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Speaker 1: Pushkin too quick. No, it's perfect push kit stuff.

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Speaker 2: You got it, Jacob, I wanted you to see one

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Speaker 2: of my prize possessions. I hit it in a bag

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Speaker 2: so that you would not see it. It is a round, cuddly,

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Speaker 2: plushy Warren Buffet.

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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: box of seas can even like a hand financial document

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Speaker 1: annual report. Yeah, why are 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 now the.

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Speaker 1: Berkshire Hathaway Sheerwolder's knitting. Always wanted to go. It's a famous.

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Speaker 2: Event 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 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 plushy dolls of billionaires because who

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Speaker 2: would want to sleep with the 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: gonna be a plushy Jamie Diamond or a plushy like

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Speaker 1: Ken Griffin.

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Speaker 2: No, no, no, no, Ken Griffin will cut you in

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Speaker 2: the night. And I think that they made a pleasure

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Speaker 2: of him because Warren Buffett is sort of extraordinary in

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Speaker 2: the history of finance. I mean there's a raw amount

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Speaker 2: of money, right, one hundred and forty five billion dollars

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Speaker 2: net worth according to Forbes. Right, but there's also the

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Speaker 2: way he earned his billions. Most billionaires, if you think

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Speaker 2: about it these days, started a company, a tiny company

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Speaker 2: that became huge, owned all the stock in it, and

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Speaker 2: so on, paper became rich. Or are the children or

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Speaker 2: the children or the children of the children. Yeah, Warren

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

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

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Speaker 2: 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 gonna say beloved figure. Right, Like,

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Speaker 1: people generally don't like finance people, 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.

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Speaker 1: Like.

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Speaker 2: He's legendarily honest. You know, his word is his bond.

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Speaker 2: His handshake does not need lawyers, Jacob.

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

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Speaker 2: He has a lot of lawyers, right, But you know

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Speaker 2: he eats at McDonald's every morning, He sweeks cherry coke

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Speaker 2: all day long, that he goes home to a tiny

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Speaker 2: house in Omaha and plays bridge. I mean, if if

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

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Speaker 2: Buffett just for those days. You know, when the stock

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Speaker 2: 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 one hundred and forty five billion dollar 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.

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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. Is a

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Speaker 2: very shrewd man. He is a shark, really when it

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

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Speaker 2: are going to show you how he got that way,

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Speaker 2: young Buffett.

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Speaker 1: I'm Robert Smith, I'm Jacob Goldstein, and this is Business History,

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Speaker 1: a show about the history of business.

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

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Speaker 2: We already told you the story of Jesse Livermore, a

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

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

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Speaker 2: Age and right before the Great stock market crash. And

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

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Speaker 2: Because Warren Buffett was born in nineteen thirty, 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 just a young

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Speaker 2: man who didn't want to work hard and figured out

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Speaker 2: a giant flaw in the stock market. Yes, to understand

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Speaker 2: how Warren Buffett cracked the code of finance, you have

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Speaker 2: to put where's cuddly guy, He's way over there. You

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Speaker 2: have to put cuddly Warren Buffett out of your mind,

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Speaker 2: and you have to picture Warren Buffett, weird kid born

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Speaker 2: in nineteen thirty. As I said, Omaha, Nebraska. It's after

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Speaker 2: the Great stock market crash beginning of the depression. His

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Speaker 2: father is a stockbroker, not a well respected profession after

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Speaker 2: the Great Crash in nineteen twenty nine. 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, I know. And Warren Buffett is

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Speaker 2: an awkward kid and an obsessive kid.

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Speaker 1: Like.

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Speaker 2: One of the things he does is he loves collecting things,

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Speaker 2: a very Warren Buffett way, right. He starts to collect

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Speaker 2: bottle caps, but not just the bottle caps on his

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Speaker 2: own bottles. He goes to all the filling stations, the

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Speaker 2: gas stations in town to where they sell the drinks.

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Speaker 2: He goes into the ice chests where they have them

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Speaker 2: and digs around for excess bottle caps, and then he

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Speaker 2: puts them in piles in his basement and at night

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Speaker 2: he sorts the bottle caps, the rare ones, the popular ones.

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Speaker 2: He thinks it's information that no one else has for

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Speaker 2: 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 nineteen thirty 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.

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Speaker 1: By their house. Yes, just in case, just in case.

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Speaker 1: It's just like there's some order in the world. There's some. Yeah.

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Speaker 2: Warren Buffett had a job early, you know, newspaper rowd.

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Speaker 1: He worked as a delivery boy.

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Speaker 2: For his grandfather's grocery business. He told Alice Schroeder in

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Speaker 2: her book Snowball, It's a biography of Warren Buffett, he said, quote,

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Speaker 2: I 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 all the time. But it turns out, right, you

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Speaker 1: love reading financial reports or building cars, and that doesn't.

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Speaker 2: Feel like work. Yeah, I think that's right. Warren Buffett,

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Speaker 2: you know, he didn't have good grades. He just didn't

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Speaker 2: want to do what other people told him to do.

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Speaker 2: He lived a life of petty crime.

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Speaker 1: That is shocking.

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Speaker 2: I know, I love this. So he and his friends

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Speaker 2: would case out the local series. This is another quote

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Speaker 2: from the book. It's so good. We would steal the

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Speaker 2: place blind, We'd steal golf bags and golf clubs. Walked

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Speaker 2: out of the lower level where the sporting goods were

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Speaker 2: up the stairway to the street carrying a golf bag

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Speaker 2: and golf clubs, and the clubs were stolen, and so

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Speaker 2: is the bag. I stole hundreds of golf balls.

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Speaker 1: That explains the golf club on the word buffet plusure.

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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 fourteen. That's

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

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Speaker 1: But I keep was he selling the stolen golf clubs

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Speaker 1: and filing.

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Speaker 2: Taxes and filing Texas Very buffet right, honest thief. But

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Speaker 2: I come back to this obsession thing that he clearly had, right,

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Speaker 2: I mean this ended up being a very important time

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Speaker 2: at a very particular moment in the stock market, where

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Speaker 2: in order to succeed you had to like do the

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Speaker 2: equivalent of writing down license plates, You had to do

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Speaker 2: the detailed work to figure out what things were worth

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Speaker 2: in the stock market. So Buffett drifts through college, doesn't

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Speaker 2: 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 nineteen fifties, and by this point all

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

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Speaker 2: want to work for GM and US Steel.

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Speaker 1: It's that that post war era is all about that, right,

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Speaker 1: Like there's not like crazy new businesses starting up like

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Speaker 1: there were in the late eighteen hundreds or the late

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Speaker 1: nineteen hundreds. Right, it's this very steady, stable economy.

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Speaker 2: Everyone wants to be safe, and honestly, like the safe

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Speaker 2: economy is growing, so you can make money and you can.

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Speaker 1: Do what's riding up you just the organization man.

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Speaker 2: But not Warren Buffett, right, he's obsessed with this larger

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Speaker 2: than life investing professor at Columbia named Benjamin Graham legend,

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Speaker 2: a legend. So he'd read this book by Benjamin Graham

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Speaker 2: called The Intelligent Investor. You can get it to this day,

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Speaker 2: people still read it right. This book completely changed the

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

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Speaker 2: time thought about stocks. Like when we talked about the

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Speaker 2: stock market before the Great Crash of nineteen twenty nine,

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Speaker 2: Jesse Livermore, we talked about the market like it was

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Speaker 2: a rigged game, really, because it was Speculators would buy

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Speaker 2: a stock and bid up the price of it, try

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Speaker 2: to sell it to each other. They called them painting

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Speaker 2: the tape, right, They try to get their money out

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Speaker 2: before it crashed. But it went up and it crashed,

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

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Speaker 1: It was like all meme stocks.

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Speaker 2: Yeah, exactly all the time, right, all momentum trades, psychology

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Speaker 2: of the market. But Buffett's mentor, Benjamin Graham, he said

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Speaker 2: something that sounds very obvious, but it's missed by a

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Speaker 2: lot of people even today. He said, the stocks are

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Speaker 2: real companies. Stocks represent ownerships in companies that make things.

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Speaker 2: They're not just numbers that go up and down. They

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Speaker 2: represent this physical thing in the world. And so just

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Speaker 2: as if you're buying, you know, a sweater or a car,

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

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

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Speaker 2: on it, you w atre on sale. Right, you said,

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Speaker 2: just do the same thing for stocks, look for stocks

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Speaker 2: and companies that are good companies that will last for

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Speaker 2: 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, long average, Yeah,

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

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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?

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Speaker 1: Like it's so weird to me, frank the way it's

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Speaker 1: like what did it do today and what is it

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

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Speaker 1: do tomorrow now.

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Speaker 2: To be fair, it was hard at the time that

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Speaker 2: we're talking about, the nineteen fifties 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 him 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.

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Speaker 1: Right.

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Speaker 2: Buffett essentially starts to stock Professor Graham before he takes

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Speaker 2: the class. He finds out everything he can about Benjamin Graham,

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

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Speaker 2: of a company called Government Employees Insurance.

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Speaker 1: Company 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 twenty

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Speaker 2: years old, he's in school. This is his professor. He

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Speaker 2: hasn't even taken the course. He gets on a train

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Speaker 2: from New York to DC to go visit Geico to

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Speaker 2: find out more about.

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Speaker 1: It, knocks on the door on a Saturday, doors or lotday.

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Speaker 2: A janitor lets him in because Buffett says, oh, well,

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Speaker 2: my professor is the chairman of the board. And the

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Speaker 2: janitor is like whatever, kid, like, come on in. Only

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

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Speaker 2: vice president of finance. And Buffett like knocks on his door, says,

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Speaker 2: can I ask you a question? And I saw an

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Speaker 2: interview with the vice per of finance later who was like, yeah,

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Speaker 2: I thought.

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Speaker 1: I'd answer this kid's question right.

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Speaker 2: Four hours go by four hours the vice president said

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Speaker 2: this was like talking to an investor in the insurance business,

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Speaker 2: an analyst who knew all of these things. And Boffett

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Speaker 2: later he talks about this moment a lot because what

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Speaker 2: he sees is he sees that certain companies have certain

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Speaker 2: strategic advantages, and Geico is one of them. It's a

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Speaker 2: stock that he would buy and end up eventually controlling

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Speaker 2: the company. Right, But here's what he learned about Geico

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Speaker 2: two things. First of all, it's an insurance company. They

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Speaker 2: take money in when things go wrong, crash your car,

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Speaker 2: they pay out the money. Yes, what they figured out

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Speaker 2: is we need good drivers. How do you know who's

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Speaker 2: going to be a good driver. Well, back in those days,

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Speaker 2: they're like, we're only going to ensure government workers who,

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Speaker 2: for some reason or maybe statistically, right, are less likely

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Speaker 2: to speed and get in a crash and drink and drives.

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Speaker 1: If you could make up a theory, right, like, if

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Speaker 1: you're a risk averse, if you want to be a

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Speaker 1: very stable, steady person, go get a government job. You're

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

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Speaker 1: going to get fired. Sounds like a lower risk driver

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Speaker 1: 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?

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Speaker 1: Right, So this is the moat, Right, This is one

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Speaker 1: of the big buffet ideas. Is not just a company

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

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Speaker 1: that has a durable competitive advantage.

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Speaker 2: That's like classic buffet, classic buffet. The other thing he

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Speaker 2: learns is the insurance company has piles and piles of

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Speaker 2: cash because people pay their premiums every month on time

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Speaker 2: the money comes in, and the company doesn't have to

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Speaker 2: pay out that money until much later when there's a crash.

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Speaker 2: Maybe they don't pay it out at all. Right, float,

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Speaker 2: this is called the float. This is called the floats.

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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 I had so much money.

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

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Speaker 2: the way, this is all before he takes the investing cord.

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Speaker 1: Tony has got a pile of bottle caps back in

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Speaker 1: his childhood. Bet.

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Speaker 2: He starts to buy Geico right, shows up in the

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Speaker 2: class front row, raises his hand A plus, sure, I

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Speaker 2: would hope. So he wants to work for Benjamin Graham.

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Speaker 2: That's all he wants to do. Focused, focused, young man. Right,

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Speaker 2: So Warren Buffett goes to Benjamin Graham and says a plus,

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

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Speaker 2: interesting reason. Benjamin Graham was Jewish, huh, And he said

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Speaker 2: it's very hard for Jews to get jobs in Wall

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Speaker 2: Street and finance at this time.

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Speaker 1: Depends on the firm at this time.

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Speaker 2: Yes, so he said that he would only hire Jewish

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Speaker 2: investors for his firm as a sort of affirmative action.

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Speaker 1: Comfortable. I'll be honest with you that story. Yeah, as

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Speaker 1: you may know, I'm Jewish, and i feel a little

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Speaker 1: awkward about that, but I'm interested. Go on.

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

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Speaker 2: a Jew. Yes, he could not get a job 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.

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Speaker 1: And Buffett hates it.

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Speaker 2: Huh, 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, that's a really that's a

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Speaker 2: really bad business. I got one stock for you to buy,

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Speaker 2: never sell it. You can't make money off of it.

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

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Speaker 2: Graham convinces him, and this is where the two of

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Speaker 2: them they cook up the system that it's going to

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Speaker 2: make Warren Buffett rich.

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Speaker 3: After the break, It's the mid nineteen fifties and Warren

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Speaker 3: 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. Fifties Dad, that's what he loved, right, And

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

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

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Speaker 2: butt company. And the joke, I guess it is 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: that'd be just enough tobacco left to get like two

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Speaker 2: good puffs out of it.

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Speaker 1: And then you could throw it away. Right, So this

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Speaker 1: is different than the classic buffet. This is not the

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Speaker 1: way we think of buffet 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, it 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.

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Speaker 1: Right.

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Speaker 2: So here's an example. He found the Union Street railway

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Speaker 2: in New Bedford, Massachusetts. It's nineteen fifty five. There's a

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Speaker 2: company that owned a bunch of buses. I don't know

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Speaker 2: where the rail was, but a bunch of buses.

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Speaker 1: They started out as one of those little urban street

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Speaker 1: car companies.

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Speaker 2: Yeah, so they may have run a trolley car at

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Speaker 2: some point. By this point they are buses and an

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Speaker 2: amusement park.

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Speaker 1: Amazing.

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Speaker 2: Sure, so there's nothing remarkable about this company.

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Speaker 1: But at an amusement park is fun, right, It's like

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Speaker 1: the Chinese Army. It's like they own a lot of

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Speaker 1: weird things.

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Speaker 2: We have the news of the park and the way

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Speaker 2: you get there. So he starts to research the company,

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Speaker 2: and he finds out, in addition to the tilted world,

375
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Speaker 2: they have about a million dollars in treasury bonds and

376
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Speaker 2: cash just like sitting in the company. He does the

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Speaker 2: math figures out the company is worth like sixty dollars

378
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Speaker 2: per share if you include all this money laying around.

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Speaker 2: Stock selling for thirty or thirty five dollars.

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Speaker 1: Amazing. So one of the reasons.

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Speaker 2: Why there's probably this huge gap is that stocks weren't

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Speaker 2: all traded on a central system back then, right, So.

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Speaker 1: Like, 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 like, people

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Speaker 1: working 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 pouring

388
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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 Buffa puts an ad in the

390
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Speaker 2: newspaper saying I will buy shares for a certain price.

391
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Speaker 2: He wants all the shares he can get his hands on,

392
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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 like certificates.

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Speaker 1: Right, they probably have a drawer with the pass of

395
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Speaker 1: paper send them to me. It sounds like such a scam,

396
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Speaker 1: doesn't it. Like if you saw an ad in the

397
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Speaker 1: newspaper to send your stock certificate it, I would think

398
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Speaker 1: it was a scam.

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Speaker 2: But maybe more trust back in those days. It's Warren Buffett, right.

400
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Speaker 2: So he builds up his position in this company, and

401
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Speaker 2: he does what I guess apparently is one of his tricks.

402
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Speaker 2: He shows up again on the weekend, like to like

403
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Speaker 2: barnstorm into the company, meets with the CEO, and whether

404
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Speaker 2: he convinces the CEO to do something or whether the

405
00:20:51,160 --> 00:20:53,000
Speaker 2: co is going to do it anyway, we don't know.

406
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Speaker 2: But soon afterwards the CEO is like, okay, we will

407
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Speaker 2: offer dividends, payments back on the stock, and we will

408
00:20:59,720 --> 00:21:03,520
Speaker 2: pay out our cash. Oh wow, I know Buffett makes

409
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Speaker 2: twenty thousand dollars. Look at that buying up cheap stock. Yeah,

410
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Speaker 2: sell it and high, which is good, Like if you're

411
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Speaker 2: a twenty something back in those days, twenty thousands is awesome.

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Speaker 3: Right.

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Speaker 2: Yeah, so I take it today, but put an add

414
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Speaker 2: in the newspaper. Taken he starts to find more and

415
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Speaker 2: more of these cigar bots, and you know, if you

416
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Speaker 2: read his biography, there's just like he has like intricate

417
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Speaker 2: details of each one.

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Speaker 1: I think the man has never forgotten a stock price.

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Speaker 2: Right, But I'm struck by the bigger picture of American

420
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Speaker 2: finance at the time. Right in the decades after the depression,

421
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Speaker 2: American companies were really cautious, right. They stockpiled cash and

422
00:21:42,320 --> 00:21:47,040
Speaker 2: bonds and emergency funds because there was this feeling like

423
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Speaker 2: the bad times can come again very quickly. So what

424
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Speaker 2: you had was companies that were really being overly cautious.

425
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Speaker 2: And that's what Buffett saw well.

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Speaker 1: And also investors were clearly overly cautious, right, I mean

427
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Speaker 1: a they weren't doing the work of like finding these

428
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Speaker 1: obscure companies. But it's easy to forget now when we

429
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Speaker 1: just assume that, you know, the stock market, the S

430
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Speaker 1: and P is going to return whatever it is, eight

431
00:22:11,240 --> 00:22:14,480
Speaker 1: percent on average year after hear like it took decades

432
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Speaker 1: after the depression for the stock market to get back

433
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Speaker 1: to where it was. Like if you bought in twenty nine,

434
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Speaker 1: you were probably still underwater in like nineteen fifties, certainly

435
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Speaker 1: like into the forties, you know, So like not only

436
00:22:27,280 --> 00:22:30,199
Speaker 1: were companies being cautious, but so were investors.

437
00:22:30,359 --> 00:22:32,600
Speaker 2: Yeah, who would want to buy these big names, the

438
00:22:32,680 --> 00:22:35,200
Speaker 2: general motors, right, but they didn't want to look at

439
00:22:35,200 --> 00:22:38,320
Speaker 2: some tiny company in New Bedford, Massachusetts. Buffett would get

440
00:22:38,320 --> 00:22:40,439
Speaker 2: something called the pink sheets, which were the prices of

441
00:22:40,480 --> 00:22:43,880
Speaker 2: these tiny companies that would come out once a week.

442
00:22:44,000 --> 00:22:47,159
Speaker 2: I assume that they were actually pink and that was

443
00:22:47,280 --> 00:22:50,080
Speaker 2: like the most up to date knowledge about the stocks.

444
00:22:50,480 --> 00:22:54,520
Speaker 1: Once a week in the mail, running to the mailbox,

445
00:22:54,640 --> 00:22:56,520
Speaker 1: ripping over the pink sheet. Un blow.

446
00:22:56,840 --> 00:22:58,840
Speaker 2: That's when Warren Buffet would do the Warren Buffett thing.

447
00:22:58,880 --> 00:23:00,520
Speaker 2: He'd start to call him on the phone. He'd start

448
00:23:00,520 --> 00:23:02,439
Speaker 2: to research the company, ask for all their stuff, like

449
00:23:02,480 --> 00:23:05,119
Speaker 2: he is putting in the extra work. And that is

450
00:23:05,119 --> 00:23:07,240
Speaker 2: how he is finding these companies, and no one else

451
00:23:07,320 --> 00:23:09,680
Speaker 2: was doing it other than Benjamin Graham and a few

452
00:23:09,680 --> 00:23:12,879
Speaker 2: other people who followed this philosophy. And so this is

453
00:23:12,920 --> 00:23:15,000
Speaker 2: the flaw, This is the flaw he found in the market,

454
00:23:15,040 --> 00:23:18,120
Speaker 2: and this is what he started to ride. He crosses

455
00:23:18,160 --> 00:23:20,200
Speaker 2: one hundred thousand dollars in net Worth in the mid

456
00:23:20,240 --> 00:23:23,560
Speaker 2: nineteen fifties. He's in his mid twenties, still a young

457
00:23:23,560 --> 00:23:26,800
Speaker 2: man managing other people's money. At this point millionaire around

458
00:23:26,840 --> 00:23:30,159
Speaker 2: the age of thirty has ten million dollars by the

459
00:23:30,200 --> 00:23:31,440
Speaker 2: late nineteen sixties.

460
00:23:32,600 --> 00:23:35,200
Speaker 1: And the fun just these little companies one after another,

461
00:23:35,320 --> 00:23:37,440
Speaker 1: getting in, getting out. That's his move the whole time.

462
00:23:37,560 --> 00:23:40,000
Speaker 2: He does some bigger companies. There's like a play on

463
00:23:40,119 --> 00:23:44,000
Speaker 2: AMX American Express that was because of a like a

464
00:23:44,040 --> 00:23:47,200
Speaker 2: cooking oil scandal. Too hard to get into, too hard

465
00:23:47,200 --> 00:23:51,000
Speaker 2: to get into. But the weird thing about this is that,

466
00:23:51,800 --> 00:23:56,359
Speaker 2: you know, he is a very successful investor, right making

467
00:23:56,400 --> 00:23:58,920
Speaker 2: millions of dollars on this technique. He's back in Omaha

468
00:23:59,000 --> 00:24:03,160
Speaker 2: at this point, and nobody knows much about him, huh,

469
00:24:03,160 --> 00:24:05,120
Speaker 2: Like he's not on the front page of the Wall

470
00:24:05,160 --> 00:24:07,720
Speaker 2: Street Journal. People are not writing about him. Really into

471
00:24:07,720 --> 00:24:11,320
Speaker 2: the late sixties, like when he is already you know,

472
00:24:11,400 --> 00:24:15,000
Speaker 2: almost middle aged. Yeah, and he starts to like twist

473
00:24:15,119 --> 00:24:18,960
Speaker 2: these ideas. You know, Benjamin Graham retires Buffett gets his

474
00:24:18,960 --> 00:24:21,760
Speaker 2: own investors, and he starts to to kind of take

475
00:24:21,800 --> 00:24:25,280
Speaker 2: these ideas and do it slightly differently, which is Benjamin

476
00:24:25,320 --> 00:24:28,800
Speaker 2: Graham preached diversification. His idea the flip side of the

477
00:24:28,840 --> 00:24:31,879
Speaker 2: cigar butts was buy a lot of them. You never

478
00:24:32,040 --> 00:24:34,520
Speaker 2: know which one's gonna make it and which one's not.

479
00:24:34,960 --> 00:24:40,840
Speaker 2: So like diversify, right, Warren Buffett is like, no, I

480
00:24:40,880 --> 00:24:43,520
Speaker 2: have good ideas. I have this success rate so far,

481
00:24:43,600 --> 00:24:45,560
Speaker 2: so I'm going to kind of go all in on

482
00:24:45,600 --> 00:24:46,640
Speaker 2: these companies I love.

483
00:24:46,880 --> 00:24:50,280
Speaker 1: Now, that's counter not just to Benjamin Graham, right, but

484
00:24:50,359 --> 00:24:54,360
Speaker 1: to like math math right. So Markowitz right, that there's

485
00:24:54,400 --> 00:24:57,119
Speaker 1: this whole modern portfolio theory that's coming in right around

486
00:24:57,160 --> 00:25:00,199
Speaker 1: this time, right, the sixties. Yea, And like, it's a

487
00:25:00,200 --> 00:25:02,919
Speaker 1: pretty compelling case that diversification is good, that it is

488
00:25:02,920 --> 00:25:05,439
Speaker 1: a free lunch that you get basically the same return

489
00:25:05,480 --> 00:25:09,440
Speaker 1: with less kind of idiosyncratic risk. And Warren Buffett is disagreeing.

490
00:25:09,600 --> 00:25:14,080
Speaker 1: Here's what he says about that diversification is protection against ignorance.

491
00:25:14,560 --> 00:25:16,520
Speaker 1: It makes little sense if you know what you're doing.

492
00:25:17,200 --> 00:25:22,360
Speaker 2: Huh boom for chumps, Jacob like us, I mean fair tough,

493
00:25:22,400 --> 00:25:25,359
Speaker 2: I'm fair. I mean it worked for him. I do

494
00:25:25,440 --> 00:25:29,240
Speaker 2: not advise this for everyone, right, But it did give

495
00:25:29,320 --> 00:25:33,119
Speaker 2: him a certain advantage over the Benjamin Grahams of the world,

496
00:25:33,400 --> 00:25:37,959
Speaker 2: which was, if you pile into certain companies in particular,

497
00:25:38,680 --> 00:25:40,720
Speaker 2: you don't have to rely on them to do the

498
00:25:40,800 --> 00:25:44,359
Speaker 2: right thing, to release this money that they're keeping to

499
00:25:44,400 --> 00:25:45,119
Speaker 2: their investors.

500
00:25:45,200 --> 00:25:45,440
Speaker 1: Right.

501
00:25:46,400 --> 00:25:50,600
Speaker 2: If you assemble enough stock, they have to listen to you.

502
00:25:50,600 --> 00:25:52,680
Speaker 2: You can get elected to the board. You can make

503
00:25:52,720 --> 00:25:56,800
Speaker 2: them do things right. And this was the next sort

504
00:25:56,800 --> 00:25:59,200
Speaker 2: of turn of the screw that Warren Buffett was doing.

505
00:25:59,240 --> 00:26:02,320
Speaker 2: He would find these undervalued companies and then he would

506
00:26:02,560 --> 00:26:08,400
Speaker 2: make them give him back the money. Huh, Sanborn Map Map.

507
00:26:08,760 --> 00:26:10,040
Speaker 2: It's a map company.

508
00:26:09,920 --> 00:26:13,720
Speaker 1: They also own a chain of ice cream parlorts.

509
00:26:13,880 --> 00:26:15,919
Speaker 2: That would be great, right, No, but they could tell

510
00:26:15,920 --> 00:26:18,480
Speaker 2: you how to get there because they made maps.

511
00:26:19,000 --> 00:26:22,639
Speaker 1: So they specialized in selling very remember maps. You have

512
00:26:22,680 --> 00:26:24,680
Speaker 1: the Thomas Brother's Guide to the Back of the Car.

513
00:26:24,800 --> 00:26:27,760
Speaker 1: Oh yeah, yeah, it was a whole block in the

514
00:26:27,800 --> 00:26:31,119
Speaker 1: county book. Yeah, so this is even more detailed than

515
00:26:31,119 --> 00:26:32,280
Speaker 1: the Thomas brother maps. Right.

516
00:26:32,480 --> 00:26:37,679
Speaker 2: They would sell these maps that were basically diagrams of

517
00:26:37,760 --> 00:26:40,760
Speaker 2: specific buildings and every floor so you knew where the

518
00:26:40,800 --> 00:26:42,880
Speaker 2: interest is and exits were, you know, the windows were

519
00:26:42,920 --> 00:26:44,200
Speaker 2: all of this sort of thing, and they would sell

520
00:26:44,240 --> 00:26:47,240
Speaker 2: it to insurance companies who needed to know how safe

521
00:26:47,280 --> 00:26:49,560
Speaker 2: the buildings were into fire departments, so they knew like

522
00:26:49,680 --> 00:26:51,080
Speaker 2: how to get in and out of the building if

523
00:26:51,119 --> 00:26:51,960
Speaker 2: there's a fire.

524
00:26:52,040 --> 00:26:55,159
Speaker 1: Some mote by the way, yeah, right, Like who's going

525
00:26:55,240 --> 00:26:58,280
Speaker 1: to make maps of every building in America once one

526
00:26:58,320 --> 00:27:00,680
Speaker 1: company already has it exactly right, exactly right.

527
00:27:00,800 --> 00:27:05,040
Speaker 2: So Offett starts to buy some of their stock, buys

528
00:27:05,200 --> 00:27:07,520
Speaker 2: enough that he gets on the board of directors, shows

529
00:27:07,600 --> 00:27:11,359
Speaker 2: up for the board meeting, right he's ready, looks around

530
00:27:11,400 --> 00:27:15,399
Speaker 2: at the board of and he realizes they don't really

531
00:27:15,480 --> 00:27:18,919
Speaker 2: own much stock. They are the board of directors because

532
00:27:19,560 --> 00:27:21,359
Speaker 2: I assume they are old men who have been on

533
00:27:21,400 --> 00:27:24,320
Speaker 2: the company board a long time, friends of somebody way

534
00:27:24,359 --> 00:27:28,439
Speaker 2: back when. And he's the one that actually owns a

535
00:27:28,560 --> 00:27:29,360
Speaker 2: large share.

536
00:27:29,119 --> 00:27:29,760
Speaker 1: Of the company.

537
00:27:30,000 --> 00:27:32,320
Speaker 2: The rest of them, they're just there for you know,

538
00:27:32,920 --> 00:27:34,120
Speaker 2: just for fun, right, I.

539
00:27:34,040 --> 00:27:37,840
Speaker 1: Mean they're getting paid. Maybe they're friends of the CEO. Right,

540
00:27:37,880 --> 00:27:40,199
Speaker 1: classic CEO move is like pick the people who are

541
00:27:40,240 --> 00:27:42,040
Speaker 1: notionally your boss, who are actually your buddies.

542
00:27:42,200 --> 00:27:44,879
Speaker 2: Buffett says to them, hey, okay, we got to do

543
00:27:44,920 --> 00:27:46,840
Speaker 2: the thing, right. You got all this extra money, why

544
00:27:46,840 --> 00:27:49,359
Speaker 2: don't we just give it back to your shareholders, which

545
00:27:49,760 --> 00:27:55,360
Speaker 2: is kind of me? And they're like yeah, no, And.

546
00:27:56,960 --> 00:27:57,480
Speaker 1: He says.

547
00:27:57,960 --> 00:28:01,480
Speaker 2: They light up some cigars and laugh, and he's thinking,

548
00:28:02,080 --> 00:28:05,160
Speaker 2: I paid for those cigars, I paid for the room.

549
00:28:05,440 --> 00:28:07,040
Speaker 2: I paid for you guys to sit here.

550
00:28:07,119 --> 00:28:11,760
Speaker 1: Right, there's a classic problem with public companies. Right. People

551
00:28:11,760 --> 00:28:13,720
Speaker 1: have been aware of it for hundreds of years, the

552
00:28:13,760 --> 00:28:17,359
Speaker 1: principal agent problem. When one person or group of people

553
00:28:17,520 --> 00:28:20,280
Speaker 1: owns the company like the shareholders, and somebody else runs it,

554
00:28:21,119 --> 00:28:24,119
Speaker 1: the people running it are not gonna naturally act in

555
00:28:24,119 --> 00:28:25,800
Speaker 1: the best interests of the owners. They're gonna act in

556
00:28:25,800 --> 00:28:28,240
Speaker 1: their own best interests. The incentives are not aligned. Right.

557
00:28:28,480 --> 00:28:31,080
Speaker 2: So he threatens a special meeting. He's going to like

558
00:28:31,160 --> 00:28:34,080
Speaker 2: take this to all the shareholders. Eventually the rest of

559
00:28:34,080 --> 00:28:37,040
Speaker 2: the board relents. They offer to give back some of

560
00:28:37,040 --> 00:28:38,440
Speaker 2: the companies excess money.

561
00:28:38,520 --> 00:28:41,040
Speaker 1: Right, So this is his strategy, meaning pay it out

562
00:28:41,080 --> 00:28:43,360
Speaker 1: to shareholders, pay it out as defendends to the shareholders.

563
00:28:43,400 --> 00:28:45,960
Speaker 2: Still, right, So this is the strategy. You find the

564
00:28:46,040 --> 00:28:49,800
Speaker 2: undervalued company, you buy the stock. If the price goes up, great,

565
00:28:49,920 --> 00:28:52,440
Speaker 2: you can sell the stock. The stock price goes down,

566
00:28:52,560 --> 00:28:55,719
Speaker 2: you buy more and more and more, and now you

567
00:28:55,760 --> 00:28:58,040
Speaker 2: have an underpriced company that you own a big chunk

568
00:28:58,040 --> 00:29:00,200
Speaker 2: of and you can bully them into doing what.

569
00:29:00,120 --> 00:29:03,800
Speaker 1: You want, which is arguably the right thing. You can

570
00:29:03,840 --> 00:29:05,880
Speaker 1: bully them into acting in the best interests of the

571
00:29:05,920 --> 00:29:06,840
Speaker 1: owners of the company.

572
00:29:07,160 --> 00:29:10,320
Speaker 2: Now they might say another depressions around the corner. This

573
00:29:10,360 --> 00:29:13,560
Speaker 2: could happen at any time, and we can't live on

574
00:29:13,600 --> 00:29:17,960
Speaker 2: the edge, mister Buffett, And he's like, it's my company

575
00:29:18,120 --> 00:29:23,120
Speaker 2: and I want the money. Usually worked. The one time

576
00:29:23,120 --> 00:29:27,400
Speaker 2: it didn't work. Maybe Warren Buffett's most famous investment. And

577
00:29:27,440 --> 00:29:31,440
Speaker 2: we'll do that Berkshire Hathaway.

578
00:29:32,120 --> 00:29:34,200
Speaker 1: After the break, Ah, you.

579
00:29:34,280 --> 00:29:52,200
Speaker 4: Fuddy, we'll go to the bathroom.

580
00:29:58,960 --> 00:30:01,880
Speaker 1: That is the end of the ads. So Robert, when

581
00:30:01,920 --> 00:30:08,920
Speaker 1: we left, Warren Buffett was collecting cigar butts, bullying recalcitrant boards.

582
00:30:10,000 --> 00:30:12,000
Speaker 1: Now he's about to make a big moment.

583
00:30:12,560 --> 00:30:16,480
Speaker 2: Yeah, it's the sixties, swinging sixties, clearly not in Omaha, Nebraska,

584
00:30:16,760 --> 00:30:19,760
Speaker 2: never really came there. But Buffett's looking around for these

585
00:30:19,800 --> 00:30:22,480
Speaker 2: tiny companies cigar butts, and he finds what he thinks

586
00:30:22,600 --> 00:30:26,440
Speaker 2: is a great one. It is a textile manufacturer in

587
00:30:26,680 --> 00:30:29,440
Speaker 2: also in New Bedford, Massachusetts, home of a lot of

588
00:30:29,840 --> 00:30:30,680
Speaker 2: dying industries.

589
00:30:30,800 --> 00:30:33,920
Speaker 1: Yes, is it a whaling company, Yeah, exactly right.

590
00:30:34,560 --> 00:30:38,280
Speaker 2: No, it is a textile manufacturer known as Berkshire Hathaway.

591
00:30:38,440 --> 00:30:43,840
Speaker 1: Right, this great heard you heard of this textile company somehow.

592
00:30:43,880 --> 00:30:47,040
Speaker 2: So they make fabric and eventually they'll specialize in the

593
00:30:47,120 --> 00:30:50,440
Speaker 2: lining to men's suits, you know, like that kind of

594
00:30:50,680 --> 00:30:54,880
Speaker 2: Rayon Satine kind of thing. Right now, even in the

595
00:30:54,960 --> 00:30:59,320
Speaker 2: nineteen sixties, nobody thought that there was going to be

596
00:30:59,320 --> 00:31:04,640
Speaker 2: a renaissance of textile manufacturing in Northeast United States, right,

597
00:31:04,720 --> 00:31:08,720
Speaker 2: it just was not happening. Most of the textile mills

598
00:31:08,720 --> 00:31:10,880
Speaker 2: had moved to the Southern United States. They were about

599
00:31:10,920 --> 00:31:15,120
Speaker 2: to move overseas. This is an expensive, low margin business

600
00:31:15,120 --> 00:31:17,000
Speaker 2: and anyone can make the lining to assunt.

601
00:31:17,040 --> 00:31:19,640
Speaker 1: Yes, there is no mote, there is no moat.

602
00:31:19,880 --> 00:31:23,160
Speaker 2: So the owner of Berkshire Hathaway was and I love

603
00:31:23,200 --> 00:31:26,800
Speaker 2: this name, Seabury Stanton, not a two.

604
00:31:27,680 --> 00:31:29,120
Speaker 1: I'm not saying he.

605
00:31:29,080 --> 00:31:31,920
Speaker 2: Was wearing a top hat, but he definitely owned a time.

606
00:31:31,920 --> 00:31:35,320
Speaker 1: I'm thinking more yachting hat, like a like a captain's tet,

607
00:31:35,400 --> 00:31:38,680
Speaker 1: right for Sebury Stanton in New Bedford. That guy definitely.

608
00:31:38,760 --> 00:31:43,000
Speaker 2: Definitely was on a yacht. Yeah, So young Buffett starts

609
00:31:43,000 --> 00:31:46,520
Speaker 2: doing his thing. He's acquiring shares of the company right secretly,

610
00:31:46,720 --> 00:31:48,320
Speaker 2: as he often did, because he didn't want anyone to

611
00:31:48,400 --> 00:31:52,880
Speaker 2: know that he was accumulating this large position. Right, So

612
00:31:53,080 --> 00:31:55,480
Speaker 2: he looks at it, right, it's seven dollars and fifty

613
00:31:55,480 --> 00:31:59,640
Speaker 2: cents a share. He thinks company's probably worth nineteen dollars

614
00:31:59,720 --> 00:32:03,120
Speaker 2: a year. Okay, right, double right, But Seabury Stanton also

615
00:32:03,200 --> 00:32:06,440
Speaker 2: knows the company is too cheap. Seabury Stanton is also

616
00:32:06,600 --> 00:32:10,880
Speaker 2: accumulating shares in his own company. Right, So Buffett does

617
00:32:10,880 --> 00:32:14,360
Speaker 2: the thing stops buy. He just wanted to stop in

618
00:32:14,400 --> 00:32:16,160
Speaker 2: and tell you I own a large part of your company.

619
00:32:16,160 --> 00:32:17,320
Speaker 1: What are you going to do about it? Right?

620
00:32:18,200 --> 00:32:22,160
Speaker 2: And Sebbery Stanton says, I know you're buying Berkshire Hathaway

621
00:32:22,400 --> 00:32:24,560
Speaker 2: and I want to buy it back. What will you

622
00:32:24,640 --> 00:32:29,720
Speaker 2: sell it for, mister Buffett? And Buffett goes eleven dollars

623
00:32:29,760 --> 00:32:32,600
Speaker 2: and fifty cents a share. Bought it for seven to

624
00:32:32,640 --> 00:32:34,920
Speaker 2: fifty sell it for eleven fifty good profit?

625
00:32:35,000 --> 00:32:35,960
Speaker 1: Right? Yeah?

626
00:32:36,000 --> 00:32:39,720
Speaker 2: And Seabury says, if I make that offer to you,

627
00:32:40,160 --> 00:32:41,440
Speaker 2: will you promise.

628
00:32:41,080 --> 00:32:43,200
Speaker 1: To take it? Huh?

629
00:32:43,280 --> 00:32:45,120
Speaker 2: And Buffett says sure, I mean, if it's in the

630
00:32:45,160 --> 00:32:47,680
Speaker 2: near future, I will take eleven dollars and fifty cents

631
00:32:47,720 --> 00:32:51,160
Speaker 2: a share. Then eventually Buffett gets the letter from Seabury's

632
00:32:51,160 --> 00:32:55,000
Speaker 2: stanting it is not eleven dollars and fifty cents a share.

633
00:32:55,520 --> 00:32:59,240
Speaker 2: Seabury is offering eleven dollars and three eighths three.

634
00:32:59,160 --> 00:33:02,160
Speaker 1: Eighths because stocks traded in eights at that time, and

635
00:33:02,200 --> 00:33:06,200
Speaker 1: so three eighths is one eighth of a dollar less less,

636
00:33:06,320 --> 00:33:08,800
Speaker 1: yeah than he promised. What is it? It's like twelve cents,

637
00:33:08,840 --> 00:33:13,640
Speaker 1: so it's like, yeah, eleven thirty eight instead of eleven fifty. Yeah. Yeah.

638
00:33:13,720 --> 00:33:18,560
Speaker 2: Buffett goes blisting, Right, this is not a bottle cap

639
00:33:18,640 --> 00:33:22,000
Speaker 2: I was promised. So this guy's trying to chisel me

640
00:33:23,040 --> 00:33:24,920
Speaker 2: for twelve cents, and.

641
00:33:24,760 --> 00:33:26,920
Speaker 1: Buffett's in at seven to fifty a share, just to

642
00:33:26,920 --> 00:33:28,400
Speaker 1: be clear, until basically.

643
00:33:29,000 --> 00:33:31,840
Speaker 2: Says I don't want this company, but I certainly don't

644
00:33:31,840 --> 00:33:36,360
Speaker 2: want Seabury Stanton to have this company. And Buffett says,

645
00:33:36,400 --> 00:33:39,320
Speaker 2: I'm not going to sell. I'm going to keep buying

646
00:33:39,800 --> 00:33:44,120
Speaker 2: and keep buying, keep buying, and suddenly, like the theory, right,

647
00:33:44,160 --> 00:33:46,200
Speaker 2: you're going to take a few puffs off the cigar button,

648
00:33:46,280 --> 00:33:49,560
Speaker 2: throw it away. All of a sudden, he controls the company.

649
00:33:49,640 --> 00:33:52,880
Speaker 1: He's chewed up the cigar butt and swallowed it, and

650
00:33:52,920 --> 00:33:56,200
Speaker 1: he's like, I have a dying manufacturer in frankly, a

651
00:33:56,280 --> 00:33:58,880
Speaker 1: dying corner of the country. Right, shout out bed.

652
00:33:59,280 --> 00:34:02,640
Speaker 2: He would later call it his biggest investment mistake.

653
00:34:02,760 --> 00:34:06,320
Speaker 1: Huh. And just to be clear, as one knows, the

654
00:34:06,360 --> 00:34:09,600
Speaker 1: company he controls, the company that he rode to fame

655
00:34:09,680 --> 00:34:12,600
Speaker 1: and fortune, is called Berkshire Hathaway.

656
00:34:13,000 --> 00:34:16,519
Speaker 2: Yes, they shut down the mills eventually, nineteen eighty five. Right,

657
00:34:16,640 --> 00:34:19,880
Speaker 2: there is no textile manufacturing Berkshire Hathaway now. But he

658
00:34:20,000 --> 00:34:23,080
Speaker 2: kept the name. It became the company that he used

659
00:34:23,880 --> 00:34:27,719
Speaker 2: to buy other companies and to grow this empire. And

660
00:34:27,760 --> 00:34:31,160
Speaker 2: I think he keeps the name just to remind him.

661
00:34:31,280 --> 00:34:33,880
Speaker 2: I think I think there's some sort of moral in

662
00:34:33,960 --> 00:34:34,600
Speaker 2: it from him.

663
00:34:34,719 --> 00:34:38,120
Speaker 1: It was this moment when he acted irrationally, presumably.

664
00:34:38,320 --> 00:34:40,800
Speaker 2: I mean, maybe it's a you know, a kind of

665
00:34:40,840 --> 00:34:44,560
Speaker 2: screw you to seaburys Stanton to this day man's Seabury's

666
00:34:44,560 --> 00:34:47,200
Speaker 2: dead and buried. But I think it was more just

667
00:34:47,239 --> 00:34:52,279
Speaker 2: to say, like, don't let your emotions rule you, you know.

668
00:34:52,440 --> 00:34:54,480
Speaker 2: And he wakes up every morning and looks at that name,

669
00:34:54,560 --> 00:34:57,160
Speaker 2: and maybe part of him is like that was almost.

670
00:34:56,920 --> 00:34:59,160
Speaker 1: A mes sae. It's great. So it's like he's arguably

671
00:34:59,200 --> 00:35:02,360
Speaker 1: the greatest investor of the twentieth century, and he more

672
00:35:02,440 --> 00:35:05,759
Speaker 1: or less chose to name his holding company's holding company

673
00:35:05,760 --> 00:35:09,680
Speaker 1: in the right term. Yeah, after his worst investment or

674
00:35:09,719 --> 00:35:11,680
Speaker 1: one of his worst investments. It is elegance. It's kind

675
00:35:11,680 --> 00:35:14,480
Speaker 1: of like the you know, the Memento moriy coin that

676
00:35:14,600 --> 00:35:17,239
Speaker 1: like it's a little bit has that kind of vibe, yes,

677
00:35:17,560 --> 00:35:20,200
Speaker 1: like remember you are imperfect?

678
00:35:20,840 --> 00:35:23,800
Speaker 2: Yeah, oh that's very the zen of Warren Buffett. I'm surprised.

679
00:35:23,840 --> 00:35:24,920
Speaker 2: I'm sure that book exists.

680
00:35:25,000 --> 00:35:25,880
Speaker 1: Yeah. Absolutely.

681
00:35:26,360 --> 00:35:30,600
Speaker 2: So he's got this company, this textile manufacturer. He's doing

682
00:35:30,640 --> 00:35:33,400
Speaker 2: all these other investments. He needs more and more money

683
00:35:33,400 --> 00:35:36,319
Speaker 2: about to keep the textile maker going and to like

684
00:35:36,719 --> 00:35:41,000
Speaker 2: continue to expand. And this this is where he finally

685
00:35:41,040 --> 00:35:43,960
Speaker 2: puts all these pieces I've been talking about together, because

686
00:35:44,760 --> 00:35:46,360
Speaker 2: he buys an insurance company.

687
00:35:46,440 --> 00:35:49,240
Speaker 1: Yes, the float like we talked about with Float.

688
00:35:49,480 --> 00:35:51,920
Speaker 2: This one is called National Indemnity.

689
00:35:52,160 --> 00:35:53,160
Speaker 1: Okay.

690
00:35:53,840 --> 00:36:01,560
Speaker 2: They make unusual insurance policies like, for example, circus performers, No, yes,

691
00:36:01,760 --> 00:36:04,200
Speaker 2: lion Tamer's, which you know, who's going to insure a

692
00:36:04,239 --> 00:36:04,800
Speaker 2: lion tamer?

693
00:36:04,880 --> 00:36:08,680
Speaker 1: Right? The body parts of burlesque stars. It's like Lloyd's,

694
00:36:08,719 --> 00:36:10,560
Speaker 1: Like people talk about Lloyd's of London like a famous

695
00:36:10,560 --> 00:36:13,200
Speaker 1: tennis player might ensure their han Yeah, you.

696
00:36:13,239 --> 00:36:16,839
Speaker 2: Know, I mean our voices obviously insured by National Unfamily right,

697
00:36:17,480 --> 00:36:21,560
Speaker 2: radio station treasure hunts. Well, you know, they would do

698
00:36:21,600 --> 00:36:23,879
Speaker 2: all these like giveaways at the radio station, and someone

699
00:36:23,960 --> 00:36:26,040
Speaker 2: needed to ensure that, like there would be enough money

700
00:36:26,040 --> 00:36:27,320
Speaker 2: and that they would pay off.

701
00:36:27,239 --> 00:36:29,560
Speaker 1: Recently, so they're still kind of in that business. I

702
00:36:29,600 --> 00:36:31,920
Speaker 1: remember there was was it Yahoo? Somebody had a like

703
00:36:32,000 --> 00:36:36,440
Speaker 1: a a college basketball tournament, you know, the NCAA tournament

704
00:36:36,600 --> 00:36:39,279
Speaker 1: bracket where if you got every single one right, you

705
00:36:39,400 --> 00:36:43,520
Speaker 1: got I think a billion dollars. And I think Buffett

706
00:36:44,320 --> 00:36:46,360
Speaker 1: ensured that same idea.

707
00:36:46,640 --> 00:36:48,759
Speaker 2: Yeah, And I mean eventually he would move into the

708
00:36:48,800 --> 00:36:52,120
Speaker 2: reinsurance business, which is insurance for insurers. Right, but it

709
00:36:52,160 --> 00:36:55,560
Speaker 2: works exactly the same way, right that all of these

710
00:36:56,520 --> 00:36:59,879
Speaker 2: linehammers at circus performers are paying money. Yeah, I guess

711
00:36:59,920 --> 00:37:02,560
Speaker 2: the owners of the circus are paying money. There probably

712
00:37:02,560 --> 00:37:05,160
Speaker 2: won't be an accident, they won't have to pay it out,

713
00:37:05,200 --> 00:37:08,640
Speaker 2: and so this money is coming in and this even.

714
00:37:08,520 --> 00:37:10,759
Speaker 1: If they do have to pay it out, it'll be later, right,

715
00:37:10,840 --> 00:37:13,400
Speaker 1: Like that's the key thing is that you get to

716
00:37:13,480 --> 00:37:15,759
Speaker 1: hold the money. Yeah, exactly right.

717
00:37:16,040 --> 00:37:18,520
Speaker 2: So, by the way, National Indemnity, he was a good company,

718
00:37:18,680 --> 00:37:21,720
Speaker 2: was doing well, but apparently he learned that the CEO

719
00:37:21,880 --> 00:37:24,960
Speaker 2: once a year would say, like, I can't stand being

720
00:37:25,000 --> 00:37:27,520
Speaker 2: this business. I just want to like go to Florida

721
00:37:27,680 --> 00:37:29,640
Speaker 2: and retire and be on vacation. I'm going to sell

722
00:37:29,680 --> 00:37:32,160
Speaker 2: this whole place. And Warren Buffett said to someone in

723
00:37:32,200 --> 00:37:35,520
Speaker 2: the company. The next time, he says he wants to

724
00:37:35,560 --> 00:37:38,840
Speaker 2: sell the whole company, call me, yeah, call me, And

725
00:37:38,920 --> 00:37:41,759
Speaker 2: apparently he the whole thing happened. He goes, he buys

726
00:37:41,840 --> 00:37:44,920
Speaker 2: National Indemnities, and the guy goes on vacation the next day.

727
00:37:45,040 --> 00:37:48,319
Speaker 2: Just makes it happen really quickly. Right, So now calling.

728
00:37:47,960 --> 00:37:51,680
Speaker 1: Warren Buffett becomes a feature of the American capitalist landscape

729
00:37:51,719 --> 00:37:54,480
Speaker 1: after this, Right, this is a great moment phone history.

730
00:37:54,480 --> 00:37:56,719
Speaker 2: You'll have a big phone, a big red phone. That's

731
00:37:56,760 --> 00:37:57,440
Speaker 2: his Buffet on it.

732
00:37:57,560 --> 00:37:57,719
Speaker 1: Right.

733
00:37:58,400 --> 00:38:01,479
Speaker 2: So, now the pieces are in place, got money coming

734
00:38:01,520 --> 00:38:04,920
Speaker 2: in from National Indemnity, a few other insurance like companies,

735
00:38:05,239 --> 00:38:08,480
Speaker 2: You've got the mills, You've got all these different investments

736
00:38:08,480 --> 00:38:10,160
Speaker 2: he has in different small companies.

737
00:38:10,239 --> 00:38:10,439
Speaker 1: Right.

738
00:38:11,160 --> 00:38:15,000
Speaker 2: And Buffett call this the golden age of capital allocation.

739
00:38:15,719 --> 00:38:19,000
Speaker 2: And what he means is, if you have enough different

740
00:38:19,080 --> 00:38:22,960
Speaker 2: businesses putting off different amounts of money, you can direct

741
00:38:23,040 --> 00:38:25,600
Speaker 2: that money to where it's going to make the most

742
00:38:25,640 --> 00:38:30,600
Speaker 2: difference and make the most return. He's essentially this self

743
00:38:30,600 --> 00:38:33,520
Speaker 2: funding machine at this point. He doesn't need investors to

744
00:38:33,520 --> 00:38:35,560
Speaker 2: come and he doesn't have to beg or borrow money

745
00:38:35,560 --> 00:38:38,280
Speaker 2: for his companies. He just has to move the streams

746
00:38:38,280 --> 00:38:42,600
Speaker 2: of money around. And he is about to hit the

747
00:38:42,719 --> 00:38:46,080
Speaker 2: nineteen seventies, which was a terrible economic time in America,

748
00:38:46,480 --> 00:38:50,440
Speaker 2: where there's a huge recession, the prices of companies go down,

749
00:38:51,360 --> 00:38:54,560
Speaker 2: and somebody, well, Warren Buffet, because that's what we're talking about.

750
00:38:54,719 --> 00:39:00,000
Speaker 2: And Warren Buffett has the cash and the confidence to

751
00:39:00,080 --> 00:39:01,640
Speaker 2: go wild in the nineteen seventies.

752
00:39:02,400 --> 00:39:05,640
Speaker 1: So the bad stock market is just what he needs.

753
00:39:06,000 --> 00:39:09,120
Speaker 2: It's exactly what he needs, and he takes stakes in

754
00:39:09,239 --> 00:39:13,360
Speaker 2: the Washington Post. He buys more Geico, he bought National Presto.

755
00:39:14,360 --> 00:39:16,400
Speaker 2: I built the names of these companies, which makes pressure

756
00:39:16,440 --> 00:39:17,760
Speaker 2: cookers and popcorn poppers.

757
00:39:19,160 --> 00:39:19,719
Speaker 1: I love that.

758
00:39:19,880 --> 00:39:23,200
Speaker 2: I love that he puts a big stake into Pinkerton's

759
00:39:23,239 --> 00:39:25,960
Speaker 2: detective agency, A little.

760
00:39:25,760 --> 00:39:28,960
Speaker 1: Weird that I'm important in the business history in their

761
00:39:29,000 --> 00:39:29,359
Speaker 1: own way.

762
00:39:29,440 --> 00:39:31,360
Speaker 2: By the end of nineteen seventies, Buffet's worth around one

763
00:39:31,400 --> 00:39:34,320
Speaker 2: hundred million dollars, right, and it's all under this umbrella

764
00:39:34,360 --> 00:39:37,200
Speaker 2: of Berkshire Hathaway. They don't make fabric anymore. They just

765
00:39:37,320 --> 00:39:38,920
Speaker 2: make well popcorn makers.

766
00:39:39,000 --> 00:39:39,720
Speaker 1: They make money.

767
00:39:39,880 --> 00:39:42,360
Speaker 2: They make money, right. And so this is the point

768
00:39:42,560 --> 00:39:46,840
Speaker 2: that I would say, young Warren Buffett has become essentially

769
00:39:46,880 --> 00:39:51,200
Speaker 2: the investor that we see today. Not a collector of

770
00:39:51,200 --> 00:39:55,440
Speaker 2: cigar butts, not like making these tiny little plays to

771
00:39:56,000 --> 00:39:58,880
Speaker 2: get some money back from these companies, but an owner

772
00:39:59,320 --> 00:40:02,799
Speaker 2: of big American companies that he thinks are at great

773
00:40:02,840 --> 00:40:06,040
Speaker 2: prices that he likes to hold and do the capital

774
00:40:06,040 --> 00:40:10,000
Speaker 2: allocation thing. So it's around this time, late sixties, early

775
00:40:10,040 --> 00:40:11,840
Speaker 2: seventies when he starts to appear.

776
00:40:12,040 --> 00:40:14,319
Speaker 1: In the newspapers, right in the magazines.

777
00:40:14,640 --> 00:40:18,440
Speaker 2: Forbes wrote an article called how Omaha Beats Wall Street.

778
00:40:18,520 --> 00:40:21,880
Speaker 2: I'm sure everyone's like, what is this about? And it

779
00:40:21,920 --> 00:40:25,680
Speaker 2: talked about Buffett's investment firm, which had been running about

780
00:40:25,680 --> 00:40:28,720
Speaker 2: twelve years at this point after he left Benjamin Graham,

781
00:40:29,080 --> 00:40:31,280
Speaker 2: and he said they had never lost money in this time.

782
00:40:31,920 --> 00:40:34,080
Speaker 2: Ten thousand dollars had been turned into a quarter of

783
00:40:34,120 --> 00:40:36,359
Speaker 2: a million dollars and if.

784
00:40:36,280 --> 00:40:39,400
Speaker 1: You'd invested ten thousand at the beginning, yeah.

785
00:40:39,000 --> 00:40:41,160
Speaker 2: And it was the first sort of articles that started

786
00:40:41,160 --> 00:40:44,040
Speaker 2: to talk about the Buffet weirdness right that, Oh he

787
00:40:44,080 --> 00:40:46,920
Speaker 2: lives in a small house, like he drives a small car,

788
00:40:47,040 --> 00:40:49,719
Speaker 2: Like he's a big deal in Omaha, but nobody knows him.

789
00:40:49,880 --> 00:40:51,799
Speaker 1: He eats like a six year old boy.

790
00:40:51,880 --> 00:40:55,160
Speaker 2: He just likes hamburgers and French fries and that's pretty

791
00:40:55,239 --> 00:40:57,719
Speaker 2: much all he eat, Cherry coke and Cherry Coke's before

792
00:40:57,760 --> 00:41:00,360
Speaker 2: the cook. You're right, oh, young Buffett. And one of

793
00:41:00,400 --> 00:41:02,239
Speaker 2: the reasons why I wanted to tell the story is that,

794
00:41:02,320 --> 00:41:07,600
Speaker 2: like that was really this like rare moment, both in

795
00:41:08,400 --> 00:41:12,480
Speaker 2: American finance and for Buffett himself. This idea that like

796
00:41:12,520 --> 00:41:16,840
Speaker 2: there were such vast misspricings and so little information in

797
00:41:16,880 --> 00:41:21,759
Speaker 2: the stock market that someone with his particular personality could

798
00:41:21,880 --> 00:41:24,919
Speaker 2: end up making this huge amount of money. Of course,

799
00:41:24,920 --> 00:41:26,920
Speaker 2: you'd go on to make billions and billions and billions

800
00:41:26,960 --> 00:41:29,839
Speaker 2: and billions that would dwarf this, but this was the

801
00:41:29,880 --> 00:41:35,960
Speaker 2: important part that the weird kid had his moment. Now,

802
00:41:36,000 --> 00:41:38,440
Speaker 2: of course, there's no end to the amount of information

803
00:41:38,520 --> 00:41:40,560
Speaker 2: you can get about all these companies, all these stocks,

804
00:41:40,719 --> 00:41:43,160
Speaker 2: and there's a million people well first of all that

805
00:41:43,280 --> 00:41:45,920
Speaker 2: read everything Warmbuffn't writes, and that want to do what

806
00:41:45,960 --> 00:41:48,920
Speaker 2: he does. Pour over you know, returns and how much

807
00:41:48,960 --> 00:41:51,160
Speaker 2: inventory do they have, and like, you know, what's their

808
00:41:51,239 --> 00:41:54,200
Speaker 2: working capital and all these tiny little measures of how

809
00:41:54,200 --> 00:41:56,560
Speaker 2: well a company is doing. They're doing the same thing

810
00:41:56,880 --> 00:41:59,200
Speaker 2: and so it's harder to do that. Yeah, Warm Buffet

811
00:41:59,239 --> 00:41:59,680
Speaker 2: has moved on.

812
00:41:59,760 --> 00:42:02,160
Speaker 1: You have to go farther Afield, right. Actually, what I

813
00:42:02,200 --> 00:42:05,520
Speaker 1: think of here is Jane Street. You know Jane Street, Right,

814
00:42:05,520 --> 00:42:08,600
Speaker 1: It's it's this little trading firm owned by the people

815
00:42:08,600 --> 00:42:12,560
Speaker 1: who work there. They're all super smart math people, and

816
00:42:12,640 --> 00:42:14,399
Speaker 1: like the most recent time they were in the news,

817
00:42:14,400 --> 00:42:16,239
Speaker 1: it was because they had figured out that in the

818
00:42:16,400 --> 00:42:19,160
Speaker 1: Indian stock market you could make some weird move where

819
00:42:19,160 --> 00:42:22,279
Speaker 1: if you bought the options and the stock, you could

820
00:42:22,360 --> 00:42:24,440
Speaker 1: make prices move it away. That was like basically a

821
00:42:24,440 --> 00:42:28,520
Speaker 1: guaranteed profit, right. Like that actually seems kind of Buffet esque,

822
00:42:28,560 --> 00:42:31,640
Speaker 1: even though it doesn't have the like, oh, fundamental Grandpa

823
00:42:31,719 --> 00:42:35,240
Speaker 1: Buffet that's the later Buffet. It has the like, I'm

824
00:42:35,719 --> 00:42:38,160
Speaker 1: really into details and I'm going to look all over

825
00:42:38,200 --> 00:42:40,759
Speaker 1: the world for some financial detail that is going to

826
00:42:40,840 --> 00:42:43,560
Speaker 1: make me a book. I feel like that's the twenty

827
00:42:43,640 --> 00:42:44,640
Speaker 1: twenty five version of it.

828
00:42:44,719 --> 00:42:47,520
Speaker 2: Yeah, and or even high speed trading that is finds

829
00:42:47,560 --> 00:42:50,760
Speaker 2: a mispricing that occurs in a millisecond and taking advantage.

830
00:42:50,800 --> 00:42:53,560
Speaker 1: So now it happens with math. Right now, That kind

831
00:42:53,640 --> 00:42:56,400
Speaker 1: of move in the US markets, as far as I

832
00:42:56,440 --> 00:42:59,640
Speaker 1: can tell, rarely happens with reading the financial reports, and

833
00:42:59,680 --> 00:43:01,560
Speaker 1: it usually happens with math.

834
00:43:01,719 --> 00:43:05,000
Speaker 2: With quants, yes, and they do not show up on

835
00:43:05,040 --> 00:43:08,640
Speaker 2: the weekend to meet with CEOs. Their machines do it

836
00:43:08,680 --> 00:43:11,080
Speaker 2: for their machines talk to each other. I mean, that's

837
00:43:11,120 --> 00:43:14,920
Speaker 2: the big picture, you know, finance. Successful strategies don't last

838
00:43:14,960 --> 00:43:17,759
Speaker 2: for long. You can only pull the young Buffett trick

839
00:43:18,120 --> 00:43:20,400
Speaker 2: one or two times and then you got to become.

840
00:43:20,160 --> 00:43:23,680
Speaker 1: Old Buffett next time. On Business History, a show about

841
00:43:23,680 --> 00:43:27,200
Speaker 1: the history of business, how does Warren Buffett find a

842
00:43:27,239 --> 00:43:30,359
Speaker 1: new edge? How does a guy in the business of

843
00:43:30,719 --> 00:43:35,480
Speaker 1: ensuring lion tamers and buying up bus companies manage to

844
00:43:36,640 --> 00:43:40,200
Speaker 1: make a hundred billion dollars in an era dominated by technology.

845
00:43:40,680 --> 00:43:41,680
Speaker 1: It's not going to be easy.

846
00:43:42,080 --> 00:43:45,360
Speaker 2: Our producer is Gabriel Hunter Chang, our engineer is Sarah Bruguier,

847
00:43:45,840 --> 00:43:48,880
Speaker 2: and our showrunner is Ryan Dilly. I'm Jacob Goldstein, and

848
00:43:48,920 --> 00:43:51,000
Speaker 2: I'm Robert Smith. We'll be back next week with another

849
00:43:51,000 --> 00:43:51,680
Speaker 2: episode of

850
00:43:51,760 --> 00:43:56,200
Speaker 1: Business History, a show about the history wait for it,

851
00:43:57,800 --> 00:43:59,280
Speaker 1: of business