Berkshire Hathaway recently held its 2022 annual meeting. Dubbed the “Lollapalooza for Investors,” Warren and longtime partner, Charlie Munger were in rare form. They answered questions for six hours on topics related to the economy, stock market, inflation, global relations, and how to protect your investments in a down market. Frank and Ian deconstruct some of their best soundbites and relate their advice to their businesses.
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Five Warren Buffett Quotes To Help You Navigate Today’s Economy
2022 has been a kick in the pants. The stock market is down, and crypto is down, real estate is starting to falter, war, inflation, and high gas prices. It’s ridiculous. In times like this, when it gets scary, Frank and I like to go to the sages in Omaha for their wisdom. Berkshire Hathaway had their annual meeting. Some incredible soundbites came from Warren Buffett and Charlie Munger. We also looked at a few of their historical comments in this episode, where we listened to some things that the two sages said that always calmed us down. We then share our own perspectives on our businesses and what’s going on with our investments nowadays. We hope you enjoy this one.
Ian, you son of a bitch.
This time of year is special to us. It is right around when Warren Buffett and Charlie Munger come out of their cave. They are exiled for the year, where they sit around and read annual reports for 355 days of the year. They come out and get on a stage at the Berkshire Hathaway meeting and whack for six hours. It is always so fascinating.
Ian loves it because Charlie Munger is 98 and Warren Buffett is 91. The two of them both have more hair than him, and he likes being with old people with hair.
I also like the fact that those guys have worked forever and still are curmudgeons and regularly make fun of each other. It makes me think that one day, you and I will still be doing this show when we are 91 and 98. Frank is a lot older than I am.Control the controllables. Do the things you can do and pay attention. Click To Tweet
The other piece of this was a couple of weeks ago. I was walking around with my wife. I’m in a bad mood. I don’t remember why. I was just being miserable. She goes to me, “You are going to be awful when you are older. What do you think you will be like?” I’m like, “Worse.”
Every year, it gets a little worse. Things are sorer. The things that bother you that float around in your head get a little worse every year. You are a little farther from your prime. That’s true. You will be cranky when you are older. We thought about going to this meeting, and for whatever reason, Frank and I didn’t pull the string this 2022. We are going to go next 2023.
We went a couple of years ago, and it was an awesome experience. We’ve talked about this before. In 2023, we got to do it if these two are still kicking and alive. We are going to pull the string in that $1,000 flight and $700 for a Days Inn at Omaha. We will do it in 2023 because Charlie and Warren brought the thunder. They didn’t lose a step from when we saw them years ago.
They looked similar, and the good news is they’ve added more peanut brittle stage.
They are still crushing peanut brittle and still chugging Cherry Cokes. It’s fascinating longevity of those boys.
I believe the world is less fascinated by these two humans than us, so we should get to the point. We are going to look at seven clips of things they said that we thought we are interesting and have parallels. I had an invite to go to the annual meeting for a company called the Markel Corporation. It is structured very similarly to Berkshire Hathaway.
Berkshire Hathaway is mostly an insurance company and uses its float, which is the money they collect before they have to pay out a settlement and use it to invest. That’s what Berkshire does very well. With the company that I went to, what they do is the exact same thing. They buy Richmond-centric businesses because they are a Richmond-based company but it’s similar.
What was fascinating about it is I was sitting next to somebody who works in risk and casualty for Markel, which is one of their insurance divisions. She runs the division very smartly. She asked me, “Why do you pay attention to the Berkshire annual meeting? Why do you do it?” I was like, “I read the Apple annual review. I read the Google annual review. I have been doing these things for years because it makes me smarter. Not only does it makes me smarter. It makes me connect the dots.”
I started reading The Wall Street Journal when I was in my twenties. I would always ask myself, “Where the hell is the sports page?” What you realize when you read the journal or these things year-over-year is that life starts to have a sequence of events that connect the dots. She asked it in a way that my wife would ask a question, and I almost got irritated with the way it was asked like, “I spend two hours a day reading.” I was like, “What do you read?”
She reads annual reports and things about other businesses. We mostly talk about business and career. The reason we are going to talk about this in this episode that we think it’s relevant is here are seven bullet points about where the economy is now based on two smart people. We are going to take it down to the two very, much less smart people on how this synthesizes and make it into our businesses. Ian works in his selling car alarms and does coaching. I do real estate. These things permeate from the top-down, and I thought the conversation was interesting.You can only have so many of those bounces and keep betting on the future where you just keep printing more money until someone's got to pay the bill at some point. Click To Tweet
In general, Warren and Charlie are very nervous. It says, “Negative is I’ve seen Charlie Munger in a meeting in a long time, probably back to before the real estate bubble, he is incredibly nervous.” These two are incredibly conservative guys. That’s how they have been as successful as they do. They wait until everyone panics and the market burns for them to start buying.
These guys aren’t the rah-rah everyone would run out and buy all the time. They are very patient. They build up lots of cash but the boys are incredibly nervous. Specifically, Charlie is incredibly nervous about the way the United States has handled our Fed policy and printing of money. This is a clip of him talking a little bit about what we’ve gotten ourselves into.
On Printing Money
“When you print money on the scale, modern nations are printing it, Japan, the United States, Europe, etc., we are getting into new territory in terms of size. There’s never anything quite like what we are doing now. We do know, from what’s happened in other nations, that if you try and print too much money, it eventually causes terrible trouble. We are closer to terrible trouble than we have been in the past but it may still be a long way off. I certainly hope so. When Volcker, after the ’70s, took the prime rate to 20% and the government was paying 15% on his government bonds, that was a horrible recession.”
“It lasted a long time and caught a lot of agonies. I certainly hope we are not going there again. The conditions that allowed Volcker to do that without interference from the politicians were very unusual. In 2020 hindsight, it was a good thing that he did it. I would not predict that our modern politicians will be as willing to permit a new Volcker to get that tough with the economy and bring on that kind of a recession. The new troubles are likely to be different from the old troubles. You may wish you had Volcker-style recessions instead of what you are going to get. The troubles that come to us could be worse than what Volcker was dealing with and harder to fix.”
In part of it, you can read Charlie is terrified of what we’ve done. He’s comparing us to Latin America, not good hyperinflation, people rioting, and governments overthrown. He’s talking about Plato and the fall of Greece. He is saying that the odds of us pulling off what Volcker pulled off are not very good in the nowadays political climate and that we could end up wishing for a Volcker recession. Anyone that was around in the early ’80s, you and I were just kids but our parents would tell you that was a brutal economy during the late ’70s and early ’80s.
It was a long period of nothing. Stagflation was brutal on people. My dad lost his job. I’m sure your dad was struggling to find work. It was tough, and their costs were going up at the same time. On one side, he can be so negative. On the other side, he’s like, “What the hell can you do about it over time you buy when it’s low, and you try to find your opportunities?”
Both of these guys are good at warning you but also saying you can’t do anything about it other than sticking to it and being resilient as an investor. I always find that fascinating that they never leave any soundbite completely negative. They always talk about like, “Come back to Costco. Costco might be overpriced now, but after over 30 years, I love it at this price. I’m going to own it still.” He settles back in. It’s always fascinating to me.
There were a couple of things. When you mentioned Plato and the fall of Greece, he was nine years old when that happened. He still remembers that. He has a couple of quotes in here that are great. One of them is, “I want to swim as well as I can against the tides. I am not trying to predict the tides.” To Ian’s point about Costco, what they do is the bylaw. He talks about Volcker and the ’80s. If you watch this entire video, he talks about huge problems that arise with massive inflation. Massive inflation is your populace not being able to afford to live.
People do irrational shit when you can’t live or are afraid they can’t afford to live, “I can’t afford to feed my family.” We are not farmers anymore. We go to grocery stores. Hundred years ago, Germany was a very advanced society. The populace did not think they could afford to pay their grocery bill and feed their families. What happened was there was a populace candidate, and that populace candidate was Hitler. The populace candidate was like, “Germany first, screw everybody else.”
That’s a message that sells. What Charlie goes into with this is these are the things that will happen but to Ian’s point, and what Charlie says at the end is, “Japan went through this, and they are okay, so buy more Costco.” What you have to pay attention to is Hitler could rise in our country. Something could happen, so be mindful of it. We also can’t be scared and afraid of it. We are not opportunists on what is in front of us. That’s what these guys do incredibly well. There’s another clip in this that he’s great.Storytelling is such an underappreciated skill of famous business folks. Click To Tweet
He says, “The Munger family is basically invested in four things.” He goes into and through them. Costco is one of them, cash is another, Berkshire is another, and a newspaper. The other one is commercial real estate. He goes, “I don’t know how to pick twenty things but everybody in my family should be pretty happy that we picked four good ones.” My takeaway is to control the controllable, do the things you can do and pay attention to, and be opportunistic when the opportunity presents itself so you can protect yourself and your family.
When he’s invoking Japan, Latin America, and some of these things like the early ’80s and ’70s in America, what’s important for me is that we are just starting. Japan went through 30 years of nothing. They are around but their economy did nothing for 30 years for printing all that.
My oldest son was born, and Ian told me how tiring parenting is. I called Ian on the third day. I’m like, “I’m not very tired.” Ian just laughed. He had a 9 and a 7-year-old at the time. He’s like, “Buddy, the tired is coming.” What we could be facing is we have this euphoric afterbirth excitement. It’s like, “We all got the cash. We are prepped. We are ready to go.”
Nobody tells me they are nervous about the economy. I’m nervous as fuck because we don’t know what we are going through. Someone’s like, “Isn’t that too much cash to have on hand?” I’m like, “I don’t want to almost not drown. If the tides come up, I want to come to my needs.” You never know what you are getting into. These guys who are incredibly wise sages are telling us they don’t know either, and it could be pretty bad.
I’m in buckle-up mode. People have been saying forever that we are in the 7th or 8th inning of this upturn. I think we are in the first inning of something different. That doesn’t mean that we can’t make money, and you can’t be smart and outperform people. How I made a lot of money in ’08, 09, ’10, and ’11, I still made money. I still found things to do but this is a new game. I don’t know if you feel as strongly about it but I feel like we are entering something different where we are not playing the game of 2010 to 2021.
I feel like ’22 is like, “That game is over. It was a great game. We won.” Now, we are in a new game. It’s different rules. It’s different pitchers on the mound. The slate has been wiped clean. Maybe it’s even worse. Maybe it’s the first inning, and we gave up 6 or 7 runs real fast. That doesn’t necessarily mean we are going to come in the bottom of the inning and get five of our own.
For ten years, every time there has been a downturn, it has been brief and immediately an upsurge afterward, even COVID. The scariest four months of the next quarter, the stocks are off, cryptos ripped in, and real estate got hot. You can only have so many of those bounces and keep betting on the future where you keep printing more money until someone has got to pay the bill at some point.
What happened in the last economic cycle was September 11th happened in the middle of it. When September 11th happened, what happened in English was that we were due to enter into a recession. We had one-quarter of negative growth. What happened was on September 11th, the government came in and printed money. We ended up having a 6 or 7-year run from that moment forward. What happened was the financial mess of 2008 through 2012. House prices were down from ’05 to about ’12 before they started to come up again.
What happened this time is we were 10 to 11 years into an incredible cycle, and then COVID happened. The government overreacted. Instead of planes flying into a building, we have this mysterious cold that nobody knows how to deal with. What the government did is they quarantine and print. We are in a similar cycle where we probably should have an adjustment. Hopefully, it would have been softer but it’s most likely, going to be harder. What I will leave you with is a soundbite. When my parents were in town, I was talking to my mom. She would ask me what the market was.
My dad asked the question, and I answered, “I’m nervous.” My mom was like, “You will be fine. You will get through it.” I’m like, “I’m not going to jump off a bridge. I will make it through,” but at what cost? How much will I sleep? How much time will I see my kids? What will my company look like on the other side of it? How fat will I get? When I get stressed, I get fat.It’s the little things that can just sneak up on you that make a major difference. Click To Tweet
“How many stress pounds will I put on worrying about my investments, assets, and net worth?”
What happened to me for four months during COVID is I hunkered down. I told my wife, “You raise the kids, and I’m going to make sure we don’t go broke.” It turned out to be good but this is the moment we are at. We won’t know where we are at this very moment until time has passed but there’s something here.
This sets up our whole show, so it’s worth staying up for a second. It’s animal spirits. It’s easy for a collective group of people to get very excited and overly eager to acquire things, buy things, invest, and spend. It happens even faster when the animal spirits turn and get nervous, and people get scared. In everything that I do, I’m worried about the overall sentiment. We’ve got to raise money now for keeps. Months ago, venture capitalists couldn’t throw money at tech startups fast enough.
Now, there’s still money to be spent. What are the terms look like? They are not going to be the same terms they were months ago. The expectations have ratcheted up because they are getting burned on many other things. It’s got this pin action. Inflation and the stock market drop and are like the Kingpin. It’s got this pin action that ripples through the economy, and I see Joe Biden is tweeting, “Look at unemployment. Look at all the jobs we’ve created.” That’s such a lagging indicator.
That’s maybe the back row of bowling pins that get hit, which is employment because people get nervous. They can’t raise money. They can’t get capital. That capital was spending money on hiring people and on growth. That stops, and suddenly, unemployment starts drifting the other way. Claiming victory on employment now is a pretty tenuous time to do it.
It’s the reason why we were talking about Buffett and Munger. We are not doing a breakdown of Obama, Trump or Biden and their presidential speeches. Something I trust as an indicator more than I trust our president is sending out masks years after the pandemic started to everyone in America. We don’t figure out how to get a mask but we need you to send this one, which I thought was the most ridiculous thing. I played golf on Monday with an attorney and his corporate counsel for Caterpillar Finance.
Caterpillar Finance is the finance company behind Caterpillar. Whenever you see a lot of construction, you see yellow earthmovers. They are Caterpillar. What he said is, “Sales are down, and foreclosures are up. It’s usually a pretty early indicator of what’s coming in the market, and it’s already happening.” The reason we talk about this stuff is that if you parse the information together, history leaves clues. These guys have seen more history than us, and we think it affects multiple things. As a business owner, I want to be ahead. We don’t need to be 3 or 4 innings ahead. If we are a mover ahead, we can outpace the market, and that’s enough.
Our Fed has printed record amounts of money for a decade and super spiked in the last couple of years. That’s what’s got them nervous. The CPI came out. The print was 8.3%. That’s nuts. That’s the highest in 30 some years. When you look at some of that, the ramifications and inflation Warren Buffett here is going to talk about what inflation does to any investor in the country and any American.
“The inflation swindles the bond investor too. It’s when there was a person who kept their cash under their mattress and swindles almost everybody. The problem is if you have a business that doesn’t take any capital and, let’s say the dollar depreciates to 90% or something, things cost ten times as much. If it doesn’t take any capital, you can charge ten times as much, and you’ve kept your relative position. Most businesses take some capital. If our utility business, and say that the dollar worth 1/10th, some years, hence from now, we have to have ten times the capital investment.”
“We get paid on return on that but we have forced capital investment and essentially keep them in the same place. I wrote an article related to that. I will tell you one very famous story, which you will all sympathize with. I wrote that story for Fortune. When I finished it, it was about 7,000 words. Fortune didn’t like publishing 7,000 words. I had my friend, Carol Loomis, explain that to me, knowing that I would pay more attention to her than anybody else. Being stubborn and male, I said, ‘Every word is precious. They can either run it or not.'”Invest in yourself, invest in training, invest in your network, figure out ways to be better at what you do so that you can out earn the expenses that are creeping up all around you. Click To Tweet
“They sent an editor, a very nice guy out of Oklahoma. This guy explained to me that it wasn’t right to use that many words. I said, ‘That’s fine. If you don’t do it all, buy this someplace else.’ A disgusting behavior on my part. It was beginning to bother me a little, so I sent it to my friend, Meg Greenfield. Meg was a great editor at the Washington Post.”
“We are very good friends. She was a wonderful woman. Meg was tough as nails with most writers but she was nice. She didn’t want her to hurt me too much. I said, ‘Meg, what do you think?’ She said, ‘Warren, you don’t have to tell everything you know in this article.’ It made the point. I wrote that article shorter. I would say more or less the same thing. If you could have a totally stable unit of monetary use for the next 100 years, it would be better for business and investors in general.”
What I love about Warren and what makes him and Charlie so memorable and loved by people is he’s smart enough to tell you the scientific reason behind most things. Instead, he almost always chooses some story from his life that makes you think about it differently. Storytelling is such an underappreciated skill of famous business folks. A lot of them get to that place because they are good storytellers. They help people understand. Steve Jobs used to do it all the time when he would get on stage. You would use stories to relate to what he was trying to do to change the world. Buffett was great at that.
The whole concept of swindling and how inflation swindles everyone is such a silent thing. You are not always counting how much you pay for your groceries every time but it creeps on you over time and to folks that groceries are a big part of their bill every month, that’s brutal. Gas is brutal when it doubles in costs. Let’s take keep in our car alarm company. We based our $199 price on a certain bill of materials. We had reliable estimates and costs. We acquired those components.
We can make our first devices now with those components we bought but if we had to go out and buy all of them again now, the $199 price doesn’t work long-term. What we’ve got to figure out is, “Does that inflation calm down? Does it come back down, the components we have to buy for that? If it’s going to come down, we don’t need to react immediately but we are still a new brand. Do we have to raise the price to $299?” We are grappling with this because to own our device, and you have to pay an annual fee. It’s a cellular fee for connectivity, all of those things.
For us, the lifetime revenue of a customer is much higher than the revenue of the device, which makes us a little bit like a software as a service company. We have that renewal but it’s hitting us 100%. We are looking at our bill of materials saying, “Damn, it is getting expensive to make this thing. How many of these can we make at this cost and this price? How long does this inflated world of input costs last?”
There’s the story of the frog who jumps into the boiling water and jumps out. There’s a story of the frog who’s in a cool tepid pot of water, and the temperature of the water continues to rise. He doesn’t jump out because the boils around, and it cooks. When I was preparing for this episode, I watched a different video on inflation. What is talked about is if you could buy 100 meatballs subs, which Ian and I both love meatball subs and will probably work our way through a significant number of those 100 meatballs subs.
The point of this is if you have enough money through investments or whatever to buy 100 meatball sandwiches, and then there’s inflation and other stuff. If that investment has gone up but only buys you 80 meatball subs, you have been negatively impacted by inflation. If that has gone off to buy you 150 meatball subs at some period, then you’ve won over that, why wages and inflation matter so much is because most people’s salaries don’t rise with the cost. There is a fascinating thing that I saw an article on sent through the New York Times. It says, “What percentage of inflation you have factored in.”
I ended up at under 8%. It asks things like, “How many miles do you drive a week?” I live 1 mile from home, so I don’t drive that much. “Did you buy a car?” I bought one during COVID, so I didn’t affect it. I went and changed a bunch of these answers. I put that I was not as fiscally prudent. I was driving a bad car that I needed to replace and drove for miles. The net effect on me went from 7.9% to over 15%. Those are little things that can sneak up on you that make a major difference. If you would look at it as meatball subs or family groceries, what you can afford goes down, which causes stress and strain.
That’s ridiculous too. You don’t look at your cable bill every month and see that there was a $2 fee added. You don’t look at your cell phone bill. You don’t look at all of these input costs you regularly have that are creeping up all over the place. Maybe you are celebrating that you got a 5% raise. You are poorer this 2022. That didn’t do enough to overcome what was happening. With all of those things, you keep adding and stacking that up. The problem that you run into is enough inflation hurts consumers enough that they stop spending on other things.Inflation is brutal, but go figure out how to earn money. Click To Tweet
People usually say, “Buy companies that make the groceries. Buy consumer staples, things that people need.” The truth is, in the hierarchy of needs, you are going to eat first. That might mean you are going to probably buy one last pair of wireless headphones or whatever it might be. On the margin, what gets cut off when people get focused on the necessities like gas, my rent was way up this 2023, and you can blame Frank for that. He’s taken him up as high as he can. You look at what you will cut off.
I’m going to use a weird example here. Inflation and worrying about inflation and groceries is defense. The best defender in the NBA makes about 50% of the best score. All of the best scores in the NBA are your best earners. Giannis and Curry make the most money. They play defense. If you are reading this and are like, “How do I not let things affect me?” It didn’t affect Ian. He immediately went from groceries to wireless headphones. That’s a big jump. He’s got a big cushion. If you are in this period in your life where you are like, “I don’t want this shit to affect me,” learn how to earn. Be a scorer.
This is a great transition into Warren’s. We will get to that now.
On Investing On Yourself
“What would your advice be to people who are investing? What should they change? What should they do?”
“Inflation, Kane said many years ago, is an invisible tax that only one man in a million understands. It’s a tax on people that had faith in the currency that the government has issued. The best investment against inflation is to improve your own earning power and your talents. Very few people maximize their talents. If you increase your talents, they can’t tax it while you are doing it. They can’t take it away from you. If you will become more useful in your activities, your profession, doctor, lawyer or whatever it may be, that is the best protection against a currency that might decline at a rapid rate.”
“Very few people invest enough in themselves.” I love that quote. I love that he talks about how most people are not reaching their earnings potential. It’s the best way to combat inflation if your costs are going up. He’s looking at individuals like you and me, anyone who’s reading this, your careers like look at yourself as a P&L, a Profit and Loss. Your expenses are going up. You can’t do a lot about that. You can try to spend a little less but what you have to spend is going up. What are you doing to increase your revenue?
Your bottom line is a problem. What are you doing about the top line? How do you get more business? How do you get more revenue? How do you bring in more to compensate for that? His advice is, “Invest in yourself, training, and your network.” Figure out ways to be better at what you do so that you can out-earn the expenses that are creeping up all around you.
One of the things I hear is a lot of instances from people who are employees and owners of businesses do this inherently but employees are like, “I can’t afford it. I can’t spend money on this.” The question that Warren was asking you to rephrase is, “How can you not?” Doing the little things that you do early on your dime can have massive impacts. I will tell a quick story. When I was 25 years old, in 2000, I went and saw Tony Robbins speak. Ryan Holmes paid to send me there. We are a whole group of twenty people from our division. I thought he was fascinating. It was an interesting thing called Results 2000.
He had Norman Schwarzkopf and a Washington football player. Different people were there. Trump was the last speaker who flew in late. It’s a whole thing but it was interesting. Years later, as time went by, I read one of his books. I was like, “I’m going to go to one of his events.” I went to one of his events, which cost me several thousand dollars. While I was at his event, he sold a package of three more events that was $10,000. I was 28. It was a ton of money. We did all kinds of stuff. He went through this exercise where you had to write a letter to yourself.
That letter was, “What do you really want? What are you living without, and are you willing to change it?” There were three things in there I wanted to do. “I wasn’t happy in my relationship,” which I have gone off. “I wasn’t happy with my job, and I wanted to own real estate.” Those were the three things that I wrote about. You had to post-date it and show it up in the mail a year later. I still remember that letter. I still have that letter that costs me $15,000. It’s made me millions because I took the time to invest in myself.There are people in this world who are savers and are earners. Click To Tweet
As I said, business owners do this inherently. If you are doing these things, is it reading? Is it finding other people? Ian, I can talk to you and tell you stories about the books we’ve read or the things we’ve spent money on. That’s what Warren says, “Become indefensible as a business person, be smarter, and be someone who is unfirable in a recession.” Those are the things that add the earning power and will take you to the next level.
I love that story, and it reminds me of the last time we had a major recession was during the housing downturn when it got at one of its ugliest points. Our CEO sent out an email saying, “Bonuses are off.” It was late in the year. I had my plan in the bag, so this email was a bombshell to me and everyone who worked for me because it was a six-figure.
It was during a time when all of our investments and hopes were down. The housing market looked like it was going to be a disaster for years. I was counting on that six-figure bonus on a number of different fronts. It was incredibly deflating. It was hard not to feel miserable. Do you remember getting that email?
I remember getting the email. I ran 1 of the 2 divisions in the company that made this plan two years in a row. I remember it being exactly like you. I was in my low 30s. That much money was a significant amount of money then. It was a ton of money.
It was brutal. I remember that I talked to our president. I was very close to him and dragging my ass. I was feeling bad for myself. My condo price was down 20% and dropping like a rock. I thought it was going to zero. We were laying off a lot of people. I’m trying to live on a salary and an expensive place with a big mortgage payment. He said, “Everything you are complaining about is not in your control. If you keep feeling bad for yourself and don’t focus on what’s in your control, it can get a lot worse.”
What he was trying to say is, “If you don’t perform, you are going to lose your job. How bad is it going to be to make that mortgage payment if you are not here?” It woke me up. Some of the other regionals couldn’t wrap their hands around it. It was, “Who moved my cheese?” They couldn’t figure it out. I just got focused. I thought, “What’s in my control? I’m going to run the best region in the company. I’m going to perform like crazy with the people I have and what I’m asked to do. I’m going to be the best at it.”
A year and a half later, we went from 6 or 7 regions to 4. One of those regions got envelopes into mine. Now I had twice the size. I had twice the profit center. In doing so, I was promoted and given stock options at a time when our stock price had dropped in half. Our peak at the time had been $700 or $900 stock price.
I was given options down in the $500 level. Those stock options ended up becoming worth millions of dollars to me because I focused on earning. I focused on being better. I focused on what I could control, which was to be a better manager, be better at my job, learn, study every book I could, and put in more hours. It’s because of that, I ended up profiting greatly from a big downturn. A lot of Warren’s saying is, “Inflation is brutal, but figure out how to earn more money.”
It’s wonderful advice. There are people in this world who are savers. Ian and I are earners. We might be speaking something with you that makes no sense, and that’s fine. What we like is a strong offense. The team that scores the most points has never lost. They don’t always win the championship but they don’t lose the game. Those are things that you have to be mindful of.
On Giving Your Investments Time
Outside of earning, what else can you do? Where would you be investing? Warren’s got pretty good advice on what to do in any recession.It’s not the short-term game. It’s giving the thing time. Click To Tweet
“Let’s talk a little bit about the fact that the market is down almost 800 points. Was it a concern for you?”
“That’s good for us. We are a net buyer of stocks over time. Like being a net buyer of food, I expect to buy food for the rest of my life. I hope that food goes down in price tomorrow. When stocks are down, we are going to be buying on balance. Who wouldn’t rather buy a lower price than a higher price? People are strange about that. Most of your audience are savers. That means they will beat up buyers, and they should want the stock market to go down. They should want to buy the lower price but they got that feeling that they feel better when stocks are going up.”
“If you worry about corrections, you shouldn’t own stocks. If you can’t take your stock going, it will be going to go down sometime if you own a stock. Why worry about it? The point is to buy something you like, at a price you like, and then hold it for twenty years. You should not look at it day-to-day. If you bought an apartment house, you wouldn’t get a quote on it every day, every week or every month. It’s a terrible mistake to think of stocks as something that bob up and down and that you should pay attention to those bobs up and down.”
“Every day, you have thousands of the major American corporations offering you at a price that changes daily. You don’t have to make any decisions. Nothing is forced upon you. There are no called strikes in the business. The pitcher stands there and throws balls at you. If you are playing real baseball and it’s between the knees and the shoulders, you either swing or get a strike call on you. If you get too many calls on you, you are out.”
“In the securities business, you sit there, and they throw a US Steel at $25, throw General Motors at $68, and you don’t have to swing at any of them. They may be wonderful pitches to swing at but if you don’t know enough, you don’t have to swing. You can sit there and watch thousands of pitches. Finally, you get one right where you want it, something that you understand, and then you swing.”
“You might not swing for six months.”
“It might not swing for two years.”
“Isn’t that boring?”
“It would bore most people. Certainly, boredom is a problem with most professional money managers.”
There is so much good unpacked on that.Boredom is the enemy of the typical money manager. They just can’t stand to not be doing something. Click To Tweet
I love that whole clip but there’s something that I thought was hysterical from the start. Do you know the difference between a bad haircut and a good haircut?
That’s exactly what Warren’s talking about. It’s not a short-term game. It’s, give the thing time. It’s the best deal I have had for years. I’m clearly not as old as Warren but things I’ve had at 10 to 15 years have done very well. Things that he has been on for 60 to 80 years have done incredibly well. Go ahead and set us up here.
I love what he says, “I’m a net buyer of food. I’m going to buy food for the rest of my life, so I get excited when the prices are low. I am a net buyer of stocks. When the stocks are low, I’m more excited than when they are high because I can do something. I can get after it.” He says something that I tend to struggle with.
Let’s say I sell some real estate or get a check from a corporate client. I get a $50,000 check, got this money, and it comes to me. I hate having cash sitting in an account. I feel the need to like, “What’s on sale? What can I buy? What can I invest in? How do I put it to work in a smart way?” He says something that boredom is the enemy of the typical money manager. They can’t stand not to be doing something. The baseball analogy works for me well.
It’s like, “You don’t have to swing.” You can just sit there and watch him throw strike after strike and not cut at it if you don’t feel like it’s your pitch. Whereas in baseball, you got to cut because the umpire will call you out for not swinging. There’s no penalty for not doing anything unless you feel it’s a good investment at the time.
What is critical here is this. Most people are not Warren Buffett, and we weren’t in a position years ago to be where we are now to be incredibly patient. Most people need to earn. If you need to earn, you feel the need and the desire to swing because you need to earn. Several of these videos are probably from the ’70s onward. He started twenty years before that.
His need to earn period was gone. He was in a position of luxury where he only swung when he thought he must because he had good strong fundamentals and lived below his means. These are things that take insane discipline that is being forsaken here for speed but are critical. You need to be in a position where you can be super prudent and patient. The fund managers that he makes fun of are people who are on fees.
They have to get in and out or they don’t make money. You have to understand the pressures and where you are. You don’t just arrive here. You get here with a lot of intent and purpose. To be able to watch things go by and not swing is a position of luxury that, in his case, was built over decades, utilizing patience and long-term hold strategy but it turned into something incredible.
I love how he says, “Who wouldn’t rather buy at a lower price than a higher price?” That’s pragmatic but it’s not the way people work because the problem is they see that their balance in their account went down. They are thinking, “I lost money.” Let’s take my father-in-law’s trucking business. It’s not public. It’s a small privately-owned company. At any given year, someone could value his business at a different dollar amount.Be a net buyer. Chill and hold. Click To Tweet
Someone could value it at $5 million one year, $10 million the next, and in heady times, they might offer them $15 million because it’s strategic, they want the land, and it fits in with their business. Every different buyer has a different opinion of what his business is worth. He has his own opinion. If every person came around and said, “Your company is only worth this or that,” that doesn’t mean he would sell and panic. He knows what his business is doing. He knows what this work is long-term and what it can generate for him.
It’s the same with publicly-traded stocks and real estate. Someone who knows the market knows long-term what income they could generate from a property like that. You own a lot of real estates that you don’t have intentions of selling for a long time where people pay their rents. Let’s say we go through a downturn. Some of your properties, if you tried to sell them, would be down 30% to 40% from what they were in 2021 if you tried to sell it but you don’t care because people are still paying the rent. You are still collecting cash. Over twenty years, it’s going to be worth a hell of a lot more than it was in ’21.
The other part of it is you have to take what the market gives you. If the market gave us low-interest rates, that’s when I refinance. Rents would have to go down, and prices might go down 40% but I don’t care as long as the rents don’t go down 40%. In a really bad recession, the taxes might drop a little bit but my mortgage rate is fixed. I have a fixed cost, and it’s a lower interest rate than you can get currently. I’m protected.
He said something else that is incredible. He’s not critical all that often. Maybe he’s getting old and getting a little curmudgeon, which I like even more. “If you are going to sell when things go down, you are not fit enough to own stocks.” That was his quote. It’s the truth. I have a friend that’s a real estate guy. He bought a bunch of stuff in 2006, 2007, and 2008. It took more than ten years for those to be worth more than he paid for them but he didn’t sell any of them. He collected rent and came on the other side incredibly strong because he had incredible discipline.
The last thing that came out of it that I liked, and you started by talking about it, was that if you hold an investment long enough, the risk goes way down. If I buy a property, knowing I need the cashback in twelve months, that is an incredibly risky and borderline asinine thing to do. That’s 2005 flippers, “I’m going to buy it and hope the price is higher in six months and flip it.” That is risky. If I buy a property and look at what the debt would be, what my payments would be, and what I believe the rent could be, and I plan to hold it for twenty years, I would argue that there’s no risk in that at all.
Even if you sell it for the same price one day, you will have made all your money back in rent from what you put into it at some point if it’s hitting the goals that you have. Everyone has different goals with their real estate. I love the way he talks about that. You think about it that way, “Why do I want to own this piece of property in 10 to 20 years? Why do I want to own this company?” I always talk about the companies I love. Frankie, over the last months, as the market has been dropping, I’m buying more Google and Microsoft. I love Airbnb. I think in the long-term, it’s going to do well.
I’m buying more Amazon, even though Amazon probably has more inflationary pressure than all of them. All I can think about is that they generate a ton of free cash. They are going to keep building this mountain of cash over the next 5 to 10 years. What I want to own those 3 companies in 5 or 10 years, the answer keeps being yes. I’ve owned more NVR. It’s a company I believe in.
In a period like this, it’s scary but you have to think long-term. If you are going to buy, you are acquiring more of a very solid corporation, and you are more of an owner of a company that can generate profits and cash. Are you buying a lot of companies that are making a profit yet now? No, this is not the market to do that because who knows if they will make it? The ones that are stacking cash and profits, I’m with Warren. Be a net buyer, chill, and hold. In ten years, you will be like, “I’m glad I bought it.”
The stock market is a lead indicator. My industry is a lag indicator. We talked about employment numbers dropping after a company starts feeling the pressure. Real estate hasn’t started to have those moments but I’m ready when they do. I have to be very fiscally prudent to get to that point. What I’m waiting for is that pullback like, “When will there be a pullback? When will something come about?”
I’ve got my eyes on stuff. I know what those numbers are. Maybe I don’t time it exactly perfectly. I don’t grab the falling knife perfectly but if I get it at a discount and ride it into the future for 1, 2, 3 or 5 decades, it doesn’t matter if you’ve got it exactly right. There are other factors there. You have to understand what your asset class is and realize a pullback is a wonderful opportunity.
I hope that little episode gives you some perspective and helps you relax a little bit with your investments and everything you’ve got going on in your career facing this market. It’s maybe the start of something big. It might be a continuation of something else we were feeling but we will know more in about five years. We had a great time digging into some things that the oracle had to say about this.
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