Berkshire after Buffett

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Pushkin.

He's 94, he's pretty much universally loved in American finance circles, and he's probably the most famous investor in the world.

No, I'm not talking about Rob Armstrong.

He's nowhere near that nice.

But about Warren Buffett has announced his retirement from Berkshire Hathaway, which is a textiles company he bought way back in the day in 1965 and turned into an insurance and investment giant.

He's still going to be chairman.

He's not going anywhere really, but day-to-day management is passing along.

Now he's not just an investor though.

His annual shareholder meetings draw thousands of adoring fans from all over the world every year all the way to Omaha.

I can't be the only person looking on that from this side of the Atlantic and wondering how on earth this whole mythology took hold.

So, today on the show, we're asking: will we ever see the likes of Warren Buffett again?

This is Unhedged, the Markets and Finance podcast from the Financial Times and Pushkin.

I'm Katie Martin, a markets columnist at FT Towers in London, and I'm joined down the line from New York City by Rob from the Unhedged newsletter.

And Rob, you're not quite 94 just yet, but do you think you'll be able to do it?

I don't admit to 94.

I don't look a day over 84.

Let me tell you this.

I, along with your friends Oliver Ralph and Eric Platt,

did about a four-hour interview with old Warren about five years ago, maybe a little more now.

And we didn't know it was going to be four hours, but he was like 89 then.

And let me tell you, he wore us out.

We thought we're going to, we like had to rush to get our questions in because we don't know, oh, you have to leave the great Mr.

Warren's office now.

You know, you got your half an hour, get out of there.

We asked everything we could think of, and he was like, any more questions?

You guys don't want to keep talking?

You know, what's going on?

This has been great.

He's a tireless person.

Amazing.

Yeah, and I think this is something,

a general observation

I make about people who are extremely successful in business broadly, CEO types or whatever, is they do tend to have in common this kind of bottomless well of physical energy.

Basically the reason I am not a CEO is because I constantly need to have a nap, right?

Yes.

One of the reasons.

Like I could go to the board meeting, but

I get a little sleepy.

But let's start at the beginning a little bit here,

because I'm not saying

Europeans have never heard of Warren Buffett, but I am saying we kind of don't get it.

Like there's no, there's no equivalent.

There's like maybe George Soros, who obviously, you know, bet against the Bank of England and won back in 1992.

I saw him speak in Davos, darling, a few years ago, and he was tearing strips out of Facebook in the way that only a billionaire who is all out of flips to give can do.

It was great.

Indeed.

Berkshire and Buffett are generally different from any other kind of animal we have.

Totally weird.

Totally weird.

So here's this business that started out when Warren was quite a young man in Omaha, Nebraska.

He comes from a good family in Omaha.

His dad was in politics.

He gathers together some money and, you know, starts a little investment fund.

And Berkshire Hathaway is actually the name of a company he bought that turned out to be a terrible failure and an awful investment, which I think is a good thing.

This is the textiles company, right?

Yeah, it was like, they made like rugs or something something like this.

And, you know, he loves to talk about how he never should have bought the business and his partner, Charlie Munger, tried to talk him out of it.

But because,

you know, it's kind of part of his mystique.

Like for some corporate reason, it was just easier for him to merge into Berkshire Hathaway.

So the most successful financial conglomerate in the history of the world is named for the failed textile mill it used to be, which I kind of love.

How bizarre.

So now, you know, fast forward 60 years, and you have a very interesting animal, which is made up of a bunch of companies, mostly in two areas.

On the one hand, insurance.

So there's the massive Berkshire insurance and reinsurance operations, and car insurance, and property casualty, the whole, you know, a large range of insurance products.

And then there's a bunch of what you might term unfairly old economy businesses, utilities, energy companies, railways, and then there's loads of bits and bobs.

A sneaker company sees candies.

I recommend to your British friends and neighbors, if you are ever in America and specifically San Francisco, seize candies, delicious, tiny business they've owned for a long time.

It's not like that horrible chocolate you guys eat.

It is not like the horrible chocolate.

They are delicious, a little box of variety of different things.

Peanut brittle is a great specialty of theirs, which I like.

In any case,

and there's so many little companies in there, they don't even list them all in the annual report.

But the big ones are a huge railroad that he bought 10 years ago or something, a bunch of utility companies, a bunch of energy companies, and a massive insurance operation.

Then there's a very large portfolio of publicly traded stocks.

And

this all sits together and generates a lot of money.

And the kind of first salient characteristic we should note about the business is he never pays pays dividends.

This is the snowball metaphor people like to use for him.

The money,

these businesses all generate cash.

They're all very safe, steady businesses, and he just plows the money back into the business and it grows and grows and grows and picks up momentum.

Yeah, because if you want to buy like one share in this thing,

it's going to cost you a lot of money.

It's an enormous stock.

They have issued sliced up shares, but to get an A share is like in the hundreds of thousands.

Mad.

And it's very good you you mentioned that, Katie, because that actually is indicative of a key part of the magic.

Like a couple of other people I could name who have built very unconventional but very successful businesses, Warren Buffett has cultivated a very special relationship with his shareholder base so that they are very loyal to him.

When the going gets rough, and like for any company, the going does get rough sometimes for Berkshire.

You know, it does underperform sometimes.

He doesn't have to worry about the stock churning or any kind of rebellion of any kind because he's built this almost personal relationship with the shareholder base, which you see at the Lollapalooza of Capitalism in Omaha every year, the annual challenge.

It's a bit like Elon Musk and Tesla, except a lot more wholesome.

There is a kind of

lot more wholesome.

It's a bit like it, except totally different.

Less obscene tweets, but otherwise it's basically the same thing.

Boffett has cultivated this incredible

folksy image.

So like if you think of high finance and you think of Wall Street like you think of like Gordon Gecko kind of you know fictional characters.

A lot of hair product.

A lot of hair.

Lot of shiny suits.

You know lunches for wimps and it's all about you know fast cars and piles of money and terrible behavior.

He, however, is this kind of quiet, modest guy with little wire-framed glasses and sort of, you know, snowy hair.

So Eric Eric and Oliver and I,

every financial journalist, basically one thing that you do is you call Berkshire Hathaway

and you ask for an interview with Warren and they say no.

And so, you know, we'd all, especially Eric, had asked for an interview a million times.

And then like on this random Saturday in 2019, he gets the phone call, you know, would you boys like to come out to Omaha?

Would we ever?

Off we go.

I learned a lot about business from that interview.

We talked for four hours, wore us out, as I said, but I came out thinking that this was the greatest master of public relations I had ever met and am ever likely to meet.

And I say that not to degrade his other great achievements, but the way he spoke to us, the way

his kind of personal warmth, his directness, his ability to control our conversation without being seen to control it.

I have never seen the likes.

And I've interviewed a lot of CEOs, and this was the most skilled communicator I have ever met in the business world.

And did he have with him like a phalanx of really annoying PR people who none.

The office is like a random office with like drop ceilings and he just walked us into his office and there's like eight people in the office.

They let the businesses manage themselves.

You know they're they're managing the stock portfolio and taking calls but it's like a modest office in an anonymous building in a small city in the middle of America.

And there you are talking to old Warren.

Isn't he a big fan of Cherry Coke, which is a big minus against his name for my money.

But anyway.

They did have a fountain soda machine in the office, which I had a lot of respect for.

So

he's been very, got very old and been very healthy on this

cocktail of fizzy pop that he's been.

I find money is a great preservative in general, Katie.

I don't know about you.

Very good at keeping you young.

That's why I look so old.

But

I digress.

But old Father Time has caught up with him, right?

He is 94 years old.

Charlie Munger, who you mentioned earlier, was his kind of business partner.

He passed away a few years ago at the age of about 99 or something.

Yeah.

Really on.

I had a real soft spot for Charlie Munger because he really hated crypto.

Yes.

And he used to just issue like drive-bys on crypto every now and then in a way that I found really quite amusing.

One of the annual meetings, he said it wasn't even as valuable as cow dung.

It was worse than a cow patty.

Yes.

Yes, brav.

Go, Charlie Munger, R.I.P.

But he's not leaving because it's not working anymore.

The stock has actually had a great run in the last five years.

If there's anything that shows to you that there is strain on this business, is that it has never held a larger proportion of its assets in cash than it does right now.

So, and the cash pile at Berkshire kind of fluctuates, you know, relative to the other assets.

Does that mean that he's nervous about the state of the world?

I mean, he doesn't talk about it that way.

So we are sort of left to speculate.

Right.

But he's always looking for opportunities, and they're not easy to find.

And he is very explicit that at Berkshire's size, there is a very small number of opportunities to choose from.

I'll give you the example.

So his biggest investment of recent years, which he's now shrinking, by the way, and we can talk about that later, is a huge investment in Apple, which did very well for most of the time he held it.

But literally,

I've often thought about this question.

Of publicly traded stocks in the world,

how many of them are large enough that he can take a position in them that will actually matter to Berkshire Hathaway's results?

And I think there might be like 10 in the entire world that literally the company is big enough that Berkshire can buy enough that it will move the needle on Berkshire's result.

Apple's one of them.

And of those 10, he picked a really good one, which was Apple.

I mean, again, like going back to his folksy image, you know, when you talk to a lot of people in finance about how to put money to work, they come out with a lot of like gobbledygook and long words and complicated formulas and all this sort of thing.

And you think, wow, I'm nowhere near clever enough to be in finance.

You listen to Buffett, when he's talking about the companies that he buys or buys stakes in, he's like, well, I look for good companies at a good price.

And you're like, yeah,

with a management team that I trust.

Yes.

Yeah.

It's like, how about that?

That's never going to catch on.

Surely you need a spreadsheet.

There's been a fair amount of academic work, as you might imagine, on what exactly is his secret formula.

And there are some general points you can make.

And

this point was made most famously in a paper by a guy called Andrea Frazzini at AQR.

That paper said, you know, the businesses that he has bought tend to have a couple of characteristics in common.

They tend to be

quite stable.

Right.

As you say, they tend to have been bought at a reasonable-ish price,

and they tend to be highly profitable.

So the point is, you buy a kind of stable-ish business that has generally a high level of profitability, meaning it's a high-quality business, and you pay an okay price.

And then the most important part of the formula, more important than those first three, is you stick with it.

Yeah.

Right?

So you just.

Compounding, baby.

Yeah, you just let the, you, you build a ton.

So buying businesses with those characteristics, everybody knows you get a little edge in terms of returns from doing that.

You know, measured in, you know, less than a percentage point a year, maybe.

But you just let it go and you reinvest the money and it goes and it goes and it goes.

And because the businesses are kind of stable, you do a very important thing for any investor, which is to not go out of business.

Right.

Important.

It doesn't blow up on you.

It is very important when you are trying to live

to not die.

Yes, it's one of the more important maxims out there in market.

But so,

you know, he's used this sort of deceptively simple framework to become a multi-squazillionaire and one of the most important figures in American finance.

But, you know, Charlie Munger passed away.

The guy himself is 94.

It's clearly time for him to, like, hang up his boots.

What has the sort of succession process been like?

Because as I understand it, it was at his big annual meeting the other day that he just dropped it at the end of like a several hour meeting that, oh, by the way.

It's time for me to step down.

And the new guy is Greg Abel, who's been a kind of a loyal lieutenant.

He's a loyal lieutenant.

I think he ran the energy business, if I remember correctly, not the utility business.

And he's just, you know, he's a Buffetty kind kind of character in that he's very steady, humble, discreet,

and all of that stuff.

I should say, in terms of the longevity of this business, it's very important to think about not just the asset side of the balance sheet, in other words, what Warren Buffett buys, but the liability side, how he funds those purchases.

And famously, these insurance companies throw off premiums, which turn into a huge pile of money, which is perfect if you happen to have a genius around to invest it.

So that's low-cost capital.

That's a very famous point.

But in general, he has gotten a lot of different forms of very long-term, very stable capital at a low cost to finance the investment.

And it's the difference between the return on your investments and your cost of capital that matters in that business.

And it's not acknowledged enough that he may be a greater master on the funding side, the liability side, the cost of capital side, than he is on the asset side.

He's managed that part of the business brilliantly.

That is an advantage that should persist, I would think.

Is that again because he's just seen as such a safe pair of hands and so like on a level?

Like does that sort of come from the top down?

Well, he has massive imitators in that it has occurred to every investor in the world at one point or another that this owning an insurance company thing is actually a pretty clever idea for an investor to do because customers pay you these premiums that look a lot like free money until you have to pay the claims.

But insurance, as it turns out, does not provide free money.

It is a hard business to run.

You have to really master it and it takes a long time to build up a big business that people trust and will use and so forth.

And so he's just been better at insurance and built a bigger insurance conglomerate over a longer time than any of the young Turks who are are trying to imitate him can do.

It's kind of like, oh, good idea, young man.

See you in 60 years.

Speaking of young Turks, I mean, you know, this is a very kind of old school conglomerate model, right?

It's a very kind of 80s.

It's just not a kind of big.

Even 60s.

Yeah, right?

Like, this is pretty old school.

Now it seems to have been usurped by private equity, which is a little bit different because there they buy companies or stakes in companies with the specific aim of selling it again in a few years' time for more money.

The most famous Buffett on that point, and I'm sorry to interrupt you, the most famous Buffett aphorism, possibly of all, is our preferred holding period is forever.

Yeah.

Right.

And, you know, private equity's...

preferred ownership period is five years.

Those are very different amounts of time.

Yeah.

So, I mean, what's your hunch?

Do you sense that Warren Buffett is a one-off?

Let me put it to you

in slightly mystical terms.

Okay.

So

in rational finance terms, conglomerates don't make loads and loads of sense.

The idea is, look, if you want to diversify your exposure as an investor, you can diversify it at the portfolio level.

You can buy all the little things you want.

You don't need to hire someone to run an entity that diversifies for you, as it were.

And

sort of business school 101 says every company should just do the thing it's very best at and leave all the other stuff to somebody else.

And so

if you broadly believe those kinds of thoughts from finance theory,

what is the point of a Berkshire Hathaway?

It shouldn't work.

Yeah, it shouldn't work.

And I really think that there is a meaningful part of the point of Berkshire Hathaway, that it is a community of trust.

There is something like people participate in it.

They learn from it.

They watch it closely.

They respect its leaders.

They feel like they're part of a family in some broad sense.

And that is

a significant part of what it's all about.

Yeah.

Right.

So, and without that, questions like, wouldn't this business be more efficient if it was broken into parts?

Do you really need to own C's Candy and a utilities company and an insurance company all in one place?

Those questions get louder if the business doesn't serve this kind of community

or symbolic or almost spiritual purpose.

Yeah.

Yeah.

Can you believe I just said all that mushy thing?

That was actually quite kind of woo-woo for you.

Yeah, I know.

I think you're right.

And I can't see anyone else achieving this sort of status in my

opinion.

Or it'll be another great genius.

Like, it won't just be somebody who read about it and decided to do the same thing.

Like, to do the same thing.

It'll be somebody who has a very, very special talent.

Maybe it's you, Rob.

I am certain it is not me.

I'll second that.

We'll be back with your ideas about things that are good and bad in a second with long short.

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Okey-doke, it's time for long short, that part of the show where we go long a thing we love or short a thing we hate.

Rob, what you got?

I'm short-ish

something.

And I say there all the reason I'm short-ish is because I used to be long at.

One of my stock picks in the FT stock picking contest was Google.

Right.

A company that I love and admire.

I think it's a brilliant company run by brilliant people.

The structure of it is brilliant, but it's running into troubles both with AI and its relationship with Apple.

Like what is Google in an AI world?

Which didn't seem to me to be that big a problem

when I made the stock pick, but now I'm starting to get nervous.

So

I'm admitting for the first time in front of you and God and everyone

that I am losing a tiny bit of faith in Google.

And you're moving to market neutral.

So you're not exactly long or short.

Exactly.

What about you, Katie?

I will just remind listeners that this is not investment advice and that Rob and I are routinely wrong about.

Yeah, we are terrible.

So whatever we may be good at, we are not good at the FT stock picking contest.

But it's debatable what we're good at as well.

Period.

I am long in the sense that I see a lot of it about.

I'm long complacency.

There's a real

whiff of it in the air at the moment.

Pimco, the massive bond investment firm, kind of laid this out quite well in an interview that we had in the FT today, saying that people are not thinking enough about what happens when this pause on the quote-unquote reciprocal tariffs is over.

You know, people are not thinking

carefully enough about the downsides.

And also, like, you know, so the Federal Reserve this week gave quite a harem scareum message about high inflation and low growth and the market's like oh that sounds fine I'm sure we can work with that and I just think there's a lot of like amber warning signs all over the place and people are just like la la la fingers in the ears I'm not listening and that makes I couldn't agree with you more I mean it's an important reminder that the default mood status of markets is greedy.

Yes.

But given any excuse to think that money is going to be made and everything is fine, that is where markets kind of fall back to.

Yeah.

So I know I'm being a bit of a misery guts, but I do just think, careful now.

So listeners, be careful between now and Tuesday, because that's when we're going to be back in your ears.

So listen up then.

Unhedged is produced by Jake Harper and edited by Brian Erstadt.

Our executive producer is Jacob Goldstein.

We had additional help from Topa 4hez.

Cheryl Brumley is the FT's global head of audio.

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I'm Katie Martin.

Thanks for listening.