During this week’s Value: After Hours podcast Taylor, Brewster, and Carlisle explain why Warren Buffett is the G.O.A.T (greatest of all time), and discuss Berkshire’s secret sauce. Here’s an excerpt from the interview:
Q3 2019 hedge fund letters, conferences and more
Jake Taylor: Yeah, I didn’t take umbrage to it too much, but it was… It’s definitely a… It does highlight an interesting I think phenomena that maybe we’ll get to as some point during this podcast where we have… The information now has gotten so readily available that if you were just a value guy in the ’60s, even just looking through the numbers gave you such a huge advantage and now it’s gotten much tougher now to really try to find value that other people aren’t finding.
Tobias Carlisle: Well that’s the kind of the informational argument for value, right? But is that the… I’ll lean more heavily on the behavioral. I think that, and I always bring it up and I should get John Huber on the podcast at some stage, but John Huber wrote this great piece where he talked about even in very large cap companies, they vary from two thirds, like 30% tripling over the course of the year. And he gave the example of JP Morgan, which I don’t think it backed off at all through 2007, eight, nine. It might have had a couple of years where it didn’t grow book value, something like that.
Tobias Carlisle: But the share price was wildly all over the place. And if you just kept an eye on even book value, as unpopular as that is, but that’s probably a pretty good way of valuing financials, valuing banks, if you kept an eye on the book value, you bought it at a big discount the book value, you’ve done really well.
Bill Brewster: Yeah, well I mean, look at Apple since December, right?
Tobias Carlisle: Apple.
Bill Brewster: I mean, you going to tell me that that company has changed 70% value? No way.
Tobias Carlisle: It goes to show what a G.O.A.T [greatest of all time] Buffett is, backing up the truck and buying a ton of it when it was down like that.
Bill Brewster: He’s a beast. I mean, I think the thing about that is it’s always easy in retrospect to be like, “Oh yeah, that was a buy,” Pulling the trigger and catching a falling knife and knowing when it’s not a knife that’s going to stab you and when it’s a butter knife or whatever. I mean, that’s what makes the greats the greats I think.
Tobias Carlisle: So how do you do it? What’s the secret to that?
Bill Brewster: TBD [to be defined] man. I’m still working on it. But I mean, for me I got more lucky than good I’m sure, right? In December part of it was watching. Like I said, part of it was being lucky and part of it was like this is panic right now. And the stuff I’m buying, I’m comfortable owning, right? Like the cashflow underlying, even if I have to wait a while. Especially with Apple, you’re going to benefit so much from the buyback if the shares go down. I actually just let go of it today.
Bill Brewster: The capital return story doesn’t go as far with these valuations. And I don’t know… I mean, I’ve even having a little seller’s remorse, right? But it was so much easier to identify that it was cheap than… Was it right to sell? I mean, I don’t know. That’s sort of a harder question to answer, but we’ll see.
Tobias Carlisle: Well they’re two sides of the same coin, but buying is hard, but selling’s even harder.
Bill Brewster: Yeah. You know, that’s like Munger says, right? He’s like, “I’m good at buying. I’m not very good at selling.” I feel like I probably suffer from the same thing.
Tobias Carlisle: The people who are best at selling never sell. You just hold onto it. A decade later you’re like, “Oh, we’re up 1000%.”
Bill Brewster: Yeah.
Jake Taylor: I think that’s one of the maybe the secret sauces of Berkshire that doesn’t get talked about enough is that that constant replenishment of cash coming into the inside of the company. They never really have to sell anything if they don’t want too.
Tobias Carlisle: Right.
Jake Taylor: And there’s always new money coming in to buy the next interesting idea. What a huge advantage compared to when you’re… If you’re managing a fixed portfolio that you have to dump something, that can give you a lot of remorse.
Bill Brewster: Well yeah, Markel benefits from that, Fairfax to a certain extent too, right? I mean, I think Markel’s philosophy is closer to, “We’re going to focus on companies that are quality and we’re going to sort of… We’ll maybe buy a little bit more when we think they’re cheap. We’ll maybe dollar cost average throughout,” but I almost think of that portfolio like a levered quality portfolio.
Bill Brewster: I mean over time, if you have strong underwriting and you’re reasonably good at identifying when to buy something, which they obviously are, you would think that that’s going to be a powerful engine.
Tobias Carlisle: That was AQR’s analysis of Buffett too, wasn’t it? That he was 1.7 times levered to the quality factor I think. And there was very little value in there.
Bill Brewster: Yeah.
Tobias Carlisle: Which is surprising to me.
Bill Brewster: Well it’s so different from the partnership days, right?
Tobias Carlisle: Right, which doesn’t get discussed very much.
Bill Brewster: At least from what I understand. Yeah, that’s right. When he needed to make the money, he was a value guy, right?
Tobias Carlisle: Buying it like a net-net guy, a liquidation investor if he needed to be. Like a pretty hardcore activist who actually went in and shut down the business and liquidated, even though the townsfolk were upset about it and they were writing letters in the little local newspaper.
Jake Taylor: My favorite-
Bill Brewster: Don’t ruin his image, Toby. Come on.
Jake Taylor: Yeah. My favorite story of that-
Tobias Carlisle: Corporate raid Buffett.
Jake Taylor: … was from when he just went… He painted a line inside of the warehouse and said, “If you don’t get the inventory below this line, then everyone’s fired basically.”
Tobias Carlisle: We’re going to shut the business down. Yeah, that was… Was that the first… Was Harry Bottle the man who had to do that?
Jake Taylor: Yeah, that was the Dempster Mills activist position.
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Article by Greenbackd
