Clay Finck (02:08):

Thank you, Max. As I mentioned in the intro, your background is working with insurers. I had met you a couple of times previously during my previous work in the insurance field. And as an actuary, you know as much about risk management about as anyone else I know in the investment industry or just anyone else out there that is investing. What are some of the things you learned in that environment that you’ve applied to your own investment framework?

Max Rudolph (02:37):

Yeah and thanks for the kind words. I’ve spent a lot of years working with insurers and institutional investors, looking at it from a risk management standpoint. A lot of times x-rays tend to look at things from the liability side of the balance sheet, so bringing that investment knowledge comes in handy, but along with that investment knowledge and the CFA charter, I have to remind people that anything I say today is not investment advice. Although I think we will maybe talk about a couple companies, we’ll focus more on the process. But the main things that I’ve learned over the years are things that if somebody knows a lot about investments, it’s not going to be surprising. It’s beating the drum of value investing, beating the drum of risk management, so things like avoiding leverage. We’ve been in the bull market for 15 years and a lot of that was due to stimulus, things that weren’t natural to the supply demand world and I think we’ll come back to that a little bit later.

Max Rudolph (03:30):

But if you’ve been buying using leverage and levering up, that can be a problem over time. That’s one of the things that I’ve avoided over years. I’d rather get rich slow and stay rich than get rich fast and end up… And you hear stories like that from a hundred years ago of people who that happened to, that end up in the streets and die alone. As Keynes so famously said, markets can stay irrational longer than you can stay solvent and that’s a good quote to live by. And we’ve had these low rates and a lot of that has been artificial, but it drives this and bounces. If you’re buying a mortgage, buying a house and getting a mortgage, whether rates are at 2% or three and a half percent, probably doesn’t matter in terms of whether you buy the house or not.

Max Rudolph (04:16):

But if you’re a hedge fund and you can get rates of 2% or half a percent, you are off to the races. And I think we’re starting to see with the market correction recently that some of those hedge funds and other investors that have either leveraged or been very aggressive with their investment strategy, they’re starting to pay the price a little bit and really haven’t thought ahead as much as they should have. So coming at it from an insurance perspective where the money is really coming from policyholders, my belief and working at insurance company as well was always in win-win scenarios, that how can I take the side of the policy holder? How can you do right by the customer and still make a nice profit? I think there’s room to do that along with maintaining a risk profile that’s within your risk appetite and consistent with everything that allows you to sleep at night.

Max Rudolph (05:07):

That’s really the driver. If you’re not sleeping at night because of your investments, you are being too aggressive, you need to take a step back. And so I really encourage people to take control of their own finances. I’ll write articles and essays within the actuarial profession and especially from the pension side, I don’t do very well in that context because my essays always say, take control of your finances, save, invest and then rinse and repeat, do it again, don’t rely on others where a lot of times what they’re looking for is, what can we provide as a service that we can get paid for to somebody else? A lot of things out there but that’s probably the main point that I’ll make today is, listen to other people but you’ve got to have your own strategy and have it all make sense in your own head.

Clay Finck (05:56):

As I have these interviews with just fantastic investors, I always come back to Morgan Housel’s book that I recently read and had an episode on. I’m always fascinated by talking with investors that have a ton of experience like you do. In Housel’s book, he talks about the story of Jesse Livermore, of how he bets everything. He made a fortune and ended up losing it all and that relates directly to what you were saying with having conservative finances and investments and avoiding leverage as well, which is two things that Livermore wasn’t too good at. In the first chapter of Housel’s book, he talks about how each individual’s perception of the world is highly influenced by their experiences.

Clay Finck (06:38):

The way I look at the world is probably a lot different than the way you look at the world, just because of the things we’ve read, the things we’ve learned and the experiences we’ve had. And the experiences piece is a big part of that, I believe. Two people that are very smart might both be in the investment industry and work in that industry, might look at the exact same thing and come to two completely different conclusions on what an investment might look like or what its outlook might be. Could you talk to us about your investment experience over the years and some of the things you’ve learned as investor investing your own portfolio?

Max Rudolph (07:12):

Yeah. Maybe I’ll comment on your question first, because Howard Marks is somebody like that, that his books and his blogs and things like that are just fantastic, but he personally invests totally different in high yield and stuff that’s gone bankrupt and in totally different types of things that I’m comfortable doing to where the process can be the same or very similar, even while you’re in totally different markets, so that’s kind of interesting. And the Housel book is interesting. I’ve read that one as well. His skiing story is worth the price of the book by itself, so I’ll maybe tee that up for people to go out and buy it. But my experience, I didn’t grow up with a lot of money. My dad was middle class. He moved into management when I was maybe 10.

Max Rudolph (07:56):

My parents bought a dividend reinvestment plan with the local utility, which was fairly typical at the time to try to teach your kids about saving and things like that. And what I found over time was that a lot of those drips, the fees are just really high and so I’m not personally in any today, but I’ve done a couple over the years and kind of learned the hard way not to do that, but that was really my first experience of investing, because my dad was a 40 year employee with AT&T so he had an ESOP and so they lived off of their AT&T stock and what spun off of that over the years and made for a nice retirement for them. But then you don’t really get much in high school, at least in the era that I was at.

Max Rudolph (08:38):

Hopefully there’s a little bit more now. But I did take a class in college. I have a degree in math, but also a degree in business and used an elective on investing, wanted to learn a little bit more about it but didn’t have any money. I mean, I was telling somebody the story the other day that when I was a freshman in college, I had probably $3 a day that I could spend and I actually kept track of that because if you spend too much in September, you’re going hungry by the time you get to May. So I didn’t have any personal investment experience so I got a job out in Omaha in Nebraska here and then it took me a while to even get any money saved up. They added the IRA regulations soon after that.

Max Rudolph (09:18):

And so I set up an IRA and my timing was just horrible. I didn’t know what I was doing. I remember I bought IBM and within a week, we had the black Monday where the one day drop of 25% and so I think it cost me $140 and within a month it was down to 40. But at the same time, it was a small dollar amount and all that so I didn’t get killed. But then I went on, I got my actual credential in ’94, my CFA credential charter in ’98. So at that point, everything that I had was pretty much efficient market focus, where I’ve learned the value side is from living in Omaha, being exposed to Buffett and other people like him. And early on, I remember one company I bought, I bought based on a tip in USA today, where they were talking about investing.

Max Rudolph (10:09):

And I still remember when they did their one for 10 stock split, which is not the stock split that you want to see, to where your $2 investment is now back up to 20 and completely a waste of your time of having invested whatsoever, because it’s in an IRA so you don’t even get to harvest the tax loss. But then in ’88 I had been around long enough and decided to buy some Berkshire Hathaway at that point. A friend of mine that started about the same time I did had bought some and the investment department at the company I was at, they were talking about it, they owned some. But I just couldn’t save quickly enough. That was a period where it grew very quickly. And I think when I was looking to buy it, it was about $8,000 a share of what’s now an A share.

Max Rudolph (10:54):

And I finally saved up enough in ’94 when the company I was at added a bonus plan. And so all of a sudden I had this dump of money in February, March time frame and immediately went out and bought a share. And again, you had three days before it clears and before it cleared, it fell from 16,000 to 15,000. So it fell 6% before I’d even paid for it. And so this was all really good education when you’re young and obviously, I mean, I still own that share so it’s worked out just fine in the long run.

Max Rudolph (11:28):

But when you lose money early, at your age, trying different things makes a lot of sense, in terms of what works, what doesn’t work, what do you become comfortable with, because it’s education. When you’re at my age and you make a big mistake, it’s life changing. Somebody who is a hundred percent in one hedge fund and it goes belly up, they lose everything then all of a sudden they’re relying on social security for their entire retirement income. And then they end up having to work until they’re 70 or until they die and that’s really sad, so that’s why you want to have people listen to your podcast so that they can learn and get better at doing what they’re doing. So that’s why I would go with that, is try different things when you’re young and get into really that process of recurring saving and investing and not buying in and out every other day that you made either half a percent of the world that would be good at that, but chances are you’re not, I’m not.

Clay Finck (12:24):

Yeah. I really like that point where when you’re young, that’s the time to start learning and learn from your mistakes and adjust with learning from that. I think the last couple of years is just a prime example of that. I think there are so many lessons with the roller coaster ride and crypto and growth stocks, that trees can’t go to the sky is the saying, they’ll say, so it’s just a good humbling reminder to learn from those experiences. Losing money and investing is just, I think Bill Miller calls it, paying tuition to the market. The tuition’s pretty expensive at times, but you can either quit and just give up or you can learn from that experience. Now as an actuary, you’re a person who analyzes and understand risk, like I said, as well as anybody. I’m curious as someone who understands risk, how you view a portfolio of individual stocks versus say owning an index fund like the Sand P 500. Can a portfolio of say 10 stocks, for example, be much less riskier than simply owning the Sand P 500? What are your thoughts around that?

Max Rudolph (13:31):

Yeah, it’s one of those things where you get more comfortable with your personal strategy. I mean, you read the books about value investing and a lot of them, if they focus on Buffett, there’s a lot of concentration, you got to be concentrated and I’m not comfortable with that. Yeah, my best idea is probably better than my 200 best, that’s for sure and I have our portfolio right now has over 50 individual companies and that’s more than I’m comfortable with. I’d prefer to have fewer but so we went through the last 10 years, it was hard to add to certain positions because I didn’t think they were buys. And so I end up having to bring in… My first choice is always to add to a position I already have, but if there’s nothing there or there’s a certain sector that I want to move into, then you end up adding new.

Max Rudolph (14:20):

And because we’re still in our work lifetime, we’re continually adding assets to the mix so we’re not having to sell things to live off of. That’ll be interesting as we move to retirement here over the next few years and trying to just see how we develop a selling strategy. But back to your original question about concentration versus Sand P versus index funds really, I mean you have to balance that risk and return and your concentration is going to add to your volatility so you got to think about the sleep at night factor. If I only have 10 companies, even there, those 10 companies, if they’re all tech or they’re all defense or they’re all oil, they’re not really diversified so… and putting a company like Berkshire in there brings you a lot of diversification because they’re in so many different sectors and they’re a large cap, but they’re really a whole bunch of smaller companies inside of there as well to where that helps.

Max Rudolph (15:13):

But I’m not as worried about the diversification benefits from 10 versus 50, but qualitatively that gets into my thought process to [inaudible 00:15:22] I tend to think about from a marginal standpoint, what is adding this next thing? Does it offset some risks that are already in the portfolio? Is it just a naked bed on something? I don’t do a lot of that but at the same time, I mean, a couple years ago, I decided I wanted to have a position in defense stocks, but I wasn’t an expert in defense stocks. So I pulled up and kind of made a little watch list and then over the next six months, as I was putting money to work, I’d just say, well, which company is most undervalued at this point in time when I have money?

Max Rudolph (15:59):

And so I ended up developing probably half a dozen companies in the defense industry and the timing on that was pretty good. And on top of that, because I anticipated a bigger war than what we’re seeing with Russia and Ukraine, I included fossil fuels in that defense sector and so I have a couple of fossil fuel companies in there. And of course those have done really well, but it takes a lot of patience to hold those at the time where they were down 75% from when I bought them and I held them and held them and now they have a nice profit, and of course they pay a nice dividend as well, but you’re always looking for how to do that purchase or how to do that sale, what’s your process? My process for sales isn’t very good. I have not been very good at it.

Max Rudolph (16:49):

My process works better for purchases and then I tend to buy and hold unless the story changes. If something gets extremely overvalued, I might lighten up on a position but I rarely, unless the story changes, will I sell out of the entire position. I have several things that I’ve done that with in the RV industry in particular, where it grew and grew and grew and it’s like, well, I’m not really… this is a micro cap company that’s now my third biggest position. I think I’m more comfortable pulling back on things like that. So it ends up being a form of dollar cost averaging, where you invest in the cheapest of a group of companies when you have cash. And one of the things that I’ll point out that I wish 401k’s would do, is that when a 401k, when the mutual funds or ETFs within a 401k, when they pay money, they automatically reinvest in the same fund.

Max Rudolph (17:40):

I wish that they would put that in as new cash, as the cash would come out and it’d be just like you were withholding another chunk out of your paycheck and it would invest based on your new current asset allocation. Because it ends up if you’ve… It’s kind of a natural way and so I do that with our personal portfolio that when we get dividends, that just goes in the pot with cash. It doesn’t automatically go back into that same sector and certainly not into that same company. But in terms of 10 versus the index, I’ve written some essays about the problems of index fund investing that I think we’re going to pull some of those and put them in the notes for this podcast that people can just read on their own. But I’m a little bit worried about indexing in the future.

Max Rudolph (18:24):

It’s like any other idea, if just a few people are doing it, it works great. But once everybody does it, it worked great when the Fed was stimulating and when the treasury was pumping money into the system. But as that gets unwound, the same thing’s going to happen in reverse. And I think that the index funds will just naturally go down through no fault of their own, the same time they went up through no fault of their own.

Clay Finck (18:48):

I think that’s a good transition to talk about some of the risks in today’s market. You mentioned how many people just simply invest in index funds and really don’t even look at individual stocks. They just continually just buy the index, don’t even worry about what the price is and that’s worked over the last decade and you’re very familiar with enterprise risk management. So you’re pretty aware of what’s kind of going on in the markets, how markets work, are there any big risks you think investors are potentially underestimating in today’s market, especially with… Things are changing rapidly. You mentioned the Fed and widening its balance sheet and inflation’s running hot so I’m curious if you believe there are any risks out there that investors are underestimating.

Max Rudolph (19:34):

Yeah, there’s a few and I always seem to be early. So I’ve been talking about these… I think you’re going to refer back to one of my… I do an annual financial predictions and some of these things that I’m going to talk about here, I’ve been talking about probably since 2000, probably for 10 years, things that… I always tend to be early. I kind of see the future based on what we’re doing today and so I try to prepare for that future, but it’s hard because markets are efficient so whatever’s today is the same thing. I’ve heard even on The Investors’ Podcast, I think Preston has talked about how he doesn’t understand why Berkshire isn’t fully allocated all the time, why it keeps cash. And it’s like, well, because you can end up better down the road if you hold cash today and then engage it tomorrow to where it…

Max Rudolph (20:23):

Everybody has a little bit different thought and even within enterprise risk management, I’ve had some discussions just in the last couple days with other people about how our definitions of VRM are different. I mean, I look at it as this as your aggregate and you’re looking at everything, you’re rolling everything up and you’re looking at interactions between the different risks. You’re not just looking at your silo risk, you’re looking at how maybe credit risk interacts with your interest rate risk type of a thing, and getting that over onto the liability side within the insurance industry. But yeah, the market was positioned for a fall before the pandemic. We remember at that point we were talking about there was the longest running bull market in history.

Max Rudolph (21:06):

It was over 10 years long and then immediately we jumped in with all this stimulus, which was important to do from a main street standpoint, but it really continued to mess with the markets. The markets, it was kind of that too big to fail but for everybody, and we’re going to pay for that going forward and we’re starting to pay for that even today. I think the stimulus that was added in 2020 made sense, but the stimulus that was added in 2018 with the tax reduction bill, that was a real problem and that teed up a lot of what we’re going through today. We’re not seeing people talk about that yet, but we need to look at this from a fiscal standpoint, more so than just talking about it from a monetary policy standpoint. You may be familiar with the book, signal and the noise, with Silver’s book.

Max Rudolph (21:57):

And it’s really interesting. And the way I interpret that for the situation we’re in is that fiscal policy’s actually the signal, that’s what matters, that’s what drives your trends. The monetary policy is the noise, it’s the cycles, you go in, you go out. And the problem is that the fiscal policy is what’s important but that gets passed by Congress. And Congress just totally abdicated any involvement in the economy. They essentially say, well, we can spend more, we can spend more, but that doesn’t work in the long run. We’ve gone from debt to GDP of 60% to debt to GDP, I think it’s up 120 or 130% today. Every time I do a talk down at Nebraska to the practicum class of seniors, that’s one stat I have to look up because it changes every year and it never goes down.

Max Rudolph (22:44):

But the further we go away from that 60% debt to GDP, the more assured we are that at some point things will blow up. What will trigger it and how far it can go, the timing, there’s no consistent timing. I can’t say, oh, it’s going to happen here or here or here, but we will need at some point to either collect more taxes or to spend less. And so much of the spending goes to automatic spending like social security that it’s really hard to address that side. So problem is on the fiscal policy, there’s no short term downside to having that punch pull out and putting more alcohol in it and the party goes on and on and the longer the party goes on, the more we reelect these guys and ladies to Congress where at least on the monetary policy side, they recognize the importance of getting it right.

Max Rudolph (23:33):

They know we need to get back to let’s say a 3% Fed funds rate and they’re working. Whether they do it regularly or whether they have a surprise somewhere along the way, they’ll get there. But I think I wrote several years ago, boy, if the Fed can keep interest rates and inflation down below 15%, they’ll have done a wonderful job. And I still think that’s true. I think one of the asset classes I became aware of just in the last year were those I bonds. I wasn’t aware that those were out there and Jason Zweig wrote them up in the journal and I started looking into them and it’s like, oh, this is a no brainer. You go, well, what sectors would you buy right now? And that’s the one that’s the obvious one.

Max Rudolph (24:16):

Everything else, the risks are really high. But one of the things people don’t talk about about the I bonds is that, yeah, we’re in, I would argue, a stagflation environment right now, but as the Fed raises rates, interest rates will come back down and the demographics of the United States and of the world really, of the developed part of the world is such that it’s going to continue to pull down on interest rates. And those I bonds have a floor of zero. They go with CPI, but if CPI is negative, they don’t take any away from you. So there’s a benefit if you’re in a high inflation environment and there’s a benefit if you’re in a deflationary environment, which is kind of interesting. And right now nobody’s worried about that. But I think in the long run, there’ll be some discussion about that. So I think the mistakes that people make are being too concentrated in one thing, that’s the risk management side of it. They end up being all in one sector or one company or one asset class or else it’s leverage.

Max Rudolph (25:22):

There’s an awful lot of people buying on margin and you shouldn’t use margin until you’ve lived through a credit cycle. Once you’ve lived through a credit cycle, then you’re going to recognize, I think, a little bit better that there’s a risk there, that it’s not just free money. It’s kind of like Beta on the CAPM, which I’m not a big CAPM fan, but you can take beta all day when the market’s going up and do great and it looks great. But as soon as the market starts to come down, that over performance when it goes up means under performance when you’re going down. So I think you’ve still got, from a risk standpoint, you’ve got other issues out there, you’ve got climate change being a threat multiplier to almost everything, it makes other risks worse.

Max Rudolph (26:03):

So climate makes you more likely to have regional conflict. The entire Middle East is becoming unlivable at some point. And as you have sea level rise, you’ve got a billion people in Bangladesh that live below two feet of sea level to whereas as that comes up naturally over the next 20 years, where are they going to go? Immigration policy is going to be huge and everybody just says, no, I don’t want them. But we’re the ones who created this problem and we need to be part of the solution. These are all going to have negative impacts on economic growth and eventually that flows through markets.

Clay Finck (26:40):

You mentioned your predictions and I’d like to pull the thread on one that you mentioned there. You said that if monetary policy gets too extreme, then things might really break. And in one of your predictions, you mentioned a potential currency default of the US dollar and how MMT is not the answer to the US’ debt problem. This reminds me of Ray Dalio’s work on the long term debt cycle. It’s something we at TIP study and talk about a good amount. And my question is, why is there no mention of gold or some sort of alternative currency or alternative system in your writings? Wouldn’t this be the time to buy something like gold, if there is some sort of currency default?

Max Rudolph (27:26):

Yeah. Gold is one of those asset classes that I’ll readily admit that I don’t understand why gold has value either. I mean, when people come back and say, when you have the crypto discussion, you always end up back in gold, but gold has historically been a store of value. If you go back into colonial times, Spain and the other countries that were bringing gold back from the new world, that was their natural growth of their economic system to where it does matter. I’ve actually taken a small position in a gold mine to try to learn more, but it certainly hasn’t paid off for me at this point. I still think it may. I think that the fact that crypto is out there, is taking some of the people who would’ve invested in gold and taking that money over to the crypto side and the fact that crypto is going down, and so is gold tells me it’s not coming back right now.

Max Rudolph (28:19):

So it’s a very confusing asset class to me. It’s one that my gut still tells me that gold is going to take off at some point, but my money is not where my mouth is. And I like assets that have a return to them that I can value using a discounted cash flow method. I’m much more comfortable with that. And again, I guess it comes back somewhat to the, do what you’re comfortable, do what lets you sleep at night. I don’t feel like crypto is taking away the real economy so I don’t think those are going away. So I’m comfortable just sticking with what I do, but I always wish everybody else luck. I’d say, I hope it works out for you and if it does, then you can explain to me why you’re so much more brilliant than I am.

Clay Finck (29:03):

Yeah, stick with what you know. That’s a ton of investors do, just look at Buffett. A bit earlier you mentioned that, you live in Omaha, Buffett’s had an influence on you as an investor, and I’d love to dive into the Buffettology side of the conversation. Could you talk a little bit more about how Buffett has influenced you over the years? You’ve been in Omaha for a really long time, you’ve watched him evolve as an investor, I’m sure you’ve studied many of the books that have been written about him. So I’d love for you to expand on some of the things you’ve learned from him.

Max Rudolph (29:38):

Yeah. Warren Buffett has been a big influence on my life, not because I have lunch with him on a regular basis. I think I can’t even remember whether I shook his hand the one time when he and Katherine Graham were signing her book when you’re at one of the annual meetings. But once you start to follow him and you kind of keep track of what he’s doing and look for the nuances in what’s changing, he’s not a stable investor. I mean, at one time he was doing debt arbitrage and stuff like that and you hear some stories from back in the ’50s and ’60s of some of the things that he was doing, but he’s evolved over time. But his underlying process of looking for undervalued things and being patient and all that has been consistent across all of time. So for me, it’s a great learning experience even now, because my background really pushed the efficient markets and CAPM and all that from university, from actuarial credentialing and even from… CFA does broader than that.

Max Rudolph (30:40):

And it introduces you to some of the value tools, but watching Mr. Buffett, Mr. Munger over the years helped me to kind of compare and contrast and get to a place that I was comfortable with. And I’m much closer to them today than I am to the efficient market theory. And so building off of those efficient market tools to add that qualitative view of the company, to try to work your filters so that you’re doing both a quantitative and a qualitative, looking at the margin of safety, if things work out, you do great. If things don’t work out, you still do okay. That’s useful for me, I’m not trying to hit home runs all the time. As long as I’m continually hitting singles and doubles, some of those home runs happen naturally and Berkshire’s one of them.

Max Rudolph (31:26):

I mean, I’ve got a… what? A 20 bagger out of that over my lifetime so it’s been nice. But developing my own interpretation of kind of that rising and falling tide, Buffett’s famous for his comment, you don’t know who’s been swimming naked until the tide goes out. And when you’re talking to a non investor, that can be a very good analogy because they understand that, that when the tide’s rising, all the boats are rising with it, but when the tide starts to fall, when markets are moving against you, if somebody doesn’t have a swimsuit on, they’re highly embarrassed at that point and that’s worked well for me. A lot of times people I’ve worked with over the years, they’ll ask me to speak to somebody who’s just coming out of college or somebody who’s couple years into their career.

Max Rudolph (32:15):

And I always encourage them to buy a single B share of Berkshire because it gets them into the annual meeting every year. And then once you own something, the whole behavioral finance side, you tend to. You’re an owner now so it’s important to you and you track what those people say. And I think it can become really cheap education for somebody to do that. And there’s other companies out there too that I think people have, reading the blogs, have been really, really effective. I mean, I like Howard Marks’ blog. I don’t pay for any blogs but there’s enough free ones out there that are really interesting.

Clay Finck (32:56):

You mentioned a bit earlier that you decided to purchase Berkshire back in 1988 and if I’m doing my math right, that’s 34 years ago. And I’m just so curious how Buffett was viewed back then. Was he a well known guy in Omaha? Was he this guy that’s one of the richest people in the city and everyone knows who he is or did he kind of fly under the radar?

Max Rudolph (33:17):

Well, I think during the ’50s and ’60s, he did fly under the radar a bit. There was his group of core investors that were… They knew his dad or they knew his wife’s dad who was active in the community, and there was a group of them, of doctors that funded it. And lot of the local hospitals now in the area are named for those doctors because they stuck with them over the years. But I moved here in 1983 and that was the year that they bought the Nebraska Furniture Mart from the Blumkin family. And of course, Rose was well known as working till she was 103.

Max Rudolph (33:54):

And I mean, she didn’t die on the floor of the Furniture Mart or anything like that, but it was close to that. And Buffett uses that a lot of times in the annual letters to make a joke about why it’s not a big deal that he’s 90 years old and still working, because he learned from the best. But his reputation was good at that time and becoming better known. Since I was working in an insurance company and starting to talk to the investment folks there, I was aware of him. One of the things that’s interesting in reading some of the bios, especially the Alice Schroeder, The Snowball bio, was his role along with his wife, Susie in Omaha in terms of some of the discrimination and things like that and trying to make things better for communities that weren’t favored.

Max Rudolph (34:37):

And he’s continued to do that. I mean he does the girls club here in Omaha and they’re just in the process of doing the last luncheon with GLIDE out in San Francisco, which was one of his wife’s favorite charities. And so yeah, he was well known and obviously now, he’s very well known. But one of the interesting things that came out, somebody did the calculation and it’s like 99% of his wealth came about after he turned 65 or I can’t remember the exact number, but it’s just phenomenal, the growth that investment, just that whole conglomerate has had since then. And really, they work off of the same process. He’s the chief capital allocator.

Max Rudolph (35:21):

That’s the role that I worry about in succession. He’s got a couple of really good investors in there. He’s got operations guys, he has got Ajit Jain on the insurance side and getting Todd Combs involved on that now and now bringing in Joe Brandon back into the fold with the new acquisition here just recently of Alleghany. There’s a group there but the person who’s sitting at the top, that’s deciding, okay, I’ve got 20 different groups coming to me asking for money, which one do I give it to? That’s the role that I worry about a little bit with Berkshire because I mean, he’s the best at doing that. You can’t find somebody and just replace that so that’ll be interesting going forward to see how that plays out. But yeah, they’ve got a great team and I expect it to continue to do well. I fully expect that most of my shares, if not all, will go through the estate planning process.

Clay Finck (36:15):

Yeah. It’s one of those companies you can definitely feel confident holding for a very long time period, especially like you mentioned earlier, just how diversified it is. And I like to dig a little bit into the holdings that Buffett has. It really interested me that he added to his Apple position, just looking at the valuation from say 2015 to now, it’s like, yeah, he bet big in, I believe it was 2016 actually. He bet big in 2016 and he’s still adding that position despite the multiple expansions so I was really interested to see that. It wasn’t a lot he added, it was like 600 million if I remember right. And then I went to the meeting and was also somewhat surprised to see him allocate over $40 billion towards the energy sector, specifically Chevron and Occidental Petroleum were two of those names that he added to. And during our conversation beforehand, you mentioned that you actually own Chevron so I’m curious what your general thoughts are on what Buffett might be seeing in this pick.

Max Rudolph (37:12):

I’ve gone in and out of oil stocks a number of times and each time I do, it’s kind of like Buffett is with the airline stocks. He keeps getting pulled back in and it never works out and he swears off them and then eventually he comes back. I’m kind of like that with energy stocks. I own both Chevron and Phillips and I was looking for… it is part of that defense sector allocation that I talked about earlier, that if we have a major war, it’ll run on fossil fuels and the fact that Chevron has a lot of North American, that’s where their resources are, they’re not pulling things from the Middle East and other areas that they might get turned off, where the taps might get turned off. He added substantially to that position since Russia invaded Ukraine. What’s not clear to me is why he didn’t do something a year ago.

Max Rudolph (38:03):

Because I got in, like I mentioned earlier, I mean it was down for most of the time but it had already come back up and was already ahead of where I had bought it when he started buying in again. So it’s not quite clear why he did it when he did or what he’s looking for. I mean when he bought the Verizon, my interpretation was that it was a holding pattern, that he was looking for the dividend. Chevron pays a really nice dividend so there could be something tied to that as well. Now on the other side, you’ve got the whole ESG side and I’ve actually done some research on climate and done some writings on ESG, some papers and articles on TCFD, the task force on climate related financial disclosures. And I guess I’d like to talk about that a little bit because Chevron ties in with that so well.

Max Rudolph (38:52):

And it’s interesting because when you go to the TCFD folks, they talk about a company being yes or no, the worst thing ever or they’re perfect. And there’s a lot of what they call greenwashing going on out there, that companies or funds especially will say, oh, well, we’re green and then when you drill down into what they own, it’s ExxonMobil and Chevron and all these different fossil fuel companies. But in reality, we need to look at these companies on a spectrum and Berkshire’s a great example of that, where they now have the OXY and Chevron big positions, but they also are the largest renewable energy source in America. And they’re building out an electrical grid.

Max Rudolph (39:37):

They’re essentially building that wind turbines primarily in the northern part of the country, Iowa, they’re just trying to add a whole bunch more over there and what they do is then they set up the electrical grid to send that south, so the Texas or Nevada. I assume that because they have the ownership of the utility in the Northwest, that they’ll have it going down into California as well. They’re spending over $20 billion on this. I’m not sure they’re not spending more than the federal government on renewable energy. And yet according to the TCFD guys, they’re bad. And it’s just not that easy. So I would especially be skeptical of those proclaiming how good they are at ESG. We saw the same thing with enterprise risk management with DRM. The ones who said they were doing all these great things were likely to pretty much need a bailout in 2008 and the ones who kind of quietly just did their job and did a good job, you just never heard about them. So you always need to look a couple layers below the surface to see what’s going on with that.

Clay Finck (40:47):

I had a question just come to mind. One of Buffett’s core principles is to invest within your circle of competence. And you’ve talked a lot about having a diversified portfolio, so I’m curious how, maybe the people listening or something I even struggle with myself, is how do you decide whether a company or a sector is even investible given Buffett’s principle of staying within your circle of competence?

Max Rudolph (41:13):

Yeah, it’s one of those that… I know for me, there’s certain companies and I tend to be a picks and axes kind of guy, where that tell the story about, in particular, the Alaskan gold rush, where you are much more likely to make a fortune selling picks and axes to the miners than you were to actually be a miner. And so what I’ll do is I like to look at companies that they’re making widgets and then they’re sold. Actually, despite the fact that I come from an institutional investor background with a job, I don’t own any insurance companies except for the part of Berkshire. Partly because I just, as an outsider, I can’t tell how the cash flows are working or what they’re doing and I know enough about the models that they’re doing to know that well, although I wouldn’t manipulate the models, I know how to manipulate the models. And I know that means that other people will and so it’s something to be aware of. And again, I’ve gone down a rabbit hole that’s different than what you asked me so I apologize for that.

Clay Finck (42:15):

Yeah. So I essentially just had this struggle of on the one hand, you have Buffett’s core principle of investing within your circle of competence. And on the other hand, you’re talking a lot about building a diversified portfolio so I’m curious how you balance the two when you analyze a company, you’re like, yeah, it looks like a fantastic investment. But do you know enough about the industry and is it truly within your circle of competence? So I’m curious how you balance those two ways of investing.

Max Rudolph (42:45):

Yeah. And for that, I focus less on the diversification. If there’s a sector that I don’t feel like I understand, I don’t invest in it. I’d rather invest in the core things and I look at country investing the same way. I tend to invest in the United States, my wife has a 401k and so we use some of her allocation to get some international exposure and we also use some of her allocation for small caps. And then I try to stick within things that I’m comfortable with. So I started off with the picks and axes type companies and then I’ll add around the edges of that. I’ll try to learn something or I’ll take a small position in a company. And as an example, I was looking in, 15 years ago at railroads and I looked at the different railroads that you had access to.

Max Rudolph (43:37):

And I thought, I know a little bit about railroads, I think that this sector itself will do well, I’m going to pick one and buy some and then add to it as I go. Well, I picked Burlington Northern, which I bought an initial position and then the price started going up and I couldn’t figure out why and as it turned out, it was because Berkshire was buying Burlington Northern to get their initial position and they were pulling the price up. So I never did get to gain the confidence to get a bigger position but that’s kind of my strategy, is I’ll buy a small position and as I get more comfortable with it, because once it’s in your portfolio, you start following it. And it’s interesting you brought up Apple, I’m kind of the opposite there because I had an Apple position and it so dominated my newsfeed that I sold it. Not because of valuation, but just because I wasn’t able to follow the other companies because 50% of the things in the newsfeed were about Apple.

Max Rudolph (44:32):

And it was just driving me nuts so I sold it and that was right when he started buying. So I ended up gaining the exposure back, but I don’t have any direct exposure today to Apple. So I try to expand a little bit but I feel like I get enough diversification. I’m not worried that I’m under diversified at this point, but for a long time, I mean, in ’98, ’99, I mean, I avoided tech stocks and that was okay. I remember when I was at the company and they added a new growth fund and it was clearly a tech fund. And I remember saying that to somebody and going, this thing’s just going to blow up, and it did. And then we go back and say, well, I told you this was going to blow up and you go, no, you didn’t.

Max Rudolph (45:12):

And that’s why I started, when I went out on my own, doing these annual financial predictions because I think that I can learn from going back and looking and saying, what was I thinking at that time? Was I right? Was I wrong? Because otherwise you only remember certain things. And what I find is that you tend to remember the choices that worked out. You don’t remember the company that you bought that went when you bought level three at its top and it went to zero and essentially went bankrupt to where were very selective, so actually forcing yourself to go back and look at some of those things, I think, can be very healthy.

Clay Finck (45:51):

One more question related to Buffett. He is an extremely avid reader. If you ask Preston or Stig, what’s the biggest thing they’ve learned from these billionaires they’ve studied and it’s that they’re just reading monsters. They just consume so much information, just always learning and Buffett’s on record for saying that him and Charlie chose his successors because these people were the only people they could find that read more than him and Charlie. And I’m sure you’re definitely in the same boat with how knowledgeable you are and how much writing you do. So I’m curious what maybe some of the best books are that you’ve ever read.

Max Rudolph (46:29):

Yeah. And I’m glad you’re not limiting it to one because there’s a lot out there and actually the book that I’m going to eventually get to isn’t really an investment book, but there’s a lot of other ones, the Robert Hagstrom books, especially Latticework. I really like that one because it talks about the mental models that Munger’s always talking about. Now his publisher made him change the name of that with the second edition, so Latticework was the original name. I think it’s the last liberal art, I think it’s what they called it after that, Latticework. It’s how I think about it and in terms of the integration between different things. And Robert’s very, very thought provoking. He comes out here every year. I’ve spoken to him a couple times just at CFA events that they’ve had here.

Max Rudolph (47:11):

Another one that’s not investment related, but Guns, Germs and Steel. It’s a Pulitzer Prize winner, Jared diamond, but it really comes back. Buffett talks about the ovarian lottery in terms of he’s in the right place at the right time. And if you come out of reading Guns, Germs and Steel and think you’re special and it didn’t have anything to do with growing up in the United States, then you need to read it again, because it’s very true that we’ve been very blessed in our background, whether we came from… even if you came from an underclass privileges and things like that, and we’re still better off than having grown up somewhere else. Other authors that I really like, Michael Lewis and Roger Lowenstein are just great storytellers and anything that they write, I’ll pick up and read.

Max Rudolph (47:57):

But the book I’m going to mention is called The Box. It’s written by a historian named Marc Levinson and was recommended by Bill Gates. Bill Gates has had for a long time these emails that he puts out and once or twice a year, he throws out books and occasionally one will be interesting too. And this one sat on my shelf for a long time but I eventually read it and what it does is it covers the emergence of the standardized shipping container on those Maersk ship… Like when the ship got stuck in the Suez Canal, all those boxes that are on top of it, those used to be just random sizes and the fact that they standardized it and made it so that it went between auto coverage to where you would fit on a flatbed or would fit on a ship with the same shipping container.

Max Rudolph (48:47):

And it’s just fascinating to follow that for 50 years. And this one guy was kind of a driver, but he’d win and then he’d lose and then he’d win again. He’s one of those guys that I don’t know as he ended up rich, but the consumer ended up way richer than they would’ve been without him and the consumer really is the big winner there. And I like to kind of throw out these side books. I mean, everybody probably gives you the same three or four and I’ve read them all, I’ve got them all here on my bookshelves, but there’s a lot of good books out there and that whole thought process of lifelong learning is the key. If you’re not going to be a lifelong learner, you’re not going to be a good investor. And that comes through reading, it comes through learning about new companies, learning about new ways, new processes of doing things, trying to learn a little bit about crypto. It’s just a matter of figuring out what works for you and like I said at the beginning, taking ownership of your own decisions, I think that’s the key.

Clay Finck (49:43):

I love it. I’ll be sure to link many of those books you mentioned in the show notes as well as some of your writings. I really, really appreciate you joining me today. I know you didn’t have to take all this time to educate our audience so I really, really appreciate that. Before we close out the episode, where can the audience connect with you and follow along with some of the work you’re doing?

Max Rudolph (50:05):

Yeah. And I mean, I don’t have a mutual fund that I’m trying to sell. It’s really… Clay, we had met over the years and thought we might have a nice discussion. Hopefully it’s been helpful to your listeners. For the historical work, I have a website at www.rudolph-financial.com, I actually haven’t updated it for several years but I’ve been putting everything out on LinkedIn and Twitter since then, I’m @maxrudolph on Twitter. I find that most of my interesting projects are those that tie to my stage in life, so I expect that going forward, I’ll be writing more about investing in retirement and taking that block of assets that you’ve accumulated and working on a decumulation stage and we’ll link to a couple of essays that I’ve already written, kind of looking at that building off of some work that Steve Jordan, another actuary out at Stanford has done, but yeah, go back a few years and see how well my annual predictions have done.

Max Rudolph (51:00):

Really the goal of those is for me to have something down in writing so I can access them but hopefully it also provides some ways of thinking outside the box for some other people too. I put in some different scenarios or one of the things we could talk about if we decided to do this again, would be kind of what year is this year like? I like to think in terms of that and it allows me to like today, I’m trying to learn more about the gilded age because I think there’s a lot of similarities with today and it’s an era I don’t know much about. If I see other references to 1973 or 1856, which really scares me because you know what followed that. So there’s a lot of interesting things. I mean, I talked about pandemics starting in 2004, talked about low rates in 2015 in a big paper to where there’s things out there for people to see if they’re interested and if they’re not, nothing lost, find something else that you’re interested in but just keep reading and keep learning.

Clay Finck (51:59):

Well, your website reminds me of Berkshire’s website so I think you’re doing something right.

Max Rudolph (52:03):

Yeah. I’m hoping to improve it here soon. My emails blew up this last weekend and it’s probably going to force me to actually hire an IT person so the website will be part of that, I’m sure.

Clay Finck (52:14):

Well, Max, thanks again. Appreciate it.

Max Rudolph (52:17):

Yep. No, this was enjoyable. Hope we can do it again.

Clay Finck (52:20):

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. And 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. And with that, we’ll see you again next time.

Outro (52:57):

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 Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.