Brett Gardner - Buffett's Early Investments

27:26And, you know, he thought that there was some off balance sheet items. But the reason why a 20 bag was because of capital allocation, like the coal business was kind of an afterthought. What they did well was sell off the inventory, do some high finance tricks to shield taxes, but it was generally the capital allocation that did it. Sheltering income from the underwear business with NOLs from the obviously bad old business, for lack of a better term. Did Philadelphia and Reading end up being a picture of how Berkshire Hathaway was going to operate as a conglomerate? i i 100 think that that's uh like to to me um photo of him reading is is about its blueprint for berkshire um you know he you know not only was he did he idolize graham um he made his biggest position he dipped back in the partnership in the 60s he was friends with mickey newman and grand throughout his life.

28:30I think he took those lessons. And this is speculative, obviously, but I think when he's 24 years old and seeing this, he was like, I'm going to one day do this or something similar. And he didn't know Berkshire was going to be the vehicle, but I think that was his blueprint. When Cole came to start in this business, he spent a lot of time trying to find a small insurance company that we could buy so that he could do in this small insurance company some of the things that Buffett, I think Enum. Well, by the way, to Buffett's point, there's a lot of bad people in the insurance business, just like there is in banking.

29:05That's why it stays so fashionable over time. Let's see. So can you talk about, so you mentioned the Buffett Associates Partnership, which is one of the partnerships you talk about. He lays out, there's three types of investments that he had in that partnership. can you teach our audience what the three types were sure uh so there were workouts controls and generals who would later break out the generals into two other categories um one was uh you know relatively relatively undervalued and one was on a private owner basis um so workouts were what are today known as special situations or arbitrage opportunities liquidations uh stuff like that the amount he allocated to the workouts fluctuated on you know what was available in the market so sometimes it was as low as like 10 or 15 sometimes up to almost a third of the portfolio i only wrote about uh one of them british columbia power but they were kind of an important source uh for buffett to generate income in down markets sure um and then uh second category was controls which were situations where he owned enough stock to dictate corporate policy uh and there are a couple i don't write about like sam were mapped um dempster mills um and then berkshire hathaway would obviously be the obvious example these were um you know like i said just companies that he controlled usually these were net nets um that had excess cash or excess inventory that he took took control of and did something with in some cases he uh took the cat took the securities or cash and sent them back to shareholders other times he would like invest within within uh within that company um and he made these controls frequently big swings um sambor maps was like 25 35 of the portfolio dempster mills was the same um and then uh the last group was was generals which was basically just anything that was cheap the generals could become controls if they got cheap enough or a buffet could accumulate enough shares but they were just kind of generally cheap securities gotcha and i think that from a portfolio management perspective the controls and workouts were really important driving returns because they were not entirely but but sort of market agnostic where uh workouts was always dependent on a corporate event rather like the liquidation payment coming back from the company to help you realize returns or in a situation of controls um he would uh mark them on his books at um at like uh net current asset value or book value not necessarily like the market price um Um, and also because there was like corporate action happening, it usually meant the stock was going up, um, regardless of what was going on.

32:02Sure. And this is back in the day when you just put it on your books, whatever you wanted to, and the investors had to deal with it too. So a little bit of different, uh, you know, operating a regulatory environment. Um, you, you, I think you got into a really interesting niche conversation that I don't think most people even pick up on. So I want to say, I really appreciate, um, why was Munger so open to talk about his investments and Buffett not. And I asked that question, do you think this is why Berkshire talks less about what they do today? Well, obviously Charlie's not here and obviously he was much older in the recent 10 years compared to the past.

32:37Because I think of like my favorite chance, I'd rather not go to the Berkshire meeting. I'm gonna listen to it, but I'd rather not go. I wanna just listen to the Daily Journal meeting because it's like raw, uncut, uncensored, Charlie giving you his bare soul. and that's not what you get in the Berkshire meeting today. Yeah, I mean, I think it's a good point. I think that some of that's personality driven where Munger is just blunt and to the point. I think it's just him while Buffett is a little... I don't think Buffett ever really lies in public, but he says what he wants, meaning he'll tell you what he thinks, but he won't give you the other side of the coin.

33:22Yeah, sin of omission. He's not lying to you, but he's not telling you the full truth. No, he doesn't want to die with a lot of enemies. Yeah, and I think that the Disney chapter is a great example of this, where he's talked about how great Walt is all the time, but then left out that Walt was sort of siphoning value from the company to himself. So I think Buffett's a very literal speaker, and I think Munger's just built a little bit differently. And I also think the reason why Munger talked about a lot of investments in his early days was just trying to get to Curry Buffett's favor. Because he knew that Warren was like not a normal person.

34:02He was wicked smart. Yeah, exactly. Yeah. So let's pivot to Amex, which is really fun. What was the original fraud that DeAngelis was pulling and how did Amex get tangled up in it at the beginning? Sure. So the salad oil scandal was pretty complicated, but basically just boils down to the fact that D 'Angelo was holding inventory that was supposed to be filled. He's had these big tanks in New Jersey that was filled with oil and they were filled with water instead. that was essentially it and he had all these interesting ways of getting around like the inspections where like he would fill up like part of the container where they would they would you know drop the measurement device in and they see it's all it's all oil when it was like 98 percent water um and you know then he would like make it worse by gambling on uh futures in the market um and you know you just like double down as a bet and eventually the price went down people discover the inventory wasn't there um and the way that amex got oh sorry and amex was warehousing that so that's how they were connected amex was warehousing and they were ensuring the proceeds so um like like tino didn't really have um he had a very shady background before becoming an amex client um and he needed somebody to kind of sign off on him and provide uh insurance and credit for the for the banks were lending against the inventories um and you and you liken this to like an nba style business where they're they're getting paid an insurance premium to ensure these quote-unquote assets right exactly They were just kind of like clipping these coupons.

35:59In theory, it should be like an easy business with like no risk. And, you know, Amex had a good standing with the banks because they're selling them the traveler's checks. And in theory, it should just be like a coupon clipping business. That's not really how it turned out. I think I've never actually really made any money in this. Sure. And you talk about, you know, as Munger has talked about, incentives are just crazy. and so uh you know the incentives around the people with this business i think you pointed out that as they're investigating this they're finding out that people at amex were co-investing with with deangelis in his business so it's like they had a reason to hide the fraud to a certain extent yeah i mean it was really insane in my view it was like twofold one these people were invested two if there was no field warehousing business they would all be fired and out of jobs So they were laser focused on protecting him.

36:57Also, Tino was like kind of a kind of a likable guy. Like he was a little, you know, he was a con man, but he had like like a like a glad. Yeah. Yeah. Like, you know, he's a people pleaser. He's like the short, fat guy who, you know, was charismatic. And so you had all these things working, working for him. And the Amex people, like, I mean, they were foolish, but to your point, the incentives were for them to be foolish. So how much how important was the issue of trust to the salad oil scandal? um it was critical because um mx had at this point had spent over 100 years building its brand name in a way where they they originally started with the express business uh which was transporting cash and goods um from one destination to another then they did the money order business um and then the traveler's checks and travel checks depended on the fact that amex was was there and they were going to cash the checks.

38:06And the travel checks were purchased at banks. So the banks were critical for American Express's continued success. And if there was any decline in trust, people would stop purchasing them. The banks would stop selling them. Sure. We would get those before we take our family driving vacations when I was a kid in the 60s. So then you kind of touch on this, by the way, one of my favorite TV shows that I was really glad you mentioned in the book is like Mad Men. Such a great movie. When I think of Mad Men, I think of Buffett in the 60s, like, you know, ferreting out stocks in New York and that kind of stuff.

38:42So I appreciate that. But so obviously, you know, this idea of a dining card, a dining charge card takes off. And so like the diner's card shows up. Amex looks and says like, oh, we should buy this. They're not successful. So they just go into the business directly. How did that business operate and how slow was that to kind of get off the ground? Because on one hand, you have this traveler check business that's like, you know, quote unquote, today we're like, oh, we have this large installed user base. But it wasn't that smooth, was it? No, it really wasn't because people would purchase a traveler check and just kind of sit on them for sometimes months, sometimes years.

39:21Well, the charge card was a little bit different. So American Express didn't offer what was conventionally known as a credit card until later on. So they have a charge card where people go to a restaurant, put down the card, and American Express would pay the restaurant. And they would true up with the customer. Initially, it was like three months, and then eventually one month. This wasn't really considered an extension of credit, even though it was, if that makes sense. Sure. and then Amex would like take a cut of the fee. The idea was that we'll take a cut of the fee of the restaurant bill, for example.

39:59And the idea was that this would lead to more transaction at the restaurant. So the restaurants were happy because cardholders were spending more money than the average person. And also Amex charged people for having a card. Now, one of the things that made American Express's entry into the business much easier than it would have been. otherwise is the fact that they had this travel strikes business. So people knew the American Express brand name. It's allowed American Express to charge more for the card from consumers versus Diners Club. And then it also meant demand for the card was through the roof.

40:35How did the holidays increase the moat of Amex? I thought that was an interesting point that you brought up. Oh, you mean like how? Well, banks are not open on Sundays or Saturdays. Oh, right. So originally when it was a bank holiday in the 30s, Amex remained open and Amex was a source of cash for people when they literally couldn't get it from their bank. So that one built trust and two, it was a way for consumers to be a little bit more liquid than they would have been otherwise. We hope you're enjoying the podcast. You know, we work hard putting together this show, but we work even harder for our investors at Smead Capital Management.

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42:01You're now going to clean up the solid oil scandal. So here's Buffett analyzing the investment. Okay. Obviously, immediately you have this situation where, okay, trust could be questioned because they've been insuring something from a fraud. And at the same time, they can't just go out to the people that they've been insuring on and saying, listen, this is fraud. We're not going to pay these claims because ultimately those same parties were causing their major profit centers in the charge card in the traveler's check business. Is that the fair way to think about the idea of trust in their profitability?

42:36Yeah, 100%. I mean, so the banks were liable for the missing oil in theory if Amex didn't step up. So. So the banks looked to Amex to to fill the hole and make them whole on this. But it wasn't really clear if they necessarily had to pay up. In theory, could have just put the bankruptcy, the subsidiary, the field warehousing subsidiary into bankruptcy and walked away. The issue was that the banks would be really pissed off, obviously. And, you know, it would kind of ruin the toners of the trust they had with the banks. Yeah. So Henry Brandt helped Buffett with what we call the scuttlebutt method.

43:21What did he do? So he went to some restaurants in New York just to make sure that the card was still being used, traveler's checks were being used. and he put together a research report on his findings. And Buffett himself did this work too. Buffett went to restaurants in Omaha, made sure that the card was still being used, that there was no disruption.

43:47And when Buffett started buying, and I think it's an important point that Buffett started buying five months after the salad oil scandal. He didn't buy immediately when the stock dropped. um there was uh another fortunes article that talked about how you know card card usage was going up travel check usage was going up and consumers were really unfazed by it um which i don't think was like probably that surprising because they probably didn't know as much about the warehousing scandal as um as the bank said it would still have money on the line Sure. And by April, it became very clear that Amex was going to do something for the banks.

44:26They were going to make them 100 percent whole, but they were going to cover enough of the losses to keep them happy. So so what was the lesson for getting into the field warehouse business and what did it have to do with the core business? So it really had nothing to do with the core business. Amex, I think, you know, made the false assumption that this is easy money to make, that they can just use their brand value to brand value from the banks to to make some easy money. But there was a huge concentration of risk in the field of warehousing business in contrast to the credit card business and travel checks business where you have a highly fragmented consumer base.

45:04So any one customer defrauding you is not that serious. I mean, the risk to Alloyed Crude, which was Tino's company, was massive. And the concentration of risk was a huge contrast to anything Amex did before or since. Yeah, we own a company called U-Haul. And what they did is they created a second business on the same property. They set up storage units. and of course the most likely person to need a storage unit is somebody that rents one of their vehicles. Yeah, it plays at your core, so it makes sense. Let's see, he obviously, this is a massive position for him. He's talked a lot about over the years and you talk about this book, how concentrated he was in this business as he, you know, got deeper and deeper into it.

45:53This was big for his returns looking out, I want to say, what was it, five or six years in. Can you talk about the returns and then can you talk about why he didn't stay with it yeah so he he started buying the stock in 60 april 64 um a few weeks after his uh his father passed um and he didn't make it like that big of a position initially um you know a couple million dollars um but he scaled the position up as the data started getting better meaning when he started buying um in april 1964 the liabilities were ring fenced meaning it was very clear what amount they were gonna have to pay roughly um and that gave buffett certainty that like this was over i guess our buying but he didn't really start scaling the position uh until he saw a couple of things um first is the trajectory the card business was on where they were just growing at double digit rates um a lot of it was falling to the bottom line um and you know the consumer adoption was rapid they were increasing the price they're increasing the take rate there are all these levers they could pull on a charge card to create value um and travel checks business was continuing to be you know pretty good um And this accounted for roughly a third of his returns over four years, from 64 to 67.

47:27It might have been a little bit more than that. And he eventually made it a 40 % position in the partnership. It kind of foreshadows, you know, I came in the business in 1980, and Coca-Cola was trading at six times earnings, paying a 5 % dividend. in 88, 89, I think it had to do with the Berlin Wall falling. It made Buffett a lot more comfortable with Coca-Cola. But anyway, he bought at five times the price the stock was trading at in 1981 to buy into Coca-Cola. And that's in effect what you're talking about. One year later and started buying after the returns had gone higher. And I think that's what you're laying out is the returns had actually gone way higher on Amex despite the salad oil scale.

48:12And that's what I'm thinking about as you say that. Because I think in that case, it went from 25 % returns on Coke to 50-plus percent return on equity. And that's probably the kind of same phenomena he was seeing in Amex. And he was originally a shareholder of Pepsi and was a Pepsi drinker originally. So that might have something to do with it also. Yeah, that's totally correct. Once he started getting the data, and the stock was not trading that expensive. It wasn't a single-digit PE. But relative to the market, it was, you know, at the same multiple or cheaper and growing a lot faster. And Buffett did all this work to figure out that it was worth that.

48:51It was just a much better business than the average American corporation time. But he really needed to see that data come in like he's there. Two things that I think are like important lessons here is one, you know, Buffett didn't have this primal reaction to jump in when the stock was getting crushed. during the salad oil scandal. He waited until the facts came in. I mean, stock got like walloped immediately after the salad oil scandal came out. JFK got assassinated a couple days later. Yeah. And Buffett didn't buy then. He started working. And then once the liabilities were ring-fenced, then he plunged in.

49:30And then he started scaling the position as the data came in on the quality of the business. Like he had this thesis that the business was really good. and it was and in my view in particular the charge card business was really good and could grow fast and once the data started coming in he's like all right i could scale this position up sure and now i think that he sold for a couple reasons one valuation started uh getting pretty hot in the late late 60s so it's partial valuation driven but second competition started coming from the banks. The predecessor to Visa was just kind of really starting out.

50:08I think it was like 1966 when Bank of America started being licensed to non-Bank of America banks and competitions was arriving. Sure. Let's see. You talk about the retailer, Hochschild Cohn and Company. Sandy Gottesman is really who brought him into that, call it opportunity, if you want to call at that um what was what was sandy's relationship to uh the company and then why did he call buffett sure so um first i pronounced it exactly how you did uh but i was corrected by a baltimore author who kindly told me it is hoschild cone okay um well that's like the schuylkill in in uh in uh philadelphia you haven't been there you don't know right exactly so uh i just had to point that out um so goddessman's mother-in-law was uh owned some preferred stock um and um the you know the family was getting the family was getting a little older they didn't really have anybody who wanted to like run the business so they're looking to kind of cash out is a story.

51:22You know, the thing that I point out is that Louis Cohn actually, you know, stayed around the company for a few years. But it seemed like they wanted to cash out with, you know, some core family members getting older and maybe not being successive generations to run a business. So Sandy was familiar with the company because he helped them raise debt. You know, he was running First Man at the time and helped Holt Cohn raise debenture. and once he found out they were going to sell and sell below tangible book, he called Buffett up and was like, you should take a look. Yeah, so it's kind of a CFA level one thing, but why would you pay attention to LIFO accounting in a retailer?

52:08Yeah, so the thinking was that there was a little bit of inventory cushion there because you were, it's most likely that you were selling, they were selling FIFO, meaning first in, first out. So you got the goods, you sold them. But in LIFO accounting, you were selling the last in, first out. So in theory, there was a little bit of excess inventory value that was not appropriately captured in your books. Sure. In other words, also, you're giving yourself the cost advantage, the smaller margin on cost if cost went higher, but the reality is you're actually selling product that you built originally or made originally.

52:46Is that fair? I hadn't thought of this before, but the terrible experience that he had in retailing, considering how much Charlie Munger thought and loved Costco, maybe that's why Buffett never bought Costco. Oh, yeah, but Charlie took risk on like Alibaba, which he said was nothing more than an internet retailer. So I think Charlie throwing the craps dice a little more than Buffett at times. That's why he used more leverage. Do you want to go to the next one? Sure. Wasn't the real issue with the retailer the sustainability of returns on capital through the cycle? It was a tiptoe business, as he and Munger said.

53:21Yeah, that's exactly right. And I think that there was just the fact that you go down to the store at Howard and Lexington in downtown Baltimore, and you turn 360, and you see four exact stores that are the same thing. They sell basically the same stuff. Sure. And there was no competitive advantage. And there was a time when they can survive because people take the streetcars out of the city and shop at their favorite store and maybe even hit up the second or third one. But the inner city of Baltimore's population became stagnant and started declining around this period because the population moving to the suburbs.

54:05There were branch stores that were opening up. Hostelcom did a little bit of it, but its competitors did it better. and you know once people stopped going to to the city they stopped shopping at the stores sure and this led to returns deteriorating and i mean it was never like it was not that good of a business when boffitt bought it anyway but it was just going to get worse and i i actually asked munger a question on this because he disagrees with my conclusion but um the after um martin Luther King Jr. was assassinated, there were riots across the country, and that accelerated some of the population dispersion in the suburbs.

54:46Yeah, they call that white flight during the 60s. Yeah, and I think that had a bigger impact than people think. It's hard to quantify these types of things, but the city of Baltimore's population started declining pretty rapidly, or more rapidly after that. And I think that played a role in the investment being a loser. Munger says it was going away anyway, and he's probably right. But I think that he could have earned a few more bucks off of it if that didn't happen. Sure. So I'm going to show up a slide. I love this because it showed the kind of the complicated matters of things of Disney as Buffett's analyzing the business.

55:25Can you explain like the relationship of Walt to the Disney company and what was his effectively his management company of Disney, WED? Sure. So Walt was not the CEO or president. He was on the board of directors and his title was executive producer and in charge of all productions. But he ran the company like there was no there's no fans or buds. Yeah, no fans or bots. He ran the company. His brother Roy was the president and would become CEO after his passing. He was the first one to take the title. But Walt ran the company. He ran the show. um roy roy to me is a very underrated figure in disney's history there's a great book by bob thomas on him um and you know he did a lot to help finance walt's expeditions um but well we'll control the show um he was the creative force behind the company and what he said eventually got done um now walt had a interesting history where he created this figure called I was well the rabbit in the 1920s and he essentially had a stolen from him from his distributor uh because you know Disney was a producer and uh distributors sold his content to movie theaters um and I think this made Walt very skeptical and cynical about uh corporations and even his own so in the early 50s he made an outside company called wd enterprises which his initials walter elias disney um and he used this to essentially generate income outside of walt disney productions which was and walt disney production was the company that buffett invested And so W.E.D.

57:19licensed his name to to to Walt Disney Productions. It would eventually own the monorail. And Walt, through this company, also had the right to invest in some Walt Disney Productions movies, including Mary Poppins, which he made a million dollars off of. Now, the first reason he started the company was because he wanted to generate income outside Walt Disney Productions. But he eventually used it to build Disney, the theme park in California. Because Roy kind of pushed back on him. He didn't really want to do it. He thought it was a stupid move. So Walt started working on this in WD Enterprises.

58:04And he hired folks, including folks from the Disney company, at WED, and really started building the park there. But what I emphasize is like, even though Walt was a good guy, you know, having WED was sort of unacceptable, like corporate governance. It's not the kind of thing that Buffett would typically want to get involved in. But also, if you recognize the genius of Walt Disney, you could kind of understand, as I tell people, problems like that create discounts. If they can go away over time, you paid nothing for the discount. Yeah, I completely agree. I think one of the reasons why Buffett kind of limited his position size, he made an eight and a half percent position, which is a big position, but not compared to what he was doing.

58:48This was this was like right when like when American Express was like 40 percent of his portfolio. Yeah. So and he would free and take like 25, 35 percent swing. So it was it was a big bet, but it wasn't his biggest. In my view, he probably limited it partially because of concerns about Walt Disney himself and also because of the industry generally. but you know Warren was certainly aware of this corporate governance risk because it was on the front page of fortunes and uh as he was buying the stock uh and he went out and met met Walt seemed to like him and I think he also realized what a genius he was yeah um which I don't think I don't think using an investment analyst lens is uh applied to Walt Disney would make that an obvious conclusion hey I want to give a big shout out to everyone who's been working so hard on the show.

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1:00:06Please refer to the prospectus for important information about the investment company, including objectives, risks, charges, and expenses. Read and consider it carefully before investing. Smead funds distributed by UMB Distribution Services, LLC, not affiliated. When I think about Mary Poppins, Buffett bought in the year after Mary Poppins. 66. Was the blockbuster. Yeah. And just for our audience, it's hard to wrap your mind around how huge Mary Poppins was. I mean, I saw that movie in an old style Orpheum theater in downtown Portland. And I would say, think of the most popular Disney movies the last 10 to 20 years.

1:00:51Or like the Barbie movie. But way more powerful. I mean, literally, if you were a five to 12 year old kid, you saw that. Okay. So therefore, thinking about we're not growth stock people, but for growth stock people, to go from there, that sugar high of that blockbuster movie and its impact on earnings meant that I was shocked when I read your book that the earnings actually grew. So talk about what the trends were in box office sales at the time. Sure. So the movie industry was really declining at the time. pretty much everyone other than Disney and United Artists was struggling mightily because of the rise of TV competition and movie industry operated a little bit differently than it does today where a lot of movies now are kind of like released everywhere at the same time while back then it would kind of be rolled out everywhere so Mary Poppins was debuted the year prior to buying the stock but But it was being rolled out across the globe, which is why earnings ended up going going up.

1:02:05But the movie industry was it was not a very good one. Then there were seven majors. Disney was not considered a major because it only released a handful of films each year compared to 20 or 30 for for the bigger companies. But Disney had more home runs. and at the time Mary Poppins was like the fourth highest grossing film of all time it was just like an incredible success I and you know Buffett actually went to the theater a few blocks from where I am today to watch the movie himself I also watched the movie and I liked it way more than I expected so I think I think he said like he went by himself he felt like he should have rented a kid exactly exactly so Blazing Saddles was an incredibly good movie and and in in the silent movie uh he he he made incredible fun of the the conglomerate uh gulf and western which he called engulf and devour right and and them buying paramount and and then later now we have the the the godfather show that that has also dug into that.

1:03:21Teach our audience who the other studios were and what kind of valuation he got from their open market prices. Sure. So there were actually very similar companies to the ones operating today. There was MGM, United Artists. I know I'm forgetting a few of the other ones off the top of my head. Columbia, there was another one. That was another big one I'm not remembering right now um but seven companies were are still operating today i was gonna say fox yeah fox was another one about that one and you know they've been they've been around for i think almost i think every single one has been around for over a century at this point um so they were all the companies that we know today um and you know stocks were not doing well because the earnings were poor at that point in time.

1:04:15But there started to be a little bit of M &A that was juicing the valuations a little bit. Like Gulf and Western, the clomerate you were just mentioning, was purchasing Paramount for like 15 times EBIT, which is a pretty expensive valuation. The theory being that they had this excess land because of the studio and also because the earnings were temporarily depressed in their view. I enjoyed the research to figure out whether that actually became true or not. I guess it's not because box office was continuing to decline. Yeah. In 100 to 1 in the stock market, I'm sure you've probably read that book by chance.

1:04:53There's a quote from the book talking about these incredible compounders. It's the vision to see them, courage to buy them, and the patience to hold them. The patience is obviously the toughest. What kind of patience did Buffett exhibit on Disney? uh he's he held it for a year so he didn't uh so he bought in uh 1966 uh walt actually passed in away in december um unfortunately and you know stock rose off that um roy his brother said that he thinks the stock rose because um movie studios stocks as a whole were cheap but there was also rumors of takeover. So, you know, Walton, his wife, owned about 40 % of the company.

1:05:37The theory was the company was now in play with his passing. And Warren sold out a 50 % gain, 55 % gain. You know, our first exposure to this whole subject was Keenan Flagler Business School. The University of North Carolina Business School students and Buffett always says, you know, everybody always asks me what, you know, my poorest investment was. In other words, it's the worst thing, worst investment I ever did. And he says, my sins of omission versus commission, I never lost more than 2 % in a single thing. But he said in, I think it was 96, that he sold at a 50 % gain. He bought up 5 % of the company for$4 million.

1:06:25He sold a 50 % gain a year later. And it was a 250 bagger by 1996. 96. So just think about if he'd have sold it well in 2021, what that number would have been. When we were talking about before, Brett, you know, tracking it after is something we kind of played around with because we go because we're trying to sit down and say, OK, here's the greatest investor of all time. He makes mistakes just like we make mistakes. And did he make more than one mistake? Right. Because, you know, there's opportunity costs and everything. And like we were talking about before, this thing went off like a rocket.

1:06:59I mean, when it went up in 67, it went up for seven, probably six years right after the 66, you know, disappointment of no Mary Poppins. So, you know, it made a ton of money. But on the flip side, it was part of the Nifty 52. Yeah, I think that's a great point. So I talk about this a little bit in the book where from when he sold to when he eventually got disney stock again to the cap cities merger um in the 90s buffett actually did better within berkshire than disney did meaning like his decision to sell was not as terrible as buffett makes that the seam sure you know uh in theory you could just made that one decision and held maybe sacrificed a couple points and just relaxed but um you know his irr was better within berkshire however i think that your talk your point about him not buying back in the 70s is really interesting and because by the by the 70s you had two theme parks up and running generating profit yeah the florida and the california yeah so in theory it should have been a safer business and because the other thing i would defend the sale on is you know reading the 66 and 67 manual reports i think that just how profitable the theme parks were going to be was not obvious.

1:08:17I think that, you know, you could think about how profitable they could be, but you cannot handicap it well. Yeah, sure. Let me add one more thing, because Buffett, here's, again, thinking about, you know, the partnerships. Obviously, they ended in 69, right? Buffett underperformed 70 to 74. He actually lost to the S &P during that five year stretch. OK. And so it's like, I mean, I think a lot about what if he had held Disney over that five year stretch relative to what he was doing with capital, because his five best relative years, I think, ever was 75 to 79. Well, and near the at least in the Berkshire case, near the bottom in 1974, he was interviewed in Forbes magazine because he had warned people about how overvalued the market was in 72.

1:09:14He called it charlatans. There's a lot of charlatans on Wall Street. Yeah, there's charlatans. And so they asked him what he thought about it. And he said, well, I feel like an oversexed man in a harem at the bottom in 74. So if you're feeling like an oversexed man in a harem and you're buying bargains, which he was buying bargains, I think Cole's point is very valid. Why didn't he come back? But then, so that's a total pit of despair market. But then again, on the 9-11 attacks, the stock got torpedoes because the sky was, you couldn't fly for 18 days. So every travel-oriented business went in the tank.

1:09:49And so that's 2001. So he passed quite a few times on it. You know, I think it's a great point. I haven't studied it as much as you guys have. Maybe the next book. Yeah, there you go. I would defend the sale on is - Was Moody's manual akin to Value Line for a baby boomer or a Bloomberg for a millennial? I would say it's similar to a Value Line. I think the Value Line is probably more robust on a company-by-company basis. Amen, brother. Amen. Value Line has a big stack on one of my bookshelves of small-cap Value Line. They gave you a nice full pager with more information than Moody's did. Moody's was like, I mean, the pages were pretty big.

1:10:34Maybe like, I want to say a foot, foot wide, foot tall. I'm probably even like being a little shortchanging them. But there might be like three or four companies per page. So there wasn't that much information. And then, so there are actually a couple of Moody's manuals and some of them did have more robust data. But most of them, especially the ones Buffett was buying, like Union Street Railway, Marshall Wells, Cleaver Morrison Mills would only have like only take up a third of the page in Forbes. Yeah. So you point out a couple of takeaways. And Cole really likes to think about this. Explain Buffett's soft power he exerted as an owner over his investment career compared to his most activist earlier days.

1:11:18Sure. So I used to label the hard power to characterize the period when he was taking control of companies by buying significant or majority stakes and dictating corporate policy. So he would he does with Dempster Mills, Sandware Map, Berkshire Hathaway, obviously. And in these cases, like, you know, might is right. You you you win because you have the most most shares and there's no persuasion necessary. Now, in the 60s and 70s, he started inching towards the soft power, using his social skills to build relations with the people. I think the first example of this that I know of is in 1964, when he writes to Howard Clark, the president of American Express, kind of like dismissing the salad oil scandal, like just being like, move past it.

1:12:12uh it's no big deal even though it was um a lot of money for for shareholders um and then i think the more prominent example is is uh what he did with washington post with k graham so k graham controlled the company had a dual class stock structure could have told just go away and but warren was like nice wrote these letters um they you know vacationed to together um warren introduced k to charlie um and they became friends and this i don't view this as a cynical manipulative thing by buffett at all sure um but it did allow him to help teach k about capital allocation and business he would apparently go to washington with these like stacks of annual reports for her to read and he would walk her through how to think about these things and he He got on the board and he helped persuade the board to make the right decisions.

1:13:14I want to give Cole a little credit on something here. For us as a company, our salad oil scandal was American Express divorcing the branded credit card at Costco. The stock went from 98 down to 55. And that was our entry point was that particular thing. Back in 16. And Cole had pointed out that two insurance companies, Safeco, which we worked in Seattle for 40 years, we were very familiar with Safeco, and then Progressive, they got to a point in the late 1990s where they had a choice. They either had to pull back from underwriting because underwriting was they were underwriting at a loss, not underwriting at a profit.

1:13:59Or they had to continue underwriting and expect to make it up on investment results. Safeco chose that to bet that they could beat with investment results. And, of course, Progressive 10 begged and Safeco got crippled. And now it's part of Limu Emu, the most annoying advertisements in the history of mankind. So anyway, so. Yeah, so the point being that Amex produced good enough returns on its own. It didn't need to lose money with the Costco customers, which were a low margin loss leader in many cases. Yeah. And so we looked at the demographics and said, millennials like to travel. And we're very happy Amex customers.

1:14:38As we fully disclose, we own a position in the company. So we think it's a wonderful business. And we think the future is always getting brighter. I was going to ask you, you've been posting. I found your book via X. You post a lot online, which I really appreciate. Because it's like, if you hadn't posted some of this stuff, I would have never been like, who's this guy with this book? And he's just got great data. and where the, thank God for Elon Musk and X and all that kind of stuff. So is there anything you've been posting lately that you found terribly interesting that didn't end up in this either because the editor or time or whatever that was?

1:15:13Yeah, so there were a couple of things. One thing that I posted maybe a few months ago is there was this letter from Buffett to Merchants National Properties, which is still a publicly traded company today. and Buffett owned the stock in book 56, 57. And he wrote a fairly abrasive letter to the board of directors, basically accusing them of some weird insider dealings. And I haven't actually posted the entire story yet, but what's kind of interesting is it seems that they actually became, he became friends with the CEO in subsequent years. Like I don't see all the interactions, but Buffett started off very aggressive.

1:15:57You know, I don't want to say it was like quite like a Dan Loeb letter, but it was, it was not polite. And, you know, Buffett was able to turn that into like a fairly friendly relationship with the president. It's pretty interesting. And then a couple of the other stuff is some letters from Buffett to other people, sometimes to Graham that I came across. And it's kind of funny, like, so after Buffett graduated from Columbia, he would write to Graham all the time, pitching stocks and, you know, just trying to get in front of him all the time. And Graham would be like sort of dismissive. It's hard to like entirely trust your judgment on what you're reading from a document seven years ago.

1:16:38But Graham like almost didn't seem to be bothered. Like he'd write like, he wouldn't say like Dear Warren, it would say Buffett, sometimes with the second T missing, for example. Stuff like that was just like kind of funny. And also a little bit sad in a way because it was clear how desperate Warren was. Like reading these letters, it's just clear how hungry he was and desperate he was for his idol's affection. He lost his, I mean, at one point in his life, you know, like when they're getting together, his dad's dead. I remember there was a get-together in 69 in La Jolla, if I remember correctly.

1:17:15And Schloss and a bunch of the guys got together. And to your point, I mean, he's fatherless at this point in his life. And so, by the way, and the weird part is if you think of like you come back to like the human part of Buffett, we're talking about Ben Graham who ended up going out to have an affair with his son's girlfriend. I mean, this is like, it's not Epstein-ish completely, but it's getting closer and closer by the day of kind of weird sexual perversion. So again, to your point, like he thought he was a monster of a thinker with Graham, but he was no perfect person and obviously had his own faults.

1:17:46And another one I'd like to add to that was we were dumbfounded when, during the whole COVID thing, what people were absolutely mortified. And Buffett did his remote annual meeting. Without Charlie. Without Charlie. One of the saddest meetings ever. And he talked about one of the things he talked about for an optimism thing was the way that that Ben Graham and the economist, the other guy, brought in front of congressional testimony to talk about how, oh, we'll survive this terrible thing. And Buffett should have been saying, you know, if Ben was alive right now, he'd be happy as a clam at high tide because in 2020, in the spring of 2020, you could buy anything you wanted for a total fire sale.

1:18:43It was all the lower than$10 billion market cap stuff that he's been complaining about for years now. There had to be more net-net oriented things available at that point in time that there's been in the last, other than 08, which he did do a pretty good job on, right? So I'm still scratching my head at that. Here he's got his two underlings that he can allocate capital to and say, hey, go buy some bargains. This is crazy, but it doesn't really fit with what I do. Yeah, I think it's kind of funny. like i you know buffett has always had like such tremendous respect for graham um and you know the graham net nets are you know at least in the united states have kind of like declined over the past you know decades um but you know warren's always like gone out of his way to constantly constantly uh compliment ben graham and i think with that as value investors we all owe a great debt of Gratitude to him, obviously.

1:19:42It's Carrie Nowitz as an intelligent investor. And I think Charlie Munger did a great job of pushing people to evolve, where Graham was not interested in the quality of businesses, not interested in meeting management, and Buffett and Munger blazed their own path. Yeah. Brett, where can our listeners and our audience follow you going forward? Like, for example, what's your handle on X? So my handle on X is Brett Gardner, B-R-E-T-T-G-A-R-D-N-E-R underscore 10, just one zero. Can also reach me out on LinkedIn as well. And, you know, I'd love to hear from people. I think one of the really fun parts of writing this book is getting outreach from people who are interested in the same stuff you are.

1:20:37And I think that, you know, I kind of love learning from everybody else as well. By the way, your volume two would be taking, damn right, the story of Charlie Munger and going deeper into the, what was it? The Munger-Guerin partnerships or Munger-Wheeler. I can't remember which one it was, but I'd love to - That would be great. By the way, Charlie was my saint. That's like my patron saint. And so to your point, I just feel blessed to be around you for the fact that you got to visit with him in chat. yeah so i when i initially started writing i kind of wanted to do a munger book munger investing book um because i think i think the book i think damn right and portrales almanac are are fantastic books but more in like the first 20 years of munger's career as well the issue i had is that his partnership letters aren't really available yeah um i did do some research on munger obviously as well during his period and the one thing i point out um is he was also way more activist than people knew yeah i mean like in that book they talk about like his the the fund of letters um which was a you know closed-end fund that he bought it was actually a venture capital fund so i totally agree by the uh munger used leverage so the bottom in 74 took prisoners I mean, no one got out alive.

1:21:57And Charlie was at the bottom of that bear market, levered, you know, to the hilt. So, Brett, we really appreciate your time. I just want to open up the bill just to ask, like, any kind of parting thoughts or, I mean, it's just so much fun. No, this is just, I only knew about your book a week ago. And I thought, oh, my gosh, this is going to, I read the book. I enjoyed it thoroughly. I recommend everyone go out and get it. and it's just, it's a feast. It's literally a feast. Brett, your book makes me think about, you know, elements of Buffett that people don't talk about. Like, you know, I think we run into a lot of people say, well, here's the sector or industry I'm gonna specialize in and I only like asset light businesses, but that's not how Buffett learned.

1:22:39He learned by taking shots, taking risks, the flexibility, the ability to learn and the adaptation that he used over his career from the things he did learn. We talk a lot about being lifelong learners as investors. Buffett's early investment, your book, highlights superbly this for our audience. If you enjoyed this podcast, go to Apple, Spotify, YouTube, or wherever you listen to A Book with Legs. Give us a review. Tell others about this book and the great authors like Brett Gardner that we have the opportunity to understand and study the world with and through. For our tribe, if you have a great book that you'd like to recommend, email podcast at smeedcap.com.

1:23:17That's podcast at smeedcap.com. You can also send your suggestions to us on X. Our handle is at SmeadCap. Thank you for joining us for a Book with Legs podcast. We look forward to the next episode. Thank you for listening to A Book with Legs, a podcast brought to you by Smead Capital Management. The material provided in this podcast is for informational use only and should not be construed as investment advice. You can learn more about Smead Capital Management and its products at SmeadCap.com or by calling your financial advisor.

1:23:50In 5 Andrea Thank you.