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Speaker 1: Pushkin. Too quick? No, it was perfect. Pushkin.

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Speaker 2: Stop.

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Speaker 1: You got it. Hey, it's Jacob Goldstein, co-host of the

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Speaker 1: podcast Business History. And I'm here talking to you now

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Speaker 1: because Warren Buffett has just said he is stepping down

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Speaker 1: as chairman of Berkshire Hathaway, a company that he ran

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Speaker 1: for more than 50 years. He stepped down as CEO

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Speaker 1: less than a year ago. Now he is stepping down

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Speaker 1: as chairman. So this is an important moment in business history.

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Speaker 1: And to mark it, we are rerunning a show we

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Speaker 1: did last year about young Warren Buffett, about how Warren

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Speaker 1: Buffett became perhaps the greatest investor of the 20th century.

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Speaker 1: Hope you like the show. Here it is.

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Speaker 2: Jacob, I wanted you to see one of my prize possessions.

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Speaker 2: I hid it in a bag so that you would

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Speaker 2: not see it in advance. It is a round, cuddly,

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Speaker 2: plushy Warren Buffett.

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Speaker 1: He's got like an argyle sweater and a golf club,

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Speaker 1: which is weird. Like it should be a cherry Coke,

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Speaker 1: a box of See's candy, even like a financial document.

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Speaker 1: An annual report. Yeah, why a golf club?

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Speaker 2: I think people who golf like Warren Buffett. And it's

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Speaker 2: just a product that you can buy. A student got

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Speaker 2: it for me who went to the most recent Berkshire

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Speaker 2: Hathaway shareholders meeting.

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Speaker 1: The Berkshire Hathaway shareholders meeting. Always wanted to go. It's

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Speaker 1: a famous event.

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Speaker 2: And this was the one where he announced his retirement.

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Speaker 2: My student eagerly like texted me the whole time.

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Speaker 1: So excited.

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Speaker 2: He knows that I love Warren Buffett. And I brought

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Speaker 2: it because it's such a weird, unlikely thing. It is

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Speaker 2: hard to buy soft plushie dolls of billionaires because who

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Speaker 2: would want to sleep with a little Elon Musk doll

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Speaker 2: at night?

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Speaker 1: Yeah, this finance seems less likely, right? Like, it's not

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Speaker 1: going to be a plushie Jamie Dimon or a plushie

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Speaker 1: like Ken Griffin. No, no, no, no.

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Speaker 2: Ken Griffin will cut you in the night. And I

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Speaker 2: think that they made a plushie of him because Warren

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Speaker 2: Buffett is.

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Speaker 1: Sort of.

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Speaker 2: Extraordinary in the history of finance. I mean, there's a

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Speaker 2: raw amount of money, right? $ 145 billion net worth, according

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Speaker 2: to Forbes, right? But there's also the way he earned

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Speaker 2: his billions. Most billionaires, if you think about it these days,

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Speaker 2: started a company, a tiny company that became huge. They

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Speaker 2: owned all the stock in it. And so on paper

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Speaker 2: became rich.

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Speaker 1: Or the children. Or the children. Or the children of

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Speaker 1: the children.

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Speaker 2: Yeah.

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Speaker 1: Yeah.

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Speaker 2: Warren Buffett did it by investing in other people's companies.

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Speaker 2: He hasn't really like made a product himself. He buys

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Speaker 2: companies that have good products.

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Speaker 1: Which in a way makes it all the more amazing

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Speaker 1: that he is this like beloved, I'm going to say

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Speaker 1: beloved figure, right? Like people generally don't like finance people

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Speaker 1: and they like Warren Buffett.

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Speaker 2: He is a symbol of what people want finance to be, right? Oh,

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Speaker 2: you buy good companies at good prices and you hold

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Speaker 2: them through thick and thin like he's legendarily honest. You know,

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Speaker 2: his word is his bond. His handshake does not need lawyers, Jacob.

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Speaker 1: I mean, I'm sure he has lawyers. He has a

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Speaker 1: lot of lawyers, right?

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Speaker 2: But, you know, he eats at McDonald's every morning. He

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Speaker 2: swigs cherry Coke all day long. Then he goes home

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Speaker 2: to a tiny house in Omaha and plays bridge. I mean,

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Speaker 2: if he didn't exist, you would have to invent a

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Speaker 2: Warren Buffett just for those days, you know, when the

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Speaker 2: stock market, like, does something terrible. You can always just say, well,

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Speaker 2: there's Warren Buffett, right? Why can't you be more like

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Speaker 2: Warren Buffett?

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Speaker 1: The honest $ 145 billion financier.

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Speaker 2: Yeah, you can be a decent fellow. And today, on

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Speaker 2: the show, as part of our investing series, I'm going

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Speaker 2: to show you that Warren Buffett is a complete fraud.

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Speaker 1: Yes. No, he's totally not. He's a great guy. Is

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Speaker 1: he kind of a fraud?

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Speaker 2: I'm just going to say that he is not as

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Speaker 2: cuddly and feel-good as you might think.

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Speaker 1: Well, I would hope not.

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Speaker 2: He is a very shrewd man. He's a shark, really,

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Speaker 2: when it comes to business deals. And today on the show,

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Speaker 2: we are going to show you how he.

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Speaker 1: Got that way. Young Buffett. I'm Robert Smith. I'm Jacob Goldstein.

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Speaker 2: And this is Business History, a show about the history

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Speaker 2: of business. This is part of our series on stock

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Speaker 2: market legends. We already told you the story of Jesse Livermore,

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Speaker 2: a very different story in a very different time, the

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Speaker 2: Wild West of speculation and tomfoolery, you know, in the

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Speaker 2: Gilded Age and right before the great stock market crash.

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Speaker 2: And today we're going to pick up a few years

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Speaker 2: later because Warren Buffett was born in 1930, right at

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Speaker 2: the start of the Depression. And before he was a legend,

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Speaker 2: before he was a billionaire, he was a He was

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Speaker 2: just a young man who didn't want to work hard

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Speaker 2: and figured out a giant flaw in the stock market.

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Speaker 1: Yes.

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Speaker 2: To understand how Warren Buffett cracked the code of finance,

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Speaker 2: you have to put, where's cuddly guy?

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Speaker 1: He's way over there. You have to put cuddly.

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Speaker 2: Warren Buffett out of your mind and you have to

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Speaker 2: picture Warren Buffett, weird kid. Born in 1930, as I said, Omaha, Nebraska.

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Speaker 2: It's after the great stock market crash, beginning of the depression.

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Speaker 1: His father died. Is a stockbroker.

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Speaker 2: Not a well-respected profession after the great crash of 1929.

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Speaker 1: Yeah, yeah, yeah.

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Speaker 2: And he'd eventually become a congressman. His father, also not

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Speaker 2: a respected profession ever.

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Speaker 1: I know, I know.

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Speaker 2: And Warren Buffett is an awkward kid and an obsessive kid.

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Speaker 2: Like one of the things he does is he loves

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Speaker 2: collecting things in a very Warren Buffett way, right?

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Speaker 1: He starts to collect bottle caps.

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Speaker 2: But not just the bottle caps on his own bottles.

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Speaker 2: He goes to all the filling stations, the gas stations

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Speaker 2: in town, to where they sell the drinks. He goes

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Speaker 2: into the ice chest where they have them and digs

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Speaker 2: around for excess bottle caps. And then he puts them

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Speaker 2: in piles in his basement. And at night, he sorts

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Speaker 2: the bottle caps, the rare ones, the popular ones. He

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Speaker 2: thinks it's information that no one else has for some reason, right?

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Speaker 1: And he's not in this to make money, right? He's

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Speaker 1: just trying to sort of understand the world. Like in

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Speaker 1: New York, it reminds me of in New York, there's

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Speaker 1: a certain kind of, frankly, it's usually a little boy

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Speaker 1: who's really into like trains and buses. And there's a

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Speaker 1: sense of like the maps and the organization. It feels

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Speaker 1: like a Omaha 1930 version of that.

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Speaker 2: At one point, Warren Buffett and his friend recorded the

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Speaker 2: license plate number of every car that came by their house.

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Speaker 1: Yes. Just in case. Just in case. Just like there's

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Speaker 1: some order in the world. There's some. Yeah. Warren Buffett

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Speaker 1: had a job early, you know.

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Speaker 2: Newspaper route. He worked as a delivery boy for his

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Speaker 2: grandfather's grocery business. He told Alice Schroeder in her book, Snowball,

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Speaker 2: it's a biography of Warren Buffett. He said, quote, I

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Speaker 2: didn't learn anything except I don't like hard work.

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Speaker 1: I actually think an aversion to hard work is a

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Speaker 1: quality you see in people who are entrepreneurial, like successful

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Speaker 1: in a certain way. Like Thomas Edison loved hard work,

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Speaker 1: but there's another version, which is like people find what

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Speaker 1: feels like play to them. And then they do it

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Speaker 1: all the time. All the time. But it turns out

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Speaker 1: you love reading financial reports or building cars, and that

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Speaker 1: doesn't feel like work.

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Speaker 2: Yeah, I think that's right. Warren Buffett, you know, he

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Speaker 2: didn't have good grades. He just didn't want to do

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Speaker 2: what other people told him to do. He lived a

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Speaker 2: life of petty crime.

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Speaker 1: That is shocking.

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Speaker 2: I know.

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Speaker 1: I love this.

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Speaker 2: So he and his friends would case out the local seers.

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Speaker 2: This is another quote from the book. It's so good.

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Speaker 2: We would steal the place blind. We'd steal golf bags

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Speaker 2: and golf clubs. I walked out of the lower level,

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Speaker 2: where the sporting goods were, up the stairway to the street,

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Speaker 2: carrying a golf bag and golf clubs, and the clubs

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Speaker 2: were stolen, and so was the bag. I stole hundreds

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Speaker 2: of golf balls.

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Speaker 1: That explains the golf club on the Warren Buffett plushie.

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Speaker 1: It's about his crime. It's about his crime. He's a

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Speaker 1: friendly old man who stole that golf club.

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Speaker 2: Now, Buffett was also making money as a kid, like

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Speaker 2: he filed tax returns at the age of 14. That's

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Speaker 2: how much money he made from his newspaper route.

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Speaker 1: Or was he selling the stolen golf clubs and filing taxes?

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Speaker 1: And filing taxes. Very Buffett, right? Honest thief.

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Speaker 2: But I come back to this obsession thing that he

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Speaker 2: clearly had, right? I mean, this ended up being a

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Speaker 2: very important time at a very particular moment in the

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Speaker 2: stock market. where in order to succeed, you had to

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Speaker 2: do the equivalent of writing down license plates. You had

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Speaker 2: to do the detailed work to figure out what things

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Speaker 2: were worth in the stock market. So Buffett drifts through college,

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Speaker 2: doesn't do very well with the ladies, or so he says,

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Speaker 2: ends up at Columbia Business School, my alma mater. And

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Speaker 2: this is the 1950s. And by this point, all of

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Speaker 2: his fellow students want jobs in big businesses.

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Speaker 1: They want to work for GM and U.S. Steel. It's

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Speaker 1: that post-war era is all about that, right? Like there's

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Speaker 1: not like crazy new businesses starting up like there were

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Speaker 1: in the late 1800s or the late 1900s, right? It's

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Speaker 1: this very steady, stable economy. Everyone wants to be safe.

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Speaker 2: And honestly, like the safe economy is growing, so you

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Speaker 2: can make money and you can do well.

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Speaker 1: You're just riding up. You're just the organization man.

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Speaker 2: But not Warren Buffett, right? He's obsessed with this larger-than-life

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Speaker 2: investing professor at Columbia.

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Speaker 1: Yeah. named Benjamin Graham. A legend. A legend.

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Speaker 2: So he'd read this book by Benjamin Graham called The

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Speaker 2: Intelligent Investor. You can get it to this day. People

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Speaker 2: still read it, right? This book completely changed the way

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Speaker 2: Buffett and a bunch of other investors at the time

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Speaker 2: thought about stocks. When we talked about the stock market

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Speaker 2: before the great crash of 1929, Jesse Livermore, we talked

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Speaker 2: about the market like it was a rigged game, really.

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Speaker 1: Because it was.

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Speaker 2: Speculators would buy a stock and bid up the price

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Speaker 2: of it, try to sell it to each other. They

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Speaker 2: call them painting the tape, right? They try to get

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Speaker 2: their money out before it crashed. But it went up

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Speaker 2: and it crashed. And this is what the stock market was.

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Speaker 1: It was like all meme stocks. Yeah, exactly. All the time, right?

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Speaker 2: All momentum trades, psychology of the market. But Buffett's mentor,

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Speaker 2: Benjamin Graham. He said something that sounds very obvious, but

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Speaker 2: it's missed by a lot of people, even today. He

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Speaker 2: said that stocks are real companies. Stocks represent ownerships in

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Speaker 2: companies that make things. They're not just numbers that go

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Speaker 2: up and down. They represent this physical thing in the world.

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Speaker 2: And so just as if you're buying a sweater or

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Speaker 2: a car, you want it to be good, you want

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Speaker 2: it to last a long time, and you want to

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Speaker 2: get a deal on it. You want it on sale, right?

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Speaker 2: He said, just do the same thing for stocks. Look

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Speaker 2: for stocks in companies that are good companies that will

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Speaker 2: last for a long time that you can find on sale.

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Speaker 1: And like, it's worth pausing here for a minute, right?

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Speaker 1: Because still today, it sounds almost naive to talk about

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Speaker 1: stocks in this way, but also it is what a

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Speaker 1: stock is, right? You own a share, a part of

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Speaker 1: a company. And in the sort of platonic ideal of

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Speaker 1: the world, that should be worth some share of all

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Speaker 1: of the company's future profits, right? They call this a

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Speaker 1: discounted cash flow model, which you have built, which you

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Speaker 1: have showed me. And like, in the long run, it's

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Speaker 1: more or less true, right? In the long run, on average,

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Speaker 1: the price of a stock does represent the best guess

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Speaker 1: the world can make today about the value of that

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Speaker 1: company's profits from today until forever.

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Speaker 2: But a lot of investors don't think about the long run.

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Speaker 2: They're just like, will more people buy it tomorrow? And

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Speaker 2: can I sell it for more money than I bought it?

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Speaker 1: It's so weird to me, frankly. Very weird. The way

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Speaker 1: it's like, what did it do today? And what is

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Speaker 1: it going to do tomorrow? Nobody knows what it's going

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Speaker 1: to do tomorrow.

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Speaker 2: Now, to be fair, it was hard at the time

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Speaker 2: that we're talking about, the 1950s, to get the kind

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Speaker 2: of information you would need to figure out what a

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Speaker 2: company is really worth. You know, there wasn't a Yahoo Finance.

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Speaker 2: There were annual reports, but you had to search for them.

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Speaker 2: You had to get them in the mail. You had

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Speaker 2: to go to the library.

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Speaker 1: And importantly, right, there wasn't this giant industry like there

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Speaker 1: is today of people who are pouring over those things

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Speaker 1: and getting all the information they can out of them.

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Speaker 2: Luckily, Warren Buffett is a collector of weird things and

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Speaker 2: is willing to go the extra mile to find them.

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Speaker 2: He was perfect for the situation. So he signs up

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Speaker 2: for Graham's investing class at Columbia. And this is where

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Speaker 2: it tips over into actually disturbingly crazy, right? Buffett essentially

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Speaker 2: starts to stalk Professor Graham before he takes the class.

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Speaker 2: He finds out everything he can about Benjamin Graham, including

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Speaker 2: the fact that Graham was chairman of the board of

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Speaker 2: a company called Government Employees Insurance Company.

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Speaker 1: Ah, Geico. Geico.

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Speaker 2: It will eventually be known as Geico. This is way

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Speaker 2: before the gecko, right? And Buffett is like, huh, what

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Speaker 2: is up with this Geico company? And again, he's 20

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Speaker 2: years old.

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Speaker 1: He's in school.

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Speaker 2: This is his professor. He hasn't even taken the course.

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Speaker 2: He gets on a train from New York to D.C.

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Speaker 2: to go visit Geico to find out more about it.

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Speaker 1: Knocks on the door. What does he do?

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Speaker 2: On a Saturday, doors are locked. A janitor lets him in.

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Speaker 2: Because Buffett says, oh, well, my professor is the chairman

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Speaker 2: of the board. And the chairman is like, whatever, kid.

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Speaker 1: Like, come on in.

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Speaker 2: Only one person is working on this Saturday at Geico,

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Speaker 2: the vice president of finance. And Buffett, like, knocks on

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Speaker 2: his door, says, can I ask you a question? And

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Speaker 2: I saw an interview with the vice president of finance

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Speaker 2: later who was like, yeah, I thought I'd answer this

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Speaker 2: kid's question, right?

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Speaker 1: Four hours go by. Four hours. Four hours.

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Speaker 2: The vice president said this was like talking to, you know,

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Speaker 2: an investor in the insurance business, an analyst who knew

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Speaker 2: all of these things. And Buffett later, he talks about

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Speaker 2: this moment a lot because what he sees is he

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Speaker 2: sees that certain companies have certain strategic advantages. And Geico

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Speaker 2: is one of them. It's a stock that he would

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Speaker 2: buy and end up eventually controlling the company, right? But

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Speaker 2: here's what he learned about Geico.

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Speaker 1: Two things.

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Speaker 2: First of all, it's an insurance company. They take money in.

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Speaker 2: When things go wrong, crash your car, they pay out

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Speaker 2: the money. What they figured out is we need good drivers.

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Speaker 2: How do you know who's going to be a good driver? Well,

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Speaker 2: back in those days, they're like, we're only going to

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Speaker 2: insure government workers who, for some reason, or maybe statistically, right,

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Speaker 2: are less likely to speed and get in a crash

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Speaker 2: and drink and drive.

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Speaker 1: You could make up a theory, right? Like, if you're risk-averse,

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Speaker 1: if you want to be a very stable, steady person,

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Speaker 1: go get a government job. You're not going to get

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Speaker 1: super rich, but you're probably not going to get fired.

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Speaker 1: Sounds like a A lower risk driver than the average person.

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Speaker 2: So he sees a company that has identified a way

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Speaker 2: to lower their costs and to basically choose their customers

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Speaker 2: and have a competitive advantage because they specialize in government employees.

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Speaker 2: Where else are they going to go but your company, right?

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Speaker 1: So this is the moat, right? This is one of

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Speaker 1: the big Buffett ideas. It's not just a company that

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Speaker 1: is beating its competitors, but a company that has a

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Speaker 1: durable competitive advantage. That's like classic Buffett. Classic Buffett.

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Speaker 2: The other thing he learns... is the insurance company has

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Speaker 2: piles and piles of cash because people pay their premiums

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Speaker 2: every month on time. The money comes in and the

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Speaker 2: company doesn't have to pay out that money until much

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Speaker 2: later when there's a crash. Maybe they don't pay it

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Speaker 2: out at all, right?

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Speaker 1: This is called the float. This is called the float.

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Speaker 2: And so he saw that this company was constantly looking

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Speaker 2: for things to invest in because they had so much money.

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Speaker 2: Young Warren Buffett is like, huh. And by the way,

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Speaker 2: this is all before he takes the investing course.

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Speaker 1: He's 20. He's got a pile of bottle caps back

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Speaker 1: in his childhood bedroom.

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Speaker 2: He starts to buy Geico, right? Shows up in the class,

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Speaker 2: front row, raises his hand, A +.

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Speaker 1: Sure, I would hope so.

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Speaker 2: He wants to work for Benjamin Graham. That's all he

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Speaker 2: wants to do. Focused, focused young man, right? So Warren

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Speaker 2: Buffett goes to Benjamin Graham and says, A +, can

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Speaker 2: I come work for your company? And Benjamin Graham says, no.

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Speaker 2: Interesting reasons. Benjamin Graham was Jewish, and he said it's

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Speaker 2: very hard for Jews to get jobs in Wall Street

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Speaker 2: and finance at this time.

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Speaker 1: Depends on the firm.

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Speaker 2: At this time, yes. So he said that he would

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Speaker 2: only hire Jewish investors for his firm as a sort

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Speaker 2: of affirmative action.

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Speaker 1: I'll be honest with you, that story, as you may know,

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Speaker 1: I'm Jewish, and I feel a little awkward about that,

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Speaker 1: but I'm interested. Go on.

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Speaker 2: This is what Benjamin Graham thought. Warren Buffett, famously, not

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Speaker 2: a Jew. Yes. Could not get a job at the company, right?

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Speaker 2: So he gets a job as a stockbroker like his

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Speaker 2: dad did. And Buffett hates it.

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Speaker 1: Huh.

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Speaker 2: Hates being a stockbroker. And if you think about it,

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Speaker 2: being a stockbroker means you are a salesman and you

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Speaker 2: have to sell new companies to your investors all the time.

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Speaker 2: Buffett wants to buy one company. He wants everyone to

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Speaker 2: just buy Geico and to never sell it ever. And

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Speaker 2: if you're working on commission.

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Speaker 2: That's a really bad business. I got one stock for

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Speaker 2: you to buy. Never sell it. You can't make money

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Speaker 2: off of it.

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Speaker 1: So what's he do?

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Speaker 2: He eventually does go back and gets a job with Graham,

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Speaker 2: convinces him. And this is where the two of them,

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Speaker 2: they cook up the system that is going to make

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Speaker 2: Warren Buffett rich.

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Speaker 1: After the break. After the break.

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Speaker 2: It's the mid-1950s, and Warren Buffett is living the dream.

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Speaker 2: Maybe not his dream, but a classic American dream. He's

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Speaker 2: living in Westchester, outside of New York City. He's working

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Speaker 2: for his hero, Benjamin Graham. He's got a wife, Susan,

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Speaker 2: two kids, soon to be three kids, Susie, Howie, and Peter.

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Speaker 2: And Buffett spends almost no time with them. He basically

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Speaker 2: eats dinner, goes upstairs, and reads one financial report after

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Speaker 2: the other.

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Speaker 1: 50s dad. That's what he loved, right?

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Speaker 2: And the key idea that he and Benjamin Graham had

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Speaker 2: was to find something that they referred to as a

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Speaker 2: cigar butt company. And the joke, I guess it's a

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Speaker 2: joke after the depression, right? The joke is that you

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Speaker 2: could find a cigar butt thrown in the gutter and

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Speaker 2: there'd be just enough tobacco left to get like two good.

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Speaker 1: Puffs out of it. And then you could throw it away, right?

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Speaker 1: So this is different than the classic Buffett. This is

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Speaker 1: not the way we think of Buffett today. No, that's right.

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Speaker 2: This is how young Buffett made his money because there

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Speaker 2: was this information gap in the market. If he could

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Speaker 2: find a cigar butt company that felt like I can

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Speaker 2: get a little bit of money out of this and

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Speaker 2: sell it, then I'll be able to like multiply my money.

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Speaker 2: I'd be able to like, you know, make it happen. Right?

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Speaker 1: So here's an example.

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Speaker 2: He found the Union Street Railway in New Bedford, Massachusetts.

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Speaker 2: It's 1955. This is a company that owned a bunch

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Speaker 2: of buses. I don't know where the rail was, but

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Speaker 2: a bunch of buses.

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Speaker 1: I bet they started out as one of those little

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Speaker 1: urban streetcar companies.

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Speaker 2: So they may have run a trolley car at some point,

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Speaker 2: but at this point they are buses at an amusement park.

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Speaker 1: Amazing. Sure.

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Speaker 2: So there's nothing remarkable about this company, but.

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Speaker 1: Warren Buffett starts to- Buses at an amusement park is

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Speaker 1: mildly remarkable. It's fun, right? It's like the Chinese army.

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Speaker 1: They own a lot of weird things.

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Speaker 2: We have the amusement park and the way you get there.

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Speaker 2: So he starts to research the company and he finds

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Speaker 2: out that in addition to the Tilt-A-Whirl, they have about

402
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Speaker 2: a million dollars in treasury bonds and cash, just like

403
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Speaker 2: sitting in the company. He does the math, figures out

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Speaker 2: the company is worth like $ 60 per share if you

405
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Speaker 2: include all this money laying around, stocks selling for $ 30

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Speaker 2: or $ 35 a share.

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Speaker 1: Amazing.

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Speaker 2: So one of the reasons why there's probably this huge

409
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Speaker 2: gap is that stocks weren't all traded on a central

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Speaker 2: system back then, right?

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Speaker 1: So just to be clear, this stock is not on

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Speaker 1: the New York Stock Exchange. It's some weird little company

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Speaker 1: that trades at some random little exchange. So people working

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Speaker 1: on Wall Street don't even know this stock exists.

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Speaker 2: No, only a man who would spend every night whoring

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Speaker 2: over companies and company documents would know that this tiny

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Speaker 2: company exists, right? So Buffett puts an ad in the

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Speaker 2: newspapers saying, I will buy shares for a certain price.

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Speaker 2: He wants all the shares he can get his hands on,

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Speaker 2: hoping that there's like old retirees of the company who

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Speaker 2: have these stocks who are reading the newspapers.

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Speaker 1: Like certificates, right? They probably have a drawer with a

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Speaker 1: piece of paper. Send them to me. It sounds like

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Speaker 1: such a scam, doesn't it? Like if you saw an

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Speaker 1: ad in the newspaper to send your stock certificate in,

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Speaker 1: I would think it was a scam.

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Speaker 2: But maybe more trust back in those days to Warren Buffett, right?

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Speaker 2: So he builds up his position in this company and

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Speaker 2: he does what I guess apparently is one of his tricks.

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Speaker 2: He shows up again on the weekend, like to like

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Speaker 2: barnstorm into the company, meets with the CEO and whether

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Speaker 2: he convinces the CEO to do something or whether the

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Speaker 2: CEO was going to do it anyway, we don't know.

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Speaker 2: But soon afterwards, the CEO is like, okay, we will

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Speaker 2: offer dividends, payments back on the stock and we will

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Speaker 2: pay out our cash.

437
00:21:37,660 --> 00:21:40,379
Speaker 1: Oh, wow. I know. Buffett makes $ 20, 000.

438
00:21:40,020 --> 00:21:44,120
Speaker 2: Look at that. Buying up cheap stock, selling it high,

439
00:21:44,660 --> 00:21:46,909
Speaker 2: which is good. Like if you're a 20-something back in

440
00:21:46,940 --> 00:21:49,379
Speaker 2: those days, $ 20, 000 is awesome, right?

441
00:21:49,670 --> 00:21:51,530
Speaker 1: Yeah. I'd take it today.

442
00:21:53,270 --> 00:21:56,169
Speaker 2: Put it out in the newspaper, Jacob. He starts to

443
00:21:56,190 --> 00:21:59,149
Speaker 2: find more and more of these cigar bots. And, you know,

444
00:21:59,170 --> 00:22:01,290
Speaker 2: if you read his biography, there's just like, he has

445
00:22:01,310 --> 00:22:03,630
Speaker 2: like intricate details of each one. I think the man

446
00:22:03,650 --> 00:22:05,050
Speaker 2: has never forgotten a stock price.

447
00:22:05,109 --> 00:22:06,010
Speaker 1: Yeah. Right? Yeah.

448
00:22:06,450 --> 00:22:10,020
Speaker 2: But I'm struck by, the bigger picture of American finance

449
00:22:10,140 --> 00:22:13,340
Speaker 2: at the time, right? In the decades after the Depression,

450
00:22:13,680 --> 00:22:16,200
Speaker 2: American companies were really cautious, right?

451
00:22:16,619 --> 00:22:18,660
Speaker 1: They stockpiled cash.

452
00:22:18,510 --> 00:22:23,170
Speaker 2: And bonds and emergency funds because there was this feeling

453
00:22:23,290 --> 00:22:26,850
Speaker 2: like the bad times can come again very quickly. So

454
00:22:26,970 --> 00:22:31,850
Speaker 2: what you had was... companies that were really being overly cautious.

455
00:22:31,950 --> 00:22:33,690
Speaker 2: And that's what Buffett saw.

456
00:22:33,890 --> 00:22:38,669
Speaker 1: Well, and also investors were clearly overly cautious, right? I mean, A,

457
00:22:38,730 --> 00:22:41,300
Speaker 1: they weren't doing the work of like finding these obscure companies,

458
00:22:41,359 --> 00:22:44,720
Speaker 1: but it's easy to forget now when we just assume that,

459
00:22:44,820 --> 00:22:46,179
Speaker 1: you know, the stock market, the S & P is

460
00:22:46,200 --> 00:22:48,520
Speaker 1: going to return whatever it is, 8% on average year

461
00:22:48,540 --> 00:22:52,239
Speaker 1: after year. Like it took decades after the depression for

462
00:22:52,260 --> 00:22:54,140
Speaker 1: the stock market to get back to where it was.

463
00:22:54,220 --> 00:22:57,040
Speaker 1: Like if you bought in 2019, you were probably still

464
00:22:57,060 --> 00:23:00,600
Speaker 1: underwater in like 1950, certainly like into the 40s, you know?

465
00:23:00,619 --> 00:23:05,790
Speaker 1: So like, not only were companies being cautious, but so

466
00:23:05,830 --> 00:23:06,570
Speaker 1: were investors.

467
00:23:06,750 --> 00:23:09,090
Speaker 2: Yeah, who would want to buy these big names, the

468
00:23:09,109 --> 00:23:11,530
Speaker 2: General Motors, right? But they didn't want to look at

469
00:23:11,550 --> 00:23:14,590
Speaker 2: some tiny company in New Bedford, Massachusetts. Buffett would get

470
00:23:14,609 --> 00:23:16,810
Speaker 2: something called the pink sheets, which were the prices of

471
00:23:16,850 --> 00:23:20,270
Speaker 2: these tiny companies that would come out once a week.

472
00:23:20,430 --> 00:23:23,530
Speaker 2: I assume that they were actually pink. And that was

473
00:23:23,590 --> 00:23:27,220
Speaker 2: like the most up-to-date knowledge about the stocks once a

474
00:23:27,260 --> 00:23:28,160
Speaker 2: week in the mail.

475
00:23:29,119 --> 00:23:32,040
Speaker 1: Running to, running to the mailbox, ripping over the pink

476
00:23:32,080 --> 00:23:32,919
Speaker 1: sheet envelope.

477
00:23:33,180 --> 00:23:35,240
Speaker 2: That's when Warren Buffett would do the Warren Buffett thing.

478
00:23:35,280 --> 00:23:36,880
Speaker 2: He'd start to call him on the phone. He'd start

479
00:23:36,900 --> 00:23:38,639
Speaker 2: to research the company. He'd ask for all their stuff.

480
00:23:38,680 --> 00:23:41,380
Speaker 2: Like he is putting in the extra work and that

481
00:23:41,420 --> 00:23:43,419
Speaker 2: is how he is finding these companies. And no one

482
00:23:43,440 --> 00:23:45,859
Speaker 2: else was doing it other than Benjamin Graham and a

483
00:23:45,880 --> 00:23:49,080
Speaker 2: few other people who follow this philosophy. And so this

484
00:23:49,160 --> 00:23:51,020
Speaker 2: is the flaw. This is the flaw he found in

485
00:23:51,040 --> 00:23:53,899
Speaker 2: the market. And this is what he started to ride.

486
00:23:53,920 --> 00:23:58,459
Speaker 2: He crosses $ 100, 000 in net worth in the mid-1950s. He's

487
00:23:58,500 --> 00:24:01,160
Speaker 2: in his mid-20s, still a young man. Managing other people's

488
00:24:01,200 --> 00:24:03,780
Speaker 2: money at this point. Millionaire around the age of 30.

489
00:24:03,780 --> 00:24:05,139
Speaker 1: Has $ 10 million by the late 1960s.

490
00:24:05,270 --> 00:24:05,340
Speaker 2: Wow.

491
00:24:09,030 --> 00:24:12,199
Speaker 1: And just these little companies, one after another, getting in,

492
00:24:12,240 --> 00:24:13,939
Speaker 1: getting out. That's his move the whole time?

493
00:24:13,960 --> 00:24:16,939
Speaker 2: He does some bigger companies. There's like a play on Amex,

494
00:24:17,000 --> 00:24:21,560
Speaker 2: American Express, that was because of a cooking oil scandal.

495
00:24:22,220 --> 00:24:24,030
Speaker 1: Too hard to get into. Too hard to get into.

496
00:24:24,090 --> 00:24:29,210
Speaker 2: But the weird thing about this is that he is

497
00:24:29,230 --> 00:24:33,889
Speaker 2: a very successful investor, right? Making millions of dollars on

498
00:24:33,910 --> 00:24:37,740
Speaker 2: this technique. He's back in Omaha at this point. And

499
00:24:37,800 --> 00:24:40,840
Speaker 2: nobody knows much about him. He's not on the front

500
00:24:40,880 --> 00:24:43,160
Speaker 2: page of the Wall Street Journal. People are not writing

501
00:24:43,200 --> 00:24:45,790
Speaker 2: about him really into the late 60s, like when he

502
00:24:45,890 --> 00:24:52,730
Speaker 2: is already almost middle-aged. And he starts to twist these ideas.

503
00:24:52,790 --> 00:24:56,230
Speaker 2: Benjamin Graham retires. Buffett gets his own investors. And he

504
00:24:56,270 --> 00:24:59,090
Speaker 2: starts to kind of take these ideas and do it

505
00:24:59,170 --> 00:25:04,189
Speaker 2: slightly differently, which is Benjamin Graham preached diversification. His idea,

506
00:25:04,390 --> 00:25:06,670
Speaker 2: the flip side of the cigar butts, was buy a

507
00:25:06,710 --> 00:25:09,740
Speaker 2: lot of them. You never know which one's going to

508
00:25:09,760 --> 00:25:12,900
Speaker 2: make it and which one's not. So, like, diversify, right?

509
00:25:12,920 --> 00:25:16,420
Speaker 2: Warren Buffett is like, no.

510
00:25:17,200 --> 00:25:18,020
Speaker 1: I have good ideas.

511
00:25:18,080 --> 00:25:20,620
Speaker 2: I have this success rate so far, so I'm going

512
00:25:20,640 --> 00:25:23,390
Speaker 2: to kind of go all in on these companies I love, right?

513
00:25:23,430 --> 00:25:28,950
Speaker 1: That's counter not just to Benjamin Graham, right, but to, like, math. Math, right.

514
00:25:29,130 --> 00:25:32,450
Speaker 1: So Markowitz, right, there's this whole modern portfolio theory that's

515
00:25:32,490 --> 00:25:35,690
Speaker 1: coming in right around this time, right? The 60s. Yeah. And, like,

516
00:25:36,240 --> 00:25:39,060
Speaker 1: It's a pretty compelling case that diversification is good, that

517
00:25:39,119 --> 00:25:41,240
Speaker 1: it is a free lunch, that you get basically the

518
00:25:41,280 --> 00:25:43,980
Speaker 1: same return with less kind of idiosyncratic risk. And Warren

519
00:25:44,000 --> 00:25:48,570
Speaker 1: Buffett is disagreeing. Here's what he says about that. Diversification

520
00:25:48,670 --> 00:25:52,209
Speaker 1: is protection against ignorance. It makes little sense if you

521
00:25:52,250 --> 00:25:52,930
Speaker 1: know what you're doing.

522
00:25:53,609 --> 00:25:53,810
Speaker 2: Huh.

523
00:25:54,450 --> 00:25:57,889
Speaker 1: Boom. It's for chumps, Jacob, like us. I mean, fair.

524
00:25:58,570 --> 00:25:59,230
Speaker 1: Tough but fair.

525
00:25:59,810 --> 00:26:02,350
Speaker 2: I mean, it worked for him. I do not advise

526
00:26:02,369 --> 00:26:03,310
Speaker 2: this for everyone, right?

527
00:26:03,330 --> 00:26:03,750
Speaker 1: Yeah.

528
00:26:04,960 --> 00:26:08,550
Speaker 2: It did give him a certain advantage over the Benjamin

529
00:26:08,570 --> 00:26:12,350
Speaker 2: Grahams of the world, which was if you pile into

530
00:26:12,670 --> 00:26:16,389
Speaker 2: certain companies in particular, you don't have to rely on

531
00:26:16,430 --> 00:26:19,830
Speaker 2: them to do the right thing to release this money

532
00:26:19,890 --> 00:26:24,430
Speaker 2: that they're keeping to their investors, right? If you assemble

533
00:26:24,460 --> 00:26:27,300
Speaker 2: enough stock, they have to listen to you. You can

534
00:26:27,340 --> 00:26:30,360
Speaker 2: get elected to the board. You can make them do things, right?

535
00:26:31,080 --> 00:26:33,770
Speaker 2: And this was the next sort of turn of the

536
00:26:33,850 --> 00:26:36,570
Speaker 2: screw that Warren Buffett was doing. He would find these

537
00:26:36,609 --> 00:26:40,570
Speaker 2: undervalued companies and then he would make them give him

538
00:26:40,650 --> 00:26:41,290
Speaker 2: back the money.

539
00:26:41,470 --> 00:26:46,720
Speaker 1: Uh-huh. Sanborn Map. Map. It's a map company. Do they

540
00:26:46,760 --> 00:26:50,580
Speaker 1: also own a chain of ice cream parlors? That would

541
00:26:50,600 --> 00:26:51,500
Speaker 1: be great, right? No.

542
00:26:51,840 --> 00:26:53,420
Speaker 2: But they could tell you how to get there because

543
00:26:53,440 --> 00:26:57,689
Speaker 2: they made maps. So they specialized in selling very detailed maps.

544
00:26:57,710 --> 00:27:00,270
Speaker 1: I remember maps. Did you have the Thomas Brothers guide

545
00:27:00,330 --> 00:27:02,320
Speaker 1: at the back of the car? Oh, yeah. Yeah, I

546
00:27:02,320 --> 00:27:03,480
Speaker 1: absolutely did. It was a whole book. It was a

547
00:27:03,520 --> 00:27:05,140
Speaker 1: whole block in the county. It was a whole book, yeah.

548
00:27:05,560 --> 00:27:08,640
Speaker 2: So this is even more detailed than the Thomas Brothers maps, right?

549
00:27:08,920 --> 00:27:14,030
Speaker 2: They would sell these maps that were basically diagrams of

550
00:27:14,180 --> 00:27:17,169
Speaker 2: specific buildings in every floor. So you knew where the

551
00:27:17,230 --> 00:27:19,270
Speaker 2: entrances and exits were, you knew where the windows were,

552
00:27:19,369 --> 00:27:20,590
Speaker 2: all of this sort of thing. And they would sell

553
00:27:20,630 --> 00:27:23,630
Speaker 2: it to insurance companies who needed to know how safe

554
00:27:23,670 --> 00:27:25,970
Speaker 2: the buildings were, and the fire departments, so they knew

555
00:27:26,109 --> 00:27:27,430
Speaker 2: how to get in and out of the building if

556
00:27:27,450 --> 00:27:28,030
Speaker 2: there was a fire.

557
00:27:28,050 --> 00:27:31,649
Speaker 1: It's a moat, by the way. Yeah. Who's going to

558
00:27:31,760 --> 00:27:35,000
Speaker 1: make maps of every building in America once one company

559
00:27:35,020 --> 00:27:37,080
Speaker 1: already has it? Exactly right. Exactly right.

560
00:27:37,160 --> 00:27:41,480
Speaker 2: So Buffett starts to buy some of their stock, buys

561
00:27:41,540 --> 00:27:43,929
Speaker 2: enough that he gets on the board of directors, shows

562
00:27:43,990 --> 00:27:45,270
Speaker 2: up for the board meeting, right?

563
00:27:45,530 --> 00:27:48,810
Speaker 1: He's ready. Looks around at the board of directors.

564
00:27:49,090 --> 00:27:53,800
Speaker 2: And he realizes... They don't really own much stock. They

565
00:27:53,840 --> 00:27:56,719
Speaker 2: are the board of directors because I assume they are

566
00:27:56,840 --> 00:27:58,740
Speaker 2: old men who have been on the company board a

567
00:27:58,780 --> 00:28:02,510
Speaker 2: long time, friends of somebody way back when. And he's

568
00:28:02,550 --> 00:28:06,110
Speaker 2: the one that actually owns a large share of the company.

569
00:28:06,430 --> 00:28:08,770
Speaker 2: The rest of them, they're just there for, you know,

570
00:28:09,250 --> 00:28:10,310
Speaker 2: just for fun, right?

571
00:28:10,410 --> 00:28:14,280
Speaker 1: I mean, they're getting paid. Maybe they're friends of the CEO, right?

572
00:28:14,320 --> 00:28:16,600
Speaker 1: Classic CEO move is like pick the people who are

573
00:28:16,660 --> 00:28:18,340
Speaker 1: notionally your boss, who are actually your buddies.

574
00:28:18,710 --> 00:28:21,250
Speaker 2: Buffett says to them, hey, okay, we got to do

575
00:28:21,270 --> 00:28:23,250
Speaker 2: the thing, right? You got all this extra money. Why

576
00:28:23,270 --> 00:28:25,650
Speaker 2: don't we just give it back to your shareholders, which

577
00:28:26,150 --> 00:28:31,630
Speaker 2: is kind of me. And they're like, yeah, no. And

578
00:28:31,850 --> 00:28:36,440
Speaker 2: then he says, they light up some cigars and laugh.

579
00:28:37,040 --> 00:28:41,000
Speaker 1: And he's thinking, I paid for those cigars. I paid

580
00:28:41,020 --> 00:28:41,580
Speaker 1: for the room.

581
00:28:41,920 --> 00:28:43,760
Speaker 2: I paid for you guys to sit here, right?

582
00:28:43,860 --> 00:28:48,300
Speaker 1: There's a classic... problem with public companies, right? People have

583
00:28:48,320 --> 00:28:50,650
Speaker 1: been aware of it for hundreds of years, the principal

584
00:28:50,790 --> 00:28:54,170
Speaker 1: agent problem. When one person or group of people owns

585
00:28:54,210 --> 00:28:56,670
Speaker 1: the company, like the shareholders, and somebody else runs it,

586
00:28:57,530 --> 00:29:00,390
Speaker 1: the people running it are not going to naturally act

587
00:29:00,430 --> 00:29:01,970
Speaker 1: in the best interest of the owners. They're going to

588
00:29:01,990 --> 00:29:02,890
Speaker 1: act in their own best interest.

589
00:29:02,910 --> 00:29:05,720
Speaker 2: The incentives are not aligned, right? So he threatens a

590
00:29:05,800 --> 00:29:08,280
Speaker 2: special meeting. He's going to, like, take this to all

591
00:29:08,300 --> 00:29:11,940
Speaker 2: the shareholders. Eventually, the rest of the board relents. They

592
00:29:12,080 --> 00:29:14,960
Speaker 2: offer to give back some of the company's excess money, right?

593
00:29:15,000 --> 00:29:17,440
Speaker 1: Mm-hmm. So this is his strategy. Meaning pay it out

594
00:29:17,460 --> 00:29:19,640
Speaker 1: to shareholders, pay it out as dividends to the shareholders.

595
00:29:19,700 --> 00:29:22,410
Speaker 2: Exactly right. So this is the strategy. You find the

596
00:29:22,450 --> 00:29:26,170
Speaker 2: undervalued company, you buy the stock. If the price goes up, great,

597
00:29:26,350 --> 00:29:28,830
Speaker 2: you can sell the stock. If the stock price goes down,

598
00:29:28,930 --> 00:29:32,150
Speaker 2: you buy more and more and more. And now you

599
00:29:32,170 --> 00:29:34,370
Speaker 2: have an underpriced company that you own a big chunk

600
00:29:34,450 --> 00:29:36,850
Speaker 2: of and you can bully them into doing what you want.

601
00:29:37,450 --> 00:29:40,650
Speaker 1: Which is arguably the right thing. You can bully them

602
00:29:40,690 --> 00:29:42,840
Speaker 1: into acting in the best interests of the owners of

603
00:29:42,840 --> 00:29:43,470
Speaker 1: the company.

604
00:29:43,470 --> 00:29:46,780
Speaker 2: Now, they might say another depression's around the corner. This

605
00:29:46,780 --> 00:29:48,780
Speaker 2: could happen at any time, No, that's true. And we

606
00:29:48,860 --> 00:29:51,000
Speaker 2: can't live on the edge, Mr.

607
00:29:51,040 --> 00:29:51,440
Speaker 1: Buffett.

608
00:29:51,900 --> 00:29:55,340
Speaker 2: And he's like, it's my company, and I want the money.

609
00:29:55,520 --> 00:29:57,640
Speaker 1: Yeah. Usually worked.

610
00:29:58,980 --> 00:30:02,000
Speaker 2: The one time it didn't work, maybe Warren Buffett's most

611
00:30:02,320 --> 00:30:04,330
Speaker 2: famous investment. And we'll do that.

612
00:30:05,170 --> 00:30:12,690
Speaker 1: Berkshire Hathaway. After the break. Oh, you're funny. I'm going

613
00:30:12,730 --> 00:30:15,450
Speaker 1: to go to the bathroom. That is the end of

614
00:30:15,490 --> 00:30:40,620
Speaker 1: the ads. So, Robert, when we left... Warren Buffett was

615
00:30:40,760 --> 00:30:47,020
Speaker 1: collecting cigar butts, bullying, recalcitrant boards. Now he's about to

616
00:30:47,080 --> 00:30:48,580
Speaker 1: make a big move.

617
00:30:48,980 --> 00:30:52,860
Speaker 2: Yeah, it's the 60s, swinging 60s. Clearly not in Omaha, Nebraska.

618
00:30:53,160 --> 00:30:56,150
Speaker 2: Never really came there. But Buffett's looking around for these

619
00:30:56,210 --> 00:30:58,870
Speaker 2: tiny companies, cigar butts, and he finds what he thinks

620
00:30:58,930 --> 00:31:03,370
Speaker 2: is a great one. It is a textile manufacturer also

621
00:31:03,430 --> 00:31:07,360
Speaker 2: in New Bedford, Massachusetts, home of a lot of Dying Industries, yes.

622
00:31:08,140 --> 00:31:10,219
Speaker 1: Is it a whaling company? Yeah, exactly right.

623
00:31:11,000 --> 00:31:14,480
Speaker 2: No, it is a textile manufacturer known as Berkshire.

624
00:31:14,140 --> 00:31:18,540
Speaker 1: Hathaway, right? Just this great regal name. I've heard of

625
00:31:18,600 --> 00:31:20,120
Speaker 1: this textile company somehow.

626
00:31:20,180 --> 00:31:23,400
Speaker 2: So they make fabric, and eventually they'll specialize in the

627
00:31:23,510 --> 00:31:27,630
Speaker 2: lining to men's suits. You know, like that kind of rayon,

628
00:31:27,750 --> 00:31:31,400
Speaker 2: sateen kind of thing, right? Now, even in the 1960s,

629
00:31:31,390 --> 00:31:31,750
Speaker 2: nobody thought.

630
00:31:34,870 --> 00:31:35,830
Speaker 1: that there was going to be a.

631
00:31:35,890 --> 00:31:41,200
Speaker 2: Renaissance of textile manufacturing in Northeast United States, right? It

632
00:31:41,220 --> 00:31:45,200
Speaker 2: just was not happening. Most of the textile mills had

633
00:31:45,260 --> 00:31:47,400
Speaker 2: moved to the Southern United States. They were about to

634
00:31:47,440 --> 00:31:52,090
Speaker 2: move overseas. This is an expensive, low-margin business. And anyone

635
00:31:52,150 --> 00:31:53,550
Speaker 2: can make the lining to a suit.

636
00:31:53,570 --> 00:31:55,550
Speaker 1: Yes, there is no moat. There is no moat.

637
00:31:56,310 --> 00:31:59,560
Speaker 2: So the owner of Berkshire Hathaway was, and I love

638
00:31:59,580 --> 00:32:02,240
Speaker 2: this name, Seabury Stanton.

639
00:32:02,760 --> 00:32:03,160
Speaker 1: Not a Jew.

640
00:32:04,110 --> 00:32:06,820
Speaker 2: I'm not saying he was wearing a top hat, but

641
00:32:06,860 --> 00:32:08,230
Speaker 2: he definitely owned a top hat.

642
00:32:08,300 --> 00:32:12,120
Speaker 1: I'm thinking more yachting hat. Like a captain's hat, right?

643
00:32:12,140 --> 00:32:16,000
Speaker 1: Seabury Stanton in New Bedford. That guy definitely was on

644
00:32:16,060 --> 00:32:16,420
Speaker 1: a yacht.

645
00:32:17,380 --> 00:32:21,360
Speaker 2: So, young Buffett starts doing his thing. He's acquiring shares

646
00:32:21,400 --> 00:32:23,900
Speaker 2: of the company, right? Secretly, as he often did, because

647
00:32:23,920 --> 00:32:26,480
Speaker 2: he didn't want anyone to know that he was accumulating

648
00:32:26,510 --> 00:32:27,610
Speaker 2: this large position, right?

649
00:32:29,210 --> 00:32:30,990
Speaker 1: So, he looks at it, right? It's $ 7. 50 a share.

650
00:32:31,010 --> 00:32:31,540
Speaker 1: He thinks....

651
00:32:34,310 --> 00:32:36,090
Speaker 2: The company's probably worth $ 19 a share.

652
00:32:36,130 --> 00:32:37,650
Speaker 1: Okay. Right? Double, right?

653
00:32:38,150 --> 00:32:41,190
Speaker 2: But Seabury Stanton also knows the company is too cheap.

654
00:32:41,610 --> 00:32:45,550
Speaker 2: Seabury Stanton is also accumulating shares in his own company, right?

655
00:32:46,490 --> 00:32:49,780
Speaker 1: So Buffett does the thing, stops by. Oh, hi.

656
00:32:49,820 --> 00:32:51,420
Speaker 2: Just wanted to stop in and tell you I own

657
00:32:51,440 --> 00:32:52,880
Speaker 2: a large part of your company. What are you going

658
00:32:52,900 --> 00:32:55,640
Speaker 2: to do about it, right? And Seabury Stanton says, I

659
00:32:56,360 --> 00:32:59,540
Speaker 2: know you're buying Berkshire Hathaway, and I want to buy

660
00:32:59,580 --> 00:33:01,820
Speaker 2: it back. What will you sell it for, Mr.

661
00:33:01,860 --> 00:33:07,720
Speaker 1: Buffett? And Buffett goes... $ 11.

662
00:33:03,720 --> 00:33:07,220
Speaker 2: 50 a share.

663
00:33:08,300 --> 00:33:08,780
Speaker 1: Bought it for $ 7.

664
00:33:08,680 --> 00:33:11,170
Speaker 2: 50, sell it for $ 11.

665
00:33:10,370 --> 00:33:11,870
Speaker 1: 50, good profit, right? Yeah, yeah.

666
00:33:12,420 --> 00:33:16,090
Speaker 2: And Seabury says, if I make that offer to you,

667
00:33:16,590 --> 00:33:17,990
Speaker 2: will you promise to take it?

668
00:33:18,850 --> 00:33:20,670
Speaker 1: Huh. And Buffett says, sure.

669
00:33:20,710 --> 00:33:22,630
Speaker 2: I mean, if it's in the near future, I will

670
00:33:22,670 --> 00:33:26,930
Speaker 2: take $ 11. 50 a share. Then eventually, Buffett gets the letter

671
00:33:26,970 --> 00:33:27,830
Speaker 2: from Seabury Stanton.

672
00:33:29,390 --> 00:33:30,170
Speaker 1: It is not $ 11. 50 a share.

673
00:33:30,190 --> 00:33:34,770
Speaker 2: Seabury is offering $ 11.

674
00:33:30,770 --> 00:33:38,420
Speaker 1: 038. Three-eighths, because stocks traded in eights at that time.

675
00:33:38,460 --> 00:33:40,380
Speaker 1: And so three-eighths is.

676
00:33:40,920 --> 00:33:43,780
Speaker 2: One-eighth of a dollar less than he promised.

677
00:33:43,820 --> 00:33:45,680
Speaker 1: What is it? It's like 12 cents. So it's like

678
00:33:45,680 --> 00:33:53,510
Speaker 1: 11.38 instead of 11.50. Yeah. Buffett goes ballistic. Right? This

679
00:33:53,570 --> 00:33:55,970
Speaker 1: is not the bottle cap I was promised.

680
00:33:56,710 --> 00:33:59,670
Speaker 2: So this guy's trying to chisel me for 12 cents.

681
00:34:01,130 --> 00:34:03,690
Speaker 1: And Buffett's in at $ 750 a share, just to be clear.

682
00:34:03,760 --> 00:34:05,860
Speaker 1: It's still basically a 50% return. Buffett says, I don't

683
00:34:05,940 --> 00:34:09,460
Speaker 1: want this company, but I certainly don't want Seabury Stanton

684
00:34:09,500 --> 00:34:13,259
Speaker 1: to have this company. And Buffett says, I'm not going

685
00:34:13,279 --> 00:34:17,180
Speaker 1: to sell. I'm going to keep buying and keep buying,

686
00:34:17,819 --> 00:34:20,860
Speaker 1: keep buying. And suddenly, like the theory, right? You're going

687
00:34:20,880 --> 00:34:22,620
Speaker 1: to take a few puffs off the cigar butt and

688
00:34:22,640 --> 00:34:25,900
Speaker 1: throw it away. All of a sudden, he controls the company.

689
00:34:26,040 --> 00:34:28,540
Speaker 1: He's chewed up the cigar butt and swallowed it.

690
00:34:29,190 --> 00:34:32,510
Speaker 2: And he's like, I have a dying manufacturer in, frankly,

691
00:34:32,530 --> 00:34:34,209
Speaker 2: a dying corner of the country, right?

692
00:34:34,610 --> 00:34:35,450
Speaker 1: Shout out to Bedford.

693
00:34:35,650 --> 00:34:39,050
Speaker 2: He would later call it his biggest investment mistake.

694
00:34:39,710 --> 00:34:43,170
Speaker 1: And just to be clear, as one knows, the company

695
00:34:43,230 --> 00:34:46,630
Speaker 1: he controls, the company that he rode to fame and fortune,

696
00:34:46,650 --> 00:34:49,629
Speaker 1: is called Berkshire Hathaway. Yes.

697
00:34:49,710 --> 00:34:53,360
Speaker 2: They shut down the mills eventually, 1985, right? There is

698
00:34:53,410 --> 00:34:56,580
Speaker 2: no textile manufacturing in Berkshire Hathaway now. But he kept

699
00:34:56,640 --> 00:35:00,370
Speaker 2: the name. It became the company that he used to

700
00:35:00,450 --> 00:35:04,250
Speaker 2: buy other companies and to grow this empire. And I

701
00:35:04,330 --> 00:35:08,009
Speaker 2: think he keeps the name just to remind him. I

702
00:35:08,610 --> 00:35:10,390
Speaker 2: think there's some sort of moral in.

703
00:35:10,390 --> 00:35:14,500
Speaker 1: It for him. It was this moment when he acted irrationally, presumably.

704
00:35:14,719 --> 00:35:18,120
Speaker 2: I mean, maybe it's a kind of screw you to

705
00:35:18,140 --> 00:35:22,279
Speaker 2: Seabury Stanton to this day. Seabury's dead and buried. But

706
00:35:22,400 --> 00:35:25,160
Speaker 2: I think it was more just to say like, Don't

707
00:35:25,180 --> 00:35:29,399
Speaker 2: let your emotions rule you, you know? And he wakes

708
00:35:29,460 --> 00:35:31,360
Speaker 2: up every morning and looks at that name and maybe

709
00:35:31,400 --> 00:35:33,580
Speaker 2: part of him is like, that was almost a mistake.

710
00:35:33,600 --> 00:35:35,690
Speaker 1: I mean, it's great. So it's like, he's arguably the

711
00:35:35,730 --> 00:35:38,910
Speaker 1: greatest investor of the 20th century and he more or

712
00:35:38,930 --> 00:35:42,169
Speaker 1: less chose to name his holding company, is holding company

713
00:35:42,190 --> 00:35:46,390
Speaker 1: the right term? After his worst investment or one of

714
00:35:46,410 --> 00:35:47,030
Speaker 1: his worst investments.

715
00:35:47,170 --> 00:35:47,710
Speaker 2: It is elegant.

716
00:35:47,730 --> 00:35:50,150
Speaker 1: It's kind of like the, you know, the memento mori

717
00:35:50,270 --> 00:35:52,629
Speaker 1: coin that like, remember, it's a little bit has that

718
00:35:52,650 --> 00:35:57,880
Speaker 1: kind of vibe. Yes. Like, Remember, you are imperfect. Yeah. Oh,

719
00:35:57,940 --> 00:35:59,620
Speaker 1: that's very... The Zen of Warren Buffett.

720
00:35:59,640 --> 00:36:00,180
Speaker 2: I'm surprised.

721
00:36:00,260 --> 00:36:02,250
Speaker 1: I'm sure that book exists. Yeah, absolutely.

722
00:36:02,770 --> 00:36:07,009
Speaker 2: So he's got this company, this textile manufacturer. He's doing

723
00:36:07,030 --> 00:36:09,750
Speaker 2: all these other investments. He needs more and more money

724
00:36:09,790 --> 00:36:13,109
Speaker 2: about to keep the textile maker going and to.

725
00:36:13,130 --> 00:36:14,390
Speaker 1: Continue to expand.

726
00:36:15,350 --> 00:36:17,910
Speaker 2: And this, this is where he finally puts all these

727
00:36:17,950 --> 00:36:22,020
Speaker 2: pieces I've been talking about together because... He buys.

728
00:36:21,739 --> 00:36:24,710
Speaker 1: An insurance company. Yes. The float, like we talked about

729
00:36:24,730 --> 00:36:25,590
Speaker 1: with Geico. The float.

730
00:36:25,870 --> 00:36:28,350
Speaker 2: This one is called National Indemnity.

731
00:36:28,630 --> 00:36:28,950
Speaker 1: Okay.

732
00:36:30,210 --> 00:36:33,350
Speaker 2: They make unusual insurance policies.

733
00:36:33,489 --> 00:36:37,920
Speaker 1: Like, for example? Circus performers. No. Yes.

734
00:36:38,140 --> 00:36:40,600
Speaker 2: Lion tamers. Which, you know, who's going to insure a

735
00:36:40,620 --> 00:36:44,460
Speaker 2: lion tamer, right? The body parts of burlesque stars. It's

736
00:36:44,480 --> 00:36:45,060
Speaker 2: like Lloyd's.

737
00:36:45,100 --> 00:36:46,900
Speaker 1: Like, people talk about Lloyd's of London. Like, a famous

738
00:36:46,960 --> 00:36:49,460
Speaker 1: tennis player might insure their hand or something. Yeah, yeah, yeah.

739
00:36:49,480 --> 00:36:53,140
Speaker 2: You know, I mean, our voices, obviously insured by national indemnity, right?

740
00:36:53,860 --> 00:36:55,750
Speaker 2: Radio station treasure hunts.

741
00:36:56,770 --> 00:36:56,850
Speaker 1: What?

742
00:36:57,210 --> 00:36:59,110
Speaker 2: Well, you know, they would do all these, like, giveaways

743
00:36:59,170 --> 00:37:01,410
Speaker 2: at the radio station. Someone needed to insure that, like,

744
00:37:01,450 --> 00:37:03,469
Speaker 2: there would be enough money and that they would pay off.

745
00:37:03,630 --> 00:37:05,930
Speaker 1: Recently. So they're still kind of in that business. I

746
00:37:05,969 --> 00:37:08,430
Speaker 1: remember there was, was it Yahoo? Somebody had a, like a.

747
00:37:09,650 --> 00:37:13,410
Speaker 1: a college basketball tournament, you know, the NCAA tournament bracket,

748
00:37:13,469 --> 00:37:15,950
Speaker 1: where if you got every single one right, you got,

749
00:37:16,030 --> 00:37:21,360
Speaker 1: I think, a billion dollars. And I think Buffett insured that.

750
00:37:21,660 --> 00:37:23,280
Speaker 1: Same idea. Yeah.

751
00:37:23,460 --> 00:37:26,080
Speaker 2: And I mean, eventually he would move into the reinsurance business,

752
00:37:26,100 --> 00:37:29,280
Speaker 2: which is insurance for insurers, right? But it works exactly

753
00:37:29,320 --> 00:37:33,570
Speaker 2: the same way, right? That all of these lion tamers

754
00:37:33,590 --> 00:37:36,689
Speaker 2: and circus performers are paying money. I guess the owners

755
00:37:36,750 --> 00:37:39,219
Speaker 2: of the circus are paying money There probably won't be

756
00:37:39,260 --> 00:37:41,700
Speaker 2: an accident. They won't have to pay it out. And

757
00:37:41,739 --> 00:37:45,040
Speaker 2: so this money is coming in. And this, you know, even.

758
00:37:44,920 --> 00:37:47,150
Speaker 1: If they do have to pay it out, it'll be later, right?

759
00:37:47,190 --> 00:37:49,770
Speaker 1: Like that's the key thing is that you get to

760
00:37:49,870 --> 00:37:53,089
Speaker 1: hold the money. Yeah, exactly right. So by the way,

761
00:37:53,210 --> 00:37:55,650
Speaker 1: National Indemnity, it was a good company. It was doing well.

762
00:37:56,170 --> 00:37:58,910
Speaker 2: But apparently he learned that the CEO once a year

763
00:37:59,350 --> 00:38:02,110
Speaker 2: would say like, I can't stand being this business. I

764
00:38:02,130 --> 00:38:04,759
Speaker 2: just want to like go to Florida and retire and

765
00:38:04,800 --> 00:38:06,680
Speaker 2: be on vacation. I'm going to sell this whole place.

766
00:38:07,160 --> 00:38:10,100
Speaker 2: And Warren Buffett said to someone in the company, the

767
00:38:10,140 --> 00:38:12,760
Speaker 2: next time he says he wants to sell the whole company,

768
00:38:12,860 --> 00:38:17,420
Speaker 2: call me. Yeah. Call me. And apparently the whole thing happened.

769
00:38:17,460 --> 00:38:20,170
Speaker 2: He goes, he buys national indemnities, and the guy goes

770
00:38:20,310 --> 00:38:22,150
Speaker 2: on vacation the next day. He just makes it happen

771
00:38:22,170 --> 00:38:23,009
Speaker 2: really quickly, right?

772
00:38:23,430 --> 00:38:26,390
Speaker 1: So now. Calling Warren Buffett becomes a feature of the

773
00:38:26,450 --> 00:38:29,509
Speaker 1: American capitalist landscape after this, right? This is a great

774
00:38:29,570 --> 00:38:30,830
Speaker 1: moment in business history.

775
00:38:30,850 --> 00:38:33,120
Speaker 2: You'll have a big phone, a big red phone that

776
00:38:33,140 --> 00:38:35,739
Speaker 2: says Buffett on it, right? So now the pieces are

777
00:38:35,780 --> 00:38:39,330
Speaker 2: in place. got money coming in from National Indemnity, a

778
00:38:39,370 --> 00:38:43,170
Speaker 2: few other insurance-like companies. You've got the mills. You've got

779
00:38:43,190 --> 00:38:46,810
Speaker 2: all these different investments he has in different small companies, right?

780
00:38:47,610 --> 00:38:51,489
Speaker 2: And Buffett calls this the golden age of capital allocation.

781
00:38:52,150 --> 00:38:55,390
Speaker 2: And what he means is if you have enough different

782
00:38:55,430 --> 00:38:59,350
Speaker 2: businesses putting off different amounts of money, you can direct

783
00:38:59,390 --> 00:39:01,830
Speaker 2: that money to where it's going to make the most

784
00:39:02,030 --> 00:39:06,379
Speaker 2: difference and make the most return. He's essentially saying, this

785
00:39:06,640 --> 00:39:09,900
Speaker 2: self-funding machine at this point. He doesn't need investors to

786
00:39:09,940 --> 00:39:11,899
Speaker 2: come in. He doesn't have to beg or borrow money

787
00:39:11,940 --> 00:39:14,620
Speaker 2: for his companies. He just has to move the streams

788
00:39:14,680 --> 00:39:20,090
Speaker 2: of money around. And he is about to hit the 1970s,

789
00:39:20,370 --> 00:39:23,589
Speaker 2: which was a terrible economic time in America where there's

790
00:39:23,630 --> 00:39:29,510
Speaker 2: a huge recession, the prices of companies go down, and somebody, well,

791
00:39:29,530 --> 00:39:31,640
Speaker 2: Warren Buffett, because that's what we're talking about, and Warren

792
00:39:31,660 --> 00:39:36,609
Speaker 2: Buffett has the cash and the confidence to to go

793
00:39:36,710 --> 00:39:37,799
Speaker 2: wild in the 1970s.

794
00:39:37,820 --> 00:39:41,890
Speaker 1: So the bad stock market is just what he needs.

795
00:39:42,440 --> 00:39:43,379
Speaker 1: It's exactly what he needs.

796
00:39:43,420 --> 00:39:46,799
Speaker 2: And he takes stakes in the Washington Post. He buys

797
00:39:46,840 --> 00:39:51,250
Speaker 2: more Geico. He bought National Presto. I don't know the

798
00:39:51,270 --> 00:39:54,050
Speaker 2: names of these companies. Which makes pressure cookers and popcorn poppers.

799
00:39:55,570 --> 00:39:56,950
Speaker 1: I love that. I love that.

800
00:39:57,350 --> 00:40:00,750
Speaker 2: He puts a big stake into Pinkerton's detective agency.

801
00:40:01,800 --> 00:40:05,120
Speaker 1: A little weird. Not that I'm important in business history

802
00:40:05,140 --> 00:40:05,719
Speaker 1: in their own way.

803
00:40:05,880 --> 00:40:08,980
Speaker 2: By the end of the 1970s, Buffett's worth around $ 100 million, right?

804
00:40:09,080 --> 00:40:11,680
Speaker 2: And it's all under this umbrella of Berkshire Hathaway. They

805
00:40:11,700 --> 00:40:15,350
Speaker 2: don't make fabric anymore. They just make, well, popcorn makers.

806
00:40:15,390 --> 00:40:17,230
Speaker 1: They make money. They make money, right?

807
00:40:17,590 --> 00:40:19,910
Speaker 2: And so this is the point that I would say

808
00:40:20,910 --> 00:40:24,930
Speaker 2: young Warren Buffett has become essentially the investor that we

809
00:40:25,010 --> 00:40:29,940
Speaker 2: see today. Not a collector of cigar butts. not like

810
00:40:30,020 --> 00:40:33,279
Speaker 2: making these tiny little plays to get some money back

811
00:40:33,340 --> 00:40:37,890
Speaker 2: from these companies, but an owner of big American companies

812
00:40:38,239 --> 00:40:40,109
Speaker 2: that he thinks are at great prices that he likes

813
00:40:40,170 --> 00:40:43,810
Speaker 2: to hold and do the capital allocation thing. So it's

814
00:40:43,850 --> 00:40:47,210
Speaker 2: around this time, late 60s, early 70s, when he starts

815
00:40:47,270 --> 00:40:49,810
Speaker 2: to appear in the newspapers, right?

816
00:40:49,850 --> 00:40:50,670
Speaker 1: In the magazines.

817
00:40:51,110 --> 00:40:54,810
Speaker 2: Forbes wrote an article called How Omaha Beats Wall Street.

818
00:40:55,030 --> 00:40:58,150
Speaker 2: I'm sure everyone's like, hmm, what was this about? And

819
00:40:58,230 --> 00:41:01,770
Speaker 2: it talked about Buffett's investment firm, which had been running

820
00:41:01,790 --> 00:41:05,050
Speaker 2: about 12 years at this point after he left, Benjamin Graham.

821
00:41:05,530 --> 00:41:07,610
Speaker 2: And he said they'd never lost money in this time.

822
00:41:07,610 --> 00:41:12,270
Speaker 2: $ 10, 000 had been turned into a quarter of a million dollars.

823
00:41:12,530 --> 00:41:15,069
Speaker 1: If you'd invested $ 10, 000 at the beginning. Yeah.

824
00:41:15,430 --> 00:41:17,450
Speaker 2: And it was the first sort of articles that started

825
00:41:17,469 --> 00:41:20,649
Speaker 2: to talk about the Buffett weirdness, right? Oh, he lives

826
00:41:20,690 --> 00:41:23,370
Speaker 2: in a small house. Like he drives a small car.

827
00:41:23,430 --> 00:41:25,950
Speaker 2: Like he's a big deal in Omaha, but nobody knows him.

828
00:41:26,280 --> 00:41:29,520
Speaker 2: He eats like a six-year-old boy. He just likes hamburgers

829
00:41:29,620 --> 00:41:32,100
Speaker 2: and french fries, and that's pretty much all he eats.

830
00:41:32,140 --> 00:41:35,469
Speaker 1: Cherry Coke. And Cherry Coke. It's before the Coke era, right? Oh, right.

831
00:41:35,950 --> 00:41:37,450
Speaker 2: Young Buffett, and one of the reasons why I wanted

832
00:41:37,469 --> 00:41:41,689
Speaker 2: to tell this story is that, like, that was really this, like,

833
00:41:42,130 --> 00:41:47,570
Speaker 2: rare moment, both in American finance and for Buffett himself.

834
00:41:47,710 --> 00:41:51,350
Speaker 2: This idea that, like, there were such vast mispricings and

835
00:41:51,450 --> 00:41:55,839
Speaker 2: so little information in the stock market. that someone with

836
00:41:55,920 --> 00:42:00,620
Speaker 2: his particular personality could end up making this huge amount

837
00:42:00,660 --> 00:42:02,420
Speaker 2: of money. Of course, he'd go on to make billions

838
00:42:02,460 --> 00:42:04,520
Speaker 2: and billions and billions and billions that would dwarf this.

839
00:42:04,580 --> 00:42:09,700
Speaker 2: But this was the important part, that the weird kid

840
00:42:10,660 --> 00:42:14,000
Speaker 2: had his moment. Now, of course, there's no end to

841
00:42:14,040 --> 00:42:16,140
Speaker 2: the amount of information you can get about all these companies,

842
00:42:16,260 --> 00:42:19,219
Speaker 2: all these stocks. And there's a million people, well, first

843
00:42:19,239 --> 00:42:21,759
Speaker 2: of all, that read everything Warren Buffett writes and that

844
00:42:21,800 --> 00:42:24,950
Speaker 2: want to do what he does, pour over returns and

845
00:42:25,000 --> 00:42:27,900
Speaker 2: how much inventory do they have and what's their working

846
00:42:27,960 --> 00:42:30,779
Speaker 2: capital and all these tiny little measures of how well

847
00:42:30,820 --> 00:42:33,420
Speaker 2: a company is doing. They're doing the same thing. And

848
00:42:33,460 --> 00:42:36,080
Speaker 2: so it's harder to do that. Warren Buffett has moved on.

849
00:42:36,120 --> 00:42:38,520
Speaker 1: You have to go farther afield, right? Actually, what I

850
00:42:38,600 --> 00:42:42,049
Speaker 1: think of here is Jane Street. You know Jane Street, right?

851
00:42:42,739 --> 00:42:45,150
Speaker 1: It's this little trading firm owned by the people who

852
00:42:45,170 --> 00:42:49,149
Speaker 1: work there. They're all super smart math people. And like

853
00:42:49,190 --> 00:42:50,830
Speaker 1: the most recent time they were in the news, it

854
00:42:50,850 --> 00:42:53,230
Speaker 1: was because they had figured out that in the Indian

855
00:42:53,290 --> 00:42:55,610
Speaker 1: stock market, you could make some weird move where if

856
00:42:55,630 --> 00:42:58,850
Speaker 1: you bought the options and the stock, you could make

857
00:42:58,910 --> 00:43:00,840
Speaker 1: prices move in a way that was like basically a

858
00:43:00,880 --> 00:43:04,860
Speaker 1: guaranteed profit, right? Like that actually seems kind of Buffett-esque,

859
00:43:04,960 --> 00:43:08,480
Speaker 1: even though it doesn't have the like, oh, fundamental grandpa Buffett,

860
00:43:08,500 --> 00:43:12,520
Speaker 1: that's the later Buffett. It has the like, I'm really

861
00:43:12,560 --> 00:43:14,660
Speaker 1: into details and I'm going to look all over the

862
00:43:14,719 --> 00:43:17,379
Speaker 1: world for some financial detail that is going to make

863
00:43:17,440 --> 00:43:20,820
Speaker 1: me a buck. I feel like that's the 2025 version

864
00:43:20,860 --> 00:43:21,320
Speaker 1: of it.

865
00:43:21,520 --> 00:43:25,400
Speaker 2: Or even high-speed trading that finds a mispricing that occurs

866
00:43:25,460 --> 00:43:27,239
Speaker 2: in a millisecond and taking advantage of it.

867
00:43:27,239 --> 00:43:29,979
Speaker 1: So now it happens with math, right? Now that kind

868
00:43:30,020 --> 00:43:32,779
Speaker 1: of move in the U.S. markets, as far as I

869
00:43:32,800 --> 00:43:36,049
Speaker 1: can tell, rarely happens with reading the financial reports. And

870
00:43:36,090 --> 00:43:39,189
Speaker 1: it usually happens with math, with quants. Yes.

871
00:43:39,670 --> 00:43:42,670
Speaker 2: And they do not show up on the weekend to

872
00:43:42,730 --> 00:43:43,950
Speaker 2: meet with CEOs.

873
00:43:44,110 --> 00:43:45,270
Speaker 1: Their machines do it for them.

874
00:43:45,290 --> 00:43:47,600
Speaker 2: Their machines talk to each other. I mean, that's the

875
00:43:47,620 --> 00:43:51,260
Speaker 2: big picture. You know, in finance, successful strategies don't last

876
00:43:51,320 --> 00:43:54,100
Speaker 2: for long. You can only pull the young Buffett trick

877
00:43:54,620 --> 00:43:56,540
Speaker 2: one or two times, and then you've got to become

878
00:43:56,560 --> 00:43:56,979
Speaker 2: old Buffett.

879
00:43:57,610 --> 00:44:00,250
Speaker 1: Next time on Business History, a show about the history

880
00:44:00,270 --> 00:44:04,189
Speaker 1: of business, how does Warren Buffett find a new edge?

881
00:44:04,910 --> 00:44:08,110
Speaker 1: How does a guy in the business of insuring lion

882
00:44:08,130 --> 00:44:14,100
Speaker 1: tamers and buying up bus companies manage to make $ 100

883
00:44:13,680 --> 00:44:17,569
Speaker 1: billion in an era dominated by technology? It's not going

884
00:44:17,590 --> 00:44:20,870
Speaker 1: to be easy. Our producer is Gabriel Hunter-Chang. Our engineer

885
00:44:20,930 --> 00:44:21,790
Speaker 1: is Sarah Bruguier.

886
00:44:22,310 --> 00:44:24,110
Speaker 2: And our showrunner is Ryan Dilley.

887
00:44:24,430 --> 00:44:26,549
Speaker 1: I'm Jacob Goldstein. And I'm Robert Smith. We'll be back

888
00:44:26,610 --> 00:44:30,020
Speaker 1: next week with another episode of Business History. A show

889
00:44:30,040 --> 00:44:34,740
Speaker 1: about the history. Wait for it. Of business.