LMSM 11 | Starting Early

In this episode, Frank and Ian can hardly contain their man-crush for legendary investor and CEO, Warren Buffett. Only the truly dedicated will invest $5,000 and an entire weekend in Omaha to listen to Warren opine for six hours at the “Woodstock for investors.” We talk about the day we spent at the Berkshire Hathaway annual meeting and all of the other lessons we’ve learned from our hero.

In this episode:
  • Ian gets shamed by a sweet, but very rich, old lady in Omaha
  • How your earliest jobs can form who you become in your career
  • It has never been easier to start a side gig
  • No one will invest in you without a track record or skin in the game
  • Patience is an underrated strategy for building wealth
  • Why Warren is either lavish in his praise or dead silent – a lesson in motivation
  • You cannot build a career when you are overly focused on your image
  • “Lose money for the firm and I will be understanding. Lose one shred of our reputation, and I will be ruthless.”
  • Buffett’s approach to delegation is next level
  • Why Buffett does not set limits on compensation
  • How to raise private capital like Warren Buffett

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Listen to the podcast here:

What Warren Buffett Taught Us About Business

Lesson From The Oracle Of Omaha

We are talking about our favorite person on the planet. Frank and I have a lot of common heroes, but it would be hard to find one that we like more than Warren Buffett. Is that probably accurate?

Behind Dr. Emmett Brown, Warren Buffett is my number one.

Frank and I used to go to Las Vegas on a regular basis. At some point, we had kids. All of a sudden one year, instead of going to Las Vegas, we decided to go to Omaha to venture out, to see Warren Buffett’s Berkshire Hathaway Annual Meeting, which is quite a show. It’s fascinating. That weekend was incredible, but to make this happen is absolute misery. This was in 2018. We said, “We’re going to do this every year. This is great.” Once you do it, you realize no one flies to Omaha except for one month of the year and everyone knows that. To get a flight into Omaha is over $1,000. We were there for 36 hours. We spent over $1,000 on a crappy flight to get in there. There are no hotels anywhere near this meeting. The place we stayed at was a motel that was 45 minutes away. You had to get a cab driver because I don’t think Uber was there yet in Omaha. They probably still aren’t.

I think I had to fly into Kansas City. I had a limo pick me up and drive me because coming from Richmond, it was impossible to get there. I’ve flown to Europe for less than I have flown to Omaha.

It was expensive this weekend in Omaha. It was expensive given the ticket is free to go to the actual event because I own shares of Berkshire. You get these free tickets that you’ve got to sign up for to show up. You end up spending thousands of dollars to go there. It’s all in the flight, hotel and traveling back. Everyone jacks everything 5x to 10x what you have to pay for. Frank and I Googled around for the nicest steakhouse in Omaha and I found a real beaut. We show up and there’s a miniature golf course with the giant, big, ugly papier-mache cow on top of it. I’m thinking, “It’s Omaha.” There’s not a better place in the country to get a cut of meat and get some steak.

Ian and I like to drink overpriced wine. It was hard to find some that you can’t buy at Albertsons on a menu. Every place we went it said, “This is Warren Buffett’s favorite.” Everything was highlighted like, “When Warren comes here, he gets this.” He eats like a seven-year-old. We do not emulate his dietary habits.

Every single steakhouse in Omaha advertises itself as Warren Buffett’s favorite steakhouse. They like to tell you the last time he was there what he likes to order. Yet you go to every one of these steakhouses and it’s like eating in Ponderosa. It’s not a nice steakhouse. Maybe that is Warren Buffett’s style.

It’s a slightly downgraded version of Ponderosa. You can imagine something that maybe not quite as nice. Ponderosa has got some good real steak in the world. These are not quite as nice.

You have to get up early. We hadn’t slept anyway. We get in and eat at a crappy steakhouse. We set our alarms for 4:30 or 5:00 in the morning. You had to call a cab the night before because you can’t just call a cab in the morning. No one will come out to this motel where we were staying, which was nowhere near the meeting. We get picked up, drive into Omaha, and there’s already a line of thousands of people. It’s like a rock concert all the way down the street because the way it’s set up with the tickets, Warren Buffett wants it to be classless.

LMSM 11 | Starting Early

Starting Early: If you want to become an expert at something, start doing it earlier than other people are willing to start.

 

He doesn’t want you to be able to pay for a better seat. Every ticket is identical. There are no box seats or front row Joe. There are no special backseat passes because he knows the kind of people that follow him would pay up for all of that, and it would stick all the rest of the people in the back. The people who get the front row seats, the great seats are the ones that show up at 4:00 in the morning and start putting chairs out there. We got over there at 5:00 or 5:30 and we were already in the cheap seats like nosebleeds, way down the block, just to get over there.

We’re in the second ball. Ian and I looked at each other and we’re like, “Second ball? Let’s head right there.”

We wanted to be respectful to the Oracle of Omaha so we wore sports jackets and nice button-down shirts. There were two segments of people. There were people doing that, which were normally like low-level analysts at Wall Street firms that were there to take notes, and report back to someone more senior or dipshits like Frank and I. Everyone else had flip flops and tie-dyed shirts on like they were going to Lollapalooza.

The best thing was we were getting hazed by 80-year-olds. They would look at us in our sports coats, sitting in tier two. They’re like, “You guys are B-share guys.” To put this in perspective for you, an A-share of Berkshire Hathaway stock is $200,000 and B-share is a couple of thousands. These old people that are in flip-flops and Adidas from 1988 are going to look at us in our Brooks Brothers suits and our custom jackets and they’re like, “You guys are the cheap ones with the shitty shares.” They were hazing us. We got hazed by an 80-year-old woman.

She’s a little old grandma who’s like, “I’m owning the shares since 1976.” She’s clearly rich and wearing whatever the hell she wants. She’s making fun of me for being there with a notebook and having just purchased my shares and not being a millionaire like her yet. It was great.

The cool thing about this and what drew us to the event was we’ve always wanted to go. Ian and I are fanboys. We read all the books. We’ve read books about Buffett or Charlie Munger. We wanted to see it in person. It was a fun adventure. Let’s get into the meat of this. There’s a reason why people who are in business are big of Buffett because they call him The Oracle of Omaha for a reason. He’s real smart. He’s always ahead of the market, but his principles are simple. That’s what we like about him.

At one point, he was the richest man in the world. He’s since given a lot of that money away. He’s still top ten at any given time, still running a business in 1990 as a CEO with some of the same principles he was running when he was seventeen years old, when he started the thing. He does it right. For all of that money, for everything, he’s never around controversy. His businesses are rarely around controversy. He runs his business the right way for decade after decade and it’s profitable. Frank and I talked through this a little bit. We think we can narrow it down to six big things that a manager could learn and things that we’ve taken away from Warren.

For most people, you have to learn business somewhere and sometime. A lot of people that I’ve worked with that are successful, startup founders or people that have worked their way up the chain. If you ask them when their first job was and, “When did you start making money?” They’ll go back to they were 7, 8, 9 or 10 years old. They can tell you vividly about their business of buying and selling baseball cards or lemonade stand that they made big, or how they used to hawk candy during recess in elementary school for a markup knowing the demand would be higher when kids wanted it.

I used to sell Blow Pops and M&M’s.

Business is a sport you can play for your entire life. Click To Tweet

There’s a kid in my town who is always out on hot days on our trail where people are running selling bottled waters for $3. I respect the hustle. He made $100 a day out there hawking stuff. Buffett sold everything. He sold Coca-Colas and gums, but the big thing that he always talks about is he had a paper route. It’s very different now but back then, you could build a paper route into something bigger where you have almost employees that are handling certain things and you’re giving off. He expanded this paper route to one of the biggest in Omaha. He sold it to another kid once he got done with it and was ready to do other things.

He visited the New York Stock Exchange for the first time when he was ten. He bought his first stock when he was eleven. He can still talk about how he screwed up and sold the stock because he read a headline in the newspaper and it made them nervous. It dropped 20% and he sold it for a loss. That stock went on to triple overtime. He wasn’t confident enough in his own thesis and he fell for a headline. He can talk about those formative moments. Now at 90, how some of those things stayed with him for 80 years by buying those stocks. Like a lot of successful people, Buffett started very early. It gets right into the 10,000-hour things, if you want to become an expert at something, start doing it earlier than other people are willing to start.

Also, don’t stop.

The guy started a hedge fund at the age of seventeen, which is to me that’s nuts. He started it on borrowed money on private capital from family and friends. Frank, what were some of your earliest experiences that you can remember in business?

Ian looks at my dad as an entrepreneur. I look at my dad not as entrepreneurial but certainly a self-employed person.

He is a freelancer.

The entrepreneurial spirit is a little different, but he always worked for himself. As a little kid, when I was 3, 4 or 5 years old, my hero was my dad and granddad. I wanted to go to work with them whenever I could. My entire lineage is construction workers. I would go to construction sites with them when I was 4 or 5 years old. At first, I chased frogs and play in the playpens in the back. I always cherish lunch because we were Italian and there was always a hoagie sandwich at lunch and we would sit there, we would talk, and we would sit on paint buckets. That was always a blast.

The thing about it that was cool was I remember, you didn’t get to have the lunch experience if you didn’t do the work. If you didn’t show up, get in the van and be on time, you didn’t get to have that lunch. That lunch was something I cherished from 5 or 6 years old. I learned construction. I also learned that I was good at sales. I would stand in front of grocery stores and peddle candy bars when I was a little kid for my basketball team or baseball team. I learned early doing that I was fearless. I would knock on doors. I would ask people and I realized that not everybody did that. When I was coming out of college, I’d won every sales contest I’ve ever entered since I was a kid because I wasn’t afraid.

When I had a chance to do a job, I went to a company that trained me in sales. I was like, “I’m going to cross-train in sales. I know construction. They’re going to cross-train me in sales. I’m a great salesman.” I started to experiment with what I was good at as a young person. Because I did those experiments, when it was time to make big decisions in my life about where I wanted to work, where I want to put my career trajectory, I knew what my strengths were so I could be honest to those. I could find an opportunity that was best for me because I started early.

LMSM 11 | Starting Early

Starting Early: Build fundamental building blocks at an early age that leave clues long-term.

 

It’s funny you bring up the hawking candy as kids. That’s a rite of passage. THA, the Trend Hockey Association, my little league hockey. I started playing hockey at 4 or 5 years old. Even your first year in Mighty Mites, when you could barely skate, they were handing us kid boxes of M&Ms. Your dad would drop you off on one side of the block and pick you up on the other. I hated it at first. I hated knocking on doors and you could see the irritation on people’s faces. They’d have to reach into their wallet and buy some M&Ms. You had two products. It was regular or peanut M&Ms. I can remember the light bulb switching for me though.

I hated it and then I came back, and our coach was keeping score. These are all of my best friends. They’re on my little league hockey team. I come back and I’m middle of the pack. I thought I did okay, but it was like, “Mathews sold 27 regular and 42 peanuts.” One of the kids was up like at 100 and 100. I remember being like, “No. Coach, give me another box. I’m going back out. That’s embarrassing.” I didn’t have to. My time was done, but I went out and sold more M&Ms. I got the money and brought it back to the coach. I’m 6 or 7 and I’m already learning how to be competitive. That’s no different than when I was at GE and someone put my name up on a whiteboard underneath McCauley or one of my friends there. I was like, “No. I’m not losing to him. I’m going to make some more cold calls.”

What happens in most American boy’s lives is you fall in love with something. Most of us fall in love with sports, some with scouting. We were kids that fell in love with sports. Thankfully, we had enough brushes that usually came from sports. Our parents didn’t have a lot of money so you had to sell M&Ms to be able to go on travel teams. That’s how it all worked. Once you fall in love with sports, you watch SportsCenter as a kid. As you get older, you realize, “I can’t play sports anymore.” The competitive spirit that I love about sports is also in business. Buffett was competitive, but he was a strategic thinker. Ian and I were not as smart or strategic as he was, but we did fall in love with the hustle and winning.

Working within teams and being respectful of your coach.

The grind and doing it over and over again. That’s high school football. That’s baseball. That’s you and I hitting ground balls at night or being in the batting cage in the morning. What’s cool about it is if you fall in love with the business, it lasts a lot longer than the affiliation with sports. Your knees are going to be gone way before Warren Buffett at 90 can sit on the table, talk and wax poetic about business.

He still acquires a $10 billion business at the age of 90 because he’s experienced.

It starts with hawking candy as a little kid or with a paper route or little things. We talk a lot about interviewing people. When I interview someone, I want to hear a story of how you can connect the dots in your life. You can explain to me the foundational pieces that have led you to be in front of me. I want to see, if you’ve been able to do it enough, could you do it here? That’s what happens with Buffett with business. He started something at 7, and then at 11, 15, 17. At 90, he’s got thousands of these experiences by starting as a little person and doing those little things.

Paper routes are now mostly non-existent. Entrepreneurial kids aren’t doing paper routes. What are young kids doing now? YouTube channels. Can you monetize it? Running a lemonade stand? If you’re going to interview a 25-year-old and they had a newspaper route, that’s like trying to sell a steamship. It’s worthless. What are the things that young people are doing that you’re interviewing, that you’re seeing and saying, “What are the things that you guys are doing to hone those skills?” What are the 25-year-olds that you see doing?

It’s a lot easier now. We had to go hawk stuff door to door. If you wanted to sell something, you stood around by a grocery store outside like the Shriners people with the bells, or you went door to door and you sold it. To start a gig now is outrageous. My son has his own eBay account. He sells his old baseball bat sometimes. You could start selling things right away on eBay. You have a market immediately so you can buy. Business is nothing but speculation. You buy, you sell, you have raw costs. You can do anything. You could hawk anything. There’s Upwork, Fiverr, and places that are built to support freelancers who can go in and build a website for someone. If you have some skill that you’re okay at, you can get business. Look at the artist that drew our logo and our caricature for this show. He’s out in Kentucky somewhere. He saw our little thing. He responded to it. He posted some of his work and it was like, “That’s great.” What high school art student couldn’t do that? Any of them could.

No closing trick will help you if you've not been a person of integrity and hard work leading up to asking for money. Click To Tweet

What I think is important here that we want to talk about is it’s never too early to start, and it’s building blocks. If you’re trying to get a job or become a manager, talk about the things that you did as a young person. Think about how you got to where you’re sitting now, and connect the dots for people. If you are in the chair and you’re interviewing someone else, what did they do? Was it a YouTube channel? Was it a lawn mowing service? It’s going to be different depending on where you are in life? Did they wait tables? Whatever the story is, it doesn’t matter because everyone picks a different path. What’s critical is, did you get into it? Did you become great at it? Did it pivot you into something else? That’s what we’re trying to focus on now is starting to build those fundamental building blocks at an early age that leave clues long-term.

There are two things here that I love where you’re going and advice for people. If you’re a manager, don’t just focus on the professional career. That’s important. That’s going to be 60% or 70% of your interview. I love the question of, “What was your first job?” The second question I love is, “What was your crappiest job?” I love those two questions. They’re hilarious to me, but they show what kind of grind you’ve gone through. Those kinds of jobs like construction jobs and washing dishes in a restaurant, they tell you about someone’s character, their resilience, their ability to deal with customers.

I love waitress and waiter jobs because I can ask a bunch of questions like, “Tell me about the craziest customer you ever had. How did you handle it? How did you make them happy?” I love those kinds of questions because they tell me so much more about character than your internship at a law firm, making photocopies, and playing solitaire half the day because no one had anything for you to do. If you are interviewing for a job, don’t be afraid to bring some of those up because the person interviewing you is a manager or an owner. They hustled like you when they were younger, and they will see some of themselves in you. If you tell them about some crappy job you were willing to do to make some money, they will connect with you faster.

It’s always the unvarnished stuff that we don’t think is worthy of bringing up that builds connectivity and relatability. When someone says, “My first job was a busboy at fifteen.” I’m like, “You started a little too late.” “My first job was shoveling driveways when I was four and I loved it. I love being in the snow.” You tell stuff like that. Stories your parents have trumped up about how great you are at shoveling snow. Those are things that make you relatable and it’s fun. It gets the story started. Everything in business comes down to two things, competency and likeability. If you have those skills and you can build on them, and the person in the interview understands that, that is what propels it.

It’s hilarious that you said that. I’ll go to the next point after this. When you talked about shoveling snow, I have more experience in this area than you do growing up in Florida and me growing up in Michigan. I used to shovel snow a lot largely because I wanted to take slapshots at my garage. In Michigan, you’d always see the kids out shoveling snow because we wanted to get back to play hockey. Mrs. Dane was next door. She was a little old lady and at some point, she quit asking me because she knew I would come over and do it. Mrs. Dane was like, “Ian, would you mind doing mine?” It was like a little two-minute job. The snow in Michigan is 1.5 feet of snow. I’d be like, “Okay, Mrs. Dane. I’ll come to do it.” She always paid me with two Hershey bars. That’s what I got paid. For little chubby Ian Mathews at eight years old, it was a great payment. I was like, “I get a couple of chocolate bars out of this and then I can play hockey.”

We are going to talk about negotiating your pay and working for what you’re worth.

Number two, Warren Buffett started his hedge fund when he was seventeen years old. This was in 1956 or 1953. He started with $100,000. He did not have $100,000 when he started it. He had to raise it from family, uncles, aunts, his mom and dad, $5,000 or $7,000 investments. In 2020 terms, $100,000 is a little more than $1 million. Most people at seventeen are in high school and not doing a lot. What strikes me and we can go down a lot of different paths here, but to raise in today’s numbers, $1 million at the age of seventeen is fascinating to me.

I pictured the seventeen-year-olds I know, there’s no chance they’d be getting that kind of money if they ask, “Can I borrow some money and invest it for you?” What that tells me is Warren wasn’t the punk kid in the family who wasn’t respected. He had respect from other family members because you can love family, but to give the family $1 million to manage your money, those are two different things. Warren had to have earned that kind of respect and trust. In my mind, over the past many years, he had built a brand with his own family members as being responsible, being intelligent, being hardworking and being prudent. He’d already built a brand or there’s no chance they would have given him $1 million in today’s money to start a hedge fund for the most part.

The ask happens at a moment in time, but your resume starts the day you start breathing in someone else’s world. Ian and I have done deals together and invested in other people. Ian has invested in me. We both invested in some of his friends. Sometimes we make them, sometimes we miss them. The important thing here is everything in life is a calculated risk if you are going to do the work, and you are going to have the foundation, and you constantly do the right stuff. Are you someone who’s reliable? Are you someone who shows up? Are you someone that problem solves? Are you someone who thinks through problems and doesn’t act irrationally? Do you come in with different haircuts or are you stable?

LMSM 11 | Starting Early

Starting Early: It’s always the unvarnished stuff that you don’t think is worthy of bringing up that builds connectivity and relatability.

 

Those are little things that people look at and they say, “I’ve seen a 12 or 15-year track record of someone even if they’re young, but I buy into it because I’ve seen a body of work.” That doesn’t change. I never knew I was going to ask Ian for money to raise money for a deal that we did. It was a $10 million deal. What Ian did know is he knew me for a decade-plus. He saw my work, my work ethic and the results. He saw my problem-solving skills. When I did bring that up, it was an easy ask. It’s the same in Buffett’s life, it wasn’t a tough ask because people had seen it. Everyone thinks it’s a light bulb moment that happens, but it isn’t. It’s an ongoing process.

I wrote something for my newsletter about the myth of the closer. A lot of people think that closing is slick. You’ve got the right combination of words at the right timing that if you do, it unlocks the sale. The truth is closing starts from the first time you ever say a word to a customer. I love what you said about you’re building your brand from the time you’re born. By the time you go to close someone, it’s incredibly boring. When we are doing this, that was your close. I don’t even know if you even said that. It was like, “I think I’ll do it.” I don’t even know if you asked.

You said, “Let me show you how this could work. What do you think?” I asked you a bunch of questions because I needed to get my head wrapped around it. What I needed to know at that point was how confident you felt, and how much risk you felt was in it. I needed to know enough details where I could speak intelligently to other investors to raise for a $10 million deal, but everything else for your close, 99.9% of it, you learned that from me since 2005. I’ve known you by your work ethic, by me watching you directly, by watching the risks you take, and your conservative nature in general.

The fact that I’ve known you this long, and you’ve never asked, which means you’re not a desperate guy. You’ve passed on a lot of things you could have brought me in, and then you felt good about this one. You would close that for years with me. I find it’s the same thing. When someone comes into a commercial real estate deal with me or something else, I’m not doing a lot of selling. They’re coming to me and there’s not much of a close, but the people that have invested with me have known me for a decade or two and they know what I’m about. They know I wouldn’t be putting my own capital into something that I had not done a good deal of researching.

The topic here is to build something from nothing, you need to know how to raise money. The point that Ian and I want to make here is this. Done properly, this looks like an idle layup. It’s an idle Tuesday. It’s not Christmas. It’s not the Fourth of July. It’s a normal thing. If it’s done properly, it’s not a half-court shot. It’s another in a process of things. It’s the next logical step and Buffett built it. Successful people we’ve invested in built it piece over piece, time over time. The question you asked me when you got into this deal is you said, “How many of this type of house have you owned?” I said, “All of them.” It was that kind of a house. It’s nothing that I haven’t seen 100 or 1,000 times. I own houses on the same street. There’s a saying that someone has of, “Success leaves clues.” That’s what we’re talking about here. If you have a success and a track record, other people can see it and it’s an easy sale. Even as a seventeen-year-old raising in today’s terms of $1 million, that is crazy. With a track record, it doesn’t matter how old you are. You’ve got the track record.

Frank asked me and then I went and talked to other investors. Some of the asks were easy because these were investors who knew Frank and me. They knew us both. They might’ve known me a little better, but they knew Frank well too. Those were the easy ones, but there were some that didn’t know Frank from a hole in the ground. I’d send them a link to see his website. They were investing and they know me. They know I wouldn’t put my money at something crazy. They know I wouldn’t even call if I thought I was putting them in an excessive amount of risk. There are different levels of it.

You build that brand over years of making responsible decisions, being a hard worker and being someone of character. There is no close in the world that is going to help you raise money if you’ve not been a person of integrity, hard work and success before. You just won’t raise money. You don’t live a life that is radical and out of control and then ask for money and say, “This time it’s different.” No one will give you money. You need to have a track record of someone who’s prudent.

Have you ever swung and miss? Have you ever invested in the wrong person? I have.

I’ve missed a few where I should have invested in someone who was a person of hard work and good intelligence. I was too scared. I looked back and regretted it. I’ve never swung and missed on an investment where I trusted someone and they lost all of my money, aside from maybe a broker who had an idea that I didn’t like at first and I was talked into it.

Everything in business comes down to two things: competency and likeability. Click To Tweet

Why don’t you talk a little bit about being hesitant and missing on opportunities? I’m going to talk about the other side because I’ve invested money out of my personal IRA in a couple of people and I didn’t get paid back. I can tell you fundamentally what went wrong.

The biggest one that I always think about is one of my best friends in college started a restaurant concept. At that time, I didn’t get it. I didn’t like the industry. I didn’t like the business model. It didn’t make a lot of sense to me. I wasn’t focused at all on the operator. I was overly focused on the granular details that I didn’t understand. Ultimately, it became a massive success with 50 different locations and restaurants. I missed it. That sticks with me all the time when someone that I trust is starting something, I am always weighing my decision much more heavily on the person than on the granular details.

The opposite happened to me. I’m part of a mastermind group. There’s a person who had the stage. There was someone who was up there who I trusted before I worked alongside of them. The whole thing was integrity, but I didn’t see the clippings. I didn’t see the story going back to when they were 7, 8 or 10 years old like we’ve talked about. I saw someone who had the spotlight and I’m like, “This seems like a trustworthy person.” I have not been paid back 5 or 6 years later. This is $35,000 out of my IRA. It’s not an insignificant amount of money. There’s no way you can swing and hit everything. You’re going to miss stuff.

What I did was the opposite of what Ian did. I didn’t know the press clippings. I didn’t know the backstory, but what I did know is, “This person seems right,” but that’s what’s important. What we both appreciate about Warren Buffett, about working together, and people who we have successfully invested in is get away from the limelight and the spotlight. Show me a track record of success. When did that track record of success start? Are you interviewing to work at my company? Show me your track record. Are you interviewing someone for a sales job? Show me how you’ve sold something. That’s what it all comes down to. That’s why we use behavioral interviewing. Ian and I both use that and we want to see different things you’ve done because we want to see how success led clues. Have you gotten here because of something that is repeatable. When we successfully invested in people, they’ve done that. They’ve had a track record. When it hasn’t worked out, we’ve missed it.

Those are interesting two examples that we use. You were overly focused on the details of the deal because it’s your business. You understand it as residential real estate and you understood the numbers. You didn’t know the person well enough. For you, the lesson learned is you could’ve checked more reference. You could have said, “Give me the name of five people that have invested with you on similar deals like this. I’d like to talk to them about how you handled that capital.” I know some people have done that with me before they’ve got involved like, “Ian, I like you. I know you, but I don’t know you in this capacity. I’m going to call and check on a few different people.” I’m fine with that. Do that and call and check to see, am I full of crap or am I delivering what I said I was going to deliver?

The other thing is you can’t have every piece of detail. You’ve got to make a good decision or you’re going to be paralyzed. You make those decisions, but then what you do have to happen is as Ian says, “I’m not going to miss this opportunity next time for these reasons.” I’m going to say, “I’m going to skip this opportunity next time for these reasons.” That’s what happens. You build a book of business or you build a decision-making matrix. That’s what we talk about first with it’s never too early to start. It becomes another rung on the ladder that at 90 years old like Buffett, it’s a tall ladder with a lot of data points.

That ladder got taller over the years, which is the third point that we’re going to talk about. Warren Buffett is famous for the terminology of compounding interests. No one is better at it than him. The only way compounding interest works is if you are outrageously patient, and you’re not buying and selling on a regular basis. You buy things you believe in. These things could be people, assets, equities, businesses or anything. You buy things you believe in and you sit and hold them forever. At some point, they’re going to go up. He’s as good at this as everything. He’s notoriously frugal. He’s lived in the same small house in Omaha forever. He doesn’t drive flashy cars. We mentioned some of his favorite restaurants he goes out to. He doesn’t jet-set around the world. He was known as cheap for the first 30 or 40 years of being a CEO.

He’s very tight with expenses. He would rather every penny of profit, both personal and his business, go back and do reinvesting into his businesses, and purchasing more assets. His word is schnitzel. He’s always trying to schnitzel a little bit more, schnitzel some shares back, schnitzel everything. He’s always putting it back into the business. The average person would hear that and say, “It makes sense,” but doing it is incredibly hard. It’s hard to have the discipline to hold something for ten years. Especially when you’re young, it’s outrageously long of a period of time. You have to sacrifice and give up so much for it to get that far out. Ten years isn’t even close as far as what Warren has been able to do.

I’m trying to think here about where to go with investing and letting things compound. I’ve got a couple of stories. You’ve got a couple of stories. How does it manifest? If I have a job, how does it work in Corporate America? That’s more of who you speak to in a lot of instances. How can you reinvest?

LMSM 11 | Starting Early

Starting Early: Closing starts from the first time you say a word to a customer.

 

It’s basic things. If you have a company that is competent and is publicly-traded, putting a share of your paycheck into your 401(k) or putting it into some kind of investment and not touching it, and setting as high of a number as you possibly can. When I had barely anything, I still was putting 10% to 15% of my paycheck away pre and post. I would put my money away. As soon as I could, I got used to living on less than I was paid. That’s ingrained in me. My parents did a good job of reminding me to do some of that and investing in the right things. If you don’t work for a publicly-traded company, you want to put money into equities or other investments, but you need to be investing in assets that will pay you back and will appreciate.

For me, I worked for two very good companies, but one of them felt like it was on the downslide like in GE. After Jack Welch left, things felt different. I left GE because I felt like it wasn’t the same company. I had stock options. I had equity but I didn’t feel like the stock was going in the right direction. I went to a company in NVR. It was good at driving shareholder value. It had a long track record of rewarding shareholders that bought and held their stock. To make great wealth in a big company, you need to get to a level where you’re regularly given stock equity, stock options, and restricted shares so that you can appreciate as the company appreciates.

When I started with NVR, the stock was $600 or $700. When I left, it was $3,500. That’s a thirteen-year period where the stock went up to $3,000 and I had thousands of shares. Being there and holding on for thirteen years, it gave me the chance to never have to work for a big company again, by being disciplined, staying, and earning more stock every year by doing my job, doing it better every year than I did at the year before. What’s interesting about that is as I tell that story, it’s like, “That’s smart. You came in at $600 and you sold when it was six times that, and you made a ton of money.” That sounds good in hindsight but in between that, the stock price got up to $850 in 2005. In August of 2013, the stock price was still at $850. Think about that.

That’s seven years of working my ass off, twelve hours a day as vice president in a company, as an executive. I traveled a lot. I got up early and went to work. I got home late every day. All of my stock that I had been given was zero. It was worth nothing. I put nothing away in the bank. I had a good salary. I had a good bonus. I was putting some away in 401(k), but the stock had done nothing. I wasn’t appreciating. That’s hard because I’m living in Washington, DC. I have a wife. We want to spend, go places, and take vacations. I would like to drive a nicer car than my Jeep Grand Cherokee that I had had for six years.

You sacrifice. You don’t do it because you know that if you work for a great company, at some point, it’s going to appreciate it. Buying and holding is how you make wealth. The fact that I didn’t sell my stock options, every time a new chunk was vested, I kept holding. I held them as many as I could all the way up until when I left. When I left, I had so much money that I could retire twice. That sounds easier than it is when you’re living without, when you’re having to say no to Jenny about the trips and things that we want to do because we were living below our means, knowing that one day there was going to be a payoff.

This is a story that I’ve never told you. It predates your story from a chronological standpoint. Warren Buffett has a famous saying, “Be fearful when others are greedy, and greedy when others are fearful.” I started working for the same company as Ian in 1998. I made my first bonus check in 1999. It was somewhere between $2,000 and $3,000. I think it was $2,700. I took $200 off the top and put it in my checking account. I took $2,500, which as a 23-year-old kid was a shitload of money. I’d read a book by Peter Lynch that said, “If you believe you work for a good company, invest in it.” I already had a 401(k). I was maxing out my 401(k), but my first real bonus check, I took $2,500 and I bought stock at $33 a share and it promptly went to $28. It sat at $28 for a year.

I could have used that $2,000. That was a lot of money. What happened was between 1999 and 2006, the stock went from $30 a share to $850. Everybody was like, “The stock is going to run.” I look at it and was like, “I can take that money out and I can buy an investment property that I can flip.” I sold that stock for somewhere between $70,000 and $80,000. I bought my first foreclosure on the foreclosure steps. That prompted me to build the business that I built now. Taking $2,000 off the table, letting it ride, then selling that when I thought it was going to be at a high point. I didn’t time the market perfectly. You said that between that stretch of time, it was $850 for eight years. I took the money off. I bought a townhouse, flipped it, made $40,000, and bought another one. That’s how I propelled myself in business. That is one of 3 or 4 moves that got me here.

How long did you have that old SUV I used to make fun of you about?

For almost a decade.

There's no way you can swing and hit everything. You're going to miss stuff. Click To Tweet

For almost a decade, you had the same vehicle. You’re a vice president of the company and you are riding around in a 200,000-mile beat-up old SUV.

I had 75 employees and I had the 71st nicest car.

Every one of your sales reps is rolling in with brand-new BMWs and you didn’t give a damn. You were looking at them like, “You’re going to work until you’re 80. You better be a good rep still in 50 years, because of the way you spend your money, you’re always going to be beholden to another company.” I always find that fascinating about you. You lived frugally. When you left NVR, you lived in that same townhome in Charlottesville for 5 or 6 more years. When you moved to Richmond, you rented. You could have, but you didn’t run out and buy 5 acres out on the fan. You were smart. You cared more about building a business than what others believed your success level was with things.

One of the things that end up happening is this. I made a good move when I was in my low twenties and propelled it into $80,000, which I propelled into a flip, which turned into something cool. Ian and I both hit the lottery. Ian had a ten-figure exit. I had a seven-figure exit at 34. We pick the right places. We put ourselves in a position to succeed and then we picked good companies and we got lucky. Nobody knew the stock was going to go from $33 a share to $850. I thought I went to a great company. I didn’t know I went to the equivalent of Google. I got lucky there. Here’s what I didn’t get lucky with. All I spent my money on was houses. I moved into a house that I fixed up or I built from scratch at 25. I did it again at 27. I did it again at 30.

It was an area that I knew incredibly well. I was an insider. I could depreciate and I could use tax advantages. I can use all this stuff. When I quit my job, I had $2 million, which is not an insignificant amount of money and I didn’t have to pay myself. What I did is I live without a salary for almost six full years. I live on $80,000 a year. I could take a little bit if I needed it, but I didn’t need a lot because I drove a car with no payment. I had a mortgage that was $1,600 a month. I got to reinvest. I hire people now and they’re shocked at how good our technology is. They’re shocked that we have an IT department. They’re shocked that we can offer health insurance.

Do you know why? Because I don’t go out and buy flashy shit. I reinvest the money that we make. We make a decent amount of money but not a ton. We take it and we invest in people, in process, in software, and the other thing we invest in is we hold almost 300 houses that we own. Those appreciate and depreciate. I do not have the same business model as Warren Buffett, but what I do have is I have frugal tendencies. I invest in what I know. I hire good people and I don’t trade. I try to own and hold. Those things give you the ability to build something sustainable over time.

All of those reinvestments in your business help you recruit better. You get better talent. They stay longer and work a little bit harder. Over years, that’s all compounding interest. It all will pay you back from a revenue perspective at one point. All of these things are great and they helped make more enriched, but one thing that Frank and I both find incredible is he’s had many years of career when he started. The guy has never been involved in a scandal. His name is never besmirched by anything. For the number of businesses that he has purchased and acquired, if you think about the thousands of employees that have worked for Berkshire Hathaway, you think about all of the investors. His name is never tied to anything nefarious or awful.

The way that most billionaires get there, there’s a lot of dirt and ugly stories. Warren starts his meeting every year. The one scandal he was ever involved in is he acquired Salomon Brothers and they had a very big trading scandal. They were ripping people off and it was illegal. A lot of these traders, he had to clean house. He cleaned the house with the managers. He needed to go in front of Congress. His famous quote as he apologized to Congress was, “If you lose money for the firm, I’ll be understanding. If you lose one shred of reputation, I will be ruthless.” We loved this. This was one of our favorite things about going to Berkshire’s Annual Meeting. He said that in the mid-80s.

A 30-year-old plus video of him with hair. He looks a lot different, a grainy video.

LMSM 11 | Starting Early

Starting Early: If you have success and an excellent track record, other people can see it and lead to an easy sale.

 

It’s an old C-SPAN video. He starts his annual meeting every year to remind people of that moment when one company almost ruined the reputation of Berkshire Hathaway because he wants everyone to know, “There is nothing more important to me than the integrity of this firm.” A lot of people talk about integrity with a lot of flowery languages. Integrity is profitable. You can raise more money when you’re a person of integrity. Your brand is stronger. People want to hire you. People want to invest with you. They want to join your company. It is more profitable to have integrity than it is to rip people off and think short-term. It’s one of our favorite aspects and tenets of Warren Buffett.

One of the things that I wrote down and I never connected the dots like this before. The most relevant or important piece of compounding interest is integrity. You talk about compounding interest like making good and ethical decisions for decades can be ruined with 1 or 2 bad decisions.

His quote is, “It takes 50 years to build a reputation and five minutes to ruin it.”

One of the things that we have in our office is on the front wall, we have our mission statement and our core values. This is what our core values say, “Be honest in all transactions in communication and honor assignments.” It quotes Buffett. It has the quote that Ian said about contemplating in action and all of that. We go over this with employees. One of the things that Ian and I are going to do at some point on the show is about building a company culture. I don’t know a better person to point to with hundreds or thousands of businesses and a sterling reputation. He inherited a dog shit business and what does he do? He says, “I’m going to put a tourniquet on this thing. I am going to take full responsibility for it. I’m going to lead. I’m going to say, ‘This has happened. There’s no way humanly possible it’s going to happen going forward. I’m going to make sure of it.’”

Let’s talk about that moment. He has Salomon Brothers. He’s a huge stakeholder in Wells Fargo. Wells Fargo did the exact same thing 30 years later. What happened? Buffett had already lived through this with Salomon Brothers. This could have sunk people. People looked at it, Buffett got the facts. He said, “That’s it. We’re not going to put up with this.” That’s his reputation. If you look at Bob Woodward who’s written incredible books. He protected Deep Throat, the source on Watergate. He protected him for almost 40 years. People came to him for four decades because he was known as the guy who would protect his source. That is integrity. That is building a brand. That is dividends paying off for years because of something that you are not going to fundamentally break on.

It’s a parallel of this at number five that Warren is very good at. Buffett is good at looking at metrics of a business. He’s got his thresholds and hurdles, but he doesn’t look at anything. He published all of it. It’s all based off of Benjamin Graham’s thinking. That’s who he learned investing from, The Intelligent Investor. He still invests that way now. I don’t think there’s anything magical about the way he invests. He’s just more disciplined than most, but one thing that Buffett also puts in and it goes along with the integrity is he is big on the founder, the CEO or the owner of the company, and what kind of a person they are. He talked about it at our meeting.

You still hear about Mrs. B, Rose Blumkin. She was the Founder of Nebraska Furniture Mart, which was one of the biggest furniture stores in the country. There’s a big warehouse in Omaha. She built it up. She’s a Russian immigrant and she was good at controlling costs, running her business, competing, keeping prices low, keeping expenses, and Buffett loved her. He tried to buy her company for years because of how successful they were, the balance sheet, and everything else. He finally buys 90%, brings in Nebraska Furniture Mart. Within a few years, she’s fighting with her kids. She leaves Nebraska Furniture Mart and starts a competitor in the furniture space across the street.

Warren was like, “This is awful. I bought this because of her and now I’m competing against her.” Within 5 or 6 years, she kicks in Nebraska Furniture Mart to where Warren had to buy that business. He had to buy her twice because she was so good. His quote is, “I’d rather wrestle grizzlies than compete with Mrs. B.” I love that quote. Buffett uses her all the time. Find people that you would never want to compete with and pay them whatever you need to and keep them.” I think Mrs. B is used a lot in his businesses. He still uses them now with what he expects out of a CEO as an example. She ran that business at like 104 years old.

People like to invest in people who have those kinds of tendencies that get results, that are driven, that work their butt off and go through it. That’s the kind of people that Warren goes and looks for. It’s like the deal you were explaining where the Xs and Os looked okay, but the person wasn’t of integrity. You’ve got to have both. People won’t invest in you unless you have the skills, ability to do it, put together a good idea, integrity, work ethic, fundamentals, and characteristics of a person.

It is more profitable to have integrity than it is to rip people off and think short-term. Click To Tweet

I want to use two things here. Blumkin is the furniture mart Ian talked about. Let’s talk about repeating things and making things wash and repeat so you don’t have to reinvent the wheel. See’s Candies and Clayton Homes are two businesses that he bought that both were good at what they did. They both had good leaders and both had family businesses around them. The next point we’re going to talk about is his hands-off management style. Those were unique businesses, remarkably profitable, great structure and management, and great product. He bought them because he could analyze it. It was simple and easy, and they had great people running it. The other side of it is internal.

I can’t say his name but he runs the insurance arm, and another guy’s name is Ted Weschler. He is a guy who was in Charlottesville. I lived in Charlottesville. Now he works at Berkshire and he controls billions of dollars’ worth of assets. Warren lets those two people do whatever they want because he trusts them. He trusts them because they’re smart, hardworking, and have a track record. All the things we talked about, they’re examples of. They embody it. If you are a business owner and you’re looking to invest in either people or places or different things, what is it that makes sense? How do you know you can control the narrative? How do you know that you’re making a good investment? You’re buying the right thing, investing in the right asset, and buying the right segment of business? A lot of our readers are younger in their careers or younger managers.

How do you get someone to believe in you? How do you get someone to want to promote you? How do you get someone to want to give you autonomy? That’s what Ian and I want to talk about and we want you to get away from this. All of this stuff we’ve talked about talk about those young things that set you apart, your track record, how you’ve invested in yourself and how you’ve paid dividends, talk about reinvesting and your integrity. That’s how you win an interview. That’s how you get promoted. That’s how you get a different opportunity. That’s what Ian and I are passionate about. We stumbled ass-backward into this stuff in our lives and we’ve seen it through Buffett. We’ve also benefited from it because we’ve had good mentors in leadership and we’ve been able to bump into it.

The summary there is be someone Warren Buffett would want to invest in. He makes it very clear the things that he looks for. He looks for intelligence, hard work and integrity. He always says, “If they don’t have the third, the first two will kill you.” He always puts that first. The head of their insurance is Ajit Jain and he loves that guy. The last one. You’ve got the people, you’ve got the integrity, you’ve bought the businesses, one thing that makes Buffett incredibly unique is he takes delegating to a whole crazy different level. Buffett’s never been one that wanted to be a manager who’s involved in a lot of people’s businesses. He’s always bought businesses that he thought were good bets with good people and got out of their way.

His quote is, “At Berkshire, managers can focus on running their businesses. They’re not subjected to meetings at headquarters or financing worries nor Wall Street harassment. They simply get a letter from me every two years and they can call me when they wish.” Anyone who’s ever worked for him says that’s exactly how it is. Some people go, “It is wild that a business president could go a year without talking to the CEO unless they call.” That’s what Buffett is. He hired you because you run a good business and you know the business better than he does. Unless you think that he has something very specific that his expertise could help with, he gets out of the way. My takeaway in always watching that is if you have the right people, if you hire well, if you onboard well, if you do your homework, you shouldn’t have to spend much time telling them what to do.

You need to tell them, “Here are the outcomes I’m looking for. Here are the results I’m looking for. Here’s how productive I need you to be.” Buffett does all of that. His hurdles and threshold, he’s looking for growth, earnings and cashflow. He’s looking for you not to get too much debt. He’s looking for all those things but largely, if you need to make an acquisition, make it. If you need to grow, grow and run your business. It’s the same as a manager. If you have a great salesperson, a great project manager, a great engineer, and you’ve hired someone who’s incredible, leave them alone. Let them do what they need to do, be available, find out how you can help and take things out of their way because there’s always something in the way.

For the most part, let them run their business. In a couple of things he does that a business owner could think about, Buffett puts no caps on his compensation. If you go and you triple earnings and that means that you tripled your own profit as a manager, fine. As long as you’re delivering more to the mothership, Buffett doesn’t care. He caps nothing. A lot of companies screw up by this. They put arbitrary caps on things. They give you a quota and you can’t make a dollar over that. All that’s going to get you as a bunch of people that get right to your quota and stop working. If that’s what you want, great. If you want to cap your earnings, great. You might be doing that for a reason. There are reasons to do that. You don’t have enough employees to handle the volume coming in. There could be things, but if you want massive growth, don’t cap compensation of people who work for you that are responsible for bringing in that business.

The second thing he does that I think is incredible is he only gives positive feedback. Part of it is his personality, but he’s outrageously rosy when he’s happy with you. If he’s not happy with you, he goes quiet. You can know from reading his annual report who’s on his good list and on his bad list because the bad list doesn’t get talked about. The good list, he’s out of control thousands of words, talking about how great they are. A lot of times, it’s your boy, Ajit. He’s always getting lots of words, but the businesses that didn’t do too well, he doesn’t write about them. They get the point. Those are two things he does that are incredibly hands-off that I would say 95% of managers in Corporate America are not that way. Most feel like they need to be telling you what to do all the time and how to do it. That’s not Buffett style and it’s worked for many years.

In my last point here, I’m going to speak to the young employee or the young manager. One of the things that’s critical is realizing even an expert was a beginner once, and everybody has a place to start. You need the fundamental chops, the skills, and understand the job. Let’s say you’re a home builder and you become a production manager or something like that. You know how to build the house, you get further away from building the house and start to manage the process. You can’t fake that. What Ian and I talked about starting too early, that’s the foundational stuff. What the other things that are important here. If you’re looking to be promoted, be a good person, let others let you get out of their way.

Starting Early: If you can establish value no matter where you are, those things are rewarded.

 

What I mean by that is do your job, do it well, understand it, ask questions, and then do the job. If you’re great at the job, things will start to happen for you. One of Buffett’s fundamentals is he buys slow. Why does he buy slow? He wants to see like, “Are you going to screw up? Are you not? How’s it going to go?” He might be tracking you for a decade before he finally comes in and buys. It’s like Apple and the train he bought back in the last downturn, and like Bank of America when he bought it at its low. He’s tracking it.

How does that apply to you if you’re a new employee or a new manager? Your managers are tracking you over time. You have a long career. If you put in a successful track record, these things tend to add up for you and it starts to work in your favor. If you can establish value, no matter where you are, you’re a business owner or an employee, those things are rewarded. It doesn’t happen overnight and it feels grueling. If you can be that person that’s always bringing and adding value, different things start to happen in your life that you can’t measure or guess or anticipate.

To stay on the theme from one thing you said, compounding interest is also your personal brand within an organization, outside of an organization, no balls just like money does with interest. You show up every day, have a great day, put in a great effort, and work hard. You’re not going to have a perfect day every day. You’re not going to always achieve some success or hit some metric, but every day you come and bring it. You’re a good teammate, you come in, put in a big effort and do something good for the company. You do enough of that and you’re building up a compounding interest. That’s how you move up within an organization. You and I are not even fortunate. We did our homework on NVR before we went there. I didn’t leave a company like GE accidentally. I studied it. I said no, the first time NVR is going to go.

What’s unique about someone in NVR, a company doesn’t go from $30 to $3,500 because the people within it are not exceptional and are not doing exceptional things. For me, that meant a lot of sacrifice to get that stock up. The other top 50 executives in the company were sacrificing right along with me, but I had to earn that. I had to put a lot of time in to make sure I wasn’t one of the ones in the way of that stock going up. Once you get within a company that’s run well, you’ve got to be a part of the solution for it to go up and get that kind of equity.

We’ve accomplished what we wanted to with this show. You can look at it from 100 different angles and a bunch of different things. If you stay to these core values, it’s never too early to start. You’ve got to build something before you can raise money, reinvest everything, spend almost nothing, have integrity, invest in people and then be hands-off. That is an arc that takes you from an 11-year-old to a 90-year-old who’s one of the richest people in the history of the world. No matter where you are in your process or your life, if you get on board where you are and ride that same arc, we’ve done it in our own way and it’s been hugely beneficial for us. No matter where you are in your arc, you can follow the same process.

I think we have a name for this show now. It’s Frank’s Six Simple Steps to Being Worth $36 billion. It’s that simple. Follow those six steps and $36 billion is on its way to you. It’s that easy.

I think we’ve done it all.

It’s good to chat with you.

It’s always a pleasure, Ian.

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