During their latest episode of the VALUE: After Hours Podcast, VSG, Taylor, and Carlisle discuss Warren Buffett’s Never-Sell Strategy. Here’s an excerpt from the episode:
Q1 2023 hedge fund letters, conferences and more
Tobias: I think that’s part of Buffett’s success has been– Aside from the fact that he’s done pretty well picking them, he just doesn’t sell for the most part. Just lets it roll.
VSG: Yeah. Like Coke, basically, he gets the entire market capitalization. He paid back in 1987. He gets that paid in dividends. Now, Apple, he’s doing the same thing with that. He’s just letting that run.
Tobias: On a recommendation from my good friend, Jake here, I went and listened to the Berkshire archives of all of the meetings. I haven’t listened to anywhere near the whole thing. I was just searching a few things as I went through it, but it keeps on pulling up the same parts. It’s amazing how very early on– Buffett, I think he put $1.3 billion into Coke very early on. When he put $1.3 billion into Coke, it was 40% of Berkshire. Two years later, the $1.3 billion was worth $3.4 billion, which was the entire market capitalization of Berkshire when he put it on.
VSG: Wow. That’s incredible.
Jake: He’s pretty good.
Tobias: He is good at this game. And then, he didn’t sell. Now, they’re all like, he puts them on at one and they’re $22 billion, $25 billion positions that are sending back $700 to a billion dollars in dividends. It’s amazing. You guys ever heard of that guy, Warren Buffett?
Jake: [laughs]
VSG: I’ve heard of him. And then– [crosstalk]
Tobias: He’s an insurance investor.
Jake: Yeah.
Tobias: He runs an insurance.
VSG: Even did that brilliant move in 1998 or so when he bought General Re to basically dilute the holding in Coke without selling it and without realizing the taxes from it, it was a pretty masterful move right there. [laughs] Realizing it was overvalued, figured out a way to reduce it without actually incurring any taxes.
Jake: Yeah. Take an equity portfolio that was overvalued and a price to book at three times for Berkshire at that point. So, not only is the underlying probably rich, but the container that it lives in is too expensive. Trade that in for basically a big bond portfolio, water the whole thing down, and then reset, and come out the other end looking like a genius.
Tobias: Then, the hilarious thing is, you see every letter after that, he talks about they didn’t know about the derivative of General Re. So, he just criticizes– He says he made a mistake like every year for the next two or three or five years after that. I think it’s funny. It’s amazing– [crosstalk]
Jake: Well, they did clean them all up though before they actually were– He said it was hard to unload it, but that was even in an orderly market selling off these derivatives, getting out of the contracts was difficult. But I don’t think they lost too too much money on that.
Tobias: When was that big derivative meltdown? Was that pre the GFC? Was it [crosstalk] GFC? Yeah, he knew it was a powder cake and he was winding it up before.
VSG: Yeah, he was talking about how derivatives are weapons of mass financial destruction back in 2003 or something. He was way ahead of the curve on that stuff.
Jake: Well, that’s what’s so amazing about going through the archives like that and listening to them in real time, or listening to what they’re worried about in real time and knowing what’s coming up next, and then– Just the triangulation of that I find to be so fascinating and so elucidating as to how these guys think. I know I rave about this all the time, but it really is amazing thing.
Tobias: It’s a good exercise.
Jake: Yeah, it’s great.
Tobias: It’s amazing to hear how many times they get asked questions which basically like, explain the valuation of this thing or explain the prospects of this thing, and he says, “I’m not going to tell you what I think, but here’s one way you could think about it.”
VSG: Yeah, that’s true.
Tobias: He’s just got playing on a different level to everybody else.
VSG: They are really fun. The 1990s Berkshire Hathaway meetings, I think, are the best. I listen to those a lot on walks. You definitely learn a lot. They’re awesome now, but back then, they were just like intellectual Rambos. [laughs] The insights that they’ll drop in 10 minutes of conversation will blow your mind.
Jake: They’re really funny too. They’re hilarious to listen to. It’s like a little standup act also on top of the best business school that you could imagine.
VSG: Yeah, that is true. It does make me laugh often.
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Article by The Acquirer’s Multiple.
