RWH032: The Vigilant Investor w/ Chris Bloomstran

You're listening to TIP. Hi there. I'm really excited about today's episode of the podcast. Our guest is Chris Blumstrom, who's a superb investor. He's the president and chief investment officer of a firm in St. Louis called Semper or Gustas. And this conversation is really so rich and so packed with practical lessons about investing and business and life that I didn't want to cut it short. So for the second time in the history of the podcast, I've turned this interview into two episodes. In part one which you're about to hear, Chris shares what he's learned over the last three decades about how to navigate the madness of financial markets so that you can survive and thrive through thick and thin. So we talk about how Chris and his mentor are brilliant but unknown investor who had previously survived the crash of 1929 managed to sidestep the dot com bubble that burst back in 2001. We talk about how to protect yourself in these crazy outbreaks of irrational exuberance which go back at least as far as 17th century Holland where investors were prepared to pay almost anything to own the rarest tulips. And it's not a coincidence as you'll hear that Chris actually named his investment firm after the most coveted of all tulips which was called the Semper Augustus. And that's really an ironic reminder that investors can be dangerously irrational. Some of the lessons in this conversation are timeless and foundational but Chris also warns very specifically about the perils of betting now on hot tech stocks like Tesla and Nvidia. Why is he so wary of them? It's an age old story really about excessive expectations, lots of hype about their supposedly limitlessly rosy future and also a failure to remember the most fundamental principle of investing which is that valuations matter that you can never afford to ignore the price you pay for any stock regardless of how attractive the business might be. If you want to outperform over the long term as a stock picker I think Chris is an excellent person to study because he shows what it takes to win this game of beating the market and truly just how hard it is. As I think you'll hear in this conversation he's ferociously intelligent but he also has a lot of other qualities he's got a calm temperament he has this intense drive he's got a very independent mind he also has a relentless passion for analyzing businesses and solving the investment puzzle which really is not just about wanting to get rich but about just being fascinated intellectually by companies and business models equally important he's a profoundly skeptical investor he doesn't really take anything on trust he questions everything and he doesn't let down his guard the word that came to mind to me when I was thinking of him earlier today was vigilant and when I think about all of these qualities that you need to be a successful long-term stock picker it helps me realize that I would much prefer to hire Chris or someone like him to manage my money rather than actually compete with him and I think that self awareness is important because one of the great lessons I learned while writing my book Richard Wisehappier is that it's smart to stick with games that we're actually equipped to win in any case I hope you enjoy our conversation and I also hope that after listening to this episode you'll then listen to part two where Chris talks in depth about what he's learned from Warren Buffett and Berkshire Hathaway which he's studied as deeply as any investor I know thanks so much for joining us you're listening to the Richard Wisehappier podcast where your host William Green interviews the world's greatest investors and explores how to win in markets and life Hi folks I'm absolutely delighted to welcome today's guest Christopher Bloomstrand Chris it's lovely to see you thank you so much for joining us Bill it's great to be here I mean as much as I loved your book I've in the last few weeks knowing those coming on your podcast I've been listening to probably through a third of them and they're just phenomenal conversations about not only investing but life and kind of true to the spirit of the book so it's real privilege to be with you today thanks thank you it's a it's a real delight to have you on one of the reasons why I wanted to get you on actually is the guy spear said to me months ago you need to get this guy on he said his head Chris is brilliant and he has a really interesting mind and he's really unusual and so I had read your letters over the years I think I'd read your letter for last three years which is an amazing amazing thing as we'll talk about I mean it's a it's a huge thing but it's lovely to meet you finally in person at least virtually remotely and I wanted to start really by chatting with you in some depths about an extraordinary but largely unknown character who played really a transformative role in your life this a man called Robert Brookings Smith and in your 2021 letter to your clients you wrote if the world knows Benjamin Graham as the father of value investing I hold Robert Brookings Smith as its godfather I contend he is the only investor to have nailed 1929 1932 and 2000 spectacularly well and he's also just a really fascinating character personally as well so can you tell us who mr smith was and how he came to be client number one at your investment firm temporal gusters and then let's get to what you learn from him wow sure so had I not had I not included that section in the letter which really was been dawned on me I should do it with an interview I'd done with Jim Grant and we touched on kind of our first client and who he was and I told a little bit of his story Jim called me after he published it and said he thought it was his favorite interview well he called me right before he published and said you know the one thing you didn't do was mention his name and I said well you know a he was very private but you know we're very kind we're very guarded with our clients and I said I wrote just not in a position to tell you who he was other than he was somber's first client and that that a background and so I so his piece turned out so well I thought gosh and his story really deserved to be told he was a remarkable man so I called his daughter and told her what I was thinking about what I was working on for the letter and she loved the idea and encouraged me to do it and so I set out to tell a little bit of his story as an investor and a human being through what I view is the the main secular peaks and troughs over the past century and kind of linked it with what Warren Buffett had likewise done at various peaks and troughs and so I set out to succinctly try to tell the story of this great guy that was born in 1903 to a fairly wealthy family here I'm saying what was they had a brokerage business that was started in the 1800s that still exists by name today never got acquired in any event he went off to Princeton and to study and was in the choir but he rode crew he was on the football team and came back from school and joined the brokerage business in his mid 20s early 20s I guess by 1925 or so his father had passed away and he had moved up the ranks a little bit as a you know youngster but in early 1928 he would have been about 25 years old and he believed there was a bubble in the stock market and in the economy and so he took all of his families you know substantial of the time capital out of the market and invested in bills and gilts and some railroad bonds and any clients that that would follow the heat of a young broker likewise did the same and if you know your stock market history you'll know that the stock market peaked in the fall of 1929 and so if you go back in time and look at kind of when he sold the portfolio down the Dow Jones would have been about 200 well it didn't peak until hitting 381 I believe it was some you know year and three quarters later which would have been brutal I mean it would have been like getting out of the stock market in 1990 you know seven or 1998 thinking there was a bubble and just watching things continue to skyrocket higher especially for the outside clients and so obviously vindicated in the end and in the Dow plunge 89% we wound up in a depression and he waited until the bitter end and he waited until 1932 to put the capital back to work and reasoned at the time that you could buy businesses like general electric for less than the cash in the business and kind of a genuine net of working capital so where Ben Graham was writing security analysis having lost an awful lot of money in the 1930s Bob Smith was picking up just gems of assets and would have been harder to do because you know most investors and most most and most people in the stock market had lost so much that you know even if even if you had the the the wherewithal to to not panic and sell on the way down you needed to live if you need to live off of portfolio and you had there a couple of great books out but they were you know the doctor class and and the lawyer class professionals had clients but the clients didn't have any money so nobody was getting paid and so you had to liquidate your stock portfolio well if you had capital and and and and weighed back in at you know very incredible discounts he that that's what he did and then yeah I think you said that he bought GE at the the equivalent of 12 cents per share in 1932 so yeah by the time I got in the late 90s the the dividend was multiples of the cost basis even the quarterly dividend was multiples the cost basis which is kind of incredible but that's what happens with what had been a good business over a lot of years and GE wound up ultimately not being a great business we'll be figuring that out but but that's a great astounding thing if you think about it even the fact that he he not only did this extraordinary thing that you mentioned in in 1928 where he saw that there was trouble coming then he gets back in in 1932 but then equally astounding is that he holds something like GE for for the best part of 60 years and I think you've said maybe it was in that 2021 letter which was terrific you talked about how he picked up various other great stocks along the way I mean he bought I think Merck and Dow Chemical and AT&T in that maybe the 30s and then later things like Walmart and then Microsoft and Sun Microsystems can you talk about how he was able to hold these things for so long because it's not just it's not just the timing it's it's the extraordinary patience of the man that's remarkable well he was a little like Warren Buffett in the regard that I don't think he favored sending money to Washington DC so you know to the extent he had capital gains taxes he was averse to that and adopted what he called for years and years so investment philosophy of benign neglect which essentially it's a little like the coffee can approach where you know some of your your winners really wind up dominating the portfolio I mean by the end by 1998 when I got involved GE was half the business but I also think over the course of his life he he observed some things you know you had kind of a somewhat of another secular peak in 37 but that was the point where Germany was on the rise he was actually in Germany doing some work and had a lot of friends in Washington the family it was very well connected and he had very earth so he had some very early intelligence he and a friend of his Ned Potsel who wound up being an attorney in St. Louis who wound up running the OSS which was the intelligence arm of the military during the war but you know Mr. Smith had some he had a fair amount of intelligence that Germany was mobilizing and you know he didn't trust the communications so he got on a ship came back to the states met with Pentagon and let their the war department I guess the Pentagon at the time let the folks know what was happening and then by the time the war actually broke out and Japanese invaded Pearl Harbor he called his friends in the war department he was in his late 30s now at this point in mid 30s late 30s and he couldn't bear to not be in the fight and they said you know Bob we're not going to put you in the fight you're too old I mean he says no I got to be in the fight and so they put him in charge of training vessel on Lake Michigan it would still the Navy's big training facility and ultimately I guess he called him back at city this is not really the fight this is not what I signed up for so he wound up ultimately second in command on a light carrier the white planes and found himself deep in it and was in the battle the Philippines when I met him for the first time and throughout his time when he was in the office we had pictures in his office of the battle of lighty golf which was the which was the major battle the turning point of the battle where we decimated the Japanese fleet and cut off their oil lines and supplies and reverse fleet couldn't get back for munitions by not having the stranglehold of the Philippines and he was Ed and he was part of the battle and he would tell me these stories and he told me at a point in life he said Chris you know it's when you get to my age it's it's a bittersweet satheese I'm so fortunate and blessed for the relationship with you we've got to be very good friends in his last four or five years but he said my friends are all dead and so he'd confide in me a lot of things and he said you know he would have nightmares throughout his lifetime about that battle in particular they were it was the first time the Japanese had used a kamikaze strategy and you know he told me the stories about the jet had the kamikaze dive bombing his ship you know one exploded just a few feet from the ship damaged the whole of the ship they wound up having to take the ship back to San Diego after the battle but another Jason carrier was destroyed by kamikaze it may have been a it may have been a it may have been a destroyer but you know he had pictures of the boats sinking and you know the sailors in the water just a harrowing thing and so you know I think scarred by that so here he is at war and the stock market by 1942 was really he had just been decimated again from the 1937 recovery high you were back do I think 90 on the Dow you got down to 41 in 1932 but back up to almost 200 then so here he is and surely at some level you know you're in the Pacific theater but you're paying attention to the stock portfolio because you come from a family of money and you're in the money business and but I think at the point even Warren has talked about this it's you know if if things looked as grim in 1942 and America wound up being what it was and you could survive that onslaught you just you just let things go and so I think you know he probably came to this philosophy of not selling things because he obviously sold things in 1928 but then wound up not selling things but he came back and wound up leading the effort to start shrinking the reconstructions and ants corporation you know businesses had been you couldn't get loans and couldn't get insurance contracts the rfc had to run off he was told he told stories about having they were selling off the military planes and and ships some for scrapping but they had to shrink that enterprise and he led that effort then eventually got into the banking world and would join mercantile trust here in town ran the investment operation eventually became vice chairman of the bank and so didn't go back into the brokerage business but but ran substantial institutional trust pools of capital and by 1998 we were introduced by mutual acquaintance who a gentleman had heard me give a speech and it told Bob you need to meet Chris and Chris you need to meet Bob and so we got together he and his nephew and talked for a couple months and he told me at a point he'd love to have me take over the family portfolio I said why do you know be a lot delighted too they weren't a client of the bank of the bank I worked for I was running money for a bank trust company at the time and ran a mutual fund and was working with the trust accounts and some public pension systems ultimately running the St. Louis operation for what was a Kansas City-based bank and so you know we met and and his office in Kansas and Eric in St. Louis rather and so he said you know but you can do it on one condition you can't be working for a bank because even though I ran a bank and it was vice chairman of bank I hate banks he says they don't manage money the way I think you know to be managed and my concentrated positions I lost on it it it bothers me to know end to be signing letters of indemnification for my concentrated positions I've managed the portfolio I'm comfortable with these positions and so you know after a month or a month and a half of talking we launched Simper and he asked me to come set up shop and in his family office in St. Louis and so over the course of his last years he made it to almost a hundred years old this was late 98 when we got together and his gym put it in his interview we joined forces which I love the term he'd come to the office all every day and didn't tell about his last years I had to go see him at the house but you know we'd carve out an hour hour and a half every day he wanted to spend time with me and I really enjoyed spending time with him and his friends like Ned Putsle who ran the OSS was on the foundation board that we had and in terms of the portfolio I believe there was a bubble he believed there was a bubble which was the impetus for our getting together and so worked up a plan to start throwing assets into a foundation his foundation and set up some credit accounts which share where remainder trust accounts that would feed he and Nancy his life income during their lifetimes which would eventually wind up in the foundation which then would give and make grants via you know his family overseeing the the grant making process but the beauty of doing what we did in the late 90s is you had a bubble in in blue chip stocks in 98 you know Coke within the Berkshire Portfolio Mr Smith had some Coke I was trading at 50 plus times earnings the GE position was over half the capital and at that point more than two thirds of the business was finance Jack Welch had run it for a bunch of years there's a great book out by Bill Cohen on the history of GE which is a I think a must read for anybody but I thought GE was really a house of cards at that point the leverage was off the charts the off balance sheet debt was crazy and they ran the business on a you got to make the quarterly number approach and Jack's been a lot of time with the cell site on Wall Street and said you can't have these reinsurance businesses these insurance operations inside of a holding company and run them on a short-term basis you're going to wind up with problems and so he said I'm back to benign neglect he says I get it said GE was so viable for the family that why don't we sell 90% of it and so you know I was able to sell 90% and that was before the one for eight stock split between 50 and 60 bucks to share the stock still down 75% are there about 80% from where we sold it and the interesting pivot at that point was in concurrence that there was a bubble and his belief that it looked an awful lot like 1929 had discussions about whether it made sense to just sit in cash and the market is you know William was so bifurcated that did you wind up with the tech bubble by early 2000 well anything value related under the surface was being given away if you were a small cap value fund manager you were getting redemption in the last couple of years daily because people wanted to chase the Nasdaq bubble the Nasdaq was up something like 84% in 1999 and you know the world just had lost confidence in real businesses and so mid cap small caps real businesses just got crushed we were able to build a portfolio of real businesses trading for six seven eight nine 10 12 times earnings and so pivoted into a very undervalued corner of the market which wound up wouldn't have expected it but when the S&P 500 did fall almost 50% the Nasdaq fell 80% we wound up making 30 35% during that 2000 to 2002 bear market and so and I think you said the stocks that you bought him are up over 10 times since then so you were saying that the Delta is actually 50X because the stuff like GE would have been so killed is that right well against against the GE position yeah you think GE's down was done 80% and we're up over 10X and so you know the performance record doesn't give you that Delta but you take a million dollars to 200,000 dollars or you take a million dollars to 10 million dollars or more than 10 million dollars today yeah the Delta is a 50 and just it was very fortunate it was very fortunate that we got together and it was a highlight of my life because in addition to being a great investor he was one of the most kind human beings that I'd ever met we developed such a great friendship he was brutally honest I had episode I grew up in a household with a kid with an individual that I really couldn't tolerate my mother remarried when I was seven she left my father and I grew up seeing a lot of lack of ethics and lack of morals and zero kindness and zero treatment of human beings well I mean the way women were treated was abhorrent and so Mr. Smith was anything but that he was the exact opposite and he was just a great human being he was philanthropic he was modest for his whole life he'd given a lot of his money away charitably and then ultimately started doing it through the foundation but it was always anonymous and certainly certainly the big beneficiaries in St. Louis of his benevolence knew who he was and they'd come visit the house and it was fun for me to get to know the directors of museums and the garden and the zoo and things like that but he was just he was very modest and which is why I thought it was so important to tell his story and so I wound up when I we published the letter I sent it down to his daughter and she had just lost her husband and I didn't hear back for her for two or three weeks and I thought oh hell this is gone badly if she not only she liked what I wrote because she would have gotten back to me center and she called me three four weeks after I'd sent a tour and said yeah Chris this was the most wonderful thing I did I got very emotional I cried I stirred up so many memories of dad and you know anybody that knew I loved him and to be a friend of his and to be a mentee of his really and to be able to spend the hey the regret I have is I didn't do video recordings like we're doing now all of our conversations and there was so much we should there there should be a movie there there should be a book let's take a quick break here from today sponsors facts are facts like how contributing to employees financial security makes them want to work harder for their company in fact according to a 2023 study by principle 87% of employers say that better employee financial security means employees are more engaged and productive at work the fact of the matter is that employees want to feel financially secure in their future so consider this principle helps you invest in your employees by providing customized benefits and retirement plans to help keep your employees more engaged and productive when you take care of your team they take care of business that's a fact learn how principle can help you find the right benefits and retirement plan for your team at principle dot com slash benefits that's principle dot com slash benefits products and services offered by member companies of the principal financial group Des Moines Iowa for important information visit principle dot com slash disclosures foundation devices is self custody done right they build a premium grade hardware wallet called passport right here in the US and it's fully open source verifiable it's the most intuitive bitcoin hardware wallet designed with a UX reminiscent of a simple feature phone so you'll know how to navigate and use it the moment you pick it up get your bitcoin off exchanges and into your hands in just a few minutes experience the peace of mind that comes with taking ownership of your own keys after a massive may sell off during the bitcoin Miami 2023 the passport is back in stock at foundation devices dot com it's bitcoin only open source verifiable completely offline air gap security model gorgeous design craft premium build materials if you've been thinking about getting your bitcoin off exchanges this one's for you check out the passport link in the show notes below to learn more you want to speak a new language but haven't quite got the hang of it meet your language learning match babble you get a whole kit of effective learning methods that have been developed by real teachers in over 200 language experts your taught useful everyday phrases for every day conversation and you can test your pronunciation to beyond the comprehensive lessons on the app you can listen to podcasts or join live online classes with professional teachers to get the best speaking practice babble is designed for you to break down that barrier that makes you feel self conscious and for your knowledge to become hardwired in that way you feel comfortable and confident speaking the new language with over 10 million subscriptions sold and 60,000 lessons on the app conversations start with babble are you ready use our code investor spelled i-n-v-e-s-t-o-r and get a 12 month subscription for the price of six months visit babble dot com slash audio to redeem your code now that's babble dot com slash audio with code investor you can also find all the info on this limited time offer in our show notes all right back to the show there's a beautiful thing in your letter where you talk about what a giant of a man he was and you say shunning the spotlight in the extreme a model of living not within but under ones means humble brilliant hilarious and charitable kind to a fault and you talk about how he would give money to charity but it would always be anonymous and and you talk about how he was playing tennis to the very end albeit doubles in the end but was he couldn't quite cover the court the way he used to and so he had to resort to the doubles game yeah yeah and then you say also please take from the story the importance of saving thrift and living well within ones means and so it seems like there are a lot of lessons from him as an investor but also personally in terms of his courage his sense of service during the war his his modesty humility lack of lack of display and ostentatiousness and arrogance and stuff is that is that said to say if I had to pick a man I tried to pick a human being to model one's behavior and life after he'd be it and I know my my little segment of my letter didn't do justice to the giant of man that he was but I hope it was an ice tribute and it it really felt great and it meant a lot to be to be able to tell the story at least in brief the way I was able to do it in the letter and I'm really thankful to his daughter for blessing the project because I was you know so always so impressed with how private he was and how modest he was despite the wealth of me he didn't flaunt it and you know he was and he was he was such a curious guy I mean even after retirement from cheering the bank he had all these great projects going on and he was a voracious reader he probably he would he would have been a lot like Charlie Munger in that regard he was incredibly well read but he had he had these venture projects going on all the time he had a he had a smart card technology business and at the very end he thought we were going to trend toward needing to have digitization of health records and he had a medical card that had a smart chip embedded in it where you'd be able to store your medical records so he was working with Washington University here in town about some things that have come come to us and in other corners but he was curious to the end he was always trying to figure out what was going to happen next and I think you know for somebody that would have loved seeing how the next hundred years would have evolved it would have been it would have been Bob Smith he was truly was a giant of a man yeah and it's interesting he I read a couple of a bit trees of him the other day and there isn't much out there I mean there's something I think in a Princeton alumni publication in a local publication from the place where he lived and he died at 99 in 2002 and here we are 121 years after he was born 120 years after he was born and we're still we're still chatting about him it's an amazing thing right it shows that when when you meet someone who really is remarkable it leaves this kind of enduring mark so I'm glad to have a chance to talk about him I wanted to get a sense of what you think he saw in you because in some ways you were a kind of unlikely person for him to to pick up in that way and to entrust with his family's fortune after all of those years because you must have been about 30 right and you'd studied finance at the University of Colorado in Boulder and you'd worked at this bank trust company and you've managed money for a few years there and you managed a bounce mutual funder so you're clearly smart and driven and talented but but I'm wondering if there was other stuff like if the fact that your father was a marine and he had served in the Navy or if it was the fact that he played football at Princeton you played football very seriously at the University of Colorado where there was something that he saw in you that just resonated really deeply with him I don't know we immediately hit it off on the one I on the day we met I was in my office and received a call early afternoon from his nephew who said look I'm sitting here I'm with my with my uncle he said this is my name's Bob Smith and I'm with my uncle Bob Smith and we'd a friend of ours said we should get together and could we get together I reached for my calendar to set a date and I said sure I'd love for you so now I actually mean like right now today who's oh I want him driving out and we sat around for oh the afternoon and wound up going to dinner that night and so probably spend nine or 10 hours talking in you know he had I mean he loved the stock market and he loved businesses and I hadn't seen the portfolio but you know he would bring up all the companies that he owned and I suppose it might have been just my ability to talk about just about everything he owned in depth with just the work that I'd done just for the few years that I'd done an investor I was 29 years old we started the firm we started December just slightly before my 30th birthday but as I say we spent over a month month and a half talking pretty regularly and strategizing a bet and just getting an ohms of human being and yeah I'm not sure we get in a much of my life story at the time but it's from a personality standpoint and from a temperament standpoint I think we hit it off I loved his story about what he had done in 1928 I loved how he'd go about finding under businesses the the notion of minimizing the tax burden all resonated with me and you know what I had learned to that point and at that point I was in the Berkshire world when I finally too late discovered Berkshire Hathaway but I didn't follow Berkshire until 1996 when they when they issued the b-share or something found the stock too expensive I was stunned at the front page of the offering document when they did the b-share they wrote the chairman of the vice now he's not neither the vice chairman nor the chairman find the shares sufficiently you know reasonably valued or undervalued to we are we wouldn't recommend if we purchased our families but well who the world does this and was getting my mind around Berkshire and at that point he had read probably all the chairman's letters back to 1977 and so that resonated with me and I'd already developed my own thoughts on executive compensation and stock options and the way accounting was abused and yeah that that was very much a war and Buffett thing and that was very much a Bob Smith thing so I think it was just our I think was our interest in businesses and I find myself today my whole friend groups are folks that just love to sit around and talk about stocks and if we're not talking about stocks we'd kind of get bored and he and I loved to talk about the markets and stocks and and it was you know later as we were working together that the friendship really evolved and I got to really understand who he was as a man and anybody that's off to war and in his in battle and sees death and experiences friends dying usually don't talk about it and he'd said he'd rarely in his lifetime had talked about the war but for whatever reason he was very very candid and very open about that chapter in his past and I'd love war history world war two history revolutionary war history sauce fascinated with that but it was just his it was his to temperance it was it was his even keel approach you know he wasn't concerned that that he was missing out on the tech bubble he said I've seen this picture show before and it's been in battle and there was just a lot of commonality to the way we thought and looked at the world probably beyond the stock market and the economy but so it was a good fit for personality standpoint it was good but I think had read we've been in the same generation and known each other I think we would have been best friends so you started the simple Augustus investment group it was sort of late 1998 early 1999 you got launched so really this is about when I was starting very seriously as a financial journalist and so I remember living through this stuff and writing for magazines like Forbes and Fortune and Money and there was always this kind of credulousness in some of these magazines where they'd be writing about these crap companies that you know someone had just made five million dollars off their tiny investment and it was very it was very intoxicating and sort of head spinning and at the same time I I was kind of a born contrarian outsider and so I so I never owned any tech and I looked at it like this is just moronic and I ended up investing with Marty Whitman at the time and so I for me it all sort of seemed nuts but it was it was very intoxicating and I I was struck by the name that you chose for your firm because it was a sort of ironic nod to the fact that this was clearly above all that there was a parallel not only with 1929 but also with the 17th century can you talk about why you call the firm Semper Augustus what the what the historic connotations of this beautiful name actually are well it really was a contrarian bias and I don't know if that's innate if it's born if it's learned if it develops based on your your life history but I found myself very contrarian very skeptical from the get go I'm the first stock I bought shortly went bankrupt and that makes you fairly John just right out of the gate and so I've always been fairly skeptical everything I've read but I love I love finance financial history even in college I was reading everything I could trying to figure out the investing game and eventually got a kindle burger mania's panics and crashes and the extraordinary popular delusions and madness of crowd and all the Austrian school and during what was the first real mania in Virtula bulbs and Holland in the 1630s the Semper Augustus was the most inflated of the bulbs and their great stories about that episode and their debates to whether early was a bubble but it didn't there was a there was a bubble in real estate and there was a bubble in the economy and there was bubble and trade and from the extension of that was probably this group of collectors that like tulips and the Dutch have always liked flowers in any event the Semper Augustus was the most highly valued of all the tulip bulbs at the peak in 1637 and today's dollars I don't know what would have gone for three or four million dollars they say you could have bought a flat on the river and Amsterdam for the price of one bulb and what interestingly the bulb itself was genetically flawed it couldn't reproduce which was what which was what produced if you know the what the picture of the flower the red and white really streaking in the bulb but yeah I thought the and then part of the reason we got together mr smith and I was this sense that there was a bubble and the bubble was again first in blue chips the bubble was not the tech bubble yet the tech bubble developed but those big blue chips the GE's and the coax rolled over in 1998 about the time we were starting to farm so we couldn't have sold the portfolio we couldn't have done that at any better time and then in that last period is when all the small caps really got cheap in the bid caps really got cheap in some Japanese companies really got cheap in Berkshire itself really got cheap after the bought in January Berkshire got cut in half and it was only after the stock dropped by half that from three times book we paid 1.05 times book for it but the tech bubble by the end of 98 was raging and believing it was a bubble and what a fool to start a business in the middle of the bubble so the use of the emperor which I that always kind of thought I'd start a firm at a point and harbored that name oh my god somebody's gonna beat me too and I wish they did I was praying every day that nobody would beat me to the name some for Augustus I actually I dug out extraordinary popular delusions in the madness of crowds which is the book where I think you first read about the tulip momania bubble back in the 1630s and there's this beautiful passage in it that I where it's talking about how crazily overvalued the central Augustus was and how it says so anxious with the speculators to obtain them the one person offered the fee simple of 12 acres of of building ground for this particular tulip the Harlem tulip and then another guy bought one for a new carriage two gray horses and a complete set of harness then there's an amazing story that's worth telling just because it's so ridiculous which I'm sure is untrue but I think it's too good to fact check where some guy basically comes I think to deliver something to this labor labor yeah it's a sailor it says the sailor simple soul and he sees what he thinks is an onion and he takes it with him and he's he's sitting on a bunch of ropes and is eating the onion and doesn't realize that actually he's eating this unbelievably precious central Augustus tulip and so he ends up getting arrested for felony against this much and but then there's this really beautiful passage that I just wanted to refer to because it all bursts and it's so reminiscent this account from 1637 of what's happened in much 2000 when that bubble burst or with the nifty 50 or with more recently when when tech stock started to blow up or certain cryptocurrencies blew up and it talks about how suddenly the confidence starts to starts to go out of this this thing and people start to default and people are suddenly left with these these valueless things that nobody will take and it says the cry of distress resounded everywhere and each man accused his neighbor the few who had contrived to enrich themselves hid their wealth from the knowledge of their fellow citizens and invested it in the English or other funds many who for a brief season had emerged from the humbler walks of life were cast back into their original obscurity substantial merchants were reduced almost to beggary and many a representative of a noble line saw the fortunes of his house ruined beyond redemption and so there's something just so wonderfully resonant about it right like this this is just sort of a part of human nature and it just kind of repeats itself again and again it's done it for certainly the last four centuries and obviously much further back than that I thought we'd never see what transpired in late 99 early 2000 again the Janices of the world capturing half of all of the flows into the mutual fight complex and trailing the same 20 stocks that all treated it what we wound up being kathy would you know circa 2021 type valuations the excesses and accounting the excesses in compensation and you know here we are we did the same thing we've done the same thing in the last cycle and this last period here in the last year year and I have feels an awful lot like what happened the late 90s and even throughout 2000 you had the big break in March of 2000 and you had a recovery there's always a recovery about so it was 1929 the market fell from 381 to 41 but it recovered a 190 in change by 1937 then of course it fell off again but that was World War II but and you had a recovery in 2000 from March you had a big sell off and I don't think the S&P 500 hit its eventual high until September of that year despite a big sell off in the interim period and so you had the big sell off last year in the NASDAQ over 30% the NASDAQ 100 S&P was down 18 and change on a slow return basis and here you are these indices are all closing in on their 2021 closing prices you've had this recovery rally and valuations in some of the the real businesses we're starting to get reasonable I think a lot of the stuff that was so speculative is still somewhat washed out all this but you've got recoveries and businesses that really shouldn't exist that are at 100 200 300 400% this year and you know they're not near back to where they were so the generals the big five or seven companies every covered but that same thing happened when Microsoft first broke and Sun Microsystems first broke in Oracle first broke during 2000 they all had a big recovery back September and then it just ground down over the next two years 2000 or 2001 in 2002 so it was three years of pain but nobody believed it you didn't believe the first sell off and I think there's this abulliance today there's this bullishness that's return you know among the tech crowd in particular that believes that you know we're back and off to the races and as Bob Smith said of the 1920s you know I've seen the show before in history repeats and we're repeating it again and that's the extraordinary Carpool Adusions mass ground since Charles McKay and it's a wonderful read might might first read of it and I read it many times turns out to be the abridged version turns out there's a giant version which I've now bought three copies of and which I haven't read yet but it's it's going to be like reading War and Peace or the Bible it's it's a it's a pretty weighty Tom yeah it's really fun you don't know entirely whether it's actually accurate but as Tom Gannon might say it's directionally correct and it's it's uh it's elegantly done and one of the things that's very interesting actually is that I think I write about this briefly in my book that Sir John Templeton loved the book so much that he republished it through his Templeton foundation back in the 1980s and he wrote a forward and so I was saying in my book that that his forward basically offered a rational antidote to financial insanity and so what Templeton said in his forward is he said the best way for an investor to avoid popular delusions is to focus not on outlook but on value and so he talked about the importance of grounding yourself in very specific valuation measures and in a critical analysis of a company's fundamental value and that very much meshes with what you've done through your career I mean you're you're almost a maniac in your annual letter to clients where you you tear apart the financial statements of Berkshire in unbelievable detail and you're going into the footnotes and the and the like and and really explaining what the economic value of these businesses is can you talk about that the importance of in a way this whole other system of investing right on the one side we have the casino where it's full of these charlatans like you you've you've talked about charlatan promotion right whether it's the SPACs or crypto trading or meme stocks and the like all these things where people are somewhat unscrupulously making hundreds of millions of dollars from heavily promoting their SPACs or you're interviewing to massively overpriced funds and the like and in a sense your early your early life was a kind of introduction to the casino element of it right I mean back when you were a college the stock that you lost money on where you lost I think seven thousand dollars was something where you'd read about it in herd on the street in the Wall Street Journal and kind of rolled the dice and then realized oh god I knew nothing about this so in a way I see your career as a kind of renunciation of the casino element of investing and a shift towards what Templeton is talking about which is no ground yourself anchor yourself in fundamental valuation and that's what's going to keep you safe and this strikes me such an important thing to explore for our listeners because this is this is how they're going to protect themselves from charlatans and unscrupulous promoters and bubbles sorry it's a long-winded question but the stage is yours why no I think in retrospect probably the best thing that could have happened to me was having I was reading everything I mean I'd fall in love with investing when I had me from the engineering school to the business school at Colorado there were no investing courses we didn't have a student run fund this this was not Columbia MBA program this was academic finance via the booth school efficient market hypothesis finance was taught in a corporate setting so if you were running DCFs it was project basis and not on how to value a business but I was reading everything in the library in the fit in the into business school library I was talking myself at the tattered covered bookstore downtown Denver buying and reading all of the investing books that I could find I was doing a lot of technical analysis candlestick charting I'd gravitated toward billonials can slim method which was it's still a thing it's an acronym it's essentially a momentum-based strategy of when earnings are breaking out and a stock price breaking out that that's when you put your money to work and so that that's all I knew when I thought I knew enough but I'd read this heard on the street column on this Norwegian very large crude carrier company and well why not this makes total sense to me but so I convinced this retail broker walked into the office with all of my money my $7,000 which was some leftover scholarship money and everything I'd saved from my summer jobs in college and in high school and plunked it all down and the broker even bought a little bit and he said you know pretty well you should probably diversify if this is all of your money so this is such a sure thing but I had no idea what I was doing I had never read a balance sheet or an income statement had been exposed to financial statement analysis in the least and so you know when you lose all your money you realize good lord either need to get a way different hobby or I better figure out what the heck happened and so I had to write a letter over to Norway to get the financial statements and as I learned by reading them and I'm not sure I would I had no expertise but I realized this thing was so levered the structure of the business which was a liquidating structure they had these four ships they were working they were all they were going to run them around for a while and then scrap them and sell the scrap for a profit everybody was going to make a bunch of money but there was so much leverage they were such bad assets I learned two things I learned this was the bad business it was a bad capital structure and I also learned you know right so you have to you have to pay a reasonable price I hadn't been it hadn't been a reasonable business but over paid you could have lost a whole bunch of your money and so I've just very quickly you know as I learned realize the only way to protect yourself is with is with the the business quality and the price you pay for that business quality and so I became really a price zealot and when I found myself in a professional setting in the trust company in the old United Missouri bank it was a value shot and he was a bank so you know hundreds of stocks in a portfolio and the chairman of the bank who was not an investor mandated 25% cash reserves but there was there was fundamental analysis going on there were you know analysis of pees and price to books and price to sales and price to cash flows and dividend yields I'm not sure there was that much going on in terms of a genuine understanding of what makes a great business and the differentiation between a great business and a cyclical business which can be a great business at the right price but a terrible business at the wrong price I came to that all over the years but I got grounded very quickly and then the business itself trying to figure out how it works whether it's a good one and then ultimately the price you pay for it and the lesson that so many people learned in 99 and 2000 and that they learned a couple of years ago is even if you've got a great business yet that the wrong price is stashable to say you know the the the great business at the wrong price is a terrible investment let's take a quick break here from today sponsors you want to speak a new language but haven't quite got the hang of it meet your language learning match Babel you get a whole kit of effective learning methods that have been developed by real teachers in over 200 language experts your taught useful everyday phrases for everyday conversation and you can test your pronunciation too beyond the comprehensive lessons on the app you can listen to podcasts or join live online classes with professional teachers to get the best speaking practice Babel is designed for you to break down that barrier that makes you feel self conscious and for your knowledge to become hardwired and that way you feel comfortable and confident speaking the new language with over 10 million subscriptions sold and 60 thousand lessons on the app conversations start with Babel are you ready use our code investor spelled i n v e s t o r and get a 12 month subscription for the price of six months visit babel dot com slash audio to redeem your code now that's babel dot com slash audio with code investor you can also find all the info on this limited time offer in our show notes this episode is brought to you by alpha sense the AI driven market intelligence and search platform behind the world's biggest decisions are you still leaving alpha on the table the best of the best know that the right financial intelligence platform can make or break your quarter that's why alpha sense is the number one rated financial research solution by G2 with AI search technology and an extensive universe of public private proprietary and premium content you can stay ahead of key macro economic trends and accelerate your research efforts AI capabilities like smart synonyms sentiment analysis and smart summaries ensure you go even deeper on industry and company analysis from when to buy hold or sell investments to why alpha sense enables you to spend less time on manual fruitless work and more time on providing better analysis move faster than the market and beat phomo by visiting alpha dash sense dot com slash fs today that's alpha dash sense s c n s c dot com slash fs if your business earns millions or even tens of millions of dollars in revenue then you're in luck because it's your time to learn about net sweet we get it all businesses run into their own issues you fall behind teams get buried in work and it feels like you're putting out one fire after another in your search for truth if this is you you should know these three numbers thirty six thousand twenty five one thirty six thousand that's the number of businesses which have upgraded to net sweet by Oracle net sweet is the number one cloud financial system streamlining accounting financial management inventory HR and more twenty five net sweet turns twenty five this year that's twenty five years of helping businesses do more with less closer book and days not weeks and drive down costs one because your business is one of a kind so you get a customized solution for all of your KPIs or key performance indicators in one efficient system with one source of truth manage risk get reliable forecast and improve margins everything you need all in one place right now download net sweet popular KPI checklist designed to give you consistently excellent performance absolutely free at net sweet dot com slash study that's net sweet dot com slash study to get your own KPI checklist net sweet dot com slash study all right back to the show I was struck by two things that you said I sent a ridiculous amount of time of the last few days reading really through old writings of yours listening to lots of interviews and transcripts of your interviews and I was very struck by a couple of things that I think are really worth our listeners internalizing because they're so important and so fundamental and one is that you said prices the paramount driver of what we do and the other is that something you you alluded to a moment ago that I think it's worth pausing and dwelling on which is that you you have a dual margin of safety and the dual margin of safety is either price you pay and be the business quality and I don't really see a lot of people talking about both of those things in terms of margin of safety that it's not just the price you pay but also the quality of the business can can you talk about that a little because it seems to me a very important insight and I remember you saying to Jim Grant we're very disciplined on business quality and management quality so and likewise later you talked with with Peter Kaufman at Glen Air and he talked to you about his checklist of six agencies that you have to have to satisfy in order really to have a high quality business so this whole issue of quality is really critical it seems what's it's it's paramount to everything a lot of it can only be learned over time through repetition through making mistakes but it's very easy to start with the ballot sheet and simply discern leverage levels and within footnotes try to find off-balance sheet liabilities you know places where a culture is not run for the benefit of the owner the shareholder but it's run for management and so you spend your time in the proxy statements there figuring out what really drives managers and how they're compensated you're trying to find the classic value investor moat the thing that makes a business durable you wind up loving oligopolies you know places that are impenetrable but at the same time at least in in my world in our world you've got to have the flexibility to I think more broadly to find business quality again we own a fair number of cyclical businesses today but we've identified places where you've got some changing economics where you've gone from hyper competition to more of an oligopolie structure in the case of a commodity chemical business oil and here in St. Louis which we've made an awful lot of money on you know half the investing world hadn't heard of it and it's been public company for a century they've been a dividend aristocrats since the 1930s but it's a business that is in the chlorocoli world they take salt and a slurry of salt electrify it and make chlorine and caustic soda on either side of the bulk you all they've got a vinyls and an epoxy business through it and I saw this industry consolidate when down merge with Dupont you saw Olen pick up a bunch of assets for antitrust reasons which at this point then five six years ago made it along the low-cost player in this in this chlorocoli world vertically integrated as well by picking up the vinyls business and the epoxy business and what I realized was you're going to go through a period of a decade where nobody's going to build any supply and if we have population growth and industrial production growth Olen being the low-cost producer in the world you know China's not going to be a position to export product onto the market they don't have low cost feed stock natural gas the way an olen wood with its plants on the Gulf Coast with natural gas feed stock sitting right next to the plant in any event that that that scarcity that was developing became a margin of safety and I was able to look through what was a fairly encumbered balance sheet with the depth they had to take on you got to the pandemic and the business the stock got really cheap we were buying it in the mid to high teens the stock got down to ten bucks a share on 165 million shares market cap got down to 1.6 billion our basis in it was about two billion and on a normalized cash flow basis the business went in a kind of a mid cycle level due to an half billion in cash flow so we paid less than one one times cash flow for it but in the pandemic things the in the in markets for so many of their their product in the epoxy world the auto industry slowed in closed plants you know Boeing and Airbus closed so the pain some coatings businesses slowed in use for vinyls vinyl siding housing market housing construction slowed a bit and so you know the the most optimal thing to do with capital would would have been the stock by the stock back when it was that cheap but they had too much debt on the balance sheet was as the economy and the business recovered they've paid down the debt for over four billion to two point seven billion dollars but knowing that you have this coming supply demand and balance allowed you to look through what was probably a more levered balance sheet than we ever would have done to where it's now a pristine balance sheet on a mid cycle basis debts now one times cash flow the stock is up five action where we bought it and here's a business where again if you're not going to add capacity at all and in fact they've taken out a lot of their lowest margin capacity which has made the business even better than it was when I first started analyzing it they're buying the stock back they've gone in the last year and a half two years from 165 million shares out to 127 million and the stock at seven billion cap up from our cost of two billion is still treating it kind of a mid single digit to what I'd call free cash and so here's a place where you want these this management team buying the stock back at as low of a price as they can get it and so you're marginous at 20 years ago 10 years ago even I wouldn't have defined margin of safety in that setting but you really I didn't understand how this thing was going to evolve and as long as we were confident you'd make it through the pandemic we were comfortable making it a big size position and so it's not just it's not just the these lists of 50 companies they get put together with all the great businesses that we all know are great businesses that this is the master cards the cost goes you've at least in my world you've got to be able to look beyond the refiners which I was I was able to buy for almost free in 2000 when the energy component of the S&P got down to one and a half percent from what had been double digits just a few years prior you know European majors were shedding assets institutions endowments sovereign wealth funds were shedding their energy investments and the whole thing aligned where we were building developing real shortages of capacity in various corners of the world we have two little refining capacity we've cut the number of refiners in this country in half starting five years ago we started shrinking actual right refining capacity and so a business that was so cyclical that never would have been attractive to us they came very attractive because you started to say okay well what business business quality can be defined through something like a developing scarcity that's going to give you a lot of protection in the coming what would be cycle when you start to remove a bit of the cycle out of the cycle and so it's my definition of business quality is evolved over time we're still looking for the best businesses the ones that if you take our overall portfolio and put it together as though it's a company you know we essentially run no net debt on the collective balance sheet you know we've got about 10 percent net debt on the balance sheet versus more than 50 percent from the S&P 500 a lot of our companies have net cash they don't have debt on the balance sheet the intangibles of you know how ethical and how moral and how honest your management teams are how aggressive or not aggressively or they're accounting that becomes a huge component of margin of safety when you're defining business quality and when you put it all together really the last thing that you'd want to focus on is price but then you only want to buy these assets in these great businesses or these cyclical assets are these one-off special situations that a price that allows you to be okay if you're wrong under thesis and if the business doesn't exhibit the same quality or if the scarcity is you think that are coming in a cyclical world don't develop as you think they're developing and so price becomes really important and it gets lost on the investing curve at secular peaks it's completely lost on the tech crowd today this big recovery in the big five and the big seven or eight companies has seen the the what I call the fab five shrink from what was almost 25 percent of the S&P 500 at the in 21 they got crushed down 36 or 37 percent in 2022 they're almost back to their highs I mean Microsoft is back to an all-time high apples back to an all-time high and they're back to almost 25 percent you throw in the Vidya and Tesla in addition to the big five and they're 30 percent of the index and they're back to trading collectively at more than 30 times earnings and these are bigger businesses today and they were 10 years ago 12 years ago they're not going to slow but price matters I mean you may have seen the letter that I wrote that I think was interesting to to Jim Grant that I put out in January 2000 so we had just started the farm and we were in this bubble and I was so uncomfortable with what had developed in this tech world the market cap of the Nasdaq when I looked at this number I used to track I had a spiral binder and then I had multiple spark bars I'd go to the barren's business week section which used to be really thick it used to be thicker than what is now the entirety of barrens and they've removed a lot of that data but oh just by pencil just tracking you know hundreds of data points per week you know you took note of the fact that the market cap of the Nasdaq which was published in barrens I do infer that actually they were giving you the market cap of the New York Stock Exchange but the market cap of the Nasdaq when you look through to Microsoft's percentage you can back into how big the Nasdaq was this is how I did it the market cap of the Nasdaq was going to pass the market cap of the New York Stock Exchange in March 2000 even though 80 percent of the profits were on the side of the New York Stock Exchange businesses and so I penned this fun letter at the end of 1999 on January 1 2000 we published it with a series of predictions it was the millennium and people worried about clocks on computers and the meltdown of the world that was coming but I put out 12 or 13 predictions to the next 15 years thinking well yeah you're gonna get held the task for being wrong for 15 years if you make a 15 year prediction but I said the first prediction was Microsoft shareholders will lose money for the next 15 years from today's price and it had nothing to do with Microsoft being a bad business it was a wonderful business it still is a wonderful business it was simply the price on 20 billion in sales and a 38 percent profit margin so seven and a half billion dollars in net income the market cap was 620 billion dollars 31 times sales and 80 times earnings on a business that's not going to grow as fast as it had from its IPO 15 or 14 years prior you went through an extrapolation of well one if the market cap were to grow at the same rate well you'd be in the quadrillions of dollars and what if sales would keep growing at 45% then you know the business would essentially at a point consume the entire economy and so I was right and 15 years later you had a negative total return even to today start to finish you've made a single digit return on Microsoft which is now back to the purchase of number two largest company it's you back to 37 times earnings it's profit margin is recovered back to where it was in 2000 but paying that price you know lent at best a mediocre return in for 15 years it delivered a loss and so so so Chris applying that kind of lens to the current crop of fab companies you know the the Microsoft's the Google's the Apple's the Amazon's and the like if you were to make a similar prediction over the the next 10 years 15 years of places to avoid being places where if you're really anchored in valuation in the way that that you've had to be your entire career what do you avoid what what would you advise our listeners to say yeah this might be an amazing company it might be a great business and it could continue to rise but the odds are against you be very careful here what what would be a list of companies that trip off the the tip of your tongue that our listeners ought to be careful of well I'd be very careful of the businesses that that some of your software companies and a lot of what's in in the art portfolios where you don't have profits and you may not have profits where almost everything has to go right yet you're paying ridiculous multiples to sales I'd be it always be careful of paying big multiples to sales for profitless businesses but a video reminds me today so much of Microsoft low 23 years ago you know here you are with a transformational AI on a business that has been a very good business with their graphics chips but on what's trailing 25 billion in sales that's clearly going to grow very quickly over the next few years you had a market cap that hit 1.2 trillion dollars now we've got a short position on this thing but you go through the same math on trailing 25 billion in revenues if you grow those revenues at 20 percent a year let's say you wind up you wind up in a decade at at at 400 billion in revenues and then you take today's 20% profit margin and you could look at it growing the 30% look at it growing to 40% and in any of those scenarios if you if you grow the top line at 20 which is very difficult to do for any business for a sustained period of time and grow the margins to a very healthy level far above what a semiconductor business is normally going to earn it but if you allow them a 30 or 40% margin and then you apply a 30 or a 40 multiple earnings only then can you make a 10 plus percent return I mean you have to grow the margin to 40% double it from where it is today now they're a Wall Street analyst then in the next five years think the profit margin is going to get 50% and that the business is going to grow by 40% here maybe it does but when you start talking about 10 and 15 year periods of time and you start talking about paying it trillion to for a business that's doing 25 billion in sales on a 20% profit margin even if you get this immediate surge in top line growth and are immediate surge in profitability you have to presume a lack of competition I mean AMD there are other players in the chip world there's so much that can they can go wrong but only in the case where everything goes right when you extrapolate everything out can you get to a mid to high single digit return so I would say Nvidia you pay Nvidia today's price I'd say the same thing that I did about Microsoft today's investor in will lose money over the next 15 years and what it has to do with what about things like Tesla or any of the other big names are there things that just seem kind of strikingly obvious if you're if you're anchored in intrinsic value and the like rather than in momentum and hype and the like I'm not saying this about Tesla in particular I'm just wondering if there are other big names that leap out at you like that no I mean so I've got a very short I only shorten one account I'm not a good short seller I should I should never do it but we've actually made money on our Tesla short we have a very small Tesla short we've got a very small Nvidia short it's just we just recently put on it Tesla at what's approaching a trillion dollar market cap again I mean they're now at a hundred billion dollar revenue run rate everything has to go right and bothers me to no end and I have an LA Elon was out this morning singing the praises of analysts and one of them is a CFA and when they are they being arc put out their first research report on Tesla a couple years ago you had these wild assumptions about robo taxi and wild assumptions about the number of EVs that Tesla would sell on their market share and even things like you know they assumed within a five year period a Tesla was going to sell its own auto insurance and they'd be writing as much business as geico and progressive numbers two and three in the field are only slightly behind state farm having done this now for 90 years each and their latest report arc presumes in five years time four and a half years time now that in their base case Tesla is going to grow to a seven trillion market cap which is about the same market cap that the the fab big five sported just a month and a half ago in their bull case you get to nine trillion dollars Elon said today you think he's going to he's going to he's going to think his business becomes a nine trillion dollar business and he supports the robo taxi concept I don't get it I mean if you're going to be in the worth I mean so your auto manufacturer and you're grounded by conventional manufacturer margins and capital needs when you're building cars if they're really going to grow to to arcs base case base case in five years time 10 million vehicles you're going to need to help a lot more capacity than you have today that requires capital the beautiful thing that Elon did was talk the stock price up so much that they had several funding rounds they went to these at the market transactions when the cap got up to close to a trillion dollars and they got golden and others to sell five billion dollars here five billion dollars there at what was then two hundred three hundred times earnings you know twenty times sales it was almost free capital and it provided the money to build out Germany and to build out taxes but the full self-driving you know Tesla says you're going to be in production this year there's no way I mean you're so far from getting regulatory approval from the stuff being safe and then you think about the economic so if Tesla is the car manufacturer and we're going to sell cars at these wonderful margins that nobody in the auto industries ever been able to do but we're going to have software and so our consumer is going to pay a way higher priced and sticker because every upgrade our car is going to get better and better so it's not a thirty thousand a thousand dollar car but it's going to be a fifty thousand dollar car but it'll be a better car four years now that it is today because the software not sure I buy that and I really don't buy the concept of Tesla the full self-driving Tesla buying cars from Tesla the manufacturing side making wonderful margins now this car side which is the akin to running a yellow cab business or what's now in Uber well Uber killed the yellow cab medallions in New York City the Uber business doesn't make any money and the drivers if you look through to your actual overhead of insurance and depreciation and fuel costs and the opportunity cost of your driving in Uber versus going out and having another job the Uber driver doesn't make any money so but all of a sudden now we're going to full self-driving because it's going to be safer and everybody's going to adopt this and nobody's going to drive their own car but we're going to have wonderful margins on the FST side as well that supports what's now a nine trillion dollar market cap that's that's the number that these folks at Ark and now Elon's talking about the total market cap of the S&P 500 is thirty eight trillion dollars today but we're going to grow to nine you mean you're going to be you're going to be bigger than the 30% market cap today Tesla included that the big seven stocks make up of the S&P and we're going to get there in ARC's prediction for and a half years and Tesla says you ought not listen to anybody but ARC because there are analysis is really good well that's dangerous and that's puffery and you know you start to measure the integrity of management and the promises that are made you know I'd I'd steer it as far away from a megalomaniac at the helm of the business and that that's just not that's just not it's not setting the expectation bar with any level of reality but it now starts to border on hype and when the retail investor is the one that gets harmed by the puffery that that gets my dander up a little bit it's some of the behavior that we've seen in the SPAC world that with some of these charlatans that have really just been in business of enriching themselves and abusing the retail investor look if you're running a hedge fund and you want to drink the Kool-Aid and play the game find so be it but you know it's the retail buyer of stock that is the one that really bears the brun of the pain I mean the institution's plenty of them got wrapped up there are a lot of really great investors that drank the tech Kool-Aid in 99 that blew themselves up and you know they were down the full 80% with an Azdaq and price was not a thing with them you know it was all about well business quality when this this latest iteration everybody's going to be the next Amazon because you should get a whole pass for making money for an indefinite period of time because this technology is going to be so wonderful I mean everybody ought to go read Robert Gordon's book on the the economic history of the night it's the forget the title of the book I'm for estimated in my letter it's a really long book he's a Princeton professor this is the one that took you two years to read yeah I mean forever but it's a wonderful history and it essentially goes back to the great technologies both the industrial revolution and they were so transformative the all this AI and and SaaS software and even the internet is more incremental to real GDP growth per capita than some of those transformative changes were and then you've got to put it along perspective I wanted to ask you a related thing you you this this whole issue of these these great compounders these great businesses the truly a high quality businesses right you've owned you've owned a bunch of them over the years whether it was starting with something like Ross stores around 2000 or then Costco around 2004 Starbucks Nike these really truly truly great long term outstanding businesses and there seems there seems to be a kind of tension in your own investment career over how long to keep them and and what to do when you're truly anchored in this notion of intrinsic value what to do when a great business starts to get really pricey and and you've told the story a lot of the early mistake that you made in Ross stores where you bought it in 2000 for about 10 times earnings and then sold it in 2002 after make a hundred fifty percent and then watched it go up 25 fold and so this is something you've wrestled with a lot and I'm and I'm just wondering how you deal with it because it's kind of become almost an orthodoxy that there are certain businesses that are great enough that you shouldn't sell and yet over the years I've seen you cut back things like Costco a Nike almost like you can't bad to hold them because they just get too expensive. How do you how do you wrestle with this kind of eternal dilemma? No it's I can't bear to I can't bear to hold them at least in size that's well put when they get that expensive but what I've learned is don't eliminate a company you want to own forever from your portfolio and it's entirety. Be is it becomes that much more difficult to bring it back into the portfolio and we only bring in one two three new names year and to bring something new and you know generally got to have something that's going out on the other end it's not a perfect time to sell something entirely and bring something in it's just you find so many new things that you want to bring in because you've got a piece you like which you own the price doesn't matter now having trimmed the Costco position back and we still own a bunch of it in in taxable accounts. I'm not going to sell my 19 dollar. Cost basis Costco where we've made 19 dollars and special dividends another 20 dollars and regular dividends in the stock at 550 you know if you've got a taxable if you have a taxable investor where you're probably going to get a most we changed the tax code a basis step up at death I can't afford to pay the tax I mean I'm a buyer of the stock on a 25 or a 30 percent decline from from current prices but I mean Costco's traded as high as 50 times your next it's trading it over 40 times today I can't buy Costco but I can sure eliminate it out of a non-taxable account Nike which had gotten to be a we've made a lot of money in Nike it's it's a one half of one percent position and I'm chomping at the bit to bring it back in. Lew Simpson turns out who ran Geico's portfolio of course had adopted this theory at a point in life I've recently learned that he never wanted to get rid of his great businesses so I've got a handful of companies in the portfolio that I'm it's also part of our process William my turnover his average 20 let's call it 15 percent a year over the last quarter century if I'm bringing in one I brought in one new company all of last year it may be a third of our turnover is the elimination of the company from a portfolio and the Syphicles are going to all have to go at some point Olin's going to have to go at some point I can't own a business that's not going to grow at all for 30 years but I can trade that out of it in the interim but eventually it's got to go most of my activity is trimming the most expensive portions of the portfolio and buying the things that are the cheapest you can see what I've done with a dollar general over all the years we bought it back in 16 or 17 that I don't know high 60s maybe 70 bucks a share was trading in the mid teens the world thought Amazon was going to come along and the internet was going to come along and kill all retailers well dollar general has a whale of a motor around it given their their rural footprint given the economics of the median household that is their customer it I don't think that that at that price point and what they sell you can be displaced by the internet and so we found them out in a business that that went that went begging they've been taken private in 2007 and came back out with a bunch of debt no nine that that had to get worked down but it was a it was a wonderful business and all through it was a wonderful business and so we bought a bunch of it it made a bunch of money and they were a clear beneficiary when the pandemic yet I think it it's low in March the stock was down 12 or 13 percent and then it wanted to be all up a whole bunch for the year so you know where I'm I tend to now stay once I'm fully invested on a portfolio I tend to not raise cash I like to be fully invested when I'm buying Valero and I'm buying what was Holly Frontier now HFs and Claire and I've got to raise money I'll go to a dollar general that was then trading at about a full valuation and take it from a four percent position to a one percent position to free up three percent of the capital I needed to buy the refiners and so here you are fast forward well you've got some operational issues today with dollar general the tax repates are not what they are other customer of that business is essentially half of us household median income the business tends to do absolute worst right before recession in a recession the use of snap which is the food stamp program estilates and so dollar general winds up being a better business when the economy is at its worst well the economy was at its worst in the pandemic and so you know dollar general wound up doing way more revenues per store and way more profit per store than they had done and so some of that's now on the backside of that working off the states are one by one pulling back out of the surplus snap benefits that the federal government through the state's ways and so that's all going away and so you've got some you've got some things going over the stock is now kind of back to where it was when I was selling it a couple of years ago the business is bigger they've added a thousand stores per year so you're pushing 20,000 stores today but I'm making I just made dollar general a very big position here in the last month month and a half because it's now among the cheapest companies in the portfolio versus what was one of the most fully valued companies in the portfolio two years ago under the hood you don't necessarily sit if you simply look at a list of simple Augustus holdings but it's the value that's added by trimming the deer and buying the cheap at the margin that I think delivers an enormous amount of value over time and that's very much predicated on price and this has nothing to do with and I believe the the issues that dollar general is grappling with now operationally and on the regulatory front and on a little bit of changing distribution is they've changed the footprint of the stores and they're making their base store model a thousand square foot bigger 1100 square foot bigger than the typical 7400 I think this manager team is so good their board is so good Mike Colbert the chairman I've got to know he's phenomenal these are very good retailers they'll fix the current issues and again some of these issues are simply the flip side of the business being pulled forward being too good for a year and a half period of time now you're kind of back to where you were in 2019 on a margin basis it'll fix itself but opportunity cost I would throw if we're talking about business quality price that all meshes to where when you're a portfolio manager and moving money around and you're trying to put money to work that all boils down to opportunity cost and it's not so much any hard and fast multiple to earnings or to cash flow or to book or whatever but it's dollar generals one of the best names right now front and center in front of me and their corners of the portfolio that I've got a little more fully valued so when I'm buying DG I'm trimming other things in the portfolio I think it's how you wind up keeping the overall portfolio in a reasonable valuation at most of time all right folks thanks a lot for listening to the first half of my conversation with Chris Bloomstrand as I mentioned at the start there's much more to come so I ended up dividing this conversation into two episodes if you liked part one as much as I did I hope you'll also listen to part two which is titled lessons from Buffett and Berkshire Chris is one of the world's leading experts on Berkshire's way and he's extremely thoughtful in that conversation about the many unconventional things that the company does right including treating its shareholders honorably and fairly as true partners we also talk in that episode about what Chris thinks of Buffett's enormous investment in Apple how Chris manages his time and how he overcame a painfully difficult childhood to become a highly successful investor I'm deeply biased of course but I really don't want you to miss that second part of the conversation because it's just so full of valuable insights about investing in life and Chris is very candid and open and thoughtful in the meantime as always please feel free to follow me on Twitter at William Green 72 and do let me know how you're enjoying the podcast it's really always a great pleasure to hear from you until next time take good care of yourself and stay well study billionaires and the financial markets to access our show notes transcripts or courses go to theinvestorspodcast.com this show is for entertainment purposes only before making any decision consultor professional this show is copyrighted by the investors podcast network written permission must be granted before syndication or rebroadcasting