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IFB132: Warren Buffett on Investing in Business Vs Pricing

Announcer:                        00:00                     You’re tuned in to the Investing for Beginners podcast. Finally, step by step premium investment guidance for beginners, led by Andrew Sather and Dave Ahern. To decode industry jargon, silence crippling confusion, and help you overcome emotions by looking at the numbers, your path to financial freedom starts now.

Dave:                                    00:37                     All right folks, we’ll welcome to investing for beginners podcast. This is episode 132 tonight Andrew and I are going to listen to a few clips from our uncle Warren Warren buffet that is, and we’re going to, I picked out some different interviews and picked out some different clips, and I’m going to play them for us. And then Andrew and I are going to comment on those as well. So hope you guys enjoy, and without any further ado, I’m going to go ahead and turn it over to uncle Warren and let him do his thing.

Warren Buffett:                01:06                     Well, yeah, if you own stocks like it on a farm or apartment house, you don’t get a quote on those every day or every week. And I think you look, you look at the business, and the value of American does. This depends on how much it delivers in cash to its owners over between now and judgment day. And I don’t think it changes by 10%.

Andrew:                              01:23                     Yeah, I liked this one. Was this from a recent Berkshire meeting? It sounds very familiar. It’s an interview that he gave on TV about a year ago. Yeah, I remember that interview. I think it was with Becky Quick on CNBC. That’s correct. I’m everything out now. Okay, cool. Yeah. Yeah. So yeah, I liked that quote by Buffet. When you look at the market, and you see the wild swings, we’ve, you know, one of the things that have been on my mind lately is the big moves and a lot of these different stocks based on just the smallest of news. And so you’ll see these huge swings and it goes against what you know is a business losing, let’s say 10% of its earning power or gaining 10% of its earning power within the period of a few days. I think that’s, that’s somewhat hard to imagine.

Andrew:                              02:32                     And yet we see these huge swings in price with a lot of these stocks. And so it makes me laugh to think that there’s, there are ideas that you can’t find value within these wild swings. And I think especially when you’re looking at a prolonged bull market, or you’re looking at a very pessimistic bear market, there are going to be a lot of wild mispricings. And so that can lead to a lot of opportunity for investors and particularly investors that can be a little more rational level headed and have this old school, Warren buffet business owner type approach to the stock market. And so I think, you know, it’s starting with that quote right there. I like it because it defines how we look at the stock market and kind of where that competitive advantages, right? Because if you’re going to try to buy stocks and you’re going to try to be at least as good as the market of their, tried to beat the market, you have to know where your edge is and what that is.

Andrew:                              03:41                     And so by defining it as how hard it is to be a business owner, I’m not going to freak out and try to check the quote every day, but I’m just going to believe in the business and find the businesses that are not being recognized by the market. Then when you recognize and kind of set that as your advantage point, then from there, you can figure out what you want to focus on and figure out that this is going to be the way that you’re more likely to make gains in the market. It’s not going to be from insider information. You know, it’s not going to be from being a superior market timer. This is where the bread and butter are going to be made. And so again, focusing on that and not worrying about all the other aspects of the market, I think, can help confirm that behavior. If you have that mindset, you can reinforce that behavior within yourself and hopefully lead to better returns and better results.

Andrew:                              04:44                     And I think it all starts with the mindset and buffet lays it out very perfectly there. Yeah, I agree. And the thing that always strikes me when I listen to talk is a couple of things kind of always come through. One, the conviction with which he is talking about his ideas and his thoughts. You know, he, you could tell that he believes in what he’s saying. And the other thing that always comes through to me is how simple he makes it sound. We all know it’s not simple. He’s a brilliant man, and it’s not simple, but like you were saying, he, he’s, he, he’s how to control his emotions and turn out the note, tune out the noise to help him think about the status of the business as opposed to the wild fluctuations that are going on with Mr market in the market itself. And I think those are the things that always kind of really come across to me whenever I hear him talk about his ideas about investing in his thoughts on that.

Dave:                                    05:46                     And I think this little snippet here really kind of illustrates that because he keeps talking about the business and the cash flows of the business as opposed to, you know, what an is saying or what the news is talking about. The company’s talking about simply the cash flow from the business of what’s happening with the business as opposed to, you know, all the other noise. And I think that’s the thing that always really strikes me. Whenever I listened to him talk, you can hear it in his tone. That’s not even that he believes it. It’s like he’s just speaking facts and he’s, exactly now, Hey, this is how this, yeah, it’s, it’s, it’s coming from a place where he, he believes what he’s talking about. And this is a completely rational, factual thing. Like there’s not, there’s no argument. You can’t argue with what he’s saying. It’s just like, this is just a matter of fact way of talking about it is they always strike me that way. And you can’t argue with his results either.

Andrew:                              06:47                     The way he does it, he’s, he’s apart business center. He, they buy businesses, on the whole they, they buy stocks and not all of them work out, but a lot of them do where they’re just holding it forever and just collecting those cashflows. And so you can look at this track record to see where his conviction comes from. Yeah, exactly. And he, he always talks about that in his letters in his, in his talks about how he’s a better investor because he’s a better businessman and he’s a better businessman because he’s a better investor and he feels like they’re, they’re very entwined, and he credits a lot of his success to becoming a great investor because he’s been a good businessman and vice versa. And I love that.

Warren Buffett:                07:32                     If you’re investing if I’m going to buy a half interest in a McDonald’s stand and you’re going to run it or a McDonald’s franchise, you’re going to run it. I look to the business to determine whether I made a good investment and I’m concerned about, you know, whether we have new competition, how we do over the year, but it’s the business I look at when you’re just looking at the price of something you’re not, you’re not investing. I mean if, if you buy something Bitcoin, for example, or some cryptocurrency, you’re not looking to the asset itself to produce anything. If you buy an apartment house, you’re looking at all of the apartments. I was still here by a farmer. You look at a farm does, if you buy a whole business, you’re looking at how the business does. If you buy a part of a business, why shouldn’t you look at how the business is going to do?

Andrew:                              08:14                     I liked that. So I’m going to relate it to what I’ve seen personally in the past couple of years. I’m not going to give away the stock ticker is because these are recommendations that you let their subscribers pay for, but I’m just going to lay it out as these different types of stocks. So I have a stock I bought that’s in the financial industry, deals with asset management. I have another one that is in retail, more particularly like the mall stores. And then I have a third one that is chemical company that, which is a very big generalization because they do all sorts of things and they have different segments that are, some are more profitable than others and it’s, it’s a very confusing business, but each of these, so each of these have had somewhat better times to own the stock and worst times I own the stock.

Andrew:                              09:12                     So I’ll start with the asset management business. And this is one that I started, it, it, it turned out pretty good. And then it was a dividend fortress and then things just really, really went South. So the stock dropped 20, 25%, something like that and stayed down there for a long time. And even to this day, it’s starting to hover around where I bought it that, but it’s just, it’s one of those stocks that leaves a sour taste in your mouth. Right. And I’ll contrast that to the chemical stock. I also bought this one I’ve; I’ve, I bought into several times. The first two times I bought in the stock continue to rise, and it was one of the top performers, not not like the top three, but maybe like the top five, something like that. And so it was a stock that was, that was a fruitful investment.

Andrew:                              10:11                     And then some of the commodities that were involved in this industry took a turn. And you know, the way commodities work is they’re not all perfectly in tune with the economy. So some might have downtime while others have uptime, and that could be independent of the overall economic cycle. So with this one, I added it again cause it still looked like a good value. And the third time after I added, then now it dropped and it went, it dropped pretty far where my previous gains got erased. And now it’s, it’s starting to work its way back up. It’s still at a substantial loss I think like 10 or 20% to my portfolio. And so as I look at some of the, like these two in particular, which are the two stocks that really, or Glenn the, the two glaring weaknesses in my portfolio as of right now.

Andrew:                              11:14                     Right. So, so the reason I bring these two stocks up is when buffet talks about, you know, looking at what the, what your investment does, what the price of it’s done, and then what the business has done. It’s very easy for me to look at both of those stocks and because they have been two of the worst performers as of the past 12 months. So really hate on both of those businesses where it, regardless of what’s going on inside the business, you look at the UC red and you look at the negative percentages, you look at that cost basis and then how much it’s worth now and, and it, it can be very frustrating, right? Whether you have one mistake or 20, but you know, when I look at these two, what I need to do and something that Buffett’s speaking to here is instead of looking at what’s, what’s the stock price done, look at how the financials have done.

Andrew:                              12:15                     So, in my case, the asset management business, their top line, and bottom line have been flat if not like slowly declining. And for the chemical business, they see these swings and in their past five years things have gone up quite a bit and then they’re just starting to decline. So really you have one stock that’s been floundering for like five years and one who’s just starting to kind of flounder and the future looks a little bit uncertain and like things aren’t going to continue in the straight line. So I’m trying to paint the picture of these two different businesses. And so from a buffet point of view, I think it makes a lot of sense to look at the chemical business and say, well, it’s had such great success up to now. And just because all of that success brought a lot of popularity with the stock and it got bid up pretty high.

Andrew:                              13:17                     And so at the first sign of that prosperity slowing down, then a lot of investors fled the stock. Whereas with the S the asset management company, things have been flat for a while and there’s, there’s this really no, no sort of growth of all either looking into the future or looking at the past. And so I think what buffet would speak to if he were talking to me and looking at the situation is like, Hey, don’t get too worried about the stock that went up high and then went down a lot. When you understand that the business is still fine and over the very long term it’s growing and having a nice trend and contrasting that to the other one where it’s like, Hey, maybe this business might be a little bit more problematic because of the declining revenue and the declining earnings.

Andrew:                              14:18                     So I think looking at it from that perspective, rather than just writing off both of these stocks as they lost me more money than any other stock in my portfolio. So I am just either going to cut those losses, or you’re just going to look at these stocks and never want to touch them again. Because, you know, sometimes a great opportunity in your portfolio can be the S the various stocks have, they’re beaten down, and maybe those are the stocks you need to re upon. And if you’re bringing this mindset that while the stock has gone down, I don’t want any part

Dave:                                    14:52                     Of it anymore that can, you know, that can lead to a lot of missed opportunity. And, and really when you start to have a mindset where you’re thinking one way against the stock, and it’s kind of unfair to the business, I think that can craft your decision making and lead to bad buy or sell decisions.

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Dave:                                    15:23                     I, I like how you are using the business model as a basis for deciding as opposed to the price and just what’s going on with the price. And I think that’s really what w Warren was trying to get at was that you need to look at the business itself and try to ignore as much as you can what is going on in the stock market because there are so many forces at play with different companies that we’re not really, you’re not going to have a good, true sense of how the company is going to do for some time. And, and it was listening to a podcast of, from that Toby Carlyle was doing recently. And one of the things that he talked about what’s struck me, and I think Warren buffet would probably say the same thing, was value investing can be painful because it sometimes could take a while for the company to realize what you think it’s worth.

Dave:                                    16:29                     And that could be a year, two years, three years, five years before you see what you think the company is worth. And you may have to endure some dips and maybe even some dramatic ones like Andrew was referring to with a couple of the companies he was talking about. And I think that’s something that can be very stressful and turn people off about this investing. You know, value investing over the last, what eight to 10 years has not done the greatest compared to other styles of investing. But it seems to be making more of a comeback. And I know that we’re a buffet. His style investing really kind of can take a beating when there’s a long bull market, but when there is downturn in the market, that’s where we were when he makes his hay and it’s really because he’s looking at his view doesn’t change based on the boots swing of whether everything’s going up or whether everything’s going down.

Dave:                                    17:37                     He’s still looking at the basic function of the business. Is this company producing what they produce? Are people still buying it? Is it still making money? And if all those things are still true, that even though the stock price may have gone down 30 or 40% all the other characteristics of why he buys the company and why he’s interested in it are still the same. That he knows through his experience in all the time that he spent in a market that the, that the price will rebound eventually. And so he’s basing all of his investment decisions on the actual business as opposed to the price fluctuations from day to day, month to month, year to year. Because a lot of that time, that can be noisy and it can be things that you have no control over. But when you’re looking at the income statement for Walmart, it’s, you know, it’s going to tell you what’s going on with the company. And regardless, whether it’s at $70 a share or it’s $102 a share, the underlying businesses, it’s selling what it’s supposed to sell. Are people buying it and are they making money? You know, as our profit margin has stayed the same or all those things still the same, then it’s still the same business regardless of the ups and downs of the price. And I think that’s really what Warren’s tried to say here.

Andrew:                              19:01                     Yeah. You bring up the, you know, looking at the income statement as an example, Walmart or some other stock you’re looking at. And I don’t know if I’ve said this in the past, I’m going to say it again. If I did, why I like to do, I have a spreadsheet where I have every stock that I own, and you know, you can be fancy like I am and set it up so it synchronizes with the market and so you, you kind of get live ticker data and everything like that. But that’s a nice feature to have. But I’m not focusing on that. When it comes to maintaining a portfolio, what I do on this spreadsheet is I have a column and I put the month for every stock on there. What month does their next annual report come out? And then I either leave the box on color, they’re colored and so every month I can look at that spreadsheet and I can look at which stocks have annual reports coming up and then I can update my VTI spreadsheets with the new annual report.

Andrew:                              20:06                     You know, look at that income statement, look at the new balance sheet and look at the cash flow statement. And now I have context on how the business is doing from the year, the year of the year. And I think that’s been very, very helpful for me to keep myself grounded regardless of how the stocks move in the market. I’ll give one more example because I think this is, Oh another way to look at it, but from the other side, so I have a stock that I bought in, I think it was early 2015 the ticker symbol is L R C X Lam research and it’s been the best stock I’ve ever bought as far as the life of the portfolio so far. And so this is stock. Luckily I got in one, the price to book was something ridiculously low, like something like 1.5 or something and just whatever happened with it.

Andrew:                              20:58                     You know, Tech’s been crazy over the past few years. Semiconductors have blown up. Certain stocks like AMD and micron, they’ve shot to the moon. And so other companies that support these stocks and sell to these stocks have made a lot of money too. So Lam research is one of those who are not directly in semiconductors, but they work with semiconductor equipment and, and you know, have, have their various products and everything like that so that a lot of the sectors related to just kind of tech, in general, took off through those years. And so I finally sold it a cow a couple of months ago and it was a really tough decision for me to do because this thing was like my Darlene, you know, every, every month I would look at the portfolio, I would see those return numbers based on how these tickers are moving. And then it was like, Lam research never failed.

Andrew:                              21:57                     It always made my portfolio look good. But the most recent annual report they had showed that they very, very aggressively went into debt, like the debt to equity just shot up. And that is something that, that is concerning to me as an investor. Not only that, the price of the book had risen to a point where it was somewhere like seven or eight. So that in and of itself is a huge kind of marker for overvaluation. And when you combine that with what’s going on with the business, I didn’t like how much debt they were piling on it. It just didn’t make sense to me that they were having so much success and so much growth yet now they were super aggressive with their debt. And so I made that tough decision and I sold it. And you know, it has gone higher since I’ve sold it.

Andrew:                              22:54                     But it’s, it’s one of those things where I’ve had to stay grounded and understand that if I’m going to look at a stock as a business and if the business starts to do something that you don’t like and it goes counter against your values. To me as an investor with my values, I like stocks. I keep it conservative or reasonably conservative. And so when the stock kind of steps out of that boundary, then I’m just going to have to cut ties. And so whether that’s a stock that’s been a darling to me or been, you know, a huge embarrassment and disappointment, the action is the same. And to get to that action, you need to have the right focus and, and be looking at the right things. And so I think that’s two different ways you can apply what buffet has said and use that to make smart decisions with your portfolio. Moving on to the next to quote

Warren Buffett:                23:55                     [Inaudible] people. If they take of stocks as pieces of business, they’d be so much better off than things. You got those little things that move around and price. And I think with Berkshire, we have an unusual number of people. The shareholders would look at Berkshire as a bin. They look at it as a savings account. They put some money in 20 or 30 or 40 years ago. We retain it and reinvest for them, but we’re where their savings account and, and

Andrew:                              24:18                     Okay. Dave, I’m going to put the spotlight on you now. Are you a Berkshire shareholder? I am. Okay. That shouldn’t have even been a question. Right? I should know that. Are you? Oh, of course. So I’ll tell you one story. I don’t know if I’ve told this on the air or not yet. So I went to Omaha and I’m blanking on whatever year it was, but it was somewhat recently and it was amazing to me to see all the different people that are there and really how this one man in this city, in the middle of nowhere in Nebraska was able to bring all these people together. And when you go to one of these events as a, as a Berkshire shareholder, you, you can be, you can be a shareholder and have one Berkshire share, one share of Berkshire B, which is like $300 or something.

Andrew:                              25:15                     And you’re allowed to go to this annual shareholders meeting that they hold every year. And it’s now like a huge conference thing. I would say it’s probably the most popular sort of investing place or event that we have as of now. I don’t know. You have, you have CNBC. I don’t know. I, I’m not able to think of, of like a, a, a, something that’s similar to that. So I know I’ve talked in the past about how I went, but it was just, it was, it was amazing to me to talk to somebody who said, yeah, basically my financial strategy has been buying Berkshares shares, and now he’s a millionaire. I think that’s; it can go the show that the way that a lot of money is made in the stock market does not necessarily have to do with all this effort, right?

Andrew:                              26:20                     All a lot of sweat and work isn’t always correlated with wealth and I think it’s because of the way Buffett has structured his investing, the way he looks at business, the way he understands how wealth creation, the compounding of earnings, all of these things take a lot of time. And so as somebody who’s trying to make money in the stock market, you can look at it as, well, I’m going to try to muscle my way into more money. Or you can look at somebody like Buffet and understand that these are the shareholders of Berkshire were people who just partnered with buffet, whether buffet knew them personally or not. They trusted their money in the Buffet and Buffet was able to use the money that Berkshire had to buy businesses outright. Or it’s a buy part ownership in businesses through stocks and let the businesses inside of that grow the capital.

Andrew:                              27:25                     And so as an individual investor yourself, when you look at your money in that way, instead of trying to be clever or trying to, you know, really look at the most highly risky stocks, the ones that are the most exciting, the ones that make the headlines. Instead, if you think of the slow and steady long-term approach, then you know, if you find the right couple stocks or the right, you know, you find your Warren buffet so to speak, then it can be kind of like putting money into a savings account and seeing the explode after several decades like, like, like the Berkshire shareholders have seen. So a lot of like power with, with what he’s saying. And he’s lived it and he’s seen it. And it’s just amazing how you can contrast what buffet has done and the wealth he’s built with a lot of different other ventures, I guess through wall street that has not been nearly as successful.

Andrew:                              28:34                     And if you boil down his approach, it’s really kind of boring, slow patient and prudent and it can be a great grant, a great way to, to build your wealth.

Dave:                                    28:45                     It’s, it’s, it’s fascinating to see there really is, and it’s it, you know, I keep coming back to how, how simple he and Charlie mugger always, you know, talk about, to them it’s, it’s finding good businesses and investing in them and finding people that are going to run them the way that they would, you know, like to see them run and just sitting back and enjoying the ride and you know, not worrying about all the different machinations that go on in wall street and trying to get too fancy. I mean, they, you know, they, they talk a lot about the too hard pile and you know, Warren is famous for his reading as, as well as Charlie is and you know, darn well that they’re reading through everything and they have, you know, ideas of what companies

Dave:                                    29:42                     They would want to purchase and things that’d be Berkshire’s in a way, different situation that, you know, that I am. And that goes without saying, but you know, their, their investment thesis and what they’re trying to do is completely different than what we’re trying to do. But the P the basic premise is still the same, you know, trying to find you know, great business at a good price and investing in it and just sitting back and letting them do all the work. And it doesn’t need to be super hard, super complicated, you know, very involved, you know, with higher-level math and all those kinds of things. It just doesn’t need to involve that. But, you know, wording how the business works of learning what it is that they do. And it’s like anything else, you know, the more you do it, the better you’re going to get at it.

Dave:                                    30:32                     And the more time that you put in doing those kinds of things. And I was thinking about what Andrew was doing with his spreadsheets and having, you know when the annual reports are going to be coming out for those companies, and I, I can pretty much guarantee that you know, after four or five years of looking at the same company’s annual reports, he could pick up a tenor of what’s going to be said and he could see the decisions that the management makes. And it all starts to make a lot more sense because the more you familiarize yourself with what the company does and how they do what they do and who it is that are running the companies, the more comfortable you’re going to be with what is going on with a business. And it’s, I mean, it’s a little bit of, I guess like dating, you know, as you first meet somebody and you get comfortable with them and you weren’t how they do their things and eventually you’re finishing others, each other sentences and making them a sandwich without even having to ask for it.

Dave:                                    31:33                     So, you know, all those kinds of things. It’s just a familiarity with what it is you’re doing. And I think that’s what strikes me so much about what it is that Warren does. And again, how simple he makes everything seem. And it just strikes me that he’s so, you know, convicted and he understands what it is that he’s doing just because he’s, he’s put that knowledge that he’s earned to work and it’s worked for him as so inspiring. And I love the way in all three quotes, he’s very simple, and you know, it’s a very simple yet clear, easy to understand the message.

Andrew:                              32:16                     And I think I, I don’t think he would be so vocal about, about those things if he didn’t believe that regular people like you or me could, you know, it’s not like we’re going to surpass him or anything like that with, with our performance, but in some way I follow in the footsteps and do good enough where the effort is worth the while. And so, you know, just by listening to him or reading one of his books I, I have one above my fireplace right now called the essays of Warren buffet where it’s a collection of, of the different annual report, what do they call them, the shareholder leathers that he’s done for, for these annual shareholder meetings. Something like that. Or I’ve, I’ve recommended this book in the past, the Warren buffet way. That one’s a great book and lays out how buffet has invested in and done well. And I think it’s; it’s very inspiring to me. It’s, it’s always been inspiring when I first started and as I continued to invest every day, it’s, it’s, it continues to inspire me. And I feel like there’s always something to learn from buffet himself. So, I think we can learn a lot from it.

Andrew:                              33:42                     And I think there’s a lot of potentials there if we pay attention and listen and just try to apply the simple yet foundational concepts that buffet lays out. And I think there’s been one theme that rings through all three of these quotes and it’s, you know, look at it as a business. You’re part owner of a business. It’s all about the business. Stop thinking about the stock market. All right, folks, we’ll, that is going to be a wrap-up or discussion for this evening. I hope you enjoyed our quotes from the uncle’s ward. I enjoyed grabbing them for us to listen to and for eight or nine and have our little conversation. I thought it was very interesting to hear how Ord had his kind of theme and he stuck to it. Do you? It has a conviction to what he’s saying and all the principles that he’s taught us have been fantastic. And you know, he shows us that this is something that we can all do and we can’t do it. So without any further ado, I’m going to go ahead and sign us. Go out there and invest with a margin of safety if some of the safety, if we don’t hear from you, have a great new year and we’ll talk to you next year.

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