EM Talk: The Letter The World Waits Up For

Bryce: [00:01:27] Welcome to another episode of Equity Mates, a podcast where we break down the world of investing from beginning to dividend so that you can hopefully make some returns. My name is Bryce, as always. I'm joined by my Equity Mates. Alec the Ren, Renehan. [00:01:40][13.6]

Alec: [00:01:43] Yeah, I'm good. I'm good. I actually had a thought, as you were introducing me, that people would probably think my name was Ren. [00:01:49][5.9]

Bryce: [00:01:50] Yeah, I know. That's why I threw that in. [00:01:51][1.3]

Alec: [00:01:52] Glad we clarified that. [00:01:53][0.6]

Bryce: [00:01:54] All right. Here we are again with the learn to invest in 15 minutes or less. And our theme and topic for this episode is Warren Buffett's letter. Now, what does that mean? No, he didn't write a letter during the week, although we have tried to reach out to him many times to come onto the show. And unfortunately, we've never heard back. But we're going to be discussing Warren Buffett's letter. And for those of you who are unaware, it's one of the most highly awaited releases from a fund manager every year. And he releases a letter to his shareholders and pretty much explains in good detail and in very descriptive language his decisions for the year and his view on the market. And Ren stays up till midnight every year to wait for the release of this personally from Warren. [00:02:39][44.7]

Alec: [00:02:39] Like Christmas. [00:02:39][0.2]

Bryce: [00:02:40] Yeah, and he's one of the best in the world to read it and analyse it. [00:02:44][4.1]

Alec: [00:02:44] I put a stocking out and milk and cookies just like for Santa. Yeah. [00:02:48][3.9]

Bryce: [00:02:48] And he hates this thing apart word by word. And then up now is his time to shine with a few of the highlights from Warren Buffett's letter of 2018. So I have two major takeaways and I'm not sure what you have planned, Ren. But let's get stuck in. [00:03:05][16.8]

Alec: [00:03:05] Yeah. Before we start, if you're Googling it, it's actually his twenty seventeen letter, although it was released in twenty eighteen. The second thing is, so these letters are it's not just Warren who writes them. Obviously he's much famous for them. But if you're interested in investing, if you're interested in certain companies, it's a great resource to look out for. So Jeff Bezos is the head of Amazon. His letters have become quite famous. Most fund managers will write a letter. Some won't be made public. But if you're a shareholder, you can get them. Otherwise, just Google them and say they are public because they are really interesting getting different people's thoughts on the markets or thoughts on business or thoughts on whatever. And given Warren Buffett is the greatest capital allocator of all time, he's definitely someone we want to read. [00:03:52][46.2]

Bryce: [00:03:53] Yes. And get on the show. So, Warren, if you're listening, reach out. [00:03:55][2.9]

Alec: [00:03:57] All right. So why don't you kick us off? What was your number one takeaway from Warren's twenty seventeen letter [00:04:02][5.7]

Bryce: [00:04:03] that he got a twenty nine billion dollar Kikka from the US tax cuts. [00:04:06][2.9]

Alec: [00:04:06] Yeah, that's nice. Isn't it good [00:04:09][2.9]

Bryce: [00:04:10] that so for those that are unaware, Trump recently decided to drop the corporate tax rate in the United States of America down to 15 percent. I think it was that right, Ren? [00:04:22][12.1]

Alec: [00:04:22] No, not fifteen percent. He wanted twenty percent. And I think they landed at like twenty one. [00:04:27][4.5]

Bryce: [00:04:28] Twenty one. Right. And obviously his reasoning for doing so is that companies are going to be paying less tax and then hopefully they reinvest that back into the business or pay more wages or whatever it is. So Buffett had sixty five dollars billion revenue generated from his Berkshire Hathaway company last year, but two [00:04:46][18.5]

Alec: [00:04:46] point sixty five. Sixty five billion profit, yes. [00:04:48][2.0]

Bryce: [00:04:49] But twenty nine billion of that was from this US tax cut. So essentially that what he's saying is that reduction in tax rate was resulted in him paying twenty nine billion dollars less tax than he would have. So that's a nice little kicker and one that I'm sure he will be reinvesting back into the business because that's very much his philosophy. So that's what I'll kick off with. Ren, what are your thoughts on that one? [00:05:13][24.4]

Alec: [00:05:14] Yeah, well, building off that, it's interesting to note that without that twenty nine billion dollar tax cut benefit, it would have been it's been a pretty quiet year for Warren and Berkshire Hathaway. And it's just interesting that it seems that when markets are really hot, people come out and start, you know, questioning Warren like it happened in the eighties when everyone was making heaps of money and he was seeking to value investing. It happened in the lead up to 2000 when everyone was making some money from the tech boom. People started questioning Warren Buffett. And it seems that after a quiet year, people would, you know, not surprise. But, you know, he didn't have a he didn't have a great year in terms of the numbers. And people are starting to whisper. But I think that might be just saying where we are in the cycle. And I don't think Warren is saying a lot of value out there. And the reason that we can say that he's not saying a lot of value out there is that he has a hundred and sixteen billion dollars in cash and short term US bonds, and that is just waiting for an opportunity to buy something [00:06:20][66.6]

Bryce: [00:06:21] good he's actually looking to make. A massive purchase, isn't it? [00:06:24][3.4]

Alec: [00:06:25] Yeah, but the thing is like, hey, people question whether he's the best investor of all time. No one, I think can question that he's the most disciplined investor and his discipline to just wait, wait and wait until there's a good company that will come up the compound every year and that is valued at a good price is pretty unbelievable. So this time last year, he had eighty six point four dollars billion in cash and treasuries waiting to be deployed, which would be burning a hole in your pocket if you had that much money. But rather than buying something, he waited and he added another 30 billion dollars to that pile. And everyone expects him to make a big splash. You know, with one hundred sixteen billion dollars, you could buy anything. A company. Yeah, yeah. It's ridiculous the way he's disciplined. [00:07:16][51.3]

Bryce: [00:07:17] He made a couple of massive purchases in Apple. And Apple is now his second largest holding. But what's also interesting with your disciplined comment there, Ren. So he made one purchase. I can't honestly remember the time, but it was some point during last year and absolutely nailed the timing of that purchase. And after making that purchase, Apple stocks just went on an absolute run and he made almost a Dollars billion profit on on what he bought. And then we had the 10 percent correction and the price obviously fell to a point where he was happy to buy in again. And so obviously off the back of that discipline thing, he obviously waited for a price, an entry point that he was happy with and he's bought in more. So it's interesting because I'm pretty sure at one stage he said it was never going to buy so classic. [00:08:04][47.6]

Alec: [00:08:05] Well well, his thing is that he never buys tech stock. That's right. He doesn't understand tech, but [00:08:10][5.5]

Bryce: [00:08:11] he's getting a bit better. More of an understanding. [00:08:13][1.5]

Alec: [00:08:14] Well, I think I think it's pretty fair to say that Apple is not so much a tech stock anymore. You'd almost call it consumer discretionary. Yeah, I mean, phones, maybe consumer staples. But it's just like, you know, it is it is a it is a brand. It is a consumer product. All of their financials then open to be analysed as just a company that sells, you know, a good or a service rather than a tech company where you have to understand and value the technology to understand the value of the company. So I think that's that's why a lot of people suspect he is investing in Apple. He also invested in IBM, I think it was last year and or a couple of years ago when he sold it last year. And IBM hasn't done that well. And so he's obviously dabbling in more and more tech focussed businesses. But Apple is a great example of a success. He's had thought he hasn't had a clean track record. IBM was, I guess you'd call it a failure or mistake. But, you know, when you go one hundred sixteen dollars billion in cash, you can you can afford to have a have a fund and make some mistakes. [00:09:22][68.0]

Bryce: [00:09:22] Yeah. So one thing that stood out to me in his letter off the back of that one hundred sixty five billion in cash is the fact that he's got no debt and well, he makes a strong case that I haven't really heard him talk about before. And it was all about not leveraging to buy stocks and what that means, not borrowing money to increase your positions in stocks. So he showed a table that highlighted the four times in the history of Berkshire Hathaway that his stocks have been absolutely hammered and the value of his shares were down upwards of 50 percent. And his reason for showing that quote was this table offers the strongest argument I can muster against ever using borrowed money to own stocks, he wrote. There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions are immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary, and an unsettled mind will not make good decisions. So he concluded, the big drops are great opportunities for those who are not loaded to the gills in debt. And obviously he's got one hundred sixty billion dollars waiting for a bit of a drop to come. But I love this quote that he ended with this sort of commentary in his letter, and it's a passage by a guy called Rudy Kipling, some 19th century poem. But this is a clear example of how popular obviously thinks. He said if you keep your head when all about you are losing theirs, if you can wait and not be tired by waiting, if you can think and not make thoughts, your aim, if you can trust yourself when all men doubt you, yours is the earth and everything that's in it. So he's obviously just sitting there calmly waiting, waiting, waiting, and he's just going to blow this one hundred sixty billion when the time is right. [00:11:07][104.3]

Alec: [00:11:08] That was a beautiful poetry reading, you've got to say. [00:11:11][3.0]

Bryce: [00:11:13] Do you have any comments on that, [00:11:14][0.9]

Alec: [00:11:15] on the poetry, [00:11:15][0.3]

Bryce: [00:11:17] on the leverage? [00:11:18][0.4]

Alec: [00:11:18] You know, I mean, look, it's a it's a good general rule. Don't take out debt when you don't need to like obviously, I mean, we have friends that trade on margin so they leverage their trades and it's all good and well until they're wrong and they have a margin call and the bank needs them to put more money in the account. And I sleep a lot better at night just knowing that I've only invested my own money and not the bank's money. Yeah. [00:11:43][25.2]

Bryce: [00:11:44] Do you have anything to add? Ren. [00:11:45][0.9]

Alec: [00:11:46] Yeah. To two quick last ones. I know where we're sticking to this 15 minutes. So the first one, I just think again to comprehend how unbelievably successful he's been for such a long period of time over the 53 years since Buffett took over Berkshire Hathaway, a failing textile mill that per share book value has gone from nineteen dollars to two hundred and eleven thousand seven hundred and fifty dollars. Phenomenal. And what that means is that it has been compounding at an average rate of nineteen point one percent a year. So on average, every year the company's value increases by almost 20 percent each and every year, which is just a phenomenal, phenomenal achievement over such a long period of time. And that's why he's considered the best. Just because, you know, paper, a fifty three year period has had that level of consistency. All I'll back him in awe of anyone who wants to argue for someone else. And I guess speaking to that, the last thing I wanted to mention was someone did bet against Buffett. There was someone there was a money management company that bet on that. Hedge funds could beat the index, the S&P 500 index. So Warren took the S&P 500. That put a million dollars on this bet. And what happened was Warren put a nominal amount of money in the index and then this company could pick five fund of funds. So that's a fund to fund is a fund that invests in multiple hedge funds so they could pick five fund of funds to go up against the S&P. Warren smashed in the S&P 500 index rose one hundred and twenty five percent. Warren won the million dollar bet and gave the money to charity thought. Look, it's just another example of how he's he's very insightful and he's more often right than wrong. [00:13:48][122.0]

Bryce: [00:13:48] Now it's not. So you included the letter in our thoughts Dollars on Monday that we just had. So for those that want to get access to it, sign up to our thoughts, Dollars on our website. And we've also got an archive of the potentially [00:14:04][15.2]

Alec: [00:14:06] Equity Mates dot com slash thought starters. You can say all old additions and you can sign up so you get new additions direct to your inbox every Monday. [00:14:14][8.2]

Bryce: [00:14:15] So this is well worth having a look at this letter. It's only six pages long, so usually they're about thirty. So he obviously ran out of it this year. But it's very easy to read. It's very informative and gives you some great insight into how arguably the world's best investor thinks. So thanks for listening to this episode. We hope you enjoyed it. And journeying through our next one [00:14:38][23.3]

Speaker 5: [00:14:39] Equity Mates in the people appearing in this programme may have positions in the companies mentioned. This is general advice for me. Please speak to a financial professional to understand how they pertain to your individual situation. [00:14:39][0.0]

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