The 3 Investing Rules That Changed Warren Buffett’s Fortunes

32:46It had these massive textile mills in New England, and it was a leftover from the 19th century, a bit like our textile mills up north in the UK, right? So you had these towns depend on textiles, and they were producing a commodity product. Mostly Berkshire Hathaway was producing suit linings, cheap suit linings, okay? And so it lost money frequently, but it had all these mills left over, and they would, every now and again, they would sell some mills and then buy back shares. So Warren bought in 1962. He was 32 years old. He bought some shares for his investment partnerships. And he went along and chatted to the domineering character that was in charge of the company and said, yeah, I will sell these shares back to you because this domineering character did not want big shareholders.

33:45He wanted to carry on domineering, being dominant. So he said, yeah, I'll buy back those shares at this price. And Warren said, okay, yeah. So Warren makes a nice turn on this. So next time he solves something, Warren was expecting a payout at a certain amount of money. And this guy chiseled him. He made the offer to buy back shares at a lower price. And Warren was bristled. He was bristled at this. It's disrespected. Yes. So he said, right, I'm going to buy loads of shares in this, and I'm going to take this over. So he let emotion take control, which is something you're not supposed to do as an investor.

34:30At that point, he only had less than a million pounds worth, a million dollars worth of shares in the company. So come 1964, he started buying a whole load of shares. And he got to know other members, the brother of this domineering character, and he got to know other major shareholders and they were equally fed up with this guy. So as Warren got to sort of, well, over half of the shares, it became obvious that he could take over the board. So we put in, that would be slightly under 10 million by that stage. So it was only a very small company. So Berkshire Hathaway today is worth a trillion dollars, by the way.

35:21So in those days, it was only worth about 20, less than 20 million. So he bought shares, took over the board. And to start with, it was quite quiet. It was still a textile company. And he was still trying to turn it around. They had a couple of years where they made decent profits. but he had in my you'd already set up a committee to do investing now i've discovered myself in this country if you if you go into a company and say uh as a board director i want to turn this from whatever it's doing at the moment i want to give it some more legs i want to do investing i want to do some buying of subsidiaries they don't like it at all they know that industry they know what they're doing that's their low risk area okay so warren was very subtle to start with but he had so much control he eventually had 70 control so then he two years later he bought he had a portfolio of shares fine two years later he bought national indemnity which is an omaha company with insurance so it it gave insurance to taxi drivers and to other strange not that text stories are strange but some really strange ones like lion tamers would give insurance to even lion tamers yeah i know and um he loved the business he he was familiar with it for years because warren has always lived in omaha apart from two years in um in new york and uh he knew it was a good business, and this guy wanted to sell.

37:05So he made Berkshire Hathaway pay$8.7 million for it, which was pretty well everything that Berkshire Hathaway, he had to borrow some money to do it. So it had the textile business, it had an insurance business. The beauty of the insurance business is you've got a thing called float. So when you and I pay insurance premiums, that money doesn't just sit there in a big vault somewhere. it's invested until there's claims. And so insurance companies have really big floats. This was a little one. So the float, I can't remember. You might remember the numbers better than I did. Was it 20 million or something like that as a float?

37:49It's now... Sounds about 22.5 actually. Sounds about right. It's now over 100 billion as its float. So it's really big now. and that gave him like leverage it gave him the ability to invest other people's money yeah basically it gave him a bigger pot of cash well it's counted as a liability on a balance sheet of an insurance company right but Warren regards it as an asset because you can invest this money and you're going to invest you have to invest most of it in something very safe like government treasury bills because if you lose it your whole company could come crash if you need to pay out but that return is his and it's off other people's money so it's an infinite return almost Because he's not putting any money down to risk by the investment originally to buy the company.

38:31Exactly, exactly. That's what banks do, right? With our current accounts. Like if you put money in your current account, it's just not just, if I've got 100 grand in my current account, I can't go in and give me 100 grand cash. They're like, yeah, sure. We'll get it for you. But they've invested it somewhere. Exactly. So did that become the engine of generating cash to invest into other businesses? It did massively. I mean, you had other businesses with it because he went out and bought a bank. talking about bank, only two years after that. And then he bought things like a sea candy. So you had these other generators of wealth, but the insurance float was very, very handy for buying all sorts of other things.

39:09So Coca-Cola investment, for instance, goes through the insurance float. So you've got billions and billions. So Berkshire owns, it's about 10 % of Coca-Cola now. The dividend's massive, isn't it, that he receives? So, yeah, it's a relatively safe investment, even for an insurance company in those circumstances, to own Coca-Cola because it does pay out those dividends on a regular basis. And the returns he's actually generating are infinite because he's using other people's money for an insurance company to buy into a business like Coca-Cola, which then now delivers dividends every year far in excess of his initial investment.

39:48It's kind of a wonderful thing he did, right? It's like an infinite money machine. Yeah, American Express is another good one that he's held for decades along the same lines. So Geico is another big insurance company that they bought, which is a major auto insurer in America. It's the biggest or the second biggest now. So that one is a low-cost model. It's not necessarily that people love Geico and they want to consume Geico all the time. It's because they give a fantastic service and it's a low-cost model way of running things. So yeah, you buy in a commodity market, but you sell in... Is Apple a bit of that in the sense of they're just buying, you know, semiconductors and copper wire, but they've made a brand around it that is sticky?

40:33Yeah. Would it be similar? Is Apple, you say Silicon Valley before, and I'm thinking, but he bought Apple, which is much more like a Heinz than it is, like a software business. They sell consumer products, right? They sell like stuff that people have sat on a table, like a ketchup. Yeah, the key to thinking about companies like that is whether there is potential for entry into that marketplace and whether somebody else can take your market share. So NVIDIA is an example right now where it's priced on the assumption that there will be no entry into that marketplace. You know NVIDIA produces graphical processing units, right?

41:15Fantastic. Google has been working, as well as a lot of other companies, on their own chips. and they've now developed the Tensor processing unit, which is better than the graphical processing unit. At the same time, they announced that Gemini 3, it's not them, independently assessed, Gemini 3 is better than anything that ChatGPT's got. So I'm thinking, hmm, so you've priced NVIDIA on the basis at 45 times its profit, 45 times. You can justify that if you think profit's going to double and double. but what if there's going to be a whole load of new chips out there? Well, you think of all the other producers, AMD and things, they're not just going to sit there and go, oh, you have that market.

42:02Because these were guys making chips for gaming devices, and now it's this other market that it dwarfs the gaming stuff, the GPU, the G almost, the graphic side of things. So these competitors aren't just going to sit on the sides and go, oh, you have that market. No, I've been watching them for the last three, four years. Yeah. make announcements about how they are determined to compete against NVIDIA. And there's so many of them, they're so powerful. Amazon, for example.

42:36They are going to contest that market. What about TSMC then in that network? Because everything does go through them and they seem to have, they're like the fabs or whatever they're called. Not many people seem to be able to make what they do. This is something that people don't understand. that these graphical processing units, they don't manufacture them. They're designers. They design them, and then they're actually manufactured. 80-odd percent of the manufacturing takes place in Taiwan. China decides to hop across the water. The whole industry comes down potentially. Yeah, hence why Trump and Bush wanted Arizona plants set up.

43:12So TSMC are currently setting up big fabrication plants in Arizona to try and get that diversification that america needs it's where it can get its fancy chips from but of the highest end chips which is what we're talking about here 80 odd percent are produced simply by that one company in the whole world in one location as well yeah because i correct me if i'm wrong but i think when covid happened nvidia tried to switch to samsung which i believe is the other 20 and they just found the failure rate was so high it's it's not as simple as just going we're going to open a factory they're so dialed in and yeah the the production is crazy that it's really hard to get high quality consistently and it's so expensive if you get it wrong i think they've got an amazing culture at tsmc everybody's really switched on to continuous improvement and um in fact i've heard quotations from people that work at the plant there uh saying oh yeah the americans want to do this as well do they okay well they're going to have to have our culture everybody here is really focused because you have to be to make chips that carry a billion different transistors that requires a hell of a lot of concentration of brain power and it's those little things that people understand when you've been through the process many over many years to produce something now that tsmc the problem there is that tsmc haven't seen cycles before they've seen that chips go in phases you get you get a massive rise in demand and then it just falls away so you've got nvidia shouting at them and amd and all the other ones arm saying produce more produce more produce more and they're saying hold on we've seen this before we've got to be cautious so they've limited themselves to just just um starting two fabrication plants two new ones which is nowhere near enough so all of their production just about for the whole of 2026 is already sold out there was a quote i i don't know if i've got it here but charlie munger said about one business where the the the man the branch manager said he wanted a christmas tree and he said well you gotta buy it yourself and he was like as soon as we heard that we bought more yeah and it kind of speaks to that that that sensible sort of yeah i mean it sounds a bit tight to be honest i read it thinking bloody scrooge give them out a christmas tree but it but it more spoke to the fact that the business it might have even been chase uh chase jp morgan potentially of like they wouldn't they wouldn't supply christmas trees to branch managers you'd buy it yourself you own that branch if you want to do that you that's on you it's those sorts of little things you can find out having a burger with somebody in mcdonald's and that this is with tsmc they they could they could rapidly expand now into the demand but them going no we're going to throw away the profits because we've we've been here before we've seen this ride and we think at some point the demand will fall off yeah you think that would make warren excited about that kind of business and yet at the same time people are buying nvidia and so on on the basis that they can keep increasing they don't even know the bottleneck is is already sold out and and it's not actually even about nvidia it's about this other linchpin company not to mention the geopolitical risks that exist around them that could really...

46:35So it's price for perfection. So I'm not going to say whether there's going to be a crash, but there's price for perfection. I think you could always say there is going to be one at some point. We just never say when. We're not going to say if it's tomorrow or the day after. The common thread there then is that what Warren is actually really good at is judging people, individuals, in a quick amount of time and their ability to run a business well. Yeah. I want to talk about him then as an individual and that characteristic of him, because I think a lot of people just think, oh, he's probably really good at judging the numbers.

47:11I want to start with a failure. What went wrong with Tesco's and his ability to judge those people? Yeah, I was invested in Tesco's at that time as well. It was an accounting fraud, was it? Yeah, yeah. It was the managers. This is the problem with a lot of career managers is they get obsessed with short-term numbers and they want to make the numbers. And the way in which they made the numbers was they get like special payments from suppliers. Okay, so you've got supermarkets. And the supermarket will say, supermarket buyer, will say to Heinz, look, we'll give you the most prominent position in the store.

47:55And we'll sell a certain volume. you give us a special discount not a front where you give us a big lump sum at the end right so they had all all these agreements around the place but what they were doing was accounting for that benefit before it actually arrived so they bumped up their profits near term so they hadn't actually been paid paid by say Heinz I'm inventing this but paid by Heinz, that bonus that they were due. And maybe that bonus never arrived because they didn't meet the numbers that they were supposed to meet. But it bumped up their profits. And of course, they got found out eventually when a whole other numbers weren't met.

48:42And so those managers had to resign. And of course, the share price fell dramatically. So both Warren and I were both fooled by by the managers you use heinz isn't warren and craft heinz yes so how would he have not had some kind of insight into that practice oh sorry yeah could he have not like looked at that internally well no it's in a it's another one of these fancy accounting just quite complicated and nuanced and you don't know little thing that you just wouldn't notice because they would have hundreds of these deals they'd have it with cabris and all the rest of them coca-cola and so on in this in for for the stores and warren just wouldn't see that sort of detail my stepdad at the time managed the largest tesco store in the uk yeah so he had like a frontline kind of expertise these things were mental 900 staff you know that you're running a big business just out of one store yeah I think at Christmas they would turn over millions of quid in a day potentially.

49:45And he just said there was a culture of like bring everything forwards all the time. You know, from like what you're saying of count the tills early almost. To make the numbers look better rather than just like operate in a way that was best for the store. So you see how crucial culture is. If you get the right culture and Warren buys into these cultures, these personalities, these people, then he can trust them and just leave it alone. Is that where he went wrong with Tesco because he trusted the management too much and he said he was dwardling and Charlie Munger said he was some fucking, some, some, some fucking?

50:20Thumb sucking. Yeah, I can't say it right now. Yeah, he was dwardling because he liked the management too much. So he's great at judging people's directors and management and people's personalities, but does that mean that he put too much faith in his own judgment at that point? He admits freely that he makes mistakes. Like we all do. Yeah. it makes you feel better when you're like the greatest investor in the world one of he's made the same mistakes that we do like hold on to stop too long or you waste your time or maybe you'll get better or maybe being optimistic when really you should just cut your losses and that's where Charlie like for reading I obviously knew Charlie was important the man sat next to him for decades but what I realised from reading your books is how important Charlie was in terms of managing Warren and being like do this or don't do that and because Warren was often emotional or wanted to get out of something or didn't and your book was always like he listened to charlie and it worked and you often think it's charlie the guy here actually is charlie the one that's the really smart obviously both smart but you know what i mean equally smart yeah yeah i know that he was um a fight like a meteorologist in the ward and he used inversion to stop the pilots dying and i told that story in one of my my videos about his he always approached problems from like what's the worst thing that could happen and how do we not get that this inversion thing yeah know where you're going to die and don't go there yeah yeah yeah and he had that sensibly and i think charlie what he'll be missed for is his ability to like in a couple of words just say hit the point yeah yeah when when warren was um they were just friends at this stage they didn't have uh charlie had his own fund over in california when warren bought into berkshire hathaway um charlie said you made a massive mistake there but I'll help you get out of it help you get out of the mess and uh you did by changing that investment philosophy to to economic franchise investment I would like to I'm conscious of time and I've got a couple of questions I definitely want to ask you before you go I want to ask you about the man um he's got quite a folksy image I would say that everyone in the world would be like I would like Warren Buffett to be my granddad yeah yeah is that something that he's curated because how does a man that has this kind of nicey nice image clearly be a ruthless businessman because he must be if you go to Omaha you'll know it you meet people all the time and they are so nice you know it's it's it's like going to the nicest town in Britain everybody's nice to you it's the midwestern culture of helping each other being nice joke those jokes and all that sort of thing it all comes from that midwestern culture having said that warren was a very bad public speaker very bad he had to go on a dale carnegie course to learn how to speak in public and even then he was ill preparing for speeches he was so nervous about doing it so in that sense he had he had to cultivate it um but i think like with all of us if you are well prepared you really understand your field um and you stick to that field stick to your circle of competence then you come across as very confident is is he is he ruthless though so i look at the net jets thing where lots of people had to be sacked i also look at the fact that there's one line around him a whole town hated him at one point and he seems to take these things quite badly in terms of he does he hates conflict is this some is this a fragile ego in that sense of a desire to be kind of loved by people well i have read that his mum had mental health issues and she would fly off into a rage and so he grew up in that environment and as a result maybe i'm putting two and two together and i shouldn't hear but he had an aversion to conflict so yes in that sense he wants to be he would hire people to do his dirty work like the net jets thing was uh it seemed like he outsourced that to a lieutenant he said i'm sorry i failed everyone walked away yeah and hired a guy to sack everybody basically well it's it's less that that then he does he has another clue how to run businesses he's not the business runner he has to have when somebody sells business to him he always asks have you got somebody to actually run this for me because i've got nobody so he has to so it's mostly that he has to have somebody to do it but yes occasionally there is dirty work to be done in the sense that if the business isn't turned around everybody's sacked the whole business disappears so you sometimes you just have to do the arm off to save yeah the body kind of thing Yeah, so in that NetJets example, they were losing money for year after year.

55:20Yeah, in so many of the businesses. What do you think is his biggest mistake then? Or his biggest failure? Well, NetJets was bad. I thought that was... For years, when I was a shareholder in Berkshire and I was going over to Omaha, I thought, NetJets? Are you serious? I mean, I better explain what NetJets is, don't I? So instead of owning your own private jet, you own a share, you own an eighth, let's say, or a sixteenth, which means you're entitled to a certain number of hours a year where you can fly. Because most of the time, if you owned your own jet, you wouldn't be flying in it. You wouldn't use it.

55:56You wouldn't use it enough. So it's best to share it with other people. And you don't want to have a specific jet. What you want is access to that number of hours. So NetJet set itself up, and a mathematician started it, and worked out how many jets you need in order to make them, make a jet available to every client that had a 16th or had an 8th or had a quarter or whatever. So I could chart a service almost where you can just be like, I'm in San Francisco, I want to jump on a jet and fly somewhere. Yeah, so if I was a member, I could go on my phone now and I could say, I need a jet sometime this afternoon to take me from Heathrow to New York.

56:34And there's probably some net jets right now at Heathrow and they can book you down. So they worked it all out mathematically where they have to be in the world to make sure that that's available to these high net worth individuals that want this sort of flight. But my worry was always that there weren't enough high net worth individuals around that actually wanted jets. And so for year after year, it failed because as you take on more high net worth individuals, you need more jets because there's more of them saying, I want to fly to New York this afternoon. All right? So you've got a real problem because you've got to make sure there's enough Heathrow or whatever.

57:13And the staff costs and the kind of the pilots. Maintenance of the jets and all sorts. Yeah, so your cost scale with your users, which is like disastrous for those kind of businesses, right? So I was kind of proved right for year after year after year. But anyway, they have turned it around now. They have got to a sufficient scale. They've become the biggest and therefore the most attractive. There's a kind of network effect there. so once you are the biggest you are going to have the greatest distribution the greatest number of pilots greatest number of jets yeah so warren stepped down now as um berkshire's ceo or the top of the company yeah but you don't think he's done no he stepped down as ceo and greg has taken over and all the companies like seize candy boss reports to him fine warren still goes into the office five days a week and he's still getting all these ideas and people coming to him with ideas and it'll be warren that i think people will phone so just so long as his mind is working 100 and from what i saw in may when i was over there it is working 100 he's he loves it he's going to carry on i can't i can't see him stopping maybe the final decision will be grex but i bet you who'd be in the room let's say let's say we could wind the clock back now and warren was 20 again yeah and he had no money yeah but all market conditions are as they are now yeah how would he be investing what kind of things would he be doing ah well you see you see i've said there's been a transition from the sort of benjamin graham approach net current asset value safety first towards this more economic franchise approach both of them are still valid except that when you're dealing with billions you can't find those net current asset value investments it's mostly small companies yeah so i think there'll be a lot more of the original benjamin graham type investing uh there will be some franchise type investing um but it'd be much more balanced he was asked this actually um at one of the meetings that i went to and he said but what if you were starting with just a million so it's not quite what you asked but if you're starting with a million what would you do i said yeah i'll be looking at all these small companies i'll be going through all the books you know you know the way in which he got his ideas back in the day don't you there's um because everything was printed in those days we had nothing online right so you there's books uh by moodies and it's got the summary statistics of every company on the stock market and you'd have about a page for a company and you would flip through the pages and so there were thousands and then you start start again and you just look for something uh that had the right quantitative characteristics and then he would layer on the qualitative and that's like okay hurdle one jumped yeah now the next he would just filter them all for yes and as i say he was able to find companies that often had more cash than what their market capitalization was was it easier back then because of the lack of um digitalization of the data in the sense of if you could go through the book you were you were probably one of the only people doing that whereas now everything is online in one sense yes uh but there's there's two inhibitions to that in the modern era you might think all the data's out there right so you can go and get the data is less important than the qualitative so you there are people in the city that go through data all the time and that's done to death so where you're going to find the inefficiencies there is and you want to look at the qualitative anyway yeah which is again getting back into the cinemas and those kind of characteristics of his investing as well it wasn't just that it was the because he understanding people he went to consumer yeah he went against the grain of the market the narratives of the time and these are the guys that had the same data and they were going amex is done because of a scandal and then he goes into a restaurant and everyone's still using it he goes i don't think they are done so i'm going to buy it so it's still just a hurdle isn't it you know the data can only get you so far yeah it can't get you in the restaurant yeah so your database even today would tell you amex profits have gone down shock horror it's terrible but you need to understand why those profits have gone down and what the the key phrase that he used with amex actually was is the franchise still intact and as you say the way in which he found out was to go to restaurants and the big thing in those days was travelers checks yeah if you went abroad you took money in the form of a check i'm old enough to remember a challenge yeah yeah you don't look it yeah he's even older stop it but i look younger so it's all right

1:02:01by order of the peaky blinders um and okay so you i said i'd come back to this as the last question you wrote a book the great investors who do you think is the greatest oh he is he is without a He brings it all together. Yeah, so he brings together the Philip Fisher sort of intense, really intense. I mean, Philip Fisher was extreme in terms of diversification. So maybe you only have three or four companies. So if you were in Silicon Valley now and you really understood whatever the new technology is going to be and you actually knew the people, you could say that one is going to be the winner.

1:02:40Circle of competence, really. which is another Warren kind of idea of. So it's a very narrow circle of competence, but the depth is there. So that is the Philip Fisher approach. So Warren brought that in, as well as your Benjamin Graham and your Charlie Munger. What about like a Jim Simons? He's mathematician Jim Simons. Yeah, he's pound for pound more successful than Warren over the period, right, in terms of the returns he generated. He just died before. He didn't live as long. or he wasn't he wasn't investing as long because he had his career at nasa didn't he came out renaissance was it the the the quant but this is kind of you might not even call it investing because it's basically just playing the market isn't it placing millions of bets at base it's psychology still yeah okay which is interesting because what you're doing is you're looking for direction movements or reversals in the market through mathematics um and what motivates what moves people to do that sort of thing is often psychology so panic or greed fear whatever it is and so you you're analyzing that and he sees it in the numbers whereas warren sees in the people they're both very similar in a way there's a quote from jim simon so it was like i did a lot of math so i made a lot of money and then i gave it all the way yeah i think it's very similar to warren in that sense warren is trying to do exactly that yeah they're very similar well he's done yeah uh i say all those years i don't know what was it 15 years ago he started giving his money to bill and melinda gates anyway he stopped giving money to bill and melinda gates and i believe in america you can give away five percent of your wealth and you get tax relief on it or something.

1:04:25So he's giving away 5%. Same as Bill Gates. Bill Gates has been giving away, giving away. And then the share price of Microsoft goes up, or the share price of Berkshire Hathaway goes up by much more than 5%. So he ends up wealthier at the end of the year, even though he's been giving away 5%. So now he's got the problem, right? He's still got over 100 billion in Berkshire Hathaway. And so he started accelerating, giving away. So he's not doing it with Bill and Melinda Gates, but his three children have got massive charitable foundations. So there was one on the telly the other day, on the news programme, because there was prosthetics for Ukrainian service people.

1:05:07And I noticed it was Howard Buffett's foundation that was giving money. It's kind of like a Carnegie thing, isn't it? You know what I mean? In hundreds of years, there'll be libraries that are like, oh, Buffett Library. Oh, no, that's one thing that Warren doesn't not want. he does not want it to go on because he wants it to be used quickly quickly fix some problems yeah fix some problems because he hates those ones that have been going on for hundreds of years and now you've got some trusty people who don't really do very much has he read your books? because you've met him? I don't know I don't know is the answer you send them to him?

1:05:42yes yeah there you go thank you so much thanks for coming I really really enjoyed the book I wish I like I said I wish I read it like a couple of years ago so yeah well thank you I've thoroughly enjoyed it it's been a great pleasure yeah yeah no thank you thank you and thanks for bringing the hat coolest hat I've seen all year the best hat yeah can I borrow it I'll get you one from Omaha next time oh nice yeah and some water I feel like I would look like such a fool in that hat but like it suits you if you wear glasses it's absolutely essential