The Exchanges

Q We've talked about doing this, and we're just gonna focus and dive in on this little company in Omaha. We're gonna start there. When did you first buy your first share of Berkshire Hathaway?

A Well, that would have been just after I first spent time with Warren, and it was in 1981 or 82, and it was at Stanford Business School, and Professor Jack McDonald, who was the value investing professor, the Roger Murray or the Bruce Greenwald, the believer in fundamental analysis at Stanford, who had a longstanding friendship with Warren. I think his involvement with Warren was maybe forged two decades before I was in the class that Warren spoke at. I remember afterwards saying to the professor, McDonald, he's right that Berkshire is, is remarkable. Warren's the smartest person I've ever heard speak and all of that. And I said, but Isn't it too bad that it's gone from 300 dollars a share to 900 dollars a share? Because after all, because the bird has flown. And he said, Tom, you're not nearly so talented as I thought. You know, this is not, there's a lot left in this one. And, and so that was the first time I experienced the thought process behind Berkshire. And nobody was talking about Berkshire as a place where you should spend time at that

AI assessment note: “that would have been just after I first spent time with Warren, and it was in 1981 or 82”

Q And so to get a sense of the time lag, what was the Tom Russo research process in 1981 in between when you first met this guy, Warren Buffett, and when you bought that first share?

A Well, it was the same time. There's not a lot of distance, and it was the simplicity with which Warren approached answering the questions from the audience and also leading the audience. So his first point was that the government only gives you one advantage As an investor, and that's the non-taxation of unrealized gains, and so you better do something about that, and what that means is that he'd taken this massive step from old Ben Graham value investing to the start of a new approach to investing, because Ben Graham was all about 50 cent dollar bills, but every time you found one, you were driven to close that gap quickly to sustain an IRR, and the longer you waited, the patient sort of investor didn't make sense Up against the traditional Graham and Dodd networking capital type investments. And so Berkshire was at the dawn of moving into an investment that required that you find business at the capacity to reinvest. And then the question he said is that anybody who reinvests on your behalf is your agent, and it's really hard to succeed in business if your agent is self-interested rather than has your interest at heart. And so that was a Really important insight is that you need something that can grow, and the only way you'll get the benefit of that growth is if the investments are made by an owner-minded manager.

AI assessment note: “Well, it was the same time. There's not a lot of distance”

Q of time, much like your own strategy, a lot of the Berkshire businesses were consumer facing. You know, we talked about Everything around homes, and home building, and insurance, and a lot of the early investments, or Coca-Cola, American Express. The last decade or so, this whole group of these regulated capital intensive businesses, how have you thought about a shift to different type of business, different type of economics?

A Well, I mean, you're absolutely right. When they bought from Scottish power, Pacific Corp, I think it was called. They paid 10 times pretext to buy that business, and then they had an endless ability to deploy capital in the capital-starved company that they bought. Scottish Power hadn't invested in that production and distribution network sufficiently, and so they had, they had the ability, because of regulated capital returns, to deploy capital at 10% plus as they built out the network. And that's an extraordinary investment opportunity where you have the ability to deploy more and more and more and more capital. Now, ultimately, you want to make sure that society doesn't change the terms on you midstream as you're, you're deploying capital because of your belief that you can deliver your power that you produce through your wires to your clients at the price that you demand. That gives the return, the average return that you're allowed for on your capital. But society has come along and said, you know, really, that's a forced contract of adhesion. And you should give the user choice as to where they source their power. And then some of them might like wind, for example, wind casino might be in a particular part of the world where they're very close to massive wind and massive solar production capacity. And they may balk at having to pay the blended rate for the power that the…

AI assessment note: “they had the ability, because of regulated capital returns, to deploy capital at 10% plus”

Q And did you come to that in your very early days in the business? So you're coming out of business school and all of a sudden the light goes off for these consumer brands, or was there a little bit of trial and error involved?

A You know, it's pretty early days. I, I did all sorts of kooky things as a young student invested in hospital change and all sorts of strange things, and they were fine. But very early on, I started to invest in something called Weetabix, which is a product that my wife, who's British, loved, and of course, no, nobody other than the British can stomach, but she was a complete loyal fan on that, and You know, at some point early on, I, I resolved that the types of businesses that I could naturally file that follow and that interested me were consumer brands because you can ask people what they think of them. You could watch them shop. You can try them yourselves to determine whether they're good or poor. It's unlike investing in a Qualcomm chip set. You know, I can't really know much about those given my interests, aptitudes, and background, but I can know a fair amount about what What people esteem in the consumer realm. And so I often said that, you know, what I'd like to do as an investor is go into someone's kitchen and open up the cabinets and just see what is regularly there. And I most enjoy it when I ask somebody, why is that there? And they say they, they don't really know. It's just always there. That kind of legacy brand preference is worth a lot, and it always has been. My wife happened to favor strange English diet, including Weetabix, and Marmite, and Branson Pickle…

AI assessment note: “You know, it's pretty early days. I, I did all sorts of kooky things”

Q and knowledge base that grows and compounds over time. As we've talked about, a certain type of client base that's willing to stand by you. And there's probably only a subset of companies that you found. There's maybe 20 that, that you enjoy and have owned for a long time. Warren Buffett and Berkshire don't own a lot of the same names you do. Why do you think that is?

A Well, one thing is the international. I mean, he, he clearly finds more than enough to keep himself busy, as he said, in the US. He said this, so I, I just ape his own comments. He doesn't feel That he has as strong a way of quickly assessing the caliber of the management in foreign markets as he does in the U.S., where he knows if they were Notre Dame, you know, or if they graduated from Washington or George Washington or Dartmouth or someplace else, says something to him. He, he, he, sort of five questions you can kind of figure out what, what you need to know about someone in the U.S., and you just can't begin to get that. From, in the international markets. At least he doesn't feel so. I have felt more comfortable. I think extremely highly of the Heineken family. I think what they stand for is something as knowable. It's enduring, and I, and so I'm more comfortable. Have been since the start with the international exposure. I think we've added value by being willing to move there earlier on. I mean, he, he, he recognizes it when he describes his continued joy about the exposure he gets through Coca-Cola, for example. In, in consumption growth worldwide, but, but prefers not to own those companies internationally, and I, I actually prefer to own those, and, and so that's one big difference. He's had historically a much more industrial orientation, certainly in those privatel…

AI assessment note: “Well, one thing is the international. I mean, he, he clearly finds more”

Q And is there anything that you enjoy reading that Other people might not know about?

A No, I'm a very promiscuous reader. I think the third book I would recommend is called Essentialism, and it talks about how you say no to the things that consume your time. You know, for me, I would read, you know, just from the start of the day to the end, but. Work comes in between in some ways, and you know, I, I always have to recall Warren Buffett's advice, admonition, which is to say, investing is not just about reading. It's a lot about reading, but if it were just about reading and storing what you read, librarians would be the richest people in the world, because they know how to do it better than anyone else, but it's not, and what I personally struggle with, and I think other investors would share this, is that in the search for the final answer, The last unread bit on a subject, you can use that search to deflect the responsibility of making decisions with a sense of being fully engaged and productive. In the search, very quickly in an investment, you get 80% of the weight of the outcome. And how much you dedicate for the remaining 20% can often be an excuse for inactivity rather than the requirement for the last piece.

AI assessment note: “No, I'm a very promiscuous reader. I think the third book I would recommend”

Q It's like third point in green, like create reinsurance businesses, but struggle to have great underwriting operators underneath them. When you're assessing, will that strength and underwriting continue? We've got Warren's word at the annual meeting and you've got a few numbers. Is there any way of Getting comfort that that continues across other insurance operations.

A It's so wrapped up in the talent at the top. I mean, it's so rare to have a person of Ajit's appetite and capacity to run a division with a partner as smart as Warren on risk management. So Ajit sources the market all day, every single day he's pulling in Quotes, and he's learning from the market by virtue of what people are pitching to him to participate in, what the tone of the market is. And then on specific risks, he, he consults with Warren, the best risk adjuster in the world. And together, you have this ability not to swing for endless pitches, endless countless pitches they don't swing. But when they do swing, it's the big fat one. And so it's so interesting how the concept of margin of safety Crosses over from the investment side with Warren having that conversation at the end of each day with, ah, Ajit about, ah, is there enough margin of safety? And the way you get there is just that you get such high premium at some time because no one else has the capacity. And they only get there because they don't squander their capacity. Now, I mean, on the margin, there are a whole host of areas that are developing within Berkshire's insurance where they're putting together more traditional looking operations that, uh, in large measure have spun off from AIG and, and those businesses begin to, as is January, look more like a day to day, year to year rollover type business. Whic…

AI assessment note: “we haven't lived long enough through this cycle to know how that new story will turn out”

Q How much of that is inextricably linked to Warren himself?

A Well, what happens as a result of what we just described Is that the ecosystem is very appealing to companies that are exactly the kind of companies that Berkshire would most want to own. Ironically, there's a symbiotic relationship between the companies that want to care for the cultures that they've established and respect the legacy that they built, and Berkshire's desire to buy those types of companies. And so long as all of the infrastructure that I described within the Berkshire model as they operate, Remains. I think Berkshire will have the ability to drop people from similar businesses down the road over time. The moment that they break from that process of offering protection from quarterly conference calls, offering capital, offering advice, and letting the management who, who owned the business continue to run them as they still did. If that continues, it'll go unbroken. Warren was asked that question, exactly that question at the last annual meeting. How much is it you? And how will your successors handle it? He said, it's not about me. It's about the fact that the sellers of such cherished businesses have nowhere else to go. And he said, it's not anything about me. It's about what we offer them, and there's nowhere else that offers that.

AI assessment note: “He said, it's not about me. It's about what we offer them”

Q If you started your career over today, money was no object, and you couldn't be an investor, what would you like to do?

A It's a very good question because, you know, we face that question every day because you can always do something else, and so, ah, that, that is already a very profound question. I suspect it could be one of two things. I mean, Charlie Munger has this part of his, his personality That he describes as, as resulting from the kind of paint drying nature of long term investing, which is he's found an outlet in building things. And so, I, you know, I've enjoyed the, the building of many different, uh, structures, the additions, changes to our homes and all the rest. And that's someplace I could spend time, uh, productively. It's the, it's the vision thing that you have to get right. And then it's the execution thing that delivers on that vision, and I find that to be a rewarding process. I don't know that that would be the thing I would do to my exclusion, but if I stopped investing in common stocks, but still felt the need to be commercial, that's where I direct my efforts, I think commercially. I suspect though, at this stage of the going, I would probably just direct my efforts away from commercial pursuits into something that's more along the lines of a give back than a make more. That's really where I think I would end up.

AI assessment note: “I suspect it could be one of two things.”

Q And how about in your day-to-day interactions? So we're having a conversation, and A few days go by, and I get one of these, now among some of my friends, notorious emails with a PDF attachment from Tom Russo, and, and there's always a recollection of something in an ordinary conversation. Not, how does that come about?

A Well, you know, I, I end up, I take more notes than you suggest. I mean, that's clearly it. I'm, I'm often just scribbling something down, and then I, I struggled myself to read what I wrote. But, you know, it is. I use those moments to, in effect, Create a conversation that I can look back on. And so if I, if I'm putting something on paper, it's because I want to make sure I've got it restored. I have access to those, and they form part of my memos to myself almost. They happen to be shared because they involved you in the case that you described. But at the same time, they're really my leg, my, my sort of legacy of, of, of important observations that I'd like to make sure are saved. Other people do it through, you know, sort of their internal files. I sort of extended a little bit by working letters around it, and thanking you for the time you spent, and, and sharing those thoughts again together.

AI assessment note: “I use those moments to, in effect, Create a conversation that I can look back on.”

Q In the MyTech case, when you talked about this phantom stock plan, are you only aware of that because it came up in an annual report?

A In that case, I'm sure I heard about it from the annual report. It would not have come from them. But there are, there are very interesting conversations. I mean, 12 years ago, maybe, maybe more, closer to 20, I met with Kevin Clayton, who spoke at one of Bob Miles' conferences. Bob Miles is the Berkshire CEO and an author and a symposium organizer for Berkshire. Kevin spoke, and I met with him afterwards, and I said, what's life like? This is the question I so often ask is, How's it different within Berkshire? And he said, well, the beauty is no more quarterly earnings. I just shut down that whole operation, which added no value whatsoever to anybody involved. And then he said, relief from, of having to reinvest the free cash flow that pops up from our business beyond what's organically required in our business, because we actually give that money to Berkshire and we don't have to fret on that anymore. And then he said, an absolute Waterfall of capital is available if we need to make an investment beyond the cash flow that we've, we've, we've got. So that was interesting. And then he said, and you get with it the world's smartest consultant, Warren.

AI assessment note: “In that case, I'm sure I heard about it from the annual report.”

Q What do you think happens to the stock the day he's no longer the company?

A I think there's already still a departure discount, so I think the markets already carries with it the secret that Warren is 88 years old. And so, I think that the company is very critically, at the moment, engaged in share repurchase, with the strong view that, though it's always been an option, the fact that it had been underutilized over time meant that his successor in decision-making on allocation would always have struggled to hold forth to the remaining Berkshire shareholders the virtue of share buybacks, when in fact it wasn't a component Of wealth development over history, and so the announcement last year that they would unhinge the buyback to any kind of statement on book value premium meant that Berkshire could get at it, and they bought back a lot of stock, and I think we'll see in the fourth quarter that they continue to, and I think you sort of see billions of dollars. My hope is that magnitude of two to four billion dollars will have been bought back, so that it's undeniably The case that it's a tool going forward. And that gets the question you asked, which is hopefully Berkshire will buy a lot of stock. That would be the right move. And then for me, longer term, since the world is increasingly holding Berkshire shares philanthropically. That over time, I would love to see a big dividend so that those institutions with a payout ratio requirement can fund it thr…

AI assessment note: “I think there's already still a departure discount, so I think the markets already carries”

Q notion, he's very well known for castigating Wall Street's helpers, and yet At different times, he's owned positions in investment banks. Last year, I think, came up this question of sugar and Coca-Cola, and how does he feel about it? And on one hand, he has high moral ground. On the other hand, he said, well, I'm really happy because I drink Coke. How do you think about those conflicts?

A It's hard, you know, especially as the world moves increasingly towards ESG standards. I'd say Warren has often described the issues in business, the mistakes in business, as being A function, not a good idea, a bad idea at the start, but good ideas taken to extremes. And so he's benefited over the years by not ending up on an extreme position. So for example, if he could own tobacco, has not, has chosen not to be, he's just uncomfortable with that. With Coca-Cola, it's a really big issue. And society is sort of answering it for him. Coke's share price has been 44 dollars a share down from, I don't know what the peak was, maybe 65, 70 bucks in 1989 or whatever it was. It's actually taken a toll on the performance of the company that he owns, and if you just go into any outlet today and look at what's happened to the beverage category, it was once an enforced Coca-Cola phalanx, and today it is chaos. In terms of choice, and Coke doesn't participate in that, because to the consumer who's drinking kombucha or something, they're just not even thinking about sugared soft drinks.

AI assessment note: “he's benefited over the years by not ending up on an extreme position.”

Q Yeah. And just to give a sense, cause I had a chance to read your letter and I was like, wow, Tom's bought a new name. And then I look in the back of the letter and how big was the position when you first wrote about it?

A Less than one percent. It's not just over one percent. It's not a big position. And it will likely grow, and begs the question about Facebook and Amazon, and as I mentioned with Amazon, the insight there is not privately held, it's just they have a massive competitive advantage in delivery costs, and they, they have to be very careful, I must say, that search function that I rely upon them to treat me fairly with has to be protected, and they have to be very careful, so I, for instance, recently went to Buy William Sonoma kitchen towels. They have a blue stripe down the middle. It says William Sonoma. It's what we like. So I thought, well, why don't I just check Amazon? Maybe I can buy those less expensively. They appear on the homepage. Four for 40 bucks. Again, dozens of vendors, four for 40 bucks. Picture of a white towel with blue with a label going through it. And upper left-hand corner of the first page, there was one that said 12 towels for 30 bucks. Everyone else is four for 40. And so I, I kept thinking, well, then I finally said, I went back, I was going to click and buy that one, because after all, I get lots more at a lower price. And then I looked, and it was like William Sonomi. And it was from, it was a complete passing off. But there was a very high probability in my hurried life that I wouldn't investigate beyond the original visual impression. I click, buy, it…

AI assessment note: “Less than one percent. It's not just over one percent. It's not a big position.”

Q the, the first is the ability to listen. A number of times we've had conversations over the years and within a week, I get back a note from you that encapsulates things I had forgotten about, and yet you're not writing anything down. We're just having conversation. Can you talk a little bit about listening and how you've developed that skill and how you deploy it in what you do?

A I think the trick is to listen, listen for the things that surprise you, and most of what I hear, I'm, I'm not particularly provoked or excited, but every once in a while you hear something, I was just with an organization yesterday that's stumbling very badly, and I have a sense that part of it is, is a function of the, uh, the infrastructure, of the management, and the Ill-working nature of people in, in the senior most roles, and in the possible, very serious possibility of compromised decision making. You know, a person oversees another person oversees another person, nothing gets done, and the outcome is, is subpar. And I was listening to the person describe the head of the, the geography that is surfacing the most trouble, and the person is quite accomplished. And the man I was speaking with described him as being part of the effort, but in fact he should be the old effort, and that the decisions were really made by his superior. He's a very talented person. There's absolutely no reason why his superior should have any authority over the daily operations of a division run by one of the best talents there. And I, I really, I was stunned to hear him say, and of course he's making all the decisions. I, I, I said, Repeat that. Tell me what you really meant to say. What do you mean by that? That, to me, was extraordinary, to hear that expression. Now, we talked a little bit fa…

AI assessment note: “I think the trick is to listen, listen for the things that surprise you”

Q Yeah, so when you roll into December, and the markets really sell off, how do you calibrate how much to put in?

A Frankly, the fourth quarter of this year, I think it may have been down 10%, It may have been the best performing stock in the portfolio because the international consumer, just the general fear of trade wars had weighed so heavily on the market. So what we did have an opportunity to do is we had some sales of heavy weighted positions that freed up some capital. So we bought some more Google around the thousand dollars or whatever it was. It came down, but it didn't come down as heavily and it wasn't an opportunity to Leave a position full scale and swap in. The beauty of Google is that it is liquid as can be. So we have the ability to go in and size it if, and when the opportunity is right.

AI assessment note: “we had some sales of heavy weighted positions that freed up some capital”

Q Yeah. Historically, when you've entered names, you've owned them for decades. How do you think about Google 10 or 20 years from now?

A It will have changed our lives. I mean, it's the same kind of disruption that I look at in everything. So I was just looking this week at a publication that tracks spirits companies, and one in particular is called Campari. And Campari has a product called Aperol. Aperol is used for spritzers. It's a refreshing drink mixed with Prosecco and Aperol, which is a bitters, and it's taken over Europe. Campari bought it. Small company. They've rolled it out. It's taken over Europe. I think it's taken over North America because the people I know all guzzle the stuff. It's fabulous. It's the refreshing drink of the century and everything else. I looked at the statistics for aperitifs in North America. And Aperol's gone from 30,000 cases seven years ago to a 100,000 cases. Now, the largest aperitif companies in North America do six million cases. And yet, within my sphere of influence, because I know the management from Campari, I associate with people who like the product, and so I see it around all the time where I circulate, it's only a 100,000 cases in North America. It could be three million in five years, given the kind of ramp and given the way that The management there carefully rolled things out with permanence in mind. But it's only a 100,000 cases now, and I sort of feel like the spring has sprung. And so it's one of those things that happens in the investment business when yo…

AI assessment note: “It will have changed our lives. I mean, it's the same kind of disruption”

Q And then the two characteristics of these companies, the capacity to reinvest and the capacity to suffer. Why don't you take me through each of those?

A Well, you know, Winabix is a perfect example. So many of the family, it was totally family controlled. I mean, it's, it was a process where I'd look at the back of the box of the cereal and it says Bert and Latimer and United Kingdom , I checked under Bloomberg at the time, or whatever source I used, and sure enough, it was public, but good luck finding it. You had to go to a Offex, uh, exchange, and it traded rarely. I probably was the only scale buyer for 20 years that I owned the shares, and, and we just kept hoovering them up, and so we did so typically at a very cheap price, Because most investors have no interest in, in, in risking their capital in a, in a family controlled company when they have no way of controlling or in many instances knowing what the outcome will be, and they can't know whether the firm has an idiot uncle or a waste, wasteful nephew that might end up inheriting the business and ruining it for the outsiders and eventually for themselves. The world, the world of history is full of examples of companies like that. So whether it's Weedabix or whether it was James Burroughs, which in the early eighties was the parent company of then single brand beef eaters, Jen, well, that's a very odd business, but it was a public company that we could buy shares in. It obviously ended up being taken over by another company. And now it's, it's, it's in our portfolio. Ag…

AI assessment note: “Well, you know, Winabix is a perfect example. So many of the family, it was totally family controlled.”

Q On the insurance side, is that a similar dynamic? There are a few pockets, there's the Geico pocket, but it does feel like there are a lot of lines where it just makes sense to create scale rather than to compete across two different businesses that they acquire.

A Well, insurance is harder to penetrate because I, she does not have a booth, and Geico does, but you know, Geico's booth is all about the gecko, and it's the solicitation. You can do better if you sign up for Geico right now, and so it's the ease of access to capture new insured at the Coliseum that you come away with. Well, God, that's a fairly automated process and, and a very attractive pricing combination, so you can see real time how they're capturing business and how they promote it. But you don't really get a sense of what they're thinking about. And I guess you see them extend, extend into motorcycles, into pontoon boats, into power boats and all that. So you do see them grow, but you don't really get a sense of what's going on inside Geico as you can inside my deck.

AI assessment note: “you don't really get a sense of what's going on inside Geico”