Old Warren Buffett: "Never Invest in a Business You Cannot Understand"

22:28Warren Buffett:He cancels everyone's magazine subscriptions. He just thinks like they're spending way too much money. He's being the frugal Warren Buffett, which remember, you know, this is Wall Street. Wall Street in the 80s. Yes. And, you know, he cuts the cocaine budget. Exactly. It's terrible. And he tells the workers at Solomon. Wait for it. You got it. Lose money for the firm and I will be understanding. Lose a shred of reputation for the firm and I will be ruthless. Eventually, Solomon Brothers gets bought by someone else. Buffett can get out. And to be clear, he ended up making a bunch of money on the deal, as he always does.

23:03Warren Buffett:Right. But he would be sort of gun shy about this lending his reputation to another business for for a long time. Right. And over the next few decades, he would get the call. The first place you turn when you're like, oh, we screwed up. We're about to go out of business. There's a run on our bank or whatever. We need to call Warren Buffett. We need a smiling grandpa face on that building. So in the late 1990s, there was a firm called Long Term Capital Management. I heard of it. Amazing story. Spoiler, not long term. Hey! They were a company staffed by brilliant Nobel Prize winning, right? Yes.

23:44Warren Buffett:Economists who thought they had figured out all these global arbitrages. And then there's the 1998, was it the Russian currency? It was Russia. And they were highly leveraged. They borrowed a ton of money. This is the gasoline and the fuel tank blowing up moment. Ring, ring, ring. Yeah. Warren Buffett, would you like to buy everything we own and save our company? So Buffett made an offer to save long-term capital management. But he had pretty strict terms. He's like, I'm going to buy all your assets for very cheap, and you all need to leave the company. And they didn't like that. Give you a little money, and you're fired.

24:18How about that for a deal?

24:19Warren Buffett:No, thank you. A consortium of investment firms had to sort of bail out long-term capital management and save the global economy. So Buffett did not like this role of savior. But at this point, Warren Buffett is sort of facing this bigger existential crisis, which is as we move into the 1990s, we're about to hit the age of computers and the Internet and high tech. And Warren Buffett, he doesn't even know how to turn on a computer. Wait a minute. Never invest in a business you cannot understand. And understand it, he did not. After the break.

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27:17That's the end of the ads. We're going back to the show. It's the late 90s and the internet boom is here and Warren Buffett doesn't know how to use a computer.

27:25Warren Buffett:Yeah, I mean, he didn't want to use a computer, right? He lives in an analog world. He gets the Wall Street Journal, I was going to say every morning, but I think he had a deal to get it the night before, you know, delivered and he would read it from beginning to end. He liked to read papers and magazines and annual reports. This is the Warren Buffett, right? And everyone kept telling him, oh, you should really get a computer. It's the next hot thing. When I say everyone, I mean like Bill Gates. He was friends with Bill Gates, which is sort of unusual, right? An older man, younger guy. They played bridge together, right?

28:00Warren Buffett:Yeah, yeah, yeah. And they just loved to talk about business. They really hit it off. And Bill Gates is always like, well, you might want to use a computer. Or Bob's like, no, no, no. And then, of course, people would pitch him, like, you need to buy these dot-com stocks, these high-tech stocks. Microsoft. Or even Microsoft, really. I mean, Bill Gates came to him about this. And Buffett said, like, I don't understand how it works. So I really don't want to do it. He eventually got on the internet for a funny reason. He loves to play bridge. And one of the professionals he was playing bridge with was like, you know, you could play bridge anytime, day or night, with people around the world.

28:40Warren Buffett:So I imagine there was a time when if you were playing bridge online, you might Might have been playing against, I don't know, WB-7712. Might have been Warren Buffett, right? I like that for Warren Buffett, the internet is just basically like a bridge video game. Well, you know, it's funny. Someone had pointed out to him that, like, for a lot of people, the internet is just a way to do something they really want to do. And, like, that is the strength of it. So hopefully at this point, like he's sort of seeing this, but he is still not going to pour money into dot-com stocks or into the tech business at all in the 1990s.

29:18Warren Buffett:And we know where this story is going. There is a crash coming. The stock market is going crazy. Valuations are up. I think, you know, the NASDAQ went up 70, 80 percent in a year. Like it was just insanity. and Warren Buffett's stock, Berkshire Hathaway, is kind of like not doing so well. Underperforming. Underperforming, at least everyone else, right? This is what's going to happen in a bubble. At one point, there is a rumor that Warren Buffett has died. The rumor was started on an internet bulletin board by, on Yahoo, someone used the moniker ZX1675. That guy. Sounds credible. Yeah. And he posted, Warren in hospital, critical.

30:04Warren Buffett:And here's Warren Buffett. Hasn't even seen the internet, right? Berkshire Hathaway stock plunges. They have this policy. They don't comment on Warren Buffett or anything. But they had to put out a thing that said, Warren Buffett's fine. He is alive, right? But even after they debunk it, the stock is down 11 % for the week, right? And by the end of the 1990s... It goes down on rumors of his death then up. I was a little nervous you were going to say they said he died and it went up. That would be the really bad sign. No, no, no. I mean, they still like the people who trade in Berkshire Hathaway stock need Warren Buffett, right?

30:38Warren Buffett:At one point, he looks back on a year or two and he's done worse than the S &P index. Yeah. Which happens to a lot of companies. The S &P index was going up a lot at this time, driven by tech stocks. So there's this legendary moment in 1999, right? Right. Buffett goes to this big conference in Sun Valley, Idaho, happens to this day. It's called like the Allen and Company Conference. Right. All the CEOs pour in. There's a lot of media types, high tech. Right. So they all wear vests. And weirdly, like part of the Allen Sun Valley Conference is it's got to be some kind of photo op. Because, like, if you see a picture of Jeff Bezos or Rupert Murdoch or whatever, like, it is usually from there.

31:22Like, it's a phenomenon that I don't understand, but I have observed for years now. It's like a low-key red carpet for billionaires.

31:29Warren Buffett:The heads of Microsoft, Apple, they're all there. Warren Buffett is the final speaker. In this book, The Snowball, there's this long thing about, you know, he can't, he's got to set up his presentation and everything. Not a big computer guy, right? He's not setting up his own presentation. He's not talking to the A.V. guy. I know that. So he looks out and he says to the CEOs, many of which are very rich from this bubble, right? There is no new paradigm. This time is not different. This is a bubble fueled by greed and baloney. And Warren Buffett loved baloney. But he wasn't using it that way. He was saying, look, you only have to go back to history to see what is happening today.

32:12Warren Buffett:He says, look at the car industry, right? The car industry, huge invention, right? Maybe even bigger than the internet, right? The car, right? Changed the world. But of the 2 ,000 auto companies started, only three survived. So he's like, look, it was great for America, great for the world, but kind of miserable for investors. There's not a guarantee that a transformative invention is going to be hugely profitable for the people invested in it. One more example he gives them? Airplanes. Airline industry, right? Revolutionary, transformative, travel through the air, right? But to quote Buffett, about airlines?

32:49You did this one in our Southwest episode, right? If a capitalist had been present at Kitty Hawk, he should have shot Orville Wright. He would have saved his progeny money.

32:59Warren Buffett:His point here is whatever you all think about the Internet, it can both be the world's best invention and companies can still go out of business and still lose money on it. This is the classic bubble story, right? Like, in fact, now when people talk about the dot-com boom, they talk about actually the fiber optics, right? These telecom companies that were laying fiber optic cables, totally overbuilt, put in way too many fiber optic cables, had horrible economic returns for their investors. But we as America had all this fiber optic cable that allowed the rise of the 21st century Internet. A similar story about railroad tracks in 19th century England.

33:44Same story.

33:45Warren Buffett:Yeah, and people would make money, obviously, off the Internet to this very day. But it would happen after the investment, after a lot of people went out of business. And, of course, we remember this speech in 1999 because in the year 2000, the bubble pops. A lot of these companies do go out of business. And by the way, today, this is the way people, a lot of people are thinking about AI, right? Exactly right. There's a very plausible story, which is, yes, AI is an incredible transformative technology, but also a lot of these companies that are high-flying today will lose a ton of money for investors, especially those who are getting in at high prices.

34:22Warren Buffett:Exactly right. So Buffett can now say he was right. He stood in front of these geniuses and he told them the way it works. They didn't listen to him. Or even better, you know, they listened to him like, well, what are we going to do? We got to ride this up. So there's a crash. And Buffett does what he did back in the 1970s. He still has money. And he looks at his stock, remember, which is like a little lower than he thought it should be. And so he says publicly, I'll buy it. If you have my stock and you don't want it, I will buy it from you. So he's doing kind of the like fundamental analysis of his own company.

35:02Of his own company. And he's saying it's too cheap. It's a deal. I got cash. My company is a deal. I will buy back your stock.

35:09Warren Buffett:And he doesn't really have to because when people hear this, they're like, oh. If Warren Buffett thinks it's a good deal. Stock goes up 24%. Amazing, right? But this is also one of those moments, those buying spree moments that Warren Buffett loves, right? So now his stair price is going up. He still has some cash. And companies, because there is a recession and there's been this bubble crash, companies are cheap. So he starts buying. I got one. Yeah. Opportunities come infrequently. Ah. When it rains gold, put out the bucket, not the thimble. Love it. And he put out the bucket. He bought Benjamin Moore, paint manufacturer.

35:49Sounds like a classic Buffett play. Oh, this one's even better.

35:53Warren Buffett:Fruit of the Loom. Sure. Not a food company. It's underwear, no matter how much the stock market goes down. I know. If you're in recession, man, still sell underwear. Not a fruit company. It's a loom company. Exactly right. Buffett buys carpet maker pipeline companies. So by the end of 2007, the S &P index has suffered sort of a lost decade. You know, if you invested, and I think this doesn't count dividends and such, but if you invested at the beginning, 10 years before, your stock has gone nowhere over a decade. But Berkshire has gone up 12 % a year. Lesson from first decade of the 21st century, courtesy of Warren Buffett, be fearful when others are greedy.

36:37Be greedy when others are fearful. We may need that one soon. I'm going to keep that one.

36:43Warren Buffett:So during this time, Warren Buffett's also doing some clever things with the company itself, or at least unusual things, I should say. One is he never lets the stock price split. Now, to explain this, oftentimes when a stock goes up to$200,$300,$400, they'll say, oh, we are basically giving you two shares for every one share. So now instead of one$400 stock, you have two$200 stocks. Basically just because it makes it easier for people to buy shares in the company. Simple. Easier, absolutely. It doesn't mean anything economically, really. Warren Buffett's like, no, I'm not going to do that, right?

37:20Warren Buffett:The Berkshire stock, which I guess if we go all the way back, started at$7.50 a share, right? Kind of a normal share price. Yeah. As of this taping, the class A shares of Berkshire Hathaway are above$715 ,000. Per share. For one share. One share or a house. Like that's your choice. Why? Like it seems kind of counter to the like folksy, normal guy, rational guy. Like, why does he do this? When he is asked, he says that a low share price encourages short-term investors. And he doesn't want people going in and out of his stock. He wants to kind of almost keep it as a club. And at that point, it is sort of like a club of people who are investing in the company and don't want to sell it.

38:07Warren Buffett:But I think it's also just like a weird ego thing that as he looks, I bet it's up on his computer now. he uses computers, his share price every day is a symbol of like everything that's happened over the last 50 years in one number. Yeah. I mean, in the last episode, you were talking about how he kept the name Berkshire Hathaway, even though it was one of his worst investments as like a way to be humble. This is sort of the opposite of that. Like if he's feeling too humble, he just looks at the Berkshire share price. It's like, oh, I'm doing all right. You'll like this. When When the share price started to get so big, a number of enterprising investment companies were like, well, wait a minute here.

38:47Warren Buffett:What if we just imitate the share holdings of Berkshire Hathaway, do everything that Warren Buffett does, but offer shares at like a cheap price, you know, essentially a more manageable price, I should say. And people were doing this and Warren Buffett was like, oh, they're making fees and all this sort of stuff off of my investment ideas. So he creates the B class of shares. And these are the Democratic shares that anyone could buy. In fact, he said he would print as many as people want because he didn't want like their scarcity to go up. Well, that's the way normal stock works. Yeah. Like they split the stock if the number gets high.

39:24Warren Buffett:Yeah. So these people can then go to hear him talk at the Berkshire Hathaway meetings. Right, because they're shareholders. Right, right, right. And it was enormously successful because it was like, first of all, symbolic of this, you know, American democratic company that everyone should be a part of. And also it allowed dabblers to buy some Berkshire B stock. Sure. Dabblers are just ordinary investors. Like Berkshire B is just a normal stock. The weird one is the$700 ,000 one. I mean, presumably the$700 ,000 one, not only is it good for his ego, it's good for his brand. Right. This whole thing of like he's profitable because he is Warren Buffett, like that a single share trades for$700 ,000 burnishes that brand.

40:07As we look back in sort of recent years, Warren Buffett just keeps finding these companies that you didn't even think of, but they're just everywhere in your life.

40:19Warren Buffett:Brooks Running Shoes, which I'm a big fan of. Classic dad shoe. Yeah, absolutely. In fact, a postal worker stopped me the other day and said, what are those shoes? And I'm like, is that a compliment? Yes. In New York, that's a person who walks for a living. Exactly right. He buys Heinz, of course, of ketchup fame and Kraft of macaroni and cheese fame. Encourages them to merge and that doesn't work out well. And I think they're breaking apart now. Buys Duracell, like the battery company. And eventually, very famously, he hops into a tech stock. He hops into Apple. Huge investment in Apple. He's recently sold some of that.

40:59Warren Buffett:Recently sold a lot of it. But Apple, like, he buys Apple, like, relatively late in the life of the company. And it actually makes sense as a Buffett stock, even though it's a tech company, right? Clear moat. That brand is a clear moat, right? You can have whatever, a Dell laptop or an Android phone. But Apple can sell its products at a premium price year after year. Like, that is the Buffett thing. And an Apple iPhone is just a thing that everyone has. Yeah. Like the running shoes or Dairy Queen, that sort of thing. And even the story of Warren Buffett as White Knight, that also keeps happening.

41:35Warren Buffett:In 2008, during the financial crisis, he gets a call from Goldman Sachs. At the time, everyone is panicked about everyone. I won't say there was any particular problem with Goldman Sachs compared to the other investment companies. But Warren Buffett invests$5 billion. You know, they hang a big poster of Warren Buffett up on the building. Not really, but kind of metaphorically. Yeah, yeah.

42:00Warren Buffett:slimy Wall Street investment firms? Oh, no, no, no, no, no. We have Warren Buffett. By the way, a striking thing to me in the financial crisis was that Uncle Warren, Mr. Squeaky Clean, had also owned a huge share of Moody's, the ratings company, that was, you know, I would say implicated, like not criminally, but, you know, they were one of the key people who put these AAA ratings on bad mortgage bonds. And Buffett was there too, and yet never sort of got tarred with that. It's interesting, right? So he makes$3 billion from the Goldman Sachs deal. There's the Moody's thing. He has made missteps, many missteps.

42:41Warren Buffett:But I don't know if it's just his demeanor or the amount of successes he's had, but the press kind of gives him a pass on just about everything. And I mean, the amount of money he's made for his investors over the years, I guess it makes sense. You're willing to forgive a few missteps. And I don't think it's just the money, right? Like, he hasn't used a crazy amount of leverage. He never, like, blew up. He never needed to be bailed out. He invested for the long term in, you know, things that people find useful. I have an iPhone. It's a good company. You know what I mean? Lots of people drink Coca-Cola.

43:16Like, he is sort of the opposite of the caricature finance villain who is just playing weird games and not doing anything for the real economy. Like, I think that is valid.

43:26Warren Buffett:And this brings up the question, what happens now? At his last giant meeting, I think 40 ,000 people came to Omaha for the Berkshire Hathaway annual meeting. He announces that he's stepping down as CEO. He'll still stay on as chairman, but his last day is December 31st, 2025. and it's a really interesting time for him to leave right we're seeing another perhaps bubble in tech stocks right um he has sold a lot of of apple and other companies so brooks r hathaway has a big pile of cash starting to seem like the 1970s and the 2000s all over again they are poised to perhaps something bad happens in the stock market to go in and make like these huge acquisitions Like, he'll be able to do pennies on the dollar for a data center, let's just say.

44:19Warren Buffett:Maybe, maybe not, right? And he's not there to do it. So the question is, without Warren Buffett there, does the philosophy of Berkshire Hathaway and all their natural advantages, does it succeed? They'll have the money to deploy. They have the ideas. They have a thousand quotes from Warren Buffett about how to do it. But they don't have the man himself. And we'll be able to see, like, what does that mean? Remember, Warren Buffett is getting personal phone calls when good companies are for sale or when bad companies need help. That's a one on one phone call. They're not calling the company. They're calling Warren Buffett.

44:57Warren Buffett:We said how the press gives Warren Buffett a pass. Regulators kind of do, too. Like he just has a lot of goodwill. Right. and then there's this like interesting sense that like warren buffett was there as this like symbol during difficult times when you have lost money on tech or some bubble or something like you kind of want to go into the warm embrace you know of of a cushy warren buffett being like here have have have a dairy queen treat and some coca-cola like everything will be okay and now We're going to see, right? We'll see how much we miss Warren Buffett. I mean, you're doing the time will tell ending.

45:41But the thesis of this show, as I hear it, is like this whole last several decades, the second half of Buffett's career was trading on Buffett the man, Buffett the persona, let's say. He's 95. He's stepping down as CEO. He's not going to live forever. Like, as I read this show, as I listen to what you're arguing, like, Berkshire Hathaway isn't going to be able to keep making those moves after Buffett. That seems to be the argument this show is making. I don't know.

46:11Warren Buffett:I mean, it's good to have a lot of cash. And it's good. They have very smart people. And he's put very smart people in charge. And I will say there was a tiny little note that I saw somewhere, which was, although he's no longer CEO, he is still chairman of the board. And he might still be a little involved in times of great opportunity. He's 95. Those times better come soon. Our producer is Gabriel Hunter Chang. Our engineer is Sarah Brugger. and our showrunner is Ryan Dilley. I'm Jacob Goldstein. And I'm Robert Smith. We'll be back next week with another episode of Business History. A show about the history.

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