SORAB: We have a very special
guest here with us today. Please join me in
welcoming Jeremy Miller. JEREMY MILLER: Thank you. Thank you. Thank you, Sorab. It's-- it's a real honor to be
here and talk about the book, and my experience in learning
from the process of studying these letters and
compiling the book. You know, I'm not a
professional writer. I view myself much more as
a sort of project manager for what I saw as something
that was being widely neglected by the value community
and the public at large. I mean, everyone knows
about Warren Buffet's time at Berkshire Hathaway and
how successful that's been, so, you know, last year
was the 50th anniversary of his ascension into the
chairman role of that company. So we have his 50
letters from that period. But you know, there was also
a period between 1956 and 1970 where he was running a
partnership largely comprised of people that he knew. In fact, the initial
investors were family members, and roommates,
and people from Omaha that he knew. Folks that he was
very close with. And he was writing
these letters to them. So you can imagine trying to
convey a sense of philosophy, in terms of how to
think about markets, covering this 14-year period. 33 or so letters,
compared to the 50 that we've all known and loved
and studied very closely. You know, I just felt like there
was this big swath of wisdom that was being overlooked,
coming from Buffett at a time when he was talking
to his family members. And he was running
small sums of money. So the initial
partnership was started with seven other people. $100,000 of their money. $100
that he threw in on his own. And you know, he also
taught a class at the time. So I like this slide,
because it sort of shows him as the teacher
which he really was. So it was a very productive
time for Warren Buffett. You had a 29% compounded
annual rate of return over the 14 year period. He never had a down year. The markets had several. He never underperformed
the market. Right? Which is just really impressive. And there's a quote from
1999, which is obviously sort of towards the peak of
the NASDAQ, where he said, if I was running
small sums again today, I think I could do a
50% compounded annual return. And he went as far
as to say that he guarantees he could do that. So you know, there's a
lot to be explored here in terms of what you can do when
you truly have a go anywhere, do anything strategy. And that's very different
from the position that he finds himself in today,
where he's sort of saddled with more capital than ideas. This is the time where his ideas
far outweighed his capital. Right? So I've organized
this talk in a way that I ripped off from Charlie
Munger, who ripped it off from Johnny Carson, you know,
who may have ripped it off from Carl Jacobi, the
famous algebrist, who had a view that if you really
want to solve a problem, one great way to go about it
is to invert the question. Right? Think about it backwards. So the talk that
I've put together is a few really sound ways to
avoid success in investing. And the idea is, if you can
just not do these three things, and I'll unpack
them for you, you're going to go a long way
in finding success. And so let's get started. So the first one is
about predictions. We live in a 24-hour
news cycle culture, where people that claim
themselves to be experts are more than happy
to get up on TV and hold forth on the outlook
for interest rates, oil prices, what's going
to happen with Brexit, you know, all sort of
backed by a Wall Street culture that benefits from
churn in people's portfolio. And Buffett, as of
the first meeting of the partners,
before he even allowed them to write the check, said
to them, very specifically, I am not in the business
of making predictions on the general stock market
or business fluctuations. If you think that I can do
this, or it's even necessary, the partnership is not for you. Well, first of all, so a great
way to turn your net worth into your broker's
current income is to trade every
whim that you have. You think, OK, I have a view. The EU, you know, the UK is
going to leave the Union. Right? So I'm going to sell the market. That's, like, a terrible idea. Right? And the reason for that
is because the world is full of radical uncertainty,
and there's a lot of things that you can't predict. So I think one of the
distinguishing factors about Buffett from a very
early point in his career was that he was very
comfortable saying, you know, it's OK to have no idea. Right? And he'll say that up
to today, when it comes to interest rates, et cetera. It's not about being able
to predict everything. It's about having confidence
in what you're actually trying to predict. And really, the past being the
best source for making guesses about what's going to
happen in the future, and being long term in the
way that you think about it. So that is number one. The second really great way
to destroy your net worth is to use the market as
a source of information as to what you think
a business is worth. The average investor's
experience in the stock market is rather poor, right? I think we all know that. There's a tendency to
buy high and sell low, and it's sort of
natural, right, I guess? Stanford's got their
first football game coming up next Friday, right? And so if you go
to campus, you want to find your way to the
stadium, the best way to do that is to sort
of follow the crowd. That's a natural thing. But in the market, when you're
in agreement with everybody, that could be a really
dangerous thing. Right? Let me back up a bit. So if you invest in
equity security-- you buy a stock, right? I would encourage
you to think of that as if you were buying
a proportional share in the assets of the company. Right? And you should
value that business. Right? And hopefully you're
doing it in a field that you know
something about, so that you can make an
educated guess as to what that business is worth. So if you and I got together and
bought a dry cleaning business, and someone walked
in one day and said, I'll give you $5.00
for this place. Right? You'd tell him to take
a walk, but it certainly wouldn't freak you out, right? That your dry cleaning
business is only worth $5.00. Right? The same thing is true
about the equity markets. You can't let a market
quote turn from an asset that you can utilize
when it's in your favor to a liability that's going
to take you out of the market. So that comes down
to a concept of what I would think of as true north. Right? So if you can't use the market
to tell you what something's worth-- you can only use the
market as the price at which you have the option
of transacting-- then you need to be able to value
the business yourself, right? And here you have
this wonderful quote that basically says,
being right is not about being in the crowd. Being right is not about having
well-respected people agree with you. Being right is about
putting your facts together, and then reasoning them through
in a sound and logical manner. And if you do that
consistently over time, that's what's going
to give you success. So I just think, again, to
Brexit, where all these folks, they see the television, you
know, oh, my God, the world's going to come to an end. I mean, forests were
felled to create the paper on which Wall
Street wrote reports about the implications
of Brexit, right? Literally. I can't imagine. And they all end with the same
thing, which is basically, I think it's going to bad,
but I really have no idea. Right? That's the conclusion. So folks that get
scared because of that. And I think they
get-- it all gets rather accentuated by the way
it's portrayed in the media. And ultimately, for
value investors, it's about finding
great companies. Harnessing the power
of compound interest. You know, Fidelity had this
great story that I just love. The best performing
Fidelity accounts, according to a big
study that they did, were of the
individuals who forgot that they had an account. Right? So trading is not your friend. Listening to the market
is not your friend. Try and figure
out what you think a business is worth, and
worry about your view of its intrinsic value and
how it's changing over time, and put the market aside. One more point I'll make
on this that I really enjoy from Buffett's
commentary, is that risk is oftentimes
a quantifiable notion to a lot of people. And Buffett thought
very differently from almost the very
beginning, right? Risk is not beta. Beta is the amount by
which a stock squiggles over a certain period of time. Right? To Buffet, that's not risk. Risk is not knowing
what you're doing. So maybe you have
the wrong facts. Maybe you've thought
them through in a way that was internally unsound. Maybe something that you didn't
consider came into the picture, and your hypothesis was wrong. Right? Being wrong is risk. Not knowing what you
don't know is risk. Squiggles don't
matter when you're in Buffett's shoes, which
is thinking about companies divorced of their stock price. Willing to cheer for
them to go lower, because you don't really care. You don't have to
sell, and you're more than happy to buy more. Buffett found himself
in these positions where he would buy a little bit,
and the stock would go down. And his intrinsic value
estimate didn't change, so he'd buy a little more. And it would go down. And it would do so for years. And he didn't need the market
to tell him he was right. It was his own reasoning that
led him to that conclusion. The third thing that I think
is a really good way to fail is to play somebody else's game. And, you know,
there's going to be times where value investors
feel like they are out of sync with the market. And it's really hard,
I think, to stick to your philosophy
and your principles when you're in the, sort of,
speculative froth of a bull market. Right? So we saw this at the end of
the partnership era, which is, as we approached 1970, you were
in what they called the "go-go" phase of the market. It was the conglomerate era. And it just predated
the Nifty Fifty, if people have heard of that. But Buffett couldn't
find stuff that made sense for him to invest. And so he returned the capital. Right? The same thing happened
in the tech bubble. I mean, there was all
sorts of articles about how Buffett had lost his way. Right? Old fogeyism, you know, knew too
much that was no longer true, it's a new era, you
know, all this stuff. And he told folks that
nothing had changed, and that the market
was overvalued. And so, for the second
time, he issued a warning. So I think this is really
important to investors, is to really figure out
what you're all about. There's been some
really-- people that I admire so much come
here to speak to you that have very different approaches. And something that I
struggled with quite a bit, for a few months, actually,
was thinking about, OK, we had young Buffett--
OK, in the early stages he's a lot like Tobias
Carlyle was, right? He's pure Graham. He's looking for
statistical cigar butts that are super cheap. Out of favor. By the end, he's a
lot like Tom Gayner. Right? Where he's got the majority of
his funds in American Express. Right? He bought Walt Disney. So he went from buying
Dempster Mill, which is a windmill implements company
on the verge of bankruptcy, to high quality businesses
that were compounding, and were compounders in general. And so the question
is, what should you do? So I was trying to think,
OK, what kind of advice should I be giving? And if somebody asked
me what's right? And, you know, Tobias has got
great statistics, you know, he's got all this math that
shows his way is better. Right? But then Tom Gayner's
got this great stat on Graham, which is that, yeah,
he bought a lot of cigar butts, but guess what? He made more money
in GEICO than he made in all his other
investments combined. So if you find one
great compounder, and you make 19 other
mistakes, you're still bound to do wonderfully
well because of the way that compound interest works. So the answer that I came to
was that, unfortunately, it depends-- what should you do? It depends on you. Right? Play your game. Figure out what your
circle of competence is. What areas are you interested
in, and passionate about? Where are you apt to be able to
have an understanding of what a business is worth? And then, what is your, sort
of, psychological disposition to being on this
treadmill of cigar butts? Because they are sort of
fleeting in their value, and you have to be on a
constant search for them. Which is very different
than what Buffett does now, or Mr. Gayner does at Markel,
which is buy great businesses and sort of sit on your butt. So the other thing I will say
before I close on this topic is that very early in
the partnership-- 1959, 1960-- Buffett put 35%
of the funds in a company called Sanborn
Map Company, which was a mapping business used
in the insurance field. And the market cap
at the time was right around its stated book
equity, of $4 and 1/2 million. OK? So the inflation factor
being seven or eight, you can be thinking $35
million, market cap. Now, that is a minuscule thing. Right? So the idea of following
Buffett because he bought, you know, Phillips 66,
that might be great. But if you are at a position
where you can sort of put the Geiger counter over some of
these micro caps, you should. Because there's a
lot of fertile ground where institutions can't go. So I would just say go anywhere. Do anything. Don't try and copy anybody. You can look to them to see
what you like about what they're doing, what resonates with you. But like Guy Spier
said when he was here, don't try to be Warren Buffett. Try to be the best Guy Spier. Or try to be the
best Jeremy Miller. Because that's
really the only way that you're going to be able to
make it through the tough times when your strategy
is-- inevitably, you're going to come through
times where it gets hard. So to invert the inversion, you
really need to think long term, and get yourself away from
making predictions, especially short term predictions. Forget the market. Carefully assemble the facts. Apply sound reasoning. Come up with your own
value-- your own view of what something's worth. And be confident in it
before you do anything. Because if you're not
confident in your view, you're going to get shaken
out of your position. And then third is, figure out
what kind of investor you are. What suits you, from a
temperament perspective, and play that game. Don't play someone else's game. So with that, I thought
I'd stop and see if there's any questions. AUDIENCE: [INAUDIBLE]
and see what happens? JEREMY MILLER: Yeah,
so the question is sort of the continuum
by which Buffett was active and engaged with his companies
during the partnership era versus today. Is that fair? And so what I would say,
interestingly enough, is, so-- you know, Buffett
came out of Columbia, where he studied with Graham. Right? And then he begged Graham
for a couple years for a job at Graham-Newman, and
he ended up getting one. Right? And at Graham-Newman,
it was very much the way that you described. Initially, this sort of
hands-off off approach. Because Graham had this
view that you should be able to just read
the Intelligent Investor and securities analysis and
make money, and it would be, kind of, we're trying to
prove that to people, so don't go talk to
management teams, or get one-on-one access to
these things, and so forth. But then, as soon as Buffett
started the partnership, he moved away from that. And what he did was, he had
three categories of investing, right? One was called the "Generals." These were generally
undervalued securities, these ultra-cheap cigar
butt-type things, right? And then he had "Workouts,"
which is basically just risk arbitrage. You know, one company
buys the other, so you bet that the
transaction closes. And then the third category was
actually born out of the first. So the Generals--
so, for instance, I mentioned Sanborn Map. $4
and 1/2 million market cap. Right? So over time, he
comes to acquire 20%. Gets together with some
other friends, gets 40%. Forces his way onto the board. Now, Sanborn Map was unique
because it was asset rich. It had all these
securities in its portfolio that it didn't need. It was just making so
much money for so long that they bought
stocks and bonds. The board was
comprised of people from the insurance
industry that didn't own any shares in the company. They didn't care. So if you've read "Snowball,"
you know, this story is in that. He forces his way on to the
board, threatens a proxy, does an exchange for his
shares in Sanborn Map for the securities portfolio. Makes a very nice return. Avoids some taxes. So even back then, he
was very willing to do what it takes to unlock
the value, if he had to. So I kind of think of that
as-- him as an activist. Later on, he would buy
full controlling positions in companies. So maybe just one
last point on that, that I think you
might find interesting is that Buffett seamlessly moves
between the world of business and investing. Right? So a portfolio manager takes
a pile of capital-- people give them money, right? That portfolio manager then
selects the best stocks that they can find to earn
the highest return possible. Well, Buffett thinks the
same way about a CEO. A CEO has a pile of capital. It's in the form of the assets
of the company, the working capital of the
company, et cetera. You know, the cash. And says, how are we going
to deploy these assets to their highest and best use? AUDIENCE: So an alternate
approach that may be something that, say, a Tom Gayner would
propose is to study business that are good quality,
and Buffett has this knack of making everything look very
easy, but it actually isn't. And so maybe instead
of doing what Buffett did in his early years,
just study good businesses, and whenever you have a Brexit,
you just buy those businesses and hang on to them. And obviously, you're not going
to make 30% annualized returns, but for most people, if
you do it over 30 years, I don't need to make
30% annualized to do OK. What do you think
of that approach? JEREMY MILLER: Fabulous. I think that's a great approach. I mean, if you can identify
the field in which-- if you can identify
a field of securities that you think you
understand and can value, then you can also identify
the price at which they'll offer you the compounded rate
of return that you're after. And that you think maybe
you're entitled to. And what I mean by that is,
if interest rates are at 10%, you know, the demanded
rate of return that you're going to
expect from the investment is going to be higher
than if they're 2%. Right? But if you have a field
of, say, 25 businesses that have public equities
associated with them, you can value those
businesses, and then determine the price
at which they're going to offer you
the rate of return that you think you need
to make the investment. I think Buffett always used 15. I think now, with the
size of his capital, it's dropped down closer to 10. But if you're not
operating with billions, then maybe 15 is
the right number. But whatever that is, I think
that's a great strategy. Especially if it suits you. AUDIENCE: I just had a question
regarding what you're saying, versus, I guess, what you
call the efficient market theory, which is, really,
no individual can actually get more information
from the system, you know, legally, than anybody
else, and it's all built in. And in particular,
people do talk about how almost nobody can
do better than the indexes. And of course there is
two counterexamples, which is Peter Lynch of
Magellan, and Warren Buffett, of course. And then people say,
well, Warren Buffett, you can't really count him,
because he actually goes and, like you
said, gets on the boards and helps manage the company. So he personally takes a role in
making the company successful. Which, obviously,
most of us can't do. And then Peter Lynch, he
had a very strong run. But then once he
got out of Magellan and started predicting stocks,
his private portfolio actually didn't beat the market. So even-- and I would say all
of us here, we work at Google, and yet even we--
and so we think we probably know something
about the internet business and whatnot-- and even
I think most of us are pretty astounded by
the way Google's performed, and continues to perform, and
even I'm here for many years, I have no idea what's
going to happen in the internet business, in
the sales and advertising market and so forth. So I'm not sure how I
would even apply the things that you're saying personally,
even being in the business that I'm in. JEREMY MILLER: Sure. So let me try and unpack
that a little bit. So, you know, Buffett's best
rebuttal to efficient market theory is, it was a
speech that he gave called "The Superinvestors of
Graham-and-Doddsville," where he played out a scenario
of a national coin-flipping contest, where
everybody flipped a coin and, you know, the
iterations went daily until there were 20
or so left, and said that wouldn't it be awful
weird if all 20 came from the same town? Right? And then he outlined
the results of what he called "The Superinvestors
of Graham-and-Doddsville," which were basically a
collection of people that studied under Graham, or
were heavily influenced by his teachings. I will say that during
the partnership years, there was no index
investing, right? That hadn't been invented yet. But even then, Buffett was
making the case that if you can't outperform the market--
the index, the general results of the Dow Jones, which is
what was the primary one; I guess S&P today--
then you shouldn't be investing actively. It is the onus of the active
investor to outperform, and those who can't
outperform are doing a disservice to their
investors by being active, right? In terms of how
you personally can go about taking on a value
approach would be to do, one, exactly what you
started with, which is, reject things that you don't
think that you can really have a strong view
upon, in terms of how the future is going to unfold. You know, it may be very
different than, perhaps, buying a dry cleaner that
has an advantaged position next to the train
station in the town, that-- in the commuter
town, and whatever. XYZ America. Right? So looking at the stocks
as businesses, I think, is the best way to do it. When you have a strong view of
what those businesses are worth and you're presented with
prices in the market that are different than that, I
think that's the essence of it. And what those will be will be
dependent on your own circle of competence-- what you know,
and are capable of valuing. Which I'm sure is a lot, when
you start to think about it. SORAB: We were talking-- you
were alluding to it, I think, before you began the talk. And I was just thinking, for the
benefit of the audience here, in doing such a deep study
of his early years, what are things that stood
out to you, in terms of-- things that have impacted
you at a personal level? Not just in investing,
but maybe-- in any aspect. And if that question
were put to you, what would stand out to you? JEREMY MILLER: The
way that Buffett went about structuring
the partnership, communicating to his investors,
was sort of high class, from the very beginning. There was a lot of
integrity, and it really shines through the letters. That would be one thing. But from a practical
perspective, in terms of what really
changed the way that I think about investing
as a participant, would be this idea of a
business as a pile of capital. So look to see where
the assets are. What's the, sort
of, return that's being generated on those assets? Are they optimized? Right? Look at the businesses, if
you own the whole thing. Even though, when
you buy the security, you buy your proportional share. What is the whole thing worth? Right? If you go to Yahoo Finance
to look at a company, don't look at the share price. Look at the market cap. Right? What's the whole business worth? Right? And then, if I buy my
fraction of the business, am I getting a discount
or am I overpaying? So, you know, the
fungibility of the capital, the idea that business
and investing is sort of very much-- the
difference between the two is sort of false. In a way. And then, I guess,
the other thing would be to think long term. OK? So compound interest
requires patience. It doesn't really kick in
until, like, six, seven years, depending on the rate. But once it goes, it's the
most powerful force there is. That's why Buffett used to
joke that his haircuts were costing him $200,000 apiece. Right? Because if he had
foregone the haircut and put the money in the fund--
you know, he said $200,000. When I did the math, I
came to, like, $2 million. But the point's the same. AUDIENCE: I've found it
very hard to reconcile two of Buffett's sayings. And I think you referred
to one today, which is, if I were managing
$10 million or so, you know, I think I could make
50%-- oh, never mind, I think I can guarantee it, right? And then, I think, after he
started Berkshire Hathaway as a public company,
he's kept on emphasizing it's far better to buy
a wonderful business at a fair price than a fair
business at a wonderful price. Right? And he goes on to say, there's
never just one cockroach in the kitchen. And buying Berkshire
as a textile mill was one of the worst mistakes
he's ever made in his life. So I found these
hard to reconcile. I'm sure you've
thought about this. I'd like your thoughts on this. JEREMY MILLER: Yeah. Well, you know, Charlie Munger,
the Vice-chair of Berkshire, was asked a similar question. And his answer
was, it turned out we could buy great
businesses, and it only cost us a couple points
of compounding a year. And what a better life? Right? So I think about this
Sanborn situation all the time, because it
was such a small company. Right? I mean, you could
almost envision a group of individuals getting
a controlling stake in a company that had a market cap of
$5 million or $10 million. I mean, that could happen today. Right? That's what he was doing. So I think if he's
saying, oh, OK, if I had a couple
million bucks, you know, I could find these companies. Maybe they have a $5
million market cap. Right? Maybe they just need
to be shut down, or maybe they need to
be sold, or maybe they need-- but you could engineer
these type of returns. I think that's what he means. But for the lifestyle
that he wanted to live-- if you want to have a
diary with your weekly schedule that, you know, is
blank, except for, like, Thursday at 2:00-- haircut. Right? Compounders is a really
good way to do it. You know, he made a
much better return in a company called Dempster
Mill, which he liquidated, effectively. And then deincorporated,
to avoid tax. And he made a great
return on that. But, you know, the town
of Beatrice, Nebraska, had headlines about Buffett
the Liquidator all the time. And that's not any
panacea in terms of how you want to live
your life and be seen. So once he was already rich,
I think he sort of latched onto this idea, even though
it wasn't maybe the optimal, from a return perspective. AUDIENCE: I saw a paper, a quote
that Buffett [INAUDIBLE], which attributed, like, a part of
Buffett [INAUDIBLE] return to his leveraging
in his portfolio. Maybe he [INAUDIBLE]
like an insurance float. I wonder, do you know,
like, how much leverage in his early portfolio? JEREMY MILLER: Yeah. So the leverage that he used
was only in the Workouts. So within the
merger arb business, right-- Company A buys
Company B. If it goes through, there's this spread-- usually
it's a couple percentage points, but, you know,
the window is short. So if you annualize that, it
gets to, like, six or seven. But then if you put three
turns of leverage on it, then you're looking
at 18 or whatever, something along those lines. So when he was doing
those types of things and had high degree of certainty
that they would actually close-- and you know, he did
them sort of sporadically. A lot of these merger arb
shops do a ton of these deals. But he did a few years,
something like that. He was highly confident. And, you know, he
would leverage those. But the rest of the
portfolio was unlevered. AUDIENCE: You
spent a lot of time or alluded to
Buffett's skill sort of as a manager, whether it's
through special situations, sort of like debt workouts, and
you can gain outsized returns from that. But I was wondering
how you'd respond to Andrea Frazzini and some
of the other people at AQR who wrote a paper a few years
ago, discussing, sort of, where does Buffett's
performance come from? Like, why he had a 0.76 alpha? Why, exactly, was he able
to gain such high returns at a relatively low volatility? And so they had
done the analysis. And so they looked,
one, at his skill as, like, stock selection. And two, his skill
as, like, a manager in these type of situations. And he concluded that it
was due to-- it was actually the former-- his stock
selection ability, whether it was being able to pick low
beta stocks, companies who had a high quality, his very
consistent growth, high payout ratios-- rather than
his ability as a manager to manage private
companies, to navigate corporate
restructuring and such. And I even believe they
also attributed it partly to his high leverage. So they had leverage
of 1.6 to 1. And so this is
calculating leverage as assets minus excess
cash divided by equity, rather than how you
did it, with-- I think you were mentioning,
like, three turns, right? And that's using
EBITDA as a multiple. So basically, the
central point is that they did a
statistical analysis, and they were able to account
for his high alpha due to his ability as
a stock selection, rather than his ability to
actually have somebody use debt workouts, merger arb, or
any of these other, I guess, more exclusive methods. JEREMY MILLER: Yeah. Great question. And just to be clear, when
we talk about leverage, we're talking about it
on the same basis, right? So the amount of assets
that's being controlled by a given amount of equity. Right? So if we've got a 6% return
and we lever it three times, that means we're controlling
three times as much assets with a given amount of equity. And that's what
gives you your 18%. And there wasn't a lot of risk
arb in the Berkshire years. There was some. And he wrote about
it in the '70s. But the main thrust of your
point is absolutely accurate. The qualities of the businesses
that he has been involved in have been rather
consistent over time. It's financials, it's branded,
it's consumer companies, and others where
he feels like he has a view on what
the business is likely to earn 10 years from
now, with not a lot of-- or I should say,
with what he thinks is a high degree of certainty. That he can know what the
business is going to look like in the future. And so those kind of things have
factors associated with them. So whether it's volatility,
or the actual underlying volatility of the business
itself, et cetera. And then the leverage
factor is a huge piece. Because not only
did he have leverage from the float of the insurance
company-- which, by the way, was purchased for Berkshire
while it was a portfolio holding of the
partnership-- but also through the leverage
of the deferred tax liability associated with
the unrealized capital gains on the securities portfolio. So we can talk about Buffett
and avoiding leverage. But really what
he's talking about is leverage that has a
due date, or leverage that has a coupon
associated with it-- a principal payment, an interest
payment associated with it. So, you know, float, when
underwritten properly, tends to come for Berkshire
at a near free cost. And of course the
deferred tax liabilities don't bear interest either. So I think you're right. But I would also
say that I think it's easy-- it's
not easy, but you can do the statistical analysis,
and run the regressions and see what the factors
were that led to the success. There's a reason why
there's one Warren Buffett. Right? So I don't know if
I would necessarily think that we could just do a
[? comp ?] model and replicate Buffett if we started today
with the same factors. AUDIENCE: Well, so
part of the argument is, it's not like the
private companies are-- JEREMY MILLER: Oh,
oh, sorry, sorry. Let me address that. OK. So I agree with
you there as well, and I don't think Buffett
wanted to ever get active. Nor did he think it was his
skill set to get active. I don't think today
he wants to be active. The managers don't
call in to Buffett once a month to give
the numbers and say, you know, here's what I'm
doing, what do you think? And Buffett says, OK, well, you
should get your working capital down, or you've got too many
fixed assets, or whatever. He says, give me great
managers, and then let them run their business. Right? And that's sort of his MO now. So he's not really claiming
to be a great cast iron forger, so he's going to buy
precision cast parts-- you know, the most recent
deal he did, $40 billion or so-- you know. It's not that-- he bought
the manager and the company. So I think he has
a lot more to say about how the capital
gets allocated than how the business is run. And that's really where
he adds the value. AUDIENCE: If you look from
the '60s to the late '90s, the majority of the returns came
from a handful of businesses. American Express in the
'60s, and then See's Candies, Coca-Cola,
American Express again. And primarily the
reason being that he had a very concentrated bet. American Express
was some 30%, 40%, and Coke was, I think,
over 20% of the capital. And GEICO also was a
pretty significant bet. So when he made
these investments, they were out of favor, and
he had a differentiated view. And the differentiated view
came from he doing scuttlebutt on these companies that
gave him these kind of differentiated point of view. You know, the security
I like the best, and American Express
he went around and did all the scuttlebutt. So my point being is,
from those lessons, seems like concentration,
scuttlebutt, if I am going to be a stock
picker, are important. What are lessons
from there that we can do today apply if I am
an active investing picking stocks, and I-- if
concentrated is the way to go? The counter-- just to
complete the sentence-- is, the counter being
lots of hedge funds thought that they had a
differentiated point of view, and they were all in Valeant. And it was a concentrated bet. It could always go
the other way and kill decades of compounding. JEREMY MILLER: Yeah. Absolutely. Love that question, right? So Sequoia Funds, right? Taken down,
effectively, reputation was dismantled by
Valeant, was created because Buffett's
partnership closed. The investors who wanted
to maintain their exposure to the equity market, even
though Buffett was recommending that they didn't do that,
he gave them the option. Bill Ruane was there. Started Sequoia for
the partnership, so that people who
wanted to stay in, could. Basically following
this same strategy, which is sort of like a-- it's
like an Icarus strategy, right? I mean, you're flying
awful close to the sun. It improves the returns. Your question sort of
framed it very well. Part of the reason
for the success was he was concentrated
in the right stuff. Right? Part of the reason for the
downfall of the Sequoia Funds was that they were concentrated
in the wrong stuff. Right? So it works really well as long
as you don't make a mistake, I guess is the point. So the degree to which you have
the confidence in what you're doing should determine the
degree of concentration that you're willing to accept. Because if it goes
wrong, it's going to go horribly wrong
if you're concentrated, and it's recoverable. SORAB: Jeremy, when
I was asking you, alluding to the
same issue earlier, you mentioned a brilliant
Ben Graham quote about Warren Buffett. JEREMY MILLER: Oh, right, yeah. So Graham was asked
about what Buffett had become in terms of his
quality compounder strategy. And he said, I can understand
why you're doing it. But it's harder. Right? So I think that's for everybody
to decide on their own, whether they find it to be
in their nature to be more like Buffett of 25, 26,
27 years old, or more like Buffett at age 40, or
age 84, like he is today. SORAB: Thank you so much
once again for being with us here today. This was amazing. JEREMY MILLER: Thank you.
