Preston Pysh 7:30
You know, Stig. It’s funny because a lot of people think that because they don’t make a decision, they’re not making a decision. But in this case, what’s kind of interesting is when you decide to not move out of that position; let’s say you invested in in stock X, and it went down by 10%, and you don’t want to sell it to move into the other opportunity, which you think is much more promising because you don’t want to take a loss, and so you decide not to do anything. That lack of a decision is actually a choice that unconsciously or consciously you just made in that you chose to continue to have maybe a, an investment that will maybe persist that no gain or even decrease more, instead of moving into something that you felt was more promising that was going to grow at 10%. And I know that’s a very hard concept for a lot of people to take. And to be honest with you this was my favorite point in the whole book was this discussion of opportunity cost, when he was talking about this inventory because it really kind of hit home to me. And I think it applies probably most to a lot of investors that have that situation, where they have a loss on their, on their account for a particular pick, and they could take that loss and move it into something else that is definitely more promising, and they refuse to do it because they don’t want to take a loss. And you know, it was very interesting to see how Charles Koch, you know, this billionaire thinks about that particular situation, and he was just like, “Sell it! Take the loss. Put it into the, into the better opportunity ’cause all you can do is act at the time now, and look forward,” like Stig said. So really great point in the book. I really liked it. So the last thing that we’re gonna highlight in the book is we’re going to go through Charles’ five points to what he refers to as market-based management. And that’s what he refers to, throughout the entire book, is he says that he has a process that he uses for buying new businesses; for all of his decision making process, and that is called market-based management or MBM, as how he refers to it. And there’s five steps to MBM, okay? And so his first step is vision. So for vision, he wants to know where and how the organization can create the greatest long-term value. And I think that “long-term” is the real key word here. Because a lot of people whenever they buy a certain asset or something like that, they think very short term. They think, “How can I make my money in the next year? Or next two years get, and get it back? And Charles is of the opinion of let’s see where we’re gonna go. Let’s look at that 10, 20, 30. I mean, it’s just exactly like Warren Buffett, and all these other billionaires that we study and research, is they’re always thinking very long-term value. And so that’s where the vision that he has really kind of comes into play. Stig, did you have anything else that you pulled apart from that first tenant that he has of the five tenets? With respect to vision?

Stig Brodersen 10:12
Yeah, so I just have a quote that I really loved about the book. It was when Koch was saying that, “Success is harder to overcome than adversity.” And I thought that was really, really strong. So it’s not like he mentioned in this specific company, but what comes to mind is company like Sears, and Kodak, and Xerox, which has been hugely successful in the past, but they’re not successful anymore because they haven’t been able to adapt to the new times. And I really, really think that this quote, “Success is harder to overcome than adversity,” was a really strong point in the book.

Preston Pysh 10:45
Yeah, I, I love that quote. It was a, you know, you see it so many times where these companies make a lot of money. They start just hiring as many people as they can; not selecting the right people and being choosy; and their success actually becomes their, their greatest setback because then, they fill their ranks. They fill all the people within their organization at such a quick pace. And, you know, it just, it doesn’t work out that way. They’re not systematically slowly growing it in a conservative manner that leads to more long-term value. And I think that’s really what he’s referred to with Stig’s quote, and just in general with the vision tenet. So the next step that he has in this five-step MBM process is virtue and talent. So that kind of goes to my point that I was just making. And you see this with a lot of billionaires. That hiring the right person is probably one of the most important things you can do as you’re growing your business. And what you see is, is when somebody comes out with a new product or service that’s really successful; that does really well; has high margins. The first thing that a lot of managers and owners want to do is, “Well, let’s expand the business. Let’s grow it as fast as we can,” and they just start hiring, and they start hiring the wrong people. And as soon as you hire a one wrong person, guess what, that person then becomes a manager, and they hire another five wrong people that are just like them. And so, we, you see this trend with Jeff Bezos specifically, I mean, he’s emphatic about hiring the right people. Steve Jobs–if you’ve read Steve Jobs book–emphatic about hiring the right people. And so Koch obviously has the exact same mindset as these other billionaires in that he would much rather sit on an empty seat, and potentially forego revenues by–by hiring the right person than to hire the wrong person, and put them in there. And, and just–it would act as a cancer to the organization. So I think that this was a very important point. If you’re a business owner, entrepreneur, something that you probably definitely want to consider is: Do I really want to compromise growing too fast and having the wrong people in my organization? Or do I want to take it a little bit more conservative; put the right people in there, and make good solid decisions? ‘Cause that’s the foundation of your organization. And I think that was the main point here.

Stig Brodersen 13:01
Yeah. And I really–when, when I read the heading, it said virtue and talent. And I don’t know if I’m really over analyzing anything, but there’s a reason why he put virtue before talent. And he’s actually saying that it’s much more important to have–to have a person with a lot of virtue, and only little talent than the other way around. And one of the principles that he talks about in this chapter was that he wants his employees to think and act like an entrepreneur. And I thought that was a really good point. Because if you have employees that thinks and act like an entrepreneur; that think like, like the owner of the company and don’t think like employees, so they don’t think that they should give away their time in exchange for money. They’re thinking as entrepreneurs (*inaudible*), which means that they can change everything that they want in the organization. And entrepreneur can grow, and build, and can be visionary. And I thought that was such a strong, strong point.

Preston Pysh 13:57
Yep, I love that point. ‘Cause so often do you go to a restaurant, or a store, or something like that. And you see a person thinking like an employee and not like an owner. For example, I was at the supermarket the other day, and a person was setting up their cookie stand, and I wanted to try the free sample of the cookie, of course, I did. So I asked the lady, “Hey, can I have a sample of that?” And she’s, “I’m, I’m not set up yet. You’re gonna have to come back in five minutes.” And our whole stand was set up. And I’m thinking to myself: “You don’t think like an owner. You think like an employee,” and it wasn’t to dig her. It was just–you could have made a sale, you know? If I tasted the cookie, and I buy the whole thing…so that’s a perfect example of a person who’s thinking like an employee versus thinking like an owner. And that was what Charles Koch was saying in the book was, “I want to hire people that think like owners. I want to hire people who think like entrepreneurs,” because when you fill your ranks and your whole organization with people like that, I mean, you’re just destined for success. Another thing that I want to hit on real fast, which Stig brought up about the virtue being in front of the talent was Koch had this amazing quote in the book, and the quote went like this: “Employees with little virtue and lots of talent have done more harm to business than employees with great virtue and little talent.”

Stig Brodersen 15:09
Such a great point. And I just keep thinking, Preston, did you go back and, you know, tried the cookie?

Preston Pysh 15:15
No, I didn’t. Hahaha! Great point! So I was, I was, it was probably because of…the fact that I always look at things from a business standpoint. I did not go back on purpose because I was like, “That person’s thinking like a, like an employee, not a business owner.” So I did not go back and taste the cookie. I like that question though, Stig.

Stig Brodersen 15:35
Okay, so this just, this just proved that he has a good point…(*inaudible*)

Preston Pysh 15:41
Best question of the whole episode. All right, so let’s go to the next thing. The next point that he had, so we covered the first two of the five points. The third point that he had was knowledge and process. So I think this one goes without saying, when you look at a picture of Charles Koch, he’s typically standing in front of a whole stack of books behind him, and he greatly values education. And I think that that just goes without really putting too much emphasis on this one. I think everyone can just intuitively understand why that’s important. The one thing that I would say that came out of this section that I found kind of interesting was that he uses the profit-loss statement or his income statement as his metric and his key guide to determining how much value is a person actually creating for the process that they’re managing. And so, he starts off. He kind of looks at, okay, they bring in this on their top line. This is their bottom line. This is what they net, and that person created this much value for the company. And that’s how he kind of determines and measures their worth, if you will. So you obviously need good data in order to make good decisions. The other thing that he hit out in this specific point in the book was the idea of how much he puts emphasis on optimization and lean efforts. So a lot of people know the buzzword “Lean Six Sigma.” That’s something that I could see inherent throughout the entire book in the way that Charles Koch thinks. He’s constantly thinking of ways how he can make things more efficient, and get a better product out of that efficiency opposed to, you know, more defects. So we, we’re gonna have a link to a book in the executive summary that we type up for this if you’re interested in lean efforts ’cause that’s actually a very important aspect to just managing a business. And we could go for literally 5 to 10 episodes, just talking about Lean Six Sigma and those kind of ideas. But we have a link in, in the show notes. And we’ll also have a link in our executive or five-page executive summary for you to kind of review that type of idea and to explore that more.

Stig Brodersen 17:40
What I liked about this chapter was that he was talking about accuracy and precision, which actually are not the same thing. So what he’s saying is that you should have access to the right information. And, but he also says that you shouldn’t be too detailed in your information. I think that’s, that’s a really good point because you see a lot of calculation that might be calculation for a business, stocks, or whatever, and you will see that they will have like three, you know, $10.3278, something like that. I know I’m just over exaggerating here. But he’s just saying, you need to have access to the right data. You need have access to the right data, and then analyze on that.

Preston Pysh 18:20
Yeah. “Don’t over process it,” is what he’s saying, you know, the…and that goes back to the Lean Six Sigma. That’s one of the key tenets of that is don’t over process something. Just come up with what’s good enough. What, what do you desire? Like what’s your outcome? What’s your end state? What do you need? And get to that point, then move on. Move to the next task, you know? Be efficient with your time. So great point, Stig. So we’ll move to the…fourth tenet of the five, and that’s decision rights. So this addresses the idea that the right people are in the right roles with the right authority to make decisions. So regardless of whether a leader takes responsibility or delegates responsibility for their decisions, they are still responsible for all their actions, regardless of what happens with what their subordinates do with those decisions that they’ve been given the authority to. And I think that that’s something that sets a culture within an organization that you are responsible for the authority that you’ve been delegated. And when you have a culture that, that embraces that, and is used to that, you’re going to see people taking ownership for their decisions and know that they’re the person who’s ultimately responsible for what’s happening within their organization. Okay, so let’s hop to the very last tenet that Charles highlights out of the five and that is incentives. This is one that I really like to kind of talk about because a lot of the times, when you see people setting up a contract with another company and things like that, they always want to put incentives in the contract. And so I think incentives, in general, are a very good thing. But I think that one thing that a lot of people fail to recognize is: Why are you incentivizing something? Okay, now, let me give you an example. Let’s say that you need somebody that you hired, and you wanted to incentivize them in order to produce something at an accelerated timeline, say that, it probably would take two months to do it, but you need it in a month. So in order to get them to do it for you in a month, you’re going to incentivize them, okay? So you incentivize them through, through monetary incentives, or whatever the incentive might be. So what a lot of people fail to realize is typically, whenever you incentivize something, there might be a cost; an intangible cost potentially with that incentive. So if I incentivize somebody to do something very quickly, the cost to that incentive could potentially be the quality of the product that they produce because they’ve done it in an accelerated environment. So it’s very important to understand that every time you put an incentive in place, there’s sometimes a cost that’s associated with that incentive. And that’s just one little highlight that I wanted to, to point out. The other thing that, that Charles talks about specifically in the book is that he tries to find the ideal incentive that best motivates the individual employee. He does not like to put out blanket incentives. It doesn’t work like that. And he’s, he’s saying that if you really want to have a successful organization, you got to empower your leaders through those decision rights, which was the last tenet to go out and understand your employee, to the point where you know it incentivizes them. Some people are incentivized by money. Other people are incentivized by more leave in the year, whatever it is. Koch is basically saying you need to tailor that and customize it to each person within your organization. And most importantly, whenever you do that, it needs to be incentive that’s long-term value to the person, to the company, to society for the product that they’re producing. And it was just, it was a great discussion that he had on what it is that’s gonna keep the right people within your organization ’cause that’s what incentives really kind of do; that’s keeping that knowledge base and keeping those quality people within your organization, and not doing it in excess. Okay, so that’s real briefly, those are the five tenets of market-based management, which is the style of leadership that Charles Koch implements on a daily basis within his organization. And the key point that he summarized at the very end of the book is that you can’t implement these five tenets just step-by-step, you have to be understanding that change piece. You got to be dynamic. You got to be willing to constantly reassess where am I at now? And where am I going? So, fantastic read. We thoroughly enjoyed it. So let’s talk about maybe something that you didn’t like. So Stig, what was a piece in the book that you didn’t really particularly care for?

Stig Brodersen 22:39
Well, I got to say when, when I read the book, and when I heard all his points, it was almost like sitting with a checklist in front of me. Because I was just saying like, “Check. Check. Good point. Another good point. Check.” That was really, really amazing. I think all the, he hit all the, the highlights there. I think if there was something that I should say was that the way of presenting it was perhaps a bit off from time to time, so just a word of caution if you decide to read the book. And I really do recommend that you actually dig into that book. It might be a bit dry here and there. And I think he has a minor in philosophy, and I think that’s probably also something that you can, that you can see in his book. He’s very philosophical about a lot of these leadership things, where I’m probably more the get-to-the-point kind of guy. He actually has the point, but it might take, it might take a while here and there.

Preston Pysh 23:30
Yeah, and I, I agree with your point. I think that was probably the biggest…I don’t even want to say that it was a bad part of the book. But I think for some people that might not be as interested in business as maybe Stig and I are, I think you might find the book a little dry. It was, you know, it was probably a little hard to be excited to continue reading it, where I, you know, I obviously read it like it was an action novel, but I’m a little geeky, when it comes to business books. So I think some people might find it a little dry.

Stig Brodersen 24:00
Yeah, just to give you an example. For instance, in the discussion about incentives. You know, for a guy like me, I’ll probably like to know–so if I’m Charles Koch, and I’m hiring a new person–how will my contract look like? I mean, that’s, that’s kind of the nitty-gritty details I want to know. But he was more into, you know, history part and philosophy. So he said, “Well, so if we look at how the pilgrims came to America, and then what happened?” I mean that was just his approach, I mean. Mine was the same, but he just got about it in another way.

Preston Pysh 24:31
Yeah. Yeah. Now, I agree. And I think that, you know, I think he was really writing the book for his employees, so that they kind of understand his mindset, and that culture is really being bred within Koch Industries. So I think that was his primary audience was his employee base, and then anybody else who’s interested in knowing more about him. So, in general, though, I don’t want to distract from the fact that I really kind of classify this book as probably one of the best books that I’ve read on business. So really enjoyed it. I highly recommend everyone goes out there and reads this. If you don’t have the time and you want to read our executive summary, our five-page executive of summary, make sure you sign up on our mailing list, and we’ll send it to you. But at this time, let’s go ahead, and play the question that we have from one of our audience members. And this question comes from Trey Lockerbee.

Trey Lockerbee 25:17
Hey! My name is Trey. I’m a fan of the podcast and also the Buffett’s Books website. I was looking into Apple, not a stock that Warren Buffett would buy nor would I possibly, but just out of curiosity, I was running it through the intrinsic calculator, and I noticed that the intrinsic value was about 317. And the quote right now is only about 108. So I imagine that the intrinsic value is based off of the stock price before it split. So would have been about 645, I think, right? When it splits, so I was wondering how to, you know, amend that, so it would represent the most recent quote of the stock. And I was also finding the same issue with RDS Point A. Looks like I found an intrinsic value of 204. And the quote is only about 70. So I wanted to…before I got really excited about finding things like that, I wanted to make sure I’m not…misrepresenting them via the split stock price. All right, thanks a lot.

Preston Pysh 26:21
So Trey, fantastic question. And this is something that Stig and I see quite a bit on the forum. People are asking how do you value a company, whenever you have a stock split? I’ll tell you this. So we have two different intrinsic value calculators on Buffett’s Books. We have one that’s based off of a model that would be a similar way to value in fixed income securities, which is bound by time, and that’s the intrinsic value calculator that you’d see on Lesson 21. And then, we have another calculator, which is on Lesson 35 of Buffett’s Books, which calculates the intrinsic value using a discount cash flow model. And this one is not bound by time. This one values the business into infinity. The main reason why we have the two different models really kind of comes down to a very obscure topic called “look-through-earnings.” And that addresses the calculator, which we have on Lesson 21. So if you’re valuing Berkshire Hathaway, Berkshire Hathaway has what’s called a lot of look-through-earnings. And it’s a accounting concept that would probably take me a couple episodes to describe to people. But to just make things really simple to answer your question, I’ll tell you, I would use the calculator on Lesson 35 if you’re dealing with a company that has recently had any type of stock splits because it’s going to naturally take that into account by looking at the cash flow over the last 10 years, and then using the current number of outstanding shares in order to determine the value of the business. So without getting too technical and probably hurting people’s ears, we’ll just kind of leave the answer to your question there. If it’s something that you want to discuss in more detail, I highly recommend that you go to our forum, and talk to some of the people in the community there because they might be able to describe it in more detail. So Trey, thanks for the outstanding question. Stig and I will send you a free signed copy of our book, the Warren Buffett Accounting Book. And actually in the book, it talks about that concept a little bit more in detail. So if you’re interested in, in reading that portion of it, you’ll find it in the book that we’re going to send you. So everybody, if you’re interested in reading our show notes, make sure you that you go to theinvestorspodcast.com. You can download the executive summary that Stig and I typed up about this book. Great having you listen to us today! Keep the comments coming throughout the community because that’s helping us develop a better product for you, so really appreciate all of that. So thanks for listening, and we’ll see you next week.

So one of the things that Stig and I are very strict about is not endorsing any kind of service or product that we don’t personally use ourselves. So with that said, we give our full endorsement of our sponsor’s content realvisiontv.com. Real Vision is a site that Stig and I personally use ourselves, and it has had a profound impact on the way that we view the financial markets. One of the most important things a person can do is seek the knowledge of highly successful investors and business leaders, and more importantly, understand their thought process and how they make decisions. And with Real Vision, you get exclusive and in-depth interviews and presentations from the world’s sharpest independent analysts, fund managers, geopolitical strategists, economists, and investors, all in the same place. And right now because you’re listening to this show, we have a special offer for everyone in the TIP community. If you go to realvisiontv.com, and put in our special offer code: T-I-P, which stands for The Investor’s Podcast, you get 10% off your subscription to Real Vision TV. And if you’re not sure if you want to get a subscription to the site without seeing the videos and content first, we completely understand that. That’s why Real Vision is offering the TIP community a free week trial to see if you like their service. So trust me, you cannot afford to ignore the value that Real Vision creates with these in-depth, full length interviews from famous investors like Kyle Bass, Jim Rogers, Tim Ferriss, and many more. The people being interviewed often have a net worth far exceeding hundreds of millions of dollars, and watching Real Vision is like being able to sit in the corner of a room, and listen to a conversation that you’re not supposed to have access to. So don’t pass up this amazing offer to tap into the world’s smartest investors all in one place, and go to realvisiontv.com. Don’t forget, use the discount code: T-I-P, for your free week and 10% discount, today.

Outro 30:28
Thanks for listening to The Investor’s Podcast. To listen to more shows or access to the tools discussed on the show, be sure to visit www.theinvestorspodcast com. Submit your questions or request a guest appearance to The Investor’s Podcast by going to www.asktheinvestors.com. If your question is answered during the show, you will receive a free autographed copy of the Warren Buffett Accounting Book. This podcast is for entertainment purposes only. This material is copyrighted by the TIP Network and must have written approval before commercial application.