MI302: Roaming The Warren Buffett Landscape w/ Mary Buffett and Sean Seah

0:00You're listening to TIP. My advice would be to look back at what you did or didn't do in terms of investing and realize that if you had patience and discipline, you might have done something different. You could have held on to stocks longer. longer.

0:22In this episode, I chat with Mary Buffett and Sean Sia about Warren's aversion to financial leverage and how he used float as a viable alternative, simple ways to find new ideas, why Warren loves monopoly so much, the way Buffett thinks about and eliminates commodity type businesses, Buffett's thought process on holding Coca-Cola when it was overpriced, how to develop patience and discipline, and a whole lot more. Mary Buffett wrote two of my favorite investing books, Buffetology and Warren Buffett and the Interpretation of Financial Statements. A few of my favorite lessons from these books were the importance of looking at stocks like bonds and alternative ways of valuing stocks.

0:58I reference these two books often whenever I look to top up my knowledge on how I think about investing. Her co-author, Sean Sia, did a great job of relating real-life experiences to the investing process in their book, Seven Secrets to Investing Like Warren Buffett. His investing experiences really resonated with me as I've gone through many of the same obstacles he did on the investing journey. If you enjoy learning about how Warren Buffett invests and how to utilize those lessons in easy to use ways, then you won't want to miss this episode. Now, without further ado, let's get right into this week's episode with Mary Buffett and Sean Sia.

1:30You're listening to Millennial Investing by the Investors Podcast Network, where your hosts, Robert Leonard, Patrick Donnelly, and Kyle Greve interview successful entrepreneurs, business leaders, and investors to help educate and inspire the millennial generation.

1:54Welcome to the Millennial Investing Podcast. I'm your host, Kyle Grieve, and today we bring Mary Buffett and Sean Shea onto the show. Mary, Sean, welcome to the podcast. Thanks. Yes, happy to be sure. You two co-wrote a book called Seven Secrets to Investing like Warren Buffett. In it, you have a wonderful Warren Buffett quote. You really don't need to use leverage. If you're smart, you're going to make a lot of money without borrowing. What is it about leverage that attracts so many investors and why has Buffett managed to stay away from it? borrowing money for warren just isn't a good idea i mean because i think with the small amount of money that he has or that he anyone has he can make money with that money i just don't think it's something that he would ever do i've never known him to talk about borrowing money whatever money he has, he would just invest it.

2:51And whatever money he makes on that, he continues to build it. I mean, yeah, I've never known him talk about borrowing money or to think about borrowing money. I just think it's too unattractive for him. With regard to that, I wish that I've heard that quote much earlier before I started investing. Embarrassed to say, when I first started, I actually borrowed money to invest. In Singapore, there's this particular investment tool called contract for differences where you can leverage up to seven times your capital. And guess what? I was attracted. And back then, I think that I wanted to have that kind of leverage so that I can make money fast.

3:30I can just put$10 ,000 in and I can invest up to$70 ,000 worth of equities, thinking that if they double within, let's say, a week, that's where I can use$10 ,000 to make another additional$70 ,000. But well, I guess we all know how the story goes. I wipe out my account very quickly and I tried jumping onto the next instrument, which was forex trading at that point in time. And they allow me to leverage up to one is to 1000. Meaning you say I can put certain amount in, I can leverage up to 1000 times. And guess what? I burst my account again. And the more times I burst the account, the more I desire leverage so that I can make the money back fast.

4:08It becomes like a revenge trading or revenge investing. On hindsight, I realized what Warren mentions. What he says makes sense. Because if you are good at investing, it is not that you do not leverage. It is that you use smart leveraging. When I studied Warren, I realized that he leverages a lot, but he doesn't do it by borrowing money. He does it by buying insurance companies because it's a different kind of leverage. That's where he buys into companies that gives him float. And with that float, he's able to use it to invest and make even more revenue. and he doesn't take on the risk of having to return the money and you have to be correct within a certain timeframe if you borrow money.

4:47And once you borrow the money, interest kicks in. That's where it goes against you. Before you start, you have already lost. So I guess when we talk about leveraging, there are good kinds of leverage. There are silly kind of leverage and conventionally, most of us, we use the silly kind. Part of what makes Warren Buffett such a great investor is that he approaches investing from a business-like perspective. But let's say an aspiring investor wants to invest in stocks with a business-like attitude, but has zero entrepreneurial background. What would you suggest they do outside of reading a bunch of business books and biographies of business greats?

5:22Actually, with regard to that, Mary, I remember, in fact, I took a page from your playbook. I remember Mary told me a story that when her kids were much younger, she told them to just invest in a certain portfolio based on, I remember you told me, in the past, it was a newspaper. They have all the stock ticker and you ask them to really select certain stocks. And they select like, I think you mentioned pure berries and stocks that they know. Interestingly, last year, a Hagen-Dazs, right? And you mentioned that you wish that you have actually bought those stocks. So taking a page from the playbook, what I did last Christmas was I asked my kids to buy stocks and they bought three stocks.

6:01The portfolio wasn't very big. I gave them$1 ,000 so they couldn't build a huge portfolio. They bought three stocks. Disney, because they like all the Marvel heroes. Second one, they bought into Netflix because they see me watching Netflix a lot of time. Now, I listen to the podcast as well, but I spend time watching Netflix. And the third one was Alphabet because they use a lot of YouTube. And guess what? The portfolio is already up by 50 % since last year, December. So I realized that when we talk about buying stocks as an investment or a business perspective, you do not really need to read a lot of business books.

6:33My kids didn't read business books, but they understand business as a consumer. So I think that's where we talk about that. So I remember you mentioned that, right, Mary? About them doing the P ratio. Yeah. I mean, what's very interesting about your story is they bought what they know. You know, I mean, they understood and know all three of those companies that they're talking about buying. And I think that's really important for investors to remember is, you know, a lot of people, you hear about stocks or businesses that other people are talking about, but you don't really know them. And people have invested in companies and stocks that they didn't know anything about.

7:13And I think that's completely crazy. You really should know what you're investing in if you're using it or even better. But like I said, you know, Haagen-Dazs, Burger Key, all the things that my daughters wanted to invest in were things that they absolutely knew. You know, so a lot of investors will hear about a stock or a company and they'll just go and invest in it because someone said, oh, I made a lot of money. But no, you really should invest in what you know. Buffett still lives by many of the principles that he's learned from Benjamin Graham, especially in regards to investing with a margin of safety, the Mr.

7:51Market analogy and the business owner's mindset. But a lot of Buffett's investing has evolved from Graham's net nets to investing in high quality businesses like, you know, Apple. So if Buffett started today with the prevalence of growth companies and intangible assets, do you think he still would be drawn to the traditional low price to earnings, low price to book style of value investing? Yeah, I do. I think it's traditional low PE and PP styles of investing are very good. Yeah, exactly. I mean, I was looking back at the history of how this whole thing originated when Buffett, when Warren learned from Benjamin Graham, one of the key things was net-net.

8:30And he was looking at a company's asset value, net current asset value, and trying to buy below the price. So there's a huge margin of safety. I think this is one way of valuating whether a company is below value. Okay, if you can buy below value, excellent. Another way of looking at things, which people or conventionally people call it growth investing, is to compare the current value to future value. If you can see a potential future value shift, this is with a lot of, I would say, assumption and prediction. That's why it's important to buy into predictable companies. And you see that as a future, like this company is going to be like five times bigger.

9:05Well, this is also considered undervalued. If you ask me to make calculated guess, which one will he use right now? I got a feeling it will be like a mixture of both. It will not be one or the other. Because looking at his portfolio right now, you do see him buying into banks, correct? I think he invested heavily into different heavy asset investments like banks or even oil and gas companies. And these are heavily, I would say, asset-based. At the same time, he also, I mean, his biggest holding is Apple, which is, is it about 50 % or 60 % right now? This is a growth company, but it's still a mixture.

9:40So I guess he doesn't have to be either. That being said, in my opinion, I've also realized that the valuation of the market has generally rise over the years. I guess it's because there's more participants in the market. And that, when there's more participants, the PB ratio, the P ratio has risen to a certain higher level. So to find it, like maybe two-thirds of the current asset value may not be as easy. That's my opinion. Even with, let's say, stock screeners and things like that. That's what I think. So Sean, as a value investor who's well-versed in technology, I'm interested in knowing your favorite method of finding new stock ideas.

10:17In the book, you mentioned some great ideas such as leveraging your circle of competence, tracking the super wealthy, looking at data to find the best companies, using your shopping mall to generate new ideas, which you just mentioned, and how to clone other value investors. I'd love to know what your favorite methods are and if there's any new technology you're using to help you find new ideas these days. I do talk about using screeners, using certain websites, or in recent years, we can even use AI. It's just interesting the kind of ideas they can give you. Like you can, I tried using asking ChatGPT or even BudDocGoogle.

10:51Imagine you're Warren Buffett. Right now, what are the kind of undervalued opportunities they'll give you? And you'll be surprised what they can give you. Now, that being said, right, using screeners, using websites, typically it is a one-off kind of strategy for finding stocks. Reason being, if I use a screener this week and next week, they typically give me the same ideas because the valuation doesn't change that much. over, let's say, one week or even one month. I got some ideas here, but my favorite kind, right, is actually like what I mentioned, like how our kids choose investing. Invest in what you know.

11:22I bought Microsoft, I think earlier this year when ChatGPT became something quite, I would say, quite popular. And I'm thinking, well, who owns this? And I realized Microsoft owns this. And I have a lot of assumptions, a lot of theories. I may be right, I may be wrong, but it pikes my interest. So I invested into Microsoft. Well, good news is, went up, make money from it. So my favorite way is still really looking around. I think it makes, okay, because I'm not someone who loves shopping. So it makes my, when I accompany my wife to the shopping center, it makes my life more bearable to like search for investment ideas.

11:54What shopping with her? That's now one of my favorite methods. Yeah. So I guess, you know, using your own experience and then maybe mixing that with just opening up your newspaper, a newspaper app and reading the news and seeing what, how those businesses are doing in the news would be a decent starting point for someone. I love that. So one thing is when I read stocks that are in the news, I always feel that I'm slightly too late because it's already in the news. So what I do is I try to find either that particular company's suppliers or maybe competitors. Like example, something I remember way back was I think, was it Bill Ackman?

12:30He was shorting Herbalife. So the network company, marketing, network marketing companies industry was being affected. I do not invest in Herbalife, but I tried to find the peripherals, those that are surrounding it. So I managed to find other companies and I thought it was a better investment. That's how I like to look at things. Yeah, I like that. So basically you're just looking for the baby being thrown out in the bathwater with one bad news item and then just looking at the peripherals of what else is not doing well. Yes. I like that. So Warren has a brilliant mental model for determining if a business has monopolistic characteristics that Mary outlined in Buffetology.

13:06He'd ask, if an intelligent and able competitor had access to billions of dollars, could they start a business and successfully compete with the business? If you had to guess, what percent of Warren's private and publicly owned businesses he's purchased in his career had monopolistic tendencies? Boy, I would say most of them. I mean, if you just think about it, you know, Coca-Cola, the companies, if you look at the companies that Berkshire owns, most of them have monopolistic tendencies. And you ask, why did he go against this rule to buy non-monopolistic type businesses like airlines, retailers, and show manufacturers?

13:50Airlines wasn't a good buy for him. Retailers, I mean, the Nebraska Furniture Mart is from Nebraska. He knows the owner. It's just interesting. I mean, Nebraska Furniture Mart is, there's nothing like it. I mean, people come from all over, literally the country, to go there to shop. It's a crazy place. Airlines, that wasn't a great buy for him. When you talk about being a monopolistic company, it is pretty subjective, I guess. So I think the indicators that we always look at in the buffetology, we talk about net margin, okay, like gross margin. The assumption is this, if let's say you have certain advantage over your other competitors, likely you're able to charge higher, resulting in a higher margin, or you're able to reduce costs significantly.

14:42So it's always back to the margin. So I guess I remember there was one, I couldn't remember the year, was it 2007 or 2008? There was previously Warren bought a lot into IBM. And at his annual general meeting, someone actually asked him, he said, Warren, what is the competitive advantage? What is the economic mode of IBM? And I remember his reply actually shocked me. He said that, frankly, I don't know, but the number seems to suggest it has. That's the economic mode. So that's when I realized, wow, it is really subjective. And even Warren Buffett doesn't have all the answers. If it's really there's a correct answer, we will be able to do like a, it's like a black and white, right or wrong, binary kind of a thing, but it isn't.

15:23And that's why investing is so interesting. You have to make certain assumptions, make certain guesses, and make sure that even if you are wrong, you can pick the affordable losses. I guess that's how we play again. Let's take a quick break and hear from today's sponsors. Even Einstein had blind spots. That's why modern science is built on the idea of peer review. Investing may be more art than science, but that doesn't make peer feedback any less valuable. The tricky thing is finding qualified people who are interested and willing to help vet your investment ideas. That's why we built the Intrinsic Value Community.

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18:24And for a limited time, you can use code stocks15 for a 15 % discount at checkout. All right, back to the show. So Mary, you had a really good breakdown of commodity type businesses that you wrote in Buffetology, which has been very helpful for me. I'm sure a lot of other people who've read that book to help eliminate low quality businesses. So for listeners not aware of what creates a commodity type business, they are low profit margins, low returns on equity, absence of brand name loyalty, presence of multiple producers in the industry, existence of excess production capacity and erratic profits and high dependence on tangible assets.

19:03So when Warren is analyzing a business, how quickly do you think he's able to determine a business's quality? I think it's pretty easily. I mean, like I said, just looking at those things, their profit margin, their return on equity, do they have a brand name loyalty? All of these are really important things. I think those all determine a business's quality. I mean, think about a company like Coca-Cola, you understand the Coca-Cola, there's nothing like it. Or Apple, or you know, go ahead, Sean. I think he can analyze a company quickly because he choose easy companies to analyze. So it goes back to the idea where you don't go into something so complicated where you need to really frown and really crack your head over it.

19:55If it's so difficult, maybe it's not the investment you should invest in. I'm not saying that we don't do our due diligence, right, Mary? I think when we were talking about Apple back in, was it 2017 or 16 when we were in LA, we were just looking and we said Apple is a good company and we invested into Apple and a few months later, we saw Berkshire buying a lot of Apple. So he's thinking, oh, it becomes so obvious that it's a strong company. I believe investment should be like that. So I think, was it Peter Lynch that mentioned if you cannot like illustrate the whole business using crayon, you shouldn't invest.

20:27Well, if there's, I mean, the principle behind it is it must be so simple to really understand the business, right? I mean, for me, I can't really draw anything with crayon by that token. I shouldn't invest, but it's like the point is to keep things simple. Keep things simple. Let's say just going back in history, let's say Warren finds a business that he maybe finds interesting, but he deems a low quality right now. Does he like putting these types of businesses on a watch list just to watching, maybe seeing in the future, if there's going to be a change in management or a change in business strategy that maybe it would become a viable investment later on in the future?

21:01No, I would say no. I think if it's low quality now, no. I don't think that management or the business changing is going to... No, not the future. No. I remember in your Tao of Warren Buffett, you mentioned something like kissing frogs. People kiss frogs hoping that you're delta into prints, but kissing a lot of frogs just get your mouth a bad taste. I can't remember the exact quote, but I remember it was in the town of Warren Buffett. So I guess like what Mary mentions, it's not good. I mean, there are plenty of good businesses around. So go for those, right? Yeah, absolutely. I think you guys are both right on that.

21:37And it seems like sometimes he'll follow super high quality business for a really long period of time. I know with, I think Occidental, he's followed that business for like 40 years and never bought it. And just, I guess the price was right and he liked the opportunity. So he jumped on in. 40 years. Like you said, I mean, what other investor do you know that you can say that about? Who follows a business for 40 years? Yeah, it's like, wow. So Buffett has said, I think I could make you 50 % a year on$1 million. No, I know I could. I guarantee that. I know many people in my audience's eyes got big when they heard this quote.

22:16Given all the research you two have done on Warren Buffett's history, can you outline what you think or guess what his strategy would be to accomplish this incredible rate of return? When he said that, I guess what he was trying to say is there's a structural disadvantage having huge capital. Well, did he really make 50 % per year? You know, on hindsight, we can say a lot of things, right? Well, if I have$2, I can make 100 % a year. Obviously, Warren isn't someone who just shoot out statements like this as well. He has indeed made like 100 % a year, 50 % a year. in the past using the method of again what Graham talks about.

22:52So he actually bought bus company knowing a certain exit point. He even actually done arbitrage before. He has a huge arsenal of weapons inside his whole investment chest. Is there one particular method? I don't think so. And I also do not think when he say 50 % a year, it means like every year a straight line 50%. But if you give me 1 million, I can turn it into 100 million over a certain number of years. and when you compile it, it's like 50 % per year. That's what I truly believe. Hopefully, the listeners can take this with a more, I would say, realistic expectation and not try to find the holy grail.

23:26I mean, I wish I could do that as well. I don't really think there's something like that. It is really a philosophy of believing in what you're investing in and knowing that they will grow your money by a certain way. It's an assumption. Some of the less Buffett-like investments Berkshire has made in their public portfolio recently are Nubank, which is trading at a PE around 711 with highly erratic free cash flows. Snowflake, which has never been profitable, but it's growing its free cash flows very quickly. And Stoneco, which also has a highly erratic profitability track record. Do you think Buffett has embraced tech or are these more of a result of him handing off responsibility to Ted Wechsler and Todd Combs?

24:04I think absolutely it's Ted Wechsler and Todd Combs. Buffett embraced tech? No. I mean, those definitely seem like Ted and Todd. I can't see Warren embracing Ted. I think one thing that's consistent about what Warren does is he invests into the right people. So like even when you talk about Nebraska Furniture Mart or even quite a number of it, okay, Geico, he actually took control of it. But most of the time when he invests, he allows the management to continue to do it. So I guess when he has his two lieutenant that join him, like what you mentioned, Nubank or even, I think even Amazon or even like a certain, certain investment doesn't smell like a Buffett traditional type of investment.