Speaker 1: Pushkin too quick. No, it's perfect push kit stuff.
Speaker 2: You got it, Jacob, I wanted you to see one
Speaker 2: of my prize possessions. I hit it in a bag
Speaker 2: so that you would not see it. It is a round, cuddly,
Speaker 2: plushy Warren Buffet.
Speaker 1: He's got like an argyle sweater and a golf club,
Speaker 1: which is weird, like it should be a cherry coke
Speaker 1: box of seas can even like a hand financial document
Speaker 1: annual report. Yeah, why are golf club?
Speaker 2: I think people who golf like Warren Buffett and it's
Speaker 2: just a product that you can buy. A student got
Speaker 2: it for me, who went to the most recent Berkshire
Speaker 2: Hathaway shareholders meeting now the.
Speaker 1: Berkshire Hathaway Sheerwolder's knitting. Always wanted to go. It's a famous.
Speaker 2: Event and this was the one where he announced his retirement.
Speaker 2: My student eagerly like texted me the whole time so excited.
Speaker 2: He knows that I love Warren Buffett and I brought
Speaker 2: it because it's such a weird, unlikely thing. It is
Speaker 2: hard to buy soft plushy dolls of billionaires because who
Speaker 2: would want to sleep with the little elon musk doll
Speaker 2: at night.
Speaker 1: Yeah, this finance seems less likely, right, Like, it's not
Speaker 1: gonna be a plushy Jamie Diamond or a plushy like
Speaker 1: Ken Griffin.
Speaker 2: No, no, no, no, Ken Griffin will cut you in
Speaker 2: the night. And I think that they made a pleasure
Speaker 2: of him because Warren Buffett is sort of extraordinary in
Speaker 2: the history of finance. I mean there's a raw amount
Speaker 2: of money, right, one hundred and forty five billion dollars
Speaker 2: net worth according to Forbes. Right, but there's also the
Speaker 2: way he earned his billions. Most billionaires, if you think
Speaker 2: about it these days, started a company, a tiny company
Speaker 2: that became huge, owned all the stock in it, and
Speaker 2: so on, paper became rich. Or are the children or
Speaker 2: the children or the children of the children. Yeah, Warren
Speaker 2: Buffett did it by investing in other people's companies. He
Speaker 2: hasn't really like made a product himself. He buys companies
Speaker 2: that have good products.
Speaker 1: Which in a way makes it all the more amazing
Speaker 1: that he is this like beloved I'm gonna say beloved figure. Right, Like,
Speaker 1: people generally don't like finance people, and they like Warren Buffett.
Speaker 2: He is a symbol of what people want finance to be. Right, Oh,
Speaker 2: you buy good companies at good prices and you hold
Speaker 2: them through thick and thin.
Speaker 1: Like.
Speaker 2: He's legendarily honest. You know, his word is his bond.
Speaker 2: His handshake does not need lawyers, Jacob.
Speaker 1: I mean, I'm sure he has lawyers.
Speaker 2: He has a lot of lawyers, right, But you know
Speaker 2: he eats at McDonald's every morning, He sweeks cherry coke
Speaker 2: all day long, that he goes home to a tiny
Speaker 2: house in Omaha and plays bridge. I mean, if if
Speaker 2: he didn't exist, you would have to invent a Warren
Speaker 2: Buffett just for those days. You know, when the stock
Speaker 2: market like does something terrible, you can always just say, well,
Speaker 2: there's Warren Buffett, right, Why can't you be more like
Speaker 2: Warren Buffett.
Speaker 1: The honest one hundred and forty five billion dollar financier.
Speaker 2: Yeah, you can be a decent fellow. And today on
Speaker 2: the show, as part of our investing series, I'm going
Speaker 2: to show you that Warren Buffett is a complete fraud.
Speaker 1: Yes, no, he's totally not. He's a great guy.
Speaker 2: I'm just going to say that he is not as
Speaker 2: cuddly and feel good as you might think. Is a
Speaker 2: very shrewd man. He is a shark, really when it
Speaker 2: comes to business deals. And today on the show, we
Speaker 2: are going to show you how he got that way,
Speaker 2: young Buffett.
Speaker 1: I'm Robert Smith, I'm Jacob Goldstein, and this is Business History,
Speaker 1: a show about the history of business.
Speaker 2: This is part of our series on stock market legends.
Speaker 2: We already told you the story of Jesse Livermore, a
Speaker 2: very different story in a very different time, the wild
Speaker 2: West of speculation and tomfoolery, you know, in the Gilded
Speaker 2: Age and right before the Great stock market crash. And
Speaker 2: today we're going to pick up a few years later.
Speaker 2: Because Warren Buffett was born in nineteen thirty, right at
Speaker 2: the start of the depression, and before he was a legend,
Speaker 2: before he was a billionaire, he was just a young
Speaker 2: man who didn't want to work hard and figured out
Speaker 2: a giant flaw in the stock market. Yes, to understand
Speaker 2: how Warren Buffett cracked the code of finance, you have
Speaker 2: to put where's cuddly guy, He's way over there. You
Speaker 2: have to put cuddly Warren Buffett out of your mind,
Speaker 2: and you have to picture Warren Buffett, weird kid born
Speaker 2: in nineteen thirty. As I said, Omaha, Nebraska. It's after
Speaker 2: the Great stock market crash beginning of the depression. His
Speaker 2: father is a stockbroker, not a well respected profession after
Speaker 2: the Great Crash in nineteen twenty nine. Yeah yeah, yeah,
Speaker 2: and he'd eventually become a congressman. His father also not
Speaker 2: a respected profession ever, I know. And Warren Buffett is
Speaker 2: an awkward kid and an obsessive kid.
Speaker 1: Like.
Speaker 2: One of the things he does is he loves collecting things,
Speaker 2: a very Warren Buffett way, right. He starts to collect
Speaker 2: bottle caps, but not just the bottle caps on his
Speaker 2: own bottles. He goes to all the filling stations, the
Speaker 2: gas stations in town to where they sell the drinks.
Speaker 2: He goes into the ice chests where they have them
Speaker 2: and digs around for excess bottle caps, and then he
Speaker 2: puts them in piles in his basement and at night
Speaker 2: he sorts the bottle caps, the rare ones, the popular ones.
Speaker 2: He thinks it's information that no one else has for
Speaker 2: some reason, right.
Speaker 1: And he's not in this to make money, right, He's
Speaker 1: just trying to sort of understand the world. Like in
Speaker 1: New York. It reminds me of in New York. There's
Speaker 1: a certain kind of frankly it's usually a little boy
Speaker 1: who's really into like trains and buses, and there's a
Speaker 1: sense of like the maps and the organization. It feels
Speaker 1: like a Omaha nineteen thirty version of that.
Speaker 2: At one point, Warren Buffett and his friend recorded the
Speaker 2: license plate number of every car that came.
Speaker 1: By their house. Yes, just in case, just in case.
Speaker 1: It's just like there's some order in the world. There's some. Yeah.
Speaker 2: Warren Buffett had a job early, you know, newspaper rowd.
Speaker 1: He worked as a delivery boy.
Speaker 2: For his grandfather's grocery business. He told Alice Schroeder in
Speaker 2: her book Snowball, It's a biography of Warren Buffett, he said, quote,
Speaker 2: I didn't learn anything except I don't like hard work.
Speaker 1: I actually think an aversion to hard work is a
Speaker 1: quality you see in people who are entrepreneurial, like successful
Speaker 1: in a certain way, like Thomas Edison loved hard work.
Speaker 1: But there's another version, which is like people find what
Speaker 1: feels like play to them and then they do it
Speaker 1: all all the time. But it turns out, right, you
Speaker 1: love reading financial reports or building cars, and that doesn't.
Speaker 2: Feel like work. Yeah, I think that's right. Warren Buffett,
Speaker 2: you know, he didn't have good grades. He just didn't
Speaker 2: want to do what other people told him to do.
Speaker 2: He lived a life of petty crime.
Speaker 1: That is shocking.
Speaker 2: I know, I love this. So he and his friends
Speaker 2: would case out the local series. This is another quote
Speaker 2: from the book. It's so good. We would steal the
Speaker 2: place blind, We'd steal golf bags and golf clubs. Walked
Speaker 2: out of the lower level where the sporting goods were
Speaker 2: up the stairway to the street carrying a golf bag
Speaker 2: and golf clubs, and the clubs were stolen, and so
Speaker 2: is the bag. I stole hundreds of golf balls.
Speaker 1: That explains the golf club on the word buffet plusure.
Speaker 1: It's about his crime. It's about his crime. He's a
Speaker 1: friendly old man who stole that golf club.
Speaker 2: Now, Buffett was also making money as a kid, like
Speaker 2: he filed tax returns at the age of fourteen. That's
Speaker 2: so much money he made from his newspaper route.
Speaker 1: But I keep was he selling the stolen golf clubs
Speaker 1: and filing.
Speaker 2: Taxes and filing Texas Very buffet right, honest thief. But
Speaker 2: I come back to this obsession thing that he clearly had, right,
Speaker 2: I mean this ended up being a very important time
Speaker 2: at a very particular moment in the stock market, where
Speaker 2: in order to succeed you had to like do the
Speaker 2: equivalent of writing down license plates, You had to do
Speaker 2: the detailed work to figure out what things were worth
Speaker 2: in the stock market. So Buffett drifts through college, doesn't
Speaker 2: do very well with the ladies, or so he says,
Speaker 2: ends up at Columbia Business School, my alma mater, and
Speaker 2: this is the nineteen fifties, and by this point all
Speaker 2: of his fellow students want jobs in big businesses. They
Speaker 2: want to work for GM and US Steel.
Speaker 1: It's that that post war era is all about that, right,
Speaker 1: Like there's not like crazy new businesses starting up like
Speaker 1: there were in the late eighteen hundreds or the late
Speaker 1: nineteen hundreds. Right, it's this very steady, stable economy.
Speaker 2: Everyone wants to be safe, and honestly, like the safe
Speaker 2: economy is growing, so you can make money and you can.
Speaker 1: Do what's riding up you just the organization man.
Speaker 2: But not Warren Buffett, right, he's obsessed with this larger
Speaker 2: than life investing professor at Columbia named Benjamin Graham legend,
Speaker 2: a legend. So he'd read this book by Benjamin Graham
Speaker 2: called The Intelligent Investor. You can get it to this day,
Speaker 2: people still read it right. This book completely changed the
Speaker 2: way Buffett and a bunch of other investors at the
Speaker 2: time thought about stocks. Like when we talked about the
Speaker 2: stock market before the Great Crash of nineteen twenty nine,
Speaker 2: Jesse Livermore, we talked about the market like it was
Speaker 2: a rigged game, really, because it was Speculators would buy
Speaker 2: a stock and bid up the price of it, try
Speaker 2: to sell it to each other. They called them painting
Speaker 2: the tape, right, They try to get their money out
Speaker 2: before it crashed. But it went up and it crashed,
Speaker 2: And this is what the stock market was.
Speaker 1: It was like all meme stocks.
Speaker 2: Yeah, exactly all the time, right, all momentum trades, psychology
Speaker 2: of the market. But Buffett's mentor, Benjamin Graham, he said
Speaker 2: something that sounds very obvious, but it's missed by a
Speaker 2: lot of people even today. He said, the stocks are
Speaker 2: real companies. Stocks represent ownerships in companies that make things.
Speaker 2: They're not just numbers that go up and down. They
Speaker 2: represent this physical thing in the world. And so just
Speaker 2: as if you're buying, you know, a sweater or a car,
Speaker 2: you want it to be good, you want it to
Speaker 2: last long time, and you want to get a deal
Speaker 2: on it, you w atre on sale. Right, you said,
Speaker 2: just do the same thing for stocks, look for stocks
Speaker 2: and companies that are good companies that will last for
Speaker 2: a long time, that you can find on sale.
Speaker 1: And like, it's worth pausing here for a minute, right,
Speaker 1: because still today it sounds almost naive to talk about
Speaker 1: stocks in this way. But also it is what a
Speaker 1: stock is. Right. You own a share a part of
Speaker 1: a company, and in the sort of platonic ideal of
Speaker 1: the world, that should be worth some share of all
Speaker 1: of the company's future profits. Right. They call this a
Speaker 1: discounted cash flow model which you have built, which you
Speaker 1: have showed me, And like, in the long run, it's
Speaker 1: more or less true, right, in the long run, long average, Yeah,
Speaker 1: the price of a stock does represent the best guests
Speaker 1: the world can make today about the value of that
Speaker 1: company's profits from today until forever.
Speaker 2: But a lot of investors don't think about the long run.
Speaker 2: They're just like, will more people buy it tomorrow? And
Speaker 2: can I sell it for more money than I bought?
Speaker 1: Like it's so weird to me, frank the way it's
Speaker 1: like what did it do today and what is it
Speaker 1: going to do tomorrow? Nobody knows what it's going to
Speaker 1: do tomorrow now.
Speaker 2: To be fair, it was hard at the time that
Speaker 2: we're talking about, the nineteen fifties to get the kind
Speaker 2: of information you would need to figure out what a
Speaker 2: company is really worth. You know, there wasn't a Yahoo Finance.
Speaker 2: There were annual reports, but you had to search for them,
Speaker 2: you had to get him in the mail, you had
Speaker 2: to go to the library.
Speaker 1: And importantly, right there wasn't this giant industry like there
Speaker 1: is today of people who are pouring over those things
Speaker 1: and getting all the information they can out of them.
Speaker 2: Luckily, Warren Buffett is a collector of weird things and
Speaker 2: is willing to go the extra mile to find them.
Speaker 2: He was perfect for the situation. So he signs up
Speaker 2: for Graham's investing class at Columbia, and this is where
Speaker 2: it tips over into actually disturbingly crazy.
Speaker 1: Right.
Speaker 2: Buffett essentially starts to stock Professor Graham before he takes
Speaker 2: the class. He finds out everything he can about Benjamin Graham,
Speaker 2: including the fact that Graham was chairman of the board
Speaker 2: of a company called Government Employees Insurance.
Speaker 1: Company AH Geico, Geico.
Speaker 2: It will eventually be known as Geico. This is way
Speaker 2: before the Gecko, right, And Buffett is like, huh, what
Speaker 2: is up with this Geico company? And again, he's twenty
Speaker 2: years old, he's in school. This is his professor. He
Speaker 2: hasn't even taken the course. He gets on a train
Speaker 2: from New York to DC to go visit Geico to
Speaker 2: find out more about.
Speaker 1: It, knocks on the door on a Saturday, doors or lotday.
Speaker 2: A janitor lets him in because Buffett says, oh, well,
Speaker 2: my professor is the chairman of the board. And the
Speaker 2: janitor is like whatever, kid, like, come on in. Only
Speaker 2: one person is working on this Saturday at Geico, the
Speaker 2: vice president of finance. And Buffett like knocks on his door, says,
Speaker 2: can I ask you a question? And I saw an
Speaker 2: interview with the vice per of finance later who was like, yeah,
Speaker 2: I thought.
Speaker 1: I'd answer this kid's question right.
Speaker 2: Four hours go by four hours the vice president said
Speaker 2: this was like talking to an investor in the insurance business,
Speaker 2: an analyst who knew all of these things. And Boffett
Speaker 2: later he talks about this moment a lot because what
Speaker 2: he sees is he sees that certain companies have certain
Speaker 2: strategic advantages, and Geico is one of them. It's a
Speaker 2: stock that he would buy and end up eventually controlling
Speaker 2: the company. Right, But here's what he learned about Geico
Speaker 2: two things. First of all, it's an insurance company. They
Speaker 2: take money in when things go wrong, crash your car,
Speaker 2: they pay out the money. Yes, what they figured out
Speaker 2: is we need good drivers. How do you know who's
Speaker 2: going to be a good driver. Well, back in those days,
Speaker 2: they're like, we're only going to ensure government workers who,
Speaker 2: for some reason or maybe statistically, right, are less likely
Speaker 2: to speed and get in a crash and drink and drives.
Speaker 1: If you could make up a theory, right, like, if
Speaker 1: you're a risk averse, if you want to be a
Speaker 1: very stable, steady person, go get a government job. You're
Speaker 1: not going to get super rich, but you're probably not
Speaker 1: going to get fired. Sounds like a lower risk driver
Speaker 1: than the average person.
Speaker 2: So he sees a company that has identified a way
Speaker 2: to lower their costs and to basically choose their customers
Speaker 2: and have a competitive advantage because they specialize in government employees.
Speaker 2: Where else are they going to go but your company?
Speaker 1: Right, So this is the moat, Right, This is one
Speaker 1: of the big buffet ideas. Is not just a company
Speaker 1: that is, you know, beating its competitors, but a company
Speaker 1: that has a durable competitive advantage.
Speaker 2: That's like classic buffet, classic buffet. The other thing he
Speaker 2: learns is the insurance company has piles and piles of
Speaker 2: cash because people pay their premiums every month on time
Speaker 2: the money comes in, and the company doesn't have to
Speaker 2: pay out that money until much later when there's a crash.
Speaker 2: Maybe they don't pay it out at all. Right, float,
Speaker 2: this is called the float. This is called the floats.
Speaker 2: And so he saw that this company was constantly looking
Speaker 2: for things to invest in because I had so much money.
Speaker 2: Uh huh, Young Warren Buffett is like, huh. And by
Speaker 2: the way, this is all before he takes the investing cord.
Speaker 1: Tony has got a pile of bottle caps back in
Speaker 1: his childhood. Bet.
Speaker 2: He starts to buy Geico right, shows up in the
Speaker 2: class front row, raises his hand A plus, sure, I
Speaker 2: would hope. So he wants to work for Benjamin Graham.
Speaker 2: That's all he wants to do. Focused, focused, young man. Right,
Speaker 2: So Warren Buffett goes to Benjamin Graham and says a plus,
Speaker 2: can I come work for your company? And Benjamin Graham says, no,
Speaker 2: interesting reason. Benjamin Graham was Jewish, huh, And he said
Speaker 2: it's very hard for Jews to get jobs in Wall
Speaker 2: Street and finance at this time.
Speaker 1: Depends on the firm at this time.
Speaker 2: Yes, so he said that he would only hire Jewish
Speaker 2: investors for his firm as a sort of affirmative action.
Speaker 1: Comfortable. I'll be honest with you that story. Yeah, as
Speaker 1: you may know, I'm Jewish, and i feel a little
Speaker 1: awkward about that, but I'm interested. Go on.
Speaker 2: This is what Benjamin Graham fought. Warren Buffett famously not
Speaker 2: a Jew. Yes, he could not get a job company, right,
Speaker 2: So he gets a job as a stockbroker like his
Speaker 2: dad did.
Speaker 1: And Buffett hates it.
Speaker 2: Huh, hates being a stockbroker. And if you think about it,
Speaker 2: being a stockbroker means you are a salesman and you
Speaker 2: have to sell new companies to your investors all the time.
Speaker 2: Buffett wants to buy one company. He wants everyone to
Speaker 2: just buy Geico and to never sell it ever. And
Speaker 2: if you're working on commission, that's a really that's a
Speaker 2: really bad business. I got one stock for you to buy,
Speaker 2: never sell it. You can't make money off of it.
Speaker 2: He eventually does go back and gets a job with
Speaker 2: Graham convinces him, and this is where the two of
Speaker 2: them they cook up the system that it's going to
Speaker 2: make Warren Buffett rich.
Speaker 3: After the break, It's the mid nineteen fifties and Warren
Speaker 3: Buffett is living the dream.
Speaker 2: Maybe not his dream, but a classic American dream. He's
Speaker 2: living in Westchester, outside of New York City. He's working
Speaker 2: for his hero, Benjamin Graham. He's got a wife, Susan,
Speaker 2: two kids soon to be three kids, Susie, Howie, and Peter,
Speaker 2: and Buffett spends almost no time with them. He basically
Speaker 2: eats dinner, goes upstairs and reads one financial report after
Speaker 2: the other. Fifties Dad, that's what he loved, right, And
Speaker 2: the key idea that he and Benjamin Graham had was
Speaker 2: to find something that they referred to as a cigar
Speaker 2: butt company. And the joke, I guess it is a
Speaker 2: joke after the depression, right. The joke is that you
Speaker 2: could find a cigar butt thrown in the gutter and
Speaker 2: that'd be just enough tobacco left to get like two
Speaker 2: good puffs out of it.
Speaker 1: And then you could throw it away. Right, So this
Speaker 1: is different than the classic buffet. This is not the
Speaker 1: way we think of buffet today. No, that's right.
Speaker 2: This is how young Buffett made his money because there
Speaker 2: was this information gap in the market. If he could
Speaker 2: find a cigar butt company, it felt like, I can
Speaker 2: get a little bit of money out of this and
Speaker 2: sell it. Then I'll be able to like multiply my money.
Speaker 2: I'd be able to, like, you know, make it happen.
Speaker 1: Right.
Speaker 2: So here's an example. He found the Union Street railway
Speaker 2: in New Bedford, Massachusetts. It's nineteen fifty five. There's a
Speaker 2: company that owned a bunch of buses. I don't know
Speaker 2: where the rail was, but a bunch of buses.
Speaker 1: They started out as one of those little urban street
Speaker 1: car companies.
Speaker 2: Yeah, so they may have run a trolley car at
Speaker 2: some point. By this point they are buses and an
Speaker 2: amusement park.
Speaker 1: Amazing.
Speaker 2: Sure, so there's nothing remarkable about this company.
Speaker 1: But at an amusement park is fun, right, It's like
Speaker 1: the Chinese Army. It's like they own a lot of
Speaker 1: weird things.
Speaker 2: We have the news of the park and the way
Speaker 2: you get there. So he starts to research the company,
Speaker 2: and he finds out, in addition to the tilted world,
Speaker 2: they have about a million dollars in treasury bonds and
Speaker 2: cash just like sitting in the company. He does the
Speaker 2: math figures out the company is worth like sixty dollars
Speaker 2: per share if you include all this money laying around.
Speaker 2: Stock selling for thirty or thirty five dollars.
Speaker 1: Amazing. So one of the reasons.
Speaker 2: Why there's probably this huge gap is that stocks weren't
Speaker 2: all traded on a central system back then, right, So.
Speaker 1: Like, just to be clear, this stock is not on
Speaker 1: the New York Stock Exchange. It's some weird little company
Speaker 1: that trades at some random little exchange. So like, people
Speaker 1: working on Wall Street don't even know this stock exists.
Speaker 2: No, only a man who would spend every night pouring
Speaker 2: over companies and company documents would know that this tiny
Speaker 2: company exists. Right, So Buffa puts an ad in the
Speaker 2: newspaper saying I will buy shares for a certain price.
Speaker 2: He wants all the shares he can get his hands on,
Speaker 2: hoping that there's like old retirees of the company who
Speaker 2: have these stocks, who are like certificates.
Speaker 1: Right, they probably have a drawer with the pass of
Speaker 1: paper send them to me. It sounds like such a scam,
Speaker 1: doesn't it. Like if you saw an ad in the
Speaker 1: newspaper to send your stock certificate it, I would think
Speaker 1: it was a scam.
Speaker 2: But maybe more trust back in those days. It's Warren Buffett, right.
Speaker 2: So he builds up his position in this company, and
Speaker 2: he does what I guess apparently is one of his tricks.
Speaker 2: He shows up again on the weekend, like to like
Speaker 2: barnstorm into the company, meets with the CEO, and whether
Speaker 2: he convinces the CEO to do something or whether the
Speaker 2: co is going to do it anyway, we don't know.
Speaker 2: But soon afterwards the CEO is like, okay, we will
Speaker 2: offer dividends, payments back on the stock, and we will
Speaker 2: pay out our cash. Oh wow, I know Buffett makes
Speaker 2: twenty thousand dollars. Look at that buying up cheap stock. Yeah,
Speaker 2: sell it and high, which is good, Like if you're
Speaker 2: a twenty something back in those days, twenty thousands is awesome.
Speaker 3: Right.
Speaker 2: Yeah, so I take it today, but put an add
Speaker 2: in the newspaper. Taken he starts to find more and
Speaker 2: more of these cigar bots, and you know, if you
Speaker 2: read his biography, there's just like he has like intricate
Speaker 2: details of each one.
Speaker 1: I think the man has never forgotten a stock price.
Speaker 2: Right, But I'm struck by the bigger picture of American
Speaker 2: finance at the time. Right in the decades after the depression,
Speaker 2: American companies were really cautious, right. They stockpiled cash and
Speaker 2: bonds and emergency funds because there was this feeling like
Speaker 2: the bad times can come again very quickly. So what
Speaker 2: you had was companies that were really being overly cautious.
Speaker 2: And that's what Buffett saw well.
Speaker 1: And also investors were clearly overly cautious, right, I mean
Speaker 1: a they weren't doing the work of like finding these
Speaker 1: obscure companies. But it's easy to forget now when we
Speaker 1: just assume that, you know, the stock market, the S
Speaker 1: and P is going to return whatever it is, eight
Speaker 1: percent on average year after hear like it took decades
Speaker 1: after the depression for the stock market to get back
Speaker 1: to where it was. Like if you bought in twenty nine,
Speaker 1: you were probably still underwater in like nineteen fifties, certainly
Speaker 1: like into the forties, you know, So like not only
Speaker 1: were companies being cautious, but so were investors.
Speaker 2: Yeah, who would want to buy these big names, the
Speaker 2: general motors, right, but they didn't want to look at
Speaker 2: some tiny company in New Bedford, Massachusetts. Buffett would get
Speaker 2: something called the pink sheets, which were the prices of
Speaker 2: these tiny companies that would come out once a week.
Speaker 2: I assume that they were actually pink and that was
Speaker 2: like the most up to date knowledge about the stocks.
Speaker 1: Once a week in the mail, running to the mailbox,
Speaker 1: ripping over the pink sheet. Un blow.
Speaker 2: That's when Warren Buffet would do the Warren Buffett thing.
Speaker 2: He'd start to call him on the phone. He'd start
Speaker 2: to research the company, ask for all their stuff, like
Speaker 2: he is putting in the extra work. And that is
Speaker 2: how he is finding these companies, and no one else
Speaker 2: was doing it other than Benjamin Graham and a few
Speaker 2: other people who followed this philosophy. And so this is
Speaker 2: the flaw, This is the flaw he found in the market,
Speaker 2: and this is what he started to ride. He crosses
Speaker 2: one hundred thousand dollars in net Worth in the mid
Speaker 2: nineteen fifties. He's in his mid twenties, still a young
Speaker 2: man managing other people's money. At this point millionaire around
Speaker 2: the age of thirty has ten million dollars by the
Speaker 2: late nineteen sixties.
Speaker 1: And the fun just these little companies one after another,
Speaker 1: getting in, getting out. That's his move the whole time.
Speaker 2: He does some bigger companies. There's like a play on
Speaker 2: AMX American Express that was because of a like a
Speaker 2: cooking oil scandal. Too hard to get into, too hard
Speaker 2: to get into. But the weird thing about this is that,
Speaker 2: you know, he is a very successful investor, right making
Speaker 2: millions of dollars on this technique. He's back in Omaha
Speaker 2: at this point, and nobody knows much about him, huh,
Speaker 2: Like he's not on the front page of the Wall
Speaker 2: Street Journal. People are not writing about him. Really into
Speaker 2: the late sixties, like when he is already you know,
Speaker 2: almost middle aged. Yeah, and he starts to like twist
Speaker 2: these ideas. You know, Benjamin Graham retires Buffett gets his
Speaker 2: own investors, and he starts to to kind of take
Speaker 2: these ideas and do it slightly differently, which is Benjamin
Speaker 2: Graham preached diversification. His idea the flip side of the
Speaker 2: cigar butts was buy a lot of them. You never
Speaker 2: know which one's gonna make it and which one's not.
Speaker 2: So like diversify, right, Warren Buffett is like, no, I
Speaker 2: have good ideas. I have this success rate so far,
Speaker 2: so I'm going to kind of go all in on
Speaker 2: these companies I love.
Speaker 1: Now, that's counter not just to Benjamin Graham, right, but
Speaker 1: to like math math right. So Markowitz right, that there's
Speaker 1: this whole modern portfolio theory that's coming in right around
Speaker 1: this time, right, the sixties. Yea, And like, it's a
Speaker 1: pretty compelling case that diversification is good, that it is
Speaker 1: a free lunch that you get basically the same return
Speaker 1: with less kind of idiosyncratic risk. And Warren Buffett is disagreeing.
Speaker 1: Here's what he says about that diversification is protection against ignorance.
Speaker 1: It makes little sense if you know what you're doing.
Speaker 2: Huh boom for chumps, Jacob like us, I mean fair tough,
Speaker 2: I'm fair. I mean it worked for him. I do
Speaker 2: not advise this for everyone, right, But it did give
Speaker 2: him a certain advantage over the Benjamin Grahams of the world,
Speaker 2: which was, if you pile into certain companies in particular,
Speaker 2: you don't have to rely on them to do the
Speaker 2: right thing, to release this money that they're keeping to
Speaker 2: their investors.
Speaker 1: Right.
Speaker 2: If you assemble enough stock, they have to listen to you.
Speaker 2: You can get elected to the board. You can make
Speaker 2: them do things right. And this was the next sort
Speaker 2: of turn of the screw that Warren Buffett was doing.
Speaker 2: He would find these undervalued companies and then he would
Speaker 2: make them give him back the money. Huh, Sanborn Map Map.
Speaker 2: It's a map company.
Speaker 1: They also own a chain of ice cream parlorts.
Speaker 2: That would be great, right, No, but they could tell
Speaker 2: you how to get there because they made maps.
Speaker 1: So they specialized in selling very remember maps. You have
Speaker 1: the Thomas Brother's Guide to the Back of the Car.
Speaker 1: Oh yeah, yeah, it was a whole block in the
Speaker 1: county book. Yeah, so this is even more detailed than
Speaker 1: the Thomas brother maps. Right.
Speaker 2: They would sell these maps that were basically diagrams of
Speaker 2: specific buildings and every floor so you knew where the
Speaker 2: interest is and exits were, you know, the windows were
Speaker 2: all of this sort of thing, and they would sell
Speaker 2: it to insurance companies who needed to know how safe
Speaker 2: the buildings were into fire departments, so they knew like
Speaker 2: how to get in and out of the building if
Speaker 2: there's a fire.
Speaker 1: Some mote by the way, yeah, right, Like who's going
Speaker 1: to make maps of every building in America once one
Speaker 1: company already has it exactly right, exactly right.
Speaker 2: So Offett starts to buy some of their stock, buys
Speaker 2: enough that he gets on the board of directors, shows
Speaker 2: up for the board meeting, right he's ready, looks around
Speaker 2: at the board of and he realizes they don't really
Speaker 2: own much stock. They are the board of directors because
Speaker 2: I assume they are old men who have been on
Speaker 2: the company board a long time, friends of somebody way
Speaker 2: back when. And he's the one that actually owns a
Speaker 2: large share.
Speaker 1: Of the company.
Speaker 2: The rest of them, they're just there for you know,
Speaker 2: just for fun, right, I.
Speaker 1: Mean they're getting paid. Maybe they're friends of the CEO. Right,
Speaker 1: classic CEO move is like pick the people who are
Speaker 1: notionally your boss, who are actually your buddies.
Speaker 2: Buffett says to them, hey, okay, we got to do
Speaker 2: the thing, right. You got all this extra money, why
Speaker 2: don't we just give it back to your shareholders, which
Speaker 2: is kind of me? And they're like yeah, no, And.
Speaker 1: He says.
Speaker 2: They light up some cigars and laugh, and he's thinking,
Speaker 2: I paid for those cigars, I paid for the room.
Speaker 2: I paid for you guys to sit here.
Speaker 1: Right, there's a classic problem with public companies. Right. People
Speaker 1: have been aware of it for hundreds of years, the
Speaker 1: principal agent problem. When one person or group of people
Speaker 1: owns the company like the shareholders, and somebody else runs it,
Speaker 1: the people running it are not gonna naturally act in
Speaker 1: the best interests of the owners. They're gonna act in
Speaker 1: their own best interests. The incentives are not aligned. Right.
Speaker 2: So he threatens a special meeting. He's going to like
Speaker 2: take this to all the shareholders. Eventually the rest of
Speaker 2: the board relents. They offer to give back some of
Speaker 2: the companies excess money.
Speaker 1: Right, So this is his strategy, meaning pay it out
Speaker 1: to shareholders, pay it out as defendends to the shareholders.
Speaker 2: Still, right, So this is the strategy. You find the
Speaker 2: undervalued company, you buy the stock. If the price goes up, great,
Speaker 2: you can sell the stock. The stock price goes down,
Speaker 2: you buy more and more and more, and now you
Speaker 2: have an underpriced company that you own a big chunk
Speaker 2: of and you can bully them into doing what.
Speaker 1: You want, which is arguably the right thing. You can
Speaker 1: bully them into acting in the best interests of the
Speaker 1: owners of the company.
Speaker 2: Now they might say another depressions around the corner. This
Speaker 2: could happen at any time, and we can't live on
Speaker 2: the edge, mister Buffett, And he's like, it's my company
Speaker 2: and I want the money. Usually worked. The one time
Speaker 2: it didn't work. Maybe Warren Buffett's most famous investment. And
Speaker 2: we'll do that Berkshire Hathaway.
Speaker 1: After the break, Ah, you.
Speaker 4: Fuddy, we'll go to the bathroom.
Speaker 1: That is the end of the ads. So Robert, when
Speaker 1: we left, Warren Buffett was collecting cigar butts, bullying recalcitrant boards.
Speaker 1: Now he's about to make a big moment.
Speaker 2: Yeah, it's the sixties, swinging sixties, clearly not in Omaha, Nebraska,
Speaker 2: never really came there. But Buffett's looking around for these
Speaker 2: tiny companies cigar butts, and he finds what he thinks
Speaker 2: is a great one. It is a textile manufacturer in
Speaker 2: also in New Bedford, Massachusetts, home of a lot of
Speaker 2: dying industries.
Speaker 1: Yes, is it a whaling company, Yeah, exactly right.
Speaker 2: No, it is a textile manufacturer known as Berkshire Hathaway.
Speaker 1: Right, this great heard you heard of this textile company somehow.
Speaker 2: So they make fabric and eventually they'll specialize in the
Speaker 2: lining to men's suits, you know, like that kind of
Speaker 2: Rayon Satine kind of thing. Right now, even in the
Speaker 2: nineteen sixties, nobody thought that there was going to be
Speaker 2: a renaissance of textile manufacturing in Northeast United States, right,
Speaker 2: it just was not happening. Most of the textile mills
Speaker 2: had moved to the Southern United States. They were about
Speaker 2: to move overseas. This is an expensive, low margin business
Speaker 2: and anyone can make the lining to assunt.
Speaker 1: Yes, there is no mote, there is no moat.
Speaker 2: So the owner of Berkshire Hathaway was and I love
Speaker 2: this name, Seabury Stanton, not a two.
Speaker 1: I'm not saying he.
Speaker 2: Was wearing a top hat, but he definitely owned a time.
Speaker 1: I'm thinking more yachting hat, like a like a captain's tet,
Speaker 1: right for Sebury Stanton in New Bedford. That guy definitely.
Speaker 2: Definitely was on a yacht. Yeah, So young Buffett starts
Speaker 2: doing his thing. He's acquiring shares of the company right secretly,
Speaker 2: as he often did, because he didn't want anyone to
Speaker 2: know that he was accumulating this large position. Right, So
Speaker 2: he looks at it, right, it's seven dollars and fifty
Speaker 2: cents a share. He thinks company's probably worth nineteen dollars
Speaker 2: a year. Okay, right, double right, But Seabury Stanton also
Speaker 2: knows the company is too cheap. Seabury Stanton is also
Speaker 2: accumulating shares in his own company. Right, So Buffett does
Speaker 2: the thing stops buy. He just wanted to stop in
Speaker 2: and tell you I own a large part of your company.
Speaker 1: What are you going to do about it? Right?
Speaker 2: And Sebbery Stanton says, I know you're buying Berkshire Hathaway
Speaker 2: and I want to buy it back. What will you
Speaker 2: sell it for, mister Buffett? And Buffett goes eleven dollars
Speaker 2: and fifty cents a share. Bought it for seven to
Speaker 2: fifty sell it for eleven fifty good profit?
Speaker 1: Right? Yeah?
Speaker 2: And Seabury says, if I make that offer to you,
Speaker 2: will you promise.
Speaker 1: To take it? Huh?
Speaker 2: And Buffett says sure, I mean, if it's in the
Speaker 2: near future, I will take eleven dollars and fifty cents
Speaker 2: a share. Then eventually Buffett gets the letter from Seabury's
Speaker 2: stanting it is not eleven dollars and fifty cents a share.
Speaker 2: Seabury is offering eleven dollars and three eighths three.
Speaker 1: Eighths because stocks traded in eights at that time, and
Speaker 1: so three eighths is one eighth of a dollar less less,
Speaker 1: yeah than he promised. What is it? It's like twelve cents,
Speaker 1: so it's like, yeah, eleven thirty eight instead of eleven fifty. Yeah. Yeah.
Speaker 2: Buffett goes blisting, Right, this is not a bottle cap
Speaker 2: I was promised. So this guy's trying to chisel me
Speaker 2: for twelve cents, and.
Speaker 1: Buffett's in at seven to fifty a share, just to
Speaker 1: be clear, until basically.
Speaker 2: Says I don't want this company, but I certainly don't
Speaker 2: want Seabury Stanton to have this company. And Buffett says,
Speaker 2: I'm not going to sell. I'm going to keep buying
Speaker 2: and keep buying, keep buying, and suddenly, like the theory, right,
Speaker 2: you're going to take a few puffs off the cigar button,
Speaker 2: throw it away. All of a sudden, he controls the company.
Speaker 1: He's chewed up the cigar butt and swallowed it, and
Speaker 1: he's like, I have a dying manufacturer in frankly, a
Speaker 1: dying corner of the country. Right, shout out bed.
Speaker 2: He would later call it his biggest investment mistake.
Speaker 1: Huh. And just to be clear, as one knows, the
Speaker 1: company he controls, the company that he rode to fame
Speaker 1: and fortune, is called Berkshire Hathaway.
Speaker 2: Yes, they shut down the mills eventually, nineteen eighty five. Right,
Speaker 2: there is no textile manufacturing Berkshire Hathaway now. But he
Speaker 2: kept the name. It became the company that he used
Speaker 2: to buy other companies and to grow this empire. And
Speaker 2: I think he keeps the name just to remind him.
Speaker 2: I think I think there's some sort of moral in
Speaker 2: it from him.
Speaker 1: It was this moment when he acted irrationally, presumably.
Speaker 2: I mean, maybe it's a you know, a kind of
Speaker 2: screw you to seaburys Stanton to this day man's Seabury's
Speaker 2: dead and buried. But I think it was more just
Speaker 2: to say, like, don't let your emotions rule you, you know.
Speaker 2: And he wakes up every morning and looks at that name,
Speaker 2: and maybe part of him is like that was almost.
Speaker 1: A mes sae. It's great. So it's like he's arguably
Speaker 1: the greatest investor of the twentieth century, and he more
Speaker 1: or less chose to name his holding company's holding company
Speaker 1: in the right term. Yeah, after his worst investment or
Speaker 1: one of his worst investments. It is elegance. It's kind
Speaker 1: of like the you know, the Memento moriy coin that
Speaker 1: like it's a little bit has that kind of vibe, yes,
Speaker 1: like remember you are imperfect?
Speaker 2: Yeah, oh that's very the zen of Warren Buffett. I'm surprised.
Speaker 2: I'm sure that book exists.
Speaker 1: Yeah. Absolutely.
Speaker 2: So he's got this company, this textile manufacturer. He's doing
Speaker 2: all these other investments. He needs more and more money
Speaker 2: about to keep the textile maker going and to like
Speaker 2: continue to expand. And this this is where he finally
Speaker 2: puts all these pieces I've been talking about together, because
Speaker 2: he buys an insurance company.
Speaker 1: Yes, the float like we talked about with Float.
Speaker 2: This one is called National Indemnity.
Speaker 1: Okay.
Speaker 2: They make unusual insurance policies like, for example, circus performers, No, yes,
Speaker 2: lion Tamer's, which you know, who's going to insure a
Speaker 2: lion tamer?
Speaker 1: Right? The body parts of burlesque stars. It's like Lloyd's,
Speaker 1: Like people talk about Lloyd's of London like a famous
Speaker 1: tennis player might ensure their han Yeah, you.
Speaker 2: Know, I mean our voices obviously insured by National Unfamily right,
Speaker 2: radio station treasure hunts. Well, you know, they would do
Speaker 2: all these like giveaways at the radio station, and someone
Speaker 2: needed to ensure that, like there would be enough money
Speaker 2: and that they would pay off.
Speaker 1: Recently, so they're still kind of in that business. I
Speaker 1: remember there was was it Yahoo? Somebody had a like
Speaker 1: a a college basketball tournament, you know, the NCAA tournament
Speaker 1: bracket where if you got every single one right, you
Speaker 1: got I think a billion dollars. And I think Buffett
Speaker 1: ensured that same idea.
Speaker 2: Yeah, And I mean eventually he would move into the
Speaker 2: reinsurance business, which is insurance for insurers. Right, but it
Speaker 2: works exactly the same way, right that all of these
Speaker 2: linehammers at circus performers are paying money. Yeah, I guess
Speaker 2: the owners of the circus are paying money. There probably
Speaker 2: won't be an accident, they won't have to pay it out,
Speaker 2: and so this money is coming in and this even.
Speaker 1: If they do have to pay it out, it'll be later, right,
Speaker 1: Like that's the key thing is that you get to
Speaker 1: hold the money. Yeah, exactly right.
Speaker 2: So, by the way, National Indemnity, he was a good company,
Speaker 2: was doing well, but apparently he learned that the CEO
Speaker 2: once a year would say, like, I can't stand being
Speaker 2: this business. I just want to like go to Florida
Speaker 2: and retire and be on vacation. I'm going to sell
Speaker 2: this whole place. And Warren Buffett said to someone in
Speaker 2: the company. The next time, he says he wants to
Speaker 2: sell the whole company, call me, yeah, call me, And
Speaker 2: apparently he the whole thing happened. He goes, he buys
Speaker 2: National Indemnities, and the guy goes on vacation the next day.
Speaker 2: Just makes it happen really quickly. Right, So now calling.
Speaker 1: Warren Buffett becomes a feature of the American capitalist landscape
Speaker 1: after this, Right, this is a great moment phone history.
Speaker 2: You'll have a big phone, a big red phone. That's
Speaker 2: his Buffet on it.
Speaker 1: Right.
Speaker 2: So, now the pieces are in place, got money coming
Speaker 2: in from National Indemnity, a few other insurance like companies,
Speaker 2: You've got the mills, You've got all these different investments
Speaker 2: he has in different small companies.
Speaker 1: Right.
Speaker 2: And Buffett call this the golden age of capital allocation.
Speaker 2: And what he means is, if you have enough different
Speaker 2: businesses putting off different amounts of money, you can direct
Speaker 2: that money to where it's going to make the most
Speaker 2: difference and make the most return. He's essentially this self
Speaker 2: funding machine at this point. He doesn't need investors to
Speaker 2: come and he doesn't have to beg or borrow money
Speaker 2: for his companies. He just has to move the streams
Speaker 2: of money around. And he is about to hit the
Speaker 2: nineteen seventies, which was a terrible economic time in America,
Speaker 2: where there's a huge recession, the prices of companies go down,
Speaker 2: and somebody, well, Warren Buffet, because that's what we're talking about.
Speaker 2: And Warren Buffett has the cash and the confidence to
Speaker 2: go wild in the nineteen seventies.
Speaker 1: So the bad stock market is just what he needs.
Speaker 2: It's exactly what he needs, and he takes stakes in
Speaker 2: the Washington Post. He buys more Geico, he bought National Presto.
Speaker 2: I built the names of these companies, which makes pressure
Speaker 2: cookers and popcorn poppers.
Speaker 1: I love that.
Speaker 2: I love that he puts a big stake into Pinkerton's
Speaker 2: detective agency, A little.
Speaker 1: Weird that I'm important in the business history in their
Speaker 1: own way.
Speaker 2: By the end of nineteen seventies, Buffet's worth around one
Speaker 2: hundred million dollars, right, and it's all under this umbrella
Speaker 2: of Berkshire Hathaway. They don't make fabric anymore. They just
Speaker 2: make well popcorn makers.
Speaker 1: They make money.
Speaker 2: They make money, right. And so this is the point
Speaker 2: that I would say, young Warren Buffett has become essentially
Speaker 2: the investor that we see today. Not a collector of
Speaker 2: cigar butts, not like making these tiny little plays to
Speaker 2: get some money back from these companies, but an owner
Speaker 2: of big American companies that he thinks are at great
Speaker 2: prices that he likes to hold and do the capital
Speaker 2: allocation thing. So it's around this time, late sixties, early
Speaker 2: seventies when he starts to appear.
Speaker 1: In the newspapers, right in the magazines.
Speaker 2: Forbes wrote an article called how Omaha Beats Wall Street.
Speaker 2: I'm sure everyone's like, what is this about? And it
Speaker 2: talked about Buffett's investment firm, which had been running about
Speaker 2: twelve years at this point after he left Benjamin Graham,
Speaker 2: and he said they had never lost money in this time.
Speaker 2: Ten thousand dollars had been turned into a quarter of
Speaker 2: a million dollars and if.
Speaker 1: You'd invested ten thousand at the beginning, yeah.
Speaker 2: And it was the first sort of articles that started
Speaker 2: to talk about the Buffet weirdness right that, Oh he
Speaker 2: lives in a small house, like he drives a small car,
Speaker 2: Like he's a big deal in Omaha, but nobody knows him.
Speaker 1: He eats like a six year old boy.
Speaker 2: He just likes hamburgers and French fries and that's pretty
Speaker 2: much all he eat, Cherry coke and Cherry Coke's before
Speaker 2: the cook. You're right, oh, young Buffett. And one of
Speaker 2: the reasons why I wanted to tell the story is that,
Speaker 2: like that was really this like rare moment, both in
Speaker 2: American finance and for Buffett himself. This idea that like
Speaker 2: there were such vast misspricings and so little information in
Speaker 2: the stock market that someone with his particular personality could
Speaker 2: end up making this huge amount of money. Of course,
Speaker 2: you'd go on to make billions and billions and billions
Speaker 2: and billions that would dwarf this, but this was the
Speaker 2: important part that the weird kid had his moment. Now,
Speaker 2: of course, there's no end to the amount of information
Speaker 2: you can get about all these companies, all these stocks,
Speaker 2: and there's a million people well first of all that
Speaker 2: read everything Warmbuffn't writes, and that want to do what
Speaker 2: he does. Pour over you know, returns and how much
Speaker 2: inventory do they have, and like, you know, what's their
Speaker 2: working capital and all these tiny little measures of how
Speaker 2: well a company is doing. They're doing the same thing
Speaker 2: and so it's harder to do that. Yeah, Warm Buffet
Speaker 2: has moved on.
Speaker 1: You have to go farther Afield, right. Actually, what I
Speaker 1: think of here is Jane Street. You know Jane Street, Right,
Speaker 1: It's it's this little trading firm owned by the people
Speaker 1: who work there. They're all super smart math people, and
Speaker 1: like the most recent time they were in the news,
Speaker 1: it was because they had figured out that in the
Speaker 1: Indian stock market you could make some weird move where
Speaker 1: if you bought the options and the stock, you could
Speaker 1: make prices move it away. That was like basically a
Speaker 1: guaranteed profit, right. Like that actually seems kind of Buffet esque,
Speaker 1: even though it doesn't have the like, oh, fundamental Grandpa
Speaker 1: Buffet that's the later Buffet. It has the like, I'm
Speaker 1: really into details and I'm going to look all over
Speaker 1: the world for some financial detail that is going to
Speaker 1: make me a book. I feel like that's the twenty
Speaker 1: twenty five version of it.
Speaker 2: Yeah, and or even high speed trading that is finds
Speaker 2: a mispricing that occurs in a millisecond and taking advantage.
Speaker 1: So now it happens with math. Right now, That kind
Speaker 1: of move in the US markets, as far as I
Speaker 1: can tell, rarely happens with reading the financial reports, and
Speaker 1: it usually happens with math.
Speaker 2: With quants, yes, and they do not show up on
Speaker 2: the weekend to meet with CEOs. Their machines do it
Speaker 2: for their machines talk to each other. I mean, that's
Speaker 2: the big picture, you know, finance. Successful strategies don't last
Speaker 2: for long. You can only pull the young Buffett trick
Speaker 2: one or two times and then you got to become.
Speaker 1: Old Buffett next time. On Business History, a show about
Speaker 1: the history of business, how does Warren Buffett find a
Speaker 1: new edge? How does a guy in the business of
Speaker 1: ensuring lion tamers and buying up bus companies manage to
Speaker 1: make a hundred billion dollars in an era dominated by technology.
Speaker 1: It's not going to be easy.
Speaker 2: Our producer is Gabriel Hunter Chang, our engineer is Sarah Bruguier,
Speaker 2: and our showrunner is Ryan Dilly. I'm Jacob Goldstein, and
Speaker 2: I'm Robert Smith. We'll be back next week with another
Speaker 2: episode of
Speaker 1: Business History, a show about the history wait for it,
Speaker 1: of business