WEBVTT - Old Warren Buffett: "Never Invest in a Business You Cannot Understand" 0:00:17.560 --> 0:00:19.040 Pushkin too quick. 0:00:19.240 --> 0:00:35.159 No, it's perfect, push kid stop, you got it. 0:00:37.440 --> 0:00:41.440 The title of this show, Jacob, is Old Warren Buffett. 0:00:41.480 --> 0:00:45.400 So when does a man get old? I asked myself 0:00:45.440 --> 0:00:45.920 that every. 0:00:45.840 --> 0:00:47.640 Day yet no today. 0:00:48.080 --> 0:00:51.479 Yet We did a whole show on Young Warren Buffett. 0:00:51.520 --> 0:00:55.240 He is ninety five years old as of this recording, 0:00:55.800 --> 0:00:59.200 so somewhere in there he became the man he is today. 0:01:00.160 --> 0:01:04.560 To recap our last episode on Young Warren Buffett, this 0:01:04.640 --> 0:01:10.000 weird kid who had obsessive hobbies becomes investor in things 0:01:10.080 --> 0:01:15.280 that they called cigar butt companies. He found tiny companies 0:01:15.400 --> 0:01:18.679 that were worth more than they appeared by their stock price. 0:01:18.720 --> 0:01:23.200 Would buy that stock, wait for the pop, wait for 0:01:23.240 --> 0:01:24.240 the pop, and. 0:01:24.200 --> 0:01:26.520 Then sell it. And it's very different than the Warren 0:01:26.560 --> 0:01:27.559 Buffett we know today. 0:01:27.840 --> 0:01:31.679 Yeah, and in the last episode, he buys a textile mill, 0:01:32.080 --> 0:01:36.040 Berkshire Hathaway, which then becomes his holding company for all 0:01:36.080 --> 0:01:40.760 these other companies you know, insurance companies, products, all sorts of. 0:01:40.920 --> 0:01:43.840 That's the transition into the Buffet we know today. He's 0:01:43.880 --> 0:01:45.960 not buying and selling. By the end of the last episode, 0:01:46.000 --> 0:01:47.560 he's buying and holding. 0:01:47.319 --> 0:01:49.880 And he's starting to think about these big American brands, 0:01:49.920 --> 0:01:53.920 Coca Cola, Gillette, Razors, Dairy Queen. Right, you can't get 0:01:53.920 --> 0:01:56.560 more American than that. So today we're going to talk 0:01:56.560 --> 0:01:59.960 about Warren Buffett's superpower that he really leveraged in this 0:02:00.080 --> 0:02:03.440 sort of second half of his life, and that is 0:02:04.240 --> 0:02:07.840 that he was now famous. And this is the fundamental 0:02:07.880 --> 0:02:10.880 thing about Warren Buffett. Regardless of the decisions he makes 0:02:11.040 --> 0:02:14.000 by himself late night when he's deciding which companies to buy, 0:02:15.040 --> 0:02:18.000 he is a man who is now famous for being brilliant, 0:02:18.040 --> 0:02:21.200 famous for being investor, famous for being rich, famous for 0:02:21.280 --> 0:02:25.800 being folksy and all American. And that that wasn't just 0:02:25.840 --> 0:02:28.640 a result of his decisions. That was the way he 0:02:28.760 --> 0:02:32.440 ended up making so much money, his fame the Buffet Premium. 0:02:33.280 --> 0:02:36.080 We are going to start in nineteen eighty three because 0:02:36.440 --> 0:02:39.240 this is the first time that Berkshire Hathaway has an 0:02:39.280 --> 0:02:45.160 annual meeting that you might recognize today. Annual meetings are 0:02:45.200 --> 0:02:49.480 traditionally very boring and back before the nineteen eighties, like 0:02:49.680 --> 0:02:52.160 no one went to them, like maybe some old retirees 0:02:52.240 --> 0:02:52.720 and some. 0:02:52.680 --> 0:02:55.720 People work for the company, maybe a mutual fund manager 0:02:55.800 --> 0:02:56.680 trying to look busy. 0:02:56.800 --> 0:03:00.800 Yeah, So famously, the Berkshire Hathaway meetings used to be 0:03:01.280 --> 0:03:04.600 in a loft in the mill in New Bedford, Massachusetts. 0:03:04.680 --> 0:03:07.359 There's a story about like it sort of ending early 0:03:07.400 --> 0:03:11.680 because people just wandered away right meeting and turned Buffett 0:03:11.680 --> 0:03:16.080 eventually move the meetings to the National Indemnity Cafeteria in Omaha. 0:03:16.160 --> 0:03:19.000 That's an insurance company owned And in nineteen eighty one 0:03:19.120 --> 0:03:22.960 only twenty two people showed up. But in nineteen eighty 0:03:22.960 --> 0:03:25.400 three people were starting to hear these stories about this 0:03:25.440 --> 0:03:28.000 famous investor, Warren Buffett. Right, he was close to being 0:03:28.000 --> 0:03:31.720 a billionaire at this point. And a crowd one hundred, 0:03:31.919 --> 0:03:35.360 few hundred show up at the meeting, and Buffett gets 0:03:35.400 --> 0:03:37.960 this chance to do what he's done one on one 0:03:38.000 --> 0:03:39.880 for most of his life, which is to kind of 0:03:40.160 --> 0:03:45.160 hold court to talk about his philosophy of life and investing. 0:03:45.280 --> 0:03:49.080 This is what you say, he's dispensing, folksy wisdom, dispensing 0:03:49.120 --> 0:03:51.360 folks say wisdom, yeah, yeah, yeah. This is in the 0:03:51.360 --> 0:03:54.200 first graph of coverage of the Berkshire Hathaway shareholder meeting 0:03:54.640 --> 0:03:57.680 in Perpetuity. Right, people are traveling across the country to 0:03:57.720 --> 0:04:02.960 see him. Eventually, they would, you know, fill auditoriums and 0:04:03.000 --> 0:04:05.520 then arenas people would start to like dress up as 0:04:05.560 --> 0:04:09.000 Warren Buffett, they would read poems about him, seeing songs. 0:04:09.320 --> 0:04:13.120 He became this American brand, just like the brands that 0:04:13.160 --> 0:04:16.000 he love, like Coca Cola and Dairy Queen. So as 0:04:16.039 --> 0:04:18.200 part of this episode, I'm going to tell you the 0:04:18.240 --> 0:04:22.680 story of how Warren Buffett leveraged this fame. But I 0:04:22.760 --> 0:04:26.800 also have in my hand a collection of folksy wisdom 0:04:27.480 --> 0:04:30.880 that I'm going to make you read through this episode. 0:04:30.920 --> 0:04:33.080 You can shuffle them, you could pop them in whenever. 0:04:33.160 --> 0:04:36.160 So you've handed me a stack of index cards, each 0:04:36.200 --> 0:04:41.200 of which has a pithy piece of folksy wisdom from 0:04:41.200 --> 0:04:43.880 Warren Buffett, little Buffet quotes. I'm going to lay them 0:04:43.880 --> 0:04:47.039 out before me, and I'm going to pull from him 0:04:47.360 --> 0:04:48.440 as appropriate. 0:04:48.040 --> 0:04:50.800 During the show Love It. In the mid nineteen nineties, 0:04:50.839 --> 0:04:53.920 the annual Berkshire Hathway Meeting gets moved to the Colisseum 0:04:54.279 --> 0:04:56.039 in Omaha. This is when they start calling it the 0:04:56.080 --> 0:05:00.040 Woodstock for Capitalists. Ten thousand people show up, then twenty 0:05:00.080 --> 0:05:03.120 thousand people show up. Ten years later, people are dressing 0:05:03.160 --> 0:05:06.240 like Warren Buffett, reading poems about him, you know, painting 0:05:06.320 --> 0:05:09.440 pictures of him trying to give him gifts. They're buying 0:05:09.760 --> 0:05:13.280 products and souvenirs at the Berkshire halfway meeting. 0:05:13.279 --> 0:05:17.400 Boks are Berkshire companies, right, They're buying seased candies and exactly, 0:05:17.680 --> 0:05:19.640 dairy Queen dilly bars exactly. 0:05:19.920 --> 0:05:22.880 And at the center of it is Warren Buffett, just 0:05:23.000 --> 0:05:25.440 answering questions off the top of his head, you know, 0:05:25.520 --> 0:05:26.960 preaching this Buffet way right. 0:05:27.040 --> 0:05:29.720 And rule number one is never lose money. Rule number 0:05:29.720 --> 0:05:32.680 two is never forget rule number one love it. 0:05:33.200 --> 0:05:36.320 There's this great quote that Buffett gives in the book 0:05:36.360 --> 0:05:39.800 The Snowball by Alice Schroeder that sums up his attitude 0:05:39.839 --> 0:05:42.120 this whole thing. Right, I was at my best at 0:05:42.120 --> 0:05:44.680 giving financial advice when I was twenty one years old 0:05:44.839 --> 0:05:46.240 and people weren't listening to me. 0:05:46.480 --> 0:05:46.960 I could have. 0:05:46.880 --> 0:05:49.159 Gotten up there and said the most brilliant things and 0:05:49.240 --> 0:05:51.080 not very much attention would have been paid to me. 0:05:51.680 --> 0:05:53.479 And now I can say the dumbest things in the 0:05:53.480 --> 0:05:55.400 world and a fair number of people will think there's 0:05:55.440 --> 0:05:57.520 some great hidden meaning to it or something. 0:05:58.040 --> 0:06:02.600 This is insightful, but not so insightful that he stops pontificating. 0:06:03.279 --> 0:06:08.360 No, because this was his new competitive advantage, huh, and 0:06:08.520 --> 0:06:10.080 it turns out a little bit of a curse. 0:06:10.760 --> 0:06:14.600 I'm Robert Smith and I'm Jacob Goldstein. This is Business History, 0:06:14.960 --> 0:06:16.359 a show about the history of business. 0:06:17.080 --> 0:06:18.880 When we told the story of Young Warren Buffett, it 0:06:18.960 --> 0:06:20.839 was a story of, you know, a crafty man using 0:06:20.880 --> 0:06:24.039 research and math and hard work to make millions of dollars. 0:06:24.080 --> 0:06:26.960 But Old Warren Buffett's a little bit of a harder 0:06:27.000 --> 0:06:29.200 story because he sort of starts with a billion dollars 0:06:29.279 --> 0:06:32.599 and just continues to get richer, right, And he is 0:06:32.680 --> 0:06:34.520 also a man at this point who is making his 0:06:34.560 --> 0:06:37.599 own weather. He doesn't have to be smarter or faster. 0:06:37.720 --> 0:06:39.960 He may be, but doesn't have to be because he 0:06:40.080 --> 0:06:43.120 is Warren Buffett. And people just want to do business 0:06:43.120 --> 0:06:45.440 with him. They want to be part of the magic. 0:06:46.040 --> 0:06:48.760 So in the nineteen eighties, Buffet's already putting together this 0:06:48.800 --> 0:06:52.240 whole empire under the brand Berkshire Hathaway. He has the 0:06:52.240 --> 0:06:56.520 insurance company generating cash. He's got sees candy. Have you 0:06:56.560 --> 0:06:57.560 ever had to seize candy? 0:06:57.720 --> 0:07:00.279 I have, Yeah. My step grandfather used to give me 0:07:00.320 --> 0:07:01.920 a box for Christmas when I was a boy. 0:07:02.200 --> 0:07:05.640 Wid grhead parents too, and they are these lovely boxes 0:07:05.640 --> 0:07:09.440 of fancy chocolates. Half of them are disgusting. You just 0:07:09.440 --> 0:07:10.000 don't know which. 0:07:10.000 --> 0:07:11.960 You don't know, right, And they could put a man 0:07:12.320 --> 0:07:14.400 You know what, I don't want the cherry. Nobody wants 0:07:14.480 --> 0:07:17.239 the cherry. I just want the like the chocolate tree. 0:07:17.480 --> 0:07:20.360 No fruit, No, don't put the fruit in there. But 0:07:20.480 --> 0:07:22.640 old people love it. And it was a great successful 0:07:22.640 --> 0:07:25.280 American company. Right. He has a couple of newspapers at 0:07:25.280 --> 0:07:28.000 this point, he's got a bank, he owns some of ABC, 0:07:28.200 --> 0:07:33.080 the TV network, Geico insurance. So he is very successful 0:07:33.120 --> 0:07:37.480 and very rich. But this is the nineteen eighties, right, go, 0:07:37.480 --> 0:07:41.360 go Gordon Gecko. Right, is that his name, Gordon Gecko? 0:07:41.440 --> 0:07:42.280 Greed is good? 0:07:42.360 --> 0:07:45.240 Right? The movie Wall Street, it's all about financial innovations. 0:07:45.240 --> 0:07:46.400 We're all going to be rich. 0:07:47.160 --> 0:07:48.960 We're not all going to be rich in Wall Street 0:07:49.000 --> 0:07:51.440 for the record, Yes, the Wall Street people get rich. 0:07:52.360 --> 0:07:53.080 Rich, yes. 0:07:53.360 --> 0:07:53.560 Yes. 0:07:53.760 --> 0:07:57.120 And that guy in Omaha, he doesn't really know what 0:07:57.160 --> 0:08:00.480 he's talking about. Right. He doesn't believe in borrowing vast 0:08:00.480 --> 0:08:02.880 sums of money. He doesn't believe in junk bonds any 0:08:02.960 --> 0:08:05.440 of these things. Right, you just can't buy and hold. 0:08:05.480 --> 0:08:08.400 This is the nineteen eighties. And this is also the 0:08:08.440 --> 0:08:13.559 era where finance professors are starting to put forward something 0:08:13.560 --> 0:08:17.160 called the efficient markets hypothesis, which you and I know. 0:08:17.160 --> 0:08:19.760 Well, yes, yes, I mean it's basically the idea that 0:08:19.840 --> 0:08:23.080 in a big liquid market like the US stock market, 0:08:23.760 --> 0:08:28.480 the price of a stock today reflects the true value 0:08:28.480 --> 0:08:30.600 of the company. And obviously that's not true every day, 0:08:30.640 --> 0:08:33.959 but in a simpler format means you can't do what 0:08:33.960 --> 0:08:37.719 Warren Buffett does. You can't look at a stock systematically 0:08:37.800 --> 0:08:40.080 and on average beat the market. 0:08:40.360 --> 0:08:43.000 Because the price is the price, and that reflects all 0:08:43.040 --> 0:08:46.080 the information. And unless you have insider information, which Warren 0:08:46.120 --> 0:08:50.120 Buffett never claimed, essentially like you can get lucky. And 0:08:50.160 --> 0:08:52.400 they would say at this point, the professors, and they 0:08:52.400 --> 0:08:55.640 did say Warren Buffett was just pretty lucky. He made 0:08:55.679 --> 0:08:57.280 some lucky calls over the years. 0:08:57.480 --> 0:08:59.960 Or also, as we talked about in the last episode, 0:09:00.000 --> 0:09:02.680 he came along at a time when the market was 0:09:02.800 --> 0:09:06.480 less efficient, and he focused on the even less efficient 0:09:06.520 --> 0:09:07.360 aspects of the market. 0:09:07.480 --> 0:09:07.600 Right. 0:09:07.640 --> 0:09:10.880 Remember in the last episode, he's like buying companies that 0:09:10.920 --> 0:09:13.120 are not even traded on the New York Stock Exchange 0:09:13.160 --> 0:09:16.000 at a time when fewer people are paying attention and 0:09:16.040 --> 0:09:19.840 so I think clearly those markets were inefficient and he 0:09:19.960 --> 0:09:23.199 was exploiting those inefficiencies. Now it's the eighties, so not 0:09:23.280 --> 0:09:26.760 only is the market more efficient, but Buffett has to 0:09:26.800 --> 0:09:29.520 deploy so much money that even if there's some weird 0:09:29.640 --> 0:09:34.959 little bus company in New Bedford, Massachusetts, it's too little 0:09:35.000 --> 0:09:36.720 for it to move the needle for him, right, he 0:09:36.840 --> 0:09:39.400 has to be playing in this big efficient market. 0:09:39.600 --> 0:09:42.839 Yes, and more than that, the finance professor should have 0:09:42.880 --> 0:09:45.280 realized one of the reasons why the market was efficient 0:09:45.800 --> 0:09:49.480 was Warren Buffett. That variety showed, he showed and he 0:09:49.679 --> 0:09:53.959 closed those arbitrage gaps. So absolutely, but you know he's 0:09:53.960 --> 0:09:56.840 still like people are looking at him. Even his method 0:09:56.920 --> 0:10:01.199 of using mostly cash to like invest in whole companies 0:10:01.240 --> 0:10:04.760 and holding them just feels out of date in the 0:10:04.840 --> 0:10:07.920 nineteen eighties because this is the age of the leveraged buyout. 0:10:07.960 --> 0:10:11.800 You don't use your own money, You borrow massive amounts 0:10:11.800 --> 0:10:15.319 of You rate a company that doesn't want to be sold, right, 0:10:15.600 --> 0:10:20.280 you use that debt as leverage to pry the company 0:10:20.320 --> 0:10:22.800 away from the owners. Then you take that debt and 0:10:22.840 --> 0:10:26.160 you shove it down the mouth of the company, and 0:10:26.200 --> 0:10:28.600 then you take out a cleaver, and you chop up 0:10:28.640 --> 0:10:30.440 the company into little pieces and sell it all. 0:10:30.679 --> 0:10:34.040 Yes, yeah, am I supposed to like that or not 0:10:34.120 --> 0:10:36.360 like it? I have a complex emotional response to I 0:10:36.400 --> 0:10:36.760 don't know. 0:10:37.240 --> 0:10:40.360 I just got carried away good into the nineteen eighties, right, 0:10:40.760 --> 0:10:43.880 And like Buffett would definitely borrow some money to close deals. 0:10:44.000 --> 0:10:47.560 But like he thought debt was terrible, that you would 0:10:47.559 --> 0:10:50.000 be overladen with debt. He once said, oh, I should 0:10:50.040 --> 0:10:51.680 have given this to you. Right, once said debt is 0:10:51.760 --> 0:10:55.480 like gasoline makes the cargo faster, but it causes an 0:10:55.520 --> 0:10:57.040 explosion when you crash. 0:10:57.400 --> 0:11:01.000 I mean, in that metaphor, debt seems totally reasonable. Like 0:11:01.120 --> 0:11:02.960 I drive a car, I put gas in it. I 0:11:03.040 --> 0:11:05.440 just don't crash, Just don't crash. There you go. 0:11:06.320 --> 0:11:08.559 And you know, Buffett like he was not a big 0:11:08.640 --> 0:11:11.960 breaker up of companies. You know, he just wanted large 0:11:12.240 --> 0:11:14.000 and larger chunks of Coca Cola. 0:11:14.679 --> 0:11:17.640 Grandpa, if you weren't willing to own a stock for 0:11:17.679 --> 0:11:20.280 ten years, don't even think about owning it for ten minutes. 0:11:20.440 --> 0:11:24.080 Exactly, we're in Buffett exactly right. I mean, Buffett wanted 0:11:24.080 --> 0:11:27.160 companies with a durable advantage, ones that could make money 0:11:27.240 --> 0:11:30.800 for a long periods of time, like a very Grandpa move, right, 0:11:31.160 --> 0:11:35.240 But the nineteen eighties were about to test Warren Buffett 0:11:35.320 --> 0:11:37.319 and this theory. Why don't we take a break right 0:11:37.360 --> 0:11:40.079 now and we'll return with business history in a moment. 0:12:06.880 --> 0:12:09.840 So we have the wild things Wall Street are doing, 0:12:09.880 --> 0:12:12.800 we have the leveraged buyouts, we have the finances doubting 0:12:12.840 --> 0:12:16.720 Warren Buffett, and the first crack really appears in nineteen 0:12:16.760 --> 0:12:20.520 eighty six. So Warren Buffett gets a call from John 0:12:20.600 --> 0:12:24.880 Gutfrind of Solomon Brothers. He's the CEO of Solomon Brothers. 0:12:24.559 --> 0:12:27.079 And he's the guy in Liar's Poker, right, like classic 0:12:27.200 --> 0:12:28.840 eighties Wall Street guy. 0:12:29.040 --> 0:12:32.040 Yeah. And Solomon is a huge investment firm at the time. 0:12:32.120 --> 0:12:36.000 They specialize in bonds, and they're part of this go 0:12:36.000 --> 0:12:39.600 go Wall Street thing in the nineteen eighties. But at 0:12:39.600 --> 0:12:42.959 this moment they are in trouble, right because all these 0:12:43.040 --> 0:12:45.880 leverage buyouts are happening right out in the real economy, 0:12:46.160 --> 0:12:50.000 and all of a sudden, Solomon Brothers itself, the investment firm, 0:12:50.200 --> 0:12:53.640 is targeted for takeover by one of the raiders, Ron Perelman, 0:12:55.679 --> 0:12:59.679 and you know, like Raider Action on Raider on raider violence. 0:12:59.760 --> 0:13:00.040 Right. 0:13:00.280 --> 0:13:04.000 And you know the thing about being rated by another 0:13:04.080 --> 0:13:07.480 company is you start to think, oh, I'm not going 0:13:07.559 --> 0:13:09.640 to have a job, so they're going to come in 0:13:09.720 --> 0:13:11.160 and fire everyone in the country. 0:13:11.160 --> 0:13:13.240 Certainly if you're the CEA, you're thinking, I'm going to 0:13:13.360 --> 0:13:14.079 have a job soon. 0:13:14.880 --> 0:13:19.559 So the CEO gutfriend is panicking and he calls Warren Buffett, 0:13:19.559 --> 0:13:22.520 who knows from previous deals, and he's like, help, I 0:13:22.640 --> 0:13:26.000 need a white Knight. I need someone to come and 0:13:26.040 --> 0:13:29.360 hear with a huge investment, a lot of money into 0:13:29.400 --> 0:13:32.000 the company, who will basically be a big sign that 0:13:32.080 --> 0:13:34.560 says like stay away. Like, sure, you could take on 0:13:34.600 --> 0:13:37.440 Solomon Brothers, but you can take on Solomon Brothers and 0:13:37.480 --> 0:13:41.360 Warren Buffett, Uh huh, I don't think so. Now, this 0:13:41.440 --> 0:13:45.360 is not normally the kind of business that Warren Buffett likes, right, 0:13:45.480 --> 0:13:48.240 because they don't make something that an average American can 0:13:48.280 --> 0:13:49.480 buy at their corner store. 0:13:49.840 --> 0:13:52.240 Right. I used to call. 0:13:52.600 --> 0:13:55.640 Investment firms casinos, like you just didn't like Wall Street. Right, 0:13:55.880 --> 0:13:58.760 But he likes the CEO and he sees a desperate 0:13:58.800 --> 0:14:01.720 firm willing to make a really good deal, and they 0:14:01.800 --> 0:14:05.880 make an amazing offer. They essentially structure a deal so 0:14:05.920 --> 0:14:10.960 that he gets stock in Solomon Brothers guaranteed fifteen percent 0:14:11.120 --> 0:14:14.200 profit whether the start the company goes up or down. 0:14:14.320 --> 0:14:15.640 That's pretty good, right. 0:14:15.760 --> 0:14:18.920 Sixty three million dollars a year in dividends like this 0:14:18.960 --> 0:14:21.440 is this is the kind of money he can use elsewhere. Right, 0:14:22.120 --> 0:14:24.680 And Solomon Brothers, they just get the reputation of the 0:14:24.720 --> 0:14:28.720 Great Warren Buffett. Now apparently Warren Buffett shows up to 0:14:28.720 --> 0:14:32.080 make the deal, has no briefcase, no papers, you know, 0:14:32.160 --> 0:14:33.120 it's just the handshake. 0:14:33.600 --> 0:14:35.280 They got a coke in one hand and a dilly 0:14:35.360 --> 0:14:36.120 bar or the other. 0:14:36.160 --> 0:14:41.800 Exact and then he will soon regret. He will soon 0:14:41.880 --> 0:14:45.840 regret this deal because in nineteen ninety one there is 0:14:46.360 --> 0:14:48.560 a rogue bond trader. 0:14:48.680 --> 0:14:50.360 Yes, I love a rogue trader. 0:14:50.560 --> 0:14:51.440 Little explanation. 0:14:51.560 --> 0:14:55.160 Rogue. They always call them a rogue. Yes, yeah, right, 0:14:55.680 --> 0:14:59.120 it's kind of rakish, rakish pond trader. It's worse than rakish. 0:14:59.240 --> 0:15:02.960 So Solomon Brothers was a big dealer in treasury bonds, 0:15:03.000 --> 0:15:05.560 and the way treasury bonds work, they're the way that 0:15:05.600 --> 0:15:08.800 the US government funds its business obviously, right, billions and 0:15:08.800 --> 0:15:11.880 billions of dollars worth, and they don't just sell them 0:15:11.920 --> 0:15:15.760 to the public. They sell them to the most esteemed 0:15:15.880 --> 0:15:18.080 firms on Wall Street, and those firms sell it to the. 0:15:18.040 --> 0:15:19.760 Public primary dealers, the. 0:15:19.680 --> 0:15:22.640 Primary dealers, and Solomon was one of those. And in 0:15:22.760 --> 0:15:25.720 order to like make it fair, there was this rule 0:15:25.800 --> 0:15:28.600 that like one firm couldn't outbid all the other firms 0:15:28.600 --> 0:15:31.400 and sort of core to the market on treasury bonds 0:15:31.440 --> 0:15:35.680 for any certain issuance. Right, So essentially everyone was supposed 0:15:35.720 --> 0:15:38.200 to put their bids in for the treasury bonds from 0:15:38.240 --> 0:15:40.680 the government and giving them up among themselves depending on 0:15:40.680 --> 0:15:45.400 what their bids were. Right. So this trader at Solomon 0:15:45.440 --> 0:15:48.600 gets this idea that like, well, they're not really watching, 0:15:48.720 --> 0:15:52.520 I could sort of create some fake buyers and like 0:15:53.000 --> 0:15:56.280 engineer this so that the government doesn't know that we're 0:15:56.320 --> 0:15:58.720 buying all the treasury bonds. And at one point he 0:15:58.760 --> 0:16:02.400 gets like eighty seven percent of a certain issuance. And 0:16:02.640 --> 0:16:05.440 if you're somebody who has eighty seven percent of anything, 0:16:05.960 --> 0:16:07.960 you can kind of set the price. You know. It's 0:16:08.080 --> 0:16:10.120 just a little little bit of a cornering of the 0:16:10.120 --> 0:16:10.960 market play. 0:16:11.080 --> 0:16:14.040 It's funny because you think think of like treasuries as 0:16:14.080 --> 0:16:16.720 the most boring, safe thing in the world. The idea 0:16:16.760 --> 0:16:19.360 that a rogue trader is going to be monkey around 0:16:19.400 --> 0:16:21.560 there is interesting. 0:16:22.040 --> 0:16:24.080 And really scandalous. 0:16:24.400 --> 0:16:27.840 Huh yeah, because the treasuries are the safest investment in 0:16:27.840 --> 0:16:31.280 the world, like the bedrock of the financial system. 0:16:31.520 --> 0:16:36.000 So he gets caught. I believe the Treasury of the 0:16:36.040 --> 0:16:39.560 Fed sends like a letter on this. People know all 0:16:39.640 --> 0:16:42.000 the way up in the company that this has happened, 0:16:42.280 --> 0:16:44.120 but they decide not to fire him. They say it 0:16:44.160 --> 0:16:46.240 was a mistake. They said he shouldn't have done it right. 0:16:48.240 --> 0:16:51.280 It ends up being this sort of massive cover up, 0:16:51.920 --> 0:16:57.520 and the government is pissed, like they are threatening to 0:16:57.720 --> 0:17:00.280 take away this primary dealership from Solomon. Basically, it would 0:17:00.320 --> 0:17:03.480 say the US government doesn't trust you as an investment firm. 0:17:03.520 --> 0:17:04.960 It would be the end of the firm. 0:17:05.080 --> 0:17:11.840 Yeah, right, So the CEO resigns. Everyone's implicated except yeah 0:17:12.280 --> 0:17:17.480 the Oh and he's the second richest man in the 0:17:17.520 --> 0:17:19.879 world at this point. He's got things to do, you know, 0:17:19.920 --> 0:17:22.119 He's got Coca Cola shares to buy, he's got to 0:17:22.119 --> 0:17:25.480 go eat Hamburgers. He has to fly to New York, 0:17:25.840 --> 0:17:29.480 place he doesn't really like and take over running Solomon Brothers, 0:17:29.560 --> 0:17:31.719 a firm which he doesn't really respect or trust. 0:17:31.800 --> 0:17:33.080 And this is the guy who in a way never 0:17:33.200 --> 0:17:35.520 wanted a job, right, like you've said all this to 0:17:35.560 --> 0:17:38.440 be rich, and now we have it. Yes, is such 0:17:39.200 --> 0:17:39.879 a job. 0:17:40.240 --> 0:17:43.400 And he goes to the he goes to the Treasury Department, 0:17:43.720 --> 0:17:46.359 and they're talking about, you know, this sort of death 0:17:46.400 --> 0:17:49.400 sentence for the firm, saying we are going to officially 0:17:49.480 --> 0:17:52.560 say that we don't trust Solomon Brothers. And he says, 0:17:52.600 --> 0:17:56.720 you know, I have technically not signed the papers that 0:17:56.800 --> 0:17:58.639 I will take over a CEO, so I can just 0:17:58.680 --> 0:18:01.320 go back to Omaha at any time. And then all 0:18:01.359 --> 0:18:05.400 of a sudden, you have basically the greatest financial disaster 0:18:05.480 --> 0:18:08.520 in history unfolding under you. And I'm gonna go back 0:18:08.560 --> 0:18:09.000 in Eataly. 0:18:09.040 --> 0:18:12.560 I think the Warren Buffett card now with the US government. Yeah, 0:18:12.600 --> 0:18:14.800 He's saying, do you know who I am? US government? 0:18:14.880 --> 0:18:18.480 Yeah yeah, And they're like, okay, like we want you 0:18:19.640 --> 0:18:21.600 to rescue this company because we don't want to have 0:18:21.640 --> 0:18:25.119 to rescue this company, right, And they end up putting 0:18:25.160 --> 0:18:28.119 Warren Buffett through the wringer. He's got to testify before Congress, 0:18:28.320 --> 0:18:31.560 he's got to remake the management of the firm. Not 0:18:31.760 --> 0:18:34.480 a popular guy. On Wall Street at this point because 0:18:34.520 --> 0:18:39.520 he's cutting pay for the traders. He cancels everyone's magazine subscriptions. 0:18:39.640 --> 0:18:42.720 He just thinks like they're spending way too much money. 0:18:42.720 --> 0:18:46.160 He's being the frugal Warren Buffett. Which remember you know 0:18:46.320 --> 0:18:49.199 this is Wallstall the Street in the eighties. Yes, and 0:18:49.240 --> 0:18:52.439 you know he cuts the cocaine budget exactly. It's terrible. 0:18:52.440 --> 0:18:54.440 And he tells the workers at Solomon wait for it, 0:18:54.520 --> 0:18:55.040 you got it. 0:18:56.240 --> 0:18:58.680 Lose money for the firm and I will be understanding. 0:18:59.240 --> 0:19:02.200 Lose a shred of reputation for the firm, and I 0:19:02.240 --> 0:19:03.119 will be ruthless. 0:19:03.480 --> 0:19:07.000 Eventually, Solomon Brothers gets bought by someone else, Buffett can 0:19:07.080 --> 0:19:09.920 get out. And to be clear, he ended up making 0:19:09.960 --> 0:19:12.720 a bunch of money on the deal, as he always does, right, 0:19:13.320 --> 0:19:16.880 but he would be sort of gun shy about this, 0:19:17.160 --> 0:19:20.600 lending his reputation to another business for a long time. Right, 0:19:20.680 --> 0:19:23.440 And over the next few decades he would get the 0:19:23.480 --> 0:19:27.360 call the first place you turned when you're like, oh, 0:19:27.560 --> 0:19:29.960 we screwed up, We're about to go out of business, 0:19:30.240 --> 0:19:33.000 there's a run on our bank or whatever. We need 0:19:33.000 --> 0:19:34.040 to call Warren Buffett. 0:19:34.080 --> 0:19:36.639 We did, we did. We need a smiling Grandpa face 0:19:37.280 --> 0:19:38.560 on that building. 0:19:39.000 --> 0:19:42.800 So in the late nineteen nineties, there's a firm called 0:19:42.840 --> 0:19:46.119 Long Term Capital Management. I heard of it a boiler, 0:19:46.280 --> 0:19:51.360 not long term. They were a company staffed by brilliant 0:19:51.680 --> 0:19:55.800 Nobel prize winning right, yes, economists who thought they had 0:19:56.280 --> 0:19:59.560 figured out all these global arbitrages. And then there's the 0:19:59.760 --> 0:20:01.440 nineteen ninety eight was it the Russian current? 0:20:01.520 --> 0:20:03.520 Russia? Well, and they were highly leveraged. They'd borrowed a 0:20:03.520 --> 0:20:05.320 ton of money. This is the gas lean in the 0:20:05.320 --> 0:20:07.720 fuel tank blowing up. Moment, ring ring ring. 0:20:08.040 --> 0:20:10.760 Yeah, Warren Buffett, would you like to buy everything we 0:20:10.800 --> 0:20:13.480 own and save our company? So Buffett made an offer, 0:20:14.720 --> 0:20:17.719 made an offer to save Long Term Capital Management, but 0:20:17.760 --> 0:20:20.240 he had pretty strict terms. He's like, I'm going to 0:20:20.280 --> 0:20:23.280 buy all your assets for very cheap and you all 0:20:23.320 --> 0:20:25.280 need to leave the company. And they didn't like that. 0:20:25.520 --> 0:20:27.080 Give you a little money and you're fired. 0:20:27.320 --> 0:20:30.400 Yes, how about that? For socium of investment firms had 0:20:30.400 --> 0:20:33.399 to sort of bail out Long Term Capital Management and 0:20:33.560 --> 0:20:37.000 save the global economy. So Buffett did not like this 0:20:37.240 --> 0:20:42.240 role of savior. But at this point, Warren Buffett is 0:20:42.280 --> 0:20:46.040 sort of facing this bigger existential crisis which is as 0:20:46.040 --> 0:20:48.280 we move into the nineteen nineties, we're about to hit 0:20:48.320 --> 0:20:51.640 the age of computers and the Internet and high tech. 0:20:52.240 --> 0:20:55.080 And Warren Buffett he didn't even know how to turn 0:20:55.119 --> 0:20:55.679 on a computer. 0:20:55.720 --> 0:21:00.960 Wait a minute, Never invest in a business you cannot understand. 0:21:00.680 --> 0:21:02.000 And understand it. He did not. 0:21:02.520 --> 0:21:28.800 After the break, that's the end of the ads, We're 0:21:28.840 --> 0:21:31.200 going back to the show. It's the late nineties and 0:21:31.560 --> 0:21:33.760 the internet boom is here, and Warren Buffett doesn't know 0:21:33.760 --> 0:21:34.439 how to use a computer. 0:21:35.040 --> 0:21:37.720 Yeah, I mean he didn't want to use a computer, right. 0:21:37.920 --> 0:21:41.200 He lives in an analog world. He gets the Wall 0:21:41.200 --> 0:21:43.000