it really is such a good point that like you pick your head up, you look around, everything's got a sky high multiple on it. And you

• 2:16:38Ben Gilbert?

  know, Berkshire shares, at least the way that Warren sees it, don't.

• 2:16:41David Rosenthal?

  Yeah, they don't.

• 2:16:44Ben Gilbert?

  Now, it's a little bit tricky to sort of think about it this way, because the quote unquote intrinsic value of their equities holdings are marked to market. So, you know, whatever, if you say, oh, gosh, Berkshire's not trading at a crazy valuation. Well, I mean, a big portion of what they hold is publicly traded equities that are at a higher than ever multiple, however you want to mention it. So there is sort of this interesting thing where by doing stock buybacks, sure, they're not buying into any new companies that have crazy valuations, but they are buying more of the companies they already own at market prices.

• 2:17:21David Rosenthal?

  Yep.

• 2:17:22Ben Gilbert?

  All right, listeners, now is a great time to talk about a new partner of ours here on Acquired, Ligora, the agentic operating system that is redefining how the world's best legal teams work.

• 2:17:35David Rosenthal?

  Yep, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Ligora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 2:17:52Ben Gilbert?

  So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 2:18:07David Rosenthal?

  And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Legora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 2:18:31Ben Gilbert?

  And they recently launched Legora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 2:18:50David Rosenthal?

  And Legora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Legora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Legora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 2:19:20Ben Gilbert?

  Truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at legora.com/acquired and just tell them that Ben and David sent you. All right, David, I wrote up a little like bear and bull case. So as we start to translate a little bit to like, there is a playbook that we should enter here, but like, now that we're sitting in present day, why don't we reflect a little bit on, on sort of present day and in the future? Well, one bull case that I don't think we've really talked about is, you know,

• 2:20:05Ben Gilbert?

  a lot of people sort of think, oh, Berkshire's toast when Buffett retires, and I don't think he's going to retire, so passes away, and the stock's going to plummet and the performance is going to go away. I think if you've been listening to our episode, you probably don't think that.

• 2:20:20David Rosenthal?

  You might think the opposite.

• 2:20:22Ben Gilbert?

  Right. So the bull case is like, they actually could do better under Greg. Like, they might be less conservative. They could run the business by keeping less cash on hand, which is, of course, a drag on returns. And frankly, like, there's that argument that Warren has gotten really gun shy in buying stuff after a lot of the sort of sins of omission and commission that we mentioned above, that it's not clear that he sort of trusts his instinct in this environment. The only thing that he clearly trusts is to just do the stuff that has worked in the past. And I'm not sure that's well suited for this environment.

• 2:20:56David Rosenthal?

  No.

• 2:20:56Ben Gilbert?

  So.

• 2:20:57David Rosenthal?

  And not to mention, Todd and Ted are pretty good.

• 2:21:00Ben Gilbert?

  No matter what else they've done, they did Apple. So like that, everything else surrounding error, and especially when they're only managing 40 billion between them. I mean, that, what did you say, $85 billion gain, something like that?

• 2:21:12David Rosenthal?

  Eighty-nine.

• 2:21:13Ben Gilbert?

  Eighty-nine, unbelievable. So there's certainly that element.

• 2:21:20David Rosenthal?

  Just like, one more piece of context on that, that's a whole Zoom of gains. Like, they literally created a Zoom market cap worth of gains.

• 2:21:32Ben Gilbert?

  It's totally wild. Now, the flip side, the sort of bear case is, look, Warren has been successful in a lot of environments. And the thing you kind of should cheerlead about Warren Buffett is that he's reasonably consistent. Someone will always be outperforming him, but he has created this incredible rate of compounding for over half a century. So while I think the case that David and I have been making to you here for this whole episode is that the internet changed things so fundamentally that his style doesn't really work anymore, and that you do have to make bets based on the earth changing underneath you, rather than just the earth staying the same and businesses being well-run.

• 2:22:17Ben Gilbert?

  The bear case on Berkshire would be, it actually is the opposite. At some point, the Buffett way of investing, world changing or not, will actually be great. And we're just in sort of a season right now that is just making him look foolish. And yeah, maybe it's been 10 or 15 years of largely foolish decisions. But, but maybe, you know, so I'm not sure this is where I come down, but that would be sort of the future bear case on if Berkshire changes too much from the long time-tested Buffett strategy.

• 2:22:50David Rosenthal?

  I would also add another part to the bear case, which is warranted or not, right or not, or whatever, like, there is no question that Berkshire Hathaway and Berkshire Hathaway's shareholders benefit from the Warren Buffett halo effect.

• 2:23:09Ben Gilbert?

  Absolutely.

• 2:23:10David Rosenthal?

  And there are some real tangible benefits to that, like during the financial crisis, where like, my God, those deals he was getting on debt and preferred equity coupons, nobody was getting that. And the calls he was getting, like, that, that is real tangible benefits. And there's some intangible benefit, like, I definitely, lots of people, I think ourselves, myself at least included now, having done all this work, it's like, all right, Warren, you're kind of past the hill on investing, but lots of people give him the pass. And people still show up to the shareholders meeting and people still hold Berkshire Hathaway shares because they believe in Warren. And if Warren's no longer there, then what?

• 2:23:50Ben Gilbert?

  Yeah, Berkshire Hathaway is a religion and an investment. And the bear case is that at some point, it just becomes an investment.

• 2:23:57David Rosenthal?

  Yep.

• 2:23:58Ben Gilbert?

  A little bit more bear case stuff. If you think about capital allocation, if you think about maybe the way Jeff Bezos does it, ideally, there are lots of potential growth engines inside your company. To invest in, to allocate your capital to, otherwise you have to go and fight it out with every other investor for every publicly available investment vehicle. The only growth engine that Berkshire really has, like meaningful growth engine, is GEICO, and that's not a real growth engine. So it's really hard for them to consume capital internally in a way that would meet any hurdle rate that would be exciting. Like, they kind of have to keep going shopping to deploy capital at this point. There's an element there that's a little bit scary if you're thinking about investing

• 2:24:43Ben Gilbert?

  in a tech company versus Berkshire, which of course, you never really should be thinking about one or the other. They're completely different buckets. But they don't have an internal growth engine inside that company. The last one is a little bit more nuanced angle on the thing that I mentioned before about if you do a sort of a sum of parts analysis on Berkshire, then you have to look at everything that's currently marked to market, which is eye popping. You know, there's definitely a lot of people out there that think that the stock is trading to a discount of the intrinsic book value of the holdings. And that, of course, would be the case if you fully valued the cash that's on their balance sheet. But if you think about the multiples of the stocks that they own, I mean, Apple has gone

• 2:25:24Ben Gilbert?

  from being valued at something like 7X earnings to now like 30X earnings. And to believe the Berkshire is underpriced argument, it's fundamentally based on agreeing that Apple is worth what it's trading for, which maybe is true with Apple, but you're also agreeing that like BNSF is sort of worth industry multiples for railroads, which if you look around are also meaningfully expanded recently. I just think asset prices are really high. So there's definitely this element of like, if you believe Berkshire is under-valued, then I think you're being pretty generous with how you value the sum of all the parts.

• 2:26:01David Rosenthal?

  Yep. I think that's true, but there's the capital allocation question of like, well, all assets are overvalued right now. So if you're going to take capital out of Berkshire, where are you going to put it?

• 2:26:14Ben Gilbert?

  Right. Everything is only worth talking about when you compare it to its next best option.

• 2:26:19David Rosenthal?

  Yep.

• 2:26:20Ben Gilbert?

  If anybody has any really good options for really solid assets that are underpriced right now, the acquired Slack, acquired.fm/slash/Slack, go, go, let folks.

• 2:26:30David Rosenthal?

  Hang out in the investments channel. Love it.

• 2:26:33Ben Gilbert?

  Yep.

• 2:26:34David Rosenthal?

  Hang out in the digital assets channel. That is where stuff is going on.

• 2:26:38Ben Gilbert?

  Where it's at. Playbook?

• 2:26:41David Rosenthal?

  Playbook. Let's do it. You want to kick it off?

• 2:26:44Ben Gilbert?

  Yeah, I mean, the biggest one that's just so clear to me is that you need different strategies at different scales. And the same playbook clearly didn't work as they gained more capital. You know, there, there was that great thing that they were doing forever of hiring great managers that were family owned businesses that, you know, they bought for hundreds of millions of dollars and let them run and those things compound and you could be management light. It just doesn't work anymore. And so you need a completely, completely different playbook. And the interesting sort of point that I want to make on that.

• 2:27:17David Rosenthal?

  Just like the original cigar bet playbook stopped working and they had to go to.

• 2:27:21Ben Gilbert?

  Exactly. The point that I want to make on that is that they have set themselves up well, where they have a remarkably flexible structure to do that. So it's not a fund. It's an operating company. They have an infinite time horizon. The goal is to never sell.

• 2:27:38David Rosenthal?

  And there's no drag of fees.

• 2:27:40Ben Gilbert?

  And there's no drag of fees.

• 2:27:42David Rosenthal?

  As a shareholder, you can feel pretty good about the sticker performance is actually the performance you're going to get. You're not getting that less 20%.

• 2:27:50Ben Gilbert?

  And incentives are aligned. If they are not investing, they're not just sitting there collecting fees, you know, they're itching too, because they think that the best option for that capital right now is to sit in cash. So even though we were knocking Warren for like, oh, he's out of touch and his, you know, he doesn't understand the internet and he doesn't understand internet businesses and the world changed from underneath him. And we spilled a lot of words on that. What he did get right is this operating company flexible structure and probably set it up for success. I say probably because we're, I have an open question on culture and politics, but leaving enough flexibility inside the company then to make sure that they can react to whatever is coming, even if it's not in the Warren style.

• 2:28:35David Rosenthal?

  Mm hmm.

• 2:28:36Ben Gilbert?

  So that was a big one that I had.

• 2:28:38David Rosenthal?

  Say more about politics, unless you're saving it for later.

• 2:28:41Ben Gilbert?

  No, I'm not. So this is something that concerns me. So you went from having one person making all decisions.

• 2:28:49Ben Gilbert?

  Where if capital was best used on acquisitions that would get used there, if capital was best used plowing it into an internal growth engine when they had meaningful internal growth engines, you know, you can use it there.

• 2:29:00David Rosenthal?

  Like a Jeet's business. Yep.

• 2:29:02Ben Gilbert?

  Yep. If they wanted to go buy stock in companies, they could go do that. Now each of those are independent fiefdoms. And so I'm sure there's ways they can sort of do horse trading, but people's comp largely is tied directly to their own portfolio. And so who kind of gets to say at the end of the day, no, this is what we're doing. I guess it's Greg. I guess it's the CEO. But you really have to nail the incentives to make that all work. And when you have a non-founder who doesn't quite have the same sort of influence and purview all over all of those things, I think decision-making,

• 2:29:44Ben Gilbert?

  especially when you need to be able to do it in like an hour.

• 2:29:48David Rosenthal?

  Yep.

• 2:29:48Ben Gilbert?

  For a really big deal, it could get really thorny.

• 2:29:52David Rosenthal?

  Not to mention a CEO who doesn't have the investing mind that Warren does. Greg is like, great. Like he's a great operating executive, but is he going to be able to think in the same way as Warren and Todd and Ted about investments and act with the same speed and conviction?

• 2:30:15Ben Gilbert?

  Right. I mean, would the right thing to do here have been to go try like crazy? It might be, it might be very hard, if not impossible, to go find a Warren Buffett and just give it all to them. And sure, they have these other guys as employees, but like you need a one-headed monster.

• 2:30:32David Rosenthal?

  This is the funny thing about the number one criteria for the next CEO being operating experience at a large company. Well, that's not Warren.

• 2:30:44Ben Gilbert?

  Right. So yeah, so I'll be very, I mean, we may never know it may be 20 years before a book comes out, but I'll be very curious to see how contentious decisions get made between that new group of four that is sort of coming in. And if just Warren or just Charlie is left at some point with the four, what does that look like? That'll be weird for a little bit. I imagine if one of them leaves, they both leave at the same time.

• 2:31:06David Rosenthal?

  I would imagine too.

• 2:31:08Ben Gilbert?

  The other thing I'll say on culture, and this is borrowed from some great research that some listeners sent us, their culture, they sort of talk about it like it's this virtuous thing. And if it's truly this like virtuous thing, then it's something that you can sort of codify and protect. I think the cultures are really sort of like independent inside each of these operating companies. Like, I don't think, if you're an employee at Borsheims, like, I don't really think you think about Lou Brizol's culture, or like, they're completely, they have nailed it on the decentralization thing. So I think the only real sort of like shared cultural elements inside the hundreds of thousands of people

• 2:31:50Ben Gilbert?

  that work inside or for Berkshire Hathaway are, one, don't put Berkshire's reputation at risk. Two, bend over backwards to avoid paying tax, which takes money out of the business. Like, just don't take money out of the business. Leave it all in, keep compounding it, defer it however you can. And three, funnel all cash back to Berkshire for reallocation. And I mean, that's the culture. Like, those are the things that are really important to the head office for managers at their subsidiaries to follow.

• 2:32:18David Rosenthal?

  Yep.

• 2:32:19Ben Gilbert?

  Well, should we go to grading?

• 2:32:21David Rosenthal?

  Yeah, let's do this.

• 2:32:25Ben Gilbert?

  I know you have a whole slate of ways that we could grade this one. So, so kick us off.

• 2:32:30David Rosenthal?

  Here we are. This is it. Man, the whole story, nine, 10 hours in. Okay, so.

• 2:32:39David Rosenthal?

  I was thinking before we recorded about how to grade this. I don't usually write down any thoughts on grading before episodes, but I thought this is so momentous.

• 2:32:50Ben Gilbert?

  You guys know David Rosenthal. He just wings it. He isn't really prepped.

• 2:32:55David Rosenthal?

  Well, I do in grading. Okay. So I think there are four topics to discussing grading here. First, we've been through this whole thing. I think we got to grade Warren's entire career. Like, hopefully there's still a little bit more time. I don't know. Maybe not. Probably. I hope not that there's not more time. I hope there's more time in his life, but not in his investment decision-making career. I think we're basically at the end here, one way or another. The man is 91 years old.

• 2:33:27Ben Gilbert?

  Either way, dude, we're shipping this episode. So like, create the cutoff.

• 2:33:31David Rosenthal?

  Yeah. Okay. We graded the career. I think we grade performance since we left off the last episode, which was in 1992.

• 2:33:42Ben Gilbert?

  So like, I did an IRR calc of January 93 through today.

• 2:33:46David Rosenthal?

  Oh, great. Love it. Then I think we should grade recent years' performance. And then the final question, I am a Berkshire Hathaway shareholder, have been for a long time. I don't know if you are, but whether you are or not, you could pretend you are. If you are, what are you doing with your stock? Are you holding? Are you selling? Or are you buying more?

• 2:34:09Ben Gilbert?

  Interesting. David, do you have a rate of return calculation on that? The entire Buffett career?

• 2:34:18David Rosenthal?

  As a matter of fact, I do. I did some analysis on this. The entire Buffett career. So if you amalgamate 13 years in the partnership years at a 29.5% IRR during those years, and you amalgamate that with then 50 years since the partnership through 2025, 0 years, incredible, in the Berkshire timeframe, Berkshire over that time period has had a 20% IRR.

• 2:34:50David Rosenthal?

  You get a blended IRR of 22.3% across 63 years of active money management for Warren.

• 2:34:59Ben Gilbert?

  Guys, consistent.

• 2:35:00David Rosenthal?

  Quite consistent. The more incredible number, do you know what $100 invested in the Warren Buffett partnerships in 1959 and held through Berkshire today would be worth today? $100. Take a guess.

• 2:35:19Ben Gilbert?

  Millions, but the compounding math breaks my brain. I don't, I don't know.

• 2:35:23David Rosenthal?

  26.2 million dollars.

• 2:35:28David Rosenthal?

  Not bad for a, for a hundy.

• 2:35:31Ben Gilbert?

  Wow. Take a hundred dollar flyer in, what'd you say, 65?

• 2:35:37David Rosenthal?

  59.

• 2:35:39Ben Gilbert?

  59.

• 2:35:40David Rosenthal?

  I mean, that's a long time.

• 2:35:42Ben Gilbert?

  And that was a lot more money then, but inflation hasn't moved this fast.

• 2:35:46David Rosenthal?

  Yeah.

• 2:35:49Ben Gilbert?

  Now, that's a great stat. A hundred dollars at the beginning of Warren Buffett's career, following him all the way through is over $26 million.

• 2:35:56David Rosenthal?

  Yeah.

• 2:35:57Ben Gilbert?

  Remarkable. And that's a 22 point something percent IRR. So it's not over his whole career, you know, he, he flagged. Like it's not the same as the BPL, the Buffett Partnership Limited days, but that is mighty good.

• 2:36:11David Rosenthal?

  Yeah. Mighty, mighty good indeed.

• 2:36:14Ben Gilbert?

  All right. So A, A plus, what do you, how you, has anyone else been investing over this period of time? Like, I don't even know how to compare it to anything similar.

• 2:36:22David Rosenthal?

  No, I don't.

• 2:36:22Ben Gilbert?

  He outlasted everyone.

• 2:36:23David Rosenthal?

  Yeah, he outlasted everybody. I think, huh. So, okay, I wrote down A. Could maybe do an A. Okay. Here's my, here is my rationale for an A. We can debate if this holds. My rationale for an A versus an A plus was that I think we will probably see better investors in our lifetime than Warren in the past. And I think that's just a natural consequence of the numbers getting bigger over time and the world moving faster and there being more change.

• 2:37:02Ben Gilbert?

  It depends what you mean better investors, because I actually don't think so, depending on how you think about this. So I'm not sure that you could do what Warren did over his career with a career starting today without taking on a lot more risk. Or a lot more leverage. Like, it's just so competitive to be an investor now.

• 2:37:25David Rosenthal?

  Yeah, yeah.

• 2:37:26Ben Gilbert?

  So I suspect if someone, if we go set a million people free over the next 70 years, there will be someone who outperforms Warren, but they will have done it with a lot more risk. Involved. And so there's a lot more sort of luck in being the one of those million that does better than him.

• 2:37:44David Rosenthal?

  Okay, so here was my thinking on that. I tried to think of like, I did not run the numbers, so I may just be way off. We can debate. I tried to think of a tangible example, and the tangible example I thought of is Sequoia Capital as a whole. So, when was it? 72? They're coming up on 50 years next year.

• 2:38:06Ben Gilbert?

  Yep.

• 2:38:07David Rosenthal?

  And we don't have their aggregate returns across all their funds, but I suspect they might be as good or better than Berkshire.

• 2:38:15Ben Gilbert?

  Interesting.

• 2:38:16David Rosenthal?

  Now, not a single person.

• 2:38:18Ben Gilbert?

  Right.

• 2:38:18David Rosenthal?

  It's a firm.

• 2:38:20Ben Gilbert?

  But it's an institutionalized culture. And if you can do, can do something consistently, you sort of deserve to be in the same conversation.

• 2:38:26David Rosenthal?

  And here was my thought process on it. Warren, well, you know, Apple aside, which we can't really put Apple aside, like Warren deserves credit for that 100%, but absolutely, he's lost a step in recent years. Whereas I feel like Sequoia has only gotten better or stayed at the top of its game.

• 2:38:47Ben Gilbert?

  Yeah, I mean, it feels like they adjust to the climate that they're in a year before the climate changes.

• 2:38:52David Rosenthal?

  Yeah.

• 2:38:53Ben Gilbert?

  And it feels like Buffett adjusts 30 to 40 years after.

• 2:38:59Ben Gilbert?

  No, just on IBM. Yeah. Maybe, maybe 10 to 15 years afterwards.

• 2:39:03David Rosenthal?

  Yep. Yep. That's a good question, though.

• 2:39:06Ben Gilbert?

  It's interesting. But remember that thing I mentioned earlier with the expected value calculation of the probability something could happen and the outcome it happens? Sequoia is doing the exact opposite of the Buffett thing. It's a shots on goal.

• 2:39:16David Rosenthal?

  Yeah.

• 2:39:16Ben Gilbert?

  Where each shot could be absolutely huge. So it's obviously an extremely different asset class.

• 2:39:22David Rosenthal?

  Yep. But it is a approach that is, I think, more suited to, if you believe the hypothesis that the world today is more about change than Buffett's world when he was in his prime, the Sequoia approach is, is the better approach in today's world, I think.

• 2:39:40Ben Gilbert?

  Fascinating.

• 2:39:42Ben Gilbert?

  I mean, we're gonna like rile up all the growth versus value people out there.

• 2:39:45David Rosenthal?

  I love it.

• 2:39:48Ben Gilbert?

  Yeah.

• 2:39:48David Rosenthal?

  All right. What do you think? I'll put the gun in your hands. A or A plus?

• 2:39:52Ben Gilbert?

  Oh, it's an A. I mean, if he had finished strong, it would be an A plus. And you could argue Apple is finishing strong, but it's just the numbers that I ran for this last period, 1993 through today is a 13.5% IRR. And like, that's 28 and a half years. It's not like this is like a quick cycle. This is like two or three cycles. And so it's not like, oh, well, you can't just say his 13 and a half percent IRR, you know, was during a down cycle for Buffett's style. Like, no, it's been, we've been through some stuff and like, it's just not been a remarkable last 30 years. And that number, by the way, is

• 2:40:33Ben Gilbert?

  just based on their stock price. It's the coming in at 11,800, January 1st, 93. Their stock just closed at $435,000 in a share.

• 2:40:43David Rosenthal?

  Oh, so great. Okay. So this is, this is good. This is the next set of grading criteria. Maybe we can jump back to then an overall view at the end.

• 2:40:51Ben Gilbert?

  And let's compare that 13.5%. Remember the Buffett Partnership Limited? That was 29.5%. And then in the last episode where we talked about the heyday of Berkshire Hathaway, uh, ending in the Solomon, and that was a 27% IRR in the eighties and the late seventies through the, the mid nineties. So it has diminished considerably, which they told us it would because of the amount of capital they're managing, but still.

• 2:41:18David Rosenthal?

  Yep. So what do we think? Is this a, it's a B for this period?

• 2:41:22Ben Gilbert?

  It's a B.

• 2:41:22David Rosenthal?

  It's a B.

• 2:41:23Ben Gilbert?

  Yep.

• 2:41:23David Rosenthal?

  You know, we still definitely beat the S and P, like beating the market for sure, but just not to his previous standards.

• 2:41:32Ben Gilbert?

  Yep.

• 2:41:32David Rosenthal?

  Okay. So then, recent years. So I did a slightly different.

• 2:41:39Ben Gilbert?

  What does recent years mean?

• 2:41:40David Rosenthal?

  Uh, let's take the last five years, starting from the Apple investment, which is almost exactly five years ago.

• 2:41:47Ben Gilbert?

  What's your analysis?

• 2:41:48David Rosenthal?

  So this, I think, was interesting and telling to me, like, like we've been saying, the Apple investment, so amazing in the running for one of the best single investments of all time, yet. Berkshire is so big and this law of gravity around the capital is so meaningful and Warren's other investments were so bad that in aggregate Berkshire's stock price performance over the last five years on a multiple basis is almost exactly the same as the S and P, even including Apple. It has tracked the market and not

• 2:42:28David Rosenthal?

  outperformed at all for the last five years. Now, if you take out Apple, it's underperformed by about half a turn on a multiple from the market.

• 2:42:37Ben Gilbert?

  So Ted and Todd are making money, but Warren's not getting paid out any of his carry.

• 2:42:41David Rosenthal?

  Warren is literally doing worse than the market in the last five years.

• 2:42:46Ben Gilbert?

  Right. Oh, that's so interesting to think about. Yeah. Because he's necessarily underperforming the S and P because he said Ted and Todd were overperforming it.

• 2:42:53David Rosenthal?

  Yep. Yep. And Berkshire as a whole is just simply tracking. That's pretty bad. I mean, that's a C to me. And it's not, it's not worse than a C because it's not like it's a hedge fund where they're taking two and 20. Like you're just, it's the exact same thing as being in an index fund.

• 2:43:10Ben Gilbert?

  Yep. I think that's right. A C.

• 2:43:13David Rosenthal?

  Yeah. Okay. So now the money question, literally the money. What are you doing with the money? Are we keeping it in Berkshire? Are we buying? Are we selling? Are we holding?

• 2:43:25Ben Gilbert?

  So this is the moment I reveal for everyone 10 hours in that I actually have never held Berkshire Hathaway.

• 2:43:29David Rosenthal?

  No way. We've done all of this work.

• 2:43:32Ben Gilbert?

  Yeah. This is not investment advice. This is especially this part is not investment advice. And we really do urge you to talk to someone who knows about this stuff when considering making a purchase. But I've never owned, I've thought about it a lot. And especially in this research, I considered buying it many times. And the place I basically arrived is it's very conservatively managed. As a Berkshire expert quoted to me, it's a good widows and orphans stock. And frankly, I think it's a good way for someone who's rich to stay rich because of the way that they manage capital. I mean, they, they don't dividend out. So if you make a bunch of money every year, then you don't have the high taxes on the dividends. You know, it will continue to compound. You can sort of sell shares when you want to sell shares to free up some cash. It's not going to have

• 2:44:16Ben Gilbert?

  a really big down year. Maybe if there's an extreme hurricane event, but you know, it's not going to have five really big down years. So. I think that question comes down to like, where are you in your investing cycle in your life? And I'm not sure that it makes sense for young people to buy Berkshire, or at least people that are young in their wealth.

• 2:44:35David Rosenthal?

  Yeah. I differ from you in answer, but 100% agree with you in spirit and rationale. So my answer, I am a Berkshire shareholder, as I said at the top of the series, have been for many years. So I'm going to continue to hold, partially due to nostalgia for that and the Wait Award halo effect. And I get my free tickets to the shareholder meetings, should they ever resume in person. But no, the real reason I'm going to continue to hold is actually just a portfolio management strategy. It's not a large allocation of my portfolio. Almost all of the rest of my portfolio is, literally the rest of my portfolio is heavy growth, tech stocks, digital assets, et cetera, San Francisco real estate.

• 2:45:22Ben Gilbert?

  So this is like in your safety.

• 2:45:23David Rosenthal?

  This is in my, I call it my quote unquote, safety portfolio. And the way I think about it is just like, this is, should I need emergency liquidity for something in the near term? You know, I don't know what that would be. That's what my Berkshire is. It's exactly what you were saying. It's my bad term, but the equivalent of a widow's and orphans fund of like,

• 2:45:46Ben Gilbert?

  It's a terrible term.

• 2:45:47David Rosenthal?

  Terrible term, but the capital that I can feel good about, I actually thought a lot about this over the past year. I used to keep an allocation in just like a fairly sizable allocation in cash for this purpose. And then I was like, well, that's just stupid today. Like, you know, to keep cash is, is just dumb.

• 2:46:10Ben Gilbert?

  Again, not investment advice.

• 2:46:12David Rosenthal?

  Not investment advice. But when, you know, when yields on 10 year treasuries are like, basically negative.

• 2:46:19Ben Gilbert?

  Right. Just sitting there getting devalued in my bank account.

• 2:46:21David Rosenthal?

  Literally every day that goes by, you're getting poorer and poorer, you know, holding cash. Again, not investment advice. That's when I decided, you know what, I'm going to rework this and I'm going to have my allocate, my liquidity allocation be to Berkshire, because I can feel pretty confident it's not going to lose money. And I'll at least get some return on the capital.

• 2:46:43David Rosenthal?

  So I don't know. That's kind of sad. I think for Berkshire that I think of it as like an alternative to cash, but I kind of think that's where the stock is at at this point.

• 2:46:51Ben Gilbert?

  Fascinating. 10 hours in, and this is where we arrive.

• 2:46:56David Rosenthal?

  Not with a bang, but a whimper.

• 2:46:58Ben Gilbert?

  I will say the journey is the reward and I do want to sort of sum up this grading, this series, you know, of course we will get to carve out here in a second, but the completion of this with possibly the best take on Warren Buffett of anyone. Ho Nam from Altos, which is an investment firm that we very much respect, recently tweeted that he is the only investor to build a company worth over half a trillion dollars. And as Ho puts it, "A few amazing founders have done it, but no investor comes close."

• 2:47:37David Rosenthal?

  Absolutely. A great way to leave it. However, if you will indulge me, I will spoil it with a less eloquent parting thought that I wanted to add too, after, you know, gosh, we've spent hundreds of hours of research on this. This is-

• 2:47:56Ben Gilbert?

  We've read six books.

• 2:47:57David Rosenthal?

  This is the most like quixotic thing that we've ever done. Hopefully you all have enjoyed this as much as we have because it has been an absolute freaking blast.

• 2:48:07Ben Gilbert?

  It's changed the way I think too. Truly.

• 2:48:10David Rosenthal?

  We have learned so much from doing this. And I was trying to really reflect on like, okay, what have I learned from this? What can I take away? What are my feelings? There's what I'm doing about my stock, you know, that's one thing, but like the real value is in the learning. And here's my take. It's related to this Warren was the greatest status quo investor of all time idea from Andrew Marks and that the world we live in is different today. But I think Warren was right about another concept. All throughout his career, he's preached, "Believe in America. America is undefeated," you know, in terms of capital growth and a place to invest your money.

• 2:48:56David Rosenthal?

  And I think that, you know, may, may or may not be true to some extent today. But I think that concept is absolutely true for the internet. And the future ahead for the internet today, to me, is like Los Angeles in 1950, or whatever it was that when Charlie was looking for a city. What was it that was large enough to have an impact, but still small and growing enough that he could become somebody there?

• 2:49:30Ben Gilbert?

  Yeah.

• 2:49:31David Rosenthal?

  That's the internet. And if there's one thing I've taken from this, it's that, you know, that may change someday. But for the period that we're in and going forward, and despite all the ups and downs and you know, like, oh yeah, you know, Bitcoin and Ethereum, you know, and DeFi all crashed, like, you know, 50% this past weekend. It's all noise. Like, the internet is still the future.

• 2:49:56Ben Gilbert?

  Some listener out there, and please drop this in the Slack or tweet at us if you do this, we need a meme of with Warren and his slide saying, never bet against America. We need David Rosenthal, never bet against the internet.

• 2:50:08David Rosenthal?

  That's right. Never bet against the internet. That's my takeaway.

• 2:50:13Ben Gilbert?

  I love it.

• 2:50:15David Rosenthal?

  All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig.

• 2:50:21Ben Gilbert?

  Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale.

• 2:50:32David Rosenthal?

  Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next.

• 2:50:52Ben Gilbert?

  This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved.

• 2:51:04David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started.

• 2:51:15Ben Gilbert?

  Carve outs?

• 2:51:16David Rosenthal?

  Carve outs. Let's do it. I've got two, one very related and the other very unrelated, except to my joke at the beginning of the episode. The related episode is a book, Phil Fisher's Common Stocks and Uncommon Profits, a classic, really the counterpoint to the Buffett philosophy and the value investing tribe. Phil is the father of growth investing and this book was published in 1958 and Phil lived in the Bay Area here in San Francisco. And I will confess, I haven't finished the book yet.

• 2:52:00David Rosenthal?

  I'm still in the middle of it, but I'm riveted. The only reason I haven't finished is because we had to finish this episode. It's amazing. Phil like basically saw the future of what tech company like dynamics were going to be way back in the day. And he really, he writes about like the value of corporate R and D and this sort of paradox that like you can't measure the value on a balance sheet of like corporate R and D and the cost of it may be high and you don't know, but the cost of not doing corporate R and D is even higher. Really great book. Highly, highly recommend it. Also, I believe recommended to me originally by Honam, who you were just talking about.

• 2:52:44David Rosenthal?

  Oh my gosh. He's everywhere. He's everywhere. And then my second carve out is the Xbox Series S. I finally got one. Sweet. So the, and I was specifically looking for the S because like, I don't need, you know, I'm 36 years old. I don't need the X. I don't need like, I can't, my eyes can't even see well enough for the, the great graphics, but the S is awesome. This thing is like pretty cheap. I think it was $299, which is not that cheap, but the S and Game Pass, it works out to like, I don't know, what is it like $400 or something like that all in for a year. And you get access to hundreds of games and all the best ones. And I've been playing Halo Master Chief Collection and it's like Netflix.

• 2:53:29David Rosenthal?

  That's where your Halo reference came from. Where the Halo reference came in from. I see. It literally is like Netflix for gaming and it's so great. I haven't touched my switch since I got it. Highly recommend if you can find a Series X or a Series S. Game Pass just rocks. And I think it's on the Xbox One, too. If you, you can use it on the previous generation hardware.

• 2:53:49Ben Gilbert?

  Sweet. All right, I have two because you have two, but they're the most connected my two carve outs have ever been. The first is I somehow never saw Goodfellas until this week. And that movie is just so choice on so many levels. I mean, it probably came just because I, listeners will know, I just finished The Sopranos and that was my previous carve out and wanted more and the cast has like 25 overlapping people. It's the same freaking people. It's amazing, but it's, it's a frigging work of art for anyone who hasn't, who hasn't seen it. I mean, it's like Scorsese at his best. It's amazing direction. It's amazing cinematography. The dialogue is exceptional. It's just a, just a tremendous story of this person's life.

• 2:54:31Ben Gilbert?

  I've never been like a gangster movie person or I never thought I was, but this is so good.

• 2:54:36David Rosenthal?

  Ben, the, the OG, this, I have not seen it. I have to watch it.

• 2:54:40Ben Gilbert?

  It's great. It's great. And it's not like, you know, like obviously there's the Godfather and I've got a long rabbit hole to go down of like truly OG.

• 2:54:47David Rosenthal?

  Just watch one and two, don't do three.

• 2:54:49Ben Gilbert?

  That's what I hear. And then my second one is, uh, the Goodfellas soundtrack. It is like hit after hit after hit. I mean, George Harrison, Eric Clapton and Aretha Franklin. And, uh, the, the film sort of finishes with Layla by Derek and the Dominos. And that is just like the best way to wrap up any epic, epic story. I think if we had the rights.

• 2:55:11David Rosenthal?

  Which Layla, the electric version or the acoustic version?

• 2:55:14Ben Gilbert?

  Electric, although the acoustic is also great.

• 2:55:17David Rosenthal?

  Is great. I'm an electric fan though. They're both great.

• 2:55:20Ben Gilbert?

  Yeah. The, the electric creates more of a, the sort of like epic conclusion mood that is sort of appropriate for that. We'll write Eric Clapton and see if we can get the rights to use that on the fade out of this episode and.

• 2:55:33David Rosenthal?

  Great, great.

• 2:55:34Ben Gilbert?

  Actually, we probably won't.

• 2:55:35David Rosenthal?

  I'm sure he's listening.

• 2:55:37Ben Gilbert?

  For sure. But whether or not you're a fan of the movie or have seen it, go listen to the soundtrack on Spotify.

• 2:55:43David Rosenthal?

  So great. When, uh, do you know when Goodfellas came out?

• 2:55:46Ben Gilbert?

  Hmm. Early 90s. I want to say like 91, something like that. Shortly before the Solomon Brothers scandal.

• 2:55:53David Rosenthal?

  Yeah. While, while Warren was still in his, his real heyday.

• 2:55:56Ben Gilbert?

  Exactly. Exactly. All right, listeners, we are going to leave it there. With that, thank you so much to our sponsors. They've been wonderful. We have a Slack. You know this. Come hang out with us. You'll like it. We have an LP program for people who want to be closer to the show. You get to hang out on the Zooms live with us or with people like Brad Stone. When we're recording a book club episode with them, it's super fun. And frankly, I don't, you know, all that stuff is great. And if you want to engage more deeply in the show with you, you know, you should. But, you know, there's nothing like sharing an episode with a, um, a friend or social media if you want to, but just pass this along if you liked it. David and I love getting to share these stories with new people. So.

• 2:56:39David Rosenthal?

  And thank you for joining us on this journey. We're so lucky that we get to do this and it's so much fun. But like, this has been a whole new level of fun, at least for me.

• 2:56:48Ben Gilbert?

  As we sit here at like 11:00 PM, like trapped in this room for four hours. It has truly been awesome. All right, listeners, thank you so much. See you next time.

• 2:57:00David Rosenthal?

  We'll see you next time.