Ben, when we teased this episode in the email about the Jensen episode that we just released, the guesses that we were getting from folks were amazing.
I mean, people are like, it's Charlie, it's Warren, or it's Taylor Swift.
And a lot of people were right.
Hey, Taylor, you know where to find us, acquiredfm at gmail.com.
If you are looking to get more publicity, we're open.
Have Travis get in touch.
All right, let's do it.
Another story on the way.
Welcome to this episode of acquired the podcast about great technology companies and the stories and playbooks behind them.
I'm Ben Gilbert.
I'm David Rosenthal.
And we are your hosts.
We are pretty sure that this is the only podcast that Charlie has ever done.
Charlie, aside from being one of the most prolific investors of all time alongside his partner Warren Buffett, is 99 years old.
He will turn 100 on January 1st.
Of course, our conversation was interesting because he's freaking Charlie Munger, but also because it was interesting to get the perspective of someone who has seen the last 99 years of human history.
We talked with Charlie, of course, about Costco, his history investing in retailers over the last 50 years.
We also got to hear his views on what it takes to build a great partnership.
What's gone wrong in the global securities markets these days, the concept of investing versus gambling, and where investment opportunities remain in the world today.
Yeah Ben, this was such a special life experience for you and me, and you and me together, to do this.
And the fact that we got to record it and now share it with the world for posterity just icing on the cake, and the whole thing was unbelievable.
Yeah, listeners, we knew we were going to have dinner.
We were not sure whether we were going to be able to record it.
And now we get to share it with all of you.
With that, join the Slack.
There is awesome discussion of every episode and the news of the day at acquired.fm slash slack.
If you sign up for acquired emails, you will get episode corrections and follow up from previous episodes plus hints at what the next episode will be.
That's acquiredfm email and we have only one sponsor for this interview.
Yes, a special conversation deserves a special sponsorship, And longtime listeners will know there's only one company in the acquired universe.
That is truly appropriate, because everything they do is modeled after Charlie and Warren, and that's Tiny.
Yep.
Tiny is the Berkshire Hathaway of the internet.
Literally.
They are such huge fans that they started a company that makes bronze busts of Buffett and Munger themselves.
But more on that in a minute.
Yeah.
So Berkshire, as we know, started as a textile mill in Massachusetts nearly 200 years ago.
And almost 20 years ago, tiny founders Andrew Wilkinson and his partner Chris took their version of an internet textile mill, the premier design agency Metalab, which designed the UIs for Slack Uber Tinder Headspace, Coinbase and others.
And they asked themselves, what would Charlie and Warren do if they were us?
And that led to the realization that, just like Berkshire discovered in the physical world, the internet also has wonderful niche businesses with great cash flows.
In fact, they tend to be even better than the old days of See's Candies and Blue Chip Stamps, because they require zero capital reinvestment, have software margins and can build global brands much faster than the what 50-some-odd years it took C's to expand around the world.
Yep.
So Andrew and Chris took the extra cash flow from Metalab and their other businesses and created Tiny, the world's first and best permanent holding company for wonderful internet businesses.
And boy did it work.
Yeah, fast forward to today, and thanks to Tiny's success, this opportunity is no longer a secret.
Many people have caught on to the idea that this can really work.
But, just like Berkshire itself, no one else has the combination of experience temperament, access to capital and frankly, reputation that Andrew and Chris have built over the past two decades.
We're investors in Tiny ourselves, alongside Bill Ackman and Howard Marks.
And just like the two of them, Tiny is really the long-term buyer of choice in their niche.
Anyone who's looking for a permanent home for their profitable internet business or who needs a capital partner for a co-founder or VC cap table buyout would be lucky to work with Tiny.
Yep.
For instance, they just bought the premier social network for film buffs Letterboxd, which has been the founder's baby for 12 years and will stay so within Tiny.
And this really reflects Tiny's whole ethos.
Work with only the best internet businesses, commit to simple diligence, 30-day deals and leave the business alone either for you to operate or bring in new, long-term oriented management.
Up to you.
So thanks to Tiny.
This is the only sponsor, as Ben said, that you'll hear on this episode.
And just like Berkshire, it'll be here in perpetuity.
Tiny just became a public company earlier this year and they can now do deals ranging anywhere from 1 million all the way up to 250 million.
So if you want to get in touch, just shoot them a note at hi at tinycom and just tell them that Ben and David sent you.
Oh, and one more thing.
The bronze Charlie busts the perfect daily reminder in your workspace.
To ask what would Charlie do?
Just head on over to BerkshireNerds.store to buy your own.
And they also have plenty of some guy named Warren, too.
Okay, now without further ado, this is not investment advice.
David and I may have investments in the companies we discuss, and this show is for informational and entertainment purposes only.
And on to Charlie Munger.
Charlie, I was watching the NFL games last weekend and it seems like every advertisement now is a sports betting advertisement.
Is this good for America?
No, of course not.
Are the dog tracks and racetracks of America, are the casinos good for America?
Of course not.
They're just very popular.
That's how Warren got his start, though, right?
At the racetrack?
Well, but Warren never gambled heavily as a patron.
Warren wanted the odds in his favor, not somebody else.
Right.
It's just so simple if you're Warren.
You want the house.
You want to be the house, not the punter.
Listeners.
The next topic that came up was retail stock trading and the idea that for many Americans, this is akin to gambling.
Well, it's organized.
They don't really know anything about the companies or anything.
They just gamble on going up and down the price.
If I were running the world, I would have a tax on short-term gains with no offset for losses on anything.
And I would just drive this whole crowd of people out of business.
What do you think about the algorithms, like Renaissance and stuff like that?
Well, of course, Renaissance was the first algorithm.
It was so simple.
They sifted all this data from the past.
And what did they decide?
Up-up for two closing prizes and down-down were more common than down-up or up-down.
Once they realized that's the way it was for various reasons.
Deep in the psychology of man is that man is a natural trend follower.
Gambling short term.
And they just.
He's programmed the computers to automatically buy on one thing on the first up day and then sell before the end of the second day.
And they just did it day after day after day.
And every day, the machine, the central clearing agent would say, your check today is $8,500,000.
It's crazy.
Your check tomorrow is $9,300,000.
Well, what happens is that the ones...
The easiest trade is to front run what you know what the index funds have to buy.
And you know what it is exactly.
They all know that.
And the way they get their returns year after year, is taking the leverage, the midday leverage up, higher and higher and higher and higher.
So they're making smaller and smaller profits on more and more volume, which gives them this big peak leverage risk, which I would not run myself.
And that's the only way they make these big returns is to have this huge leverage.
It would make you crazy if you were already rich.
I had the good fortune of speaking with someone you know well, Richard Galante, at Costco and spending a few hours.
He knows a lot about it.
He's been there all his life.
It's crazy.
I mean, it seems like that's everyone on the executive team.
They've all been there.
Yeah, I know.
I'm curious, how did you first come across Costco or Price Club at the time?
Rod Hills somehow knew Saul Price and knew what he was doing.
He said, you have to go down and meet him.
So I drove down and went through his store and Talked with Saul.
And of course, Saul was a very intelligent man.
Saul was an ordinary lawyer until he was 39 years of age.
And he went out and formed a government employees discount company or whatever.
Was this in the Fedco days?
He was no longer with Fedco.
And he sold Fedco to the Germans.
Fed Mart to the – Hugo Mann.
Hugo Mann.
Yeah.
Yeah.
And did you get to invest in Price Club before it merged with Costco?
Yes, I did.
But I just bought my stock in the market.
I wasn't – I got any favor.
And so how did you eventually meet Jim Senegal?
Well, Sanago asked Warren to become a director of Costco.
He was looking for somebody with a financial reputation.
As an independent?
Yes, and Warren wouldn't do it.
He said, well, get Charlie to do it.
I want shorter plane rides to director's meetings and so on.
So that's how that happened.
And did Berkshire ever try to become a shareholder or acquire Costco?
I tried to get Warren to buy out the French when they left, care for them.
And Warren wouldn't do it.
Warren doesn't like retailing.
Was it just that he doesn't like retail or what was the big objection?
He's afraid of retail.
Practically everything that was once mighty in retail is gone.
It says Roebuck is gone.
The big departments are gone, you know.
It's just too damn difficult as far as he's concerned.
And he had a bad experience with diversified retail, right?
No, we made nothing but money in diversified.
We didn't exactly make it in retailing, but we made a lot of money.
Wow.
And with Diversified, most of the money was not on the retailing operation.
You made a lot of that money through... What happened was very simple.
We bought this little pissant department store chain in Baltimore.
Big mistake, too.
As the ink dried on the closing papers, he realized it would be a terrible mistake.
So he decided just to reverse it and take the hits to look foolish rather than go broke.
He just told Hank, get us out of this.
By that time we'd already financed half of it on covenant free debt and so forth and they had all this extra cash and our own stocks got down to selling an enormous we just in the middle of one of those recessions, we bought, bought and bought and bought And all that money went right into those stocks.
And of course, we tripled and just sitting on our ass.
And that led to Blue Chip.
Yeah, it was part of the early success of Blue Chip.
Wow.
And so, you know, you mentioned Warren doesn't like retailers.
It's something else that people don't know about.
Yeah.
We bought a little piss-ant savings loan company for maybe $20 million.
And when we left that thing we had taken out of our little 20 million investment over 2 billion in marketable securities which went into Nebraska insurance companies as part of their bedrock capital.
So we had some wonderful early years.
And that's what everybody needs is wonderful early years.
Wow.
So in our Costco episode we started with the joke at one of the Berkshire meetings, probably 10 years ago.
Warren told the joke about you were on a plane being hijacked and the hijackers gave you one final request and you said you'd like to give your speech on the virtues.
Warren got tired of me kind of reminding him.
Yeah, yeah.
And he said, shoot me first.
We were hoping, could you give us your speech on the virtues of Costco?
No, Warren was kidding me for being so repetitive on the subject.
But there aren't many times in a lifetime when you know you're right and you know you have one that's really going to work wonderfully.
Maybe five, six times in a lifetime you get a chance to do it.
And people do it two or three times early.
All go broke because they think it's easy.
In fact, it's very hard and rare.
What was it about Costco that made you realize this is one of those few moments in a lifetime?
Well...
They really did sell cheaper than anybody else in America.
And they did it in big, efficient stores.
And all the parking spaces were 10 feet wide instead of 8 feet 9 or whatever they normally are.
They did it all right.
And they had a lot of parking spaces.
And they kept out of their stores.
All these people didn't do big volumes, you see.
And they gave special benefits to the people who did come to the stores in the way of reward points.
The executive membership.
Yeah.
It all worked. in a capital light business model.
I mean, when we were studying it, the difference between price club and-.
They have no investment in them.
They make the suppliers wait until they've been paid, and then they're scheduled to pay only after they're scheduled to sell.
They've got 900 warehouses around the world full of high quality merchandise, none of which they have sitting on their books.
That's correct.
Yeah.
Our understanding is that Price Club went public initially before the merger.
They just listed.
They didn't raise any capital.
They didn't need any capital.
Who knows?
Saul kind of liked it.
He was kind of a financier.
He liked deals.
He liked this miscellaneous real estate.
Yeah, but it doesn't make sense.
You don't want... You got an enterprise as big as Costco.
You don't want to screw around with your parking lot and get other people to clog up your...
Parking lot permanently and stuff is not going to pay you very much.
You don't want them is the answer.
Have you ever seen another business that takes advantage of the virtue of the low SKU count the way that Costco does?
Well, there are lots of them.
That little grocery store chain. here in Los Angeles, Gelson Brothers.
They wanted the high turnovers and low capital costs.
And they never made the least effort to earn any money.
They wanted to share their parking lot with anybody.
As you reflect back on one of these few great companies in a lifetime that you should bet big on, what advice would you have for David and I, as young partners looking for a few of these in our lifetime things to look out for?
Well, you may find it five years after you bought it, you know.
These things may work into it or your own understanding may get better.
But when you know you have an edge, you should bet heavily.
You know you're right.
And most people, they don't teach that in business school.
It's insane.
Of course, you've got to bet heavily on your best bets.
And how do you develop that level of conviction to know?
You work at it.
You redo a lot of reading and thinking and visiting.
I'm curious.
We wanted to ask you.
You've had this beautiful partnership with Warren for half a century.
We're a decade into our partnership.
There was a lot of low-hanging fruit in the early days of our operation.
You don't have any low-hanging fruit that is easy to recognize.
You mean in investment opportunities?
Yeah, that's right.
But your relationship with Warren, like how have you?
Well, we were all kind of similar and we were both wanting keep our families safe and take a good job for our investors and so on.
We had similar attitudes.
Yeah.
Did it change over the decades?
No.
Warren still cares more about the safety of his burglar shelters than he cares about anything else.
If we used a little bit more leverage throughout, we'd have three times as much now.
And it wouldn't have been that much more risk either.
And we just never wanted to give them at least a chance of it screwing up our basic shelter position.
If you had used more leverage, do you think there's some chance that We would have done a little better?
Do you think there's some chance that it wouldn't exist at all?
That it would have cost you the franchise?
No, I think it would have worked fine.
Does Warren think that?
It's very easy.
The situation lends itself to, if you were intelligent, just milking it out.
When you leverage, I'm so curious on after we did our things.
It's automatically leveraged.
You open a new store with no capital, of course it's leveraged.
Who wouldn't want a business with no inventories?
Right.
That's a good point.
By the virtue of you owe a whole bunch of people money on day one for these goods, that Which turnovers are rapidly.
Right.
It's interesting.
I mean, that's leverage.
It's not debt leverage.
I mean, how do you think about debt?
Like, after we did our Berkshire series... A lot of people do it now.
A lot of people now do it, who manufacture something that is terribly strong, and they're just forcing the suppliers to carry all the inventory.
It isn't like we're the only ones that do it.
Back to the point on partnership.
David and I are coming up on 10 years as partners in this podcast we do together.
Different than the investing business, but a compounding one nonetheless.
After a 50-year partnership with Warren, what advice would you have for us interpersonally to make for an enduring partnership?
It helps if you like one another and enjoy working together.
We do.
Yeah.
I don't use any one formula.
A lot of partnerships that work well for a long time happen because one's good at one thing and one's good at another.
They just naturally divide it.
And each one likes what he's doing.
Now in Costco's case, they had Jeff Brotman, who's very smart but not a retailer, and Jim Senegal, and they divided it up.
And they had originally agreed that Brotman would be the chairman and CEO because he was his idea.
He founded the whole thing.
But Senegal decided, no, I have to be the CEO.
So it was a big, unfortunate board meeting, a big internal struggle.
And Brotman moved aside.
Was that after you joined the board?
No, before.
Do you think you and Warren not living in the same city helped your partnership last so long?
Well, I may have helped.
But Warren has very close relations with all those people that have lunch every Saturday at Berkshire headquarters.
It isn't like he doesn't have a little quarter of people there who are kind of pals from the ground up.
Do you think it helps that when you do spend the time together, it's special rather than being common?
Well, of course, we used to spend a lot of time together when we were young, because we didn't have that much to do.
Now we've got more to do, but then it's just the other minutiae of life.
So it's different.
Yeah.
That's funny.
I feel like we have a lot to do now.
Well, of course you do.
It's very difficult to invest money well.
And I think it's almost impossible to do time after time after time in venture capital.
Yeah, we really wanted to ask your thoughts on venture capital.
Some of the deals get so hot and you have to decide so quickly.
You're all just sort of gambling.
Do you think the role of venture capital is being properly accomplished in society?
No, I think it's very poorly done.
Charlie elaborated on this point with a few things that we can't air, but the topic did turn to Bitcoin.
I've heard many comments you've made on Bitcoin.
I'm curious if you have a thought on this particular angle.
An easy way to transfer money in between countries, especially when those countries don't have a stable store of value within that country.
Is it good to have an independent store of value that is not pegged to the nation state as a whole, to have a way of having some currency?
The way that was solved is.
For a long time, the British pound was the national currency of the investment world.
Then it shifted to the dollar and it's still the dollar.
And people like China have these enormous reserves of dollars.
The money we make.
Think of the money people give us, where we always just print up these pieces of paper.
And what about the common person in some of these less fortunate countries who don't have access to US dollars?
Well, they do if they ever get any money.
The dollar's very fungible.
You can always buy one anywhere.
I'm curious, back to this point of the role of venture capital in a society if you could design a perfect system to fund innovation.
It's a very legitimate business if you do it right.
If you want to give the right people the power and nurture them, help them.
You know a lot about the tricks of the game, so you can help them run their business, yet not interfere with them so much they hate you.
By and large.
Having bumped into a lot of people in the businesses with venture capital financing, I would say the ordinary rule is that people in the business doing the work They more often than not they hate the Venture Capitalists.
They don't feel they're their partner trying to help them.
They're only taking care of themselves and so on and so on.
And they don't like them.
How could it work differently?
Yeah, well, that's not true in Berkshire.
You see, they know we're not trying to discard them to the highest bid.
See if some asshole investment banker offers us 20 times earnings or some lousy business.
We don't sell.
Hmm.
If it's a problem business we've never been able to fix, we'll sell it.
But if it's a halfway decent business, we never sell anything.
And that gives us this reputation of staying with things, which helps us.
And do you think that buy and hold, not only mentality but demonstration, is the key thing that aligns investors with managers?
Well, it's rare, you see.
Everybody else has a standard way of doing things.
The lawyers have their standard forms and everybody just has the same standard form and they get the same standard results.
Subject to the vicissitudes investment life.
You don't want to make money by screwing your investors.
And that's what a lot of venture capitals do.
The world is full of XG Goldman Sachs partners that formed a private fund and they manage a billion dollars or something like that.
And they charge two points off the top plus the spending.
And that enables them to make very handsome livings themselves.
But the endowments are not getting a good return.
And do you think it's specifically the fee aspect of fund structures?
It's just the way it works.
And of course, you really shouldn't be in the business of charging extra.
You really are going to achieve very unusual results.
And, of course, it's more easy to pretend that you can get good results than it is to actually get them.
And so it attracts the wrong people.
People in investment capital turn their mind.
And the people who make the most money out of venture capital are a lot like investment bankers deciding which hot new area they're going to get in.
They're not great investors or great at anything.
What do you think... endowments and large pools of capital should do then?
Well, they're starting to do it.
The endowments have started to say to all these people that judge 3 and 30 or whatever they judge, they said we'll pay your three and 30.
We're going to put in twice as much money.
And then the next half, you'll get nothing on it.
You're just going to ride Perry, perhaps you want some of your investments.
So the fees go down by 50%.
That'll take a lot of the fun out of it.
Fees down 50%.
And that's happening all over America.
They feel had, misled, irritated.
They've looked foolish to their own trustees.
One of the issues I think in investing right now.
You mentioned it about venture capital, but I think it's true everywhere.
It's like there's just so much capital and so much competition.
We're so far removed from the cigar butt era.
We're in the opposite of the cigar butt era these days.
Are there opportunities out there?
There'll be somebody who'll find a good thing.
But it gets harder and harder.
I would argue one of the easiest ones was when they decided a little group around Home Depot.
They would copy the Costco model and home improvements.
And that was basically a good idea.
And think of the money they made doing it.
Yeah.
Bernie Marcus.
Yeah.
It was a direct copy of Costco.
Do you think there are more opportunities to copy Costco?
Well, there was another one at Costco.
Florin Decor is the current imitator.
And it's just, it's in vinyl, wood imitating vinyl flooring.
They're running a Costco model.
And they keep adding miscellaneous stuff to it, too.
It's the miscellaneous stuff that'll eventually kill you, though.
Well, it would be simpler if it was all flooring.
Yeah, the vertical Home Depot worked so well.
But I don't know that it was totally obvious.
Part of the appeal of Costco was it was horizontal.
It was everything.
Consumers could come.
They could make a trip, bring their big wagon, bring their big truck.
Home Depot was the same.
They copied everything.
Famously, Bernie Marcus came out to visit Saul before he started.
Yeah, they came out.
They copied everything.
Saul was happy to share the playbook with everybody, right?
How did Jim and you feel about that?
Saul was not crazy.
He was domineering and so on.
But he was also very intelligent.
But there aren't many opportunities like Home Depot and Costco.
There aren't very many.
Why do you think Walmart hasn't been successful once they saw Costco in competing?
They were too weathered by the ideas they already had.
That's everybody's trouble.
You just can't accept a new idea because the place is occupied by an old idea.
They got in the habit of getting their real estate practically even nothing, because they went into little towns where nothing was valuable.
So always their occupancy costs were like zero, and they knew how to make big efficient stores.
That was their formula.
So it offended them to go against the rich suburbs and have to pay up for the good locations.
And Costco just specialized in the good locations where the rich people lived.
And Walmart just let them do it year after year.
It was a terrible mistake.
Did you know Sam?
Walton?
No, never met him.
I knew the son, one of the sons.
And they divided it up, you know, in about six parts very early.
Yeah, Walton Enterprises.
So they never paid much gift taxes or anything.
The topic then turned to the automakers and the future of the car industry.
Look how hard it would be to go into the auto business and have some big killing.
Who's going to win?
Who knows?
The whole thing's been thrown way up in the air by all these electric cars.
All those big new capital requirements, different ways of selling cars.
And plus, they got these tough unions.
See, I just don't even look at the auto industry.
Do you think it's more investable today than it was 50 years ago because of the disruptive innovation of electric?
Well, for maybe for one or two, electric cars are really good at it.
Maybe, but certainly nobody else.
So you think BYD- It's too tough.
BYD was a miracle.
But that guy works 70 hours a week and has a very high IQ.
He can do things you can't do.
He can look at somebody else's auto part and he can figure out how to make the goddamn thing.
You can't do that, you see.
Charlie, you invested a Hyundai.
Yes, but they're clever too.
How was that investment for you?
I lost money.
Not much because I was stubborn.
I held out until I got back to almost what I paid for it when I sold it.
There's been a lot of discussion about Berkshire's investments in the Japanese trading houses.
Well, but that is a no-brainer.
Something like that.
If you're as smart as Warren Buffett maybe two, three times a century you get an idea like that.
The interest rates in Japan were half a percent per year for 10 years.
And these trading companies were really entrenched old companies and they had all these cheap copper mines and rubber plantations.
And so you could borrow for 10 years ahead all the money and you could buy the stocks, and the stocks made 5 dividends.
So there's a huge flow of cash With no investment, no thought, no anything.
How often do you do that?
You'll be lucky if you get one or two a century.
We could do that.
Nobody else could.
It looked attractive at half or a century.
You couldn't get it.
But Berkshire with its credit could.
And the only way you could get it was to be very patient and just pick away at it little pieces at a time.
It took forever to get $10 million invested.
But it was like having God just opening a chest and just pouring money into it.
It was awfully easy money.
It's interesting that it's paradoxical.
You need Berkshire's credit, but at Berkshire's scale it's actually hard to put enough money to work.
That's true.
But why shouldn't it be hard to make money?
Why should it be easy?
Japanese trading companies reminds me.
We studied another company recently, Nike.
That's a very different company.
Did you ever look at it?
That's a style company.
Well, of course I've looked at it, but I don't like style companies.
To fad-driven?
Well, I suppose if the RV Hermes is achieving a price, I'd buy it.
But short of that, I'm going to buy a new style of company.
Ooh, that's a good pick.
To the style point, another one that they covered was LVMH.
What Arnaud has done has been amazing.
So what do you make of that company?
Well, if you're as good as they are, what they've done, you have a lifetime to do it in.
If you have more lifetimes to do it in, you can create another, but it's not easy.
Hermes is on the eighth generation, I think, now, the family running it.
It's not a bit easy.
They have meetings every day where they make policy decisions.
They choose the locations one at a time.
It's work.
It's definitely work.
What do you think the durable value is in these, as you say, style companies of the very best one in the world, the Hermes or the LVMH?
What makes them enduring?
Well, they just got a brand people trust so much.
It took them a century to do it.
Our conversation then turned to comparing Kirkland's signature as a brand to Hermes.
Kirkland is a brand the way Tide is a brand.
And Hermes is a different kind of a brand.
Yeah, Ferrari doesn't make detergent.
No.
We've spent a lot of time studying these brands.
How do you look at the value of a brand?
It's hard for us not to love brands, since we were lucky enough to buy the See's candy for 20 million as our first acquisition.
And we found out fairly quickly that we could raise the price every year by 10% and nobody cared.
We didn't make the volumes go up or anything like that.
Just made the profits go up.
So we've been raising the price by 10% a year for all these 40 years or so.
And it's been a very satisfactory company.
We didn't require any new capital.
That's what was so good about it.
Very little new capital.
We had two big kitchens and a bunch of rental stores when we bought it.
Now it's got two big kitchens and a bunch of rental stores.
Well, Charlie was a playboy.
And his brother ran the company, his older brother, and dominated it completely.
But when he died, Charlie made his brother his executor.
And now he needs a lot of money to pay death taxes.
He doesn't have it.
And it's due, you know, eight months or something later.
And so they really wanted to sell so they could pay the death taxes.
And it seemed it was only making $4 million in pre-tax when we bought it.
And so that buying opportunity only came about because the family needed liquidity to pay their death taxes.
Yes, that's right.
We only found out about it because Charlie C. was on his cruise to Hawaii or something.
With this guy, who was a client of my resident counselor, who also worked for Blue Chip Stamps, which is the company that bought it.
And at any rate, that's how we found out about it.
We paid that guy a fine to see.
We've never paid one cent.
He always says that it was worth it.
Of course, but you don't want a reputation for paying finances everywhere in the world to be bothering you all day long.
So what do you think?
So there are categories like C's or like Hermes where brands lead to pricing power.
I think your chances of buying one of them is so low I wouldn't even look.
I only believe in looking at things that I might find.
You're not going to get a chance to buy her.
No curiosity without a return.
Yeah, yeah, yeah.
So why do you think there are extremely well-known brands in other categories, maybe packaged food or something?
There are a lot of professional investors that buy nothing but branded goods.
The one they usually start with is Nestle.
They've done two or three points better than average, but it's not a bonanza.
After that, our conversation turned to Kraft, Heinz and why Heinz is able to have pricing power while Kraft is not.
It was very interesting.
There's something about the flavor of ketchup on a goddamn fried potato.
People are really willing to change brands over.
They want Heinz.
And so we could raise the price of Heinz pretty much.
But you try to raise the price of Kraft cheese, everybody goes into rebellion, including the final customer, the housewife.
They don't care that much about whether the cheese is Kraft or not.
Why do you think that is?
Well, the sauce flavor.
It's happened elsewhere.
In Korea, one guy, a Chinese guy, throws all the sauces.
Every single major sauce, he controls at least 95% of them.
And it's because sauces have such a particular flavor that no one can imitate the trade secret?
Yeah.
Huh.
And that gives pricing power?
People get used to it.
They like it.
Is that Coca-Cola as well?
Yeah, sure.
Charlie, I'm curious at age 99, what is something that you believe today that 70-year-old Charlie would have disagreed with?
I think I knew when I was 70 that it was plenty hard, but it's just so hard.
I know how hard it is now.
And all these people who are getting this two and 20 or three and 30 or whatever.
They all talk as though it was easy and they get to believing their own bullshit.
And of course, it's not a bit easy.
It's very hard.
If you were back 30 or 40 years old again today, would you decide to go into the investment business again?
Well, probably because it suits my nature.
But I didn't really enjoy the three and 30 business.
Once I had enough money of my own, I'd rather just operate with my own money.
That is a much better way of doing it.
Because of the freedom?
We're forced to sell.
We're forced to deal with investment bankers.
We're forced to deal with investment consultants.
We're forced to deal with venture capital.
You don't want to need other people.
The point of getting rich is you don't have to need other people.
You don't have to get a lot of other people.
Charlie, if you started with Warren today and you're both 30 years old, do you think you guys would build anything close to what Berkshire is today?
No, we wouldn't.
We had everybody that has an unusually good result.
Almost everything has three things.
They're very intelligent, they've worked very hard, and they were very lucky.
It takes all three to get them on this list of the super successful.
How can you arrange to have two of the answers of good luck?
The answer is you can start early and keep trying a long time and maybe you'll get one or two.
If you were starting again today, do you think insurance would still be the vehicle?
It depends on your temperament.
Insurance would be ideal for a certain kind of a temperament.
And it takes a very patient person to get rid of insurance.
It takes forever to get anything in.
It takes forever to push anybody aside.
It's very hard to make money.
I've heard you say, as soon as you're wealthy enough to self-insure, you should.
Is there any insurance?
Well, that's about practically everything.
Think of all the crumbums of the world that drink too much and then file big claims with the insurance company when the place gets on fire or something.
Why would you want to pay that?
Your share of their stupidity.
Not to mention the overhead.
Of course, the insurance company needs to pay all the people that work there.
Yeah, yeah.
It's crazy.
Is there any insurance that you carry today?
I carry no fire insurance anywhere.
Do you carry auto insurance?
Yeah, I have to.
Well, you're legally.
Yeah.
I don't know.
Charlie could...
No, I have to and I do.
I'm curious, being that, since these guys are very tech-focused, I'm curious, not being a tech person.
How did you think about the Apple investment and what gave you the conviction to be so big?
Whatever he's learned is that Everybody needs some significant participation in the 12 companies that do better than everybody else.
And you need two or three of them at least.
And if you have that mindset, Apple was the logical candidate to be on the list for which you're gonna select your companies.
And it's not very hard to come up with the idea that it may be okay.
Making the list doesn't sound too hard.
In fact, there are these acronyms, FANG or MAMA, Microsoft, Apple, Google, Facebook.
But selecting the one and putting hundreds of billions of dollars into it.
We didn't put hundreds of billions, but we put 30 billion into it.
To create hundreds of billions of value, that to me sounds hard to pick the one.
How did you guys pick the one?
We couldn't find anything else.
Was it valuation or?
Yeah, it got cheap.
It got to be about 10 times or anything more.
2015, I believe, was the first.
Yeah.
It's fascinating to me this concept of if you look at distressed debt or you look at I think Warren in the last Berkshire letter pointed out, it's been a handful of really good decisions.
Or you look at venture capital that's classically power law distributed.
Any of these asset classes comes down to a few really good decisions with high conviction over an entire career.
Yeah, that's exactly the way it works.
It's not smooth.
There's no asset class where you can repeatedly just do okay.
No, no.
The low hanging fruit for the idiot is it's not gone, but it's very small.
You mentioned this idea that when we were talking about Apple, there's a few companies that it's just really important to be in.
Do you think these big tech companies being the winners, where all of the pensions and Berkshire and university endowments and everyone's 401ks being concentrated in these companies?
Do you think that was the natural outcome?
Did we have to end up this way?
Yeah, it was natural.
That's why it happened.
What causes that?
Well, it's just, that's what human nature and competition, that's what it causes.
Will we eventually have one?
Eventually this craziness in venture capital when they're all gone stupid.
That's a natural outcome.
Will we have one $20 trillion companies and then the next biggest company?
I don't know how the world's going to work.
I know we're going to have as many as we did.
They just happened.
Would you continue investing in China?
What's your position with that?
Well, my position in China has been.
The Chinese economy has better future prospects for the next 20 years than almost any other big economy.
That's number one.
Number two.
The leading companies of China are stronger and better than practically any other leading companies anywhere.
And they're available at a much cheaper price.
So naturally, I'm willing to have some China risk in the Munger portfolio.
How much China risk?
Well, that's not a scientific subject, but I don't mind.
Whatever it is 18 or something, whatever's worked out in the Munger family.
It's okay with me.
What about other geopolitical considerations?
Would you hold TSMC at this point?
Well, I don't like that as well, as I like something with a real consumer brand of its own, like Apple.
I'm curious what major companies that haven't been mentioned do you think people would do well to study the virtues of like studying the virtues of Costco?
Well, I only study two kinds of companies.
One, I'm another big Ben Graham fan.
If something is really cheap, even though it's a crappy company, I'm willing to consider buying it for a while anyway.
I do that occasionally.
And I've done it with great success a time or two, but my hard marks.
I've done it once or twice in my lifetime for big gains, and that's it.
It's not like I have a second.
I've done it a hundred times.
So it isn't a bit easy.
A hundred times easy money is almost non-existent.
One type of company is the cigar butt.
What's the other type of company?
The companies that people would do well to study the virtues of.
Well, the great brand companies, of course, are good.
Get them at the right price.
The whole trick is to get them on the few rare occasions when they're really cheap.
But buying Costco at its present price, it may work out all right, but that's...
Again, it's getting hard.
Forgetting the prospects of the stock, how do you think about the next 10 years for the business?
I think it'll do pretty well.
One more question for you in this area.
What is your favorite advice to give to young people?
Well, I don't give advice to just any young people.
I give it to some.
I paint my spots.
I don't want to be more of a guru to the young people than I already am.
It's getting hard out there.
And there's all this bullshit and craziness.
Of course, it's going to be hard.
Where do the attractive opportunities hang out anymore?
It sounds like everything in the whole world is overpriced.
Could that be possible?
Damn near.
Of course it could be possible.
It's not only possible, it's likely and it's actually happened.
How did the world get so rich if we have all this capital for so few opportunities?
It's the nature of things.
Look, biology produces a very advanced creature like us.
We can sit around and talk intelligently on all these subjects.
But it doesn't by killing everybody off in brutal competition one with the other for hundreds of thousands of years.
In other words, the system that nature uses to get smart is kind of unpleasant to the people who are losing.
So over the last hundred years we've brutally shifted all this value from labor to capital, and now capital is all competing to get into a very small set of opportunities.
Well, it wasn't that it was all that easy to go back a long time.
It just was a lot easier.
And if it continues to get harder, the natural end is that you have Yes, an unpleasant blowup of some kind.
And God knows what happens after an unpleasant blowup with our modern democracies.
You would get to see a lot like Europe, which is quite dysfunctional.
Is it too pessimistic of a view to say that the world seems to be out of good ideas to match the amount of capital out there looking for good ideas?
It was never easy.
Thoroughly understood it was never easy.
And it's harder now.
Those are the two.
And you pay attention that you're handling the people you deal with.
You want a good reputation when you're all done, not a bad one.
And I don't think you're saying there are no opportunities whatsoever.
I think you're just saying low expectations and fewer bonanzas.
The beauty of it is you only have to get rich once.
You don't have to climb this mountain four times.
You just have to do it once.
That's sort of your philosophy on both sides is you got to be patient for the great opportunities, but when they, you got to recognize them when they come and and pounce.
We turned off the mics to have dinner and then recorded a little bit more later in the evening about costco and some life advice from charlie.
So one Costco question that I've been wanting to ask you is all the puzzle pieces of the low SKU count and the high inventory turnover.
And there's just so many things that fit together so beautifully.
They're pretty obvious, though.
But how come no one else can pull it off if they're so obvious?
It takes a lot of good execution to do it.
You really have to set out to do it and then do it with an criticism every day, every week, every year for 40 years.
It's not so damned easy.
So you think the success is the magic of the business model and culture?
Yes.
Yes.
Culture plus model.
Yes, absolutely.
And very reliable, hardworking, determined execution for 40 years.
I mean they talk about the story of the ketchup.
That you could increase the price of ketchup by 3 and nobody would notice.
But that would destroy everything if you did that, right?
I would say that the central norm was don't raise the market.
Get it low and keep it there forever.
Which brings us to the hot dogs.
Is it true the story that when Craig took over as CEO, he did try to raise the price of the hot dogs?
I don't know.
I had no conversations with him on that subject.
And Jim forbade him.
Well, I'm sure Jim would have forbade it.
Absolutely.
There was no board level discussion of the hot dog.
No, no, no.
Those two would not have thought it was a board matter to discuss the price of hot dogs.
The one thing that fascinates me about Costco is they seem to only be able to grow 10 per year because they're not capital constrained.
No amount of money, if they were to access it for free, could help them.
It is hard to open too many stores a year.
New store, new manager, new this, new politics.
It's hard.
Plus a lot of stuff has to be learned and taught and put in place.
And so they didn't want to do more than they could comfortably handle.
Store openings, you mentioned China earlier.
Was it 20 years that Costco had the license to operate in China?
Well, let me what happened there.
The first store they tried to open in China, the first store somebody wanted a $30,000 bribe.
You know, Chinese culture.
And they just wouldn't pay it.
And that made such a bad impression on Jim Senegal.
He wouldn't even talk to him going into China for about 30 years thereafter.
So what changed?
Why finally go in?
Well, finally the board started making up noises.
You started agitating.
Yeah, yeah.
Yeah, who on the board could be excited about the Chinese market?
Yeah, who can?
Who knows?
Oh, that's so great.
One thing I found fascinating about Costco was the fact that, even though they're at the lowest possible prices, their audience skews wealthy.
Was that an accident that they figured out over time or did they know that?
That figured out to announce.
All the way back in the price club days?
Yes.
He always wanted the rich man trying to save money.
Well, and it's not just that they're the wealthiest customers.
They're smart wealthy customers.
Yeah, they're picky wealthy customers.
On some topics that are outside of Costco.
You mentioned in the Daily Journal annual meeting this year that a young man knows the rules and an old man knows the exceptions.
Yeah, that's an old saying of Peter's.
Oh, is that of Peter Kaufman?
Yeah.
What are some of the exceptions that you've found the most useful in life?
Well, take those goddamn Costco hot dogs.
That's an exception.
Anybody else would have raised the price of hot dogs a long time ago.
They just don't do it.
They just know that it's like half famous and you'll bring your kids in.
They know they've got something going there that's worth extra money to them, and they just don't destroy it.
A thing that I've never fully understood.
I know you're a big fan of the company BYD.
That of course, makes the Chinese company that makes batteries and electric vehicles.
I may be a big fan, but I'm sort of hanging on by my hat while he lurches around the track.
And they make me nervous.
It's so aggressive.
Is that dangerous in a company?
That's what makes me nervous.
Of course, it's dangerous.
So do you think that companies should try to grow at a lower rate than they're capable of in order to be more durable?
Well, of course you do that if it's safer and it's easier and so forth.
But I would argue that at Costco, where they've done some of these things that are extreme like that, though it's been a plus and they've been smart to not to change their ways on one item or two.
And it seems like there's a spectrum where on the one side there's Costco.
And on BYD, like you're saying, they grew like crazy.
Well, BYD, this year I saw at least two and a half million cars.
Most of them electric.
That's unheard of.
That's way more than Mercedes, for instance.
More than Tesla, right?
Yeah, more than anybody.
Lots of troubles and losses.
They ran into terrible trouble.
They made lots of mistakes.
They were lucky they'd be on the cutting edge of this electric car business.
It's way more acceleration than most people.
So you had a car with more oomph than most people.
So the young macho male has a real lively car.
There are a lot of things.
Well, an electric car really works in some ways that is better at making a 90 degree turn.
You go right opposite a parallel parking place and just move this way, turn the wheels 90 degrees and go in.
Well, nobody's ever done that.
If your car goes flat, you could run 100 miles on three other wheels or something.
And do they have better economics because they don't have nearly as many parts?
It's simpler.
Have you ever had an investment like that before?
I think you've invested something like 270 million that's now worth something like 8 billion in BYD.
Well, very good people have an investment like that.
That's a venture capital type investment.
It happened to be a thinly traded public company and we bought it instead of a venture capital type company.
It was a venture capital type play.
And they just went, put the foot right on the floorboard and played it hard.
Had they manufactured... By the way, both BYD and...
Try to talk him out of going into the car business.
They're going to buy a bankrupt car business and go into the car business.
I said, that's a graveyard for you.
So why would you want to do that?
And he paid no attention to us.
Had you invested already when he told you this plan?
Yes, yes. and it worked fabulously well.
After huge mistakes, they almost went broke with their early dealership building system.
Almost went broke.
What captivated you about BYJ?
That guy was a genius.
He was at a PhD in engineering and he could look at somebody's party, He could make that part.
You know, look at it in the morning and look at it in the afternoon.
He could make it.
I'd never seen anybody like that.
He could do anything.
He is a natural engineer and a get-done type production executive.
And that's a big thing.
It's a big lot of talent to have in one place.
And it's very useful.
It gave us all these problems on these electric cars and the motors and the acceleration and the braking and so on.
How would you compare him and BYD to Elon and Tesla?
Well, he's a fanatic that knows how to actually make things with his hands, so he has to.
He's closer to ground zero, in other words.
The guy at BYD is better at actually making things than Elon is.
Charlie, you turn 100, which is an unbelievable statement, on January 1st of next year.
Do you have any plans?
I'm going to party.
Where's the party going to be?
The California Globe.
But I've totally maxed out the room.
I can't squeeze another person.
What captivates you these days?
What's fun?
Well, practically everything is.
Even politics, bad as it is, is kind of interesting.
When you look back at your and Warren's time together, when did you have the most fun?
You had about the same amount of fun all the way through.
We're having fun now.
Is there a particular era that you remember the most fondly that feels like the good old days?
Well, we remember we were sweating blood in some of those good old days.
Oh, I mean, Solomon Brothers.
Solomon Brothers.
Yeah, yeah.
There were a lot of close misses.
We got out with a big problem in Solomon.
We could have had a big loss.
We could have had more problems than just a loss with Solomon, right?
Well actually, when we examined Berkshire Hathaway on our podcast, our takeaway was that the whole franchise was at risk during Solomon Brothers, the entire Berkshire Hathaway name and future.
Would you agree with that?
Not so much.
We would have survived.
If you had let the whole investment in Solomon go to zero, it would have been.
If it had all blown up and went to zero, we would have written it off and gone on and done pretty well.
What do you consider it to be your finest hour?
Well, we like to remember the close misses.
We had real terrible problems.
We had a terrible problem with the Buffalo News.
The Buffalo Evening News brawl?
Yeah, there were two newspapers in that town and we started a Sunday edition and that started a holy war and the other guy went broke.
Well, we could have gotten a lot of bad publicity over that.
And you were both pretty young and enterprising at that point.
I mean, you weren't the Warren and Charlie of No, but I was very aggressive about wanting to have a good Sunday edition.
I didn't want to own the paper for 50 years.
There was no Sunday edition when the other guy had one.
What made the newspaper business so attractive at that point in history?
It was a goldmine.
That's attractive.
Total goldmine.
Well, and the play, in particular with the Buffalo Evening News and the Sunday edition, was playing for the local monopoly right.
To be the game in town.
And with newspapers, you could do that.
Sure, sure.
I mean, newspapers for decades had EBITDA margins in the 50, 60% range, right?
No, only the little ones.
Only the little ones, oh.
Yeah, the big ones were less, 30 or 40 or 20, 500.
I said EBITDA in your presence.
I apologize.
Cash flow margins.
Actually, do you still feel that EBITDA is a criminal the way that you've demonized it in the past?
Yeah, I do.
You have a big truck company and take the depreciation out of the trucks, out of the earnings.
You're lying about the earnings.
Okay.
I mean you witnessed its rise with Malone and TCI and Liberty when EBITDA was invented as a concept.
What were you thinking?
Well, I've never liked John Malone's extreme manipulations.
I don't want to be known as the great manipulator like John Malone is.
He paid less income taxes than anybody.
He just pushed everything to the dry lodge of the stream.
In many ways, EBITDA was the community-adjusted earnings of its era.
Are you familiar with the community adjustment from WeWork?
No.
WeWork.
Oh, boy.
Maybe a final question to wrap up.
What are the set of companies that you think are the greatest that you've ever seen, either that you've owned or that you've not owned?
Well, there are a lot of great companies.
So Hermes is a great company.
In its heyday, General Motors was a great company.
It just gradually went to hell one contractor at a time.
What do you think about the predictability?
There were a number of companies back when you started where you could have said this business will be the same in 10 years.
Do you think that number is the same today or do you think it's much harder?
I think most places have a lot of change and threat in their future.
Do you think most places had a lot of change and threat in their future even 50 years ago, and this story is overblown?
There's a difference.
Some of what I call a specialized industrial company, and Berkshire has a lot of them.
We have a lot of companies that are quite insulated from really tough competition just because they've been so long and they're so good at what they do and has a good reputation and high value, and so on and so on.
What companies can you see today where you can confidently say, Berkshire aside, Costco aside, you can confidently say the business will be as good as it is today in 10 years?
Well, I think a lot of companies are pretty good, but you can't really say what's going to happen, because you may get some guy like Iger in that just wants to push everything and do the right public relations.
So no matter how good the business is, it'll be kind of phony.
Hmm.
Charlie, I have a personal question for you.
David has a two-year-old and I'm going to have my first child in a month.
What advice do you have for us about building families?
Well, of course, you got to get along with everybody.
You got to Help them through their tough times and they help you and so forth.
But I think it's not as hard as it looks.
I think half of the marriages in America work pretty damn well.
And would it work just as well if both of us had to marry somebody else, by the way?
Well, you've said that the best way to have a great spouse is to deserve one.
Yeah, sure.
As long as both parties feel that way, then it's a recipe for success.
Of course it is.
And you've got to have trust with your spouse when it comes to things like education of the children and so forth.
Yeah, I love that.
Well, Charlie, thank you.
Thank you, Charlie.
Well, good luck to you.
Charlie, a lot of people are going to benefit a lot from hearing this and your wisdom, and they're going to learn so much.
Well, you know, if you start to think about it, it's pretty hard.
It doesn't look so damned easy just to go out.
If you go to the ordinary person trying to promote himself as an investment advisor of some kind, he just thinks he knows everything about everything and how the Federal Reserve should be run and so on.
We don't feel that way.
I will say with the people we get to talk to who've built great things.
Every single one of them says it was so hard.
It's so hard.
You can't build something great without it being so hard.
Charlie, thanks so much for doing this with us.
Glad to do it. you'll do pretty well at, but it's not going to be that damn easy.
David, total life experience and complete boondoggle.
I can't believe we got to do this.
I'm still pinching myself.
It's now a couple weeks after it actually happened.
I know, with autographed copies of Poor Charlie's Almanac to prove it.
As if the podcast wasn't enough.
And actually, for those of you who haven't listened back, what in 2021, so two-ish years ago, we did a whole three-part series, just us, covering the whole history of Berkshire Hathaway.
Part one is on Warren.
Part two is on Charlie.
Part three is on Berkshire and Ted and Todd all the way up through to today.
I assume many of you have listened to that, but there probably are a bunch of folks who haven't.
So if you want another nine or 10 hours of acquired content on Berkshire, I really think it's some of, if not our, best work.
Go check those out.
With that listeners.
Our huge thank you to Tiny for being the sole presenting sponsor of this episode.
If you have or you know of a wonderful internet business, you should reach out hi at tinycom and just tell them that Ben David and Charlie sent you.
I'll see you next time.
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Is it you, is it you, is it you who got the truth now?
