00:00 Speaker A
I want to look at this through the lens of what you think were Buffett’s sort of top three pivotal decisions. And let’s take them one by one here and and dwell on them for just a second here. So first of all, um the sort of model that he used to build Berkshire in the first place, which was different from other investing models. Talk me through that.
00:30 Speaker B
So, originally Warren Buffett had a hedge fund. Uh he started in the 50s, he he shut it down in 1969 and the the original structure was easy. The first 6% goes to the clients, every profit, every dollar above 6% he he took 25% of the profits. Um in 1969, he shut it down. He didn’t understand markets, they were too frothy. So when he started Berkshire, this was a profound change because all of a sudden, he’s not looking just to make a performance fee, he’s looking for permanent capital. So he didn’t want to have to deal with redemptions. He didn’t want to have to deal with writing letters every quarter and keeping people in or justifying his moves. He wanted something to think longer term and that was a huge shift in his mindset when he uh, you know, got into his 40s. And, you know, every scholar of Buffett will look back and say he would have never become one of the richest men in history if not because of this permanent capital structure. So when we think about his legacy, it’s not necessarily about what he bought, it’s really the structure that allowed this uh compounding and reinvestment of all dividends. You know, Berkshire has never paid a dividend. It just was there just to appreciate over time.
01:54 Speaker A
And it’s also interesting because counter intuitively, you would have thinks you would have thought that sticking with the hedge fund model would have brought him at least short-term profits, right? but as we saw, it it built the long-term profits and legacy for the company. Um, let’s talk about the structure, while we’re talking about structures, let’s talk about Geico and how it is different, um from other investments, particularly other insurance companies as well.
02:26 Speaker B
Well, it’s the total engine behind Berkshire Hathaway. Now, a lot of us like the old Warren Buffett grandpa with his sweater, you know, telling stories by the the fireplace about Sees Candy. And most people have heard about he bought Sees Candy and he used all the cash flow from Sees Candy to buy other things. Not unlike a more uh, you know, what Philip Morris did uh during the last century of taking all the the money they made from cigarettes and buying cheese companies, right? But more profoundly, it was always really about Geico. I think that we talk about the Sees Candy story because it’s easier to understand, but he bought Geico and then basically he made all of his policy holders investors because what he got with the float from Geico, you know, you take money in for for insurance and then what you don’t pay out in claims, you can invest. Well, he was one of the greatest investors of all time, so he had a source of uh capital that had very, very low cost. Uh it was it was liquidity that, you know, he didn’t have a liquidity problem with investors saying, hey, we need to nab this cash. So his ability to look forward into the future and know how much cash flow he was going to get, made it a lot easier to take over companies and to buy things and have a schedule. Um really, it nobody had done this up until up until Buffett.
03:49 Speaker A
Well, um, as you say, there’s this sort of like image of him as this sort of grandfatherly figure, but that that’s also calculated in some ways. It’s it can be authentic and calculated at the same time, I suppose. But the way that he communicated with investors, in addition to the shareholders meeting was through his annual shareholder’s level letter. Um, how did he use that as a tool?
04:22 Speaker B
Uh he used it for social engineering. He wanted to engineer his client base. He wanted to make sure that he was selling long-term value. He wanted to be sure that he was selling, he was the original Bitcoin tout, right? He wanted to make sure that people bought Berkshire and held it forever and never sell your Berkshire. And so not only was the structure designed that way, not only did he have permanent capital, but through his letters, he would talk about um moving beyond volatility and not having to think about volatility. Talking about a margin of safety. Everything he bought was, you know, a value. He was buying dollars for 50 cents. Um and and on top of that, he was a salesman, right? He would talked about underperforming during bubbles and that compounding was really the way. And I think he convinced people that the moats were really about competition. I think that was one of his greatest uh magic tricks because really what he invested in through the most part of his life were monopolies and places that didn’t have competition and were not based necessarily on the innovation of America, but was based on companies like an Apple computer that just had all the cards. And I think he made people comfortable with that type of, you know, monopolistic oligopy inside of America.