1 00:00:00,000 --> 00:00:03,100 He did it again. Warren Buffett one again, and he 2 00:00:03,100 --> 00:00:06,700 always will because he is the best investor to ever live. 3 00:00:07,200 --> 00:00:09,500 And, in my opinion, it's not even close. 4 00:00:09,800 --> 00:00:11,900 It's not like there's Warren Buffett. 5 00:00:11,900 --> 00:00:15,200 And then a close second and third and fourth place, this 6 00:00:15,200 --> 00:00:18,900 isn't like a debate between Michael Jordan and LeBron. 7 00:00:18,900 --> 00:00:23,500 James is just Warren Buffett, there's Warren Buffett and then 8 00:00:23,500 --> 00:00:27,300 there's everyone else and none of them are close s. 9 00:00:27,300 --> 00:00:29,600 Now this has been pointed out time and time again. 10 00:00:30,000 --> 00:00:32,400 We have articles from The Wall Street Journal hair saying that 11 00:00:32,400 --> 00:00:33,000 Warren. Buffett. 12 00:00:33,000 --> 00:00:36,800 Wannabes are now losing luster? This is referring to the many 13 00:00:36,800 --> 00:00:38,800 people. The many people that thought 14 00:00:38,800 --> 00:00:42,800 that they could outsmart outwit and outdo Warren Buffett 15 00:00:42,800 --> 00:00:45,500 strategy by investing in lots of various companies. 16 00:00:45,700 --> 00:00:48,600 Many of them exciting tech companies and one aisle, they're 17 00:00:48,600 --> 00:00:51,400 losing their luster and they're moving back to index funds. 18 00:00:51,400 --> 00:00:54,600 They have succumbed to defeat only a couple years into their 19 00:00:54,600 --> 00:00:57,000 investing career. It's not individual investors 20 00:00:57,000 --> 00:00:59,500 being the only ones to have claimed to be Warren. 21 00:01:00,000 --> 00:01:02,200 Or to be better than Warren Buffett or to be able to beat 22 00:01:02,200 --> 00:01:05,300 him at his own game. We have lots of popular figures 23 00:01:05,300 --> 00:01:08,900 doing the same thing. We have people like Arc invest 24 00:01:08,900 --> 00:01:13,000 with Kathy would she was talked about to be almost the new 25 00:01:13,000 --> 00:01:17,400 Warren Buffett, a newer upgraded younger one that invests in more 26 00:01:17,400 --> 00:01:20,500 exciting Innovative companies that are outside of Warren 27 00:01:20,500 --> 00:01:24,700 Buffett's, circle of competence. We have people like shamalia 28 00:01:24,700 --> 00:01:27,000 patea. He actually compared himself to 29 00:01:27,000 --> 00:01:28,900 Warren Buffett. Many times, comparing his 30 00:01:28,900 --> 00:01:31,300 performance too warm. Buffett and tell of course his 31 00:01:31,300 --> 00:01:33,600 fun tanked and his performance became terrible. 32 00:01:33,800 --> 00:01:36,000 Only a couple years. After starting we have people 33 00:01:36,000 --> 00:01:38,200 like Bill Ackman. Also being compared to Warren 34 00:01:38,200 --> 00:01:40,900 Buffett. We have people like Dave Portnoy 35 00:01:40,900 --> 00:01:43,300 saying that they're the new Warren Buffett, lots of 36 00:01:43,300 --> 00:01:45,900 different challenges are coming and going and that's going to be 37 00:01:45,900 --> 00:01:49,700 the theme of today's video. Why is it that nobody can beat 38 00:01:49,700 --> 00:01:52,600 Warren Buffett? Why is it that he is able to do 39 00:01:52,600 --> 00:01:57,100 something that's so difficult to replicate his performances out 40 00:01:57,100 --> 00:02:00,200 of this world. It's literally almost so Or to 41 00:02:00,200 --> 00:02:02,600 be better than Warren Buffett or to be able to beat him at his 42 00:02:02,600 --> 00:02:05,300 own game. We have lots of popular figures 43 00:02:05,300 --> 00:02:08,900 doing the same thing. We have people like Arc invest 44 00:02:08,900 --> 00:02:13,000 with Kathy would she was talked about to be almost the new 45 00:02:13,000 --> 00:02:17,400 Warren Buffett, a newer upgraded younger one that invests in more 46 00:02:17,400 --> 00:02:20,500 exciting Innovative companies that are outside of Warren 47 00:02:20,500 --> 00:02:24,700 Buffett's, circle of competence. We have people like shamalia 48 00:02:24,700 --> 00:02:27,000 patea. He actually compared himself to 49 00:02:27,000 --> 00:02:28,900 Warren Buffett. Many times, comparing his 50 00:02:28,900 --> 00:02:31,200 performance too warm. Buffett and tell of course his 51 00:02:31,200 --> 00:02:33,600 fun tanked and his performance became terrible. 52 00:02:33,800 --> 00:02:35,900 Only a couple years. After starting we have people 53 00:02:35,900 --> 00:02:38,100 like Bill Ackman. Also being compared to Warren 54 00:02:38,100 --> 00:02:40,900 Buffett. We have people like Dave Portnoy 55 00:02:40,900 --> 00:02:43,300 saying that they're the new Warren Buffett, lots of 56 00:02:43,300 --> 00:02:45,800 different challenges are coming and going and that's going to be 57 00:02:45,800 --> 00:02:49,700 the theme of today's video. Why is it that nobody can beat 58 00:02:49,700 --> 00:02:52,600 Warren Buffett? Why is it that he is able to do 59 00:02:52,600 --> 00:02:57,100 something that's so difficult to replicate his performances out 60 00:02:57,100 --> 00:03:00,300 of this world. It's literally almost so Good 61 00:03:00,300 --> 00:03:02,700 that it's like fictitious. It's like something you'd read 62 00:03:02,700 --> 00:03:06,000 in a fantasy novel from 1965 to current year. 63 00:03:06,000 --> 00:03:13,300 He has a compounded annual gain annual, gain of 19.8%, almost 20 64 00:03:13,300 --> 00:03:17,100 percent returns per year for 57 years straight. 65 00:03:17,400 --> 00:03:19,800 That is a record that no one even comes close to. 66 00:03:20,000 --> 00:03:23,200 There is no close. Second place, his overall 67 00:03:23,200 --> 00:03:28,000 returns is a number again that seems made up its three million, 68 00:03:28,100 --> 00:03:31,400 seven hundred, and eighty seven. Thousand four hundred and sixty 69 00:03:31,400 --> 00:03:36,300 four percent returns, again, three million, 700, thousand 70 00:03:36,300 --> 00:03:39,300 percent Returns the company that he's created is so big. 71 00:03:39,300 --> 00:03:41,400 It's listed as one of the top. Ten companies in the market 72 00:03:41,400 --> 00:03:44,100 right now, it has operating earnings at beats out almost 73 00:03:44,100 --> 00:03:47,300 every other company except for Apple of which he's a huge 74 00:03:47,300 --> 00:03:50,300 shareholder of Buffett is the best and there's no one close. 75 00:03:50,300 --> 00:03:54,000 Now we have some information on how he's able to do this but a 76 00:03:54,000 --> 00:03:57,600 lot of it I think is very vague. Buffett likes to speak in these 77 00:03:57,600 --> 00:03:59,800 platitudes and in these different cliches. 78 00:04:00,000 --> 00:04:02,000 Things, right? It's better to have a bird in 79 00:04:02,000 --> 00:04:04,800 the hand, than two in the bush stuff like that, where you can 80 00:04:04,800 --> 00:04:07,600 get some meaning from it. But it's it's difficult to kind 81 00:04:07,600 --> 00:04:09,900 of dissect what he really does with his Investments. 82 00:04:10,300 --> 00:04:13,700 So, in today's video, what I hope to do is actually dig in 83 00:04:13,900 --> 00:04:17,300 and try to break through these cliche sayings and make them 84 00:04:17,300 --> 00:04:20,700 into more relevant and specific investment techniques. 85 00:04:20,800 --> 00:04:23,400 Now, before we jump in, just a quick mention today is the 86 00:04:23,407 --> 00:04:25,700 beginning of the month, which means it's time to check out the 87 00:04:25,700 --> 00:04:28,000 patreon. If you haven't already, you can 88 00:04:28,000 --> 00:04:32,200 join today and you will not Not pay anything until the beginning 89 00:04:32,200 --> 00:04:35,600 of next month which means you have an entire month to trial 90 00:04:35,600 --> 00:04:37,300 it. 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We're constantly doing upgrades 102 00:05:09,500 --> 00:05:13,500 to this as well, and all of this is for $10 a month with a 103 00:05:13,500 --> 00:05:16,900 month-long free trial. So there's no risk. 104 00:05:16,900 --> 00:05:19,600 No strings attached cancel, anytime, join today. 105 00:05:19,600 --> 00:05:21,000 Try it out. I think you'll love it. 106 00:05:21,100 --> 00:05:22,700 Now, again, diving into the subject. 107 00:05:22,700 --> 00:05:25,700 I think it's an interesting question of why nobody can seem 108 00:05:25,900 --> 00:05:29,300 to beat Warren Buffett. He always wins every single 109 00:05:29,300 --> 00:05:32,200 time. He has for over 60 years during 110 00:05:32,200 --> 00:05:34,500 that time period. There's many time periods in 111 00:05:34,500 --> 00:05:38,300 between little Windows of time where there's doubters where it 112 00:05:38,300 --> 00:05:40,400 seems like buffets going to lose. 113 00:05:40,700 --> 00:05:43,700 There was a time period where Bill Ackman was being talked 114 00:05:43,700 --> 00:05:47,700 about as baby Buffett up until this point in 2015, he had 115 00:05:47,700 --> 00:05:51,500 phenomenal returns, everything was going his way, then, he had 116 00:05:51,500 --> 00:05:55,800 the Valiant implosion, his fun claps dramatically and it looked 117 00:05:55,800 --> 00:05:59,800 like he was no longer a baby Buffett that term Slipped Away. 118 00:06:00,300 --> 00:06:03,700 And now people are hesitant to compare Bill Ackman with Warren 119 00:06:03,700 --> 00:06:05,700 Buffett. Now his return since then have 120 00:06:05,700 --> 00:06:07,500 been decent. I think he's learned a few 121 00:06:07,500 --> 00:06:10,500 things but he's no Buffett. He's not even close to Warren 122 00:06:10,500 --> 00:06:12,300 Buffett. We look at some other people 123 00:06:12,300 --> 00:06:15,000 that I think are even further away that were also claimed to 124 00:06:15,000 --> 00:06:19,500 be the new Buffett, chamath polly have patea often compared 125 00:06:19,500 --> 00:06:24,000 himself to Warren Buffett in his investor presentations for his 126 00:06:24,000 --> 00:06:26,500 own fund. He literally mapped out his 127 00:06:26,500 --> 00:06:29,700 performance, the first year, against the first year of 128 00:06:29,800 --> 00:06:32,900 Berkshire Hathaway. He continued to do this until 129 00:06:32,900 --> 00:06:35,600 his fund underperformed Berkshire Hathaway. 130 00:06:35,800 --> 00:06:38,800 Then all of a sudden that comparison was out of his out of 131 00:06:38,800 --> 00:06:41,800 his investor presentation. Now trim off Bali Hai patea 132 00:06:42,000 --> 00:06:44,800 compared himself to Warren, Buffett's saying that his spax, 133 00:06:45,100 --> 00:06:48,800 these specs are going to be like his Berkshire Empire. 134 00:06:48,900 --> 00:06:51,200 Well luckily for us we can look at the performance of aspects 135 00:06:51,200 --> 00:06:55,200 and see how this new Warren Buffett is doing space spce 136 00:06:55,200 --> 00:06:59,400 which is Virgin Galactic that's one of his specs stand 53% all 137 00:06:59,400 --> 00:07:01,000 time. That one hasn't been going. 138 00:07:01,000 --> 00:07:05,500 Well, we have Sophie that bank it's down 66 percent over the 139 00:07:05,500 --> 00:07:09,400 past two years 38% all time, we have Clover Health Care. 140 00:07:09,400 --> 00:07:13,200 This one's down 88% all time. Another trough Polly, hepatitis 141 00:07:13,200 --> 00:07:16,100 back and of course we have opened or the real estate's 142 00:07:16,100 --> 00:07:18,500 pack. That's down 88%, all time, and 143 00:07:18,500 --> 00:07:21,700 has never made any real money. But again, this was talked about 144 00:07:21,700 --> 00:07:25,000 by cumali, huh? Fatiha the king of spax as 145 00:07:25,000 --> 00:07:26,100 being. The new Buffett. 146 00:07:26,100 --> 00:07:28,800 This is his Empire that he's built a bunch of companies that 147 00:07:28,800 --> 00:07:32,000 barely have any It's that are all down dramatically all time. 148 00:07:32,000 --> 00:07:34,200 Now, of course, we have many contenders after that, we have 149 00:07:34,200 --> 00:07:36,400 people like Kathy would, with Arc and evasion. 150 00:07:36,800 --> 00:07:40,300 She was talked about as being the new Warren Buffett. 151 00:07:40,300 --> 00:07:43,200 Someone that represented a younger generation that she 152 00:07:43,200 --> 00:07:46,600 could see through all the mess of the older companies that were 153 00:07:46,600 --> 00:07:48,900 going to be disrupted by her newer. 154 00:07:48,900 --> 00:07:52,800 Younger more Nimble, Innovative companies and many YouTubers 155 00:07:52,800 --> 00:07:55,800 referred to Kathy would as being the new Warren Buffett. 156 00:07:55,800 --> 00:07:59,800 She represented Innovation him, he was literally old and washed 157 00:07:59,900 --> 00:08:01,600 Stop. These were the type of videos 158 00:08:01,600 --> 00:08:05,300 made in 2020 during the explosion of Arc Innovation. 159 00:08:05,700 --> 00:08:08,700 Now since then, we know how the story played out, it's down, 71 160 00:08:08,700 --> 00:08:10,500 percent, its underperform Berkshire. 161 00:08:10,500 --> 00:08:14,200 Hathaway with a huge amount of volatility and of course it's 162 00:08:14,200 --> 00:08:15,300 become abundantly. Clear? 163 00:08:15,300 --> 00:08:17,400 That Cathy wood is no Warren Buffett. 164 00:08:17,400 --> 00:08:19,900 So there's been many Challengers that over the years have come 165 00:08:19,900 --> 00:08:22,200 and gone as the new Warren Buffett. 166 00:08:22,500 --> 00:08:25,000 And then over time it's revealed that they're not the new Warren 167 00:08:25,000 --> 00:08:26,700 Buffett. They're not a replacement 168 00:08:26,700 --> 00:08:30,200 they're not as good at investing as Warren Buffett at the end of 169 00:08:30,207 --> 00:08:33,500 the day there's one Warren Buffett and it's Warren Buffett. 170 00:08:33,799 --> 00:08:36,200 Now we can choose to learn from a lot of different people but 171 00:08:36,200 --> 00:08:38,799 personally I'd rather just try to learn from the best. 172 00:08:39,000 --> 00:08:40,799 So what I want to do is go through this letter and 173 00:08:40,799 --> 00:08:44,600 highlight my takeaways from what I think are the most important, 174 00:08:44,600 --> 00:08:46,700 most revealing things that Warren Buffett shares. 175 00:08:46,700 --> 00:08:49,200 The first thing that he emphasizes is something that he 176 00:08:49,200 --> 00:08:52,000 has repeatedly emphasized over and over and over again 177 00:08:52,000 --> 00:08:54,200 throughout his career. And no matter how many times 178 00:08:54,200 --> 00:08:57,700 Warren Buffett says this, most investors still don't do it. 179 00:08:57,700 --> 00:08:59,700 They don't follow this advice, they do. 180 00:08:59,900 --> 00:09:02,500 View their stocks in this manner. 181 00:09:02,800 --> 00:09:06,000 He says, our goal in both forms of ownership is to make 182 00:09:06,000 --> 00:09:08,200 meaningful investments in businesses. 183 00:09:08,600 --> 00:09:12,800 Businesses being emphasized with both, long-lasting favorable 184 00:09:12,800 --> 00:09:15,800 economic characteristics, and trustworthy managers. 185 00:09:16,900 --> 00:09:19,100 He doesn't say. And I want to highlight what he 186 00:09:19,100 --> 00:09:24,500 doesn't say, he doesn't say our goal is to buy cheap stocks with 187 00:09:24,500 --> 00:09:30,200 low P/E ratios and time when the multiple expands That's not what 188 00:09:30,200 --> 00:09:31,400 he says. What does he say? 189 00:09:31,600 --> 00:09:35,800 We're buying businesses with both long-lasting favorable 190 00:09:35,800 --> 00:09:39,500 economic characteristics. That means profitable businesses 191 00:09:39,800 --> 00:09:43,400 highly profitable when Warren Buffett uses long-lasting 192 00:09:43,400 --> 00:09:46,600 favorable economics. That means highly profitable. 193 00:09:47,100 --> 00:09:52,200 High barriers to entry business, very long durable modes, so he's 194 00:09:52,200 --> 00:09:55,200 not looking for cheap companies, trading at low multiples, that 195 00:09:55,200 --> 00:09:59,100 might have a quick expansion of PE he's looking for businesses 196 00:09:59,100 --> 00:10:02,100 that have Good profitability and wide modes. 197 00:10:02,500 --> 00:10:05,000 He also looks for trustworthy managers which I think is 198 00:10:05,000 --> 00:10:08,000 straightforward, please note, particularly that we own 199 00:10:08,000 --> 00:10:10,400 publicly traded. Stocks based on our expectations 200 00:10:10,400 --> 00:10:13,100 about their long-term business performance. 201 00:10:13,500 --> 00:10:16,200 Again, he's always looking at the operating performance of the 202 00:10:16,200 --> 00:10:17,900 company. In fact, when Warren Buffett 203 00:10:17,900 --> 00:10:19,900 actually reports the earnings of Berkshire Hathaway. 204 00:10:20,200 --> 00:10:23,700 He says to focus on the operating income because a stock 205 00:10:23,700 --> 00:10:26,900 prices of all of their publicly traded holding swing so much 206 00:10:26,900 --> 00:10:30,300 that throws off the pnl that's reported and the thing to 207 00:10:30,300 --> 00:10:33,300 actually focus on is the operating income. 208 00:10:33,700 --> 00:10:37,900 So right there, he gives us a lot of information jam-packed 209 00:10:37,900 --> 00:10:41,300 and it was single paragraph. He's not buying the cheapest 210 00:10:41,300 --> 00:10:45,300 companies at favorable prices. He's buying high-quality 211 00:10:45,300 --> 00:10:48,700 long-lasting, favorable economic characteristics of businesses 212 00:10:49,100 --> 00:10:53,400 that have wide modes and then he views these as businesses. 213 00:10:53,600 --> 00:10:57,100 He tracks their business performance, not their stock 214 00:10:57,100 --> 00:11:00,500 price. He says not because View them. 215 00:11:00,600 --> 00:11:03,400 And this is again, he's not buying these companies because 216 00:11:03,400 --> 00:11:07,500 we view them as vehicles. For adroit purchases, and sales, 217 00:11:07,800 --> 00:11:11,400 adroit means clever or witty purchases and sales. 218 00:11:11,900 --> 00:11:16,200 So he's not trying to time the Ebbs and flows of the market and 219 00:11:16,200 --> 00:11:20,500 buy during little dips and sell during little surgeon price. 220 00:11:21,400 --> 00:11:25,800 That point is crucial. Charlie, and I are not stock 221 00:11:25,800 --> 00:11:28,100 Pickers. We are business Pickers, just 222 00:11:28,100 --> 00:11:31,400 this single paragraph. This one paragraph I can get 223 00:11:31,400 --> 00:11:34,000 loads of information from. Let's go ahead and just go 224 00:11:34,000 --> 00:11:35,300 through it. And we'll break down this one 225 00:11:35,300 --> 00:11:37,400 paragraph. We have companies that we want 226 00:11:37,400 --> 00:11:39,600 to buy. That have favorable economic 227 00:11:39,600 --> 00:11:41,400 conditions, that means they're profitable. 228 00:11:41,700 --> 00:11:44,000 So you have companies that are not profitable companies that 229 00:11:44,000 --> 00:11:46,300 are diluting, shareholders companies that aren't generating 230 00:11:46,300 --> 00:11:48,400 any wealth. Warren Buffett is saying that he 231 00:11:48,408 --> 00:11:52,100 does not buy those companies. Number one, favorable, economics 232 00:11:52,100 --> 00:11:55,300 means profitable companies. Number two, long-lasting 233 00:11:56,200 --> 00:11:58,000 favorable economic characteristics. 234 00:11:58,100 --> 00:11:59,700 How does the company have a long-lasting? 235 00:11:59,900 --> 00:12:03,400 Favorable economics a moat. They need to have high barriers 236 00:12:03,400 --> 00:12:06,300 to entry something. That's very difficult to 237 00:12:06,300 --> 00:12:10,400 replicate or be disrupted. So we have profitable companies 238 00:12:10,600 --> 00:12:12,900 with a wide mode. They're going to be profitable 239 00:12:12,900 --> 00:12:15,800 for a long period of time. The next thing that he points 240 00:12:15,800 --> 00:12:20,400 out is the mentality, his mentality differs from what most 241 00:12:20,400 --> 00:12:23,300 investors have. He says that he buys companies 242 00:12:23,700 --> 00:12:26,400 with the view of them being businesses and tracking their 243 00:12:26,400 --> 00:12:29,500 operating performance. This right here is something 244 00:12:29,500 --> 00:12:31,300 again. Then I think is very difficult 245 00:12:31,300 --> 00:12:34,400 for most investors to do, because what Warren Buffett is 246 00:12:34,400 --> 00:12:39,700 able to do is to decouple, the stock price performance from his 247 00:12:39,700 --> 00:12:43,500 sentiment on the stock, most investors become very bearish. 248 00:12:43,500 --> 00:12:47,000 As the stock price comes down their sentiment get slower. 249 00:12:47,300 --> 00:12:49,300 They view the stock less favorably. 250 00:12:49,800 --> 00:12:52,700 Warren Buffett doesn't do that. The price does not dictate his 251 00:12:52,700 --> 00:12:56,000 sentiment at all. The business performance does 252 00:12:56,000 --> 00:13:01,400 the operating performance does. So He is different with Buffett, 253 00:13:01,600 --> 00:13:04,500 not only does he buy great businesses with great moats? 254 00:13:04,600 --> 00:13:07,400 Great profitability. Good long-standing economics, 255 00:13:08,000 --> 00:13:10,500 but he attracts their operating performance. 256 00:13:10,700 --> 00:13:14,000 And then you decouples, that from the price of the stock. 257 00:13:14,200 --> 00:13:16,100 And then, finally, the last thing that he highlights is a 258 00:13:16,108 --> 00:13:19,800 point that he's often repeated, they are not stock Pickers, they 259 00:13:19,800 --> 00:13:21,800 are business Pickers. So Warren Buffett views 260 00:13:21,800 --> 00:13:24,900 Berkshire as a conglomerate of a lot of different businesses will 261 00:13:24,900 --> 00:13:27,800 compound, their intrinsic value faster than the rest of the 262 00:13:27,800 --> 00:13:30,100 market. He identifies these Pennies. 263 00:13:30,100 --> 00:13:32,400 Many of them like energy companies, many of them like 264 00:13:32,400 --> 00:13:35,300 insurance companies, many of them, with consumer companies, 265 00:13:35,300 --> 00:13:38,900 like Coca-Cola companies that have great economics. 266 00:13:39,200 --> 00:13:42,000 Favorable economics, they have very wide modes. 267 00:13:42,200 --> 00:13:45,300 They have intrinsic value that grows over time and he holds 268 00:13:45,300 --> 00:13:48,200 them for decades at a time decades. 269 00:13:48,400 --> 00:13:52,500 Most investors hold stocks for an average of less than one 270 00:13:52,600 --> 00:13:54,600 year. So why do you think Warren 271 00:13:54,600 --> 00:13:56,600 Buffett outperforms? Majority of investors. 272 00:13:56,900 --> 00:14:01,200 His timeline is longer the That he buys are better. 273 00:14:01,300 --> 00:14:04,800 They have better modes and his mentality is more stable. 274 00:14:04,800 --> 00:14:07,300 He does not convince himself to sell stocks when they're at 275 00:14:07,300 --> 00:14:09,600 Lowe's, and he doesn't view stocks, more favorably when the 276 00:14:09,608 --> 00:14:12,100 price goes up. So Buffett has a superior way of 277 00:14:12,100 --> 00:14:15,100 both identifying companies and investing in them, and a 278 00:14:15,108 --> 00:14:18,800 superior way of the mental game viewing, his performance of his 279 00:14:18,800 --> 00:14:22,500 companies and two coupling price from the actual business moving 280 00:14:22,500 --> 00:14:24,500 on from that. First paragraph, that's loaded 281 00:14:24,500 --> 00:14:26,500 with information. We get to the second paragraph, 282 00:14:26,700 --> 00:14:29,600 over the years, I have made many mistakes consequently. 283 00:14:29,700 --> 00:14:33,100 Lee our extensive collection of businesses currently consists of 284 00:14:33,100 --> 00:14:37,400 a few Enterprises that have truly extraordinary economics. 285 00:14:37,800 --> 00:14:40,700 Many that enjoy, very good economic characteristics. 286 00:14:41,100 --> 00:14:44,700 Now this is another thing where Allstate Warren Buffett, he uses 287 00:14:44,700 --> 00:14:47,900 these very vague terms. They're almost like euphemisms. 288 00:14:48,400 --> 00:14:52,100 He just says that they have very good economic characteristics 289 00:14:52,600 --> 00:14:54,600 and that can mean a lot of different things to a lot of 290 00:14:54,608 --> 00:14:56,600 different investors. Some investors might look at 291 00:14:56,600 --> 00:14:59,600 that and erroneously conclude that very good. 292 00:14:59,800 --> 00:15:02,500 Comics means a lot of Revenue growth and that's clearly not 293 00:15:02,500 --> 00:15:05,000 what Warren Buffett is saying he's never just searched out 294 00:15:05,000 --> 00:15:07,300 companies that have quick Revenue growth and said that's 295 00:15:07,300 --> 00:15:11,800 good economic characteristics. The best descriptor that I've 296 00:15:11,800 --> 00:15:15,400 seen of a company that has very good economic characteristics 297 00:15:15,700 --> 00:15:20,100 was what Terry Smith defined companies that have high margins 298 00:15:20,300 --> 00:15:24,700 High Returns on tangible assets. That's a an actual ratio that 299 00:15:24,700 --> 00:15:28,200 Warren Buffett has talked about many times Returns on tangible 300 00:15:28,200 --> 00:15:31,000 assets, Terry Smith. It says it's very close to 301 00:15:31,000 --> 00:15:34,500 Returns on Capital employed. That is the metric that he looks 302 00:15:34,500 --> 00:15:36,900 for. These are companies that when 303 00:15:36,900 --> 00:15:41,400 they bring in Revenue, they earn consistently a lot of money, 304 00:15:41,600 --> 00:15:45,400 their margins are high and then when they reinvest back into 305 00:15:45,400 --> 00:15:47,500 their business, with the money, they do earn. 306 00:15:47,800 --> 00:15:50,600 They also earn a very high return. 307 00:15:50,900 --> 00:15:54,300 So they're both gaining a lot of profit from the money, they 308 00:15:54,300 --> 00:15:57,300 bring in, and they're making a lot of returns when they invest 309 00:15:57,300 --> 00:15:59,500 money. Both of those things are great. 310 00:15:59,700 --> 00:16:03,200 If you find a company that can grow while doing both of those 311 00:16:03,200 --> 00:16:06,600 things, that is what I would Define as a business that has 312 00:16:06,700 --> 00:16:08,900 very good economic characteristics. 313 00:16:09,400 --> 00:16:12,500 Businesses that are not very good economic characteristics. 314 00:16:12,900 --> 00:16:15,600 These are businesses that grow Revenue really fast. 315 00:16:15,600 --> 00:16:17,800 While printing off shares like crazy and dilute the 316 00:16:17,800 --> 00:16:20,000 shareholder. These are businesses like the 317 00:16:20,000 --> 00:16:22,600 many that we've seen that. They have the free cash flow, go 318 00:16:22,600 --> 00:16:23,900 up. And then they have stock-based 319 00:16:23,900 --> 00:16:26,700 compensation further. Diluting the shareholder at a 320 00:16:26,700 --> 00:16:28,600 faster rate than they actually make money. 321 00:16:29,300 --> 00:16:31,300 There's a lots of companies I could go through. 322 00:16:31,600 --> 00:16:34,800 That have unfavorable economic characteristics. 323 00:16:35,100 --> 00:16:37,400 Warren Buffett has never invested in these companies. 324 00:16:37,600 --> 00:16:40,300 He never has yet investors today. 325 00:16:40,300 --> 00:16:43,800 Many of them continually seek out these companies in hopes 326 00:16:43,800 --> 00:16:47,200 that in the future, there economics will change that down 327 00:16:47,200 --> 00:16:49,500 the road. There economics will improve 328 00:16:49,900 --> 00:16:53,700 Warren Buffett has said before. He does not count on the 329 00:16:53,700 --> 00:16:56,300 economics of a business suddenly changing. 330 00:16:56,700 --> 00:16:59,200 If it's had a terrible past and it's going to have a bright 331 00:16:59,200 --> 00:17:01,400 future. Berkshire is going to miss it, 332 00:17:01,600 --> 00:17:03,600 they're not going to risk investing in those type of 333 00:17:03,600 --> 00:17:06,000 companies Berkshire. Invest in companies that already 334 00:17:06,000 --> 00:17:09,400 have good economics, they make major stakes in those companies, 335 00:17:09,599 --> 00:17:12,000 and then they watch the economics grow over time and 336 00:17:12,000 --> 00:17:14,900 have those businesses create wealth for the shareholder. 337 00:17:15,000 --> 00:17:17,800 So this is something again that, Warren Buffett gives these kind 338 00:17:17,800 --> 00:17:21,099 of phrases these euphemisms, these very general vague 339 00:17:21,099 --> 00:17:24,500 statements when you try to dive in and actually find the meaning 340 00:17:24,800 --> 00:17:27,900 I find companies with good economics, be high, margins, 341 00:17:27,900 --> 00:17:29,400 High rates of return on tangible. 342 00:17:29,600 --> 00:17:32,900 Assets High Returns on Capital employed and businesses that 343 00:17:32,900 --> 00:17:35,900 have favorable secular growth for long periods of time. 344 00:17:36,200 --> 00:17:38,800 Those are companies that truly have good economics. 345 00:17:38,800 --> 00:17:41,600 Now it goes on pointing out that there's many other companies 346 00:17:41,600 --> 00:17:45,400 with less favorable economics. He says, and a large group that 347 00:17:45,400 --> 00:17:49,800 are marginal companies with okay, economics, along the way 348 00:17:49,800 --> 00:17:53,600 other businesses in which I have invested in have died, their 349 00:17:53,600 --> 00:17:57,800 products unwanted by the public, capitalism has two sides, the 350 00:17:57,800 --> 00:18:01,200 system creates an ever-growing, High-level losers while 351 00:18:01,200 --> 00:18:05,400 concurrently delivering a gusher of improving goods and services. 352 00:18:05,600 --> 00:18:08,800 Moving on with this letter, he points out why that's okay. 353 00:18:09,100 --> 00:18:10,900 Why? It's okay that capitalism. 354 00:18:10,900 --> 00:18:14,300 Kills off some companies. As long as you pick a few that 355 00:18:14,300 --> 00:18:18,700 do really well, the secret sauce in August of 1994. 356 00:18:19,000 --> 00:18:22,200 Berkshire completed, its seven-year purchase of the 400 357 00:18:22,200 --> 00:18:24,900 million shares of Coca-Cola, we own. 358 00:18:25,000 --> 00:18:29,500 Now the total cost was 1.3 billion then a very meaningful. 359 00:18:29,600 --> 00:18:33,500 Full sum of Berkshire. So they made this big bet on 360 00:18:33,500 --> 00:18:36,200 Coca-Cola. The cash dividend we receive 361 00:18:36,200 --> 00:18:41,100 from Coke in 1994 was 75 million by 2020, to the dividend had 362 00:18:41,100 --> 00:18:44,600 increased to 704 million. So, just a quick glance at the 363 00:18:44,608 --> 00:18:50,100 math here, they invested 1.3 billion in 1994 and the dividend 364 00:18:50,100 --> 00:18:53,900 they receive on an annual basis is 704 million. 365 00:18:54,200 --> 00:18:56,400 Roughly half of their total investment. 366 00:18:56,800 --> 00:19:01,900 So every year, they're getting a 50, Sent return on the dividend, 367 00:19:02,100 --> 00:19:04,400 the dividend paying for half their initial investment. 368 00:19:04,700 --> 00:19:07,600 This company has paid for itself multiples and multiples and 369 00:19:07,600 --> 00:19:10,800 multiples over just by the dividend alone growth occurred 370 00:19:10,800 --> 00:19:12,900 every year. Just as certain as birthdays, 371 00:19:13,100 --> 00:19:16,000 all Charlie and I were required to do was Cash coax quarterly 372 00:19:16,000 --> 00:19:18,800 dividend checks. We expect that those checks are 373 00:19:18,800 --> 00:19:22,200 highly likely to continue growing and they are the 374 00:19:22,200 --> 00:19:24,800 dividend checks from Coca-Cola. Are going to continue to grow 375 00:19:25,100 --> 00:19:28,400 and the interesting thing here is Berkshire, doesn't actually 376 00:19:28,400 --> 00:19:33,000 reinvest this 104 million back into Coca-Cola because he 377 00:19:33,000 --> 00:19:35,900 doesn't necessarily think it's the best investment today. 378 00:19:36,200 --> 00:19:40,000 So uses this continual stream of cash flow to buy, other 379 00:19:40,400 --> 00:19:43,300 dividend-paying companies to further snowball his wealth. 380 00:19:43,800 --> 00:19:48,000 So this is one company being compounded rolling that snowball 381 00:19:48,000 --> 00:19:50,400 and that compounding going into different companies. 382 00:19:50,500 --> 00:19:53,400 American Express is much, the same story Berkshires, purchase 383 00:19:53,400 --> 00:19:57,200 of Amex were essentially completed in 1995 and 384 00:19:57,200 --> 00:20:01,200 coincidentally they also cost. Billion annual dividends 385 00:20:01,200 --> 00:20:05,500 received from this investment have grown from 41 million to 386 00:20:05,500 --> 00:20:09,900 three hundred and two million. Those checks to seem highly 387 00:20:09,900 --> 00:20:11,700 likely to increase in the future. 388 00:20:12,200 --> 00:20:14,900 He's highlighting here. Something that dividend 389 00:20:14,900 --> 00:20:17,700 investors are well aware of dividend growth. 390 00:20:18,300 --> 00:20:20,800 Warren Buffett is often talked about as not caring about the 391 00:20:20,800 --> 00:20:23,200 dividends but he obviously does care about it. 392 00:20:23,300 --> 00:20:26,500 He's highlighting as a part of the secret sauce of his 393 00:20:26,500 --> 00:20:30,300 Investments because what our dividends its actual Cold Hard 394 00:20:30,300 --> 00:20:33,400 Cash operating income that's being returned back to the 395 00:20:33,400 --> 00:20:36,600 investor Warren Buffett looks for companies that return 396 00:20:36,600 --> 00:20:40,100 Capital back to the investor. Not just companies that have a 397 00:20:40,100 --> 00:20:43,000 good return on Capital but companies actually return 398 00:20:43,000 --> 00:20:46,200 Capital back to the investors. In fact, one of the things that 399 00:20:46,200 --> 00:20:50,000 Charlie Munger highlighted is they like companies that spit 400 00:20:50,000 --> 00:20:53,300 cash back to them that they can deploy in other places. 401 00:20:53,800 --> 00:20:56,200 They don't like companies that just hold onto cash and they 402 00:20:56,200 --> 00:20:58,600 never return anything and they never do by back so you never do 403 00:20:58,600 --> 00:21:00,500 dividends. Aren't the Investments That 404 00:21:00,500 --> 00:21:03,300 Warren Buffett likes. He loves these ones that grow 405 00:21:03,300 --> 00:21:06,600 the dividend from a couple million to 704 million. 406 00:21:06,900 --> 00:21:09,900 He loves the Investments like Amex that grow the dividend from 407 00:21:09,900 --> 00:21:13,600 41 million the 302 million. That's what I'm trying to find 408 00:21:13,600 --> 00:21:14,900 as well, companies that can grow. 409 00:21:14,900 --> 00:21:17,800 Dividends at very fast rates because they'll have continual 410 00:21:17,800 --> 00:21:20,500 growth and their operating income, this is what's funded 411 00:21:20,500 --> 00:21:22,900 the continual growth of Berkshire Hathaway. 412 00:21:23,200 --> 00:21:26,400 All this Capital being returned to them that they can reinvest 413 00:21:26,400 --> 00:21:29,200 at another high rate of return above it, just got done. 414 00:21:29,600 --> 00:21:31,600 Lighting the entire idea of dividend growth. 415 00:21:31,600 --> 00:21:34,200 He highlighted it with Amex and with Coca-Cola. 416 00:21:34,600 --> 00:21:36,800 And again, this is something that's debated, a lot of 417 00:21:36,800 --> 00:21:38,700 investors. Don't agree with Warren Buffett 418 00:21:38,700 --> 00:21:40,200 here. They think Dividends are 419 00:21:40,200 --> 00:21:41,700 irrelevant. They don't mean anything. 420 00:21:42,000 --> 00:21:44,600 It's just something you should completely ignore buff it. 421 00:21:44,600 --> 00:21:46,400 Obviously does not see it that way. 422 00:21:46,600 --> 00:21:48,000 Look at what he's actually writing. 423 00:21:48,000 --> 00:21:50,800 He's highlighting it in the first part of his letter, he 424 00:21:50,800 --> 00:21:53,300 views dividend growth as a very favorable thing. 425 00:21:53,500 --> 00:21:55,900 He wouldn't be sharing it with other people. 426 00:21:55,900 --> 00:21:58,300 If he didn't like that, the divins were growing with this 427 00:21:58,300 --> 00:22:00,500 company. Are the dividend growth. 428 00:22:00,500 --> 00:22:03,200 He highlights something else. That's another form of returning 429 00:22:03,200 --> 00:22:06,100 Capital back to the shareholders which are BuyBacks. 430 00:22:06,400 --> 00:22:08,600 Let's go ahead and jump into his thoughts on BuyBacks at 431 00:22:08,600 --> 00:22:10,400 Berkshire. We directly increase your 432 00:22:10,400 --> 00:22:13,100 interest in our unique collection of businesses by 433 00:22:13,100 --> 00:22:16,800 repurchasing. 1.2 percent of the company's outstanding shares. 434 00:22:17,100 --> 00:22:21,000 That's your BuyBacks at Apple and Amex repurchases increased 435 00:22:21,000 --> 00:22:24,000 Berkshires ownership, a bit without any cost to you. 436 00:22:24,500 --> 00:22:27,400 The math isn't complicated. When the share count goes down 437 00:22:27,500 --> 00:22:29,400 your interest in many businesses. 438 00:22:29,500 --> 00:22:33,800 Goes up every small bit helps, if free purchases are made at 439 00:22:33,800 --> 00:22:37,100 Value accretive prices. That's a very simple principle. 440 00:22:37,300 --> 00:22:39,900 Warren Buffett, only invest in companies, and you only holds 441 00:22:39,900 --> 00:22:42,700 companies that he thinks are undervalued since their 442 00:22:42,700 --> 00:22:44,400 undervalued. All of these companies that do 443 00:22:44,400 --> 00:22:48,700 share repurchases are buying at Value accretive prices, he 444 00:22:48,700 --> 00:22:52,000 continues on emphasizing how good BuyBacks are, especially if 445 00:22:52,008 --> 00:22:56,300 a company is at or below its intrinsic value gains from the 446 00:22:56,300 --> 00:22:59,500 value creative repurchases. It should be emphasized. 447 00:22:59,600 --> 00:23:03,400 It all owners in every respect. Imagine if you will three fully 448 00:23:03,400 --> 00:23:06,900 and form shareholders of a local auto dealership one of who 449 00:23:06,900 --> 00:23:10,100 manages the business. Imagine further that one of the 450 00:23:10,100 --> 00:23:13,000 passive owners wishes to sell his interest back to the company 451 00:23:13,200 --> 00:23:16,200 at a price attractive, to the to continuing shareholders. 452 00:23:16,300 --> 00:23:19,300 When completed has this transaction harmed, anyone? 453 00:23:19,800 --> 00:23:24,300 Obviously the answer is no, is the manager somehow favored over 454 00:23:24,300 --> 00:23:27,400 the continuing passive owners? Has the public been hurt? 455 00:23:27,500 --> 00:23:29,400 This is something that a lot of politicians don't. 456 00:23:29,500 --> 00:23:33,200 Durst and when share repurchases happen this way, there's no 457 00:23:33,200 --> 00:23:35,400 victims. There's no one being harmed in 458 00:23:35,400 --> 00:23:38,600 this transaction. When you are told that all 459 00:23:38,600 --> 00:23:42,100 repurchases are harmful to shareholders or the country or 460 00:23:42,100 --> 00:23:45,600 particularly beneficial to CEOs. You are listening to either an 461 00:23:45,600 --> 00:23:50,200 economic illiterate or a silver tongue demagogue characters that 462 00:23:50,200 --> 00:23:54,400 are not mutually exclusive. This is Warren Buffett, I think 463 00:23:54,400 --> 00:23:58,600 he's just dropping a bomb on people like Elizabeth Warren, 464 00:23:58,900 --> 00:24:02,800 Elizabeth And routinely paints share repurchases as bad, bad 465 00:24:02,800 --> 00:24:06,300 bad bad and every situation, she's not the only one, she's 466 00:24:06,300 --> 00:24:08,900 just the most outspoken. There's other Democrat members 467 00:24:09,200 --> 00:24:13,300 that have routinely advocated for not even increasing taxes, 468 00:24:13,300 --> 00:24:15,200 on share repurchases that would harm. 469 00:24:15,200 --> 00:24:18,700 Everybody's 401K it would harm the returns of everyone invested 470 00:24:18,700 --> 00:24:22,100 in these companies, but they're outright wanting to ban them, 471 00:24:22,200 --> 00:24:24,800 they want to ban share repurchases, they want to make 472 00:24:24,800 --> 00:24:27,000 it so companies can only issue more shares? 473 00:24:27,000 --> 00:24:30,700 Only dilute the shareholder, but not even of shares outstanding. 474 00:24:30,700 --> 00:24:33,900 And that is how economically illiterate many commentators 475 00:24:33,900 --> 00:24:35,700 are. And many members of Congress are 476 00:24:36,000 --> 00:24:38,700 many members of Congress don't even understand what they're 477 00:24:38,700 --> 00:24:41,000 trying to regulate. They want to ban share 478 00:24:41,000 --> 00:24:44,000 repurchases without even understanding what they are, who 479 00:24:44,000 --> 00:24:47,600 they benefit how they work. Warren Buffett is directly 480 00:24:47,600 --> 00:24:50,300 calling these people out. He's not using their name but 481 00:24:50,300 --> 00:24:52,100 he's calling them out on this subject. 482 00:24:52,100 --> 00:24:55,100 So we have share repurchases as another big topic that Warren 483 00:24:55,100 --> 00:24:58,700 Buffett highlights as being very positive and this is something 484 00:24:58,700 --> 00:25:01,500 that I want to highlight. Well, we go through this list of 485 00:25:01,500 --> 00:25:03,100 lots of different things that he looks for. 486 00:25:03,400 --> 00:25:05,900 And one thing that I think a lot of investors that even study 487 00:25:05,900 --> 00:25:09,600 Warren Buffett continually Miss is that he does have a big 488 00:25:09,600 --> 00:25:13,800 emphasis on return of capital return of capital. 489 00:25:14,100 --> 00:25:16,800 That's different than return on Capital return. 490 00:25:16,800 --> 00:25:19,300 On capital is investing into a business and having a high rate 491 00:25:19,300 --> 00:25:22,900 of return, return of capital is when the company makes so much 492 00:25:22,900 --> 00:25:26,100 excess profit that it can return money back to the shareholder, 493 00:25:26,400 --> 00:25:29,200 it can do that in one of two ways by backs. 494 00:25:29,500 --> 00:25:32,100 Or dividends those are two different ways of returning 495 00:25:32,100 --> 00:25:34,100 Capital back to you. The shareholder. 496 00:25:34,400 --> 00:25:37,900 Warren Buffett in a large part of this letter highlighted. 497 00:25:37,900 --> 00:25:40,900 How much he loves both of them. He highlighted dividend growth 498 00:25:40,900 --> 00:25:43,400 as being something that he loves and that he's tracking the 499 00:25:43,400 --> 00:25:45,600 numbers in many ways. He's doing what we do in 500 00:25:45,600 --> 00:25:48,400 qualtrics and tracking our dividend growth over time and 501 00:25:48,400 --> 00:25:49,900 then he looks at share repurchases. 502 00:25:50,100 --> 00:25:52,100 That's another thing that I highlight all the time I bring 503 00:25:52,100 --> 00:25:54,900 up the shares outstanding chart and I look at this year's going 504 00:25:54,900 --> 00:25:57,300 down of the companies I'm invested in, he highlights both 505 00:25:57,300 --> 00:25:59,300 of these and he defends both of them. 506 00:25:59,600 --> 00:26:03,400 He loves Capital being returned back to him the shareholder and 507 00:26:03,400 --> 00:26:05,900 he's operated that way his entire career. 508 00:26:06,200 --> 00:26:09,400 Most of the companies that Warren Buffett invest in do two 509 00:26:09,400 --> 00:26:11,800 things. They pay a dividend and they do 510 00:26:11,800 --> 00:26:16,300 BuyBacks almost every single one he invest in does that but still 511 00:26:16,300 --> 00:26:18,700 we have the next Warren Buffett's and these Warren 512 00:26:18,700 --> 00:26:21,700 Buffett wannabes investing in companies that dilute 513 00:26:21,700 --> 00:26:24,000 shareholders and don't pay a dividend, they expect to 514 00:26:24,000 --> 00:26:26,900 outperform Warren Buffett by not following one of the basic 515 00:26:26,900 --> 00:26:29,400 things that he's routinely outlined as being crucial. 516 00:26:29,500 --> 00:26:30,800 Oil. Now, this next topic we're going 517 00:26:30,800 --> 00:26:33,200 to jump into is one that I just love. 518 00:26:33,200 --> 00:26:36,400 I loved reading this part because I've made video after 519 00:26:36,400 --> 00:26:39,700 video calling different companies Liars, for the way 520 00:26:39,700 --> 00:26:41,400 that they present their financial statements. 521 00:26:41,900 --> 00:26:44,100 I think it's intentionally deceptive. 522 00:26:44,100 --> 00:26:48,900 They fabricate profits out of thin air by adjusting numbers by 523 00:26:48,900 --> 00:26:51,700 coming up with free cash flow, that doesn't even factor in the 524 00:26:51,700 --> 00:26:54,500 payment of employees by doing these things that are. 525 00:26:54,500 --> 00:26:57,300 So I think deceiving making their companies look so much 526 00:26:57,300 --> 00:26:59,500 better than they actually are. And I've been trying to 527 00:26:59,500 --> 00:27:02,200 Highlight this, I don't like when companies do this, I don't 528 00:27:02,200 --> 00:27:03,700 want to invest in companies that do this. 529 00:27:03,900 --> 00:27:06,900 I like companies that are very straight forward with their 530 00:27:06,900 --> 00:27:10,000 profitability, Warren Buffett does as well. 531 00:27:10,100 --> 00:27:13,300 Finally, an important warning, the sounds like he's making a 532 00:27:13,300 --> 00:27:15,600 YouTube video. When I read this an important 533 00:27:15,600 --> 00:27:19,200 warning from Warren Buffett. Even the operating earnings, 534 00:27:19,400 --> 00:27:20,600 this is where you get sent to the warning. 535 00:27:20,600 --> 00:27:24,600 The operating earnings figure that we favor can easily be 536 00:27:24,600 --> 00:27:29,600 manipulated by managers who wish to do so such tampering is Even 537 00:27:29,600 --> 00:27:33,800 thought of as sophisticated by the CEOs and the advisors and 538 00:27:33,800 --> 00:27:38,000 reporters and analysts embraced this existence as well. 539 00:27:38,500 --> 00:27:40,800 They do. He's 100% correct. 540 00:27:40,900 --> 00:27:42,800 This is the most perplexing part of this. 541 00:27:42,900 --> 00:27:44,900 I feel like I'm yelling into a void. 542 00:27:45,000 --> 00:27:47,400 When I point out, the things that these companies are doing, 543 00:27:47,600 --> 00:27:51,300 that's intentionally deceiving the analyst embrace it, they eat 544 00:27:51,300 --> 00:27:56,000 this stuff up, he says beating expectations, this way is 545 00:27:56,000 --> 00:28:02,000 heralded as managerial triumphs Activity is disgusting. 546 00:28:02,400 --> 00:28:06,700 He calls it, disgusting it requires no talent to manipulate 547 00:28:06,700 --> 00:28:10,500 numbers. Only a deep desire to deceive is 548 00:28:10,500 --> 00:28:13,200 required. Again, when I use the term 549 00:28:13,200 --> 00:28:17,900 Liars, in my videos, I use that term very carefully. 550 00:28:18,100 --> 00:28:21,500 I do not call out companies that I think are being truthful 551 00:28:21,700 --> 00:28:24,300 forthcoming, honest, with their financial metrics. 552 00:28:24,600 --> 00:28:27,300 I call it ones that I think are being intentionally deceiving. 553 00:28:27,700 --> 00:28:31,500 He says, quote, bold and Adjective accounting as a CEO. 554 00:28:31,500 --> 00:28:35,400 Once described his deception to me has become one of the shames 555 00:28:35,400 --> 00:28:37,800 of capitalism. I don't think there's a bigger 556 00:28:37,800 --> 00:28:40,800 combination that Warren Buffett could give to people that do 557 00:28:40,800 --> 00:28:43,500 this type of accounting. It is repugnant, it's 558 00:28:43,500 --> 00:28:45,300 disgusting. That companies do this. 559 00:28:45,500 --> 00:28:48,600 They are intentionally deceiving their shareholders and to 560 00:28:48,600 --> 00:28:51,500 painting one picture about how the company is actually 561 00:28:51,500 --> 00:28:54,900 performing than what, it's actually doing a recent example 562 00:28:54,900 --> 00:28:58,000 of this and one that I'll call out with their most recent 563 00:28:58,000 --> 00:29:00,100 earnings report is another example, Pulled it out. 564 00:29:00,200 --> 00:29:04,200 Highlight as disgusting. The company's zoom zoom just 565 00:29:04,200 --> 00:29:05,800 released their most recent quarter. 566 00:29:05,800 --> 00:29:07,800 And here we have, the presentation they're giving to 567 00:29:07,800 --> 00:29:10,300 investors, right? They have these nice glossy 568 00:29:10,300 --> 00:29:13,500 presentations where they talk about how great the company is. 569 00:29:13,900 --> 00:29:16,400 But one of the things that they emphasize right here from the 570 00:29:16,400 --> 00:29:21,000 start, this is one of the first pages is the strong financial 571 00:29:21,000 --> 00:29:24,600 performance strong financial year 2023 performance. 572 00:29:24,900 --> 00:29:29,300 One of the things they emphasize right here is a 27 percent. 573 00:29:29,400 --> 00:29:32,900 Free cash flow margin right at the beginning of their earnings 574 00:29:32,900 --> 00:29:33,800 report. Okay. 575 00:29:33,800 --> 00:29:36,100 Zoom, you had very strong financial performance. 576 00:29:36,100 --> 00:29:39,100 A good, 20 22. Let's take a look at the year of 577 00:29:39,100 --> 00:29:42,700 2022 and how this company did when we can look at last quarter 578 00:29:42,700 --> 00:29:46,700 and see that the company had net cash provided by operating 579 00:29:46,700 --> 00:29:50,700 activities of 211 million. That's the operating activity 580 00:29:50,700 --> 00:29:53,900 income. Then they paid their developers, 581 00:29:54,000 --> 00:29:58,000 their employees, 518 million dollars in stock. 582 00:29:58,400 --> 00:30:01,400 This is their strong Performance having two hundred, eleven 583 00:30:01,400 --> 00:30:04,400 million dollars of income and paying over half a billion in 584 00:30:04,400 --> 00:30:06,300 stock. We bring this up on qual term, 585 00:30:06,300 --> 00:30:08,700 just to illustrate. How deceiving the Satchel is, we 586 00:30:08,700 --> 00:30:11,500 bring up their free cash flow quarter by quarter, right hair. 587 00:30:11,800 --> 00:30:14,800 And then we introduced stock-based compensation. 588 00:30:15,100 --> 00:30:19,000 And this is what it looks like stock based compost over double 589 00:30:19,000 --> 00:30:21,500 their free cash flow last quarter in, this is the same 590 00:30:21,500 --> 00:30:24,100 company that's highlighting in its investor presentation that 591 00:30:24,100 --> 00:30:26,900 it has strong free, cash flow margins of the same year. 592 00:30:27,000 --> 00:30:30,100 So after talking about return of capital in the The importance of 593 00:30:30,100 --> 00:30:33,100 dividend growth and share BuyBacks Warren Buffett, lays 594 00:30:33,100 --> 00:30:36,500 out this warning about companies that participate in deceptive 595 00:30:36,500 --> 00:30:38,900 accounting. Practices ones that try to make 596 00:30:38,900 --> 00:30:41,000 the economics of their business. Look much better than they 597 00:30:41,000 --> 00:30:43,400 actually are. Now I've created tools and 598 00:30:43,400 --> 00:30:46,100 software that really dig through this and make it so that they 599 00:30:46,100 --> 00:30:50,400 can't do this BS against us, but many investors are still being 600 00:30:50,400 --> 00:30:53,600 deceived by this. They bite into this Hook Line 601 00:30:53,600 --> 00:30:56,000 and Sinker. And so Warren Buffett's trying 602 00:30:56,000 --> 00:30:59,900 to help out investors trying to warn people about Out this type 603 00:30:59,900 --> 00:31:02,300 of thing as well. So overall this is the completed 604 00:31:02,300 --> 00:31:04,500 list of this letter and there's so much. 605 00:31:04,500 --> 00:31:07,300 I think we can gain from this one letter that many investors 606 00:31:07,300 --> 00:31:10,300 are not doing these are things that give us an edge as 607 00:31:10,300 --> 00:31:13,300 investors, we can go through what investors do. 608 00:31:13,400 --> 00:31:16,400 That's not what Warren Buffett says the best thing to do. 609 00:31:16,800 --> 00:31:20,600 Number one, buying companies with great economics gray 610 00:31:20,600 --> 00:31:23,100 economics. Again High Returns on Capital 611 00:31:23,100 --> 00:31:27,300 employed, Buffett calls it high Returns on tangible assets, very 612 00:31:27,300 --> 00:31:31,000 similar companies that have very high Margins that's number one 613 00:31:31,000 --> 00:31:34,300 and most investors get lost right at this step they buy 614 00:31:34,300 --> 00:31:37,400 companies with a low P/E ratios and poor economics companies 615 00:31:37,400 --> 00:31:39,900 with unproven business models companies that don't generate 616 00:31:39,900 --> 00:31:41,900 real free cash flow beyond the level of dilution. 617 00:31:42,000 --> 00:31:44,600 They buy companies that are optically cheap companies that 618 00:31:44,600 --> 00:31:47,400 make our durable goods and highly cyclical Industries. 619 00:31:47,700 --> 00:31:50,400 These are not companies that have very favorable economics. 620 00:31:50,800 --> 00:31:54,600 So even a number one many investors get lost, they don't 621 00:31:54,600 --> 00:31:57,400 even follow the first step. The next step is companies that 622 00:31:57,400 --> 00:32:00,000 have long and during good Economics. 623 00:32:00,300 --> 00:32:03,800 The long duration is a consequence of a moat having a 624 00:32:03,800 --> 00:32:06,800 competitive Advantage. I've done analysis on Berkshires 625 00:32:06,800 --> 00:32:09,400 portfolios, and many of the companies that he invests in 626 00:32:09,600 --> 00:32:12,900 have natural monopolies. He invests in railroads that is 627 00:32:12,900 --> 00:32:14,700 a naturally monopolistic business. 628 00:32:14,900 --> 00:32:17,000 He invested an apple. That's a company that has 629 00:32:17,000 --> 00:32:20,200 basically a monopoly. Everybody uses the app store, 630 00:32:20,200 --> 00:32:23,200 which again is a toll bridge with excellent economics and it 631 00:32:23,200 --> 00:32:26,400 has very high barriers to entry. Try competing with apple. 632 00:32:26,500 --> 00:32:27,700 Go ahead. Give it a shot. 633 00:32:27,900 --> 00:32:29,200 Even Samsung is having a difficult. 634 00:32:29,300 --> 00:32:33,400 Difficult time. So in number two investors don't 635 00:32:33,400 --> 00:32:37,000 give enough attention to the mo of the company, they invest in 636 00:32:37,000 --> 00:32:40,900 companies that are highly risky and industries that are highly 637 00:32:40,900 --> 00:32:43,400 cyclical that are ripe for disruption. 638 00:32:43,600 --> 00:32:46,800 They invest in Innovative companies that are unproven that 639 00:32:46,800 --> 00:32:50,100 come and go that are in Ever Changing Industries with unknown 640 00:32:50,100 --> 00:32:52,500 threats. Buffett doesn't do that. 641 00:32:52,600 --> 00:32:55,400 He invest in companies that have concentrated Industries. 642 00:32:55,500 --> 00:32:56,900 There's usually a couple leaders. 643 00:32:57,100 --> 00:32:58,800 They have very high barriers to entry. 644 00:32:59,400 --> 00:33:02,400 Times their outright regulated and he builds up a large stakes 645 00:33:02,400 --> 00:33:07,600 in these companies out of the first two pieces of advice, I 646 00:33:07,600 --> 00:33:10,700 would say 80% of investors. Don't even follow those two 647 00:33:10,700 --> 00:33:13,800 pieces of advice so obviously they're not going to outperform 648 00:33:13,800 --> 00:33:15,400 them. They don't follow the first two 649 00:33:15,400 --> 00:33:17,900 pieces of advice. Then we have number three, which 650 00:33:17,900 --> 00:33:20,600 I think is perhaps the most difficult step to follow, which 651 00:33:20,600 --> 00:33:23,200 Buffett has perfected the mental game. 652 00:33:23,600 --> 00:33:26,200 This one I think is the definition of easier said than 653 00:33:26,200 --> 00:33:28,300 done. It's easy to say. 654 00:33:28,300 --> 00:33:31,000 Yeah, I love you. My doc says businesses I won't 655 00:33:31,000 --> 00:33:34,100 focus on the price and and and you know look at the Ebbs and 656 00:33:34,100 --> 00:33:36,700 flows of price everyday. Investors are looking at the 657 00:33:36,700 --> 00:33:39,000 price of their companies every single day they're glued to 658 00:33:39,000 --> 00:33:41,500 their brokerage looking. If it goes up two percent or 659 00:33:41,508 --> 00:33:44,600 down 2% and then they don't spend enough time even reading 660 00:33:44,600 --> 00:33:47,000 the investor relations and the reports of how their businesses 661 00:33:47,000 --> 00:33:49,600 are actually doing. If you added up the amount of 662 00:33:49,600 --> 00:33:53,000 time that investors look at Price compared to the amount of 663 00:33:53,000 --> 00:33:55,200 time that they actually do analysis on businesses. 664 00:33:55,600 --> 00:33:59,200 It's probably 90 percent on price and 10% on analysis on the 665 00:33:59,400 --> 00:34:03,100 She'll company, Buffett has perfected the mental game. 666 00:34:03,200 --> 00:34:06,500 He has decoupled, the price from the intrinsic value and 667 00:34:06,500 --> 00:34:08,199 operating performance of the business. 668 00:34:08,699 --> 00:34:11,300 And this is something again that I know anecdotally from my own 669 00:34:11,300 --> 00:34:14,300 experience being a YouTuber and interacting with a lot of 670 00:34:14,308 --> 00:34:17,900 investors that this simply isn't the case with most investors. 671 00:34:18,199 --> 00:34:22,300 Every single company that I've invested in that the price went 672 00:34:22,300 --> 00:34:26,600 down every single, one of them. I have sentiment following. 673 00:34:26,900 --> 00:34:29,199 I'll get comments about how it was a poor investment. 674 00:34:29,300 --> 00:34:31,900 Vestment how the companies no longer doing well, how 675 00:34:31,900 --> 00:34:35,300 everything looks - and bad. Even if the price went down 676 00:34:35,500 --> 00:34:39,000 while the operating performance increased, even if the company 677 00:34:39,000 --> 00:34:42,199 is doing better, when I was buying Texas Roadhouse, the 678 00:34:42,199 --> 00:34:44,900 price went down while the intrinsic value and operating 679 00:34:44,900 --> 00:34:47,800 performance was increasing. Most comments. 680 00:34:47,800 --> 00:34:51,500 I got at the time being in the red with the price down was at 681 00:34:51,500 --> 00:34:54,400 the company's doing poorly. And why would I invest in this? 682 00:34:54,699 --> 00:34:58,700 Obviously poorly ran company. The same thing with Vici the 683 00:34:58,700 --> 00:35:01,900 price went Down and the sentiment followed many negative 684 00:35:01,900 --> 00:35:04,300 comments about that company. The same thing follows with 685 00:35:04,300 --> 00:35:07,400 every single company, right now, the price has gone down with 686 00:35:07,400 --> 00:35:09,700 Amazon and Google and many people are speaking negatively 687 00:35:09,700 --> 00:35:12,100 about the company's sentiment follows price. 688 00:35:12,100 --> 00:35:14,600 That's almost like a law of physics with investors 689 00:35:14,800 --> 00:35:17,200 inevitably. Every one of them will have that 690 00:35:17,200 --> 00:35:19,900 challenge. Warren Buffett has broken that 691 00:35:19,900 --> 00:35:22,000 law. He does not allow the price to 692 00:35:22,000 --> 00:35:23,700 dictate his sentiment on a stock. 693 00:35:23,900 --> 00:35:26,500 He only follows the actual operating performance. 694 00:35:26,500 --> 00:35:30,800 So between this step step 3 and the The other two I think we've 695 00:35:30,800 --> 00:35:34,100 lost 95% of investors. I think right off the bat there 696 00:35:34,100 --> 00:35:36,800 we've lost the huge majority. Most of them aren't going to buy 697 00:35:36,808 --> 00:35:39,400 companies with great economics because they're not studying 698 00:35:39,400 --> 00:35:42,000 enough to find companies that really have these modes. 699 00:35:42,000 --> 00:35:45,100 Great economics, number two, they're not buying companies 700 00:35:45,100 --> 00:35:47,200 that really have durable competitive advantages. 701 00:35:47,200 --> 00:35:51,200 And the number three, the mental game perfecting that as well, I 702 00:35:51,200 --> 00:35:54,200 think is a huge Challenge. And I think once you get past 703 00:35:54,200 --> 00:35:57,800 this step, you've lost 95% of investors number four and five 704 00:35:57,800 --> 00:35:59,600 are pretty simple. These are companies That have 705 00:35:59,600 --> 00:36:02,400 dividend growth that grow the dividend over time and their 706 00:36:02,400 --> 00:36:04,400 companies that produced this year, count over time. 707 00:36:04,600 --> 00:36:08,200 These are the two forms of Return of capital Buffett 708 00:36:08,200 --> 00:36:11,800 routinely emphasizes this. He likes companies that spit 709 00:36:11,800 --> 00:36:14,400 cashback Adam and he likes companies that buy back their 710 00:36:14,400 --> 00:36:16,100 own shares in increases interest. 711 00:36:16,200 --> 00:36:19,100 He loves both of them, he gave equal time to each of them. 712 00:36:19,400 --> 00:36:21,400 He emphasizes this over and over again. 713 00:36:21,400 --> 00:36:24,000 But many people say, it doesn't really matter. 714 00:36:24,000 --> 00:36:26,800 They're irrelevant and you know, how they return, Capital doesn't 715 00:36:26,800 --> 00:36:29,000 really matter. Buffett obviously doesn't think 716 00:36:29,000 --> 00:36:30,800 so. So and the number six, last but 717 00:36:30,800 --> 00:36:33,700 not least, avoiding companies that have deceiving accounting 718 00:36:33,700 --> 00:36:36,200 practices. This has been a major, I'd say 719 00:36:36,200 --> 00:36:39,000 focal point and our emphasis that I've that I've done over 720 00:36:39,000 --> 00:36:41,800 the past six months, I've really tried to give investors a lot of 721 00:36:41,800 --> 00:36:44,000 warning about this. I'm glad to see Warren Buffett 722 00:36:44,000 --> 00:36:46,900 doing the same thing here, and I think it's important, I think a 723 00:36:46,900 --> 00:36:49,400 lot of investors right now are being suckered into companies 724 00:36:49,700 --> 00:36:52,400 that they didn't fully understand the financial 725 00:36:52,400 --> 00:36:54,400 condition. The company was in and I don't 726 00:36:54,400 --> 00:36:56,700 think that's their fault. I think that there's a lot of 727 00:36:56,700 --> 00:37:00,200 slick accounting practices that are Deceptive. 728 00:37:00,300 --> 00:37:03,700 So we have tools to see past this and I think we can follow 729 00:37:03,700 --> 00:37:07,700 step 6 as well. These six steps I really do 730 00:37:07,700 --> 00:37:10,100 believe will lead to outperformance. 731 00:37:10,100 --> 00:37:12,300 I think of investors follow these six steps that will 732 00:37:12,300 --> 00:37:15,700 outperform and many investors. Say it's impossible to 733 00:37:15,700 --> 00:37:18,700 outperform the markets to efficient and it's better to 734 00:37:18,700 --> 00:37:21,900 just buy index funds. I don't have anything against 735 00:37:21,900 --> 00:37:25,300 index funds but Buffett has one more point that he highlights on 736 00:37:25,300 --> 00:37:26,900 this topic. One of the things that Warren 737 00:37:26,900 --> 00:37:29,000 Buffett directly addresses in this letter. 738 00:37:29,200 --> 00:37:31,400 Is the efficient market hypothesis. 739 00:37:31,500 --> 00:37:34,000 One of the advantages of our publicly traded segment. 740 00:37:34,000 --> 00:37:38,400 Is that episodically, it becomes easy to buy pieces of wonderful 741 00:37:38,400 --> 00:37:43,000 businesses at wonderful prices. It's crucial to understand that 742 00:37:43,000 --> 00:37:47,400 stocks often trade at truly foolish prices, both high and 743 00:37:47,400 --> 00:37:52,900 low efficient market exists. Only in textbooks, efficient 744 00:37:52,900 --> 00:37:56,700 market only exist in textbooks in truth markable stocks and 745 00:37:56,700 --> 00:38:00,000 bonds are baffling their behavior usually Understandable. 746 00:38:00,000 --> 00:38:02,800 Only in retrospect, controlled businesses are a different 747 00:38:02,800 --> 00:38:04,200 breed. They sometimes command. 748 00:38:04,200 --> 00:38:07,600 Ridiculously higher prices than Justified but are almost never 749 00:38:07,600 --> 00:38:11,900 available at bargain valuations. Unless under duress, the owner 750 00:38:11,900 --> 00:38:14,700 of a controlled business gives. No thought to selling at Panic 751 00:38:14,700 --> 00:38:17,900 type valuations. So right Harry highlights a 752 00:38:17,900 --> 00:38:20,400 couple things. He says that basically the 753 00:38:20,400 --> 00:38:23,200 people promoting efficient market hypothesis are fools that 754 00:38:23,200 --> 00:38:26,900 are existing in textbooks and not the real world and he also 755 00:38:26,900 --> 00:38:29,100 highlights that you have a bigger advantage. 756 00:38:29,200 --> 00:38:32,800 Age in the publicly traded market, then you do the private 757 00:38:32,800 --> 00:38:36,200 Market because in private Market, if things go down in 758 00:38:36,207 --> 00:38:38,300 price, they simply don't sell the business. 759 00:38:38,600 --> 00:38:40,500 A good example of this is stripe. 760 00:38:40,800 --> 00:38:42,900 Stripe was going to sell the business in the public market at 761 00:38:42,900 --> 00:38:46,000 a high price prices went down and then they decided just to 762 00:38:46,008 --> 00:38:49,700 not IPO so Buffett's highlighting that as an investor 763 00:38:50,000 --> 00:38:52,500 in the public market. We actually have a greater 764 00:38:52,500 --> 00:38:55,100 Advantage than people working in the private markets. 765 00:38:55,200 --> 00:38:58,800 So I do think that investors can outperform the market I think 766 00:38:58,800 --> 00:39:02,000 they can Eats pie but I think it will take something that most 767 00:39:02,000 --> 00:39:05,500 investors are unwilling to do. They actually have to follow 768 00:39:05,500 --> 00:39:08,600 Warren Buffett's advice. They can't just follow a couple 769 00:39:08,600 --> 00:39:11,700 cliche statements like Buy Low, sell High. 770 00:39:11,700 --> 00:39:14,700 Buy the dip be greedy when others are fearful. 771 00:39:14,900 --> 00:39:18,400 They actually have to look at what he's done in detail and 772 00:39:18,400 --> 00:39:22,300 follow the things that he says. 90% of investors are not going 773 00:39:22,300 --> 00:39:24,900 to do that, they're not going to put in the time or energy so 774 00:39:24,900 --> 00:39:27,200 they're not going to beat the market but I think investors at 775 00:39:27,200 --> 00:39:29,600 do really well, that's all for this episode and I hope you 776 00:39:29,607 --> 00:39:32,200 enjoyed and if you haven't already, try out the patreon, 777 00:39:32,200 --> 00:39:35,000 there's 100 exclusive episodes. We even have more coming in the 778 00:39:35,008 --> 00:39:37,100 future. You get access to Quality. 779 00:39:37,100 --> 00:39:38,600 Mm, I think you'll really enjoy it. 780 00:39:38,700 --> 00:39:41,300 We have some big updates coming on that and of course you get 781 00:39:41,300 --> 00:39:43,500 access to the Discord Community, where we have thousands of 782 00:39:43,500 --> 00:39:45,100 members. So hopefully, I'll see you 783 00:39:45,100 --> 00:39:46,300 there. Other than that. 784 00:39:46,400 --> 00:39:30,400 See you in the next one. and I hope you enjoyed and if you 785 00:39:30,400 --> 00:39:33,500 haven't already, try out the patreon, there's 100 exclusive 786 00:39:33,500 --> 00:39:35,000 episodes. We even have more coming in the 787 00:39:35,008 --> 00:39:37,100 future. You get access to Quality. 788 00:39:37,100 --> 00:39:38,600 Mm, I think you'll really enjoy it. 789 00:39:38,700 --> 00:39:41,300 We have some big updates coming on that and of course you get 790 00:39:41,300 --> 00:39:43,500 access to the Discord Community, where we have thousands of 791 00:39:43,500 --> 00:39:45,100 members. So hopefully, I'll see you 792 00:39:45,100 --> 00:39:46,300 there. Other than that. 793 00:39:46,400 --> 00:39:47,100 See you in the next one.