Episode 335 - "What About Warren Buffett?"

24:09So he knows what he's talking about in this space. And all All of his analysis has shown that over the last 15 years, it's really like post global financial crisis, 2008-ish, that since then, all these alternatives have really stopped delivering what they were supposed to. All these institutions have these really high fee assets that are underperforming as opposed to doing what they were doing previously, which was actually looking good. I think it really is analogous to what we're talking about with Buffett. You find something that works, you shovel too much money into it and it stops working.

24:40As recently as 2020, Buffett confirmed that that is still the case. In the 2016 letter to shareholders, Buffett does acknowledge, as he's done several times, that there will be some successful managers. He says that there are, of course, some skilled individuals who are highly likely to outperform the S &P over long stretches. Now, this part's crazy though. Buffett says, this is a 94-year-old man who lives and breathes investing. In his lifetime, he's identified early on, so before the fact, only 10 or so professionals that he expected would be able to accomplish this feat. Keeping in mind that the two that he actually picked for Berkshire have not been able to do it so far.

25:16Maybe they will be able to eventually, but so far they have not. So 10 or so in his lifetime of this 94-year-old investment oracle, as he's called that. I mean, that's something to think about. So when I hear people say like, I'm a student of Buffett, like, okay. All he had to do was just hop over to Twitter. There's thousands of them that he could have picked from that are obviously the next great Warren Buffett. It's like he didn't even know that. Didn't know. He's always been a little bit averse to technology. Just had to look on Twitter. Fair enough. That's an incredible stat, is it not? The greatest investor of our lifetime, at least, says that he has met 10 people that he thinks could perform that way in advance.

25:5110. Try to think about a skill that you could say only 10 people in the world can do this. That's a pretty elite company there. Well, and just the overconfidence for most people who think it's them because they watched 17 hours of YouTube videos and read The Intelligent Investor. He's talking about me, guys. Yeah. Okay. James from wherever. I'm one of the 10. I'm one of the 10 Buffett stocking when I know it. So Buffett concludes that section of the 2016 shareholder letter with this quote, the bottom line when trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients.

26:25Both large and small investors should stick with low cost index funds, which I think also speaks to what we were just talking about with alternative investments where those asset classes, I don't know about you, Dan, but we get pitched all the time from private credit funds or private equity funds or whatever that want to shovel our clients' money into these things that charge 5 % or 6 % in total fees. Yeah, of course you want to put the client's money in there, but it's not obvious that it's beneficial. Fees don't matter, Ben. It's after fee performance that matters. Of course. That is the talking point.

26:57Performance fees are good. And not only that though, but the barrier to access a lot of these products has just dropped So now there's robo-advisors. As long as your account is$50 ,000, you can access these exclusive asset classes. With all due respect, if you're an alternative manager and you're willing to accept accounts of that small size, like you're probably not the top decile fund manager looking for$50 ,000 accounts amongst retail Canadians. That's exactly it. Yeah, adverse selection in that space is enormous. We see it. We have some clients who, because of what they did professionally, do get access to the best, for example, venture capital funds.

27:32Venture capital is at one place where the academic evidence on persistence is actually pretty strong. If you take the best venture capital funds from the last whatever 10-year period, they do tend to be the best venture capital managers in the future. That's interesting, but there's also massive skewness in venture capital where those best ones drive most of the performance of the asset class and most other funds like the median fund does not perform very well. There's also massive dispersion where the difference between the best and worst fund performance is enormous. But the problem is, and we see this because some of our clients are able to access the best funds, even if you have the right connections, you can't get a very meaningful allocation because there's only so much to go around.

28:13And most people are not the type of person that I'm talking about. You don't have the connections to get the access, even the limited access that they can get. But if you don't have those connections, you can't even get access at all, which means you're investing in, say, the median fund, which doesn't tend to do very well at all. So that adverse selection problem, I think, is huge. And to your point, Mark, if you're accessing it through a robo-advisor, I don't know. So Buffett's message over many years has been very consistent and very clear about index funds. And most people should not be trying to pick stocks.

28:42They should just be investing in the index. I love the fact that he even says that he's not super confident that Berkshire is going to beat the index going forward. He says, we're going to be good stewards of Berkshire Hathaway. He's very conscious of the fact that many of his investors have most of their net worth in his stock. He doesn't want to mess up, but he makes no promises about beating the market. He just says, I'm going to manage this money the way that I would manage my own money. Of course, most of his own money is actually in Berkshire, but he makes no promises about beating the market, which I think is something that would be surprising to some people to hear.

29:12It's a real testament to him, getting back to what we talked about in the beginning about people listening to him selectively. It doesn't take a great leap to say he's basically saying, you're probably better off just investing in an index fund than giving us more money. He's too respectful to say that, but people don't want to hear it. Even he is telling them that he probably will not outperform. And people say, I don't care. I'm still going to give you my money. It's a testament, I think, to his charisma and his phenomenal reputation. And again, that's not taking anything away from him, but even he's seemingly a little uncomfortable with it.

29:50Isn't this one line of thinking from him alone, the biggest sort of gotcha in the face of the argument of what about Buffett? Buffett himself is telling you, we may disagree with his geographical allocations. He's saying 100 % US equity, for example, but he's out here telling you himself just by index funds. So those who are anchoring to certain characteristics and qualities of Buffett as an excuse to manage their own money a certain way, are not really listening to Warren Buffett's advice. I agree with that. Now, despite Buffett saying that most people should just invest in index funds, I know a lot of people still will want to look for an edge.

30:23And I think it is interesting to point out both from an academic perspective, but also maybe from a practical perspective, if people want to try and do it, that academic research has been able to explain Buffett's success using multi-factor asset pricing models. So in simple terms, that just means that Buffett may have systematically held more of certain types of assets that have higher expected returns, which allowed him to beat the market. Now, it's interesting for two reasons, I guess. Academically, it's interesting because it shows that, hey, maybe markets are still efficient and Buffett doesn't disprove that.

30:56He just tilted toward riskier stocks. That's academically interesting. Practically, it's interesting because if that is true, that's a lot more repeatable systematically than a special ability to pick stocks, which is what people often attribute Buffett success to. This is a 2018 paper in the Financial Analyst Journal titled Buffett's Alpha. The author set out to explain Buffett's past returns in terms of exposure to known return premiums. That's like a group of stocks with shared characteristics that have systematically higher average returns, often referred to as a risk premium, but not always because not everyone agrees on what explains those differences in returns.

31:34The authors of the paper find that accounting for Berkshire's exposure to market beta, size, value, momentum, betting against beta, which is like a low beta, low volatility factor, and quality factors, plus the use of some leverage, largely explains Buffett's past performance. In other words, Buffett's success is explained by his systematic preference for cheap, safe, high-quality stocks combined with his consistent use of leverage to magnify returns while surviving the inevitable large, absolute, and relative drawdowns that this strategy entails. Controlling for those factors, Buffett's alpha, his ability as a manager to produce returns in excess of the risk taken through his factor exposures is statistically insignificant.

32:18I know that statement's heretical to Buffett acolytes, but it's true. It is important to acknowledge though that explaining Buffett's past performance with the benefit of hindsight, of course, in 2018 does not diminish what Buffett has done as an investor. It took academic research more than 50 years to catch up. We had the Cap-Am in what, 1964 that paper was published. We had no asset pricing models basically when Buffett started. Now we have asset pricing models that are multi-factor that can maybe explain his performance after the fact, but Buffett was doing this before we had those models at all.

32:52I think we do have to tip our hat to him for that. You definitely cannot say, oh, well, it's just explained by the fact that he picked this stock and that stock. He basically split the atom before people understood physics. That's pretty much what he did. And then to say, all he did was split the atom. Let's at least acknowledge that took incredible skill. But to your point, I mean, I don't know how repeatable that is unless you have a time machine and his brain to go back and do that again, there aren't going to be any more Buffett's. That's right. I agree with what you just said completely. I've said this multiple times in this episode.

33:28I don't want to take away from what Buffett has done. It's absolutely incredible. And he did split the atom before physics even existed, which is amazing. But the reality for an investor today is that physics does exist. We know that these systematic factors exist. We know they explain Buffett's performance and we know they can be implemented in a more diversified and systematic way than what Buffett did. The authors of this paper actually do that. They build a systematic Buffett-style portfolio. They build a diversified portfolio that matches Berkshire's beta idiosyncratic volatility, total volatility, and relative active loadings.

34:00They find that that diversified systematic portfolio performs comparably to Berkshire Hathaway. That suggests that, this is a quote from the paper, Buffett's genius is at least partly in recognizing early on, implicitly or explicitly, that these factors work, applying leverage without ever having to fire sale and sticking to his principles. Another interesting the paper touches on is how Berkshire Hathaway's style has changed over time. Because they're looking at its factor exposures over time, they can see how that's changed. Early on, when the returns were exceptionally high, Buffett had more favor for smaller firms.

34:35Then later on, as the company Berkshire has gotten larger, it's become increasingly bias toward larger firms later in the analysis period. That speaks to Buffett's point that we mentioned earlier that 1954, which is pre-Berkshire, but 1954 was his best year ever. He could pick small stocks. He thought we're going to do something crazy and he was right a lot of the time. Now they've got so much capital. Even if you do that and you're right, it's not going to move the needle. When you're buying larger companies, they just don't tend to have those types of returns unless you can predict NVIDIA, which Buffett would probably shy away from anyway.

35:07He hasn't been crazy about tech. That point, just the shifting style from smaller companies to larger companies over time, I think that also speaks to the capacity constraints or diminishing returns to scale that we talked about earlier, where a skilled manager, if they've been able to do something incredible early on, the more and more capital you have, the harder it gets to repeat whatever that thing was. I think that's probably one of the things we've seen happen with Berkshire. Before we finish this topic, I need to touch on Berkshire Hathaway's increasingly large cash holdings. This always comes up.

35:37It's often referenced as a sign that investors should also be going to cash, or at least they should be concerned about a potential market crash because Buffett seems to be because of his cash holdings. He was asked about this at the 2019 shareholder meeting. An attendee asked, Warren, you are a big advocate of index investing, as we've been talking about, and of not trying to time the market. But by having Berkshire hold such a large amount of cash in T-bills, it seems to me you don't practice what you preach. Pretty good question. I cut it off, but the question also talked about how if they had done that over whatever last period of time, then Berkshire stock would have performed much better.

36:15There's a ton of cash drag. The question was saying, if you had just invested in this and the S &P 500, like you tell everybody else to do, Berkshire would have had much better returns. So Buffett has a great answer, of course. He acknowledges that it's a perfectly decent question and he said something like, I wouldn't quibble with the numbers. You're probably right that we would have performed better. He suggests that investing in index funds rather than cash may be a strategy that his successors at Berkshire should employ because Buffett says on balance, he would rather own an index fund than carry treasury bills.

36:43He does say that owning index funds in 2007 or 2008 when the market was tanking might have affected Berkshire's ability to make their opportunistic moves late in 2008 or 2009. They made some pretty famous big moves during the financial crisis because they had so much cash. But Buffett says that that type of execution problem matters more with hundreds of billions of dollars than it does with a billion or two. A billion or two is still a lot to me. I don't know. He agrees overall that it's a perfectly rational observation. And Buffett acknowledges that looking back on the bull market, that the opportunity cost does really jump out at you, the opportunity cost of holding cash.

37:18The premise is they're holding cash waiting for the right investment opportunities. And those opportunities have not presented themselves, so they continue holding cash. but meanwhile, the market's gone up a lot. Buffett goes on to say, and I think this is the key for most people watching and listening, maybe there are some multi-billionaires, I don't know. He would argue that if you're working with smaller numbers, keeping in mind that he was talking about billions as being smaller numbers, single digit billions, it would make a lot of sense to invest in index funds rather than holding cash while waiting for investment opportunities.

37:46While Buffett wants to hold cash and Charlie Munger, who has unfortunately passed away now, He chipped in in that answer too and said, we've been pretty conservative about holding cash. Maybe not right for everybody, but it's worked for us, so whatever. I thought Buffett's comments on just, yeah, we probably would have done better and most people probably should just keep the money invested rather than sitting in cash. They're not coming out and saying, we're doing this because we expect the market to crash and we can deploy this at cheaper valuations. That's not at all what they're doing when they're holding cash, but people will take that as a sign of an impending market correction.

38:17I agree with that. I wonder why he wouldn't just pay a dividend to shareholders. That's often what companies will do when they have excess cash and no reason to expect that they can deploy it productively. Let's say, well, pay it out to shareholders and they can deploy it however they would like. I think he thinks that they can still deploy it productively. In his 2012 shareholder letter, he goes through this big speech, not a speech because it's written, but this big dialogue about dividends and about why Berkshire has not paid a dividend. He walks through the difference in value creation with them having paid dividends versus not based on what they've been able to reinvest in inside the company.

38:54He basically said they're not going to pay a dividend because he thinks they can do better, but he thinks other companies that Berkshire invest in probably should pay dividends once they run out of good investment opportunities. In 2012, he does walk through super detailed reasoning about why they have not paid a dividend. Warren Buffett is hands down one of the greatest investors in history with an insanely long track record of beating the market. it. If you can find the next Warren Buffett, if you can't before the fact, you should absolutely invest with them. But I don't know how you'd find them.

39:24I don't know how you decide that you have found them. As the existing Warren Buffett himself will tell you, he is no longer the obvious answer to beating the market. And he hasn't been for quite a while now because everyone knows how good he is. So they've allocated capital to him, which has made it harder for him to beat the market. Now that generalizes, that illustrates one of the biggest challenges of active management. and it's consistent with theory and empirical observations on diminishing returns to scale in active fund management. Trying to find the next Warren Buffett before the fact is likely to be extremely difficult as Buffett himself has learned with the performance so far of his successors and finding the fact is likely too late to benefit from their skill.

40:01I think if people actually listen to Buffett, his advice in no uncertain terms is that most investors should simply minimize their costs and invest in low cost index funds. I tend to agree with him. As listeners know, the one place I'd depart from Buffett on is international diversification. He's a big advocate of investing in S &P 500 index funds. He's a big advocate of betting on America. I would, and as we do at PWL, add more stocks outside the US. But generally, I think what Buffett says makes a lot of sense. For investors who must try to beat the market, I think the good news is that diversified systematic strategies that tilt toward factors with higher expected returns, like in Buffett's case and in that paper, safe, high-quality, cheap stocks with a bit of leverage can actually explain the historical results of Berkshire Hathaway.

40:48Implementing a systematic strategy in that fashion is more likely to be successful than reading financial statements and picking individual stocks. Buffett was the original factor, bro. 100 % he was. Sweet. I feel validated. We're largely factor investors. If you were to bring that up with his accolades. They don't think about it in factor terms. They think about it in security selection terms. That's the crazy thing about that paper is they basically show that it wasn't security selection. It was exposure to no one now risk premiums and that you could have done the same thing more diversified.

41:22It wasn't about the individual securities he selected. It was about the risk factors that he was exposed to. I think the other thing people fail to realize is due to his scale, he can customize a lot of deals. There's a few examples of this. The one that I think is really interesting for us as Canadians is he stepped in to effectively save HomeTrust back in 2017. So HomeTrust is a Canadian financial institution. They're, I think, mostly a mortgage lender, but they take deposits as well. And there was essentially a run on the bank. Their deposit levels got so low that they were at risk of total collapse and failure.

41:54And Buffett stepped in in a big way with a deal that I think only Buffett could have made and effectively bought, I think it was 400 million of stock, but I think it was done in two transactions, but at an effective price that was half the value of the market price of the stock. So he effectively bought it at something like a 40 to 50 % discount to the actual market price of the stock, while also extending a$2 billion line of credit at below market rates. Only Buffett can get that type of deal. You and I can't step in with our$150 monthly contribution to our TFSA and go save home trust capital.

42:25But then he also lends his name to that deal. and that alone restores investor confidence. And so the stock soared nearly 30 % on the news, which was enough to stave off the run on the bank and they started seeing deposits flowing again. And I think he's done similar, maybe not to that degree, but similar stuff even with Coca-Cola. Like he's been known to structure his own call options or convertible securities in ways that are beneficial to him that like the general market just wouldn't normally be able to get their hands on. This is why it's sort of mischaracterizes to call him a stock picker.

42:58That sounds so quaint, like he's sitting at his desk picking stocks in his brokerage account or something. He's buying entire businesses with a phone call, probably. It's just not something that anybody can hope to say, well, I'm just going to learn his style and mimic it myself. You can't do it. I think with the home trust deal, it was something insane, like three days from the first phone call until the deal was signed. He saw what was going on, And him and his team analyzed that overnight, went, yeah, we're stepping in 400 million, done. In three days, the deal was struck, which is just insane.

43:32The speed at which he was able to pull this off. Most people didn't even know what was going on with HomeTrust, and he's already structured the deal, right? That's how fast markets move. I remember that happening. It was crazy. The other crazy thing, though, is does that move the needle for Berkshire Hathaway? Great deal. Incredible. $400 million. That's a big number for most of us. It's not a big number for Berkshire Hathaway. That's right. It's crazy to think about from so many different angles. That is a great deal objectively. But if you're a shareholder in the company, yeah, sure, you're happy that deal happened.

43:59But I mean, how happy? So I want to go back because you mentioned dividends. And I think this is a big point of contention that I face with talking to people who are students, as you put it. But people will use Warren Buffett's quote unquote love of dividends as an excuse for investing in dividend stocks themselves. And you already mentioned this, Ben, but it's not clear to me that he loves dividends. What he has said is that the company should pay dividends when they don't have better use for the capital, as he said. He did say this in, I think it was a 2008 shareholder meeting. He said, I do believe in dividends in a great many situations, including many of the companies in which we own stock.

44:36The test about whether to pay dividends is whether you can continue to create more than $1 of value for every dollar you retain. And this is why he doesn't pay a dividend. Dan asked that question is because he believes that he can create more value for shareholders by retaining that capital and investing it themselves than shareholders could create on their own were he to pay out that dividend. So I'd say he's probably agnostic to dividend policy, and he's more interested in the business's ability to use that capital in productive ways. So I wouldn't call him a dividend investor per se. Now, I haven't read all of his shareholder letters.

45:06I'm sure he's expounded on dividends much more than that single quote I've given him. But I think it's important to understand how he thinks about dividends in isolation. The other thing I'll mention is yield on cost, which drives me crazy. This is perhaps the most meaningless metric in all of personal finance. There's maybe some psychological benefits to this. And I believe this is popular because he said it with respect to his Coca-Cola shares at some point. I couldn't find the quote I was looking for yesterday in preparation for recording today, but I believe he talked about this at one point.

45:34The yield on cost is a metric where you effectively take the current yield of a stock and you divide it by your original purchase price to determine the yield on the cost of your investment. If you put$1 ,000 into a stock and it pays a 4 % yield, and that compounds for decades or however long, and now the stock is worth$10 ,000 and it's still paying a 4 % yield, that's a$400 annual dividend. Today, on a purchase that you made, let's call it decades ago, for$1 ,000, your yield on your cost is 40%. That sounds amazing. It sounds like you're getting this unbelievable yield on this investment. This is compounding.

46:11It's got nothing to do with yield itself. If you did the exact same thing with a stock that did not pay a dividend and that stock went up 4%, I could say my growth on cost in that exact same example is also 40%. It doesn't tell you anything about your actual investment experience, the returns you've earned, your ending wealth, the growth of wealth. It tells you absolutely nothing. but people will use dividends or Buffett's kind of yield on cost as a way to justify their continued use of a particular stock in their portfolio. And the hilarious thing is anybody with$10 ,000 could just go and replicate that exact portfolio today with the exact future investment experience.

46:48And their yield on cost would be 4%, not 40%, but their total returns are going to be the same. It drives me mental when people use it. And I needed to get that though, where if your yield on cost is 40%, you're less likely to worry about volatility in the underlying share price. That's not a good reason to use this metric. But that might also prevent you from selling about an investment. Well, I don't want to destroy my yield on cost. Because if I were to sell that and literally buy it back tomorrow, I've reset my yield on cost. True. It could have an endowment effect. I think it's classic. We've talked so much about dividend investing as a strategy, and it has a lot of psychological benefits, but it also has pitfalls.

47:31If you are a dividend enthusiast and you hold on to a stock during a market crash because you say, well, at least it's paying me yield every month, I think that's doing the right thing for the wrong reason. But to your point about the endowment effect, in a tax sheltered account, for example, you could sell a stock that you bought 10 years ago, repurchase it immediately, your return is exactly the same. It just feels way different. And so now you're doing the wrong thing for the wrong reasons. But it goes back to your opening comments on reframing questions. Anybody with clients has probably framed this decision for clients where it's like, should I sell a stock?

48:08And it's like, well, if you didn't own it, but you had the cash, would you go and buy it today? Well, of course not. Well, then you should sell it. Simple reframing like that, I think, catches people kind of off guard in their decision-making. Diversification, concentration. People will use Buffett as an excuse to run concentrated portfolios because Buffett once said something along the lines of diversification is for people who don't know what they're doing. And I would just like to reiterate that Buffett said that he found 10 people in his lifetime that he could identify as know what they're doing in advance.

48:35So when you're running a seven stock Canadian equity portfolio, because you've watched a bunch of YouTube videos, and you've watched Ben's videos, and you've watched some dividend growth videos, like he's not talking about you as the person that knows what they're doing. Buffett does smartly qualify, most investors should be buying index funds. And it's a shame he doesn't go deeper on that. He shouldn't be speaking in absolutes. But when he's saying most, I would guess he's talking about 99.9 % of people. He's not talking about 62 % of people. Yeah, definitely. I wanted to raise an issue with you guys and see what you think.

49:09Buffett's real superpower is not so much his ability. Well, of course, it is his ability to pick stocks and companies and make investment decisions. But it's really his long term discipline and focus that has made him as successful as he is in many ways. You talked a little bit about Berkshire changing its strategy over time, but I mean, that's inevitable. Buffett's not a trend follower, for example, and he's not a type who buys flash in the pan investments. And that's one of the reasons why he's been so successful. But I almost wonder if there's a darker side to that, or not a darker side, but a downside in the sense that a lot of people will look at Buffett and Berkshire in the 90s and they didn't get caught up in the dot-com hype and they were rewarded for it.

49:55And that's all true. But a lot of it, like in retrospect, you look back and it just kind of sound like almost Luddite behavior. I don't understand what this internet thing is. In addition to not buying into the hype and buying the garbage stocks with zero earnings, my understanding is Berkshire also did not buy some of the stocks that went on to be the most successful companies in human history. And so you can call it discipline, but at some point it's maybe close-minded and stubborn as well. I don't know. Again, this is not any knock against Buffett personally. Maybe I'm feeling a little bit like this with crypto.

50:33So many of us have been saying for years, it's not a real asset, it's unsustainable. And I feel like there's going to be a point where we look back and go, you know what? Totally wrong. I don't think I'm there yet, but I'm just trying to be humble and say, we might be looking back in 10 or 20 years and say, yep, I completely got that wrong. It's a good point. Discipline is perhaps his greatest virtue. His returns are exceptional, but 19.8 % doesn't sound like a big number. Again, I'm talking to people on Twitter all the time who are like, I got 140 % last year. It's easy to beat the market. What are you talking about?

51:06Well, the greatest investor in history, his long-term track record is 19.8 % annualized. over decades and decades and decades. And for the average investor, their investment time horizon is decades and decades and decades. Your five-year performance isn't that interesting. I'm 40. In my own personal financial plans, I go to age 95. I have 55 years of investing runway in which that I need to earn returns. The probability of beating the market over that 55 years is incredibly low. So 19.8%, it's not that number, it's the time over which he did it. And that takes unbelievable discipline. The same people who are earning 100 % returns in a year like this year are also through that same behavior going to blow themselves up in the next market correction.

51:50Yeah, I'm just trying to look at the other side of that, though. Like, I guess my point was that when he resisted the hype of the dot com bubble, that was the period where he outperformed the S &P 500, or at least in that sort of lost decade after the dot-com crash, he did extremely well. But in the period since then, a lot of companies that seemed like hype at the time have actually proven themselves to be extremely valuable companies. Maybe he was a bit late to the game on them, and that helps explain the underperformance after that period. It's hard to be right all the time. When you have a disciplined, consistent strategy, it's going to appear to not work over some periods.

52:34And as he's shown, if you get it right early on, you can be a little bit wrong later and still have the momentum, but you don't want to be moving in and out of different strategies because then you're chasing yesterday's returns and fighting the previous war or whatever other mixed metaphor you want to use. The fact that he stayed consistent has meant that he has looked foolish sometimes, but he has stood the test of time by sticking to those principles. I think it's very possible. We're having this conversation in December, 2024, and US equity valuations are edging up to dot-com bubble levels.

53:16It's very possible. I'm not predicting a market crash. We talk about US expected stock returns maybe being a little bit lower than the past because of where valuations are. I think that's probably true, but I'm not predicting a crash tomorrow or anything like that. But market valuations look a whole lot like the last time people were saying, well, Buffett's lost his touch or whatever. So we're saying now, well, hey, Buffett's underperformed the US market, but in a year, things could change. Valuations would come back down and all of a sudden, Buffett looks pretty smart again. Give him another 10 years.

53:44I don't know if he has 10 more years. Give the company another 10. If that happens, if that outcome happens, that'd be pretty incredible end to the whole story. Even if it's his successors though, I think it would still be pretty incredible to see Berkshire outperform again, but that's not the reality today. I think your point about discipline and potentially missing out on stuff is really important, Dan. We know stock returns are very skewed. We know a huge portion of the market's return comes from a relatively small number of stocks. Buffett gets this to an extent. He talks about it. This is why you should just index.

54:12But if you don't own everything, there's a good chance you miss out on those best performers. And they may be in an industry you don't like if you're an active investor. They may be in an industry you don't understand, but it doesn't mean you should miss out. I might be making this up, but didn't you say one of his greatest investing regrets so he's not buying Apple sooner or something like that. I think he has said something like that, yeah. And he eventually did buy it. Well, and it became a massive component of Berkshire, like nearly 50 % at one point, I believe. I think he's trimmed it recently.

54:35So I pulled up the overall gain instead of the annualized gain, because you were talking about that, how important the time horizon is. So that 19.8 % versus 10.2 % annualized, this is from their 2023 shareholder letter over the period 1964 to 2023. In cumulative terms, that's 31 ,223 % for the S &P 500, 4 ,384 ,748 % for Berkshire Hathaway. That's insane. We have this exponential growth bias or hyperbolic discounting. We have a tough time visualizing what compounding and discount rates do over long periods of time. When you said 31 ,000 for the S &P, I was expecting like 250 ,000 for Berkshire.

55:204 million. That's unbelievable. I know. It's crazy. The point about discipline is huge. Buffett's done this forever. Before there was any academic research or any whatever else somebody else could lean on to say, this is the right way to do this. Buffett didn't have that. He was doing his own thing. In the first tech run-up, people were saying, you're wrong. You're missing out. He's doing his thing. It worked for a long time. As I mentioned a minute ago, I wouldn't be surprised if US equity valuations of the type of stocks Buffett doesn't own come down and Berkshire ends up looking pretty smart again.

55:52I'm not predicting that, but I wouldn't be surprised if it does happen. And then we'd have to go back and redo this whole episode and say that it is possible to beat the market. Well, and it's true, like one market event can largely change that 22 or then 23 year history. You'd have to cherry pick different dates, but exactly. A hundred percent. Change the start date. I'm guessing that a lot of the underperformances has come in the last 10 of those 22 years. Looking at the chart, that looks about right. I don't know, but I'm just assuming that probably 2000 to 2008 or so, he probably did quite well.

56:26Buffett's Alpha was published in 2018. If he really is still tilted to certain factors, especially in the US markets, it's largely been large cap growth over the past 10 or 15 years. And if he is actually tilted away from that, then you would expect him to have underperformed just from the factor exposure alone. Totally. As every value investor has experienced. We'll have our day. Don't worry. Patience. You need Buffett-like discipline. Well, I mean, the nice thing about the dimensional approach, if you can call that value investing, which it is to an extent, but you still own the market and you're not concentrated in a small handful of value stocks.

57:03It's pretty close to index investing just with a little bit of spice.

57:11All right, let's go into the after show. I did want to mention that I was on the Wealthy Barber podcast, Dave Chilton's podcast. Not that I'm competitive at all. I swear I'm not. But that episode of their podcast episodes they've released has had by far the most downloads after two days, even relative to episodes I've had out for months. So I'm not going to lie. I'm pretty happy about that. That was fun. I mean, Dave Chilton's kind of like a legend. I've watched him on TV when he was on Dragon's Den. And so doing a podcast with him was pretty cool. He's a full on legend. He's like the OG Canadian personal finance content creator.

57:44When was the first edition of his book released? 1989. Incredible. He's been around for a long time. There was definitely nothing like it at the time. That was a back in a day where you could say you should just invest in mutual funds and expect 10 % a year. And it wasn't crazy in 1989. Yeah. So you can check that podcast out anywhere. It's on YouTube and on all the podcast platforms, but I thought that was cool. And I did also want to mention our Mike Green and Randy Cohen episode, which was not a debate, but a discussion. There was no winner in my eyes. I think it was just a discussion between two pretty well-informed smart people.

58:18That episode has been generally very well-received. I've heard from lots of people that it was their favorite episode ever of all of our podcast episodes they've listened to. Interestingly, I have also heard less favorable reviews where, well, most people seem to have loved it. There seems to be some people who couldn't finish the episode and found either Mike or Randy to be hard to listen to. I didn't get that at all. I thought they were both really respectful and had a great, well-informed discussion. I just find it interesting that most people seem to really like it. Some people either didn't like Randy or didn't like Mike, which leads me to believe that those people may just have a bias toward one way of thinking over the other and had trouble listening to both sides.

59:00I don't know if you guys listened to that episode. I think it's confirmation bias. If you go into that discussion already heavily biased towards one side, you might find the other person a little bit hard to take. Obviously, we all have our own biases. I personally found that episode to be really refreshing because let's agree that most of what passes for discussion and debate these days is people yelling at each other and refusing to budge. It was amazing how many times they checked in with each other and effectively said, okay, I think we can get to some consensus on this point. So I will give you that.

59:37And I agree with you, but, and then they would go on to discuss where they differed. But there wasn't this idea of I'm on one ideological end, you're on the other. We're just going to smash four heads against each other for two hours and refuse to give an inch. It was a very, very civilized discussion and well moderated by you guys. So I quite enjoyed it. It was very long, but I got through it without any problem at all, which isn't always the case for some long podcast. I don't mean this one specifically, of course, but others, there are a lot of two hour podcasts out there that I can't get through, but that one I thought was excellent.

1:00:12So I think you guys did a great job. Mostly Mike and Randy, honestly, we didn't say much in that episode. We all agreed beforehand what we wanted to cover. We didn't get through all of it, but we got through most of it. They knew where to go. And I agree with you. They had really good dialogue together. They listened to each other. And it was just an overall good discussion. And it left us and the other listeners with what are the questions that they didn't agree on? And that's what we should care about. That's what we should go and try and figure out next. And I think they would agree with you on that.

1:00:40I don't think either of them said, I'm 100 % correct on this with virtual certainty. Anybody who disagrees with me is dead wrong. It's just this concerns me. I think it's an unresolved issue. We should pay attention to it. That's what a good debate is. I've got some specific things that I'll take away and talk to some of the other people we've had on our podcast about just on those related topics. I'll try and sort some of the remaining questions I have out and then hopefully we can report back on that in a future episode. We've got two new reviews here. Pretty positive review. I don't know. Maybe as positive as it could possibly get.

1:01:13Literally changed my life. All right. It's pretty good. The quality of financial advice offered in this podcast is amazing. I've since gone back and listened to every episode. I always find it incredible when people say that they've done that. And also it makes me a little nervous. I don't know. Was I good at podcasting seven years ago? Probably not. Probably not. I went back and watched some of your earlier YouTube videos, Ben. Stop, stop it. Stop it. That's how you get better, man. You got to get the reps in. I was an original listener of the RR like when it first came out. I haven't gone back now and listened to the earlier episodes, but maybe I shouldn't.

1:01:41I can't watch my old videos. I'm so ridiculous. Some people leave comments every now and then. Wow, you've gotten so much better over time. Thanks. I appreciate it. Well, it's like anything you do though, any creative work, you're going to get better. It's like drawing. And if you're not improving, then something is critically wrong, but you've been doing it for a long time. So it's progress. This person says, I've since come back and listened to every episode and it's given me the confidence I need to better manage my financial future. Very nice. That's from Acid Caribou in Canada. Very nice.

1:02:08Randy and Michael's debate. Awesome. Michael might be the only individual on earth that sees it all, which scares me more than anything because Einstein was pretty much the only individual on earth that saw the light. There has to be math involved in this equation. It's large numbers, but absolutely a fascinating discussion. Thank you. That's from Andrew 40 ,001 from Apple Podcasts, and he is in the USA. Tons of comments on that episode. If you want to go into the RationalMinder community and see what everybody thought, I think there's like 190 or so comments from people in there. Are you planning to host more debates like that?

1:02:40Has that been talked about? I don't know. Those two guys are really well suited for that format. Mike is a very good speaker. He's very calm. He's very composed. Randy was suggested to us by people listening to the Mike Green episode and they contacted me. People who are practitioners or academics and finance or a combination, they listened to the Mike Green episode and they said, that was a really interesting discussion, but I think that there's another perspective that needs to be heard. I was like, cool. I'm not going to debate Mike Green because he's really, really good at speaking and thinking quickly.

1:03:12Sorry, I said debate. We intentionally didn't make that a debate because that's not what I wanted it to be. It was a discussion. There was no winner. I told some of the people who contacted me, like, listen, I would host that kind of discussion. If you have someone that can speak on Mike's level and has the quick thinking ability that Mike has, then I think that'd be great. That took a few weeks of people asking around and poking around to find someone that was one, knowledgeable enough to have that discussion, two, willing to engage in a public format, and three, able to speak at Mike's pace or think at Mike's pace.

1:03:42That's how we found Randy Cohen. If there's a topic that's as divisive and that we can find two people on who can speak as respectfully and intelligently as those guys, then for sure, I would do it again. I think that was a relatively rare... A bunch of things came together that made that work. It's not obvious to me that we could recreate it. I would if the opportunity arises for sure. I thought that was cool. Not a review, but I did want to mention Michael Mobison, who is someone that I've followed for a very long time. He's written a ton of really interesting stuff. He's written about the paradox of scale that we talked about earlier.

1:04:13His writing's incredible. He tweeted, the Rational Reminder podcast is wonderful for anyone who wants to learn about financial economics and investing. Benjamin Felix and Cameron Passmore, he didn't know you guys yet. He's not caught up on episodes, I guess. Do a great job with excellent guests on important topics, including the rise of indexing. I guess he listened to the Mike Green, Randy Cohen episode. Listening to finance professors is almost always easier than reading them. Their main points are often clearer. They discuss nuances and identify what work is left to be done. That was pretty cool because like I said, I followed Michael Mabosan for a very long time and I think he's an incredible thinker and writer to see that he one listens to the podcast and two wanted to tell other people about it.

1:04:51I thought it was pretty cool. Very nice endorsement from a big name for sure. His work is great. Yeah, it is. Okay, last thing. Our year-end episode, we're switching up the format this year. Historically, we have done this work-intensive, time-intensive process where Cameron goes through all the episodes of the year and picks out snippets, and then we clip them together in an episode that we then add additional commentary onto each clip. Very time-intensive for Cameron, for our production team, and for Cameron and I to record it together. So we're going to try something different. We submitted or we sent out a form that we asked people on Twitter and LinkedIn and in the rational matter community.

1:05:29We said, submit your AMA questions. We're going to do an AMA. We received 158 questions, which I don't think we were quite expecting that many. Over the course of eight days, people spent on average 18 minutes with the form open, thinking about what they were going to ask. That's incredible. 18 minutes. It's a lot of thinking. A lot of time went into that. I guess we outsourced the time to our listeners for this. 18 minutes times 158. That's a lot of time. Still time intensive. Just we diversified it a little bit, spread it around. So our plan is to go through as many as we can. I tried using chat GPT to see if there were like redundant questions that could be grouped together.

1:06:06And it said no, but I was chatting to somebody who has enterprise access to Claude and perplexity. And they suggested that those might come up with a different answer. So we're going to try that and see if we can group some of these together to get the number of questions down without sacrificing anybody's question. Are you going to get that software to give us the answers as well? Yeah, maybe I should. It's much less time consuming. Feed it all the past episodes and get it to give us the answers. Yeah. So hopefully we can get that down from 158 to some smaller number, but we'll try and go through as many as we can within reason.

1:06:35There are lots of really good questions. So I think it's going to be an interesting episode to finish the year off. Are we going to prepare answers to those questions or is it going to be live? We're recording that episode on December 9th, Mark. So get moving. I'm not going to have very much time to prepare. I haven't looked at the questions at all. Not a single one. I can send them to you. I think most of them we can probably go off the cuff. And if there's one that we can't answer off the cuff, we can say whatever thoughts we have and maybe come back to it later. I don't know. Like a true AMA.

1:07:01I think it's probably more fun if we don't prepare. That's what I'm thinking. I think the genesis of AMAs are largely Reddit. Maybe I'm wrong, but AMAs are very, very popular on Reddit. I'm sure they still are, right? Where somebody's there and the audience is asking them questions and they're responding live. So I think that's true to the spirit of the original format of an AMA. I don't want to be over prepared. And it depends on the depth of the questions too. I'll just pitch all the technical stuff over to you guys and I'll answer the ones that require very little thinking and preparation. I'm just laughing because I think we've rarely been over prepared.

1:07:29I'm only speaking for myself. Yeah. Likewise. I'm usually over prepared. Ben is usually over prepared. For Dave Chilton's podcast, I did zero preparation. He didn't even send me the questions ahead of time. I was like, what topic is he going to cover? He didn't know the questions ahead of time. That may be true. All right. Anything else? I think we're good. All right. Thanks, everyone, for listening. We'll see you next time. Thanks.