Kind: captions
Language: en
the only person who can cause you more
harm than a thief with a dagger is a
journalist with a
pen the following is a conversation with
Bill Amman a legendary activist investor
who has been part of some of the biggest
and at times controversial trades in
history also he is fearlessly vocal on X
FKA Twitter and uses the platform to
fight for ideas he believes in for
example he was a central figure in the
resignation of the president of Harvard
University Claud Dean gay The Saga of
which we discuss in this
episode This Is The Lex Freedman podcast
to support it please check out our
sponsors in the description and now dear
friends here's Bill
Amman in your lecture on the basics of
finance and investing you uh mention a
book intelligent investor by Benjamin
Graham as being formative in your life
what key lesson do you take away from
that book that informs your own invest
sure actually it was the first
investment book I read and uh as such it
was kind of the inspiration for my
career and a lot of my life so important
book you know bear in mind this is sort
of after the Great Depression people
lost confidence in investing in markets
World War Two and then he writes this
book it's for like the average man and
basically he says that you have to
understand the difference between price
and value right price is what you pay
value is what you get and he said ' the
stock market is here to serve you right
and it's a bit like the neighbor that
comes by every day and makes you an
offer for your house makes you a stupid
offer you ignore it uh makes you a great
offer you can take it and that's the
stock market and the key is to figure
out what something's worth and you have
to kind of weigh it he talked about the
difference between you said the stock
market in the short term is a voting
machine it represents speculative
interests you know supply and demand of
people uh in the short term term but in
the long term it's the stock market's a
weighing machine you know much more
accurate it's going to tell you what
something is worth and so if you can
Divine what something's worth then you
can really take advantage of the market
because it's really here to to help you
and that's kind of the message of the
book in that same way there's a kind of
difference between speculation and
investing yeah speculation is just a bit
like buying trading uh crypto right
you're strong words well uh short-term
trading crypto maybe in the long run
there's intrinsic value but uh the you
know it's many investors you know in a
bubble going into the you know the the
crash uh were really just pure
speculators they didn't know what things
were worth they just knew they were
going up right that's speculation um and
investing uh is you know doing your
homework uh digging down understanding a
business understanding the competitive
dynamics of an industry understanding
what Management's going to do
understanding what price you're going to
pay you know the value of anything I
would say uh other than love let's say
uh is the present value of the cash you
can take out of it over its life now
some people think about love that way
but it's not it's not the right way to
think about love but it's um yeah so
investing is about basically building a
a model of what this business is going
to produce over its lifetime so how do
you get to that this idea of called
value investing how do you get to the
value of a thing even like
philosophically value of anything really
but we can just talk about the things
that are on the stock market sure
companies the value of a a security the
value uh is the present value of the
cash you can take out of it over its
life so if you're think about a bond a
bond you know pays a 5% coupon interest
rate you get that let's say every year
or twice a year split and half and it's
very predictable and if it's a US
Government Bond you know you're going to
get it so that's a pretty easy thing to
value a stock is an interested in a
business it's like owning a piece of a
company and a business a profitable one
is like a bond and that it generates
these coupons or these earnings or cash
flow you know every year the difference
with uh a stock and a bond is that uh
the bond it's a contract you know what
you're going to get as long as they
don't go bankrupt in default with a
stock you have to make predictions about
the business you know how many widgets
they going to sell this year how many
going to sell next year uh what are
their costs going to be how much of the
money that they generate do they need to
reinvest in the business to keep the
business going um and uh that's more
complicated um but you know what we do
is we try to find businesses where with
a very high degree of confidence we know
what those cash flows are going to be
for a very long time and there few
businesses that you can have a really
high degree of certainty about as a
result you know many Investments are
speculations because it's really very
difficult to predict the future so we
what we do for a living what I do for a
living is find those rare companies that
you can kind of predict what they're
going to look like over a very long
period of time so what are the
factors that indicate that a company is
something is going to be something
that's going to make a lot of money it's
going to have a lot of value and it's
going to be reliable over a long period
of time and what is your process of
figuring out whether a company is or
isn't that so every consumer has a view
on different brands and different
companies and you know what we look for
are sort of these non-d disruptable
businesses a business where you can kind
of close your eyes stock market shuts
for a decade and you know that 10 years
from now it's going to be a more
valuable more profitable company so we
own a business called Universal Music
Group uh it's in the business of helping
artists become Global artists uh
recorded music business uh and it's in
the business of you know owning rights
uh to sort of the music publishing
rights of
songwriters and you know I think music
is forever right music is is a many
Thousand-Year old uh human part of the
human experience and I think it will be
you know thousands of years from now and
so that's a pretty good backdrop to
invest uh in a company and the company
basically owns a third of the global
recorded music that's you know the most
dominant sort of market share in the
business they're the best at taking an
artist who's 18 years old has got a
great voice and has started to get a
presence on YouTube and uh Instagram and
helping that artist become a superstar
and that's a unique talent and and the
result is the best artist in the world
want to come work for them but they also
have this incredible library of you know
the Beatles the rolling ston YouTube Etc
so and then if you think about um what
music has become used to be about
records and CDs and you know eight track
tapes for those of whom it was about a
new format and that's how they drive
sales and it's become a business which
is like the podcast business about
streaming and you can streaming is a lot
more predictable than what than selling
records right you can sort of say okay
how many people have smartphones how
many people going to have smartphones
next year there's a kind of global
penetration over time of smartphones you
pay call 10 11 bucks a month for a
subscription or last for a family plan
and you can kind of build a model what
the world looks like and predict you
know the growth of the streaming
business you predict what kind of market
share univers is going to have over time
and you you can't get to a precise view
of value you can get to an approximation
and the key is to buy at a price that
represents a big discount to that
approximation and that gets back to Ben
Graham Ben Graham was about what he
called uh invented this concept of
margin of safety right you want to buy a
company at a price that if you're wrong
about what you think it's worth and it
turns out to be worth 30% less you paid
a deep enough discount to your estimate
that you're still okay it's about
investing a big part of investing is not
losing money if you can avoid losing
money and then have a few great hits you
can do very very well over time well
music is interesting because uh yes
music's been around for a very long time
but the way to make money from music has
been evolving like you mentioned
streaming there's a big transition
initiated by I guess Napster that
created Spotify of how you make money on
music W with with apple and with all of
this and the question is how well are
companies like umg able to adjust to
such Transformations one I could ask you
about the future which is uh Artificial
Intelligence being able to generate
music for example there have been a lot
of amazing advancements with so do you
have to also think about that like when
you close your eyes all the things you
think about are you imagining the
possible ways that the the future is
completely different from the the
present and how well this company will
be able to like surf the wave of that
sure and they've had to Surf a lot of
waves and actually the music business
peaked the last time in like the late
'90s or 2000 time frame and then really
Innovation Napster digitization of Music
almost killed the industry and Universal
really LED an effort to save the
industry and actually made an early deal
with uh Spotify that enabled you know
the uh the industry to really recover
and so by virtue of their Market
position and their credibility and their
willingness to kind of adopt new
technologies they've kept their position
now they of course had this huge
Advantage because I think the Beatles
are forever I think You2 is forever I
think Rolling Stones are forever um so
they had a a nice base of of assets that
were important and I think will forever
be and forever is a long time but you
know
the uh again there's enormous there are
all kinds of risks in every business
this is one that I think has a very high
degree of persistence and I can't
Envision a world where Beyond streaming
in a sense now you may have a neural
link chip in your head that instead of a
phone but the the music's going to come
in a digitized you know kind of format
you're going to want to have an infinite
library that you can walk around in your
pocket or in your brain it's not going
to matter that much if the form factor
you know the device changes um it's not
really that important whether it's
Spotify or apple or Amazon uh that are
the so-called uh dsps or the or the
providers uh I think the value is really
going to uh reside in the in the content
owners and that's really the artists uh
and the label and I actually think AI is
not going to be the primary creator of
music I think we're going to actually
face the reality that it's not that
music has been around for a th thousands
of years but musicians and music has
been around like we actually care to
know who's the musician that created it
just like we want to know that Who's the
artist human artist that created a piece
of art totally agree and I think if you
think about it there's other lots of
other
Technologies uh and computers that have
been used to generate music over time
but no one wants to No One falls in love
with a computer generated track right um
and you know Taylor Swift you know you
know incredible music but it's also
about the artist and her story and her
physical presence and you know the uh
the live experience I don't think you're
going to sit there uh and someone's
going to put computer up on stage
and then and it's going to play and
people are going to get excited around
it so I think AI is really going to be a
tool to make artists better artists um
and and uh you know the I think uh like
a synthesizer right uh really created
the opportunity for you know one man to
have an orchestra um maybe a bit of a
threat to uh a
percussionist um but maybe not maybe it
drove even more demand for for for the
live experience unless that computer has
humanlike sence which I believe is a
real possibility but then it's really
from a business perspective no different
than a human if it has an identity
that's basically Fame and influence and
there'll be a robot Taylor Swift and it
doesn't copyrightable asset I would
think MH right yeah and then there'll be
not sure that's a world I'm excited
that's a different discussion um the
world is not going to ask your
permission to become what it's is
becoming so uh but you can still make
money on it uh presumably there'd be a
capital system and there would be some
laws under which AI which I believe AI
systems will have rights that are akin
to Human Rights and we're going to have
to contend with what that means well
there's sort of name and likeness rights
yes right that have to be protected now
can a name be attributed to a a Tesla
robot I don't know I think so I think
it's quite obvious to okay those are
more more potential artists for us to
represent at universe exactly exactly
all right that's sort of one example
another example could be just you know
the restaurant industry right if you can
you look at businesses like a McDonald's
right it's a whatever the company's like
a
1950 vintage business and here we are
it's you know 75 years later and uh you
can kind of predict what it's going to
look like over time and the menu is
going to you adjust over time to
Consumer tastes and but I think the
hamburger and fries is probably
Forever The Beetles The Rolling Stones
the hamburger and fries are forever I
was uh eating at Chipotle last night as
I Was preparing know EXC thank you thank
you and uh yeah it is it is one of my
favorite places to eat you said it is a
place that you eat you obviously also
invest in it uh what do you get at
Chipotle I tend to get a double chicken
bowl or burrito um I I like the burrito
but I I generally try to order the bowl
yeah cut the carb for heal reasons all
right and uh you know double chicken
quac lettuce black beans and uh I'm I'm
more of a steak guy just just putting
that on the rec
record uh what's the actual process you
go through like literally
like the process of figuring out what
the value of a company is like how do
you do the research is it reading
documents is it talking to people is how
do you do it so all the B so Chipotle
What attracted us initially is a stock
price dropped by about 50% uh great
company great concept um cons you know
athletes love it consumers love it
healthy sustainable uh fresh food made
in front of your eyes and uh you know
great Steve ell's the founder did an
amazing job but ultimately the company's
lacking some of the systems and had a
food safety issue consumers got sick
almost killed the
rent uh but the reality of the fast food
quick service industry is almost every
fast food company has had a food safety
issue over time and the vast majority
have survived uh and we said look such a
great concept but they they you know
their approach was not was far from
ideal but we start with usually reading
the SEC violing so companies file a 10K
or an annual report they file these
quarterly reports called 10 Q's they
have a proxy statement which describes
kind of the governance the board
structure um conference call transcripts
are publicly available it's kind of very
helpful to go back five years and kind
of learn the story you know here's how
management describes their business
here's what they say they're going to do
then you can follow along to see what
they do uh it's like a historical record
of you know of how competent and uh
truthful they are you it's a very useful
device and then of course looking at
competitors uh and thinking about you
know who could what could dislodge this
company um uh you know and then we'll
talk to if it's an industry we don't
know well we know the restaurant
industry really well music industry you
know we'll talk to people in the
industry we'll try to understand you
know the difference between publishing
and recorded music we'll look at the
competitors um we'll talk to we'll read
books you I read a book about the music
industry or a couple books about the
industry um so it's it's a bit like a
big research project uh and you there
these so-called expert networks now and
you can get pretty much anyone on the
phone uh and they'll talk to you about
an aspect of the industry that you don't
understand want to learn more about uh
try to get a sense you know public
filings of companies generally give you
a lot of information but not everything
you want to know and you can learn more
by talking to experts about some of the
industry Dynamics the personalities you
want to get a sense of management uh I
like watching you know podcasts if a CEO
were to do a podcast or a YouTube
interview you get a sense of the people
so in the case of Chipotle for example
by the way I could talk about Chipotle
all day I just love it I love it I wish
there was a
sponsor uh I'll mention it to the CEO
don't make promises you can't keep Bill
I'm not making can't Brian Nichol is a
fantastic CEO he's not going to spend
one doar that he doesn't think is the
company's best interest all right all I
want is free Chipotle come on
now uh what was I saying oh and so you
look at a company like Chipotle and then
you see there's a difficult moment in
its history like you said that uh there
was a food safety issue and then you say
okay well I see a path where we can fix
this and therefore even though the price
is low we can get it to where the price
goes up to its value MH so the kind of
business we're looking for is sort of
the kind of business everyone should be
looking for right a great business it's
got a long-term trajectory of growth out
into the for you know even beyond the
fores seable distance right those are
the kind of businesses you want to own
you want businesses that generate a lot
of cash you want businesses you can
easily understand you want businesses
with these sort of huge barriers to
entry where it's difficult for others to
compete you want companies that don't
have to constantly raise Capital um and
these are some of the great businesses
of the world but people have figured out
that those are the great businesses so
the problem is those companies tend to
have very high stock prices and the
value is generally built into the price
you have to pay for the business so we
we can't earn the kind of returns we
want to earn for investors by paying a
really high price price matters a lot
you can buy the best business in the
world and if you overpay you're not
going to earn particularly attractive
returns so we get involved in cases
where a great business has kind of made
a big mistake or or you a company that's
kind of lost its way but it's
recoverable and that's we buy from
shareholders who are disappointed who've
lost confidence selling at a low price
relative to what it's worth if fixed and
then we try to be helpful in fixing the
company you said that uh barriers to
entry you said a lot of really
interesting qualities of companies very
quickly in a sequence of statements that
took like less than 10 seconds to say
but some of them were fascina all of
them were fascinating so you said
barriers to entry how do you know if
there's a type of moat
protecting of the the competitors from
stepping up to the plate I mean the most
difficult analysis to do as an investor
is that is kind of figuring out how wide
is the moat how you know how much at
risk is the business to disruption and
we're in I would say a period the
greatest period of disrupt ability in
history right
technology you know a couple of
19-year-olds can you know leave whatever
University or maybe they didn't even go
in the first place
uh they can raise you know millions of
dollars uh they can get access to
infinite uh bandwidth storage uh they
can contract with uh engineers in
lowcost markets around the world they
can build a virtual company and they can
disrupt businesses that seem super
established over time and then on top of
that you have major companies with
multi-trillion dollar market caps
working to find profits wherever they
can and so that's a dangerous World in a
way to be an investor and so you want to
you have to find businesses that it's
hard to foresee a world in which they
get disrupted and the beauty of the
restaurant business and we've actually
our best track record is in restaurants
we've never lost money uh we've only
made a fortune interestingly investing
restaurants a big part of it it's a
really simple business and if you you
know get your pootle right and you're at
a 100 stores you know it's not so hard
to Envision getting to 200 stores and
then getting to 500 stores right and the
key is maintaining the brand image
growing intelligently having the right
systems uh you know now when you go from
100 stores to 3500 stores you have to
know what you're doing there's a lot of
complexity right you know if you think
about your local restaurant uh you know
the family's working in the business
they're they're watching the cash
register and you can probably open
another restaurant you know across town
but there are very few restaurant
operators that own more than a few
restaurants and operate them
successfully and the and the quick
service business is about systems
and building a model that uh a stranger
who doesn't know the restaurant industry
can come in and enter the business and
build a successful uh successful
franchise now Chipotle is not a
franchise company they actually own all
their own stores but many of the most
successful restaurant companies or
franchise models like a Burger King a
McDonald's Tim Horton you know all these
various Brands Popeyes and there it's
about systems but the same systems apply
whether you own all the stores and it's
run by a big Corporation or whether the
owners of the restaurants are are sort
of franchisees you know local
entrepreneurs so if the restaurant has
scaled to a certain number that means
they've figured out some kind of system
that works it's very difficult to
develop that kind of system so that's a
moe a moe is you get to a certain scale
and you do it successfully and the brand
is now in the in the understood by the
consumer and what's interesting about
Chipotle is what they've achieved is
difficult right they're not buying
frozen hamburgers getting shipped in
they're buying fresh you know
sustainably sourced ingredients the
preparing food in the store that was the
first right the quality of the product
that chipotle is incredible it's the
highest quality food you can get for you
can get a serious dinner for under 20
bucks uh and eat really Health you know
healthfully and very high quality
ingredients and that's just not
available anywhere else and it's very
hard to replicate and to build those
relationships with you know Farmers
around the country it's a lot easier to
make a deal with one of the big you know
massive food food producers and buy your
pork from them uh than to buy from a
whole bunch of farmers around the
country and so it's that is a big moat
for Chipotle very difficult to replicate
and by the way another company I think
you have a stake is is McDonald's no we
own a company called restaurant Brands
restaurant Brands owns a number of Quick
service companies one of which is Burger
King Burger King okay well um it's been
a meme for a while but I've Burger King
is great too Wendy's whatever but
usually go McDonald's I'll just eat
burger patties I don't know if you knew
you could do this but a burger patty at
Burger King can do this McDonald's it's
actually way cheaper they'll just sell
you the Pat the Patty and it's cheap
it's like $150 or $2 for per Patty and
it's about 250 calories and it's just
meat and despite like the criticism of
memes out there that's pretty healthy
stuff it's healthy stuff and so when I
do when I go my the healthiest I feel is
when I do carnivore it doesn't sound
healthy but if I eat only meat I feel
really good I lose weight I have all
this energy it's crazy and the when I'm
traveling the easiest way to get me is
that did you go to McDonald's you order
six patties exactly so there's this sad
meme of me just sitting alone in a car
when I'm traveling just eating beef
patties and McDonald but I love it and
you got to do what what you love what
makes you happy and that's what makes me
happy we should maybe we'll have Burger
King feature in what about flame world
what what's with these fried burgers we
got to get you to Burger King you know
grilled burgers wait is this like fast
food trash I didn't know I don't know
the details of how they're made I'm not
not I don't have Allegiance I think we
got a chance to switch you to Burger
King great we'll see I I'm I'm making so
many deals today it's wonderful okay you
were talking about most and this kind of
remind me of um alphabet the parent
company sure we're made where's it's a
big position for us so it's interesting
that you're uh think that maybe alphabet
fits some of these
characteristics It's tricky to know with
everything that's happening
in in Ai and I'm interviewing s Pai soon
it's interesting that you think that
there's a mo and it's also interesting
to analyze that because a consumer as
just a fan of Technology why is Google
still around like they've been it's not
just a search engine it's doing it all
the basics of the business of search
really well but they're doing all these
other stuff so what's your analysis of
alphabet why are you still positive
about it sure so it's a business we've
admired as a firm for you know whatever
15 years um but rarely got to a price
that we felt we could own it because
again the expectations were so high and
price really matters and really the sort
of AI scare I would call it you know
Microsoft comes out with chat GPT uh
they do an amazing demonstration people
like this most incredible product and
Google which had been working on AI even
earlier obviously the Microsoft
Microsoft was behind an AI it was really
their chat GPT deal that gave them a
kind of a market presence um and then
Google does this fairly disastrous uh
demonstration of Bard and the world says
oh my God Google's fallen behind an ai
ai is the future stock gets crushed
Google gets to a price around 15 times
earnings uh which for a business of this
quality is an extremely extremely low
price and our view on Google one way to
think about it when a business becomes a
verb that's usually a pretty good sign
about the mode around the business so
you know you open your computer and you
open your search and very high
percentage of the world starts with a
Google you know page in a on
line uh you type in your your search you
know the Google advertising search
YouTube franchise is one of the most
dominant uh franchises in the world very
difficult to disrupt uh extremely
profitable uh the world is moving from
offline advertising to online
advertising and that Trend I think
continues why because you can actually
see what your ads work you know they
used to say about advertising you know
uh you spend a fortune and you just
don't know which 50% of it works but you
just sort of spend the money because you
know ultimately that's going to bring in
the customer and now with online
advertising you can see with
granularity which dollars I'm spending
you know when people click on the search
term and end up buying something and I
pay you know the it's a very high return
on investment for The Advertiser and
they really dominate that business now
ai of course is a risk if all of a
sudden people start searching or asking
questions of chat GPT and don't start
with the Google search bar that's a risk
to the company and so our view based on
work we had done and talked to Industry
experts is that Google if anything had a
a uh by virtue of the the investment
they've made the time the energy they
people put into it we felt their AI
capabilities were if anything
potentially greater than uh Microsoft
Chat GPT and that the market had
overreacted and I because Google you
know is a big company uh Global business
Regulators uh scrutinized it incredibly
carefully they couldn't take some of the
same Liberties a startup like open AI
did in releasing a product and I think
Google took a more cautious approach in
releasing an early version of Bard in
terms of its capabilities and that let
the mark the world to believe that they
were behind and we ultimately concluded
if any they're tied or ahead and you're
paying nothing uh for the that potential
business and they're going to and they
also have huge advantages by you think
of all the data Google has like the
search data um all the various app you
know applications you know email and
otherwise and the kind of the Google
Suite of of products it's an incredible
data set so they have more training data
than pretty much any company in the
world they have incredible Engineers
they have enormous Financial Resources
uh so that was kind of the BET and um
and we still think it's probably the
cheapest of the big seven companies in
terms of price you're paying for the
business relative to its current
earnings it also is a business uh that
has a lot of potential for efficiency
you know sometimes when you have this
enormously profitable dominant company
you know all of the technology companies
in the post March 20 world uh grew
enormously in terms of their teams and
they probably over hired and so you've
seen some you know the Facebooks of the
world and now even Google starting to
get a little more efficient in terms of
their operation so we P up low multiple
for their the business um one way to
think about the value of the business is
the price you pay for the earnings or
alternatively what's the yield if you
flip over the price over the earnings it
gives you kind of the yield of the
business so a 15 multiple is about a
almost a 7 a half% yield and that
earnings yield is growing over time as
the business grows that's a you know
compared to uh what you can earn lending
your money to the government you know 4%
that's a very attractive going in yield
and then there's all kinds of what we
call optionality in all the various
businesses and Investments they've made
that are losing money they've got a
cloud business that's growing very
rapidly but they're investing basically
100% of the profits from that business
in growth so you're in that earnings
number you're not seeing any earnings
from the cloud business and you know
they're one of the top Cloud Player so
very
interesting generally well-managed uh
company with Incredible assets and
resources and dominance you know and has
no debt it's got ton of cash and so
pretty good story is there something
fundamentally different about AI that
makes all of this more complicated which
is the sort of the exponential
possibilities of the kinds of products
and impact that AI could create when
you're looking at meta Microsoft
alphabet Google all these companies
xai or maybe startups like is is there
some more risk introduced by the
possibilities of AI absolutely that's a
great question um you know business
investing is about finding companies
that can't be disrupted AI is the
ultimate disruptable asset uh or
technology and it that's what makes
investing treacherous is that you own a
business that's enormously profitable
management gets if you will fat and
happy and then a new technology emerges
that just takes away all their
profitability and AI is this incredibly
powerful tool which is why every
business is saying how can I use AI in
in my business to make us more
profitable more successful grow faster
and also disrupt or protect oursel from
the
you know the incomings you know it's
it's a bit like you know Buffett talks
about um a great business like a castle
surrounded by this really wide mode but
you have all these barbarians trying to
get in and uh steal the uh princess and
uh it happens you know Kodak for example
was an amazing incredibly dominant
company until it disappeared Polaroid
you know this incredible
technology and that's why we have tended
to stay away from companies that are
technology companies because technology
companies generally the world is such a
dynamic place that someone's always
working on a better version and you know
codec was caught up in the analog film
world and then the world changed well
Google was pretty fat and happy until
chadti came out how would you rate their
ability to wake up lose weight and be uh
less happy and aggressively ReDiscover
their search for happiness I think
you've seen a lot of that in the last
year here uh and uh I would say some
combination of embarrassment and pride
are huge motivators uh for everyone from
Sergey Brin you know to the management
of the company um and Demis Saab is
throw in into the picture and all of
Deep Mind teams and the unification of
teams and like all the shakeups it was
interesting to watch the chaos I love it
I love it when uh everybody freaks out
like you said partly embarrassment and
partly that competitive drive that
drives into engers is great I can't wait
to see what um there've been just a lot
of improvement in the product let's see
let's see where it goes you mentioned
management how do you analyze the
governance structure and the individual
humans that are the managers of a
company so as I like to say incentives
drive all human behavior uh and that
certainly applies in the business world
so understanding the people and what
drives them and what the actual
financial and other incentives of a
business are very important uh part of
the analysis for investing in a
company and you can learn a lot you know
I mentioned before one great way to
learn about a business is go back a
decade and read everything that
management has written about the
business and see what they've done over
time see what they've said you know
conference calls are actually you know
relatively recent uh when I started in
the business there weren't conference
call transcripts now you have you know a
a written record of everything
management has said in response to
questions from analysts at conferences
and otherwise
and so just you learn a lot about people
by listening to what they say how they
answer questions and ultimately their
track record for doing what they say
they're going to do are do they under
promise and overd deliver do they
overpromise and underd deliver um do
they say what they're going to do do
they admit mistakes um do they build
great teams do people want to come work
for them are they able to retain their
talent um you know and then part of it
is do they how much are they running the
business for the benefit of the business
how they running the business for the
benefit of themselves um and uh you know
that's kind of the analysis you do are
we uh talking about CEO Co what what
what does management mean how deep does
it go sure so this very Senior
Management matters enormously you we use
the Chipotle example uh Steve 's great
entrepreneur business got to a scale he
really couldn't uh run it we recruited a
guy named Brian helped the company
recruit a guy named Brian nickel uh and
he was considered the best person in the
Quick Service indust
he came in and completely rebuilt the
company actually we moved the company
reply was moved to
California and sometimes one way to redo
the culture of a company is just to move
it geographically and then you can kind
of reboot the business but a great
leader has great followership you know
over the course of their career they'll
have a team they've built that will come
follow them into the next opportunity uh
but the key is you know really the top
person matters enormously uh because and
then it's who they
recruit uh you know you recruit an A+
leader and they're going to recruit
other a type people recruit a b leader
you're not going to recruit any great
talent beneath
them uh you mentioned Warren Buffett you
said you admire him as an investor what
do you find most interesting and
Powerful about his
approach what aspects of his approach to
investing do you also practice sure so
most of what I've learned in the
investment business I've learned from
waren Buffett he's been my great
Professor uh of this business I my first
book read in the business was the Ben
Graham intelligent investor but fairly
quickly you get to learn about Warren
Buffett and I started by reading the
Berkshire hathway and reports uh and
then I eventually got the Buffett
partnership letters that you can see uh
which are an amazing read to go back to
the 19 mid1 1950s and read what he wrote
to his limited partners when he first
started out and just follow that
trajectory over a long period of time so
what's remarkable about him is one
duration right he's still added at
93 uh you know to uh you know takes a
very long-term view um but a big thing
that you learn from him investing
requires this incredible dispassionate
uh on emotional quality you have to be
extremely economically rational uh which
is not uh a basic it's not something you
learn in the jungle you know I don't
think it's something that you know if
you think about the the um you know
surviving the jungle uh you know the
lion shows up uh you know you everyone
starts running you run with them uh that
does not work well uh in markets in fact
you generally have to do the opposite
right when the Lemmings are running over
the cliff that's the time where you're
facing the other direction and you're
running the other direction I.E you're
stepping in you're buying stocks at
really low prices um you know Buffett's
been great at that and great at teaching
about what he calls temperament which is
this sort of emotional kind of or
unemotional uh quality that you need uh
to be able to dispassionately look at
the world and say okay is this a real
RIS risk or people
overreacting um people tend to get
excited about Investments when stocks
are going up and they get depressed when
they're going down and that I think
that's just inherently human you have to
reverse that you have to get excited
when things get cheaper and you got to
get concern when things get more
expensive you've been a part of some big
battles some big losses some big wins so
it's been a roller coaster so in terms
of temperament psychologically how do
you not let that break you how do you
maintain a
calm uh demeanor and avoid running with
the
Lemmings I think it's something you kind
of learn over time uh a key success
factor is you want to have enough money
in the bank that you're going to survive
uh you know regardless of what's going
on with volatility and markets you know
people who uh one you shouldn't borrow
money so if you borrow money you own
stocks on margin markets are going down
and you have your livelihood at risk
it's very difficult to be rational so
key is getting yourself to a place where
you're financially secure you're not
going to lose your house right that's a
kind of a key thing and then also doing
your homework you know stock prices
stocks can trade at any price in the
short term and if you know what a
business is worth and you understand the
management you know it extremely well
it's not nearly as uh it doesn't bother
you when a stock price goes down or it
has much less impact on you because you
know you know again as uh Mr Graham said
you know the short- term the markets a
voting machine you have a bunch of
lemmings voting One Direction that's
concerning but if it's a great business
doesn't have a lot of debt and people
going just listen to more music next
year than this year you know you're
going to do well uh so it's a bit some
combination of being personally secure
and also just knowing what you own uh
and over time you build uh uh calluses I
would say so psychologically just as a
human being speaking of lines and gazel
and all this kind of stuff yeah is there
some is it as simple as just being
financially secure uh is there some just
human qualities that you have to be born
with Slash develop I think so I think uh
now I'm a pretty emotional person I
would say or I feel pretty strong
emotions but not an investing I'm remark
ably immune to kind of volatility and
that's a big advantage and it took some
time for me to develop that so you
weren't born with that you think no so
being emotional you want to respond to
volatility yeah and you just it's a bit
again I you can learn a lot from other
people's experience it's one of the the
few businesses where you can learn an
enormous amount by reading about other
periods in history uh you know watch you
know following Buffett's career the
mistakes he made if you're investing a
lot of capital every one of your
mistakes is going to be big right so
we've made big mistakes uh the good news
is that the vast majority of things
we've done have worked out really well
and so that also gives you you know
confidence over time but because we make
very few Investments you know we own
eight things today or seven companies of
that matter um if we get one wrong it's
going to be big news and so the other
nature of our business you have to be
comfortable with is a lot of public
scrutiny a lot of public criticism and
that requires
some uh experience call that I think
we'll talk about some of that yeah uh
financially secure is something you I
believe also recommend for even just
everyday investors is there some general
advice from the things you've been
talking about that applies to Everyday
investors sure so never invest money you
can't afford to lose where it would if
you l lost this this money and you know
you lose your house Etc so
having being in a place where uh you're
investing money that you don't care
about the price in the short term it's
money for your retirement and you take a
really long-term view I think that's key
uh never investing where you borrow
money against your securities you know
the the markets offer you the
opportunity to leverage your investment
and in most worlds you'll be okay except
if you know there's a financial crisis
or you know a nuclear device gets
detonated God forbid somewhere in the
world or there's a unexpected war or you
know someone kills a leader unexpectedly
you know things happen that can change
the course of history and markets react
very negatively to those kinds of events
and you can own the greatest business in
the world trading for $100 a share and
next moment it could be 50 so as long as
you don't borrow against Securities you
own really high quality businesses and
it's it's not money that you need in the
short term uh then you can you can
actually be thoughtful about it and that
is a huge Advantage the vast majority of
investors it seems tend to be the ones
that panic in the downturns get
overrated and when markets are doing
well so be able to think longterm and be
sufficiently financially secure such
that you can afford to think long term
yeah that Buffett is the ultimate
long-term thinker and just the decisions
he makes uh the consistency of the
decisions he's made over time and
fitting into that sort of long-term
framework is a very uh very educational
let's put it that way for the for
learning about this business so you
mentioned eight companies but what do
you think about mutual funds that for
everyday investors that diversify across
a larger number of companies I think
there are very few mutual funds uh there
thousands and thousands of mutual funds
they're very few that earn their keep in
terms of the fees they charge uh they
tend to be too
Diversified um and
uh you know too shortterm and you're
often much better off just buying an
index fund and many of them
perform they look if you look carefully
at their portfolios they're not so
different from the underlying index
itself and you tend to pay a much higher
fee uh now all of that being said
there's very talented mutual fund
managers a guy named will danoff at
Fidelity had a great record over a long
period of time you the famous Peter
Lynch uh Ron Baron another great
long-term growth stock investor so
there's some great uh mutual funds but I
put them in the handful versus the
thousands and if you're in you know the
thousands I I'd rather someone bought
just an index fund basically yeah index
funds but what uh what would be the leap
for an everyday investor to go to
investing in a small number of companies
like 2 three four five companies I even
recommend for individual investors to
invest in you know a dozen companies you
don't get that much more benefit of
diversification going from a dozen to 25
or even 50 you know most of the benefits
diversification come in the first you
know call it 10 or 12 uh and if you're
investing in businesses that don't have
a lot of debt they're businesses that
you can understand yourself you
understand you know actually individual
investors did a much better job
analyzing Tesla than the so-called
professional investors or analysts the
vast majority of them so if it's a
business you understand you if you
bought a Tesla you understand the
product and its appeal to Consumers you
know it's a good place to start when
you're analyzing a company um so I would
invest in things you can understand
that's kind of a key uh you know you
like Chipotle you you understand why
they're successful you can you know go
there every week week and you can
monitor you know is anything changing
you how these new uh kind of how's
chicken alpastor is that is that a good
upgrade from the basic chicken you know
the drink offerings improving uh the
stores clean I think you should invest
in companies you really understand
simple businesses where you can predict
with a high degree of confidence what
it's going to look like over time and if
you do that in a not particularly
concentrated fashion and you don't
borrow money against your securities you
probably do much better than your
typical mutual fund yeah it's
interesting consumers that love a thing
are actually good analysts of that thing
or I guess a good starting point by way
there's much more information available
today when I was first investing
literally we had people faxing us
documents from the SEC filings in
Washington DC now everything's available
online conference call transcripts are
free um you know there you have you have
ai you know you have uh unlimited uh
data and uh all kinds of mess M boards
and Reddit forums and things where
people are you know sharing advice and
everyone has their own you know by
virtue of their career or experience
they they'll they'll know about an
industry or a business and that gives I
would take advantage of your own
competitive advantages I'm just afraid
if I invest in Chipotle I'll be like
analyzing every little change of menu
from a financial perspective and just be
very critical um if it's going to affect
your experience I wouldn't I wouldn't
buy the stock yeah I mean I I should
also say that I am somebody that
emotionally doesn't respond to
volatility which is why I've never
bought index funds and I just I just
noticed myself psychologically being
affected by the ups and downs of the
market I want to tune out because if I'm
at all tuned in it has a negative impact
on my life yeah that's really important
can you explain what activist investing
is you've been talking about investing
and then looking at companies when
they're struggling stepping in and
reconfiguring things within that company
and helping it become great uh so that's
part of it but let's just zoom out what
what's this idea of activist investing I
think recently in the last couple of
days I read an article saying that more
than 50% of the capital in the world
today that's in invest in the stock
markets passive indexed money that's the
most passive form right so if you think
about an index fund a machine buys a
fixed set of Securities in certain
proportion uh there's no human Judgment
at all and there's no real person behind
it in a way um they never take steps to
improve a business they just quietly own
Securities what we do is we invest our
capital in a handful of things you get
to know them really really well because
you're going to put 20% of your assets
in something you need to know it really
well but once you become a big holder
and if you've got a some thoughts on how
to make a business more valuable
you can do more than just be a passive
investor so our our strategy is built
upon uh finding great companies in some
cases that have lost their way and then
helping them succeed and we can do that
with ideas from outside the boardroom
sometimes we take a seat at on a board
or more than one um and we work with the
best management teams in the world to
help these businesses succeed so when I
first went into this business no one
knew who we
were and we didn't have that much money
and so to influence what was to us a big
company uh we had to make a fair bit
more noise right so we would buy a stake
we' announce it publicly we attempt to
engage with management the first
activist investment we made at persing
Square was Wendy's I couldn't get the
CEO to ever return my call didn't return
my call so we actually in that case uh
our idea was Wendy's own a company
called Tim Hortons which was this coffee
donut chain and you could buy Wendy's
for basically $5
billion and they owned 100% of Tim
Horton's which itself was worth more
than 5 billion so you could literally
buy Wendy's separate Tim Hortons and get
Wendy's for negative value that seemed
like a pretty good opportunity even
though the business wasn't doing that
well uh so we bought the stake called
the CEO couldn't get a meeting nothing
so we hired actually Blackstone which
was at that time had at Investment Bank
and we hired them to do what's called a
fairness opinion of what Wendy's would
be worth if they followed our advice and
they agreed to do it paid them a fee for
it and then we mailed in a letter with a
copy of the fairness opinion saying
monies would basically be worth 80% more
if they did what we said and six weeks
later they did what we said so that's
activism at least an early form of
activism with that