Clay Finck (02:00):

I’ve really enjoyed looking through all your content lately. We had a really good chat pre-show so I know this is going to be a really good conversation. I was looking through all the content you put out. It’s very clear you’re a huge fan of Warren Buffett and Charlie Munger. I like to start out by just asking you what led you to being so passionate about their overall investment philosophies, as well as eventually creating content related to the message they’re putting out?

Chris Franco (02:27):

For sure. I think it started for me with Charlie Munger. but I think if I had to trace everything back, it was actually for reasons that weren’t investing related. Like I’m sure a lot of people who listened to your podcast, I had found myself reading Farnam Street many years ago, let’s say around … I want to say 2014, 2015, and Charlie Munger was a prominent name on that site. I found that … At around the time, I was very immersed working for a startup and I was about to be starting my own business.

Chris Franco (02:52):

I was always looking for just wisdom about how to do things in a way that I didn’t know just by being someone who was in my mid to late 20s at the time. It wasn’t like there was tons of content about him at that time either. But if I applied those ideas, they really worked for me. I think there’s so many people offering “self-help” type of content online, and I just found just the simplicity and the rationality behind the thinking and then the utility of what he was saying to be so helpful that it really gave his brand a lot of credibility to me.

Chris Franco (03:21):

As I was simultaneously getting more and more involved in my own investing, it was only natural that I became curious about what does Charlie Munger do and how did he influence someone who even a casual observer would say is the greatest investor of all time, Warren Buffett? What exactly role did he play? I remember vividly it was 2015. I was in Los Angeles first, seeing some family, but also for some business. I think I had the 2015 Berkshire Hathaway annual meeting transcript of the Q&A.

Chris Franco (03:48):

Maybe it was for the previous year. The year doesn’t matter as much as what I took from it. I’m reading through this and it’s, again, just Charlie and Warren going back and forth, and I was struck by how humble they were. These guys are billionaires and they’re talking about themselves like they’re a bunch of dogs like, “We were so stupid to do this, and wow, we really blew it on this deal,” and that was such a stark contrast to so much of the “billionaire wisdom” that was online at the time.

Chris Franco (04:12):

I know from at the time I was also studying a lot of psychology and getting more of that world as well and realizing what they were doing took it to a different level, because it’s so hard for us to acknowledge our own mistakes. The fact that they were doing that showed me the real intellectual superiority that they were demonstrating by being so humble, because at that point, to be so successful and still really talk down on your past mistakes, not only is that hard to do, but it’s also really effective in terms of making yourself better.

Chris Franco (04:37):

I was just very impressed by the overall … just everything they were doing. As I got more into the investment philosophy, I would say when I first got into it, I had the overconfidence bug where I thought I understood it, and I figured, oh, this is … I got it now. I remember … I don’t remember the exact year, but it wasn’t long after I loaded up on I think Bank of America stock, because I was again learning by my own mistakes here thinking, “Oh yeah, this is what you do. Berkshire owns Bank of America. They know stuff. I should buy bank of America and I’ll load up on it because that’s what you do. You just got to concentrate your bets.”

Chris Franco (05:06):

Bank of America had a rough day and I think I was ready … I was back on fidelity.com hitting the sell button because I didn’t have the stomach. It was very humbling. But as I got deeper and deeper into the weeds of investing and trying to find my own approach, and I’d say it’s one that involves plenty of John Bogle as well, I began to really appreciate just how everything … You don’t have to follow everything they do as an investor.

Chris Franco (05:27):

I don’t think any one investor has a style that someone should adopt just completely. I think you have to find really what works best for you and make sure that it does make sense to you, not just because someone else does it. But the approach that Warren Buffett and Charlie mugger, let’s say their hybrid approach, it really agrees with reality. I think there’s a lot of different philosophies that are shared and you hear them every day on TV, online, they sound really good and they seem even intuitive.

Chris Franco (05:51):

But when I look at the approach that Charlie and Warren have used over the years and have continued to adapt and change, it, like I said, agrees with reality. What I mean by that is that if you take these big ideas that really are proven … People always use the word mental models. I just prefer models. Being these big concepts you’d find in the 101 of any textbook for any subject, agreed upon ideas that again have been tested against reality and up to our current level of knowledge workout, like the example of concentrating your bets.

Chris Franco (06:19):

If that makes sense, that is a better approach than diversification if you know what you’re doing. Again, not everyone should do that in most cases, but the idea of your circle of competence, that aligns with the ideas around probabilities and probabilistic thinking. I used an analogy once talking to my audience about, when you’re taught that test taking … Was it a test taking? Tactic where you eliminate what you know is not true.

Chris Franco (06:40):

If I’m looking at a sea of investment opportunities and I know, look, I know nothing about materials companies, and I can say that because I’m like, “Look, could I figure it out? Sure. But right now do I have any edge over anyone else? Absolutely not. I would get clobbered trying to play that game. Let me just not even look at those companies right now and narrow it down,” and that idea is just so useful.

Clay Finck (07:00):

Man, so many good lessons there. I think a lot of people that fall into the Warren and Charlie camp and school of thought, they’ll go down the investment route, they’ll discover Warren, discover Charlie and learn about their investment philosophies, and then they go to a Berkshire meeting and then they end up falling into this philosophical way of looking at life, and you came at it the opposite directions, the way it sounded.

Clay Finck (07:20):

You came through this philosophy side and then you fell down the investment rabbit hole. I find that pretty funny. Then you also mentioned mental models, and I have thought a lot about this lately, how powerful they can be. One way I think this is just so powerful is it just gives you a framework to operate from. So many people just go off of their emotions or go off of whatever they read off that day and they have no framework to base their decisions off of. I think just having that framework can be so powerful and give you just a framework to just operate and invest.

Chris Franco (07:54):

100%. One of the things that helps me when people always ask what is it, because I think the mental model concept can somehow be morphed into coming up with almost memorizing different concepts and using it that way. I find it to be more on the holistic level. Just you’re trying to distinguish between reality and delusion. We know that as human beings, what we perceive is our reality, but we know that our perception is flawed.

Chris Franco (08:18):

These mental models can help sharpen your perception and again see if helps you check out and actually make sure that what you’re seeing and believing is true, or at least as close to truth as we know it to be. I think that’s incredibly useful in investing. But as I know Charlie Munger has talked about, since his first introduction of the topic back in the early to mid ’90s, it’s incredibly useful for life in general because there’s all sorts of scenarios where that same type of thinking is very useful, not just in investing, but in just in life period.

Clay Finck (08:45):

I’m always interested in chatting with stock investors and getting their opinion on whether they like picking stocks or they just stick with index funds. You mentioned John Bogel earlier, and we recently had an episode where we brought on Eric Balchunas to chat about his new book that was all about John Bogel. John Bogel would say, “You should invest 100% of your money in index funds.”

Clay Finck (09:07):

In one of your videos, you have applied that to your own portfolio, but you put that number as a minimum of 60% of your portfolio should be in index funds, and then the rest are in individual stocks following the school of thought of how Warren and Charlie invest because you’ve recognized the power of index fund investing, but you also scratch that itch on investing in an individual stocks. I’m curious to hear your thought process on why you chose this approach.

Chris Franco (09:33):

Sure. I think now I’ve even said it should be even higher than 60. Then again, just for myself and it’s almost a hedge against myself, right? Then coming out of a bull market, it’s very easy to start to feel like you’re Warren Buffett himself. But realizing that one of my biggest takeaways is overconfidence is a killer for us as investors. I’m constantly trying to make sure I’m having the humility that I think is required to succeed long term.

Chris Franco (09:54):

As far as indexing and why I think it just makes sense, it’s really coming from just a data perspective. Of course, John Bogel, I often refer to him as Jack Bogel, he makes such a bulletproof argument for the reasons or the benefits of indexing, and I think he’s almost the point where his books are … They’re not the most enjoyable reads, not because … I recommend them a lot of times, but he’s just drilling that point home. It’s like, okay, I get it.

Chris Franco (10:15):

I can’t argue back on this, but I know there’s also other papers that I’ve read over the years to sharpened my own investing IQ. Some by the SEC, some about … I’ve taken a Charlie Munger approach here. It’s funny because a Charlie Munger approach has led me to be even more bullish on indexing, whereas Charlie Munger says it’s … We know what he said about indexing. I don’t need to repeat it. But what are all the mistakes that investors tend to make?

Chris Franco (10:37):

I want to make sure I avoid those mistakes, and almost always on the list is we’re bad at picking stocks. They found there’s a lot of behavioral studies that find that the more often we are buying and selling, the worst we tend to do long term. That’s been validated by a study that was commissioned by the Congress and the SEC, and tons of other studies. I don’t want to turn this into an academic decathlon, but very much, my approach has been informed by that.

Chris Franco (10:59):

Then those studies have agreed with my reality and my experiences and the challenges of picking stocks. One epiphany that I had probably in around 2019 was that it’s not … For me anyway. It’s not that enjoyable picking stocks because I do … Even though I know I shouldn’t look at it all the time, I still do look at it all the time. The investments I’ve made in low cost index funds, it’s been the easiest way to make money.

Chris Franco (11:19):

I might have made a little bit less than had I picked Apple in 2015 or something like that, but I’ve never doubted it, I’ve never … I don’t get uncomfortable about it. I understand it and it, to me, allows me to have more time to do where … focus on the things where I can actually be like the Warren Buffett of … That’s not going to be picking stocks. I don’t fool myself that I’m a … Down the street from me is Wall Street.

Chris Franco (11:39):

There’s men and women down there who extremely smart, a lot of people I know who are working at this six days a week nonstop, hugely incentivized to find all the edge they can find, and that’s your competition. Just being realistic too about who I’m competing against, and if I have the time, energy and effort required to go and do that, and it’s just not realistic if you’re doing something else in your life. You need to be like Warren and Charlie to a certain degree. You need to be fully focused on that. But I think most of us who are passionate about investing are doing other things unless you’re doing it full time. That’s what led me, I think, in that direction.

Clay Finck (12:10):

When looking through your work and just the strict principles you put on what makes a quality investment, I can’t help but wonder, given how far you narrow down your stock selection process, why is it still so difficult to beat the market even though you’re buying quality companies and you have all these other principles in place to ensure that you aren’t going to mess this up? Why is it still so difficult to beat the market?

Chris Franco (12:35):

I think it’s psychology. I think psychology is the number one reason. We know we can’t be 100% rational, as much as there’s been times I’ve gone against, and that’s why I love making content is because it’s this great feedback loop and to see if you’re actually doing the things that you’re talking about. I like to think in most cases I do, but there’s been times I know with an Alibaba investment where I realized I over did it.

Chris Franco (12:57):

I was overly excited about it because everything was so expensive. E-commerce is my circle of competency. It checks all the boxes. I went through the whole process and then watching an old YouTube video where I literally said, “I don’t need this risk.” I was like, “Why am I breaking all my rules in terms of how much of my portfolio this was?” I had to eat that humble pie and say, “You know what? You over did it,” and again it was psychology.

Chris Franco (13:18):

I think that’s what gets us every time. In terms of beating the market, I think you can … Beating the market in the short terms a lot more possible. I think when we get into these longtime horizons, which I think that’s my biggest …. That’s why I call CMQ is compound money quietly. I think for the individual, that’s what we need to remember, is what we’re trying to do is make our money compound over a long period of time.

Chris Franco (13:36):

Regardless of where you’re starting from, that’s how wealth is really built. It’s a reliable way to build wealth. When you interrupt that process by having to sell, even when you’re selling to take a short term gain, the taxes that you’re incurring at that moment, those are all things that are interrupting the process in one way or another, and I think it all comes down to the psychology of it.

Chris Franco (13:56):

I think people can pick stocks and have the intellectual capacity to do that. I think that was something I was pleasantly surprised by as I dove into this space very much a blank canvas. There’s other investors that I mention there. You don’t need to know any high math really to value a business. It doesn’t mean you’ll do it right. But you can teach yourself some of these things if you have the basic 101s of math and things like that.

Chris Franco (14:18):

But when it comes down to actually sticking to something and holding it through thick and thin, through ups and downs, through a bear market like right now where the market is very different than it was two years ago, I think that’s what gets us off our game. That’s my take anyway. The other, I could go technical here and say, well, if you also are working with maybe an advisor and you’re paying fees and things like that, or high expense ratios or commissions and things like that, that can also contribute to you not beating the market. But I think the psychology is number one for me.

Clay Finck (14:45):

I was talking about the strict framework you’ve put around investing in individual stocks, and I’d like for you to walk through your checklist or criteria to determine what makes a company investible for you? I just found this really interesting.

Chris Franco (14:59):

Yeah. The way I came up with that was helpful for me was I went through every Berkshire meeting going back to since they’ve been transcribing them, which is in the 1994. There’s Berkshire meetings before that, but I think the only transcripts available are loose transcripts from the book … Forgive me if I get this wrong, University of Berkshire Hathaway. I’m not sure if you’ve read that. I really enjoyed that book, but …

Chris Franco (15:17):

I put them all into a Google sheet and I basically could use it like a search and find anything I wanted to find. What is everything Charlie Munger has said about this topic? Doing that, I was able to look up everything that both Charlie or Warren have said about what makes a good business good or a bad business bad. I put that into a sheet and I started with the good things, and then I did the inversion exercise where I was like, “Okay, what’s the opposite of having a strong business model?” It would be a really bad business model, right? As simple as that.

Chris Franco (15:44):

From there, I came up with 18 different characteristics that would be of a bad business or what makes a bad business bad. For me, using that it’s been … Again, it doesn’t sound that … When I say it out loud, I feel like I didn’t come across any epiphany, but it did feel like an epiphany and it’s been really useful. I’m trying to think some of the examples. When you have a capital intensive business, a business that we said is a bad business model has customers that are not loyal, has a lot of churn.

Chris Franco (16:09):

It could go down the list like that. It’s not meant to be, oh, if you do this, you’ll be a successful investor. But I think with all these tools we come up with, it allows us to just have something that’s more reliable. It’s a more reliable way to go about it. It doesn’t guarantee you’re going to become the next Warren Buffett or the next stock market billionaire, but I think you can avoid making a lot of the mistakes that are very easy to make, even for experienced investors.

Chris Franco (16:31):

If you’re researching a company long enough, I would imagine in a way it’s like … If you’ve seen the movie, Catch Me If You Can with Tom Hanks, Leonardo DiCaprio, well, if anyone’s out there seen it, you would develop some affinity for your subject. He’s chasing Leonard DiCaprio’s character. This guy’s a … He is a con artist, but he has … Tom Hank’s character has some affection for him over time because you can see the good and the bad.

Chris Franco (16:53):

I think it’s only natural for us to … It’s mere exposure effect that could go down that list as well and say, “Why do we fall in love with some of these companies?” You see it now all the time. I found myself doing that with Alibaba to an extent, and I cut myself off. But when you have these filters, you can say, “Oh, wait a minute. I know I love this company, but yeah, the customer churn’s really bad and that’s in all likelihood not going to make for a great investment situation for me.”

Clay Finck (17:18):

I did look through your list of what makes a bad business, and one of those items on the checklist was actually the business is maturing, and that caught me by surprise. Why do you think this is an attribute of a bad business?

Chris Franco (17:32):

It’s funny because bad is such a simpleton word. It probably for more of like there’s not a lot of high growth left. I’m not sure what would be maturing if … One of my favorite businesses that I still learn new things about, and again it’s so obvious, but Apple. I was just recently getting into all of … I wanted to learn more about Tim Cook and what he brought to the table with the supply chain, and I thought I knew a lot about that, but with a little more research, I learned so much more to where I’m always like, “There’s more to learn here.”

Chris Franco (17:57):

If someone could say, “Oh, Apple’s business is maturing,” you could potentially come to that conclusion. I wouldn’t come to that conclusion because for me it’s about are they still coming out with an innovative product that’s a hit? Let’s say at least they’ve had one within the last five years. When that stops happening, then I would say, “Okay, they might be maturing,” but they may surprise everyone with the AirPods, and that was such an awesome product, or in my opinion, it was.

Chris Franco (18:18):

I think that’s definitely thinking more in terms of what will be a … An investment that could outpace the market would be a company that has that room to grow. I think that also comes back to something that Charlie or Warren had said. I’m not sure who made the point, but I think it reminds me of what Peter Lynch had said about. Sometimes he referred to it like innings in a baseball game. What inning is this business in? I think a lot of investors …

Chris Franco (18:39):

Facebook’s a business that I look at as, hey, they could figure it out with the Metaverse, but right now their ad business, the best days of their ad business are … Unless something dramatically changes, they’re behind them. Again, I see smart people on my Twitter feed who are talking about Facebook’s business like they just discovered gold. I don’t even invest in gold, by the way. I just want to be clear. I [inaudible 00:18:57] the reference.

Chris Franco (18:58):

But I would say, well, their business has matured for sure. Your expectations about how it’s done in the past should not impact what you think the future holds. I want to say this is a Warren Buffett quote. It’s not an exact quote here, but he talks about, you could find a great horse that had an amazing 14 years, but you don’t realize it’s headed to the glue factory, and I think that goes back to this idea of what does that mean, why a maturing business could potentially be a bad one.

Clay Finck (19:20):

Man, that’s really interesting. It reminds me of one of your videos you put together. It talked about the difference in how Warren Buffett perceives risk versus how the academics perceive risk. It’s just two totally different definitions. Could you walk us through how Warren Buffett views risk different than academics?

Chris Franco (19:41):

Sure. I have to give a little personal context here because I think this is … For me, I get really interested in things, I get obsessed with them and I like to say a healthy way. But my immersion in this world has been one that’s been driven by my own interest and passion in it, and one of the reasons Warren Buffett and Charlie Munger have helped me with that is because I was pleasantly surprised to find that they also thought in a similar way that I do, not about …

Chris Franco (20:02):

Obviously, they’re way beyond me, but in looking at things and everyone says it’s one thing and you say it’s the opposite and you’re sure that it’s right. Many times in my life, I’ve gone my own path and it’s worked better for me, but yet in conventional academia, you’re told, “No, no, no, no. Do it this way,” going back into what Warren Buffett would say risk is. Risk, it’s all about permanent loss of capital.

Chris Franco (20:22):

The risk is you lose your money. Whereas in academia, it’s taught as risk equals volatility. A lot of the strategies that you might be recommended by an advisor or someone like that are oftentimes to minimize the volatility you’ll feel. In more traditional times, there might be a better allocation between stocks and bonds because when stocks are just … Stocks are bad, bonds lessen the blow than if you’re 100% in, let’s say, the VOO.

Chris Franco (20:45):

You’d be down … Again, hypothetically here, but let’s say if the VOO’s down 20% this year, you’re down 10%. That makes people feel a little bit better. When you’re in a business that I think rewards that year-to-year retention, and someone says, “Hey, well, my buddies did this and they’re not thinking long term because it’s hard for our brains to think like that,” well, that would make sense. That definition would be the definition of the day.

Chris Franco (21:06):

But what Warren Buffett said, and I love this example, he said if you buy Coca-Cola today and you have to sell it in three weeks, that’s a very risky investment. Who knows where the price of Coke will be? Because Mr. Market is dictating that, not the fundamentals of the business. But if you buy Coke and you have to sell it in 10 years, well, that’s a much less risky proposition or an investment. That, to me, it just went off like a light bulb.

Chris Franco (21:25):

Because there’s things sometimes where I had an intuition about something, but I didn’t have the language for it or the guidance as to what am I sensing here? Because I never totally understood that idea of why I’d want to have a portfolio that would do less well over a long period of time. No one ever put it in a way that was so simple and pragmatic, and it, like I said, just resonated. What I’m surprised by, but then not surprised by … Because this is not something that’s just in finance.

Chris Franco (21:47):

It’s very difficult for the old … the definitions of the day to go away. I think, again, going back to Warren and Charlie here, they’ve talked about usually takes a generation for the generation to die out because those old ideas have to … Literally you need someone who’s totally unpersuaded by them to say, “Yeah, yeah, that’s the way we used to think the world was. It’s actually this way.” I don’t know if that’ll be the case here, but I know that in general, volatility makes people uncomfortable, but I would not categorized it as a risk. It’s only risk if you need the money.

Clay Finck (22:14):

It’s in interesting to think through that idea of maturity I brought up. You mentioned Alibaba earlier, you mentioned Coca-Cola. It’s like, okay, is Coca-Cola a growing business or is it more of a mature business? I’m going to dig into some of your other portfolio holdings. But when I look at them, a lot of them are really large companies. You look at Apple or Microsoft or Costco, all these are really large companies. It’s really interesting to think about what inning it’s in and how mature some of these businesses actually are.

Chris Franco (22:46):

100%. I think large cap companies probably have a higher likelihood of being maturing just by nature of the fact that they’re large cap and how much … What’s the likelihood that they continue growing at the same rate? I think if we look just from a standpoint of what’s the base rate there, how many companies can continue that growth trajectory? I’m not sure about Coca-Cola. I mentioned what I thought about Apple. Some of the smaller caps that I do have, that I have almost more out of an interest, they don’t even make the percentage of the portfolio because they’re so small relative.

Chris Franco (23:15):

But I do enjoy looking at smaller or even mid-size companies because it helps me better understand what’s going on in the world around me in a way that … That’s why I love 10Ks so much. 10Ks for me, I think more people should read them, not just because they need to invest in the business, but because it’s literally just the truth about what’s going on with a given company or industry. I know as an entrepreneur, during COVID, I read all of the 10Ks for all similar companies to mine.

Chris Franco (23:38):

It really helped me see the competitive landscape in a way that I wouldn’t have seen it before, and it was just merging the two worlds. I was not unaware of my competitors, but there’s a section about their strategy, there’s a section about the risks and you don’t have to agree or mimic whatever they’re saying, but it definitely helps you see yourself within the context of the bigger picture, but I think that’s really useful, as well as I think in general, small businesses are such a huge force in the United States, right?

Chris Franco (24:01):

Small businesses are really, someone could say, the lifeline or the lifeblood of our economy. I know I have a small business. I’m one of those people, so maybe I’m biased by saying that. There’s a huge passion and interest in entrepreneurship. You see that on social media. I’m sure you see that, Clay, in the different accounts that follow you or you follow, or even that are just suggested to us. People are looking for different ways to take control of their finances or their financial futures.

Chris Franco (24:24):

Investing is certainly one way to do that. But when you look at … I look at one of the truths of investing for me is it’s all about businesses, and probably my best investment where I’m riskiest is with my own business, right? I’m putting up my own capital every year to get a return on that capital. More people, when I think when you read something like a 10K, it gets you thinking more about businesses. Any human being, in my opinion, if you’re listening to this or this is something you’re interested in, not everyone has to start a business or needs to or it’s not a requirement, but anyone’s capable of it.

Chris Franco (24:51):

I think having more examples of … It’s like what you put in front of you dictates what directions you go in, and the quality of the friends you talk to the most. If you’re thinking about businesses a lot, it’s very difficult to walk around doing your day-to-day routines and not be like, “I wonder if anyone’s made a company that does this because it seems like there’s a void for that,” and I think it makes businesses less scary, as something that … 10Ks are a great discovery mechanism for that.

Clay Finck (25:14):

One company I would love to dive into specifically is Costco. It’s a business that obviously is high quality. It falls under the bucket where it’s simple to understand, you can see how the business operates and how it’s a win-win for all parties, the customers, for Costco, for shareholders, for the suppliers. Everyone’s getting a good deal. You can see the flywheel effect happening with Costco.

Clay Finck (25:39):

Charlie Munger himself, he’s been invested in Costco for many years from what I’m aware, and definitely falls in line with the quality company, strong [inaudible 00:25:48], strong competitive advantages. You go down the line. As a retail store, it’s definitely competitive space. I’m curious to get your thoughts on what makes Costco’s business just so strong and durable?

Chris Franco (26:03):

Well, first and foremost, I would say to anyone if you don’t read 10Ks and you want to start somewhere, read Costco’s. Especially when you compare it to other businesses, you’ll come across, it’s a no brainer in terms of what the business model is. It seems so obvious when you read it, but then you say, “Wow, someone thought this out and built around it,” and this idea that we’re going to, one, make everything work more efficiently, we’re going to have less hands touching the inventory.

Chris Franco (26:23):

We’re going to set up our stores in a way that doesn’t require us to stock the shelves. We’re only going to order one color Gatorade that’s the most popular. I don’t want to get too in the weeds here yet. But on Costco’s side, I think what you said about win-win is so important. I think any business … It seems like it’s an overly simplified way to look at things, but if you use this model, I think you’ll find a lot of businesses that succeed really do follow it, and that is where every stakeholder in that business is benefiting.

Chris Franco (26:48):

I think first and foremost, the customers. When I think about Costco is … They’re just 1000% dedicated to giving customers the lowest prices on things that they use and need on a regular basis. It’s not just talk, it’s not a good PowerPoint presentation. If you look at their margins and you ask, “Well, why don’t they have a bigger profit margin?” It’s because they’re passing on to the customer.

Chris Franco (27:08):

Right now, gas at Costco, I just did a little conversation about this, I believe people are saving, and don’t hold me to this because I’m sure the times will change, but something like 37 cents a gallon when you go to Costco to get your gas. Costco does this thing where they refuse to raise the price. They’re hotdogs. It sounds almost like a little thing, but it’s their commitment to of just low price. The second thing is Costco takes really good care of their employees.

Chris Franco (27:31):

Because I get really into stuff, I’ve talked to people who work there and who have worked there on all levels, and it’s, again, not just talk. Every business you look into is going to say, “We care about our people and it’s all about career. Start your career with us.” Costco’s dead serious about it. And people will start there and they’ll start there at the lowest level and they’re getting paid better than they would anywhere else, and they get to stay there for a long time and they have an actual career trajectory.

Chris Franco (27:52):

That also wears off in a good way onto the customer because when you’re dealing with people that are happy to be at their jobs … Walk into an Apple store and compare that to the days when you’d walk into a Best Buy. You return something at the Apple store, they make you feel smart. You go and talk to a genius who’s happy to help you versus being like, “Well, did you take it out first?” It’s a totally different vibe, and that does matter.

Chris Franco (28:13):

Other thing with Costco, I think if we think about just some of the things that are not as easy to copy, there’s been competitors that have come along to try to do what they do. I know Walmart made Sam’s Club. I’m not sure when they made it, if it was in a direct response. I don’t want to give false history here, but I would be concerned if Costco was maybe brand new and then everyone’s going to rush to make their equivalent version of that. But Costco’s been remarkably resilient in their membership growth over the years.

Chris Franco (28:37):

The other thing that’s really amazing with Costco, and I recommend if anyone’s interested you look this up on YouTube, look up the Costco walkthrough, I think it’s in Shanghai. Literally, you could be in your local city in America and you think you’re in the same place, with slight difference in the products. But this idea of what they have, it works. You can put it anywhere and the same thing starts happening. That is so cool to me because I know how hard that is.

Chris Franco (28:59):

They’ve got something that’s really special in that regard. One other thing I found, and this is part of the research process I went through, beyond all the 10Ks and the annual reports, it’s I wanted to understand who are the people running this business? You mentioned Charlie Munger. Charlie is on the board of directors there, and I’ll get to his influence on me on this investment in a second. But there was an interview with their CFO. I think it was from 2014, the same CFO was there now.

Chris Franco (29:22):

They asked him why they raised wages for their people in the stores. There wasn’t really a need for this, actually that wasn’t the trend at the time, and his answer was one of the coolest things I’ve ever heard someone say in response to something like that. He goes, “It was the right thing to do. Full stop. Nothing else to say.” That tells you a lot. This is not a phony-baloney … Their commitment to not just the customers, but to the people working there, it’s not just marketing, it’s the real deal.

Chris Franco (29:45):

I think when you look at someone like Charlie Munger and you really get to understand him beyond the headlines that Robinhood generates when they’re trying to position Warren and Charlie as the old guards, trying to stop people from making money and this nonsense, he likes the real deal, and again, someone from his generation who appreciates a good deal, period. Charlie’s talked about the table that they have their board meetings on. I think he said it costs $800.

Chris Franco (30:08):

He’s like, “Compare that to this …” I forget what company he referenced. But everything they do, their culture is all about just keeping it lean and just delivering as much value as possible to the people that are interacting with it. Now, going back to Charlie and why I invest in Costco, I’m not going to sit here and say that I figured all that out in 2019. I knew about Costco, I was a Costco … Or my parents were Costco members as a kid.

Chris Franco (30:28):

I remember when they opened it up in my hometown, it was this cool experience where my dad was really pumped. My dad loved deals, so it was a perfect place for him. It was an article in 2019 with … I was in an interview with Jason Zweig from the Wall Street Journal, and he said, “What are the best investments in America right now?” I think … Or he might not even ask for America, and Charlie said, “Well, outside of China, Costco,” and that was like ooh.

Chris Franco (30:48):

At the time, Charlie was really … Like I said earlier, his advice was really adding up and I didn’t jump into invest on that alone and I would never recommend someone did that, but it definitely got me more excited to learn more. As I got to learn more about Charlie Munger, I really understood why he is such a fanatic about Costco. It is Charlie Munger personified in a business. It doesn’t mean that I think that that Costco investment will beat the market by a lot over the long term.

Chris Franco (31:11):

But I mentioned, and this is a big part of my investment approach, my goal over the next 30 years is I want to beat the market by one percentage point. Now, that’s going to be really hard to do, right? The data shows that over a 30-year period, most of us will lag the market by 3.5 percentage points. If I can hug close to the index, like the S&P, and then get a couple wins that are a little bit better, that’s really what I need to do.

Chris Franco (31:33):

When I think of it in those terms, Costco might contribute to that by a little bit. It might lag the S&P by a little bit, but it’s a business that I think is really special, and I have a certain level of a safe optimism about the future with eCommerce, what they can do there. Charlie talks about this a lot, and I think my marketing background helps me see this. It’s the power of a brand. That Costco brand, people trust it in a way that’s profound.

Chris Franco (31:56):

I don’t think the average investor, not because … Just based on what your background is. I come from a world where it’s all about building strong brands. That’s the essence of marketing. To me, it just … I don’t know any other brands that really meet those criteria, that’s built that brand loyalty over a long period of time like Costco has. Maybe Apple, but Costco’s in a space that’s very of its own. It’ll be interesting to see how it plays out.

Clay Finck (32:21):

You mentioned how they can replicate their business wherever they need to, and it reminds me how Jeff Bezos mentioned all these people investing are trying to figure out what’s going to change five, 10, 20 years from now. Jeff Bezos flipped that on his head, and he says, “Well, what’s not going to change? Well, what’s not going to change is people are going to want low prices. They’re going to want a great customer experience, and I think that definitely applies to Costco as well. What a lot of people want in the US, they’re going to want that internationally as well.

Clay Finck (32:51):

There’s a lot of opportunity for Costco, I think, but with that opportunity comes risks. In terms of opportunity for growth, I would imagine at least some maturity in the US market for Costco, but there’s a lot of opportunity internationally. Like you mentioned, that can be applied internationally, but that means different markets, different consumer tastes, and that brings on its own set of maybe issues. I think the other point is what you mentioned, is the trend to eCommerce, and that’s another area they’re going to have to definitely capitalize on and adapt to. I’m curious if you’d like to expand on either of those.

Chris Franco (33:28):

I’m glad you brought up Jeff Bezos because I think that customer obsession is something I’ve talked a lot about with Jeff Bezos, as well as the long-term orientation. I think the seven year timeline is what he talks about. Jeff Bezos actually invests in this project. It’s a 10,000-year clock. I don’t know if you know about this, but it’s a real … They’re really serious about a simple idea. In terms of Costco’s ability to expand and grow, I think you’re absolutely right.

Chris Franco (33:48):

The saturation in the United States is one that you’re not going to see the most … I would imagine anyway that there’s a maturity that’s happened. When Warren Buffett and Berkshire bought into Coca-Cola, that was one of their points, was that there’s a big opportunity globally here. I would say with Costco, what I like about their approach to growth internationally is that they’re very measured about it. I know there’s a lot of entrepreneurs that I know.

Chris Franco (34:09):

I know plenty of people who could potentially be in a situation like this, where they’ve got something that’s working like gangbusters and they want to grow it internationally. They might overdo it. There’s a really great model I like to think of. It’s this idea of … I don’t know if I’m … Xylem in trees. If a tree grows too fast, like a redwood tree, that gets bubbles in its tree veins and it can rot from me inside out. Costco has this, I think, really measured approach.

Chris Franco (34:31):

Even if you look at how they’ve expanded in China, it’s not like, “Hey, we’re crushing it. Let’s go out there and grow as fast as we possibly can.” They’re doing it in a very measured way, and I don’t know how explosive that growth can be. I’m not considering it to be like the next big growth stock of the 2020s here. But I definitely think that that’s a good sign to see in management because that means that I’m looking for sustainable growth.

Chris Franco (34:50):

I’m looking for … A company also too, with Costco, they have pricing power. They have to maintain and make sure that they give their customers the best deals. But I would imagine if they raise their membership costs at a more aggressive rate, they wouldn’t lose a lot of their members. I think the value that people are getting for that far outweighs what that cost would be. That’s another area where Warren Buffett’s talking about this. You see this a lot in the current press because of what’s going on now.

Chris Franco (35:12):

It’s like you want a business with pricing power. A lot of businesses can’t do that. Chipotle was one of the first companies that came out and said they’re raising their prices. Now, I don’t know about you. I know I probably do once a week Chipotle. I tell myself it’s for the protein, but in reality, just eating a very calorie-intensive meal. But when Chipotle raised their prices, it didn’t bother me a bit.

Chris Franco (35:31):

I noted it. I’m like, “Okay, but I’m not going away.” Think about so many businesses, you have to ask yourself and now you can actually … You don’t even have to ask yourself, they are raising their prices. Some companies are going to be fine with that. Other companies are not going to be fine with that.

Clay Finck (35:44):

I’m going to jump in there and say that I recently actually switched from Chipotle to a local company. There’s a local company that’s just like Chipotle. Who knows if the food quality is higher or not. It seems pretty comfortable. But my Chipotle bowl is 15, 16 bucks, and this other place is 10 bucks right now. But that could change really quickly. I know that.

Chris Franco (36:05):

I’m amazed that price because I’m in … You were saying before, I’m in New York City and I always assume that the prices are just … I used to joke New York City’s like airport prices are everywhere. It’s like I’m just constantly walking through the airport. But yeah, that’s … You must be doing double meat, maybe some guacamole on there. That’s interesting though, and that’s always a threat I think with something like a Chipotle.

Chris Franco (36:23):

Reading their 10K, it’s been a little while, but I love the idea that they took a model of a quick-serve restaurant where you don’t need waiters and waitresses, but they’ve branded themselves in a way where you’ll pay more for the ingredients because it’s non-GMO, all these buzzwords and not that they’re making it up, but it’s a lot of marketing and branding and perception. And that’s been a really phenomenal model for them.

Chris Franco (36:42):

Not everyone can just go and do that. I don’t think Chipotle, by the way, has a sustainable moat in the way that some of the businesses we’ve talked about before do, and for that reason. Because when customers … One, someone else can bring that to the table, and two, when you’re basing … They’ve mentioned their philosophy is a competitive advantage. I don’t think that’s a real competitive advantage. I think that’s a lot of marketing.

Clay Finck (37:05):

Yeah. I haven’t thought a lot about Chipotle stock, but I think their biggest competitor or biggest risk is just the inflation side. People can always go to the grocery store and get a much cheaper meal. It just comes down to the convenience. How much are people-

Chris Franco (37:18):

Sure.

Clay Finck (37:18):

… willing to pay for that convenience? But I am not going to doubt Chipotle’s business model. I’ve ate Chipotle for years, and maybe just go off and on on it. But I agree that it’s definitely a strong business. It’s just that there are those risks being in the food industry, for sure.

Chris Franco (37:36):

I think that’s [inaudible 00:37:37] interesting to do the bad business checklist against Chipotle. It’s again I think … Also, another reason why low cost index funds are great because there’s so much nuance. I think when people are trying to pick stocks, there’s so many factors you have to consider. Even when you get everything right, outside factors can happen that no one saw coming. I don’t pay attention to charts because it doesn’t tell me anything about the future and you have to do so much real critical thinking.

Chris Franco (37:59):

Even when you’re thinking, it’s just rock solid. You can get hit with a torpedo or something crazy can happen internally that, again, no one ever saw it happening. It doesn’t have to be a black swan event or some extreme. It’s very difficult to run a business that keeps on growing year after year after year for decade, decade, decade. It’s so competitive, it’s hard and it’s even harder to try to pick who’s going to do it.

Chris Franco (38:18):

Jeff Bezos has said that. Just a quick note on Jeff Bezos, a lot of people don’t realize this, Jeff Bezos was one of the only people in attendance at the Sun Valley Conference in 1999 where Warren Buffett gave this warning of what’s to come. It’s almost … I read it to my audience because it felt like we were going that now. It reminded me of the time period. Not that I’m calling tops or bottoms or anything like that, but Jeff Bezos was quoted in the Fortune article that was later written up about it. And he said …

Chris Franco (38:44):

It was about investing in innovation. Him having a hedge fund background, he really gravitated towards what Warren Buffett was saying and he applied it. He told his team about it. Amazon’s still here today. Another example of if you take Warren Buffett seriously, it doesn’t usually work poorly for you. I think with Jeff Bezos, there’s another just … If you’re reading the shareholder letters that he’s written over the years, I don’t put them on the same level as Warren Buffett’s, but they’re a source of knowledge for sure.

Chris Franco (39:05):

I know I enjoy reading them a lot. He espouses a lot of the Warren Buffett ideals that I think are … It’s interesting to hear his focus on free cash flow per share, for example. Also, he did something that … Again, I’m going to show you how my brain’s connecting dots here. Phil Fisher is someone that influenced Warren Buffett and Charlie Munger, respectively, and the philosophy of both was influenced by Phil Fisher, as well as Ben Graham of course.

Chris Franco (39:26):

But Phil Fisher I feel like is the lesser known of the two and, that just … It is what it is. But Phil Fisher would talk about your shareholder letter’s an opportunity for you to really talk to who you want to own your shares in the first place. When Warren Buffett … If you read any of his annual letters, he’s talking to people that are going to be long term. It’s like family to him. He’s talked about writing it in the idea that he’s writing it to his sisters, wanting to tell them everything they need to know without getting so in the weeds where it’s not productive.

Chris Franco (39:51):

But it really hurt him in the late ’90s when people were starting to doubt him. It wasn’t so much as ego as he really cared about doing right by the people that invested their hard-earned savings alongside him. I think people now, he has a … His image is so distorted by this new wave of just pumping. I’m not trying to get in my high horse about this, but I realized from reading all the classics during COVID, it was like most people, I don’t think they’ve ever read a book about Warren Buffett.

Chris Franco (40:16):

Warren Buffett is not motivated to, oh, he wants to keep things a certain way, so he’s in control. No, he’s interested in making as much money as possible. He’s been interested in that since he was a little boy. He wanted to have the most money in the whole world. That’s not a secret, but he really cares about doing right by the people that are in it with him. When I think about taking Jeff Bezos’ letters, speaking to that long term shareholder.

Chris Franco (40:38):

If you invested in Amazon and you were qualified as a shareholder by his letter, he’s … What was the first … Maybe the first or second headline was it’s all about the long term. One, that sounds like Warren Buffett, and two, he’s doing that thing that Warren Buffett did and was likely influenced in some regard by Phil Fisher and saying talking to the shareholders you want. If you were willing to stick with Amazon, not to say it was going to work out, because anything can happen, but you had a ride through some big investments in the short term with a long term mindset.

Chris Franco (41:04):

I think that’s just a really interesting way to learn more about the management and for the management to seek out the types of shareholders that will allow them to grow in the way that’s going to create fortunes, not temporary have a nice year of returns. But I think there’s a huge difference there, and you see that with those two examples.

Clay Finck (41:21):

I almost had this epiphany moment right there when you were talking. I was reading William Green’s book, Richer, Wiser, Happier, and he was talking about Nick Sleep in his book. Nick, he made his investors sign this document saying, “This fund is not intended for short term investors. You should be willing to park your money here for at least five years,” and then I think through some of Nick Sleep’s favorite stocks. It’s many of the ones we’ve already mentioned, Amazon, Costco, Berkshire.

Clay Finck (41:50):

He had Amazon, he got sign off from his investors to invest over 20% in that company. It’s just really interesting how things came full circle there. Before we get too far off track, I wanted to really ask you about the valuation of Costco. The sentiment I see from people is that, yes, it is a really, really good business. But one of Buffett’s principles is not only to invest in great businesses, but also invest at a good or a fair price. I’m curious to get your thoughts around the valuation or how you’re valuing Costco and saying today’s price is somewhere near fair value.

Chris Franco (42:30):

Yeah. Well, I think first and foremost, I wouldn’t recommend anyone buy Costco or any stock for that matter. I think for me, I bought Costco in 2019 and I knew at the time, based on my just rough calculations, that I was not getting something that I was going to make a fortune on, but it was something that I felt like would have the chance of outdoing the S&P buy a little bit.

Chris Franco (42:50):

In the best case scenario, in the worst case scenario, it’s a little bit below it. But I was willing to take that go of it. Now, I felt a lot smarter for my efforts in the subsequent years, because Costco had a nice run, as many companies have had in what was crazy bull market. Well, I know Berkshire doesn’t own any Costco. Warren Buffett has not ever really gone on a limb for Costco before. It’s very much a Charlie Munger stock

Chris Franco (43:13):

Warren Buffett has made fun of Charlie at the meetings for his just total absolute love for Costco. It goes beyond love. He talks about it like he talks about like the greatest thing ever. I think people need to keep that in mind. Yeah, if you were to look at just on a very high level right now, and I’ve not looked at the numbers that recently, I’d imagine most of everything’s priced in. But you know what that brings up? A point that I think is missed a lot by especially new investors.

Chris Franco (43:35):

I wish I knew this when I started. When you’re looking at what, let’s say, the Berkshire portfolio is doing or Warren Buffett’s doing, or even Charlie, I think if you put up a list of all every hedge fund that exists, any sort of ETF even, and you put Berkshire and how much capital they have invested and to invest, the numbers are so big. They’re so much bigger than what some of these funds do, and not that the funds are small by any stretch.

Chris Franco (43:57):

But the amount of capital really limits what they can invest in. I found something interesting during this whole Bitcoin runup that happened in the last couple years. I try to read everything, right? I try to read the stuff I don’t agree with. I want to know what everyone’s talking about and see, again, if they might have thought of something I didn’t. But there was a lot of … Warren Buffett was used in a way that was disingenuous where they’d say, “Warren Buffett could have just bought this. Or what if he just bought Zoom?”

Chris Franco (44:20):

It’s like they’re not able to make investments like that because they’re capital-based, and when people were saying that look at Berkshire’s lag, the S&P, it’s … Whatever the [inaudible 00:44:30] … I think now it’s actually a little bit above the S&P over a longer period, but they’ve been … Both Warren and Charlie for, we’re talking about decades now, have said, “Do not expect us to continue compounding at these numbers.”

Chris Franco (44:41):

Again, the honesty factor there, and also managing expectations. But what’s it mean to have … that your capital base is so large, it limits what you can invest in? Why I think something like the Apple investment was so incredible, looking back at it, everyone of their brother-in-law has looked through that stock. There’s no secret to it. It’s not low analyst coverage. Everyone knows about it, at the time.

Chris Franco (45:01):

When they make those investments now, they have to make such a big investment that it’s … They’re not risky by definition we were saying earlier, but it’s a lot of capital to put up into one investment, and most people don’t fully, I think, size it appropriately to what other funds are investing at what level. Just the gumption or the guts to say, “We’re going to buy 7% of Apple, one of the biggest companies in the world.”

Chris Franco (45:21):

The other thing people don’t factor in is this, and this helps. It’s a good example of people playing the stock game, and I learned a lot of about this from Michael Mauboussin, who I learned from the Warren Buffett book, or I learned of from that book and then went down that pathway, the expectations that the market has for the stock. When Warren Buffett bought Apple in 2016, I say Warren Buffett, Charlie Munger was part of that process, in 2016, the expectations of Apple were very bad.

Chris Franco (45:41):

Fortune magazine called it a risky stock. At the time, Carl Icahn, who was one of, if not, the largest shareholder had just dumped all his shares. He owned at least 1%. He was worried about the growth in China. He said, “This is great, but I got to get out of this.” People now look back, the same people who are saying, “Warren Buffett missed the boat with Bitcoin or Zoom or whatever,” at the time, it wasn’t an easy pick.

Chris Franco (46:01):

I think that’s so interesting because they have the disadvantage of their size. They can’t just make investments in anything because they have to literally buy the whole company because 7% of Apple would buy you … I don’t know how many Zooms you could buy with that. But then it’s not as if they’re just waltzing into whatever’s popular. It just looks that way in reverse. I think that’s something when you talk about why is it better to go indexing versus individual stock picking, I always say this.

Chris Franco (46:22):

It’s not because people aren’t capable of doing it, but they don’t fully appreciate the ice in the veins and real knowledge that’s going into these decisions. These are not individuals who are doing things haphazardly. That to me is really impressive and I admire it because, not just for the reasons I stated, but typically as people get older, you get rigid, right? Your mind gets a little bit rigid, and I look at the Apple bet. Yeah. They can say, “Oh it was a consumer company,” blah, blah, blah, but you still had to learn some new things and bring everything you already knew to the table.

Chris Franco (46:52):

The BYD bet back in, what was it? 2008, I think, Warren Buffett was in his 80s, buying into EV and they say, “Oh, he’s a dinosaur.” That’s so far from the truth. Anyway, I could go off on this all day, but I think … That’s why I really appreciate your podcast and who you guys, network does because it brings light to the reality of these individuals because they’re now used as mascots for people to sell alternative investment philosophies, or frankly, a lot of nonsense and say, “Well, these guys don’t want you to be rich.”

Clay Finck (47:21):

You mentioned Warren bugging Charlie about being obsessed with Costco. I’m curious if you could expand on maybe some of the differences between Warren and Charlie’s investment styles and maybe where your mindset and thought process maybe falls more towards. I’m going to assume Charlie’s.

Chris Franco (47:39):

Yes. I think I’ve said before Charlie Munger’s investment approach, to me, it’s the most rational, but the hardest to imitate. When Warren Buffett and Charlie Munger were first getting to really know each other, there was a lot of people that were trying to what … They used this expression, coat tailing, who were coat tailing weren’t Buffett. Warren Buffett was almost … Not universally known, but universally known as this young guy, he’s the stock guy, you got to learn from him.

Chris Franco (48:03):

There was a lot of smart people that were trying to learn from him and start up their own little shops. Charlie was different in a few different ways. One is that he didn’t have any regard for the convention. He was not coming that from an investment … He was a lawyer before. He was interested in making as much money as he could. He had a lot of ambition and a lot of [inaudible 00:48:22], a lot of children, very intelligent person and was on his path that way.

Chris Franco (48:25):

He realized fairly soon into his process, and this is when he started challenging some of the Ben Graham concepts of what is the best business … He would ask people, “What’s the best business you’ve ever heard of?” Because to him … There was an example. I think it was in the book, The Snowball, great book about Warren Buffett if anyone out there has not read it, of a construction company that make a lot of money, but then you had to replace the cranes and the bulldozers every year.

Chris Franco (48:46):

You have to pour that money back in, so as a shareholder, you’re never really getting anything from it. It’s just a headache. His other look at the cigar butt approach is saying, “Yeah, this is great,” and people always talk about it doesn’t scale, but it’s also, you’re buying a lot of businesses that give you headaches. It’s not an enjoyable … Charlie Munger, he’s a minimizing effort investor. He puts in the work to know the business, but he calls it sitting on your ass investing.

Chris Franco (49:09):

The best businesses are the ones you buy and just “you sit on your ass for 40 years and it works out great.” Now, that is something that sounds really easy to do. But Charlie Munger has been described as, we’re talking about a volatility, a master bump ignore. Charlie Munger, when people would … This Alibaba situation, and I don’t want to go around the question. I want to make sure I’ll come back to it.

Chris Franco (49:28):

But this Alibaba investment that Charlie Munger has made a lot of headlines for. People were coming at me saying, “See, your hero. Look, big mistake here.” I’m like, “You don’t understand. He doesn’t care. It’s all about the long term.” At this point, it’s not … He doesn’t plan to see the investment play out. It’s literally like, “Yeah, I don’t care if I’m wrong in the one year, two year, three year or five year,” and that’s something that’s very difficult to be like.

Chris Franco (49:49):

Now, another reason the differential approach, and I think I lean towards Charlie’s approach, but I avoided trying to imitate it, is he is very concentrated and he will bet against the consensus at times that are very difficult to do that. A story that I recently shared on our podcast that I didn’t know about. I was digging through the Wall Street Journal archives when all the banks were going belly up back in … What was that? 2008.

Chris Franco (50:10):

That Daily Journal portfolio, Charlie took the cash reserves and loaded up on all bank stocks, at a time when everyone was running from them, and that could have easily gone wrong. It doesn’t mean just because they’re always smart … It’s not like he’s not a … He can’t see the future, but using his models, using what he knows about reality, he says, “In all likelihood, these companies are not going to go belly up. That’s not going to happen, and I think they’re dirt cheap right now.”

Chris Franco (50:31):

I’m not saying I know exactly what he was thinking, but he loaded up. The reason they have all this extra money in that portfolio to buy things like Alibaba was because of that decision. It was a huge win, and Warren’s alluded to it at different Berkshire meetings before, and it totally slipped behind me, and that is an approach where his own portfolio, he said that 90% of the Munger fortune has come from three things, the Berkshire shares, Costco and then the investment he made with Li Lu and through Li Lu’s fund in China.

Chris Franco (50:54):

That is again not normal for most people. It’s not what’s taught. It’s also something that Warren Buffett hasn’t had the full luxury to do, being that he’s the steward of Berkshire Hathaway. It would not be realistic for him to operate in that manner. People often ask me, “Why is Warren Buffett worth so much more money than Charlie Munger?” It’s a silly question in the first place, because it’s … But the simple explanation would be, well, for one, Charlie Munger doesn’t own nearly as much Berkshire as you might think by being vice chairman, but it’s enough to … It can make you a fortune.

Chris Franco (51:23):

That’s one reason. But also because of Warren Buffett’s … the situation with Berkshire and all the … I think most people don’t even realize how many businesses they own outside of the stock portfolio. They think it’s a hedge fund. I’m convinced if you asked a lot of people on TV, “Do you realize GEICO’s … that’s Berkshire?” Right? They’re, “What?” That’s the most obvious example of a business they own all of.

Chris Franco (51:42):

It’s amazing the portfolio they have. But when you’re running a company like Berkshire, you have to do that. You can’t just buy three things. Or maybe you could, but I think that’s a very … It’d be a little weird. But Warren has said, “We just need to make a good decision every two years or so.” But I think when you’re an individual like Charlie Munger, who’s totally independent, who’s totally just … he’s eccentric, he’s going to do things his way, he can have a portfolio. Like what I described.

Clay Finck (52:05):

Yeah. I think one of my favorite Charlie Munger quotes is the first rule of compounding, never interrupt it unnecessarily. I think I might have learned some of that for Warren because he started investing at what? The age of 12 or something? Maybe-

Chris Franco (52:18):

Yes, yes.

Clay Finck (52:18):

… earlier than that.

Chris Franco (52:19):

11 or something. Yeah.

Clay Finck (52:20):

Warren started the compounding process so much earlier relative to Charlie, who previously was a lawyer.

Chris Franco (52:27):

100%, and I love that quote too, because it’s a quote that the first time I read it, I thought I understood it, and then over time I got to really appreciate … One of the other contributing factors of the Charlie Munger approach is the unwillingness to sell even when you have something that’s worked out great. I know there was a little bit of a joke about … I think Warren sold a little bit of the Apple stock back a couple years ago.

Chris Franco (52:47):

Charlie was like, “I told not to.” One of the reasons is, and this is something I think it’s very counterintuitive to wrap your head around in the book that we were talking about before we started doing the show here today, the Warren Buffett portfolio. I learned about this … I think Robert Haggs from The Author really explained this concept well. When you take your gains and you pay your taxes, that tax is in a way interrupting the compounding process.

Chris Franco (53:09):

The longer you can let that unrealized gain continue over year after year, he describes it as it allows you to compound more forcefully. Now, the company might not be growing maybe at the same rate that it was, but oftentimes … Again, people can pull out a compound interest calculator and figure it out for themselves. There’s always going to be some nuance it, but there’s real advantage in just not getting in the way of it.

Chris Franco (53:28):

I think it’s a bigger lesson for us as investors. Even with the best intentions, our tendency is to mess it up. Right? I tell people during a bear market, I’m not claiming to be a financial advisor, but the advice I’m applying for myself is just don’t do anything. Jack Bogle would say, “If you bought right, you can sit tight.” As long as you’re not sitting on a bunch of speculative nonsense and you paid too much for it and you just were careless about it, there’s not much you can do right now to help yourself.

Chris Franco (53:50):

Trying to find, oh, I’m going to time this, or I think oil’s going here, so I’m going to do this. It’s very fun to do that, and I totally get the appeal. But generally speaking, I think if we looked at everyone’s track record over a long period of time, the times when we think we know something and we’re, “Oh, I’m going to get in here and just finagle around with it,” we ruin it. It reminds me of a model. Was it latrogenics? [inaudible 00:54:09]

Chris Franco (54:09):

I think I rarely say the word out loud. It’s the idea of when you have a … Back in the day, someone might have had some disease that needed curing and they would do … they drain their blood, or the things that we had to do to get to modern medicine, and just by intervening, we actually do more harm than good. I’m reminded of that a lot. I think that intervention tendency that we have, while it’s our best intention, not only oftentimes does it not work, but it in fact interrupts the compounding process. That’s just … My appreciation for that quote has gotten deeper.

Clay Finck (54:38):

Well, Chris, I really appreciate you coming onto the show. This is a really fun conversation. Went by really quickly, it felt like. Before we close out the episode, I wanted to give you a hand-off to tell the audience what else you’re working on, what you got going on Instagram, YouTube, and all these other platforms and stuff you’re doing.

Chris Franco (54:56):

No, totally. As I said, I’m an individual investor. I have a business here in New York City that I often don’t talk too much about on the investing side of things and I’ll keep it that way to … Again, my incentives are all positive here. For myself, I wanted to uncover everything that was true about investing and just be able to understand it the best way I possibly could because I think it’s important.

Chris Franco (55:15):

I think it’s important for anyone, no matter what level you’re at or the level you are currently would see yourself at to know this stuff inside and out, and it’s to remember that we’re all capable of knowing it and even knowing it better. In terms of what I’m working on, I think you found me through some of the Instagram pages that I’ve unintentionally have become a popular meme accounts. The Charlie Munger Quotes is one that I’m using every day that’s helped me retain a lot of the great wisdom of Charlie Munger.

Chris Franco (55:38):

Warren Buffett Videos is another page in IG. But I’d say if you enjoy the podcast … Again, you guys are the leader in this space. I’ve got a small but growing podcast called the CMQ Investing podcast. It’s mostly 99 episodes of me talking about these different topics. I think we’ll start doing interviews after we pass episode 100, but the podcast has been great. Then YouTube has been a channel where I experiment a lot and I bring my sense of humor into it and just trying to see …

Chris Franco (56:03):

For me, and this is me speaking as bit of what do I want to give back and try to do that maybe hasn’t been done, is try to take some of these big ideas that we’ve discussed on this show, and again, I appreciate you so much for having me, and take some of these ideas and make them more readily, not just available, but make them more appealing and maybe even entertaining for a new audience because I think they are, I don’t want to sound corny, but life-changing ideas, that if you can really internalize them and apply them, they can just make your life work better.

Chris Franco (56:28):

It’s not even about, oh, you’ll make more money. It’s just things will work a bit more efficiently for you. At least that’s been my experience. I think a lot of times the world of finance is very intimidating. I used to think that everyone who worked on Wall Street, and I have a lot of friends who work on Wall Street, but I thought everyone was like Albert Einstein.

Chris Franco (56:45):

I would never have thought, “Oh, I can actually contribute something here or say something that someone could learn from.” But once you get past and really dig in, and I mentioned reading 10Ks and reading the wisdom of investors like Warren or Charlie, or listening to a podcast like yours, you can find things that you’re interested in and go deeper in it and just follow your curiosity, and I think you’d be amazed at what can come from that.

Chris Franco (57:05):

CMQ Investing is my way to try to contribute to that. Just to do the plugs, I guess the CMQ Investing is a podcast. It’s on Apple and Spotify. There’s CMQ investing on YouTube. If you want to see me make a fool of myself occasionally, that’s where you can check that out, and of course, the Charlie Munger Quotes page is an Instagram page that I’m very proud of and have put a lot of time into just spreading things that have helped me from Charlie. I’ll leave it there. Chris Franco on Twitter, it’s Franco with a C, if you’re looking for some tweets.

Clay Finck (57:32):

Well, some of us mortals have 24 hours in a day, but I meet some people … Sometimes I meet people like you where it feels like you have 72 or maybe even more hours in a day to work on all these things.

Chris Franco (57:43):

It’s true. No, I need to slow down. I’ve been trying to take a little bit of a break. On the last couple days, I’ve actually been a little bit more … The end of the month, I’m like, “I need to enjoyed the summer a little bit.” I appreciate you at least acknowledging that. I’m glad it’s not going unnoticed, and I really do appreciate you reaching out and including me. This is a surreal moment to be on your program. It’s also just great to meet you and I appreciate what you guys do and spreading a lot of these important ideas through your platform.

Clay Finck (58:07):

Yeah, definitely well deserved, Chris. I’m happy to have you on, and we’ll probably have you back in the future again as well. Thanks again.

Chris Franco (58:13):

Would love to do it. Well, thanks so much for having me, Clay.

Clay Finck (58:16):

All right. I hope you enjoyed today’s episode. Please go ahead and follow us on your favorite podcast app so you can get these episodes delivered automatically. If you’ve been enjoying the podcast, we would really appreciate it if you left us a rating or review on the podcast app you’re on. This will really help us in the search algorithm so others can discover the show as well.

Clay Finck (58:35):

If you haven’t already done so, be sure to check out our website, theinvestorspodcast.com. There you’ll find all of our episodes, some educational resources, as well as our TIP finance tool that Robert and I use to manage our own stock portfolios. With that, we’ll see you again next time.

Outro (58:52):

Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday, we teach you about Bitcoin and every Saturday we study billionaires and the financial markets. To access our show notes, transcripts or courses, go to theinvestorspodcaster.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by the I Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.