Berkshire Hathaway Part I

It's time. After 150+ episodes on great companies, we tackle the granddaddy of them all — Berkshire Hathaway. One episode alone isn't nearly enough to do Warren and Poor Charlie justice, so today we present Part I: Warren's story. How did a folksy, middle-class kid from Omaha become the single greatest capitalist of all-time? Why, like Jordan, did he retire (twice!) at the top of his game, only to reinvent himself and come back stronger than ever? As always, we dive in. Let's dance. 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 Warren Buffett Playbook is available on our website at https://www.acquired.fm/episodes/berkshire-hathaway-part-i Carve Outs: Ben: Year One of Not Boring: https://www.notboring.co/p/a-not-boring-adventure-one-year-inDavid: Balaji Srinivasan on The Tim Ferriss Show: https://tim.blog/2021/03/24/balaji-srinivasan/

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

• 0:00David Rosenthal?

  Going to need some of that, you know, running like the goo that you eat.

• 0:05Ben Gilbert?

  Oh, man, I should have brought a snack.

• 0:07David Rosenthal?

  Well, great thing about not being live, we could always just take a break if need be.

• 0:11Ben Gilbert?

  It's true.

• 0:11David Rosenthal?

  On the Warren and Charlie, don't take a break.

• 0:13Ben Gilbert?

  It's true. Oh, my God. What are we doing? We should have brought peanut brittle and cherry.

• 0:18David Rosenthal?

  Snap.

• 0:19Ben Gilbert?

  For part two, peanut brittle and cherry cokes are mandatory.

• 0:24David Rosenthal?

  Mandatory. Oh, well, that's okay, because we're not really talking about Berkshire today.

• 0:28Ben Gilbert?

  That's right. That was intentional.

• 0:30David Rosenthal?

  Yeah.

• 0:41Ben Gilbert?

  Welcome to season eight, episode five 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.

• 0:58David Rosenthal?

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

• 1:03Ben Gilbert?

  And we are your hosts. Let's talk about the 10 most valuable companies in the world. The first nine are tech companies. There's, of course, the big five in the US, plus Tesla, of course, because it's 2021.

• 1:17David Rosenthal?

  Of course.

• 1:18Ben Gilbert?

  And then you have Tencent and Alibaba from China. The ninth, TSMC, the Taiwan semiconductor manufacturer. And the 10th, the only non-tech company, it's a 182-year-old company that started as a textile mill in New England, Berkshire Hathaway. As most listeners know, Berkshire is far from a textile mill today. It is a holding company, unique in every way, and by far the most successful in history. A few of the companies that they own outright include Dairy Queen, Duracell, Fruit of the Loom, GEICO, NetJets, Sees Candies, and even Brooks Running Shoes.

• 1:59David Rosenthal?

  Seattle company, right?

• 2:01Ben Gilbert?

  Oh, yeah. Oh, yeah. And I'm super loyal. I ran up Mount Sinai wearing them the other morning.

• 2:05David Rosenthal?

  Nice.

• 2:07Ben Gilbert?

  They also own large pieces of many of your favorite publicly traded companies, including Amazon, Johnson & Johnson, Coca-Cola, American Express, Kraft Heinz, Verizon, GM, Mastercard, Snowflake, and now they even own over $100 billion of Apple stock. And somehow, the man behind it all, Warren Buffett, has claimed that purchasing Berkshire Hathaway was the biggest investment mistake he had ever made. And for many of you, you're probably learning that Warren Buffett purchased Berkshire Hathaway, and it was not something that he founded, which is the first takeaway from this episode.

• 2:44David Rosenthal?

  He claims, we will cover this again much later in the episode, but he claims that purchasing Berkshire Hathaway cost him $200 billion in opportunity cost.

• 2:56Ben Gilbert?

  Well, when you compound something over 50 years, you can come up with some large numbers. So what the heck is this company? How did it come to be? And why is it that even at an all-time high for the stock, so many analysts think it is underpriced today? Well, to do this right, we are going to need more than one episode, even an acquired-sized episode. So, welcome to our first part of our two-part series on Berkshire Hathaway. And in this first part, most of it won't even be about Berkshire the company. It's about the man, Warren Buffett, and his mental iterations and learnings that would shape what Berkshire would come to be. People always try and reduce what Buffett does to a simple

• 3:38Ben Gilbert?

  strategy, or even a few pithy quotes. In reality, Warren has learned, adapted, and reinvented his strategy at least four distinct times over the decades. In doing the months of research to prepare for these episodes, David and I both learned just how much Warren's thinking evolved to create the absolutely unreplicable juggernaut that Berkshire Hathaway is today. So on this episode, we bring you the story of Warren Buffett, the learning machine.

• 4:09Ben Gilbert?

  Are you an Acquired Slack member? If not, what have you been waiting for? It is a stellar community discussing all things Acquired, recent episodes, but more importantly, it is just a genuine, smart group of people having a thoughtful, nuanced, and respectful discussion about the tech and investing news of the day. You can join at 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 would nod and you're done. But in an AI-first world, that doesn't hold up anymore.

• 4:49David 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.

• 5:09Ben 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.

• 5:31David 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.

• 5:50Ben 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. All right. Lastly, to keep this short and sweet, if you are not an acquired LP, you really should just become one. And aside from all the things that we tell you every episode about the LP program, we just did a really cool new thing. We called it a

• 6:30Ben Gilbert?

  community Q and A with the founder of Levels, Josh Clemente, after we had him on the show. And we thought, wouldn't it be cool to let all the LPs pepper him with questions and interact with him? That was super fun. If you missed it, you can check out the recording in the LP Google Drive. And if you are not already a limited partner, you can click the link in the show notes or go to acquired.fm/lp. Cannot wait to see you in there. All right, David, I think we are ready to do it. Listeners, as always, this show is not investment advice. And like Warren Buffett, we would never profess to give you investment advice. All of our best ideas, we will keep a deep, dark secret, maybe until long after

• 7:12Ben Gilbert?

  we've executed them. So we can sort of tell the world about our wonderful investments. But David and I may have investments in the companies that we discuss that show us for educational

• 7:21David Rosenthal?

  Definitely do.

• 7:22Ben Gilbert?

  Entertainment purposes only. We hope you enjoy it. And without further ado, David Rosenthal, where are we starting this story?

• 7:30David Rosenthal?

  I have been a proud Berkshire Hathaway shareholder of the B, not the A, for pretty much my entire life. The greatest things that

• 7:39Ben Gilbert?

  Really?

• 7:39David Rosenthal?

  Gifts that my parents and grandparents gave me was a few shares of Berkshire B when I was a little tyke. Never sold them.

• 7:48Ben Gilbert?

  Very smart investment on their part. What's your sell date on them? What's your, where are you exiting the position?

• 7:55David Rosenthal?

  Never.

• 7:57Ben Gilbert?

  As it should be.

• 7:59David Rosenthal?

  As it should be. Okay. Before we dive into history and facts, we owe a big, big, big thank you to Alice Schroeder and her wonderful book, The Snowball, which I at least used as my main source for this episode. Ben, you read

• 8:15Ben Gilbert?

  Yeah, Buffett, The Making of an American Capitalist, a great book by Roger Lowenstein. I thought this book was awesome. People talk about Snowball all the time as the one, as the sort of more popular Buffett biography. I thoroughly enjoyed this book, so I think you can't go wrong.

• 8:31David Rosenthal?

  Yeah, well, we'll get to compare and contrast as we go here. But Alice's own story is pretty amazing. I didn't realize, to looking this up, she was an equity research analyst on Wall Street, covering insurance companies. And she wrote to Warren in 1998, asking to talk to him. And Warren had never talked to Wall Street research analysts before, but for some reason, he takes her call. And she was the first research analyst to initiate coverage on Berkshire. Kind of amazing. And then in 2003, another author approached her about writing a book together on Buffett. She talks to Buffett, and he says, well, why don't you just write it instead, and I'll give you full access, like thousands

• 9:14David Rosenthal?

  of hours with him, family, everybody. It's amazing. Amazing story. So definitely go check out both The Snowball and Buffett. Great books. Highly, highly recommend.

• 9:25Ben Gilbert?

  And listeners, we'll have to see how this goes. This is the second time, I think, The New York Times would have been the first one, but where David and I both just read separate books. And I think we both read them cover to cover. Obviously, we've got a few dozen other sources that we use for this as well. But we may have stories that one another does not know about.

• 9:42David Rosenthal?

  Yeah, we shall see. Okay, so I'll go first and start appropriately enough, back in 1867, with a journey from New York to Omaha, undertaken by a young gentleman named Sidney Buffett, who was working for his father's farm in Long Island. But he quits because he feels like he's not getting paid enough. And like so many young people, young men of his generation, he decides to go west to seek his fortune. And he ends up in Omaha, Nebraska. He got part of the way west.

• 10:23David Rosenthal?

  Part of the way west. I think his maternal grandmother, grandfather was already there in Omaha. That might've been why he headed there. But the other reason was that Omaha was a boom town at the time. So it had existed for a long time. It was a kind of pit stop on the, uh, the trail west, the, the Oregon Trail or the California Trail for gold prospectors heading out west. But after the Civil War, the US Civil War, Lincoln decrees that Omaha is going to be the headquarters of the new Union Pacific Railroad and, uh, which is going to connect up the West Coast of the United States with the rest of the country and the town takes off.

• 11:08David Rosenthal?

  Now, interestingly, Union Pacific is still around and operating today, ironically, as the second largest rail company in America after, of course. Burlington Northern being the first. Burlington Northern Santa Fe owned by. For sure Hathaway. But that won't come until part two. So Sidney gets to town. He decides he doesn't want to be a farmer anymore. He instead wants to sell products from the farm. He opens up the first grocery store in Omaha and, um, he runs it and then effectively passes it on to his son. His son Ernest Buffett, um, I think actually technically sets up a different store, but it's like the family business.

• 11:49David Rosenthal?

  So Ernest, his son, is running the legacy of the grocery store in Omaha. And as Alice points out in the snowball, Ernest was very, very aptly named as, uh, as we'll see. Under Ernest's management of the store, his quote that he likes to use is, "The hours are long, the pay is low, the opinions cast in iron and the foolishness is zero."

• 12:19Ben Gilbert?

  Hardcore.

• 12:20David Rosenthal?

  Yeah, hardcore. So typical of this sort of a new entrepreneurial middle class. Ernest and his wife Henrietta, you know, they they're fine with their children working in the store, but they want them to get a good education and become professionals. So most of their children go to the University of Nebraska, including their third son Howard, who majors in journalism and works at the Daily Nebraskan School Newspaper. While he's working there, he meets a freshman who comes in and is applying for a job. Leila Stahl, whose father owned a local newspaper in Nebraska. And they meet, they hit it off, they marry.

• 13:05David Rosenthal?

  Of course, these are Warren's parents that we're talking about. And amazingly, you know, they meet at the college newspaper. The very fitting, the newspaper business is going to play a large part in young Warren's life to come. So Howard graduates in 1925. He and Leila marry, and as was typical at the time, unfortunately, she drops out of school. By all accounts, she was like an incredibly promising student, very good at math. Her professors were very disappointed when she drops out to marry Howard and and become a housewife. Howard, of course, he wants to go into journalism and eventually politics. But Ernest is having none of it. His son needs a respectable professional career. The no-nonsense Ernest.

• 13:50David Rosenthal?

  So he instead suggests that Howard might want to do something, you know, more more useful, something more like selling insurance. So the just ironies continue to mount here.

• 14:04Ben Gilbert?

  Boy, we've got newspapers already. We've got insurance already. It's like either Berkshire Hathaway basically has an index on the American economy or the forces that would then shape Warren forever are sort of already playing a role in his life.

• 14:16David Rosenthal?

  They're already stacking here.

• 14:17Ben Gilbert?

  Probably some of both.

• 14:18David Rosenthal?

  Probably some of both, maybe more the latter because there's one more chip to stack, which is Howard, for two years, he's a insurance agent selling insurance. But we're in the late 1920s now, and it's the roaring 20s and it's go-go time. And Howard, after a couple of years, decides, you know, Maybe this insurance stuff is pretty boring. You know, my, my customers here in Omaha, they don't want insurance anymore. They want stocks, baby. So he switches careers two years out of school and goes from selling insurance to being a stockbroker in Omaha. I had to like look this up thinking about this, like, well, you know, you hear about

• 15:01David Rosenthal?

  stockbrokers, like, what, what does it mean to be a stockbroker in Omaha in 1927? So you gotta remember, it's like, there's no Charles Schwab. For what? I mean, Schwab was hugely innovative.

• 15:11Ben Gilbert?

  Right. So how are you brokering stocks if you're not on the floor?

• 15:15David Rosenthal?

  Right. Like, so there's the exchange, the New York Stock Exchange in New York. But then for all the rest of the retail public in America, how do they get stocks? You've got a local broker who is your sort of like combination financial advisor plus, you know, exchange access, you know, you're, you call your broker or more often he calls, and it was always a he at the time, he called you and would say, hey, you know, I've got this great stock that you might want to think about getting into, you know, I, I know you and your portfolio, your investment objectives.

• 15:58David Rosenthal?

  And you would chat on the phone with him for a while, or you go to his office and then you would sign up and you would buy shares. He would then call the exchange back in New York, get a trader on the line and then buy in your name some shares.

• 16:13Ben Gilbert?

  Oh, so they would get a trader on like, it wasn't like the brokerages bought these big blocks and then they would sort of like sub, it was like your broker would like call a trader on the floor to execute your trade.

• 16:24David Rosenthal?

  Well, I think it was kind of both. I think that was if you wanted a specific trade to happen. But more often what would happen was the big banks and financial firms and trading houses in New York, they had like product that they needed to move, you know, they had issuances that they needed to move, they had trades that they were doing, they needed counterparties to the trades. And so all of these local stockbrokers distributed throughout the country, they were like the distribution and sales force, like, you know, people talk about sales and trading back in the day and as part of investment banks, the sales part of it was sales to these, you know, an effort to educate all these local brokers to then recommend and push stocks to the clients.

• 17:09Ben Gilbert?

  Yeah, pretty fascinating. I mean, and at this point in history, investing isn't really like a profession with a lot of sort of science behind it. It's kind of looked at as gambling, right? Like buying stocks.

• 17:23David Rosenthal?

  Totally. Fundamental analysis does not exist yet. It's like, people think about stocks as exactly gambling is the right word. It kind of like, you know, tickets to bet on a horse. Like, oh, I like the name of this company or I like what they're doing. But nobody's thinking about what's the capital structure of this company? What are its revenues? What are its growth prospects? That's not how this works. So Warren would later in life, as we shall see, he would do a brief interlude, working for his father at the firm as a stockbroker himself. He called what they did equivalent to being a quote unquote, "prescriptionist" versus being a doctor. It would be like if you were, you know, a medical professional and you got paid

• 18:05David Rosenthal?

  based on the type and amount of pills that you prescribed to your patients versus the actual like outcomes, because you're just getting paid by the commission on every, every stock that you sell. The incentives are totally misaligned.

• 18:19Ben Gilbert?

  Ah, you're making me pull forward my first playbook theme already. Like this is one of Warren, I mean, he's not even born yet in the story, but this will ultimately be one of his very first realizations is, what is the point of me researching the crap out of these companies and picking stocks? When all I'm getting paid for is just to move product, you know? It's like a total, like you said, total incentive misalignment.

• 18:41David Rosenthal?

  Total incentive misalignment.

• 18:43Ben Gilbert?

  But, but let's, let's stick on Warren's father, like.

• 18:46David Rosenthal?

  Father Howard. Yep.

• 18:46Ben Gilbert?

  Yeah.

• 18:47David Rosenthal?

  Okay. So Howard, 1927, he switches over to becoming a stockbroker. Things are really great. They're humming. The family's doing great for two years. And then October 29th, 1929, basically, I don't think we've talked about this on this show yet.

• 19:01Ben Gilbert?

  Amazingly, no, we've made it 150 plus episodes without talking about Black Friday.

• 19:05David Rosenthal?

  Black Tuesday.

• 19:06Ben Gilbert?

  Black Tuesday.

• 19:09David Rosenthal?

  Black Friday is a much happier event, a real capitalism fest.

• 19:13Ben Gilbert?

  America has-

• 19:14David Rosenthal?

  It was not a capitalism fest on Black Tuesday.

• 19:16Ben Gilbert?

  Left its mark on me, yeah.

• 19:17David Rosenthal?

  Yeah.

• 19:18Ben Gilbert?

  All right, so Black Tuesday.

• 19:19David Rosenthal?

  Black Tuesday, of course, we're talking about the stock market crash on Black Tuesday over, I think, it actually wasn't that bad by modern standards. I think the Dow dropped like in the low teens, maybe percentages on Black Tuesday, but it was still shocking to people. The real problem is over the next three years after Black Tuesday, the market loses 90% of its value. Could you imagine that? Like, that's-

• 19:44Ben Gilbert?

  Unbelievable.

• 19:44David Rosenthal?

  I mean, during the, in 2008, I think the market lost like close to 50% maybe, but 90% of people are just wiped out. Like, it's carnage.

• 19:54Ben Gilbert?

  Yeah, like, the way that it's described in Lowenstein's book is that what was unique and remarkable about the Great Depression was that even the smart money got wiped out because the people who sort of realized, ooh, things are cheap now, the crash is over, would buy in and then even they lost all their money. And of course, that is the thing to fear when everyone's screaming, "Buy the dip!" And of course, that hasn't happened to this level, as you're saying, since 1929, but just crushed everyone.

• 20:23David Rosenthal?

  Well, to grossly oversimplify, you know, what at least I think happened and why it hasn't fortunately happened since is the stock market crashed and that led people to panic and that led to runs on banks. People wanted their cash out of banks. Banks were, you know, not nearly as institutionalized as they are now and there was no FDIC insurance that was put in place after the crash. So when there runs on the banks, that led to bank failures. So when the, when all these local banks failed, the Fed had to, I think, raise interest rates because it was like borrowing was so hard. Now, there was so

• 21:04David Rosenthal?

  much less like capital base available to borrow, so the interest rates had to go up. So you've got an economic shock-

• 21:11Ben Gilbert?

  Oh, wow.

• 21:12David Rosenthal?

  And then interest rates are going up. Like, imagine like when coronavirus-

• 21:14Ben Gilbert?

  And you want to be able to lower them.

• 21:16David Rosenthal?

  Right, like when coronavirus hit, the Fed slashed it to, you know, less than zero and same during 2008. So no, it was a double whammy of like economic shock plus major interest rate hikes. And that just like, that led to, it was a decade of, you know, more than a decade really until World War II. The stock market, the Dow, wouldn't return to its high before the crash until 1954. That's 25 years. That's a quarter century just lost, like crazy, crazy, crazy. Okay, so back to Howard and the Buffets. Howard does something pretty crazy, right? So like, it's, you know, it's bad.

• 21:58David Rosenthal?

  Warren is born, uh, less than a year after Black Tuesday on August 30th, 1930. Warren Edward Buffett is born. The next year, it wasn't until 31, Howard was working as a stockbroker for Union State Bank. And the bank fails. So not only is Howard out of a job, but all the family's money is at the bank. So they got no money. They got no job. And Howard and Leila now have two kids. So what does Howard do? He does the 100% total contrarian move. First, he does try to go to his father, to Ernest, and, and get a job at the family grocery store.

• 22:42David Rosenthal?

  Ernest is like, I can't, I don't have any money to pay you. Like, I can't employ you. So Howard sets up his own stock brokerage firm.

• 22:55David Rosenthal?

  So we're in the middle of the Great Depression. Really? After the crash, and he's just like, well, I know how to be a stockbroker. And he's not totally crazy because, you know, the world is melting down. But for anyone who does still have some wealth left, they need something to do with it. Like, they're not going to put it in the stocks that they were in before the crash. So Howard has this sort of business plan. He starts going around Omaha to anyone who still has any wealth left. And he advises them on hyper conservative investments that they can use their capital for. So like, utility companies, municipal bonds, that kind of stuff.

• 23:38David Rosenthal?

  And it works. Like, there's actually demand for this kind of service. So he's placing all these hyper conservative securities. Uh, he ends up making, I think, pretty quickly, like way more money than he was making at the old job.

• 23:50Ben Gilbert?

  Wow. I didn't realize that he sort of broke out of his own there and started his own brokerage.

• 23:55David Rosenthal?

  Yeah, started his own brokerage. It would eventually come to be known as Buffett and Fok. And so the family actually, you know, Warren has no memory of this, of these two years of really hard times, but kind of skates through the depression fairly well off.

• 24:10Ben Gilbert?

  His dad bought the dip.

• 24:12David Rosenthal?

  His dad bought the dip. Exactly. So Warren, unsurprisingly, to anyone who's heard of him, which is probably everybody listening to this podcast, turns out to be an extremely mathematical kid. So he's like always counting things. This is things counting bottle caps. He's counting his weight. He's running all sorts of analysis, even as a little kid.

• 24:34Ben Gilbert?

  Did you see he like was counting the occurrences of letters in like newspaper articles? And then he and his friend would like tally them up and make bets on which letters were going to appear more often than others. Like he was, he was counting completely arbitrary things just to count them.

• 24:50David Rosenthal?

  You might say that he has some budding OCD developing in his personality.

• 24:54Ben Gilbert?

  He was writing down license plates that went by. I mean, it was hardcore.

• 25:00David Rosenthal?

  It was hardcore. So then famously, as the story goes, and there's actually a picture of this, for Christmas, when Warren is six years old, he receives one of those money coin changers like that you wear on your belt, like the old.

• 25:15Ben Gilbert?

  Oh, yeah.

• 25:15David Rosenthal?

  Style. I actually had one of these.

• 25:17Ben Gilbert?

  Me too. I got one from my grandpa.

• 25:19David Rosenthal?

  Ah, amazing.

• 25:20Ben Gilbert?

  With the little like crank that you push down, the little like lever.

• 25:24David Rosenthal?

  Yep. And then it spits out, you know, one coin at a time. And there was the separate slot for quarters and dimes and nickels and pennies. I mean, that thing was so cool. So Warren gets this and he becomes obsessed with it. This is like, you know, the combination of counting and collecting things and analyzing and, and money. He's just like, he wants to get as many coins as he possibly can to stuff into this thing. And then he starts keeping jars in his drawers of all the, all the money. It's amazing. So he starts to think like, how can I get more money? He goes, I assume to his grandfather to the grocery store and he buys packs of gum like in bulk.

• 26:04David Rosenthal?

  And then he starts going around door to door in the neighborhood and selling individual packs of gum to mothers in the neighborhood for five cents a pop. Amazing. Then he starts, he kind of gets this racket going. Then he starts selling soda door to door. He starts selling magazines.

• 26:24Ben Gilbert?

  Didn't he like on a vacation, he like goes and buys some cokes and he's like wandering around the edge of a lake selling cokes for like twice as much as he bought them for.

• 26:32David Rosenthal?

  I don't think this was in the snowball. What?

• 26:34Ben Gilbert?

  Yeah, it's, it's exactly that. And it was cokes. I remember that despite his soon to come Pepsi addiction, his earliest childhood sales came from cokes.

• 26:43David Rosenthal?

  Amazing. So he's starting to accumulate the beginnings of the Warren Buffett wealth. When he's 10 years old, Howard takes him on one of his trips to New York and to Wall Street. And this is amazing. You probably read this too. Warren actually gets to meet the legendary Sidney Weinberg, who was the head of Goldman Sachs at the time. He's 10 years old. Warren Buffett is 10 years old. And his dad takes him to meet Sidney Weinberg. And supposedly as they're leaving, Warren's sitting there starstruck the whole time. And as they're leaving, Sidney supposedly turns to him and says, what stock do you like, Warren?

• 27:26David Rosenthal?

  And unfortunately in the snowball, like Alice doesn't say what Warren responds. Like, I want to know what the hot pick is. But he's totally starstruck. This makes a huge impression on him. And before they come home after the Weinberg meeting, his dad takes him to the stock exchange, the New York Stock Exchange, the building for lunch. And they have this great, like amazing lunch in this gilded building. And after lunch, a waiter comes up to the table with a tray that has all of these different types of tobacco on it and rolling papers for cigars. And Warren realizes that like, oh, after lunch at the exchange, you get like a custom cigar made for you.

• 28:11David Rosenthal?

  Like you choose the tobacco. And Warren says, he's like, he, he has no interest then or ever in, in smoking a cigar or even in any of these trappings of wealth. But he realizes like, If this is how they roll at the New York Stock Exchange every day, there must be so much money here. I gotta find a way to get me some of this.

• 28:33Ben Gilbert?

  Do you know if he got to like, see the trading floor as a 10 year old?

• 28:37David Rosenthal?

  I think so. I think so.

• 28:39Ben Gilbert?

  Have you ever been?

• 28:40David Rosenthal?

  No, have you?

• 28:41Ben Gilbert?

  Yeah. So I went when I was 16 or something as part of a high school trip. There was someone who had taken a class that I had previously taken, who worked at the stock exchange and sort of got us in. And we went on the balcony and all that. And it leaves a mark. I mean, looking out at this, this would have been 2005 or six, something like that. So it was mostly already computers and the people that are there are, you know, you don't have people making every trade live on the floor the way that you did, would have in those days. But even then, it leaves that impression, especially as a teenager, how much gravitas there is there, that that's sort of the central clearinghouse of equities in our nation.

• 29:20David Rosenthal?

  Yeah.

• 29:21Ben Gilbert?

  It's a impactful experience.

• 29:23David Rosenthal?

  Yeah, it's like, it's capitalism there incarnate. So Warren says of this trip and the wealth that he saw at the stock exchange and at Goldman, he says, he didn't want, he didn't have any desire to have any of the fancy stuff. But he says he did want independence. He said, I realized wealth could make me independent. Then I could do what I wanted with my life. And the biggest thing I wanted was to work for myself. I didn't want other people directing me. The idea of doing what I wanted to do every day was important to me.

• 29:57Ben Gilbert?

  Yeah, that certainly happened.

• 29:59David Rosenthal?

  It certainly happened. It just like resonates so much. I feel exactly the same way. So when he gets home, he decides that he's going to set a goal to amass this wealth that's going to get him the independence that he wants. He tells all of his family and friends that his goal is he's going to be a millionaire by the age of 35. Being a millionaire in those days would be equivalent to about 15 to 20 million dollars in net worth today. So. You know, gosh, today, I mean, like, like, anybody can do it. And it's great. And in our entrepreneurial startup friendly, you know, ecosystem, it's probably not totally crazy if a little kid said that they wanted to

• 30:42David Rosenthal?

  amass a $20 million fortune by the time they were 35. In Omaha in 1940, this was like totally nuts.

• 30:49Ben Gilbert?

  Yeah, I'll bet. I mean, the other thing, it reminds me so much too of the, you know, he would say several times throughout his life, and I'm going to paraphrase, that he doesn't want to be rich to be rich. He wants to, you know, have a lot of money because it's fun to have a lot of money and it's fun to watch it grow. And you can sort of already see that in like, his ambition here is not to make some specific impact or to get to do a certain thing because he has passion for it. It's like, no, no, I want to be a rich person. And it's fascinating how even so early in his life, he's just unabashed about that. I mean, there's so many, like, I think we're talking to every founder right now that's going out and like 50% wants to be rich and 50% wants to accomplish the mission that they're on. And they're like, I'm here to accomplish the mission that we're on.

• 31:31Ben Gilbert?

  Because we've all had it brow beaten into us that like, it is, it is not virtuous to want to be, and he's like, no, no, no, no, no. Like, I want to be a rich person. And later in his life, he would also decide, like, I want to be likeable. I want to be, you know, an icon in America. I want to be a platform for learning. I want to teach. But at this point, he's like, I want to be a rich person.

• 31:51David Rosenthal?

  I just want to be rich. Yeah. It's kind of amazing, even the 50% of, you know, people and founders out there who like, do just want to be rich. So you would never say that.

• 32:00Ben Gilbert?

  It's a very Buffett, sort of singular focus and frankly, like, not caring about what other people think of him to just have that upfront.

• 32:10David Rosenthal?

  Come out with it. So this is pretty amazing. He's 10 years old. He has this goal and he figures something out at the age of 10 that just drives the entire rest of his life. And I think it's something that like 99.9% of people out there in the world never figure out, which is this concept that money can create more money, which is obviously compounding, which will spend most of the rest of, you know, the next several hours here and several hours on the next episode talking about. But he figures this out, like it just simply reduced to that money can create more money.

• 32:50David Rosenthal?

  And the way he figures it out, the story goes, he had gone to the library and taken out a book called 1,000 Ways to Make $1,000. One of those like books that could only exist in like the 40s and 50s.

• 33:05Ben Gilbert?

  Yep.

• 33:06David Rosenthal?

  And one of the 1,000 schemes that it describes in the book is that you could buy a penny weighing machine. So these things used to exist. They're like scales in public that would be on like street corners and in drugstores and stuff. And you would weigh yourself on it. I guess because like home scales.

• 33:29Ben Gilbert?

  Oh, I've seen these in like grocery stores.

• 33:31David Rosenthal?

  Yeah. And, and so you'd pay a penny, you put a, put a penny in the slot and then you'd get to weigh yourself. And, and so the scheme in the book is that, oh, you just go buy a penny weighing machine and then you collect the money over time and eventually you'll get a thousand dollars out of it. So Warren reads this and he's like, wait a minute. What if I buy one weighing machine? And then once I earn enough money from it, I use that money to go buy another weighing machine and then I'll put it in a different spot. And then if I've got these two weighing machines, both earning pennies every day. Well, the rate at which I'll earn enough to buy my third weighing machine is going to be half as much time. And then I can buy my fourth weighing machine and you know, another

• 34:14David Rosenthal?

  third is less time. And so he figures this out. He apparently literally starts writing out, you know, essentially compound interest tables in his bedroom in his notebook, dreaming about all these weighing machines that he's going to have.

• 34:26Ben Gilbert?

  Oh, it's so crazy.

• 34:27David Rosenthal?

  Amazing. Other kids would be like thinking about using all this money to buy bubble gum or baseball cards or something.

• 34:33Ben Gilbert?

  And he's 10. Like I knew that later, as he gets into his teenage years, he's, you know, he's got a little pinball servicing business, but like at, he's 10. That's crazy.

• 34:45David Rosenthal?

  He's 10. So yeah, so you alluded to, he never does do the weighing machines, but when he's in high school, yeah, he buys.

• 34:50Ben Gilbert?

  Doesn't actually end up buying. He just like does the formulas to see what it would be.

• 34:54David Rosenthal?

  No, he, he just does the formulas. Yeah.

• 34:56Ben Gilbert?

  Oh, wow.

• 34:57David Rosenthal?

  But he does buy used pinball machines in high school and like, he makes a ton of money off these things. He puts them in barber shops. It's great.

• 35:04Ben Gilbert?

  Do you know why he got out of that business? The pinball?

• 35:07David Rosenthal?

  No, I assume just because he graduated high school.

• 35:10Ben Gilbert?

  No, this is a call back to our Nolan Bushnell episode. Warren found out that this was a business that if you get too powerful in it, then you start having to contend with the mafia for, you know, who's getting a cut of doing that servicing. And he basically was like, well, I don't want anything to do with that. And he, his friend got out of that business.

• 35:30David Rosenthal?

  Wasn't Nolan saying something about that pinball machines were linked to like bootlegging too during prohibition?

• 35:37Ben Gilbert?

  And like bootlegging, money laundering.

• 35:40David Rosenthal?

  Yeah.

• 35:40Ben Gilbert?

  They've got sort of a storied history there that would then bleed into arcade games too. Cause I think one, it was an outcropping of the other.

• 35:46David Rosenthal?

  That's right. These are, these are during Warren's less scrupulous early years.

• 35:50Ben Gilbert?

  Well, and he, he had this whole game too, that he was running where he and his friend would basically pretend that they weren't the guys in charge, that they worked for some bigger company. And so whenever they'd get like, you know, harassed for something, or they would complain about prices or something like that, they would say like, look, we're just the, you know, we're the hired hands. Like we're not the guys in charge. We gotta, we don't set the prices. It's such a good bit.

• 36:13David Rosenthal?

  Oh, Warren. So great. So the other thing he does when he gets back from the New York trip is of course, he starts buying stocks. He's got his dad, the stockbroker right there. So he's got the line. He can go buy stocks. So he, he convinces his big sister Doris to pool all of their money together. They're about like 200, 250 bucks between them. And, and he decides he's going to buy shares, preferred shares in a company called Cities Service. So they together, you know, he's, he's the sort of managing partner in this partnership. They buy six shares for 38 bucks a share. And immediately the stock goes down to 27 bucks a share.

• 36:58David Rosenthal?

  So not a, not an auspicious beginning. Doris is like freaking out about this. And Warren feels horrible. It's like eating him up. So the stock does recover to $40 a share and Warren just unloads it. He's like, great. Get the money back. Give Doris her money back, but it keeps going. Like pretty quickly, the stock goes to over $200 a share, but Warren had already unloaded.

• 37:25Ben Gilbert?

  This is like me and Bitcoin in 2015. Like this is exactly what

• 37:29David Rosenthal?

  10 year old Warren. If only, Ben, if only you'd learned these lessons at age 10.

• 37:35Ben Gilbert?

  Blew it.

• 37:35David Rosenthal?

  So I'd say the incident makes an impression on him. He says he learns three lessons from this. I think he actually only learns one, but the first that he says he learns is don't fixate on the price you paid for something. It's irrelevant. The second is don't rush to grab a small profit. Stay focused on the big, long-term wins. The irony is he would violate rules one and two, like many, many, many times until he was about 40 years old. So as we shall see. But the third lesson he does learn, which is that you can't control other people's emotions around money. So if you're gonna take money from anybody, you need to make sure, one, that you're not gonna lose it.

• 38:14Ben Gilbert?

  And he's talking about his sister here.

• 38:15David Rosenthal?

  He's talking about his sister. Yep. And two, that you need to do something to manage their emotions or their ability to affect you so that they don't freak out and cause you to do uneconomic things. You know, Warren might've sold it $40 anyway, but certainly that his sister was breathing down his neck to sell it. You know, it reminds me of the early Sequoia days.

• 38:38Ben Gilbert?

  Yeah.

• 38:38David Rosenthal?

  Yeah, and Apple. Warren decides it's best if the clients don't see how the sausage is made, so to speak.

• 38:44Ben Gilbert?

  Which would absolutely inform his, you know, his, his perspective on some of the partnerships he would do in the near future where he would not tell people the stocks he was buying on their behalf, which like, I remember reading those words and being like, what? This is like a blind undisclosed pool that he's running, but it's so easy to see how, you know, these early experiences make him realize, yeah, like if you want to be, you know, the completely independent free thinker that you are doing your own fundamental analysis and not moved.

• 39:18Ben Gilbert?

  Not only by the current price that things are trading at, but of the emotions of your investors or the demands of your investors for their tax consideration, or for whatever reason they want to withdraw funds, then you better figure out how to hold and manage money on your own terms.

• 39:33David Rosenthal?

  Totally, totally. So meanwhile, shortly after the New York trip, Howard's career takes another turn. Pearl Harbor happens and the US, of course, enters World War II. Howard is a staunch isolationist and very-

• 39:52Ben Gilbert?

  And define that for us, like xenophobic, like anti-trade, anti-

• 39:58David Rosenthal?

  It's unclear to me if he was xenophobic. I mean, he probably was. I wouldn't imagine he was the kind of person who loved foreigners, but he was certainly very against America entering the war. And he hated FDR and Roosevelt. He was like a diehard Republican, as apparently were many people in Nebraska at the time, because he runs for Congress inspired by the US entry into World War II, which he thinks is the worst thing that has ever happened. And he wins. So the family moves to Washington and Howard becomes a US congressman. Warren, though, he hates it. He wants nothing to do with Washington. He loves Omaha. He wants

• 40:41David Rosenthal?

  to go back. So he campaigns his family to let him go live with the grandfather, with Ernest, back in Omaha. And Warren's like, this is gonna be great. You know, me and Gramps, we're gonna become industrialists. We're gonna be partners, buddy buddy. We're gonna be like, you know, the Rockefellers and the Morgans. It's gonna be great. He moves back, lives with his grandfather, and Ernest puts him to work in the store as a stock boy. And Warren's like, wait a minute, I thought we were partners here.

• 41:10Ben Gilbert?

  Hey, I like the business you're running. I don't so much like the work that I have to do inside of it.

• 41:15David Rosenthal?

  Yep. So manual labor, stocking the shelves, extremely low pay. Warren's like, this sucks. I gotta get out of here.

• 41:23Ben Gilbert?

  Did you read too that like, his grandpa was withholding a penny or two each day to simulate social security to like, show Warren what it was like to have to pay different levels of taxes?

• 41:35David Rosenthal?

  Oh, so great. So great. Ironically, somebody else would feel this exact same way about working for Ernest Buffett a few years earlier, though they would not intersect, one Charles Thomas Munger.

• 41:51Ben Gilbert?

  So crazy. Like, how nuts is it that Charlie Munger worked for Warren's grandfather in the same job that Warren did a few years later and they never met until, what, their 30s? Something like that?

• 42:04David Rosenthal?

  Yeah, until 1959. They never met.

• 42:08Ben Gilbert?

  Wild.

• 42:08David Rosenthal?

  Crazy. So after this summer that Warren thought would be his future industrialist summer, he's like, all right, take me to Washington. I gotta get out of here. Get out of the store. He goes with the family to DC where he devises a new way for making money to earn his fortune. He gets a paper route delivering the Washington Post.

• 42:34Ben Gilbert?

  Amazing. Like, beautiful foreshadowing. And when he can profess that I rose all the way from paper boy to chairman, albeit with some, you know, leaving and coming back in between.

• 42:47David Rosenthal?

  Yep.

• 42:48Ben Gilbert?

  It's an amazing journey.

• 42:49David Rosenthal?

  An amazing journey. And of course, yes, he would later become the chairman of the Washington Post and partner to Kay Graham. Was Warren the chairman? I think he was the chairman, yeah. And Kay was the CEO.

• 43:00Ben Gilbert?

  I think that's right. I mean, he got a board seat commensurate with his investment. I think she gave him the chairman role because she had so much sort of respect for his counsel.

• 43:10David Rosenthal?

  Well, we'll hear more about that in part two to come. But he's got this paper route now. And remember, he was selling gum and soda door to door back in Omaha. It's like, this is great. Now I've got the way that literally my foot in the door to all of the housewives in Washington DC. You know, I deliver them the paper, but I can sell them magazine subscriptions. I can sell them calendars. I could sell them all sorts of stuff. So he starts an empire in the streets of the suburbs of Washington DC.

• 43:42Ben Gilbert?

  And he's doing crazy stuff like he's ripping off the labels on subscriptions that I think people had like put out to throw away. So he was basically understanding when subscriptions would expire. So he knew who to go sell what subscriptions to at what time. It was a brilliant strategy.

• 44:00David Rosenthal?

  Warren loves digging in the dirt for stuff.

• 44:02Ben Gilbert?

  Yep.

• 44:03David Rosenthal?

  So by the time he is in high school in Washington, he's earning 175 bucks a month, which is more than what his high school teachers are making and almost as much as the average US worker's salary at that point in time.

• 44:22Ben Gilbert?

  Wow.

• 44:22David Rosenthal?

  And Warren's in high school. Totally crazy. He's amassed, okay, he's not spending any of it, of course. He's amassed over $2,000 in savings, which, you know, is the equivalent of like, I don't know, 40, $50,000 today. Like, how many high schoolers do you know that have amassed, self-made, almost a full Bitcoin in savings?

• 44:44Ben Gilbert?

  And, and how many high schoolers do you know that firmly understand what the value of that is compounded 7% every year for another 80 years?

• 44:53David Rosenthal?

  Yep.

• 44:54Ben Gilbert?

  You know that Warren is looking at that stack, imagining its future potential.

• 44:58David Rosenthal?

  Totally. So now he's got like some real actual capital to invest. What does he do? He's still buying individual stocks, still playing the stock market, but he really, you know, he wants to be this like industrialist businessman. He decides he's gonna buy an actual business. He's 15 years old. So he buys a tenant farm in Nebraska back home.

• 45:21Ben Gilbert?

  No way.

• 45:22David Rosenthal?

  For $1,200. So a tenant farm, he buys a farm, an active farm with a tenant on it that is working the farm, because Warren's not gonna work the farm, like, no way. And the deal is with tenant farmers is the tenant farms the land and the profits from the crops get split 50/50 between the tenant and the owner of the farm.

• 45:44Ben Gilbert?

  Half the returns to capital, half the returns to labor.

• 45:47David Rosenthal?

  Yep.

• 45:47Ben Gilbert?

  And of course, if the tenant also gets to live there in addition to getting half the profits, right?

• 45:51David Rosenthal?

  Indeed, indeed.

• 45:53Ben Gilbert?

  Wow, it's like Warren's first yielding asset.

• 45:55David Rosenthal?

  It's his first cash flow business.

• 45:58Ben Gilbert?

  Huh.

• 45:58David Rosenthal?

  So Warren graduates high school in 1947 at age 16. I don't, he might have skipped a grade or maybe he was just young.

• 46:08Ben Gilbert?

  It certainly sounded that way.

• 46:10David Rosenthal?

  Sounded that way. And he goes to where else? The University of Pennsylvania's Wharton Business School, which then as probably now, I still sort of think of it as like the preamble that you want to be an undergrad business major, you know, in the US or anywhere in the world, like Wharton is the place to go. But it's really his dad who makes him go. He doesn't want to go to school at all. He's like, I already know all this stuff. I just want to go get to work.

• 46:37Ben Gilbert?

  And he wants to stay in Nebraska. I mean, he doesn't like going east. It's never been a great experience for him and he's only comfortable doing it because he's like, my dad's in Washington, so you know, I have some family sort of close. I'll do it.

• 46:49David Rosenthal?

  Sure. So he does it. He doesn't study, you know, he like aces all the tests, you know, it's sort of ridiculous. After two years, his dad loses his congressional seat and the family moves back to Nebraska. And Warren uses this excuse to say, hey, why don't I transfer to the University of Nebraska at Lincoln, be back closer to home. He also has something else in mind, which is he knows if he goes to Nebraska, he can take a lot more courses, accelerate and graduate in three years and just get out of there.

• 47:23Ben Gilbert?

  Yeah, I don't think he was like loving the social scene of college. I mean, he wasn't a drinker. He wasn't going on lots of dates. He had his eye on the prize and for him that was making money. And he frankly, thought he was smarter than all of his college professors at Wharton. So I think.

• 47:38David Rosenthal?

  I mean, he probably was. With Warren Buffett, it's, you know, it's, he's not wrong. He was probably pretty obnoxious about it. So at Lincoln, he goes to the Lincoln Journal newspaper and he gets a job managing the country circulation, which means he now has 50 paper boys reporting to him all across the countryside in Nebraska.

• 48:02David Rosenthal?

  So he's, that's his side hustle. He loads up on courses. He finished his degree a year early. So he's 19 now. He's just graduated college. He's ready to start his business career for real. But unlike when he went to undergrad, he actually does see some value in some further education. He decides there is a graduate school that he wants to go to that would actually be worth it. And that is to go to the prestigious Harvard Business School. And he's so sure he's gonna get, he's gonna like, look, I bought my first business at age 15. I met Sidney Weinberg when I was 10. Like, there's no doubt I'm gonna get in. He writes his application. It's all about being an investor. And he

• 48:47David Rosenthal?

  goes and he does his interviews. Sure, he's gonna get in. And he gets rejected.

• 48:54Ben Gilbert?

  Which Harvard Business School would forever, forever be regretting.

• 49:00David Rosenthal?

  Totally. Now, I mean, I don't know. I don't know exactly what Harvard Business School was looking for in, in 1947 at the time. But I think kind of sort of either notes or unbeknownst to Warren, I don't think he cared either way. I think this idea of like, being an investor was sort of de classe, you know, like, what you wanted to do. I mean, because investing, you know, people were still, still hangover from the depression. And it was wartime. I think what you wanted to do is you wanted to be like mad men. You wanted to work for, you know, a big firm. You wanted to climb the ladder. You wanted the stability. Like, this idea of like, being an investor and on your own. That was not what was proper at the time.

• 49:44Ben Gilbert?

  And Ben Graham is only really starting to publish The Intelligent Investor, like this notion of how to analytically and, and from fundamentals do investing. You know, this still very much looked at as investing equals casino. We're still not quite in the era of that. Being respected and frankly, most people that are doing it are pretty much hucksters, are looking for their, just to make their commissions on the trades.

• 50:09David Rosenthal?

  And the people who were not, who were good and professionals and fantastic at their craft at this point in time, most of them are Jewish, which, you know, I, I assume there were probably some Jews at Harvard Business School, but not a lot. And it's kind of viewed as a Jewish profession. This is going to come up in a big way in a minute. Ben Graham's Jewish.

• 50:30Ben Gilbert?

  The anti-Semitism that was running rampant at the time can't have helped things.

• 50:33David Rosenthal?

  Totally. You know, Sidney Weinberg, Jewish, like Goldman Sachs, the Jewish firm. And it was very much, you know, they were outsiders. They were not the establishment. So Warren is shocked by his rejection from HBS. He starts looking at the course catalogs for other business schools, just to like, oh man, well, what am I going to do? And he happens to see in the Columbia Graduate School of Business course catalog, that there is a course taught by his hero, Benjamin Graham and David Dodd, of course. And he's like, holy crap. He would joke later, I assume this is a joke. He said, he would write a

• 51:15David Rosenthal?

  letter to them to plead his case to get into Columbia, saying, I thought you guys were dead. I didn't realize you were alive and teaching classes.

• 51:24Ben Gilbert?

  Cause he had like, just picked up their book and was like, this is the, you know, he, what, The Intelligent Investor, I think is the one he probably read and was like, this is incredible.

• 51:31David Rosenthal?

  So Graham's book, The Intelligent Investor, had just come out and Warren was obsessed with it. Now Graham and Dodd together had written, published Security Analysis back in 1934, but that was a textbook. That was like an academic, you know, I haven't read it, but like, it's super thick, dense. It's, it's not meant to be readable. The Intelligent Investor is like the Danny Kahneman Thinking Fast and Slow, you know, version of like, you know, it's case studies. It's like distilled down for public consumption.

• 52:05Ben Gilbert?

  And for listeners out there who have read The Intelligent Investor, you're probably thinking, wait, that was supposed to be the not dense one?

• 52:13David Rosenthal?

  Different era, different era.

• 52:15Ben Gilbert?

  Yep.

• 52:16David Rosenthal?

  So Warren's read, you know, the Intelligent Investor and he loves it. He's like, this is amazing. And, and what the Intelligent Investor and Security Analysis in a even more dry way before it, what they did was they espoused, they were like, hey, you should think about stocks and investing in stocks systematically and based on the fundamentals of the companies that they represent and as pieces of a business, not like tickets on, you know, horse race betting here.

• 52:43Ben Gilbert?

  And they basically introduced the idea of the discounted cash flow. Like this is the first notion that like stocks are, you know, the market cap of a company is representative of the sum of all future positive cash flows, or I guess all cash flows discounted at a certain rate back to today. And, you know, this sort of forcing you to look and say, does the price of the stock today reconcile with what you actually believe the business will yield or produce in its full lifetime? You know, that, that was frankly novel.

• 53:17David Rosenthal?

  It was. And so Dodd is the Chair of the Finance Department at Columbia. But Graham, he's an adjunct. He's a practitioner. So Warren is just so Gaga here because not only is he like, you know, a professor apparently, but he wrote this book. Graham runs essentially like the first hedge fund in the world. He runs the Graham Newman Partnership with Jerry Newman. They are a partnership that invests in stocks on Wall Street. Like there's nothing Warren wants to do more than be like these guys.

• 53:54Ben Gilbert?

  Right. I could literally go take a class from a guy who is actively employing a real investment strategy on Wall Street. Mind blown.

• 54:02David Rosenthal?

  Totally. So the deadline for Columbia has passed by the time he gets, figures this out. So he writes a letter to Dodd and Graham. He's basically just like begging them to let him in. Well, lo and behold, guess who at the time was chairing the admissions committee at Columbia Business School? It was Dodd. So Dodd like gets this and, and, you know, reads it and is like, all right, well, I'm just gonna unilaterally let this kid in. No interview, no.

• 54:36David Rosenthal?

  Discussion, no formal application. They just send Warren on a note and be like, "All right, you're in. You're starting in the fall."

• 54:43Ben Gilbert?

  Because this is like, hey, we, we basically see ourself in you. Like, no one is writing us about this thing that we're doing. And here you are crazy excited about this super dry, relatively unrespected thing that we're doing in the world. Yes, come join us.

• 54:57David Rosenthal?

  Come join us. So the fall of 1950, Warren arrives in New York City. At this point, he's compounded his net worth up to $10,000, which is a lot of money. 5X what it was in high school, five years earlier. But he still can't stand to part with any of his money. So rather than staying in the dorms at Columbia or renting an apartment, he rents a room at the YMCA for a dollar a day.

• 55:25Ben Gilbert?

  This guy is truly cursed with having a firm grasp of the future value of his money compounded in the way that he feels he can get a, get a return on it. I mean, we can, we can talk all we want about the virtue of compounding and the eighth wonder of the world. And frankly, I feel like I have a new understanding for it based on doing all this research. It's only like now that I'm feeling the heft of truly like, what if I just put $1,000 in a savings account, not a savings account, but in an index fund and accessed it 50 to 70 years from now. And you're like, oh my God, it turns into like a, a real big amount of money, almost no matter what. And it's like, you, you all know this, but when you're Warren and you've actually done all these calculations and all you're thinking about all the time with singular focus is the

• 56:09Ben Gilbert?

  future compounded value of this money. How could you ever spend a dime? I mean, it truly is cursing to your lifestyle.

• 56:17David Rosenthal?

  Yeah. I mean, Alice writes about that, that every time he looked at spending money, he would not see the sticker price for things. He would see it times eight or 10 or 20 of what that money would be worth in the future.

• 56:31Ben Gilbert?

  And just to come back and say it, so we all have a firm understanding here. If you took that $1,000 and you want to invest it for 70 years, say, getting a 10% per year return on it, which would be good, like that would be a very good return. And I think it's a little bit outpacing public markets. That's $800,000 70 years from now. And like, you know,

• 56:53Ben Gilbert?

  70 years from now, my money has a lot less utility to me than it does today because I will have not had it my whole life, which is the curse. But if you're Warren and all you're seeing all the time is that money in the future, my gosh.

• 57:06David Rosenthal?

  Well, and I think that's the difference between Warren and most normal people too, is that money in the future probably has about the same utility to him because it's not about what he can buy with the money. It's just about the stack of money.

• 57:20Ben Gilbert?

  Yep. For Warren, it is a scoreboard game, not a utility of the cash game.

• 57:26David Rosenthal?

  Yep, totally.

• 57:27Ben Gilbert?

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• 57:41David 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.

• 57:55Ben Gilbert?

  Exactly. And the challenge with AI is governing it, securing it, measuring it, and making sure that it actually delivers value. That is why ServiceNow built the AI Control Tower.

• 58:05David 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.

• 58:23Ben 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.

• 58:39David 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.

• 58:56Ben 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?

• 59:05David 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.

• 59:16David Rosenthal?

  Okay, so he shows up at Columbia in the fall of 1950, signs up right away for Ben Graham's seminar, which is in the spring semester. So he's already read The Intelligent Investor cover to cover. You know, he's wearing out the pages so many times. He knows everything, but he really like, he's such a go getter for this. He like, he really wants to impress Graham in the seminar in the spring. So he sees, I guess in Moody's and S and P put out like stock manuals at the time. That was the main thing that people like Warren and Ben Graham and Newman and everybody browsed through looking for stocks. He sees

• 59:54David Rosenthal?

  that the Graham Newman partnership owns 55% of, and Graham is on the board of this little company in Washington called the Government Employees Insurance Company. Interesting. Hmm. Sounds familiar.

• 1:00:12Ben Gilbert?

  I mean, if Ben Graham's the chairman, like surely Warren wants to know more.

• 1:00:16David Rosenthal?

  Yeah. Well, surely he wants to know more, but the Government Employees Insurance Company isn't mentioned anywhere in The Intelligent Investor. And, you know, the rest of The Intelligent Investor is full of case studies and talking about different stocks and, but they don't talk about this company there. Why is that? Warren decides, I want to go investigate. I'm going to find out more about this company, this GEICO, if you will, for short. I'm going to go pay them a visit. So he hops on the train from Penn Station, goes down to Washington on a Saturday morning, and he just shows up at the office and he knocks on the door. And he persuades a security guard at GEICO to see if anyone's around

• 1:00:58David Rosenthal?

  who could talk to him. Warren sort of presumptuously at this time, although I guess he was signed up for the seminar, says that he's a student of Ben Graham's and Ben Graham is the chairman of the board. So, you know. Might want to let me in, have somebody talk to me. Eventually, the company's head of finance, Lorimer Davidson, is there that Saturday morning. And he's like, all right, kid, come on in my office. He figures I'm going to do like a good Samaritan deed, give this kid 10 minutes of my time here. Well, it turns out that Lorimer, or Davy, as everyone called him, he wasn't just like a finance dude at GEICO. Not that there's anything wrong with being a finance dude. I guess he was a finance dude in a certain respect.

• 1:01:39David Rosenthal?

  He had been an investor and a bond salesman before joining GEICO. So he was like, he was a lot more like Ben Graham than just an employee at GEICO. The story of GEICO, the founders had thought that they could make auto insurance cheaper by having commercials with geckos in them. No, by selling the auto insurance direct to customers without using agents. And to be as cheap as possible and have the best underwriting profile as possible. They also needed very responsible drivers. So they borrowed an idea from USAA, which targeted military families for insurance. They target government employees for insurance, hence the government employees insurance company.

• 1:02:21Ben Gilbert?

  It's also amazing that their hunch that like government employees are going to be less prone to accidents than the general public was right, that they could actually underwrite to, you know, we can give these people cheaper premiums because they're going to be less expensive to us. Like that that worked out for them.

• 1:02:38David Rosenthal?

  I mean, I guess seemed like a reasonable assumption. Yeah, that if you work for the government, you're maybe more less conservative, less likely to drive under the influence of alcohol or, you know, who knows? Either way, it worked. So one of the two founders, after a bunch of years, wanted to sell, the family wanted to sell and their stake and hired Davy to help find a buyer. Davey brings it to Graham, which is how Graham at the company, he ends up negotiating a deal to buy at a discount to the asking price, of course.

• 1:03:11Ben Gilbert?

  Cause it was fully privately owned, right? It was not a fully private company.

• 1:03:14David Rosenthal?

  Yeah. So he buys out the 55% stake that the family owned for a million dollars. And then he turns around and puts Lorimer in charge of managing GEICO's own investments. So Warren happened on the mother lode, meeting this guy here. Like, you know, he's like a Graham disciple. He runs all the investments at GEICO. So Warren just starts peppering him with questions. Lorimer's super impressed. He's like, who is this 19 year old kid? They talk for four hours that Saturday morning. And Davey tells Warren all about how GEICO works, how the insurance industry works, tells him about this magical thing called float. And Warren is like, he has seen like the revelation of, you know, God has handed down

• 1:03:59David Rosenthal?

  the 10 commandments on the mount.

• 1:04:02Ben Gilbert?

  You mean, you have other people's money that they're loaning you for free that you can do stuff with until you need it? Huh?

• 1:04:10David Rosenthal?

  And you may not even ever need it.

• 1:04:12Ben Gilbert?

  Well, that's an interesting idea.

• 1:04:13David Rosenthal?

  Yeah. So what is this float idea? And how does GEICO and all insurance companies work? The premiums that the customers pay GEICO for their auto insurance, that cash comes in the door on day one and GEICO's expenses, they have to pay out claims on insurance claims later. So you pay the policy premiums upfront, but then when there are accidents and stuff and then they go through court and blah, blah, blah, it could take years before you have to actually pay out any money, if you pay out any money at all.

• 1:04:48Ben Gilbert?

  Right, right. Yeah. Supposing you have a good government employee that never wrecks their car, you might just make money.

• 1:04:54David Rosenthal?

  You might just make a lot of money and never have to, you sit on and you never have to pay it out. And if you manage it well, you can make investments with it. And that's what Lorimer is doing at GEICO. He's using all this float to make investments and he's doing a pretty damn good job of it.

• 1:05:11Ben Gilbert?

  There's sort of like two things that Warren realizes this, that like I never fully put together before about insurance premiums. The first is this is a loan that someone is making you at 0% interest.

• 1:05:25Ben Gilbert?

  You're like, well, that's a pretty good loan. Like, I don't, I don't have to, to service the debt. Well, like, that means that I basically can make more profits because I don't have to take a cut of my profits every month to pay down the debt. Awesome. It's a interest-free debt. The second amazing thing is, wait, it's not one person that loaned me money. It's a gigantic set of thousands or tens of thousands or hundreds of thousands of people that are paying me money. Well, then, what that means is they're predictable because it's not just somebody wakes up on the wrong side of the bed and says that they want their money back. Like, the worst thing that can happen, save for some hurricanes to force out of the future a little bit, is that, like, one person wrecks their car and maybe another person's car, but nobody's wrecking all my customers' cars at the same time.

• 1:06:09Ben Gilbert?

  So that's the second thing that's amazing. And the third thing that's amazing is it's not a collateralized loan. So you don't have to have something in your business that sort of like warrants you being able to take on this big debt load. It's just a big, uncollateralized, interest-free, distributed loan to you that you get to do something with until you need to pay it out.

• 1:06:33David Rosenthal?

  And especially back then, there was much less regulation about capital requirements for insurance companies and, well, all financial institutions. So they really didn't have to keep any cash reserves. I mean, they could kind of do whatever they wanted with the money.

• 1:06:48Ben Gilbert?

  Speaking of do whatever they want with the money, I think what was happening back then is that, as you would sort of imagine in the early days of insurance, you would want your premiums to basically equal the amount of money that you would need to pay out in the future. What happens now is it's assumed that you can do interesting things to earn money on the float. So, and I didn't know this till doing the research, when you pay for your car insurance, they're actually collecting less in premiums than in total they will owe out to everyone. So you need to do something interesting with the float in order to make it so that the insurance company doesn't go under, which I never, I never realized that. It's kind of like, I suppose that probably happens with competition where everybody's

• 1:07:32Ben Gilbert?

  just lowering and lowering their premiums until they realize, gosh, we effectively can sell our insurance below cost because we can invest the float.

• 1:07:40David Rosenthal?

  Yep. And GEICO has got the additional advantage, which it still has to this day of they don't employ agents. So they just have a fundamentally better cost structure than all of their competitors, which means more money they get to play with.

• 1:07:53Ben Gilbert?

  I bet if you call these guys by going direct, they can save you some money in like 15 minutes or less on your car insurance.

• 1:07:58David Rosenthal?

  How much money do you think they could save you? Like 15%?

• 1:08:01Ben Gilbert?

  I would imagine. I can't imagine what the cost of customer acquisition is through an agent, but it seems like they could at least rebate that to you.

• 1:08:09David Rosenthal?

  Yep.

• 1:08:10Ben Gilbert?

  One, one final flash forward here before we go back to the story. Everyone should go to berkshirehathaway.com. One, to bask in the full glory of this beautiful website. But secondly, please observe that there is a banner to purchase GEICO insurance on the Berkshire website. It is the one thing that they do on that website, other than a series of blue links to a shareholder documents. And it is an ad for GEICO. It's like the most hilarious use of, of web real estate.

• 1:08:39David Rosenthal?

  Hey, we have our car insurance through GEICO. It's cheap. It's great.

• 1:08:45David Rosenthal?

  All right. All right. Enough of this. So that the next Monday, this is on Saturday, on Monday, Warren goes back to New York City and immediately liquidates 75% of his portfolio and loads up on GEICO. Like he's 75% concentrated in GEICO. He's like in love and he thinks I'm going to show up at Graham's seminar. I'm gonna tell him about this. I'm just, he's just gonna go Gaga, like this is amazing. I'm gonna be his boy. It's gonna be like, you know, his dreams of Ernest back in the day. Well, he shows up at the seminar and he tells Graham what he's done. Graham is not that impressed. He's like, you put 75% of your portfolio into GEICO? What are you nuts?

• 1:09:27Ben Gilbert?

  Yeah. Well, because Graham, first of all, is not a one stock guy. He's a distributed, you know, portfolio approach guy. And second of all, I'm sure his next question was, yeah, and what'd you pay for it?

• 1:09:39David Rosenthal?

  Yeah. What'd you pay for it? So GEICO was not a typical investment for the Graham Newman partnership. They probably only did it because he was able to wheedle a deal out of Lorimer and the family. And there's a reason why it wasn't in the intelligent investor. So Graham's whole strategy, his whole mantra, like he, you know, basically like he and Dodd, you know, basically invent discount of free cash flow, discount of cash flow evaluation, you know, fundamental analysis, all that. And it comes to be known as value investing. But there's like a major problem with what they're doing, which honestly like this conflation that Graham had of what between fundamentals and value investing persists to

• 1:10:22David Rosenthal?

  this day and is still why there's like religious wars about value versus growth investing. And that's that he thought there was a very specific way to practice fundamental investing, what he and others called cigar butt investing. And what does he mean by cigar butts? This is crude, but the analogy is that like you could be walking along the street in those days in New York and you might see smoked cigar butts laying in the street in the gutter. And some of them might still have a little bit of cigar on it. And so you could pick it up for free, not pay anything for the cigar, light it up and maybe still be able to get a puff or two out of these cigar butts for free. And the analogy, the

• 1:11:06David Rosenthal?

  reason why this analogy is used is that Graham's whole like thing that he looked for in companies of stocks that he bought was he wanted companies that were quote unquote, worth more dead than alive. And he actually writes an article by this name. And what this meant was he looked for companies where like the book value of the asset. So like the cash on hand, the value of their, you know, land, property, buildings, their equipment.

• 1:11:35Ben Gilbert?

  If you shut the company down today, stop taking money from customers, paid out all your liabilities, stop the business and you just sell off in a fire sale, everything in the building. Would you make more money from what you're selling off than what the market cap of the company is trading at? That was what he looked for. Which in that era, I mean, you could find those because you didn't have tons and tons and tons of people whose eyes were always on these stocks trying to figure out, hey, is anything trading below the book value that it should be trading below? And you know, you could find them pretty often.

• 1:12:12David Rosenthal?

  You could find them. And not only there were far fewer people participating in the market and far less data available, but the people who were participating, they were mostly, you know, handicapping horse races. They weren't thinking like this. So stocks that weren't hot.

• 1:12:29David Rosenthal?

  There were a lot of them out there. And so Graham referred to, he had, he had kind of three big insights, he and Dodd, that revolutionized investing. One was this concept that a stock is a piece of a business with cash flow profiles and going concerns and you should value it as such. Two was that price and value are two very different things. And the price of a stock at any given day may or may not reflect the actual value.

• 1:12:59Ben Gilbert?

  Price is what you pay, value is what you get.

• 1:13:02David Rosenthal?

  Exactly. And you can, and that you can use this to your advantage. He had this concept of Mr. Market and Mr. Market comes to you every day and quotes prices for what you own and what you're looking, what you're contemplating owning, but he's schizophrenic and one day he'll quote high, one day he'll quote low, but the value stays the same.

• 1:13:21Ben Gilbert?

  Right. It's, it is the notion that it's, he's your business partner in the venture. And every single day he comes to you offering to buy out your stake at a price that is either too high or too low, almost never exactly reflecting the, the actual intrinsic value. And every single day you have the option to decide to sell or buy more.

• 1:13:39David Rosenthal?

  Yep. Very true. So points one and two, great. I totally agree with. Point three, I also agree with, but I disagree with the interpretation. And that's this concept of a margin of safety, the famous Ben Graham, Warren Buffett, Charlie Munger, margin of safety.

• 1:13:56Ben Gilbert?

  And of course, the way that Graham wanted to apply that is buy companies that are so cheap, they are literally free of risk.

• 1:14:04David Rosenthal?

  Yep. Yep. And so, you know, it makes sense. Like investing involves risk, as every disclaimer in history has told you and involves uncertainty. You don't know what's going to happen. So ideally you want enough downside protection built in that you'll do okay no matter what. That makes sense. And yes, you do want that. But Graham's way of looking at this, as we said, was I'm only going to buy things where if we literally shut down the business and sold off everything on hand, we would get our money back or more. There's two problems with that, both on a downside and on the upside.

• 1:14:42David Rosenthal?

  On the downside, as we shall see, sometimes the liquidation value of the assets of a corporation aren't worth as much as you think they are. So you can try to sell off the property, plant and equipment. But if there are no buyers or no buyers at the price that you want, well, just because it says it's worth something on the books doesn't mean it's actually worth that. So that's one problem. The bigger problem, though, is that like, this is the ultimate small ball way of making money. Like, your upside is so fundamentally capped when this is how you're looking at the world. Like, you could go do 100 of these cigar butts,

• 1:15:21David Rosenthal?

  or you could buy one GEICO and just hold it for 20 years and make way more money.

• 1:15:28Ben Gilbert?

  Yeah, it's fascinating. The way that I have been thinking about this, I think the closest analog is basically to gross margin in an operating business, where if you're running a tech business with super high gross margin and high fixed costs, like, yeah, you got to spend on the fixed costs, but then you get that gross margin forever without having to change what business you're in. But if you're in the business of selling lattes, then every single time you need to go and pull a new espresso. And so for Graham...

• 1:15:58David Rosenthal?

  This is the like, stock equivalent of that analogy.

• 1:16:01Ben Gilbert?

  Yeah, he's in a high-velocity business of constantly needing to go and buy a new security, sell it for more than it's worth, go buy another one, sell it for more than it's worth. And you're going to make, you know, his notion is never count on making a good sale, have the purchase price be so attractive that even a mediocre sale gives good results. But you're going to incur transaction costs every time. You're going to need to pay taxes every time. Like, you're going to have to do the work of actually identifying what you want to buy and sell every time. It's a high... Cogs business.

• 1:16:34David Rosenthal?

  Yep. And it takes a long time. So sadly, tragically, by the next year, Warren has succumbed to Graham's exhortations here. And Warren sells all of his GEICO stock in 1952, early 1952, for $15,259. He makes over a 50% IRR on it, which is amazing. But if he just held on to the damn thing, he would have made, you know, hundreds of times more of his money.

• 1:17:09Ben Gilbert?

  But of course, the Graham way to analyze that business is like, hey, it's actually

• 1:17:14David Rosenthal?

  Now, trading at a high price.

• 1:17:15Ben Gilbert?

  Right. Yeah, that its price is at or above its value. So it's time to get out.

• 1:17:21David Rosenthal?

  Yep.

• 1:17:21Ben Gilbert?

  It's so interesting. I just want to take a step back for a second here and just reflect on that for a minute. Because this whole growth versus value thing, if you think about value in this narrowly defined concept of like, let's just keep using the cigar butt analogy. You pick up the cigar butt, you smoke it and it's done. And now you throw it away. Like, there's all the work we talked about of identifying the cigar butt, the transaction cost of picking it up, of puffing it, of paying the tax on your gain of the puff and then discarding it and having to go through that whole process again. But the whole notion of growth investing is, well, wouldn't it be nice if that cigar actually got larger and larger and larger faster than you could smoke it? And like, not only do you have to not incur all those transaction costs there, but if you're willing to take some risk and

• 1:18:04Ben Gilbert?

  be smart about analyzing what risks you're going to take, the business could sort of grow, the value of the business could even grow faster than the way that it's being priced in the market. That's sort of this like completely novel concept that exists outside the universe of what Ben Graham was willing to consider in investment.

• 1:18:25David Rosenthal?

  Totally. Now, to be fair to Graham, you know, he was doing all this through the depression. Like, if you live 25 years and the stock market is flat to down for 25 years, of course, you're going to think this way.

• 1:18:40Ben Gilbert?

  Yeah. And of course, we are all a product of our environment. And I think one of the phrases that is a Buffett-ism that sort of applies to this is, you know, we've talked about is the market a weighing machine where the market basically, if you think about a weighing machine, then it effectively equates value to price. Whatever you are spending is what it's worth. Or is it a voting machine where people are sort of setting price and voting on the price independent of the weight or the value of the actual underlying security? And this is where the realization sort of comes in that in the long run, it is a weighing machine, but in the short run, it's a voting machine, the stock market.

• 1:19:18David Rosenthal?

  Totally. And sometimes the short run lasts longer than you would think.

• 1:19:24Ben Gilbert?

  Yep.

• 1:19:25David Rosenthal?

  So all that said, cigar butt investing was still a sound strategy in the 1950s. You're kind of like in the land of the blind, you know, the one-eyed person is king or queen or whatever. So, you know, the Graham approach works and Warren is just like lapping it up. So he takes the seminar. Warren becomes the first and only student to ever receive an A+ in the class from Graham. Side note, also in that same class with Warren is one Bill Ruane, who was a stockbroker at the time at Kidder Peabody and was auditing the

• 1:20:08David Rosenthal?

  class. And he realizes, he's like, man, this Buffett guy, like, he's going places. I'm gonna become friends with him. That would pay off handsomely, as we will see at the end of the episode. So after graduation, Warren, he wants more Graham. He can't get enough. So he goes to Ben and to Jerry Newman and says, hey, can I get a job at Graham Newman? Can I, can I work for you guys? And it was a pretty small place. I think there were only like six or seven people working there. They talk about it and Graham though turns him down and says, you know, I'd love to hire you. You're the best student I've ever had, but Jerry and I have a, have a pretty strict policy here. And that is that we only hire Jews. And

• 1:20:54David Rosenthal?

  He would later recant on this and would hire Buffett in a couple of years. But it makes sense. Like, you know, Graham was British, I think.

• 1:21:00Ben Gilbert?

  And this is effectively like an affirmative action type comment, right? Where he's saying, we want to make an opportunity here for those who have been sort of persecuted and discriminated against.

• 1:21:09David Rosenthal?

  Exactly. And this is, you know, 1952, World War II ended four years ago. And Graham was, I believe, British, European. He was born in Europe. You know, this is like, it's a small firm, but they're like, hey, you know, we're pretty committed to giving Jews an opportunity here. So Warren is heartbroken, but not deterred. He goes back home to Omaha, decides, okay, well, if I can't join the Graham Newman partnership, I'm just going to set up my own partnership. I'm going to do it myself. But both Graham and Howard, Warren's dad, talk him out of it. They both say, hey, you need some experience first working for someone else before you go

• 1:21:53David Rosenthal?

  and do your own thing. And the natural thing to do is why don't you go work for your dad's old brokerage firm, Buffett Fock. So Warren does. And he becomes the dreaded prescriptionist, working for his dad. And he just hates it, hates it, hates it, hates it. He's getting paid on commission, selling stocks.

• 1:22:13Ben Gilbert?

  The whole idea of there's a room full of people who are tasked with moving a stock and calling all their customers to say, you should buy this thing. It's about the most anti-Warren Buffett thing I can possibly imagine.

• 1:22:24David Rosenthal?

  Totally. He's just like, it's like organ rejection. So he's, you know, he's making his calls. He's doing what he has to do. He's moving the, trying to move the product, but he gets on the phone with people. And he's like, you know, he'll do whatever he has to do. But then he's like, hey, but there's this company called Geico. They're an agentless insurance company. You should really consider buying that as well. And people think he's nuts. They're like, insurance company that doesn't have agents? I want to talk to my agent. Like, that's weird. So he doesn't have a lot of success.

• 1:22:52Ben Gilbert?

  D to C, baby. They got this great website.

• 1:22:55David Rosenthal?

  Yeah.

• 1:22:57David Rosenthal?

  So there are two good things, though, that come out of his two-year interlude.

• 1:23:04Ben Gilbert?

  Actually, I am curious, how did GEICO work back then? Without, is it by mail? Is it by phone? Presumably, the whole thing's done by phone.

• 1:23:10David Rosenthal?

  That's actually a good question. I assume phone. There might have been some tie in with the government agencies that, you know, maybe there was like, marketing that went out to agency employees. I don't know exactly.

• 1:23:25Ben Gilbert?

  All right, well, we'll have to, we'll have to do a spin out GEICO episode at some point.

• 1:23:28David Rosenthal?

  Yeah, we will. Well, it'll come up again in part two. Don't worry. Warren gets another bite at the apple, so to speak. So two good things that come out of this little interlude back in Omaha. One, he reconnects with one Susie Thompson, whose father, Doc Thompson, was a dean at the University of Omaha and had managed Howard's political campaigns. And Warren somehow persuades Susie to marry him, which, shocking, given what Warren Buffett was, his personality and what he was like back then. And two, he also, after due to flee, you know, working for a while at the brokerage,

• 1:24:08David Rosenthal?

  persuades his dad to set up the first of the Warren Buffett partnerships with him, called Buffett and Buffett. And basically, Warren puts, you know, some of his money in and his dad puts some of, you know, the family's money in. And Warren just gets like some more capital under management to invest here. So it's his first sort of taste of being a, being a principal.

• 1:24:31Ben Gilbert?

  Yep. And just to add a little more color to that comment you made on, on sort of what Buffett was like back then and got Susie to marry him. You know, he was and is a person of singular focus in his life. And he's sort of in his old age, started to do more things, but he was never a socialite. He was never someone that was, you know, deeply diving into other people's interests and, you know, socializing to be social. He was a person that has always wanted to invest and make money. And so, of course, he did set his eyes on, hey, you know, I want to marry Susie and I'm going to make that happen.

• 1:25:04David Rosenthal?

  Well, there are all these stories about it, like. Family dinners, even like they'd have friends over and Warren would just wander off upstairs and start go reading annual reports in the middle of like a dinner party.

• 1:25:16Ben Gilbert?

  Yeah.

• 1:25:16David Rosenthal?

  He was like a, like a wild man who all he did was invest in stocks. However, the flip side of this, these personality quirks of Warren are, he is very singularly focused and he's very persistent. So despite the rejection from Graham Newman, Warren continues to write letters to Ben and Jerry, constantly talking about his ideas, talking about stocks he's looking at. He travels to New York frequently just to go see them and drop in. After two years of this, Jerry finally sits down with Ben and is like,

• 1:25:56David Rosenthal?

  you know, we've got this anti antisemitism rule here, but maybe we should make an exception and, and, and hire this kid. He's pretty special. So Ben relents, he, he calls up Warren, he's like, all right, you really want to come work here? Fine, we can make it happen. Well, you don't need to ask Warren twice. He accepts on the spot. I don't think he even talks to Suzie about it, even though they have their daughter, little Suzie at this point, and they're living in Omaha. He just accepts on the spot. They moves them back to New York at a moment's notice. He literally shows up at the Graham Newman office a month before his initial start date. He's just like, yeah, you're not paying me this month. That's fine. I'm like, I'm here, I'm working.

• 1:26:40Ben Gilbert?

  That's awesome.

• 1:26:41David Rosenthal?

  Once again, he doesn't want to pay New York City housing prices. So he moves the family into a crappy apartment in White Plains, even though, you know, he's like pretty rich already from everything he's been doing. And he's now working at like the most prestigious hedge fund in the world. And, you know, he's paying like, you know, God knows how much, like 50 bucks a month for an apartment way outside the city.

• 1:27:08Ben Gilbert?

  That's crazy. Is it fair to call it a hedge fund? Like what differentiates a hedge fund versus just like a institutional money manager?

• 1:27:16David Rosenthal?

  That's a good question. I mean, I don't think really.

• 1:27:19Ben Gilbert?

  I mean, I don't think they're taking like huge short positions or anything like that at this point in history.

• 1:27:23David Rosenthal?

  I don't think so. I think they would sometimes short stocks and Warren would actually famously.

• 1:27:30David Rosenthal?

  I wasn't gonna put this in the script, but um, he was a real pain in the ass in in high school, arguably real pain in the ass for his whole life. And in high school, he hated his teachers so much that he knew that they all had the teacher's pension was mainly invested in AT&T stock. And so Warren went out and shorted AT&T stock and brought the short, the slips in and like, put him on his teacher's desk just to show he was betting against their retirement funds.

• 1:27:58Ben Gilbert?

  Oh, and in high school, they would have like, he was already sort of seen as sort of a savant. So that probably would freak people out.

• 1:28:03David Rosenthal?

  Yeah.

• 1:28:04Ben Gilbert?

  What like, what does he know that I don't?

• 1:28:06David Rosenthal?

  Yeah, he was, he didn't really care about people's feelings, at least when he was in high school. So he lands, he's, he's at Graham Newman. Unsurprisingly, he just like crushes it pretty quickly. Within another two years, you know, Ben and Jerry are consulting him on everything that they do. Warren's coming up with most of the investing ideas that they're doing. He's involved in every decision that the firm makes. And he's really hitting his stride, so much so that Ben at this, you know, Ben is a, we're not going to get super into it. He's, he's a very colorful character, shall we say, had three wives, I think. And then the story goes, I think he, he started up a relationship after

• 1:28:47David Rosenthal?

  his last marriage with the girlfriend of, this is at the end of his life, with the girlfriend of his son after his son died. Anyway, he's a character. So he is ready to retire. He wants to move to California, live the good life. So he and Newman is also getting old, Jerry's getting old, he's thinking about the same. They offer to make Warren a general partner at the firm and have him essentially continue Graham Newman. I assume they would sort of stay as like, you know, partner emeritus or something like that. But this time Warren shocks them. And he's like, yeah, no.

• 1:29:28Ben Gilbert?

  Remember that whole on my terms thing that I really care a lot about?

• 1:29:32David Rosenthal?

  Yep. He's like, I don't know, I don't want to run your firm. If I'm gonna run a firm, I'm gonna run my firm. And You know, I'm just here in New York to work with you guys. I don't actually like it in New York. Suzie wants to be back in Omaha. I would do it in Omaha. So they end up winding down the firm and Warren and Suzie and little Suzie, their, their daughter moved back to Omaha in 1956, this time for good. So here's the plan. Tell me how, how well you think this is going to work. Warren's net worth is about $175,000 at this point, after working at Graham Newman for two years.

• 1:30:12Ben Gilbert?

  So it's a few million dollars by today's.

• 1:30:15David Rosenthal?

  Yeah. So the average yearly salary for a worker in the United States at that point is $4,800 and he has $175,000.

• 1:30:26Ben Gilbert?

  Wow.

• 1:30:27David Rosenthal?

  Saved up in the bank account and he's 26 years old. So the plan is, and they have two kids now, Howie's been born. So the plan is he's going to retire and he says, you know, made my fortune. Suzie really wants me to like, you know, be a father and all that, be involved at home, you know, just small requests. All right. I think I can retire. And if I set a budget that we can live on in Omaha, you know, I'm going to enjoy the good life. This is so not Warren. He says, I think we can, we'll set a budget of $12,000 a year. Remember the annual average income.

• 1:31:09Ben Gilbert?

  That's 3X.

• 1:31:10David Rosenthal?

  Yeah, like close to 3X that he would be spending every year. We'll buy a nice house in Omaha. This is huge. We'll live like kings. And then, you know, I'll still have the rest of the money. That'll be compounding. It'll grow. Great. It'll all be fine.

• 1:31:23Ben Gilbert?

  And how much does he have in the bank again?

• 1:31:25David Rosenthal?

  175K.

• 1:31:27Ben Gilbert?

  So that's, uh, what 6.8%. So that's probably about what he thinks he can generate passively by just leaving it in index fund. And so he's effectively.

• 1:31:36David Rosenthal?

  Well, I'm sure he thinks he can generate more.

• 1:31:39Ben Gilbert?

  Right.

• 1:31:39David Rosenthal?

  You know, cause he's, he's still going to dabble a little bit. He's going to do a little bit of active management just on, you know, his own capital.

• 1:31:46Ben Gilbert?

  Why, why do I feel like this didn't happen? I don't remember. It's part of the book.

• 1:31:49David Rosenthal?

  This did not happen. So he's, despite his retirement, you know, he's hanging out with family and friends and stuff and they're talking to him and all he could talk about is money. And so eventually some of these people are like, well, you want to manage my money?

• 1:32:07David Rosenthal?

  And Warren's like, oh, okay, twist my arm.

• 1:32:13David Rosenthal?

  I don't even know.

• 1:32:13Ben Gilbert?

  I got some ideas.

• 1:32:14David Rosenthal?

  Yeah, I got some ideas. So he starts setting up these little vehicles around Omaha with family, first like immediate family, and then a few close friends to manage their money in addition to his own money that he's managing. And he structures these things actually really, I really like the way he structures these. So he says, remember, these aren't, these are people he really cares about, you know, in his own Warren way. He structures them as partnerships where there's a 4% annual return hurdle. And any returns that he generates above 4%, he as the general partner in these partnerships keeps half of the upside of those returns.

• 1:32:59Ben Gilbert?

  Half? I thought it was 25%.

• 1:33:01David Rosenthal?

  No, it was half, at least according to the snowball.

• 1:33:04Ben Gilbert?

  Wow.

• 1:33:04David Rosenthal?

  So that's pretty huge. I mean, that's like 50% carry effectively. But, but there's the 4% benchmark return.

• 1:33:13Ben Gilbert?

  So if it underperforms 4%, then he gets no, no money. And he's not paying, there's no fees, right? He's not paying himself.

• 1:33:19David Rosenthal?

  There's no management fee. But it's, this is why I think it's actually pretty fair and I really like this structure. He personally puts himself on the hook for a quarter of the downside. So any money lost, I think between 0 and 4% return, it's like a neutral zone where nothing happens. I think if there's any capital lost, he will personally cover 25% of the losses of his partners, which is, these are pretty good incentives.

• 1:33:49Ben Gilbert?

  Yeah, he's so good at incentive alignment.

• 1:33:51David Rosenthal?

  Totally. And he hadn't even met Charlie yet. So he's finally living the dream. He's fully independent. He doesn't work for anyone else. He's got the, you know, he sort of has a partnership like Graham Newman, but it's, it's all part-time, you know, he has no employees. They're all separate partnerships. It's all friends and family. It's a little over a hundred thousand dollars total in outside money. So not, not that much money. And he does everything, everything himself. So the investing, the accounting, he, he files all the taxes himself for the partnerships. He has no employees, no outside services. His total expenses for doing all of this in 1956, you ready for this, Ben?

• 1:34:34Ben Gilbert?

  Lay it on me.

• 1:34:35David Rosenthal?

  Amount to $22.71.

• 1:34:40Ben Gilbert?

  That's like our accounting at acquired where all the labor's free.

• 1:34:43David Rosenthal?

  Yeah, totally. And that's between all of the gains that he generates and taking in some more money. By the end of the year, he's managing over half a million dollars for less than $23 in cost. That's a pretty good, a pretty good fee load on that. So word starts going around Omaha that like, hey, Warren's back in town.

• 1:35:03Ben Gilbert?

  And so wait, let me understand real quick here. So this 25% of the downside, is that like GP commit where he was putting his own money in and that money was just at risk? Or was he sort of like additionally on top of that saying, I will reimburse you for 25% of your losses? Wow.

• 1:35:20David Rosenthal?

  Like a club, yeah. So he actually, at this point in time, at first I thought this was weird, but then I understood it later. He does not really put in any of his own money. He only puts in a hundred dollars into each partnership. He's keeping his own money separate, which at first I was like, well, that's weird. But I think he did that because these are friends and family. The goal is to make returns for friends and family. He's essentially making the same investments separately with his own pool of capital.

• 1:35:47Ben Gilbert?

  I see.

• 1:35:47David Rosenthal?

  And then later, when he consolidates it all, he puts in all of his family's money as well. So I don't think he really thought of it as like, oh, this is a fee generating scheme.

• 1:35:57Ben Gilbert?

  Right. It's just that, yeah, each one of these is the pool of capital for my friends.

• 1:36:01David Rosenthal?

  Yep. Yep. So word starts going around Omaha that Warren's back in town. He's taking on money if you want to invest with him. So he can't help himself. He starts, he's loving this. He's going around town. He's meeting with everybody. He can't stop pitching. He's raising money for his retirement activities. One family he gets introduced to is the Davis family in Omaha, the husband of which is a prominent doctor in town.

• 1:36:32David Rosenthal?

  They decided to invest $100,000 in this venture after discussing amongst the family while Warren is there saying, you know, Warren, you really remind us of a really bright young man who actually grew up next door to us, now lives out in Los Angeles. You guys are like the spinning image of one another. It's really bright guy. We remember he was the smartest kid we ever knew. He's left Omaha. Now he lives out in Los Angeles. We'll have to, we have to introduce you when he's back in town sometime. Charlie Munger is his name. More, more on that to come in the next episode.

• 1:37:11Ben Gilbert?

  But it was a while, right? Like this was, yeah, the seed was planted, but they wouldn't meet for years.

• 1:37:15David Rosenthal?

  So that was in 1956 and the dinner that the Davises would organize would not happen until 1959. So yeah, three more years before Warren and Charlie would meet. So this all goes pretty well. And a couple of years later.

• 1:37:31Ben Gilbert?

  Do you, do you know the one other term that he asked of the Davises and then he would ask for everyone else going forward after that?

• 1:37:37David Rosenthal?

  Oh, no.

• 1:37:38Ben Gilbert?

  So this gets to his desire for doing business his way and not having other people's sort of influence when he does distributions or anything like that. He is open for business one day of the year to his clients and that day is December 31st. And on that day, they can either take money out or put money in, but other than that, it is managed by Warren and secret. And so he does not have to disclose what he is buying or selling, nor can they take money out.

• 1:38:07David Rosenthal?

  Ah, interesting. I knew that he obviously didn't disclose what the holdings of the partnerships were, but I didn't know that it was only that one day that, uh,

• 1:38:17Ben Gilbert?

  Yep.

• 1:38:18David Rosenthal?

  That you could take money in or out. Interesting. So, um, this goes pretty well. Pretty quickly Warren's rounded up nearly a million dollars across seven different partnerships. And after the first year or so of running this, his stake, so his intention with this effectively carried interest that he sets up the half, 50% of the profits above the 4% benchmark threshold is,

• 1:38:47David Rosenthal?

  He wants to essentially grow his equity ownership of these pools. He's not going to like, take that money out in cash.

• 1:38:55Ben Gilbert?

  Of course he's not. There's transaction costs, there's taxes, there's Warren Buffett.

• 1:38:59David Rosenthal?

  He's Warren Buffett. So he does so well within the first year or so that his fees are on paper $83,000, which is what, like almost half of what his net worth was when he started this thing. And due to that, he owns 9.5% of the combined partnership, starting from essentially zero, his $100 that he put in, he now owns almost 10% of these pools.

• 1:39:28Ben Gilbert?

  And that's of course, because in that very first year, when the Dow finished the year down 8.5%, Buffett made 10.5% that year for his partners.

• 1:39:37David Rosenthal?

  Pretty good, pretty good. So he now has enough capital under, with the million dollars, at his control that he can start to do the kind of things that Graham Newman used to do. So we didn't, we didn't really talk about this, but there was another aspect to the cigar butt style of investing. It wasn't just that Ben and Jerry and then Warren, when he joined, would look for companies with book value above trading value. They would then amass big positions in those companies, try and get themselves on the board, like Graham did with GEICO, although he didn't need to be agitate with GEICO. But with the other, with the cigar butt companies, they would then like agitate actively to get the companies to liquidate assets and distribute the cash out to shareholders.

• 1:40:22Ben Gilbert?

  Oh, it does sound like a hedge fund after all.

• 1:40:23David Rosenthal?

  Yeah, these guys are like, they're like Bobby Axelrod out there, like corporate raiders. So now with a million bucks at his disposal, Warren can start to do this. So the first of the companies he does this with is a company called Sanborn Map. He puts 35% of the capital of the partnerships into it, gets control of the company, forces it to split itself in two and makes a quick 50% profit on the spinoff.

• 1:40:55David Rosenthal?

  Boom, like he's shooting fish in a barrel. He can do this all day. By the end of 1960, total capital is up to 2 million and Warren's share is worth a cool quarter of a million dollars or 13% of the partnership. In 1961,

• 1:41:15Ben Gilbert?

  And let me pause before you go into 1961, just to recap a few of the returns here year over year. The second year, he made 41%. The third year, he made 26%. The fourth year, 1960, he made 23%. All well, the Dow is having some good years, some bad years. So it's losing money. Sometimes it's making money. Sometimes Warren hasn't lost a dollar. He's outperformed every single year. He stayed positive every year. In fact, the partnership results as a whole so far, if you compound over those four years, are 141% compared to the Dow's 43%. So, you know, whatever Warren is doing is working.

• 1:41:55David Rosenthal?

  Wow. So then, 1961, I don't have the Dow numbers in 1961. So I don't know relatively how good this performance was.

• 1:42:02Ben Gilbert?

  The Dow numbers in 1961 are 22.4%.

• 1:42:07David Rosenthal?

  22.4%.

• 1:42:07Ben Gilbert?

  Pretty good year.

• 1:42:08David Rosenthal?

  Pretty good. Warren does 46% in 61, which not only generates a bunch of returns, compounds the capital, the partners are like, please take more of our money. A bunch more money flows in. The partnerships are managing over $7 million in total, which is larger than Graham Newman ever was.

• 1:42:32Ben Gilbert?

  Wow. And let me start quoting from some Buffett annual letters here because this is an interesting phenomenon. He was a wonderful writer. He had sort of trained himself both in public speaking and taking some classes in that and in writing. And he wrote these, as I'm sure many people would guess, some prolific shareholder letters to his partnership every year. That actually is not something that he did in the early Berkshire years. It took him years to start doing that again, but he really felt like it was incumbent upon him to do this when he was running these investment partnerships. So let me just read from you a few of these. 1962. If my performance is poor, I expect the partners to withdraw.

• 1:43:14Ben Gilbert?

  1963, it is a certainty that we will have years when we deserve the tomatoes. 1964, I believe our margin over the Dow cannot be maintained. 1965, we do not consider it possible on an extended basis to maintain the 16.6% point advantage we had over the Dow. This goes on and on and on where Warren continues to caution, I don't think this is sustainable. I don't think we can keep crushing it as hard as we are.

• 1:43:41David Rosenthal?

  And he does this to this day, every year in the Berkshire letter, 50 years later.

• 1:43:49David Rosenthal?

  Amazing. 60 years later, unreal.

• 1:43:52Ben Gilbert?

  Yep.

• 1:43:52David Rosenthal?

  So at this point in 1962, when he's now bigger than Graham Newman ever was, he finally gets an office. He'd been working out of their spare bedroom at the Omaha House all these years, doing everything himself. He gets an office, he hires a couple of people, he consolidates all these various vehicles into just one vehicle, the Buffett Partnership Limited. And this is when he puts all of his own money in as well. So he's got a single vehicle. He's now, you know, I don't know if he ever said he officially unretired, but like.

• 1:44:28Ben Gilbert?

  He's in business.

• 1:44:29David Rosenthal?

  He's in business.

• 1:44:32David Rosenthal?

  He also codifies in these letters, he's sending out a few official quote unquote, ground rules for the partnership, just like Don Valentine did back in Sequoia in the early days to their limited partners. And there are a few rules in there. The last one, kind of like you were saying, Ben, hallmark of the Buffett style for years to come. I cannot promise results to our partners. What I can and do promise is that A, our investments will be chosen on the basis of value, not popularity. B, we will attempt to bring risk of permanent capital loss, not short-term quotational loss, to an absolute minimum by maintaining a wide margin of safety.

• 1:45:13David Rosenthal?

  And C, my wife, children, and I have virtually our entire net worth invested in the partnership.

• 1:45:21David Rosenthal?

  Pretty good ground rules. By halfway through that year, 1962, when he consolidates everything, Warren is 31 years old and his net worth crosses the million dollar mark. So he's achieved his dream.

• 1:45:35Ben Gilbert?

  Ah, he made it.

• 1:45:37David Rosenthal?

  He made it four years early. The next year in 1963, Buffett finds the second great investment of his lifetime and also the second great mistake that he would make on the back end of it. The first, of course, being GEICO, American Express. So this is great. Some listeners probably already know this story here.

• 1:46:03Ben Gilbert?

  And before we dive into this story, I think the framework that I would use for, if you're listening to this and hearing a lot of this for the first time, you know, you heard about GEICO, you know, you're sort of hearing these puzzle pieces where there's a lesson learned from each of these companies that Buffett was sort of the first to figure out that these businesses are each interesting in a puzzle piece way that fits in with other businesses that in the sum of its whole could create this kind of unbelievable capital efficient flywheel. And I don't know if flywheel is the right term. Puzzle pieces put together into a beautiful puzzle or mosaic might be the right term, but it really is like him understanding all these unique types of businesses that have these characteristics that he can then use

• 1:46:49Ben Gilbert?

  in the future. And American Express, I feel, is sort of like the second big lesson for him after he learns about the insurance business that put the first one.

• 1:46:56David Rosenthal?

  Well, I think you're totally right about the puzzle piece fitting together aspect. He learns that in his third great investment, which will be the last one we'll cover on this episode. So that's, that's coming up.

• 1:47:10Ben Gilbert?

  Okay.

• 1:47:10David Rosenthal?

  So back to American Express in 1963, you know, Buffett is, he's still under the Graham spell here. Like he's looking for cigar butts. That's what he's doing. He's looking for deals and Amex is no cigar.

• 1:47:23Ben Gilbert?

  Or as, as Charlie Munger would later put it, he's looking for fair businesses at good prices.

• 1:47:29David Rosenthal?

  Great prices. Yeah. Fair businesses at great prices.

• 1:47:31Ben Gilbert?

  Not great businesses at fair prices.

• 1:47:33David Rosenthal?

  Yep, exactly. Which is the Charlie way of doing things that Buffett would later wisely adopt. So you wouldn't think that Amex, you know, Amex is at this point, it was still widely respected today, but back then, American Express is like. The most trusted financial services company in America. It had been around already for close to 100 years. The traveler's checks business, some, many listeners are probably not familiar with traveler's checks, but was it just an absolute juggernaut and an amazing business? The idea was if you were traveling, and this was before

• 1:48:12Ben Gilbert?

  I did this growing up.

• 1:48:13David Rosenthal?

  Yeah, me too. Even when I was in college, when I studied abroad, my parents got me AMEX traveler's checks. The idea was you would go to your local American Express office, give them money, cash, they would in return give you traveler's checks, which were essentially like a guaranteed paper for that amount of value backed by AMEX. And then you could take those checks anywhere where you traveled. And if you like lost them, you could go to AMEX. But more importantly, when you're traveling internationally, you could use this as a way to get funds in whatever the local currency was.

• 1:48:48Ben Gilbert?

  Right, because wherever you're traveling doesn't know about your hometown bank and may not even know about your home country bank. And so this is the way to have your credit accepted everywhere.

• 1:48:56David Rosenthal?

  Right. There are no ATMs and credit cards are still early, early days, although AMEX was a pioneer there and had the American Express credit card. Anyway, it's this gilded institution. In 1963, they have a small subsidiary of the company that issued operated warehouses and issued warehouse receipts. So what does this mean? It's like the equivalent of a traveler's check for warehouses. You would have warehouses full of a commodity of something, say salad oil, in this case, soybean oil, to be exact.

• 1:49:37David Rosenthal?

  And you would get AMEX to come in, inspect the warehouse and issue paper that says like, oh, yes, there are XYZ tons of soybean oil in this warehouse. And then you could take that paper and you could collateralize it, you could borrow against it, you could trade against it. You're essentially financializing this product. It was a pretty brilliant business that AMEX was in, but it was small. This was much smaller than their consumer business. So all this is great until a pretty shady commodities trader named Anthony Tino De Angelis in New Jersey, of course, of all places, decides that he's going to pull

• 1:50:20David Rosenthal?

  one over on Amex. He has his warehouses with them. He decides to fill his tanks, which were supposedly filled with soybean oil with seawater instead and defraud the inspectors and then collateralize it and borrow against it and, you know, run a Ponzi scheme, essentially.

• 1:50:39Ben Gilbert?

  Didn't he like try and bet with it? Like he then took it and made some risky investment with his check that said, hey, this is worth so many tons of salad oil. And then he ended up like basically losing it all.

• 1:50:52David Rosenthal?

  Yeah, there was something about like, it had to do with the futures market and like, it was crazy. I mean, you can't make this stuff up. It was something with like Russia and the Soviet Union, their soybean crop failed that year and people thought they were going to have to buy US soybean oil and then they didn't. And so the price collapsed. Anyway, ridiculous stuff.

• 1:51:11Ben Gilbert?

  But anyway, suffice to say, he's now got a piece of paper that someone's coming and saying, okay, give me what that piece of paper is worth. And of course, not only does he not have it, but there's nothing in the warehouse to back it up either.

• 1:51:24David Rosenthal?

  So the piece of paper is worth zero. So all in, it comes to over $150 million worth of fraud that happens. And theoretically, Amex is on the hook for this. Now legally, it's debatable. Like Tino defrauded them. So, you know, whether they should actually be on the hook or not is debatable, but like their American Express, their, the CEO says, like, we're gonna, you know, settle, we're gonna, with the creditors, we're gonna, we're gonna cover this. This scandal like rocks Amex stock on Wall Street. So the share price drops by over 50%. And analysts and people out there think the company's not

• 1:52:03David Rosenthal?

  gonna survive. Buffett, though, thinks otherwise. He sees an opportunity. So he and his new employees, they go around Omaha and New York and a bunch of other places and they just start like Interviewing consumers and talking to them at banks and saying like, hey, what do you think of Amex? Have you heard about the soybean oil scandal, the salad oil scandal? Are you still using the traveler's checks? Are you using the credit card? And consumers are like, I haven't heard of this.

• 1:52:30Ben Gilbert?

  Scandal? What are you talking about?

• 1:52:32David Rosenthal?

  Of course, I trust the traveler's checks. So Buffett figures that Amex can easily absorb all of these losses, even if they covered the whole thing out of cash on hand. They have over $200 million of cash on hand, plus over $500 million of float from the traveler's checks business.

• 1:52:52Ben Gilbert?

  Yeah. And this is a similar lesson that he learns from GEICO, which is, look, all of this debt that the company has, that they owe out to these people with traveler's checks, as long as there's not a scandal, they're not going to have a run on us. They're not going to come at us all at once. It's a sort of portfolio distributed liability. And so as long as I do my diligence and I assume that there's that consumer confidence hasn't been rocked and there's not going to be a run on Amex, then hey, we're actually in good shape.

• 1:53:23David Rosenthal?

  So he makes a huge bet on Amex. At this point in time, the partnership, BPL Buffett Partnership Limited, has over 17 million in capital. Buffett puts 3 million into Amex right away, like a huge position at this time. And eventually he puts 13 million in total into Amex and owns 5% of the company. Amex ends up settling the case the next year for $60 million. The stock goes through the roof and they make two and a half times their money on the $13 million invested.

• 1:54:06David Rosenthal?

  So amazing win, second great investment, you know, of his career. And similarly, second incredibly stupid decision. Once he gets up two and a half X, he sells it all.

• 1:54:20Ben Gilbert?

  Brutal, brutal.

• 1:54:22David Rosenthal?

  Brutal. He did not listen to our Sequoia Capital Part One.

• 1:54:27Ben Gilbert?

  He did not. And this is something that he sort of saw too, that is a departure from Graham and wouldn't really come about until later with like Coca-Cola, but this is the first sort of twinkle of it of Buffett really recognizing the defensibility, the moat that comes from brand because brand doesn't show up on a balance sheet, but it's a huge asset. And so it's one of these things where I think Buffett's starting to, you know, flex a little bit and say, hey, I actually can analyze these businesses a little bit beyond the black and white numbers that are showing up on the financial statements by doing a little bit of a different form of diligence and assigning value to things that are a

• 1:55:11Ben Gilbert?

  little bit less tangible than, than previous value investors have in the past.

• 1:55:16David Rosenthal?

  Yeah. I mean, there's Ben Graham. Could you imagine talking to Ben Graham about brand and the value of brand? He would like kick you out of his office.

• 1:55:25Ben Gilbert?

  Ben Graham wouldn't even talk to you about product. Like he's, he's like, if you're talking to me about pri, I'm not interested in hearing your opinion on the, how the company's product, blah, blah, blah. Show me that it's underpriced relative to book value. I can't imagine taking that to brand.

• 1:55:38David Rosenthal?

  I want to know how many machines they have in the factory and what I can sell them for.

• 1:55:42Ben Gilbert?

  Yep.

• 1:55:43David Rosenthal?

  Totally. So that's the AMX story. Right around the same time, in parallel, Buffett finds another cigar butt that he is just over the moon excited about. And this one he hears about from a friend, I think in New York, Dan Cowan. It's a failing New England textile manufacturer whose stock was selling for well less than the book value of assets.

• 1:56:13Ben Gilbert?

  I think about 50%.

• 1:56:14David Rosenthal?

  Yeah. I think the, I have the numbers here. Yes. So the book value of all the property, plant and equipment and cash on hand at this company is $20 a share and the stock is trading at 750. So Warren is just like, his eyes get real big, real, real big here. So what is the company we are talking about? We are talking about Berkshire Hathaway. So Berkshire, the company, it was really Hathaway, had its origins way back in New England whaling times, like, like Moby Dick style. Which, side note, I tried to read that book once and I was like, oh, this will be cool. It's like a whaling adventure. It's an American classic.

• 1:56:59David Rosenthal?

  That is the most difficult book I've ever tried to read. I got like 50 pages in and I was like, no.

• 1:57:04Ben Gilbert?

  It's your intelligent investor.

• 1:57:05David Rosenthal?

  Yeah, totally. It was, it was the, uh, security analysis. But I needed the intelligent investor version of it.

• 1:57:11Ben Gilbert?

  There you go. Yeah, I mean, I think the, the way to think about New Bedford was like, they were an industry town and their industry was whaling and whaling oil. And then when they sort of pivoted as a town and needed a second industry, textiles sort of cropped up based on all the competency and talent and labor and stuff that they had in the town.

• 1:57:29David Rosenthal?

  The business leaders in town sort of collectively decided that textiles was going to be the thing. And, you know, we think about whaling now and it seems barbaric and it totally was. But it was the biggest industry in America. So New Bedford, Massachusetts, was the wealthiest town in America during the whaling years.

• 1:57:47Ben Gilbert?

  I did not realize that.

• 1:57:49David Rosenthal?

  Yeah, this was not like some little thing. There's a reason why Melville wrote his novel about whaling. So in 1888, after the whaling business was in decline, thankfully, because it was horrible, Horatio Hathaway and Joseph Knowles found Hathaway Manufacturing Company, which would then go on to acquire and merge with a bunch of other mills over the years. There's just sort of one problem with this business plan that the elders of New Bedford come up with, which is that building textile mills in New England was a really, really dumb idea. Really dumb idea.

• 1:58:25Ben Gilbert?

  Why is that?

• 1:58:26David Rosenthal?

  Because, you know, if you think about it, like, what, what do textile mills do? They take cotton, raw cotton.

• 1:58:31Ben Gilbert?

  From the South.

• 1:58:33David Rosenthal?

  From the South and they turn it into, you know, yarn, finished products, et cetera. Berkshire Hathaway eventually would become, I think, the largest or one of the largest producers of men's suit linings.

• 1:58:47Ben Gilbert?

  Yep, synthetics too, like polyester.

• 1:58:50David Rosenthal?

  Yep, synthetic. So you're importing this cotton from the South, right? That means that like, the cotton's got to get on ships and come up to New England. Well, if you're going to put a bunch of cotton on ships. You could also send it to places that have a cheaper cost than the former wealthiest town in America.

• 1:59:08Ben Gilbert?

  Or just not put it on ships.

• 1:59:10David Rosenthal?

  Well, not, not in the beginning. In the 1880s, you had to put it on ships because the climate in the South, the humidity was such that you couldn't, like, there were problems with, with producing the-

• 1:59:20Ben Gilbert?

  Ah, so they needed to send it to some cooler climate.

• 1:59:22David Rosenthal?

  You needed to send it to a cooler climate, but you didn't need to send it to New Bedford, Massachusetts. And so like, okay, it's not great off the bat, but then in the early 20th century, industrial air conditioning is invented and now you don't need to put it in ships at all, like just build the factories, the textile mills there, which people did. So the business is kind of limping along, but it's been operating for a long time. So there's like a lot of mills, a lot of plant and equipment. There is a decent amount of cash on hand. By this time in the 60s, it's run by a descendant of Knowles named Seabury Stanton. And Stanton, he's like the Don Quixote figure of like the New England textile business

• 2:00:07David Rosenthal?

  industry. He is all, he sees himself as like preserving the legacy, the wonderful institution of great textile manufacturing in New England. And he is going to do everything he can to protect and bring the industry back to his glory days. So he is every year just spending millions of dollars outfitting all the mills with all the latest technology, doing everything he can to like bring back the glory days.

• 2:00:38Ben Gilbert?

  Yes, he, he has not once heard of the sort of like Buffett-esque notion of, uh, you know, what's your return on invested capital in the business? No, no, no, no, no.

• 2:00:47David Rosenthal?

  Completely foreign concepts to him.

• 2:00:48Ben Gilbert?

  Spend it, just pour it into the business.

• 2:00:51David Rosenthal?

  Pour it into, he's, he's like a noblesse oblige. So Warren hears about this from Cowan and he's just like, oh, this is gonna be amazing. I'm gonna make so much money here. He starts buying the stock. Seabury, once he finds out that Buffett is, is buying the stock, he starts buying the stock himself. He's like, oh, I don't want anybody taking my baby away from me. And let alone, you know, these guys that have a reputation of being corporate raiders. And at first Buffett is happy about this because he doesn't really want to own this company. He's like, oh, good, the price is going up once it gets to a certain point. I'll sell. And if I sell to Seabury, like, all the better. I don't really care.

• 2:01:31David Rosenthal?

  So he goes and he meets with Stanton. They discuss the company making a tender offer to buy outstanding shares, in particular, Warren's shares. And they have, according to Warren, they have a handshake deal at $11.50 a share. And Warren says, great, if you launch a tender offer at that price, I will sell my shares. He goes back to Omaha, gets a letter in the mail, tender offer is announced at $11.38. It's $11.38. So whatever.

• 2:02:08Ben Gilbert?

  So what's that?

• 2:02:08David Rosenthal?

  11.3738, something like that?

• 2:02:12Ben Gilbert?

  Yep. So 12 and a half cents a share less than what they talked about.

• 2:02:16David Rosenthal?

  They talked about. And this is like, I still don't understand that. I've read a lot about this. Nobody, including Warren, can really seem to explain why Warren gets so worked up about this. Cause that's not in his personality. Like, he cares a lot about money, but it's not in his personality to get worked up about things or to get emotional about stocks. But he goes off the deep end. He is like pissed. The best explanation I've seen is sadly, his father, Howard, was dying around this time and passed away right around this time and must have been affecting Warren.

• 2:02:52Ben Gilbert?

  Well, and Buffett is also, you know, he's, he's built a lifetime reputation on doing right by his word and in dealing in good faith. And I have to imagine that, you know, facing off against someone who is not dealing in good faith and is sort of reneging on an agreement, that can't sit well.

• 2:03:10David Rosenthal?

  Totally. Although, you know, the Munger version of what to do here would be when somebody deals in bad faith, you just don't deal with them. Warren, you know, it would have been completely understandable to say like, all right, fine, whatever. I'm just going to sell my stock at 11 and 38s. Get out of this, be done with it, still make a lot of money. If you want to, you know, fight, it would be also totally rational to just hold the stock and say, I'm not selling. Instead, Warren says, screw you. I'm going to launch a tender offer for your shares.

• 2:03:48David Rosenthal?

  Which is so uncharacteristic for him. He starts canvassing the entire shareholder base, trying to get anybody to sell him shares. He is on a mission like a man possessed that he wants to get control of Berkshire Hathaway and kick Stanton out of his company.

• 2:04:04Ben Gilbert?

  And this is like a big ish company at this point. I think it's something like 15,000 people work in the mills.

• 2:04:12David Rosenthal?

  Yeah, it's, it is not a small company.

• 2:04:15Ben Gilbert?

  It would become a small company, but it is currently a large company.

• 2:04:18David Rosenthal?

  It's now a non-existent company, except in name. So by April 1965, Warren gets enough shares to get himself elected to the board. The next month, he stages a boardroom coup, essentially. Also, very uncharacteristic of him. He forces Stanton out and installs himself as chairman. He's won and his prize is this super crappy company. And it's not like, like, what's he gonna do? He could shut down the mills, but then he's got to lay off like 15,000 people and have the whole town of New Bedford hate him. But then what's he gonna do with the buildings? He's gonna sell the buildings to whom? He's gonna sell the equipment to whom?

• 2:05:00Ben Gilbert?

  Right, the whaling industry is done. Every other textile manufacturer is also not doing great at this point. Like, it's a pretty terrible asset to own, other than if he really could have liquidated it for book value, then awesome. But frankly, he couldn't have. And he's got this reputational thing, which I think we're seeing come into play here and we'll definitely see more of it in the second episode in the series, which is Buffett deeply cares about his reputation and will ultimately derive a tremendous amount of value from his reputation. And so he doesn't want to be seen as this raider who comes in and destroys the local economy and shuts down the mills. And so he basically doesn't, like, he makes a deal with himself, with the rest of the

• 2:05:42Ben Gilbert?

  company, with other, and he's like, look, we're just gonna, I think, like, you probably know better than I do, but basically not continue to invest like crazy, only make very smart investments, eventually make no additional investments into the company, but at least keep it running.

• 2:05:56David Rosenthal?

  Yes. So he would say to Alice in the Snowball about this, about Berkshire, quote, "So I bought my cigar butt and I tried to smoke it." This is amazing. "You walk down the street and you see a cigar butt and it's kind of soggy and disgusting and repels you, but it's free and there may be one puff left in it." Berkshire didn't have any more puffs. So, so all you had was a soggy cigar butt in your mouth. That was Berkshire Hathaway in 1965. I had a lot of money tied up in that cigar butt. I would have been better off if I'd never heard of it in the first place.

• 2:06:35Ben Gilbert?

  Oof. What did you say at the top of the show? It cost him in terms of compounded opportunity capital?

• 2:06:40David Rosenthal?

  So yeah, in 2010, he did the math and claimed that not only was purchasing Berkshire the worst, biggest mistake of his investing career, but had he taken the money that he put into Berkshire and instead just invested it directly in an insurance company, by 2010, he, he figures he would have made about $200 billion in incremental returns.

• 2:07:04David Rosenthal?

  Ooh, but like Steve Jobs said, you can only connect the dots looking backwards, not looking forwards.

• 2:07:11Ben Gilbert?

  And now there's an energy company that bears its name and real estate brokerage that bears its name and on and on and on.

• 2:07:20David Rosenthal?

  So not only that, but I do think if he hadn't bought Berkshire, I don't think he would have figured, made his third great investment, or at least wouldn't have made it in the same way and figured out the same lesson from it that really drove the entire rest of his career and what Berkshire Hathaway would become. So the next couple of years, despite all this Berkshire nonsense, things go great. Thanks to American Express at the end of 65, the partnership has $37 million in assets. Buffett's net worth is about $7 million.

• 2:07:55Ben Gilbert?

  And that year, 1965, the Dow did 14% and of course Buffett's partnership did 47%. So still not only beating the Dow, but positive every year of its existence so far.

• 2:08:09David Rosenthal?

  Crazy. So all this success is sort of building up and weighing on, on Warren. So in January of 66, thanks to now knowing from you that on December 31st was the day that partners could take money out or put money in, on December 31st of 65, partners invest another $6.8 million in the partnership.

• 2:08:33Ben Gilbert?

  Wouldn't you?

• 2:08:34David Rosenthal?

  Oh, yeah. All in, baby. So for the first time, Warren doesn't know what to do with all the money. He starts setting aside some cash reserves. Like, he's never done this before. He's always been 100% invested. And he starts to worry that he might not be able to find enough good investments for all the capital he now needs to play.

• 2:08:57Ben Gilbert?

  As he is cautioning in his letters every year.

• 2:09:00David Rosenthal?

  Yep. So he closes the partnership to new capital at that point, says, not going to take any more capital, continue to invest this and compounding. But like, there's danger in getting too big. I might not be able to perform in the same way.

• 2:09:14Ben Gilbert?

  This is like a disciplined seed stage venture capitalist saying, no, I don't want to grow my fund size. I don't want to have to change my strategy and invest in different things. I want to stay true to the, the thing that I'm good at.

• 2:09:25David Rosenthal?

  Yep. So this is, uh, before we get to his third grade investment, I think maybe in part because of this mindset of like, I'm going to stay true to do what I'm good at. He makes like the biggest missed opportunity ever, maybe in history. This is, I was teasing Ben over the last couple of days, texting him, saying, I've got something in this episode that I don't know if you know, but is just the most unbelievable thing that you will never imagine.

• 2:09:56Ben Gilbert?

  Lay it on me.

• 2:09:58David Rosenthal?

  In 1967, he writes his partners, saying that he's introducing a new ground rule to the partnership. And this one is quite literally the opposite of Don Valentine. He says, "We will not go into businesses where technology, which is way over my head, is crucial to the investment decision. I know about as much about semiconductors or integrated circuits as I do about the mating habits of the schranz." It's a Polish word. It means beetle in Polish. Typical, you know, Warren way with words here.

• 2:10:37David Rosenthal?

  This is very unfortunate, very

• 2:10:41Ben Gilbert?

  Uh oh, what was the company?

• 2:10:42David Rosenthal?

  Very unfortunate decision to make.

• 2:10:45Ben Gilbert?

  Let's see, 1967, it predates Microsoft by seven years, predates Apple.

• 2:10:54Ben Gilbert?

  It's way after IBM. What's around this time? DEC? Or no, it's post-DEC.

• 2:11:01David Rosenthal?

  Oh no. You'll get it if you think about it enough.

• 2:11:05Ben Gilbert?

  I mean, is it

• 2:11:05David Rosenthal?

  Silicon Valley Origins, we've talked about it a lot on this show.

• 2:11:08Ben Gilbert?

  Early Sequoia investment?

• 2:11:10David Rosenthal?

  Just pre-Sequoia. Sequoia started in 72, but this is all the, the crew that downed.

• 2:11:16Ben Gilbert?

  Is it an Arthur Rock investment?

• 2:11:17David Rosenthal?

  It is an Arthur Rock investment.

• 2:11:19Ben Gilbert?

  Is it Intel?

• 2:11:20David Rosenthal?

  We're talking about Intel here.

• 2:11:22Ben Gilbert?

  Oh, no way!

• 2:11:23David Rosenthal?

  Get this. So Buffett, at this point, is on the board of Grinnell College in Iowa. He's a trustee of Grinnell College, which by the way, he was introduced to by Susie. Susie became an incredible civil rights activist and Grinnell College was involved in the civil rights movement. And Martin Luther King spoke at Grinnell College, six months before he was killed. And Susie brings Warren to the college to listen to King speak. And like Warren is like

• 2:11:56Ben Gilbert?

  Wow.

• 2:11:56David Rosenthal?

  incredibly moved by Dr. King. And so he decides after that to join the board. They were trying to recruit him to, to join the board. And so he does.

• 2:12:06David Rosenthal?

  Do you know who else was on the board? One of Grinnell College's most famous alumni alongside Warren Buffett.

• 2:12:13Ben Gilbert?

  Nois or Moore or?

• 2:12:16David Rosenthal?

  Bingo. Robert Nois.

• 2:12:18Ben Gilbert?

  Wow.

• 2:12:19David Rosenthal?

  Alumni of Grinnell College, inventor of the integrated circuit, part of the traitorous eight, who left Shockley Semiconductor to start Fairchild and then co-founder of Intel with Gordon Moore and Andy Grove is on the board of Grinnell with Warren. Not only that, but Warren, of course, chairs the endowment investment committee at Grinnell, right? Of course, that would make sense.

• 2:12:50David Rosenthal?

  When Nois leaves to start Intel and Arthur Rock is putting the deal together to finance Intel.

• 2:12:58David Rosenthal?

  Nois brings it to the investment committee at Grinnell College.

• 2:13:01Ben Gilbert?

  Oh, man.

• 2:13:01David Rosenthal?

  And says, hey, there's $100,000 piece. I think Grinnell should invest in this company. I think this is really gonna be big. I know what I'm doing.

• 2:13:10Ben Gilbert?

  He saw the deal.

• 2:13:11David Rosenthal?

  Warren approves the investment and Grinnell does invest $100,000 in the Intel seed round, effectively, but Warren never goes near it for the partnership for himself. And in fact, says, I will never invest in technology companies. Unreal. This is unreal.

• 2:13:31Ben Gilbert?

  And basically held to that for another 45 plus years.

• 2:13:36David Rosenthal?

  Totally. Not until Apple. And I think, well, I haven't done the research yet. I think Apple bubbles up within Berkshire from Todd Combs, not from Warren. I mean, talk about sins of omission. Like this is before Sequoia. Imagine if Warren had financed Intel. Warren Buffett could have been Warren Buffett plus Sequoia Capital.

• 2:14:02Ben Gilbert?

  Wow. And what realistically, what would he have done with it? If he did invest in it, like he's never invested in business. So first of all, he's never invested in technology business to this point. He's never invested in something that early, right? Everything he's bought has been.

• 2:14:17David Rosenthal?

  Yep.

• 2:14:17Ben Gilbert?

  These public, you know, they're, they're pieces of public companies.

• 2:14:23David Rosenthal?

  Yep. Established on cash flow businesses. Yep.

• 2:14:26Ben Gilbert?

  The Buffett partnership doesn't wholly own any businesses. So it's, it's, it doesn't even own anything private, right? Every single thing is a SEC registered.

• 2:14:34David Rosenthal?

  Well, Berkshire is now private at this point.

• 2:14:37Ben Gilbert?

  Okay. I'm just trying to do a little bit of math on like, would he have held it? How long would he have held it?

• 2:14:44David Rosenthal?

  You know, all of these things, but here's the thing, like this, this whole like Warren always justifies not doing technology investments by, you know, his whole circle of competence thing that really is a Charlie Munger thing, but that Warren adopted, like I stay within what I know, my circle of competence. I know the boundaries of my competence. This doesn't make any sense to me because he invests in plenty of businesses that he doesn't know anything about at the beginning, like textiles, like insurance, you know, like retail.

• 2:15:14Ben Gilbert?

  Yeah. And the question is like, are the dynamics in those businesses more closely related to each other than they are to technology businesses? Like, are, are high growth, pre-product market fit, or like, pre-scale technology businesses just so completely different?

• 2:15:30David Rosenthal?

  Yeah. I think that's maybe what Warren thinks, but he's got some kind of mental block here. Cause like, with Intel, you got Nois and Moore and Andy Grove coming from Fairchild. Like, you know what Fairchild is? It's a staff, like, it's an amazing business. And they've like, we've got the thing, we're gonna basically dethrone, I don't know. Anyway, I just read this and I was like jaw on the floor.

• 2:15:56Ben Gilbert?

  It also goes along with his notion of independence of thought, that like, he doesn't really care what other people think about a company, that if he doesn't understand it from first principles in a way that he's sort of gonna build it up from fundamentals, then it's not his cup of tea and he's not investing. I mean, that is a very, all this sounds like Warren Buffett to me, but it turned out to be a bad decision.

• 2:16:17David Rosenthal?

  It does. I mean, that's Warren for you. So, anyway, back to the story. I just thought that was so amazing.

• 2:16:25Ben Gilbert?

  Yeah.

• 2:16:26David Rosenthal?

  So Berkshire, meanwhile, unlike Intel, is quickly becoming a major problem. Buffett, of course, stops Stanton's, you know, investing in the business. But once you stop investing, like, they were already uncompetitive. Now they're wholly uncompetitive and they're just, you know, losing money. So he says, like, gosh, I gotta do something. Berkshire's gonna burn through all of its millions of dollars of cash reserves if I don't do something here. And I don't want to shut the business down, as we were saying.

• 2:17:00Ben Gilbert?

  Right.

• 2:17:00David Rosenthal?

  So he starts thinking about like, well, could I just buy something else within Berkshire? Use the money that's sitting there and essentially just kind of transform the business around it. So he starts looking around and there's a company right there in Omaha that he's been eyeing for a while called National Indemnity.

• 2:17:24David Rosenthal?

  And this is the third great investment where we're essentially going to leave the investing portion of this story.

• 2:17:31Ben Gilbert?

  And National Indemnity, David, to me, sounds like an insurance company. Would that be right?

• 2:17:36David Rosenthal?

  That would be right. It is run by Jet Jack Ringwald.

• 2:17:42Ben Gilbert?

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

• 2:17:55David 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. Logora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 2:18:11Ben 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.

• 2:18:26David 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. Logora'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.

• 2:18:50Ben Gilbert?

  And they recently launched Logora 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.

• 2:19:09David Rosenthal?

  And Logora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Logora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Logora 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.

• 2:19:39Ben 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 lagora.com/acquired and just tell them that Ben and David sent you.

• 2:20:04David Rosenthal?

  Okay, so back to national indemnity and Jet Jack Ringwald. So what national indemnity does, they're very different than GEICO. Indemnity national, they insure super esoteric risks. Like, you know, GEICO wants the boring safe driver, you know, low risk, wide aggregate insurance.

• 2:20:30Ben Gilbert?

  These guys want like the whole in one policies, right? Like what we were talking about on the the Virgin Galactic episode with the X Prize.

• 2:20:36David Rosenthal?

  They would be insuring the X Prize. They want the riskiest, craziest, wildest stuff out there as Jet Jack was famous for saying, there's no such thing as a bad risk, only bad rates. And of course, he's right, you can price anything as long as you price it right. And they were very good at pricing risks and and Jack famously like he would personally go dig into they once there's some story about they were once insuring like a settlement on a murder case or something like that.

• 2:21:09Ben Gilbert?

  Whoa.

• 2:21:10David Rosenthal?

  Maybe it was a murder case or maybe it was something. And like he went personally and like did a bunch of detective work to figure out like how likely it was that the case was going to go one way or the other. And then he praised the risk. So and they happened to be like right down the street from Warren's office in Omaha.

• 2:21:30Ben Gilbert?

  I feel like half of like the Berkshire Orbit companies are like, oh, Warren happened upon them in Omaha and they happen to be these like best in class businesses. It's like, it's unbelievable, little nexus.

• 2:21:42David Rosenthal?

  It's so folksy.

• 2:21:43Ben Gilbert?

  Yeah.

• 2:21:44David Rosenthal?

  It's hilarious. And differently in how they did this than GEICO, but similar to GEICO, National got to use its float for a super long time because most of the policies they were writing never cashed in. Like they were the type of things they were insuring where like, it was long tail stuff, like stuff that was very unlikely to happen. So they just got used to the money for a long, long, long time. Jack, though, he's getting older. He's considering selling the business, but it's his baby. He's super, super fickle about it. Like, you know, he wants to sell, but he doesn't really want to sell. And he'd make noises about it every now and then. Warren knows all this. So in February 1967, he catches

• 2:22:29David Rosenthal?

  him in sort of a dour mood. They're like having lunch or something at some point. Warren's courting him and they work out a deal in 15 minutes, 15 minutes or less to sell your company. And Warren's like, I'm going to buy this company for Berkshire, not the partnership. This is it. I'm going to transform Berkshire into insurance company. So they hammer out a one-page deal at the price Ringwald wanted. No audited financials, promised to keep the company in Omaha, promised not to fire any employees. Every, literally gives JetJack everything he wanted, like no reason to say no. And they do it. And Jack even sticks around and continues running the business because he can't like disengage. He's obsessed, which Warren wanted anyway. So it's great.

• 2:23:15Ben Gilbert?

  Puzzle piece. That's like a little, little learning Warren's gonna employ later.

• 2:23:20David Rosenthal?

  Yep. Yep. He's just adding to his, adding to his quiver of tricks of the trade here. So it becomes part of Berkshire. And in doing this deal, it's unclear how much Warren thought about this ahead of time, or more like he was just looking for something to buy for Berkshire. But he sort of stumbles upon, this is probably like the single greatest insight that Buffett has across his entire career of marrying an insurance business with

• 2:23:53David Rosenthal?

  First one in Berkshire, but then many operating companies. And so how it works is so he knows, he already knows, going back to that within the insurance business, you have float, you can invest the float. That's great. And then you can compound your capital for free. Essentially, the problem, though, not that it's a problem, but the limiter on this is that you do need to keep some cash on hand as an insurance company. Because like, you gotta pay out some policies, like, you know, on any given month, you might need to pay some stuff out. So you can't just go invest all of your capital into other things.

• 2:24:35David Rosenthal?

  But if you actually combine an insurance operation with other, you know, non-insurance operating businesses, you can invest all of your capital, all of your float.

• 2:24:50Ben Gilbert?

  Cause an operating business both consumes capital, but also spits off cash.

• 2:24:54David Rosenthal?

  Also produces the capital. And so you can keep the capital from the float tied up in the operations of operating businesses and then buying more operating businesses to attach. And then if you ever need to pay off claims, well, you just pull a little capital over from the cash flow every month that's coming out of, say, a railroad or say, like, you know, anything that's very predictable, like a candy store or a Dairy Queen or, you know, what have you. This is brilliant because this now enables Warren, through this insight, to start building

• 2:25:36David Rosenthal?

  up a two-sided flywheel of more and more insurance businesses and operations that generate more and more float, that he can then invest that capital in more operating businesses, which generate more monthly cash flow, which enables him to take on more and more float. And you can start to see how this ping pong's back and forth. He actually writes a paper after the national acquisition, where he talks about the capital requirements for insurance companies in this insight. And he says, by most standards, national indemnity is pushing its capital quite hard. It is the availability of additional resources in Berkshire Hathaway that enables

• 2:26:17David Rosenthal?

  us to follow the policy of aggressively using our capital, which on a long range basis should result in the greatest profitability within national indemnity. Berkshire could put additional capital into national should underwriting turn sour. So boom, Berkshire is still a dog, but the insight was huge. Like he can go out and just run this playbook all day long. It's amazing.

• 2:26:45Ben Gilbert?

  Right. So this is the beginning of Berkshire morphing from a series of textile mills into a holding company that has all these incredible cash flow flywheels happening inside of it.

• 2:26:57David Rosenthal?

  Yep. And it's not just a holding company, unlike the, you know, nifty 50 conglomerates of the 60s, which were just like holding companies for the sake of being holding companies.

• 2:27:07Ben Gilbert?

  Right.

• 2:27:08David Rosenthal?

  It's a holding company with a purpose.

• 2:27:09Ben Gilbert?

  Right. Like these companies actually benefit each other rather than just, hey, we have a whole bunch of capital. So we're going to roll up companies that never really interact at all.

• 2:27:19David Rosenthal?

  Yep. Yep.

• 2:27:20Ben Gilbert?

  And I should say, it's not like the products interact. It's not like the managers meaningfully interact. The way that, and this is a little foreshadowing here, but the way that Berkshire will eventually run is capital is managed by the central head office. And when a business, you know, needs cash or produces cash, it goes to the head office and the capital allocation is done there. But all the actual operations of the businesses are done inside the business. And so it's this insight that the synergies or the flywheels or the connectivity, whatever you want to call it, don't have to happen from the managers of the businesses actually dealing with each other. It can happen at the capital allocation level.

• 2:27:58David Rosenthal?

  Yeah. And it also gives Warren, you know, look, Warren is already a what's in a generation talent when it comes to capital allocation, but it gives him this huge margin of safety because back to the Ben Graham, you know, concept, he doesn't have to chase cigar butts anymore because his cost of capital is way lower than anybody else out there.

• 2:28:23Ben Gilbert?

  He's got all these policyholders lending him money for free in a non-dilutive way. Like it's not really debt. It's not really equity. It's just free cash that he gets to play with.

• 2:28:33David Rosenthal?

  Yep. So he can go buy businesses and graft them onto this flywheel. And he has this margin of safety where like even if he doesn't, you know, he does make great investments and great purchases, but even when he doesn't, it's he's still benefiting from it because he's adding on to this capital flywheel.

• 2:28:50Ben Gilbert?

  Yep, yep. And it's this national indemnity is such a good pickup for Buffett too, because he's the master of probability. I mean, if we go back and look at Amex, you know, the market was scared off because there could have been a run on Amex. But Warren looked at it probabilistically, figured out the probability of it actually happening was low, assessed the expected value, multiplying the probability by the sort of potential outcome, and was like, oh, this is an expected value positive bet with a margin of safety. And he's just a genius probabilistic thinker. And so when you apply someone like that to owning an insurance company, not only is he a brilliant probabilistic thinker, an individualistic decision maker who doesn't need third parties to give him social proof that something's

• 2:29:34Ben Gilbert?

  a good idea. Now there's this third leg of the stool also, which is sort of this master capital allocator. So the capital allocation, the probabilistic thinking and the individualistic decision making, he's now got these like three crazy tools at his disposal and owning an insurance company is awesome for someone like that.

• 2:29:53David Rosenthal?

  Yeah. And he's playing with a stacked deck here. Like he can't lose. So no wonder he becomes the best investor of all time.

• 2:30:02Ben Gilbert?

  Well, so we're about to see some pretty excellent returns here through 1967 and 1968. The Dow does well in 67. It's at 19%, 19% return that year. We're starting to kind of see some go-go action going on in the market. 1968 is a little cooler, but it's 7.7%. Across those years, Warren did 36% in the Buffett partnerships in 67, then had its best year ever with a 59% return in 1968.

• 2:30:35Ben Gilbert?

  Like he's untouchable.

• 2:30:37David Rosenthal?

  He's just like, he's like Steph Curry. He's just draining threes here.

• 2:30:40Ben Gilbert?

  It's, I mean, if, if we look all the way from 57 through 69, the Dow, the compounded results of the Dow were 153%. The compounded results of the partnership were 2,795%. It's a 28X that Warren did over the 12 years of the Buffett partnership.

• 2:31:03David Rosenthal?

  He's just like playing out of his mind.

• 2:31:05Ben Gilbert?

  Yeah.

• 2:31:06David Rosenthal?

  Unreal. Wow. But as hopefully we've painted on this episode, you know, there's probably the best quote, I don't think we said this at the top of the episode, but probably the best quote about Buffett that has ever, most apt quote that has ever been said about him was in a Forbes piece that came out, I think right around this time, which, and it says, Buffett is not a simple person, but he has simple tastes. And so hopefully we painted the picture here of like, he's a really complex dude. Like, you know, he comes across folksy. He drinks his Coke. He eats his peanut brittle, but.

• 2:31:48Ben Gilbert?

  He doesn't use a computer for his analysis, but like there is deep, deep analysis.

• 2:31:53David Rosenthal?

  Yeah. And there's a lot of, there's a lot of psychology going on in his head. So you think like, I mean, this insight, this whole thing about insurance, the float, the flywheel and the operating businesses, this insight should have and did drive the entire rest of his career. Like the next five decades is this, but he doesn't see it. Like he's really worried at this time, you know, what started a few years ago of, I don't know that I can invest all this capital in the partnership. I don't know that I can keep generating these returns, close the partnership to new capital.

• 2:32:33Ben Gilbert?

  I'd have to go buy really big businesses or buy businesses outright to deploy this much capital. And I don't have access to that. You know, these are the types of businesses we can buy and we buy smaller shares of them.

• 2:32:44David Rosenthal?

  Yep. So in 67, he writes a letter to the partners saying, quote, "I am out of step with present conditions. On one point, however, I am clear, I will not abandon a previous approach, the cigar butt investing strategy, whose logic I understand, although I find it difficult to apply in the current environment. Even though it may mean foregoing large and apparently easy profits to embrace an approach which I don't fully understand, have not practiced successfully and which possibly could lead to substantial permanent loss of capital." He's like mentally struggling here with this dichotomy. Like, times have never been better and he's never been more worried.

• 2:33:26Ben Gilbert?

  Yeah, his, I mean, he is Ben Graham through and through at this point in his life. It's rule number one, don't lose money. Rule number two, see rule number one. And then you also have this thing going on where because everything is so tied to the purchase price, rather than the betting that you'll be able to generate a positive outcome, his mood is tied to purchase prices. So even though everything's going up, he's looking at it like, this sucks. Like, I can't find anything attractive to buy. And it's all, you know, he's almost, his mood is very much inverse of the market.

• 2:33:59David Rosenthal?

  And he's feeling, I think, like, I've got so much to lose now. I've got all these gains. He's not playing like he's got nothing to lose anymore. He's playing like he's got everything to lose. So he's in such a bad place that even after this brilliant national indemnity pickup for Berkshire, in 1968, he tries to unload Berkshire. He tries to wholesale sell it to Munger and David Gottesman, who was an investor in the partnership. And fortunately for Warren, they're either too smart or too dumb to take him up on it. They bought it typical Charlie fashion. Charlie's looks at it as like, you're telling me you want to sell

• 2:34:40David Rosenthal?

  this thing and you want me to buy it, knowing that you want to sell.

• 2:34:47David Rosenthal?

  Why on earth would I buy something knowing that you want to sell? And Warren's like,

• 2:34:51Ben Gilbert?

  The mutual admiration and respect there is so telling.

• 2:34:54David Rosenthal?

  So telling, so telling. So by mid 1969, Warren's like, he's done. He starts making plans to wind down the partnership. He's, he's like dejected. He's going to hang up his spurs.

• 2:35:08Ben Gilbert?

  After his greatest year ever.

• 2:35:10David Rosenthal?

  After his greatest year ever, you know, definitely there was some tension with Suzie as well, where Suzie was like, we're worth like many, many millions of dollars. Like, what are you doing here?

• 2:35:21Ben Gilbert?

  And interestingly, many millions of dollars, but he's still kind of an unknown person. Like Wall Street doesn't yet know the name Warren Buffett, the way that they would in the next couple of decades. And he's not sort of being called on. He's not a celebrity investor. He's not informing the public on investing. This is very much just about staying private and making money.

• 2:35:43David Rosenthal?

  Yep. Yep. So on Memorial Day, 1969, he writes a letter to the partners. And he says, if I am going to participate in the investment business publicly, I can't help being competitive. I know I don't want to be totally occupied without pacing an investment rabbit all my life. The only way to slow down is to stop. And then he says, he's giving notice of his formal retirement at the end of the year. He's going to wind up the partnership, distribute out all the securities to the partners in the beginning of 1970. That's it. He's done. He's walking away. He's like Jordan. He's going to play minor league baseball.

• 2:36:27Ben Gilbert?

  That's a, it's a very apt analogy.

• 2:36:30David Rosenthal?

  It's exact. This is the last dance, except it's not really the last dance. The partners are shocked. They rightly never thought Warren could give up the game. Of course, he can't give up the game, as we'll see next time. They ask Warren what to do. He thinks about recommending them to Charlie, but Charlie at this point is like, I don't know, I don't want a bunch of new investors either. I'm worried about the market too. So he sends the big investors to David Gaddisman at First Manhattan Bank in New York. His big firm can manage big clients and the small one, the small investors, he ships over to Bill Ruane, uh, who had back from his class with Ben Graham.

• 2:37:14David Rosenthal?

  Bill had just left Kidder Peabody and was setting up his own fund, the Sequoia Fund, not to be confused with Sequoia Capital, but equally incredible performance over the last 60 years. And that's kind of where he leaves it. So January 1970, he liquidates all the public securities. He unwinds the partnership. At this point, he owns 26% of the partnership. He gets 16 million in cash, 18% of Berkshire, 20% of diversified retail company, which was a joint venture he had with Charlie owning, uh, department stores. Ill-advised place to invest.

• 2:37:53Ben Gilbert?

  And we keep mentioning Charlie here. Do not worry. Stay tuned. We will have the full Munger story in part two.

• 2:38:00David Rosenthal?

  In part two, and, uh, 2% of blue chip stamps, which was another Charlie JV. And that's it. He also owns the Omaha Sun, which was like a vanity purchase, uh, to get back to his newspaper roots. And the partners have to decide with these private companies, Berkshire Diversified, Blue Chip and the Sun, whether they want to sell their stake. And Buffett says he's happy to buy their stakes from them if they want to sell or they want to keep them. So he writes a long, uh, FAQ to the partners, including, should I hold my stock in the private companies? To which he writes, all I can say is that I'm going to do so, hold the stock, and I plan to buy more.

• 2:38:48David Rosenthal?

  So with that cryptic statement, he drops the mic. He's out, out of the game.

• 2:38:56Ben Gilbert?

  And he owns how much of Berkshire Hathaway at this point?

• 2:38:59David Rosenthal?

  18%.

• 2:39:02Ben Gilbert?

  Hmm.

• 2:39:03David Rosenthal?

  As he rides into the sunset.

• 2:39:06Ben Gilbert?

  And I think that little cliffhanger is probably a great place to leave it on history and facts for this first half of Berkshire Hathaway.

• 2:39:15David Rosenthal?

  I don't know, we're at about three hours. Do you think that's enough? Should we go another hour?

• 2:39:18Ben Gilbert?

  We could talk about the part after this where he tries to figure out what to do with his life. Well, the market is doing crazy things or, you know, the little bit of warm water that he gets into with Charlie and the feds. But maybe, maybe let's hold on that and we'll, we'll start part two off with some of that wandering pre going all in on Berkshire Hathaway.

• 2:39:43David Rosenthal?

  Back like Jordan, wearing the four, five.

• 2:39:45Ben Gilbert?

  Yep. Well, boy, do we have some fun playbook things to dive into this episode. The first one that I have, I actually, I decided to leave Berkshire land for a moment to illustrate the point. So the point that I wanted to make is sure Warren Buffett is really into compounding. Like, I think that would be an understatement and everyone in the audience is probably chuckling if they've made it with us that far. Another fascinating thing is, David, you just mentioned, he took this distribution in cash at the end of the wind down. And what I'm thinking is, ah, that's got to kill him to have to take these transaction costs, these taxes. Like, he must

• 2:40:25Ben Gilbert?

  have really wanted to wind down the partnership to make that happen. And to illustrate the point of how much transaction costs and taxes can interrupt the beautiful thing that is compounding, I went to a paper that was written in May of 2020 from the Yale School of Management by AJ Wasserstein, Mark Agnew, and Brian O'Connor, who are collaborators with someone that we have had on the LP show. David, do you know who that person is?

• 2:40:57David Rosenthal?

  Hamilton?

• 2:40:58Ben Gilbert?

  Will Thorndike.

• 2:40:59David Rosenthal?

  Will Thorndike. I should have gotten that.

• 2:41:01Ben Gilbert?

  Author of The Outsiders, who came on our book club.

• 2:41:04David Rosenthal?

  Of course.

• 2:41:04Ben Gilbert?

  And they did some

• 2:41:05David Rosenthal?

  Will is awesome.

• 2:41:05Ben Gilbert?

  Great analysis in this paper called "On the Nature of Long-Term Holds", where they basically ran a little simulation and showed what would happen if you held something that had continuous compounding for 25 years and you paid taxes once in year 25, or if you had continuous compounding happening where you paid taxes every five years. Basically, if you withdrew in cash and then reinvested in the exact same or an equally producing asset.

• 2:41:33David Rosenthal?

  And is this assuming taxes are all long-term capital gains?

• 2:41:37Ben Gilbert?

  Yep, yep. It's assuming 25%, which would be some combination of federal capital gains and some state tax as well. So if you invested $1 and just let compounding do its thing for 25 years, you would end up with $24.9 at the end. And this is assuming a compounding rate of 15%. So you know, you take your dollar, 25 years later, it's worth $25. Now, if you pay taxes every five years, that same dollar is worth $16.8. So it's a 50% increase in the amount that you are left with at the end

• 2:42:21Ben Gilbert?

  if you just don't interrupt compounding by doing the thing that all humans want to do, which is manage the money, do stuff, be active. And I think that it's this brilliant insight that Warren has sort of like begun to have here. I think in the Buffett partnership, he moves stuff around much more than he later would in Berkshire Hathaway, but this sort of uninterrupted power of compounding, you know, taxes, transaction costs, whatever the things are, if you can find yourself betting on a winner and just let it ride. That is the very best strategy you can possibly employ. And it feels to me at the end of this story, he's like, he's really starting to grasp that.

• 2:43:01David Rosenthal?

  Yep. Well, it's kind of like, um, so there's this great, this is way out there in left field, but you know, hey, we're three hours into this episode. Who knows how many people are still listening. There's this great book called Transitions by William Bridges, and it's wonderful. And it's about psychologically dealing with transitions in your life. Even if it's like a good transition, like getting married or, or having a kid or, you know, and bad transitions too, like big changes in your life. And the whole theme of it is that when you have a transition, like the old you needs to die before the new you can arise.

• 2:43:42David Rosenthal?

  And to my, I kept thinking about this through this story here in this part one of like, Warren was so successful. He was the most successful Ben Graham disciple that there was more successful than Ben himself. But that wasn't going to work anymore. And he needed to get to start to understand these things that you're talking about. And he needed to symbolically, you know, die the old Warren to have the new Warren arrive. And I think that's what happened here with the closing down of the partnership. Whether he knew it or not, almost assuredly he did not. He needed to close the chapter on like that part of his life to start to embrace

• 2:44:28David Rosenthal?

  some of these very different philosophies.

• 2:44:31Ben Gilbert?

  Yeah, fascinating. That's a really good point. I've never thought about that sort of like literal, let the old you die, think that way.

• 2:44:39David Rosenthal?

  It's a really good book, recommend it to anyone.

• 2:44:42Ben Gilbert?

  Well, speaking of Ben Graham, this notion of independence of thought, there's a Ben Graham quote that the stock investor is neither right nor wrong because others agreed or disagreed with him. He is right because his facts and analysis are right. And this is something that I think as a venture investor is so difficult because so much of the success of a company, when you're investing in it, depends on its ability to, in the near term, raise future capital from someone who is not you. So it encourages this sort of herd mentality of, do other people perceive this to be a, you know, hot company in the same way? Whereas what Ben Graham is looking at is the complete opposite side of the spectrum, no growth at all, exclusively looking at cigar butts.

• 2:45:26Ben Gilbert?

  It's like you have to hang your hat exclusively on your independent analysis, which is way easier to do when you have a book value staring you in the face and you're only going to do basically a one-time transaction on it. But it is, I think, a thing, this sort of independence of thought, and is something that we can all bring a little bit of Ben Graham into our lives. And it's funny because the positive and the negative hit you in different ways. When other people are telling you you are right, it's very easy to accept the idea that you are right. When other people are telling you you are wrong, you know that, hey, maybe what I'm supposed to do is be contrarian here and trust my gut. And it's funny how you want to say, well, look, just because other people are telling me I'm wrong, it doesn't mean I'm wrong. But if other people are telling me I'm right, I'm definitely right.

• 2:46:15David Rosenthal?

  Totally. I think you raise a really good point in there, too. Two good points. One, yeah, we could all use a little more Ben Graham in our lives. But people talk about value investing in venture and blah, blah, blah. And like, you know, some people try to do it, other people bemoan why it doesn't happen. You raise a really, really good point, which is that

• 2:46:40David Rosenthal?

  It kind of can't because you'd need other people to believe too. And unless you're going to be willing to just wholly finance a company yourself. But even then, like that's A, a slippery slope, but, but B, the company needs to recruit employees, it needs to recruit partners, it needs to recruit customers. Like you can't just be, you gotta be bringing people into the fold. You gotta be a missionary to succeed in the startup world.

• 2:47:13Ben Gilbert?

  Right. Yeah, it's funny how it basically in a growth company and in a very small growth company, especially you cannot be the only believer, otherwise it won't work.

• 2:47:24David Rosenthal?

  Yep. Which maybe is a reason why, as painful as it is to go back and talk about it, maybe is why Buffett investing in Intel and technology never would have worked in the first place. He just wasn't in a mindset to be able to think like that.

• 2:47:41Ben Gilbert?

  Yeah, it is a completely different way of thinking. Well, speaking of not being in the right mindset, you know, Buffett spinning down the partnership in its very best year ever, or after its very best year ever. This is sort of like, there's a boom time going on and that's a terrible time for Warren to be buying. And I think that the classic Warren Buffett aphorism, be fearful when others are greedy and greedy when others are fearful springs to mind, where it's easy to say, this guy shut down his investment partnership when everyone else was being greedy. You know, like he did not-

• 2:48:16David Rosenthal?

  When he returned 50 plus percent that year.

• 2:48:19Ben Gilbert?

  Right. It's crazy. Like what, what most people would say, let's go raise so much more capital to deploy. And it is like a really adherent to principles approach of, you know, if you truly do believe the fearful when others are greedy and vice versa comment, there is no better illustration than that.

• 2:48:39David Rosenthal?

  Yeah. And interestingly though, I bet he would probably also say it was the wrong decision. You know, I mean, like the right decision in the long run because it enabled Berkshire, but like in a vacuum, like.

• 2:48:53David Rosenthal?

  He was crazy. He sort of kept going.

• 2:48:56Ben Gilbert?

  Yeah, maybe. I mean, that's the whole sort of Bill Gurley, enjoy every last minute of the upside. You never know when the downturn is going to happen. So you have to invest through all cycles. That's true unless you're Warren Buffett and you can actually pick the cycles. Like so far, he has proven and we will see in future years too. He is remarkably good at having a lot of cash when he needs a lot of cash and being fully invested when he needs to be fully invested.

• 2:49:23David Rosenthal?

  Yep, that is true. That is true.

• 2:49:25Ben Gilbert?

  Don't time the market unless you're the oracle of Omaha, I think is the second part of that phrase.

• 2:49:31David Rosenthal?

  Well, he does have the saying that I actually first heard from Chamath of all people, very different approach than Warren, although great in his own way. But the quote from him, it's not timing the market, it's time in market. Which to your point would be like, do as I say, not as I do. He also says, invest in index funds and goes out and is incredibly concentrated himself.

• 2:50:00Ben Gilbert?

  Right. Yeah. I mean, it's funny listening. I was watching the, I'm going to flash forward here a little bit, but I was watching the first recorded annual meeting, the 94 annual meeting with Ian Charlie. And he's remarking on, well, sure, if you have no conviction, then you're any better than any fool at picking stocks. You should go own as many stocks as possible. You gotta be diversified. You gotta, you know, be covered in case of downturns. If you feel like you're investing in managers who are excellent and have fortified their businesses so that they'll be excellent through all cycles, then you should own as few of businesses as you possibly can. I own one. I trust the managers implicitly.

• 2:50:37Ben Gilbert?

  It's just a very Warren Buffett quip, but for all of us who are taught diversification, that's another way of saying that we should all be reverting to the mean. And if you believe you actually have a gift and are have an edge, then you know, bet on your ability to perform superiorly, which he has done.

• 2:50:54David Rosenthal?

  Incredibly well. Yeah.

• 2:50:57Ben Gilbert?

  A couple others here that I think are worth highlighting. And I'll save a lot of these that are better illustrated in part two. I think the one that I really want to harp on here is Buffett's singular life focus and obsession. Is getting as much money as possible and watching it grow and doing it in the most ethical stand-up way possible on his own terms. And what we're witnessing is just the result of that singular focus, of that complete maniacal singular focus when applied by someone who is a genius savant at that, and also has trained himself to become a master communicator.

• 2:51:38Ben Gilbert?

  And I think there's just very few examples in the world where someone truly is world class at something and is singularly focused on it. And I think that when you have that, that is when you have these, you know, ten sigma events, or I don't know how many standard deviations from the mean this is, but it is, this performance is remarkable and enduring. And we'll talk about this in grading, but this is a 29.5% compounded return every year for 12 years.

• 2:52:09David Rosenthal?

  Partnerships.

• 2:52:10Ben Gilbert?

  It is, you know, you mentioned Michael Jordan. I don't think that's a ridiculous analogy. And I think Jordan's singular focus on winning, I think, is a very, a very reasonable comparison. He's naturally the best in the world. He is the hardest working and he's singularly focused on it. So I think that's very apt.

• 2:52:27David Rosenthal?

  Totally. There's a, I just pulled up, there's a wonderful quote from Mike Moritz that I love that was in the book Leading that he wrote with Sir Alex Ferguson. And it says, "The great ones eliminate all distractions and focus only on what matters. Shut out the things that don't matter and don't let their time get stolen away. People forget how few hours there are in a year. You must focus on what's important and not do what's not." I mean, we haven't talked about his work habits, but like Warren is the singular embodiment of that. Like, he sits in his office all day and he reads annual reports. Period.

• 2:53:09Ben Gilbert?

  Right.

• 2:53:09David Rosenthal?

  For like six plus hours a day, he's just reading and the other hours he's talking to Charlie.

• 2:53:16Ben Gilbert?

  Right. And there's massive life trade offs to that. Like if you've decided that that's the thing you want to do, and that's what makes you happy, great, but do not pretend that it doesn't come without trade offs. Because like for someone who wants a well rounded life.

• 2:53:30David Rosenthal?

  Yeah, that's not it.

• 2:53:31Ben Gilbert?

  You're not going to get it.

• 2:53:32David Rosenthal?

  Totally.

• 2:53:34Ben Gilbert?

  The last one that I'll highlight here, and then I'll save the rest for part two, because there's so many other things here worth discussing, but I think they'll be better illustrated by the full embodiment of Berkshire Hathaway, as it is today, is the secrecy of his ideas. Not to get too much into power, but I think he was actually counter positioned to every other stock picker who got paid to look smart in the short term. Warren did not care about looking smart in the short term. His business was not that. He wanted to make the most money long term, so he stayed quiet about his ideas to like a religious extent. And he never ever wanted to move the market or cannibalize that rare, really good idea that he had by sort of showing his hand too early and trying to appear smart.

• 2:54:18Ben Gilbert?

  And he didn't have that national brand. He was never paid on commission or transactions. He aligned the business model with his long term goal, and that was totally counter positioned to the market.

• 2:54:29David Rosenthal?

  Yep, totally agree. Aligning the business model.

• 2:54:33Ben Gilbert?

  Yep.

• 2:54:34David Rosenthal?

  Huge. Only one I throw in there, which will probably also come up in part two, but, but I think it really came out here in part one is just like the, I say this all the time. It's the Sequoia capital. Let your winners run. Like selling GEICO, selling Amex, those were massive mistakes. And as brilliant as all the things that Warren did, and as brilliant as his performance was in this first part of his career, it's just impossible for me to look at it and think, man, it could have been 10 times better had he not made two very simple mistakes.

• 2:55:15Ben Gilbert?

  And when you're saying, just like Sequoia, you're talking about like the hard learned lesson of selling Apple and making a $6 million profit on it.

• 2:55:21David Rosenthal?

  Yep, yep.

• 2:55:23Ben Gilbert?

  So true.

• 2:55:24David Rosenthal?

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• 2:55:31Ben Gilbert?

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• 2:55:41David Rosenthal?

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• 2:56:02Ben Gilbert?

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• 2:56:14David Rosenthal?

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• 2:56:25Ben Gilbert?

  Well, all right. As a little precursor to grading here, let's do a quick value creation, value capture. On these episodes, we always compare how does the value that they create compare to the value that they actually capture? You know, is it very little, like Wikipedia? Do they capture a lot, like Google does? And then, of course, the second part, how does the value created for the world, not just for shareholders, compare to any value destruction? So sort of talking from like an ethical, moral perspective. Well, on the first one, David, you might say, well, Warren Buffett is a pure-play investor, so that by default means he's just capturing as much value as he's creating. Like, he's not out there innovating and creating a new product for the world. He's not a value-creation type person. So I'm curious your thought on that. Like, on part two, that will definitely

• 2:57:09Ben Gilbert?

  not be true. Like, I think Berkshire Hathaway, from this point forward, will have lots of value creation to talk about. But what about up to this point, to 1970, you know, what companies created value for the world that otherwise wouldn't have created net new value because Warren was involved?

• 2:57:28David Rosenthal?

  Yeah. Well, I mean, and even stepping back and looking at the whole... Ben Graham entourage and cigar butt investing. Like you could think a super real argument that it's all that is value destructive investing.

• 2:57:42Ben Gilbert?

  Totally.

• 2:57:42David Rosenthal?

  Coming after companies and breaking them up and liquidating them like.

• 2:57:45Ben Gilbert?

  There was a going concern providing value to customers that is no longer going.

• 2:57:50David Rosenthal?

  Oh, and not employing people and like, yeah, there was definitely some value destruction here. Now, I think you could also argue about the cigar butt investing in Ben Graham. That before him and them, there was just rampant speculation that was happening. And that's ultimately value destructive for everybody too. So he did lay the groundwork for fundamental investing, value-based investing in the purest sense of the word value, not as anti-growth, but as like true investing in value as opposed to speculating. So that's all great for the world.

• 2:58:33Ben Gilbert?

  Right. If you think about all the like pensions that invested from the Graham era through today, that, you know, generated money for their, the, the people whose pensions they support. Like, that's awesome to the extent that they had access to public equities that were no longer sort of just treated as lotteries.

• 2:58:50David Rosenthal?

  Yep. So, yeah, and then Warren, you know, gosh, I don't know. It was probably neutral to Berkshire Hathaway, his involvement. Like, he stopped investing in the business, but the business was gonna die.

• 2:59:04Ben Gilbert?

  Did it die any faster? That's a good question. It is interesting because I, the, the least charitable view that you can take on investors, like pure investors, is that you're just reallocating piles of money. So you're not creating new value for the world. And that's like the least charitable in lots of ways. I mean, if you think about the ways that great venture investors are value add, like, yes, there's something there to bringing a lot more than capital. If you think that some of the things we'll talk about in part two, where someone with a really strong reputation can sort of come in and save a business who, you know, has, has, is sort of in the midst of blowing up like a Solomon Brothers or something like that.

• 2:59:48Ben Gilbert?

  Like, that is much more than reallocating money from one pile to another. So you are legitimately creating new value for the world. It's interesting, though, in up to 1970, where we've sort of covered here, I'm not really sure you could make an argument that what the Buffett partnerships were doing was in any type of value creation.

• 3:00:06David Rosenthal?

  Yeah, I don't really think so. It laid the groundwork for a lot of value creation, but yeah.

• 3:00:13Ben Gilbert?

  Yep. It's actually very interesting to examine, like in the financial sector, pure play investors, what else is value creative? Well, you can, if you increase liquidity in markets, that's value creative. If you come up with more innovative instruments that allow for, I guess it's again, companies to get funded faster or companies to get funded with fewer fees, that provides value.

• 3:00:34David Rosenthal?

  Warren's not really doing any of this at this point, though.

• 3:00:37Ben Gilbert?

  No, no, not at all.

• 3:00:40David Rosenthal?

  Yeah.

• 3:00:40Ben Gilbert?

  Not at all. It's just coming at it from the other side because normally when we're talking about a new tech product that's created, we start from a place of, well, they created all this value, did they capture it? And with pure investing and pure finance, you're starting from this place of like, well, all right, they definitely were moving value from one place to another, but where did they grow the pie?

• 3:01:00David Rosenthal?

  Yeah, I don't think they really did at this point.

• 3:01:03Ben Gilbert?

  Nope. Okay, so grading. The Buffett partnerships returned 30% for 12 years compounded. So that's a 28x. David, how do you think about that?

• 3:01:20David Rosenthal?

  Yeah.

• 3:01:20Ben Gilbert?

  Is that an A? Is that a C?

• 3:01:22David Rosenthal?

  Well, it's interesting, right? We were talking before the show about how we're gonna approach this question. And I think it depends, like everything, the lens through which you look at it. If you look at the Buffett partnerships like a fund, which they essentially are, it's essentially a hedge fund. Any fund that returns 28x over a, you know, 12-year standard-ish lifetime of a fund, that's incredible. That's one of the greatest of all time. You know, the, I, there may be some Sequoia and benchmark funds that are approaching that, but I don't think any of them hit that number.

• 3:02:07Ben Gilbert?

  No, I think the super fantastic recent benchmark fund was like a 25x.

• 3:02:11David Rosenthal?

  Right. So even that, and that had what like Uber and

• 3:02:17Ben Gilbert?

  WeWork.

• 3:02:18David Rosenthal?

  WeWork and Snap in the same fund, I think.

• 3:02:21Ben Gilbert?

  Yep. Yep.

• 3:02:23David Rosenthal?

  So, yeah, from a fund grading it through that lens, A plus, no doubt. Now, interestingly though, if you were to look at it relative to a individual company investment, which I think would be a stretch. I think it is much more like a fund. It is a fund than a company. It's not that impressive these days, you know, that you would return 28x on an individual investment over 12 years. I mean, there are individual investments in crypto these days that are returning 28x in six months.

• 3:03:00Ben Gilbert?

  Well, I mean, it's been 12 years since Bitcoin was invented and it's returned 62, no, I'm sorry, 6.2 million x. So crypto is a whole different.

• 3:03:12David Rosenthal?

  Right. So that just blows it out of the water. It's really interesting though. Like I don't, back in these times, there probably wasn't anything that was returning on this level. An individual style, I mean, Intel for sure, but like the concepts of, you know, venture investing or investing in private companies. We were talking about like maybe 15 people in the world that did that.

• 3:03:37Ben Gilbert?

  Yeah, that's a great point. Yeah. So it's, I hadn't thought about normalizing for the time period. Cause I mean, I thought about, when I looked at this, the numbers sort of jump out at me of like, oh, I have an IRR number on a 12 year fund. Like, cool. Let's compare it to venture. Oh, I have a cash on cash on a 12 year fund. So like a 28x. On a 10 year fund with a two year extension, like this is a top 0.1% venture fund. You know, this is like, people say, I want to be top decile. I want a 3X. I want a 5X. Like funds don't 28X, especially with the inflation adjusted millions that Buffett was investing then. So it's a, it's a crazy impressive feat. I mean, like just to assign a letter, this is an A plus.

• 3:04:20Ben Gilbert?

  And frankly, the fact that A, they never lost money. They, they not only beat the Dow, but they had a positive return every single year. Crazy impressive and a positive return with the option to take your money out. So there's not an illiquidity premium, unlike venture, you know, it's just crazy. And actually beats the, now granted Berkshire Hathaway has been around a lot longer and it today, and they're managing way more money than the Buffett partnerships ever were. But you know, this 30% or 29.5% definitely beats the pants off of Berkshire's returns, you know, ever since Warren went full time, which we'll talk about in the next, next episode.

• 3:05:00David Rosenthal?

  What is full time? I think Warren was just a man ahead of his time.

• 3:05:05David Rosenthal?

  Yeah. A plus. We're dancing around trying to figure, but it is an A plus. No doubt.

• 3:05:11Ben Gilbert?

  Yep. All right. Carvouts?

• 3:05:13David Rosenthal?

  Carvouts. Mine is a very, very, very different way of thinking, investing, looking at the world. But fascinating. Balaji Srinivasan on the Tim Ferriss Show, another three hour podcast that came out a few weeks ago. Wildly fascinating. Balaji is a very interesting character that many people in tech know. He was a partner at Andreessen Horowitz for a while. He founded Counsel. He was a founder of a company called earn.com, I think that Coinbase acquired, then he became

• 3:05:51David Rosenthal?

  the CTO of Coinbase. He's a crypto evangelist, transhuman evangelist, transnational, you know. Anyway, very interesting podcast. Lots of seemingly out there ideas discussed, but always worth considering these things. I really enjoyed it.

• 3:06:11Ben Gilbert?

  Yeah, I gotta, it's like next on my queue to check out. It's like right after all the stuff that I was listening to, to do the Berkshire research.

• 3:06:18David Rosenthal?

  Yeah, we haven't had a lot of time for other carve outs recently.

• 3:06:22Ben Gilbert?

  I will say, this is the first time I've started research like months in advance, just like giddy to do this episode. So.

• 3:06:29David Rosenthal?

  I know. This was so fun.

• 3:06:31Ben Gilbert?

  All right. Mine is also something that I listen to via audio. You can read it via text as well, but since I'm such a big audio consumer, I chose to listen and hearing it straight from the horse's mouth, I much prefer it to reading, especially in this case. Paki McCormick wrote a wonderful piece called Not Boring One Year In, and I can't recommend reading it, and especially the narration and hearing it in his voice enough. I don't know if it just particularly resonated with me because, you know, we're friends with Paki and we've been watching his journey, or if his journey is just like remarkably similar to acquired. So just reading it, I'm like just screaming in my car while listening to it. Yes, I get certain moments, but it is the most awesome, open book,

• 3:07:14Ben Gilbert?

  cathartic telling of his first year. I can't believe it's only been a year. What a crazy, crazy thing he's accomplished. And the biggest thing that resonated with me is that like, there's both a process and not a process. And he's like, I have certain things that I do because I need to get the content out once a week or twice a week. And so I have a set schedule that I need to follow, but I don't, I never actually know like what the content's going to be, and I need these lightning bolts of creativity. And I would say that David and I aren't quite as wide in the gamut that we run of like where the, you know, a not boring piece can look quite different than the sort of what acquired's mold is, although recently, who knows?

• 3:07:59Ben Gilbert?

  But I definitely know that thing of like, okay, there's a set of activities that I need to do to go generate ideas. And then I can, at some point, I need to narrow and pick one, and then I need to run with one of those ideas. And I think that's a, for a person who is creating on any sort of regular schedule, be it creating in products you're making, creating in the blog stuff you're writing, creating in podcast, whatever it is, like, that is such a real emotion to identify with. And Paki just does such a great job writing about it. I think anyone who makes stuff should go read Not Boring One Year In.

• 3:08:31David Rosenthal?

  Yeah, it was so good. I loved that piece.

• 3:08:35Ben Gilbert?

  Paki, my friend, you are gifted.

• 3:08:38David Rosenthal?

  Indeed.

• 3:08:39Ben Gilbert?

  Well, as we wind down here, we should say there is a Berkshire Hathaway 2021 Annual Shareholder Meeting that will be coming up on May 1st. So if you, like David and I, are becoming sort of a converted Buffett head, that is a great thing to tune into and watch on that lovely Saturday on Yahoo Finance. We will have part two coming out here in the near future. We definitely look forward to talking about all things Berkshire with you, both past as we've covered on this show, up to the present as we'll do on part two, and looking into the future with the Berkshire Annual Meeting. So tune into that if it sounds interesting. It's Warren and Charlie on stage just fielding questions for hours and hours and hours on end.

• 3:09:23Ben Gilbert?

  So it should be pretty good.

• 3:09:25David Rosenthal?

  We should totally, in post-COVID times, A.

• 3:09:30Ben Gilbert?

  Go.

• 3:09:30David Rosenthal?

  Go next year. B, be like all, you know, artists and steel and just do the same thing. We should like, we should totally do this. We should just like, get up on stage and then we should have all of our sponsors, all of our partners.

• 3:09:45Ben Gilbert?

  Oh, my gosh, out in the concourse.

• 3:09:47David Rosenthal?

  Out in the concourse. We'll have bronze busts of Warren and Charlie.

• 3:09:52Ben Gilbert?

  Thank you to our good friends at Tiny.

• 3:09:54David Rosenthal?

  Yeah, and we'll just have a, we'll have a big acquired fest.

• 3:09:58Ben Gilbert?

  I'm in. Let's do it. All right. I'm going to keep the wind down brief, everyone. If you liked this episode, share it with your friends. If you have a friend who's a value investor or not a value investor, or you talk about this stuff with, share it. Feel free to share it from social media. If you're getting excited about the annual meeting coming up for Berkshire, feel free to point people to this as a resource. And it's definitely one of the things that inspired David and I to do it. Become an LP. We love our LPs. We love everyone, but we love our LPs the most. Join the Slack. It's a great conversation there, and I'm sure there'll be much discussion of this episode there. I think that's all I got. Listeners, thank you so much, and we will see you next time.

• 3:10:37David Rosenthal?

  We'll see you next time.