We had 80% of the American population, working population, working on farms a couple of hundred years ago. And if nobody had come up with things to make it more productive farming, we’d have 80% of people working on farms now to feed our populace. It means that we’d be living in a far far more primitive way. 

So if you look at the auto industry, it gets more productive. If you look at any industry, they’re trying to get more productive. Walmart was more productive than department stores. And that will continue in America and it better continue or our kids won’t live any better than we do. Our kids will live better than we do because America does get more productive. It goes along and people do come up with better ways of doing things. 

Kraft Heinz finds that they can do whatever amount of business, $27 billion worth of business or something, and they can do it with fewer people. They’re doing what American businesses have done for a couple hundred years and why we live so well. But they do it very fast. 

They’re more than fair in terms of severance pay, and all of that sort of thing. But they don’t want to have two people doing the job that one can do. I frankly don’t like going through that having face that I pasted down to *inaudible Nebraska. And it really needed change. 

But the change is painful for a lot of people and I just would rather spend my days not doing that sort of thing having had one or two experiences. But I think that it’s absolutely essential to America that we become more productive because that is the only way we have more consumption per capita and more productivity per capita. Charlie?

Audience 6  6:12  

Well, you’re absolutely right. We don’t want to go back to subsistence farming. I had a week of that when I was young, in a Western Nebraska farm. I hated it. I don’t miss the elevator operators who used to sit there all day in the elevator, running the little crank. 

Charlie Munger  6:28  

So on the other hand, as you say, it’s terribly unpleasant for the people that have to go through it. And why would we want to get into the businesses of doing that over and over ourselves. We did it in the past when we had to, when the businesses were dying. I don’t see any moral fault in 3G at all. But I do see that there’s some political reaction that doesn’t do anybody any good.

Warren Buffett  6:54  

Milton Friedman, I think it was just talking about the time… I’ll be apocryphal. The huge construction project in some communist country and that thousands and thousands and thousands of workers out there with shovels digging away on this major project. Then, they had these big earthmoving machines behind which were idle, and which could have done the work at one-20th of the time of the workers. 

So the economist suggested to the local party worker, whoever it was that… Why in the world didn’t they use these machines? The other job is done at one-10th or one-20th of the time, instead of having all these workers out there with shovels. And the guy replied, “Well, yeah, but that would put the workers out of work.” And Friedman said, “Well then, why don’t you give them the spoons to do it instead?”

Preston Pysh  7:43  

Alright, so, pretty interesting exchange here, where it was quickly turned to a productivity discussion. And the person who was asking the question through Carol Loomis was implying that 3G is… That’s just for people to know a little context. 3G is a multibillion dollar company that Berkshire often does deals with. 

I know when they did the Heinz deal, Berkshire took the preferred stock and 3G took a lot of the common stock. And then when they did that, they ended up firing, I guess the number was 2000 employees in order to optimize operations. So the person was saying, “Hey, you know, if you keep doing business with this 3G Capital from Brazil, I have concern as a shareholder of the ethics, I guess, behind this.”

And so, Buffett quickly spun this into a productivity discussion of if you’re going to make business more productive into the future, how is that unethical? That’s capitalism at its heart. So very interesting exchange. I agree with pretty much all of this. 

I think where this kind of becomes an interesting discussion for some people is when you look at how much consolidation has occurred over the last hundred years in the United States, where the people who own a majority of the equity are much, much smaller in number than where they were 100 years ago. And that consolidation continues to happen. 

In that conversation where nothing took place and why you’re seeing such a large movement in the United States, and I’m not saying either one of these are right. I’m just laying out another argument for people to think about. I think why you have so many people that are kind of up in arms about where the direction of where capitalism in general is going is because so much of that consolidation is happening with such a few amount of people relative to what it was 50 to 100 years ago. 

If I was going to pin something on why that’s occurred, I think a lot of it’s occurred just because there’s been so much central bank manipulation for the last hundred years, and it has caused these major shifts recently. 

Let’s just take the last business cycle of the last 10 years. You saw central banks paying pretty much any price to put cash into the market and they were doing that by basically buying bonds off the market through quantitative easing. Well, that money, that cash has now been being put in the hands of asset holders. And those asset holders now have cash in order to reinvest back into the market, which then takes more equity out of the hands of the majority. So that discussion is something that was not addressed by Buffett and Munger. I’m not saying that that’s right or wrong. Please don’t take anything that I’m saying here out of context. I guess what I’m trying to do is provide an argument to the other side of this, that some people have in the world, and that would be it. 

So for me, personally, I completely agree with Munger and Buffett, I really like Buffett’s story there at the end with the spoons and the equipment. I think that that’s just a brilliant way to look at things. I think it really speaks to the true power of capitalism and that you can’t intertwine yourself into that. You have to kind of remove yourself from that and let the free market  make things more efficient, make things more productive so that our kids can have a better lifestyle than we have today.

Stig Brodersen  10:53  

I really liked how often talked about his old purchase of *inaudible and the reason why he did that back  in the 50s and 60s, when Buffett was in textile, which he quickly discovered was a horrible business. 

Well, one of the reasons why he realized that was that American businesses at that time simply became less and less competitive. So, what he saw was that it was simply a matter of time before he eventually had to close it down. What he talks about is that someone else came along, and then they ultimately needed to close it. 

You’ll very often hear these arguments that, well, if you don’t lay off people, you will probably just be, 1% less competitive. You would still be a profitable company. And that’s clear that that would be true for Berkshire Hathaway, following that approach. It will only be a question of time before it would be, you know, 2% or 10%, or 50%, or whatever this. 

Eventually, as you are progressing, and you are being less and less productive, the company will ultimately shut down. So what Buffett is really talking about is really to be on the forefront of that and saying, you know, “Whether or not we like it, we respect capitalism and the rules that they’re playing under.” 

I definitely think that Buffett agrees with the rules. But even if he didn’t, there’s really no way around it. That is what he’s saying. And another way we’re celebrating Warren Buffett is also he’s talking about how he can run his headquarters for 25 people. That’s amazing to think about, [since] he has more than hundred thousand employees. 

But you could also again, revert the *inaudible set, think about how many people that are not employed, because he could hire 200 extra people in his headquarters. So I just think he’s actually very, very honest. 

But obviously, as Preston was also getting in before, for the individual worker that’s getting fired, this is not fun. He or she might not be able to retrain. So clearly, that’s a painful transition. But it is the way this is going whether we like it or not.

Preston Pysh  12:47  

Very interesting exchange. In fact, there was another point in the meeting where they were having more discussions about productivity. Both times were very interesting to hear their thoughts on, and I think they’re obviously very biased towards “capitalism is good,” [of] which I’m a capitalist [too]. 

Okay, just so people know, we’re listening to this. I am a capitalist. I completely agree with Buffett and Munger’s opinion. I just like to lay out the other side of the argument so people that are listening to this just don’t hear one side of it, and that they can make up their mind between here and both sides. Let’s go ahead and play the next question here.

Audience 2  13:21  

This question is on Berkshire’s intrinsic value, a substantial portion of the company’s value is driven by operating businesses rather than the performance of the securities portfolio. Also, the values of previously acquired businesses are not marked up to their economic value, including Geico in American, Burlington Northern. Based on these factors, is book-value per share still a relevant metric for valuing Berkshire?

Warren Buffett  13:48  

Well, it’s got some relevance but it’s got a whole lot less relevance than it used to. And that’s why… I don’t want to drop the book value per share factor but the market value tends to have more significance as the decades roll along. It’s a starting point. And clearly our securities aren’t worth more than we’re carrying them for at that time. 

On the other hand, we’ve got the kind of businesses you mentioned, but we’ve got some small businesses that are worth 10 times or so what would occur… We’ve also got some clunkers too. But the best method, of course, is just to calculate intrinsic business value, but it can’t be precise. We think the probability is exceptionally high. That 120% understates it. Although, it was all in securities. 120% [will] be too high. 

But as the businesses evolve and as we built in unrecognized value at the operating businesses, unrecognized for accounting purposes, I think it still has some uses being kind of the base figure we use. 

If it were a private company, and 10 of us here owned [it]. Instead we just sit down annually and calculate the businesses one by one and use that as a base value. But that gets pretty subjective, when you’ve got as many as we do. And so, I think the easiest thing is to use the standards we’re using now, recognizing the limitations in them. Charlie?

Audience 6  15:14  

Yeah, I think… I basically like it when our marketable securities go down and our own businesses go up.

Warren Buffett  15:23  

We’re working to that end, we’ve been working that way for 30 years now or something like that.

Charlie Munger  15:27  

We’ve done a good job too. We’ve replaced a lot of marketable securities with unmarketable securities that are worth a lot more.

Warren Buffett  15:36  

Yeah. And it’s actually a more enjoyable way to operate to be on that.

Audience 6  15:40  

We know a lot of people we wouldn’t know otherwise. We were good people.

Preston Pysh  15:45  

So that’s such a funny exchange, because it was basically their way of saying, “Yeah, we do stock picking, but we actually really prefer running operational businesses and a lot of the stocks that we have owned that we have sold. We’ve done much better with buying operational businesses that aren’t publicly traded than keeping the publicly traded businesses on the stock market.” 

I just love that because I think everyone really needs to listen to that and take away from that what it is, which is them saying they love being business owners. They love running operational businesses, they like that much more than stocks. I just find it so awesome. 

Stig Brodersen  16:24  

If you actually look at the numbers, the market cap for Berkshire Hathaway right now is around $400 billion. Only 160% of that is in the stock portfolio. The most significant part here, at least for me, is not their stock portfolio. 

And I also think that that is definitely what they’re getting at. Buffett even said that he spent 30 years having less and less marketable securities, and then scaling up the operating businesses. That is what he wants to do. 

Clearly, this is also a question about how much capital you have. I mean, he started out more as a stock picker, which made a lot of sense because he started out with tens of thousands of dollars, and not millions of billions of dollars. So, it’s really, really hard to control a company with that amount of capital. But that is basically what he wants to do. 

Also, because he has such a great track record in terms of by operating businesses he can run by himself. He’s not using his bandwidth to manage them or his headquarters bandwidth. They’re more or less operating on their own. 

What he’s also talking about whenever he said 1.2. That was the limit of when he started to repurchase. Right now, Berkshire Hathaway shredding just showed up 1.4. And he was also getting at whether or not he might increase that soon. So basically, he was also talking about the economic value of companies that are not public companies, [which] might be worth more in value. 

Preston Pysh  17:43  

So what Stig is talking about is the price, the market price that you’d see the stock is trading for compared to the book value. So whenever you’re talking about book value, that’s just the assets on the company’s books minus the liabilities that gives you the equity and that’s the book value of the company that he’s talking about. 

So when the price is trading anywhere between 1.2 of the book value, okay or lower, he’s going to buy back shares is what he said in previous shareholder letters. So that’s why he was bringing up that number 1.2 in the discussion there. 

For anybody else who doesn’t know what marketable securities are, that’s just stocks, the stocks that he owns in his portfolio. So he owns like 10% or 15% of Coca Cola all through publicly traded stock on the stock market. That’s what he’s talking about when he says marketable securities.

Stig Brodersen  18:30  

What he also talks about in terms of how do you value a company, what he’s basically saying is that to make this as accurate as possible. For instance, for Berkshire Hathaway, you will need to take each individual business and then figure out what is the intrinsic value of that. Do that for all businesses, and then what is the aggregate of that? 

But he’s saying that is quite complicated. First of all, it’s very subjective because you might not necessarily agree on what it’s worth. And also, if you do that, as an outsider, it’s really hard because that is not disclosed, because it’s in one corporate structure. So it’s actually very hard to do. 

What he’s saying is one quick way to look at that, that would be to look at the book value. When he said it’s definitely not an accurate measure, I think no measure really is. And he also says that elsewhere during the meeting, the way he explains is that you know, if it’s stock, for instance, like Coca-Cola, it will be marked to market. 

So basically, the way we recorded this was it’s traded on the stock market, that’s also the value you would see on the books. Whereas other companies, for instance, Geico, you won’t necessarily see how much that’s trading because it’s not trading at all. And that is really what the book value is. It’s an estimate of what is recorded at. 

Preston Pysh  19:40  

All right, so here’s the next question.

Audience 3  19:43  

Warren, this one’s a fun one. Thomas Cafe here. He’s a 27 year old shareholder from Canfield, California. And I should preface this question by saying that he was here 17 years ago, at 10 years old. He asked you a question from the audience, asking you if the internet might hurt some of Berkshire’s investments. 

At the time you said you wanted to see how things would play out. He’s now updated the question. What do you think about the implications of artificial intelligence on Berkshire’s businesses beyond autonomous driving and Geico, which you’ve talked about already? 

In your conversations with Bill Gates, have you thought through which other businesses will be most impacted? And do you think Berkshire’s current businesses will have significant more or less employees a decade from now as a function of artificial intelligence?

Warren Buffett  20:32  

I certainly have no special insights on artificial intelligence. I will bet a lot of things happen in that field in the next couple of decades and probably a shorter timeframe. They should lead, I would certainly think, but again, I don’t bring much to this party. But I would certainly think they would result in significantly less employment in certain areas, but that’s good for society. And it may not be good for a given business, but let’s take it to the extreme. 

Let’s assume one person could push a button. And essentially, to various machines, robotics, all kinds of things can churn out all of the output we have in this country. So everybody, there’s just as much output as we have. It’s all being done by instead of 150 million people being employed, just one person. Is the world better off or not? 

Well, certainly we would work less hours a week of work per week, and so on. I mean, it would be a good thing, but it would require an enormous transformation in how people relate to each other, what they expect of government and all kinds of things. And of course, as a practical matter, more than one person would keep working. 

But pushing the idea that way. You’d certainly think that’s one of the consequences of making great progress in artificial intelligence, and that’s enormously pro-social. Eventually, it’s enormously disruptive in other ways, and has huge problems in terms of a democracy, and how it reacts to that. 

It’s similar to the problem we have in trade, where trade is beneficial to society. But the people that see the benefits day by day of trade, don’t see a price of Walmart on socks or whatever they’re importing that says, “You’re paying X, but you would pay X plus so many cents if you bought this domestically.”

So they’re getting these small benefits and invisible benefits. And the guy that gets hurt by it, the roadkill of free trade feels very specifically and that translates into politics. It gets very uncertain as to how the world would adjust, in my view, to great increases in productivity. 

Without knowing a thing about it, I would think that artificial intelligence would have that hugely beneficial social effect, but a very unpredictable political effect of the game. *inaudible I think it could. Charlie?

Audience 6  23:03  

Well, you’re painting a very funny world where everybody’s engaged in trade and the trade is “I give you golf lessons and you dye my hair.” And that would be a world kind of like the royal family of Kuwait or something. I don’t think it would be good for America to have everything produced by one person than the rest of us. Just gauge some leisure.

Warren Buffett  23:24  

How about if we just got twice as productive? What about if we got twice as productive in a short period of time, so that 75 million people could do what about 150 million people are doing now?

Audience 6  23:34  

I think you’d be amazed how quickly people would react favorably. That’s what happened during the period when everybody remembers that such action back in the Eisenhower years, 5% a year something. People loved it. Nobody complained that they were getting air conditioning. They didn’t have it before. Nobody wanted to go back to stinking and sweating nights in the South.

Warren Buffett  23:57  

Well, if you got everybody’s hours and a half, it’s one thing. But if you fire half the people, then the other people keep working.

Audience 6  24:04  

Well, we’ve adjusted to an enormous amount, but it just came along a few percent per year.

Warren Buffett  24:09  

Well, and the question then…

Audience 6  24:12  

You have to worry about coming out 25% a year. I think you have to worry if you’re going to get less than 2% a year. That’s what’s worrisome.

Warren Buffett  24:20  

Okay, we’ll move on. But it’s an absolutely fascinating subject to see what happens with us, but it’s very, very hard to predict in some way. We’ve got 36,000 people still employed at Geico. 

If you could do the same, perform all the same functions, virtually all the same functions even and do it with 5,000 or 10,000 people. And it came on quickly and the same thing was happening in a great many other areas. I don’t think we’ve ever experienced anything quite like that. Maybe we won’t experience anything like it because I don’t know that much about AI. 

Audience 6  24:56  

I don’t think we have to worry about them.

Warren Buffett  24:59  

Well, that’s because I’m 86. It’s not going to come quickly.

Preston Pysh  25:05  

So for me, this was absolutely positively the most interesting exchange at the meeting because I mean, what you just heard there is you here to just total brainiacs kind of sparring between the two of them. And that’s not normal. 

I can tell you having gone to a few of these meetings, it’s not normal to hear these to have a difference of opinion on stage and in front of everybody. It was pretty awesome to hear where it went. 

Here’s what I find interesting. You can really kind of see how both of them are kind of right in their thinking and how they’re going through their thought process. Buffett [was] talking about how basically artificial intelligence technology is going to continue to have this push towards more productivity in the long run where humans are going to be losing certain numbers of jobs. But in the grand scheme of things that’s going to make society more productive over time. 

Where Munger was coming from was much more of this macro discussion that Stig and I have so many times on the show where we’re talking about where we don’t think interest rates and productivity is going to be very high, if 2% at best, and that we see it going in the way of Japan. 

And so, you kind of saw those two perspectives kind of colliding here. I found it interesting that once Munger threw that card on the table saying something like, “Hey, man! Come on, really? Do you think we’re going to have more than 2% over the next decade annually?” 

And Buffett immediately, he goes, “Alright, so next question,” because you knew he agreed with Charlie at that point with respect to where he expects the macro factors in the US to kind of go like they both see eye to eye on that. That’s my opinion. I don’t know for sure. 

But based on the changes that we heard over the meeting, you can see both of these guys kind of feel that the level of productivity that they expect is to be very low. So, I don’t know where to go with what’s right and what’s wrong. 

But I can tell you that this is very, very interesting. And I think it explains how difficult it is to wrap your head around the emergence of technology taking jobs and the macro factors more from a central banking perspective and all these pressures, these large macro pressures that are in place in order to continue to push interest rates lower. 

I just find it fascinating to hear these to basically spar and not really have a solution and not really know what to say about either one of those sides of that. Pretty amazing. What do you think, Stig, when you heard this?

Stig Brodersen  27:30  

Oh, absolutely loved it and attending a few meetings myself for that you shouldn’t have this conversation like in front of 40,000 people. I think that was really what I enjoyed most about the meeting this year. I would actually like again to talk about productivity, but what is also what they’re getting at, and that employment for the sake of employment is probably not good. 

One argument that Charlie Munger has brought up earlier. This is actually something I have from his book “Poor Charlie’s Almanack” and he’s talking about creative destruction. And the example he uses is if you own a lot of horses in the beginning of the 20th century, you probably wouldn’t be too happy with cars coming in. There would be a lot of people unemployed in the horse business. 

But still, don’t we think today that we’re better off because we came up with cars. And that’s also what he was talking about in terms of air condition. Like, why is it that we invented that. I’m sure that put some people out of job. But overall, we’re pretty happy about having a condition today. 

Say that through technology, we wouldn’t have sick people. I don’t know if that will ever be possible. Just you know, for the sake of argument. That’s what put a lot of doctors out of work and it would be really bad for pharmaceutical companies. But I would say as a society would be much better off. 

Now, if we look at what has happened throughout history and whether or not this is good or bad. Well, what we can see is that some people will continue educating themselves. For instance, when we went from a transition from being an agricultural society to become a more industrial society, what actually happened was a lot of farmers became manufacturing workers and that was their decision because you can be a lot more productive somewhat easily whenever you’re entering into that role. 

Now, what that meant is that when you get more productive, you can also get a higher wage, and you will also increase your living standard as a result of this. So this is good for the people that keep learning, to keep growing themselves. And it’s not good for the people who either can’t or choose not to. So I think that was also something I’ve read between the lines in this discussion.

Preston Pysh  29:36  

Very interesting exchange, though. All right. So here’s the next question.

Audience 5  29:41  

Good afternoon. My name is Sally Burns. I’m from Australia, but I currently reside in Austin, Texas. My question, Mr. Buffett, I have heard that Mr. Munger says your greatest talent is that you’re a learning machine. That you never stop updating your views. What are the most interesting things you’ve learned over the last few years? 

Warren Buffett  30:08  

Charlie is much more of a learning machine that I am. I’m a specialized one, and he’s a bunch. He does as well as I do in my specialty. And then, he’s got a much more general absorption rate than what I have about what’s going on in the world. But it’s a world that gets more fascinating all the time. 

Also, a lot of fun can occur when you learn you’re wrong on something. That’s when you’re really learned, that the old ideas really weren’t so correct. And you have to adapt new ones. That, of course, was difficult.

I don’t know that I would pick out… Well, I think actually what’s going on in America is terribly, terribly interesting and politically, all kinds of things. But just the way the world is unfolding. It’s moving fast. I do enjoy trying to figure out not only what’s going to happen, but what’s even happening now. But I don’t think I’ve got any special insights that would be useful to you, but maybe Charlie does.

Audience 6  31:06  

I think buying the Apple stock is a good sign, Warren. Now, he did run around Omaha and has taken his grandchildren’s tablets away. He did market research, and I do think we keep learning. And more important, we don’t unlearn the old tricks. That is really important. 

You look at the people whose answers to other problems by printing money and lying and so forth. Take Puerto Rico. Who would have guessed the territory [of the] United States would be in bankruptcy? Well, I would have predicted it because they behaved like idiots.

Warren Buffett  31:48  

We did not buy any Puerto Rico bonds. 

Charlie Munger  31:52  

You go to Europe. Look at the government bond portfolios we’re required to hold in Europe. There’s no Greek bonds. Nobody but Germany. Everywhere you look in Berkshire, somebody is being sensible. And that is a great pleasure. 

You find that we’re being very opportunistic, so that when something comes along like a penny, it’s like playing with the two hands instead of one and a game that requires two hands. It helps to have a fair sized repertoire. And we’ve learned so damn much. There are all kinds of things we’ve done in the last 10 years that we would not have done 20 years ago.

Warren Buffett  32:29  

And that’s true, although I’ve mentioned this before, but one of the best books on investment was written in 1958. I think I read it in around 1960 by Phil Fisher called “Common Stocks and Uncommon Profits.”

Audience 6  32:45  

Companies went to *inaudible*, eventually.

Warren Buffett  32:47  

But it talked about the importance, I mean, or the usefulness of what he called the scuttlebutt method. And that was something I didn’t learn from Graham, but every now and then, it turned out to be very useful now. It doesn’t solve everything. I mean, there’s a lot of more.

Charlie Munger  33:03  

That’s how you do it with American Express and the salad oil scandal. *inaudible* Apple, you know, decades later…

Warren Buffett  33:10  

In certain cases, you actually can learn a lot just by asking a lot of questions. And I give Phil Fisher credit. That book goes back a lot of years, but shortly it says, some of the companies he picked were winners forever, that sort of petered out on him. But the basic idea is you can learn a lot of things just by asking in some cases. 

I mean, I used to… I mean, if I got interested in the coal industry, just say, pick one out of the air. And when I was much younger, more energetic, if I went and talked to the heads of ten coal companies, and I asked each one of them way later into the conversation after they felt like talking. 

And I would just say, “If you had to go away for 10 years on a desert island, and you had to put all of your family’s money into one of your competitors, which one would it be and why?” And then, I’d asked them if they had to shell short one of their competitors for 10 years with all their family money, why? 

Everybody loves talking about their competitors. And if you do that with 10 different companies, you’ll probably have a better fix on the economics of the coal industry than any one of those individuals has. I mean, there’s ways of getting at things and sometimes they’re useful, sometimes they’re not, but sometimes they can be and be very useful. 

And the idea of just learning more all the time about… I’m more specialized on that by far than Charlie. I mean, he wants to learn about everything and I just want to learn about something well for Berkshire, but it’s a very useful attitude toward the world. Of course, I don’t know who said it, but somebody said the problem is not getting the new ideas, but shedding the old ones and there’s a lot of truth to that.

Audience 6  34:44  

We would never bought *inaudible* 10 years earlier. We would never have bought Precision Castparts if it didn’t come along ten years earlier. We are learning and oh my god, we’re still learning.

Preston Pysh  34:57  

So I don’t really have too much to add to this. I think that it’s really important for people to hear this and hear how important this aspect of their personality is. They just keep on learning. I know we say that so much on the show, but it’s such a common theme that we can’t play it enough for people.

Stig Brodersen  35:14  

What Warren was really getting at here was that he said, his knowledge is really specialized. And he said that Charlie is much more well rounded. Anyone reading about Munger really has to be impressed. I mean, in my book is as good as Warren Buffett when it comes to stock picking. But he’s also an authority within biology, chemistry, architecture. I mean, name it. He is one of the smartest guys you can find out there.

Preston Pysh  35:42  

I just want to add something real fast in the book that you were talking about earlier, “Poor Charlie’s Almanac.” If you don’t have this book, I’m telling you this book is one of the best books out there, not just on Charlie Munger, but just investing and just general knowledge. 

You’ll feel so much smarter after reading this book because it’s just just a collage of just important things that every person should know. I can’t recommend that book highly enough. It literally sits right next to my lamp, right next to my bed, that book. 

And so, whenever I have a moment, I’ll crack it open. I’ll read whatever from the book because it’s so packed full of knowledge. So sorry to interrupt, Stig. I just want people to know how important that book is.

Stig Brodersen  36:21  

Preston, we should probably do an episode about that some point in time. Oh my god, it’s a great book. 

So really what I took away from this conversation was when Charlie Munger referred to the American Express and salad oil scandal, which is such a great story that really tells you about Warren Buffett’s approach to investing. Actually, also, what he’s been doing with Apple recently. 

So it started, it goes like this. In the late 1950s, US farmers were heavily subsidized creating a soybean oil surplus, so there was this company here, and it was called Allied Crude Vegetable Oil Company, and they have this great idea. They would buy up the entire national soybean oil surplus. And you could use that for everything from paint, but also for salad dressing. 

Now, Allied needed a lot of capital to make this happen. And they got that from American Express. Now, the problem was that it turned out that they never bought all that oil, and it was all a big scam. 

Basically, the company duped investors by filling its tankers with water, and just a few feet of oil. Now, as you might know, since oil floats above water, it simply appeared to the port inspectors that the ships were indeed loaded with oil. 

Now, American Express really took a huge hit on this because they stored the oil, or it was mainly water, but they stored the goods. They inspected it, and they also vouched for it, and they were even used as collateral for the bank loans. 

Now, when the scandal was revealed, American Express’s stock dropped 50% and there are actually a lot of people who feared that the company might eventually go bankrupt. 

Now, Warren Buffett read through it statements. And what he realized was that it was probably not as bad. I mean, short term, yes, it was bad. But what he realized after actually sitting at a restaurant and watching old people still using American Express credit cards, was that it really raised the question whether or not the fundamentals of the company were changed. 

As legend goes, he actually sat down for an entire day at the counter. So he just went out there to the clerk and asked, “Can I just sit here and look at the receipts and how many people are still paying with American Express?” And he was allowed to do that. 

So what he actually realized is that even though the company did a really bad job with due diligence, the core business still thrived, and credit cards will always be needed. So what he actually did in return was, he put 40%. 40% of his partner’s portfolios back then into American Express, which turned out to be one of his most profitable investments. 

So what Charlie Munger is talking about here is that he did it before, and now, he’s doing it again with the what’s called the “Scuttlebutt Method,” when you are not only looking at financial statements, but also seeing how much information you can compile about the core product itself. And he used this silly example with trying to take tablets away from his grandkids, but I’m sure he has been doing other research as well. And the thing it really tells you about how much more Buffett is still learning even though he’s 86. 

Preston Pysh  39:28  

Something that I really like in that exchange that you’re talking about, Stig, is just how intelligent he asks questions. So whenever he was describing how the coal industry [was], he would go and talk to the top ten coal industries and how he was phrasing the question. If you had to go away for 10 years and you could only pick the best competitor to put your family’s money in, which one would it be?

Asking such an intelligently crafted question can unveil so much knowledge and so much information. If you just pinpoint the right way to ask as oppose the some just stupid question that it’s down in the weeds and doesn’t get to the heart of the issue. 

And so, for me, that was something that I really liked about that exchange is how poignant a great question can be at uncovering information that you’re really trying to understand. 

So okay, let’s play the last question. This is our last one from the meeting that we extracted that we think was well worth everyone’s time. So, I hope you guys have enjoyed these questions. And this is the last one we got for you.

Audience 6  40:31  

Good afternoon, Mr. Munger, Mr. Buffett. My name is *inaudible*. I come from China. It’s my first time to come to this meeting. And I think I’m very lucky to have a chance to ask questions.

Warren Buffett  40:47  

We’re glad to have you.

Audience 6  40:48  

Thank you. Everyone has personal dreams, and at a different age maybe dreams will [be]come different. What’s your dream now?

Warren Buffett  41:02  

My dream? Well. Let’s skip the first one.

Charlie Munger  41:15  

Sometimes when I’m especially wishful, I think, “Oh, to be 90 again.” I got some advice…, if you got anything you really want to do, don’t wait till you’re 93 to do it.

Warren Buffett  41:40  

That’s the same thing I would tell students: you can’t always find it the first time or the second time, but when you go out in the world, look for the job that you would take if you didn’t need a job. 

I mean, don’t postpone that sort of thing. Somebody, I think it was Kierkegaard, who said that life must be evaluated backwards, but must be lived forwards. You want to sort of…Charlie says all he wants to know is where *inaudible*. We will never go there. And so, you do want to do a certain amount of reverse engineering in life. I mean, that does mean you can do everything that way. 

But you really want to think about what will make you feel good, when you get older about your life. You at least generally want to keep going in that direction, and you need some luck in life, and you have to accept some bad things that are going to happen as you go along. But life has been awfully good to me and Charlie, so we have no complaints.

Charlie Munger  42:34  

Well, you don’t want to be like the man, and they have his funeral. Minister said, “Now’s the time for somebody to say something nice about the deceased.” And nobody came forward. He said, “Surely, somebody can say something nice about the deceased.” [Still,] nobody came forward. And finally, one man came up, and he said, “Well, he said his brother was worse.”

Preston Pysh  43:00  

Oh my god, I love these two. It’s hard to have more fun than that… I don’t really have anything to that comment other than, what an awesome exchange. The other thing I like about listening to these two is the humor is so subtle. 

It is just so [much] like Buffett’s comment. He goes, “Well, let’s just skip your first dream, let’s go to your second one.” I mean, that is just so clever and hilarious. It’s just a blast. 

So, Stig, did you have any comments on the last one? I think it was more for the humor of the audience.

Stig Brodersen  43:31  

It was really a lot of fun. They were just spewing out jokes, like all the time, but one of my favorites was at the very beginning, where they introduced Jack Bogle and said, “Here’s Jack Bogle, and he’s 88.” 

Then, Buffett just said, “In just two years, Jack, you’ll be eligible for an executive position at Berkshire Hathaway.” And then, Munger would just say, “Just like that. Hang in there, buddy.”

Preston Pysh  43:59  

Oh, yeah! That’s so much fun. I’m telling you, if you’ve never gone to this meeting, these two are getting old. You’ve got to make it out to this meeting. I’m telling you, it is so worth your time. If you’re trying to mark it on your calendar around Christmas time is when you need to start planning to go to this thing. And it’s always usually the first weekend of May, [which] is when the meeting is. 

We’ll obviously be going next year. We will also be putting information out there for people who want to attend the meeting with us. We try to make it as user friendly as possible so people can attend and not have to worry about the logistics and all the craziness of getting your credentials. 

We try to make that as easy as possible and help people along the way. We have a forum where the community can help one another, so we would love to have you. If you’re listening to this, we’d love to have you with us next year, when we go out. This year we had about 150 people, and we had a blast. We had so much fun!

Stig Brodersen  44:51  

Alright, guys, so I’ll definitely say that Preston and I, we thoroughly enjoy recording all episodes, but I think the Berkshire episode is really something special for us. You can probably hear how excited we are, whenever we talk about it. It’s just so much fun. 

But guys, that was all the Preston and I had this week’s episode of The Investor’s Podcast. We will see each other again next week.

Outro  45:12  

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