You don’t have to pick one winner to be a good investor | Wealth Builders Pt 3

Bryce: [00:00:15] Welcome to another episode of Equity Mates, a podcast that follows our journey of investing and whether you're an absolute beginner or approaching Warren Buffett status. Our aim is to help break down the barriers from beginning to dividend. Now, while we are licensed, we are not aware of your financial circumstances. All information on this show is for education and entertainment purposes only. Any advice is general. But with that said, my name is Bryce and as always, I'm joined by my equity buddy, Ren. How are you? 

Alec: [00:00:45] I'm very good, Bryce. Great to be here for our third and final episode of our Long Term Compound, a series, our Thursday episode cover while we go and take America by Storm. We're recording this so we may not have taken America by storm at all. We may have meekly got off the plane, sat in the back row of Berkshire Hathaway's conference and then got on a plane and come home. But we're pumped and we're doing this series on long term compounders looking at some of Warren Buffett's best investments, the companies that really drove his wealth and unpacking what we can learn from them. 

Bryce: [00:01:23] So if you've just joined us, welcome. We kicked off the series with perhaps one of his best investments and one of his longest Geico. And the lesson was doubling down on your best ideas. He had an investment of about 45 million and turned into what a staggering the companies now a 50 billion or thereabouts friend so well played to Buffett. And then in the second episode we actually looked at the perils of selling too early and used the case study of Warren buying 5% of Disney for 4 million and selling it a year later for 50% return of 6 million. But it could be worth 9 billion today. And then that brings us to today's episode, where we are actually looking at two key lessons. The first is letting your companies go to work and then closing out with You don't have to pick a side.

Alec: [00:02:13] So Bryce, the companies that we're going to be looking at today for letting your companies go to work. We're going to be looking at Moody's. And then finally, you don't have to pick a side, Visa and MasterCard, although there's actually a heap of examples here that we can touch on. But let's start. Let your companies go to work. Moody's is the company we're talking about. Let's start with the investment story. How did Warren invest in Moody's? 

Bryce: [00:02:43] So Ren, Back in 1999, Buffett invested in a data analytics and credit information business called Dun and Bradstreet. 

Alec: [00:02:51] Heard of them? 

Bryce: [00:02:52] Yes.

Alec: [00:02:53] They're down 58% in the last five years and a third in the last year. Not just before this show. Didn't know what to put it in. 

Bryce: [00:03:01] They are Still listed. Yes. Dun and Bradstreet. But then in 2000, there was a bit of pressure from shareholders and industry, too, for Dun and Bradstreet to actually spin off one of their subsidiary businesses, which was Moody's. So they spun it off into a separate company. Now, when this happens, you are entitled to getting shares in the newly spun off company. Now, an example here in Australia, most recently in my memory would have been Woolworths spinning off Endeavour. Endeavour Group, the liquor business and also Wesfarmers spinning off ColesIn both instances, if you are a shareholder of Woolworths, if you're a shareholder of Wesfarmers, you then also got Coles shares and Endeavour shares.

Alec: [00:03:42] Spinning off is a confusing metaphor, Perhaps a more useful metaphor for people that don't quite understand. Is splitting off. 

Bryce: [00:03:49] Splitting off? 

Alec: [00:03:50] Yeah, Woolworths was one company and they split themselves into two companies and as a shareholder of Woolworths, you got shares in both companies. Yeah. And so that's what Warren did. He'd never invested in Moody's, he invested in Dun and Bradstreet and they owned Moody's. And at some point they said we're splitting Moody's off into its own company. And Warren, you own shares in Dun and Bradstreet. Here are your shares in Moody's. And it's actually gone on to be one of his best investments ever. Some argue, in fact, his best ever. 

Bryce: [00:04:20] Some argue, yeah. So he ended up owning at its peak when it was split about 20% of Moody's. And it was actually a pretty good spin off because Dun and Bradstreet at the time was actually a pretty not dodgy, but it was a floundering business. Not going so well, but the business of Moody's was actually incredibly strong, so it was a great result. He now owns 25 million shares in Moody's, which is about 13% of the company, and the company has a market cap of $60 billion. 

Alec: [00:04:52] So Buffett originally spent half a billion dollars buying those Dun and Bradstreet shares, and his stake in Moody's is now worth over seven and a half billion. I think he's topped up his Moody's position over time. 

Bryce: [00:05:06] Big time. Yeah. Yeah. Doubling down on these good ideas. Well, he loved the company.

Host: [00:05:10] What was so attractive to you about Moody's when you don't even use their product?

Warren: [00:05:13] Well, but we. We are forced to use it in terms of our own ratings. I don't use it in terms. Making my own credit judgments. About other credits. 

Host: [00:05:21] That's what I'm talking about. 

Warren: [00:05:21] And I'm ten or. Ten or 12 years ago we bought Dun and Bradstreet, which consists of two really good businesses Dun and Bradstreet and Moody's. Moody's being the better business because Moody's basically earns extraordinary returns on invested capital. It has a freedom to price and it's got a wonderful business and that's why we don't appreciate that's a good business to sell. We bought it ten, ten or 12 years ago. 

Host: [00:05:43] Purely. Look, I don't smoke, but I own Philip morris kind of decision. Okay. That much I get A lot of people here today are sying. 

Alec: [00:05:50] So, Bryce Moody's people may have heard of it. You're certainly in one today. What is it and why was it such a good long term wealth builder? 

Bryce: [00:06:00] It's a massive financial services business. It's made up of two parts. It's got Moody's Investor Services and this is the primary part of the business. It's the credit ratings. Credit ratings are really important and Moody's applies a credit rating to many financial institutions. 

Alec: [00:06:16] Yeah, you may have heard about credit ratings in the news in relation to governments like, you know, state governments especially are trying to do a lot to keep their Double-A credit ratings. The US Treasury. So would be triple-A credit rated that like you might Equity Mates might be triple B credit rated. These credit rating set the price at which government institutions and companies can then go and borrow money. 

Bryce: [00:06:43] Yeah, Or lend. 

Alec: [00:06:44] Mainly borrower. 

Bryce: [00:06:45] Yeah, it gives you access to capital. So companies pay Moody's to provide them with a rating. That's how Moody's makes their money. And Buffett actually copped a bit of stick because he was a major shareholder of Moody's and Moody's would provide the credit rating for Berkshire. Lot f interest. 

Alec: [00:07:06] Let's put it In copping a bit of stick around credit ratings because Moody's had a big role in the Global Financial crisis.

Bryce: [00:07:12] Big time.

Alec: [00:07:12] So we'll get to that. 

Bryce: [00:07:13] The second part of their business is Moody's Analytics. They provide intelligence and analytical tools to support management. So two parts to the business, but the ratings agency is the one that really attracted Buffett and is what has been driving the success of the company for a number of reasons. It has a really wide moat. It's actually apparently quite difficult to break into this market. They're now sort of really two big players in the industry, Moody's and S&P, Standard and Poor's. 

Alec: [00:07:43] And they each have about 40% market share. 

Bryce: [00:07:46] Yeah. So to break into that is going to be quite difficult. So in terms of having a strong competitive advantage, that's one of the reasons it's been pretty good. I guess it's built a reputation and it's built a reputation of reliability, accuracy. So has a stronghold in the industry. 

Alec: [00:08:03] Yeah. And if you wonder why that is the case, let's say that you wanted to start a rival ratings agency and we said Equity Mates is now giving credit ratings to major institutions. No lender is going to look at the Equity Mates rating and say, Oh, well, I can love the New South Wales Government at 4% interest because they're a low risk investment. The Moody's and S&P ratings agencies have so much power because they have so much trust in their brand. Yeah, and then the like, the networks that they have in finance, it's not a network effect per se, but I think you could maybe argue no, probably not. But yeah, they've just built this moat from that brand. 

Bryce: [00:08:46] Yeah, absolutely. So they've got a big moat and then pretty stable cash flows. And just similar to the first episode where Warren was attracted to businesses that are non cyclical, similar situation here. Companies need to consistently have their credit ratings I guess. Check? 

Alec: [00:09:04] Sorry, I just thought of another part of their moat, which is that having everyone have a moody's rating or having everyone have an S&P rating allows different companies and different institutions to be compared against each other. It would be useless if all of these different companies were getting rated from different agencies because it'd be like, what is an Equity Mates double? I mean, compared to A moody's, B compared to a Commonwealth Bank ratings, double B Anyway, I think we've made the point. 

Bryce: [00:09:38] So both are not non cyclical, stable cash flows, high competitive advantage and Moat obviously leads to a pretty decent profit margins and high returns on capital. So it was a pretty attractive investment in 2021. They write it over 35,000 organisations. So as you said, when 40% of market share, Yes. However, it wasn't all plain sailing. 

Alec: [00:10:01] No. So he got Moody's shares in 2000. Hey, being Warren Buffett in 2008, the global financial crisis happened and Moody's and S&P were right in the middle of this. Why? Because they were giving good credit ratings to. Terrible credit products. And those were the mortgage backed securities that. All these investment banks and all these institutions we're investing in that ultimately collapse to an America's housing market collapse. Moody's and S&P were meant to be reviewing these products, and if they were bad products, giving them bad ratings. But they didn't. 

Bryce: [00:10:44] No. And there was a quote from an analyst who used to work there, and they said that post the spin off in 2000, the mood really changed. The analysts suddenly felt that their priority was to actually help gain market share rather than actually get ratings Right. 

Alec: [00:11:02] And in the Big Short movie, there's that saying where I think it's a spectacle in Michael Scott. Steve Carell is speaking to the analyst from one of the ratings agencies, and she's like, what are we meant to do? If we don't give them a good rating, they'll just go right down the straight to our competitor. Yeah. I mean, what you meant to do is both give them bad, right? Anyway, that Moody's and S&P recovered, Warren got dragged into a congressional hearing. They did. But ultimately, these two companies have sort of kept on keeping on.

Bryce: [00:11:41] And interestingly, at the congressional hearing, you got a bit of insight into how. You know, this wasn't the story of Geico, where he'd been to the movie offices and really done a whole lot of due diligence. He said he'd never been to Moody's. He doesn't even know where they're, like, located. He just knew that they had a pretty extraordinary business model. He did change his tune a little after the financial crisis and thought that they were no longer as bullet-proof as they previously were. But he bought in 27 times. So.

Alec: [00:12:08] So here's the numbers from the start of 2007 to the start of 2009, Moody's fell 70%. Their share price fell 70% from that time from the start of 2009 to I have a guess about how much they've gone up. 

Bryce: [00:12:27] 280%. 

Alec: [00:12:28] 1,280%. So you're almost right. You just missed the thousand in front of it. 

Bryce: [00:12:35] Wow. So Ren, what's the lesson here? 

Alec: [00:12:38] Let your companies go to work as an investor. You have thousands of people working in these companies to make you more money. BHP employs 80,000 people. Commonwealth Bank employs 50,000 people. CSL employs 25,000 people. Woollies employs what, 200,000 people? All of these people are incentivised with bonuses, with career progression to grow the company and growing the company grows the share price. And that might be acquiring things that might be spinning companies off, that might be inventing new products. And you as an investor can sit there and do nothing and let those people go to work for you. It's pretty powerful. And in this instance, Warren got shares in a spin off, didn't do anything, didn't visit the office, as you said, and just sat back and let the Moody's team go to work and make him more money. 

Bryce: [00:13:39] He was still with the belief that obviously the spin off company was a good company. Of course. Yeah. Yeah. I think that history shows as well, when companies are spun off, the one that is spun off generally outperforms as well in the shorter term. So sub lessons and that's just a little. 

Alec: [00:13:56] little sub lesson. 

Bryce: [00:13:57] For us. Anyway, Ren, we'll take a quick break. And on the other side of this, we're going to look at two companies that have delivered 878% and 1,440% returns for Warren Buffett. 

Audio Clip: [00:14:12] Sun Tzu, The Art of War. Every battle is won before it's ever fought. Ever wondered why fund managers can't beat the S&P 500? Because they're sheep and she'd get slaughtered. 

Bryce: [00:14:28] So Ren, we've just covered off the story of Moody's. Moody's in letting your companies go to work and we're going to spend the second half of this episode looking at how Buffett has obviously identified a thematic, or at least Berkshire has identified a thematic. And rather than going all in on one company and that thematic has played both sides, MasterCard and Visa. Yeah, not one or the other, but both.

Alec: [00:14:51] Yeah, that's right. Bryce. It's this isn't sport. This isn't politics. You don't have to pick a side when it comes to investing. You can have a little bit of both and you can make money if one of them does well, if both of them do well, if all of them do well. And Warren Buffett has a habit of doing this. He owns the three major credit card players he bought American Express in 1998. I think he actually bought American Express way back when in the salad oil crisis. But then in 2011, the classic example of this, he bought Visa and he bought MasterCard. Yeah, but that's not the only example in 2016. Warren Buffett, long time critic of investing in airlines. Said 

Warren: [00:15:39] You couldn't take a cover industry. You know, ever since Hormel went up. And I said, you know, anybody really been thinking about investors they should have that will shoot him down. It can save everybody a lot of money for a hundred years. You can go to the Internet and type in airlines and bankruptcy and you'll see that something like 100 airlines in that general range have gone bankrupt in the last few decades. And actually, Charlie and I were directors for some time of USAir, and people write about how we had a terrible year. And it was one of the dumbest things I've ever done. 

Alec: [00:16:20] But in 2016, Buffett and Berkshire Hathaway buys all four major American airlines. You don't have to pick a side.

Bryce: [00:16:27] No, pretty sure, though, he sold them pretty soon after. 

Alec: [00:16:30] Me. No, I reckon he sold them for a loss in Covid. 

Bryce: [00:16:33] Yeah, like he didn't do well from airlines. 

Alec: [00:16:36] You don't have to

Bryce: [00:16:39] I lost a lot of respect for Warren the day he bought four airlines. 

Alec: [00:16:42] Did you? He's never had any respect to you, so. 

Bryce: [00:16:47] I thought he. Yeah, it felt like a fine. Fine. My play. 

Alec: [00:16:51] Okay. Yeah. Like there was a fear of missing out on massive airline gains in 2016. I think I saw a lot of 

Bryce: [00:16:59] All four like. Come on. 

Alec: [00:17:00] I don't think. He would have been worth about $80 billion at that time. And I think you got FOMO. If you have $80 Billion.

Bryce: [00:17:06] I think you do. 

Alec: [00:17:07] Only one way to find out. 

Warren: [00:17:09] It's hard to understand Costco either, you know, I mean, there are certain fundamental models out there that do not take you don't have the kind of ability that quantum mechanics requires. You just have to know a few simple things and really know. 

Alec: [00:17:22] That Costco has been a long time love for him and in particular for Charlie Munger. And then they also bought Kroger in 2019. Costco and Kroger are competitors, but as an investor, you don't have to pick a side. 

Bryce: [00:17:36] Do you have examples in your portfolio of one and the other. 

Alec: [00:17:39] So I own Woolworths and Coles. Yeah, I are. And this is a good test for how well I know my portfolio. Well, all of the ETFs that I own. 

Bryce: [00:17:52] Overlap. 

Alec: [00:17:53] With, you know, like my S&P 500 ETF has Apple, Microsoft and stuff in it. Yeah, Yeah. I've got rival fund managers. 

Bryce: [00:18:02] Oh, quite the same. 

Alec: [00:18:03] I'm trying to think if there's any other I'm sure there are, but I just can't quite think of them. Oh, like I own Shopify and Amazon. What about you? You got have example on this?

Bryce: [00:18:12] I Don't think I do. Not a single stock level. 

Alec: [00:18:15] You reckon?

Bryce: [00:18:16] Yeah. No, I'm thinking I don't have Coles, I've got Woollies. I've got. That's a good question. I can't really think of. 

Alec: [00:18:23] Oh yeah. You're putting me on the spot. Yeah.

Bryce: [00:18:26] Like Evan Bayh. I don't, I don't like the Hilton. Um, so no, I don't think, I don't think so. 

Alec: [00:18:35] What about Amazon and Microsoft? 

Bryce: [00:18:38] Yeah. 

Alec: [00:18:39] There you go and Google. 

Bryce: [00:18:40] And Google. 

Alec: [00:18:41] There you go. The three big web services players. 

Bryce: [00:18:44] True? Yeah. Um, cloud computing. Anyway, Yeah. 

Alec: [00:18:49] Veolia and clean oil. 

Bryce: [00:18:53] No. Do you own any of those?

Alec: [00:18:53] No. So, Bryce

Bryce: [00:18:55] So what's the lesson? Play both sides. 

Alec: [00:18:58] Let's go back to Visa and MasterCard, the classic example of you can play both sides and you can make money on both sides. Berkshire Hathaway bought both in 2011. Since then, I think until 2022, those numbers are from. They have made 878% on Visa and more than 1,000% on MasterCard, which comes out at 24% per annum for Visa and 27% per annum for MasterCard since 2011.

Bryce: [00:19:28] Yeah. Wow.

Alec: [00:19:29] So that's pretty good.

Bryce: [00:19:30] Solid returns for those companies. 

Alec: [00:19:32] Visa And MasterCard. Yeah, actually, that's another one I own both Visa and MasterCard. Sorry. Uh oh. 

Bryce: [00:19:40] Did you know Ren that in 2022? He actually sold down parts of those companies. 

Alec: [00:19:45] There you go. 

Bryce: [00:19:45] And did a pivot. So he sold a combined one. Combined 3.1 billion in both in across Visa and MasterCard, 1.8 and Visa, 1.3 MasterCard and then bought $1,000,000,000 in new bank. 

Alec: [00:20:00] The Brazilian. 

Bryce: [00:20:01] Yeah, the Brazilian Neobank. 

Alec: [00:20:04] He's become really international in his later life, hasn't he?

Bryce: [00:20:07] Big, big question is, did he do it?

Alec: [00:20:10] Or is it taunted? Yeah, yeah, yeah. Maybe that's the question we ask at the Berkshire Hathaway annual meeting, because as we said in a previous one of these episodes, I've got my question. You don't have yours. 

Bryce: [00:20:22] Yeah, I'm going to ad lib it. 

Alec: [00:20:24] Nice. All right. Well, look, we've been speaking about in these episodes why these companies have been such good long term wealth builders. I feel like talking about Visa and MasterCard is probably unnecessary, but very quickly, very high level. These two companies have arguably the strongest moats of any companies in the world. They own global payment rails. Almost every non-cash payment goes through one of the rails. They have stupidly high returns on capital and stupidly high profit margins as a result, and no one else has had the capital to build a third payment rail to compete with Visa's rails or MasterCard's rails. I think both of their profit margins are over 40% and they continue to take those profits and reinvest them at a high rate of return. 

Bryce: [00:21:20] Both companies have been spoken about by a number of experts on the show. 

Alec: [00:21:23] So and there's obviously always questions about what's going to disrupt these companies. And if you speak to some big supporters of crypto, they'll say that there's crypto solutions, there's, you know, other online solutions potentially. But it feels like what we just say over and over again is they just partner with Visa and MasterCard eventually. Yeah. Yeah. 

Bryce: [00:21:46] So I guess the conclusion Ren, is there is nothing wrong with playing both sides if you're only been loyal to one. He would have missed out on the 1,440% rise or the 878% rise.

Alec: [00:21:57] Well now, to be clear, if he had taken all of that money and just invested it in MasterCard, he would have done better because that was the 1,440%. 

Bryce: [00:22:07] Well, what if he did it in Visa? 

Alec: [00:22:09] Yeah, but the point is that you don't have to pick a side that you can hedge your bets, you can play all sides. I think we've said that enough. Yeah, yeah, yeah, yeah.

Bryce: [00:22:18] High rises or both. 

Alec: [00:22:19] If he had, if he had picked the one stock that would have done better than every other stock, he would have done better. 

Bryce: [00:22:25] He'd be a billionaire. 

Alec: [00:22:28] But the fact of the matter is that's impossible to do. And as an investor, you don't have to pay your colours to one company and say they're either going to make or break my fortune. That's it. Yeah. 

Bryce: [00:22:43] Well, let's leave it there. That's the end of our long term compound, a series brought to you by Warren Buffett and Berkshire Hathaway. 

Alec: [00:22:48] Wrap it up for me. One of the lessons that we've learnt. 

Bryce: [00:22:51] And we started with episode one, which is doubling down on your best ideas, and we said there that the best while Warren actually was it Warren he said the best idea is probably already in your portfolio. 

Alec: [00:23:00] So I think it was actually Andrew Page.

Bryce: [00:23:02] Oh, was it? That's right, it was. 

Alec: [00:23:04] I think a lot of people probably said. 

Bryce: [00:23:06] Well, cool, we're kind it. The SEC. The second episode was all about the perils of selling too early. And we looked at Disney and then we've just closed out then with letting your companies go to work, taking advantage of the spin, if you're lucky enough, and also the idea of not having to pick one side. So a lot of lessons from Warren. If you haven't already, check it, check out his website and you'll see the investor letters that he writes every year. 

Alec: [00:23:34] You love his work so far. 

Bryce: [00:23:35] Check out his website just for a lull. We'll be back next week, Monday with an Equity Mates chat. And then Thursday, we're back with an ask an advisor. And Ren, before we go, there was one thing that you wanted to close out with. 

Alec: [00:23:46] Yeah, I think we're talking about long term compounders and we spoke about Moody's earlier in this episode, how it fell 70% and then ten bad from there. Yeah all of these long term compounders have had periods where they've hurt investors where they've fallen a lot. And I just remembered I just opened up our first book, Get Started Investing, but wherever good books are sold. But we looked at the. Best performing stock over the last ten years in Australia and the USA and the UK. And the point is the same in all of them. In Australia it was Northern Star Resources average 79% per year over the past ten years, but it fell almost half in 2016. In the US, Domino's Pizza averaged 44% a year. Over the past ten years it fell more than 20% in 2017 and then Games workshop over in the UK averaged 39% a year over the past ten years. It fell more than a quarter, 26% in 2017. It's just a reminder that these long term compounders, this long term growth isn't linear and so that's why these lessons are really important. Doubling down on your best ideas, especially if they get cheap. Not selling too early. Letting them go to work and do their thing. And then playing all sides if you want to.

Bryce: [00:25:05] Play the room. Now, I saw a great way to wrap it and there is one ask from us if you can please write and review Equity Mates Investing podcast. That would be really, really appreciated. We do love the support and love reading. The reviews of Five Star would be appreciated. Always helps us get in front of new beginner investors on the charts, but Ren. We'll leave it there and we'll pick it up next week.

Alec: [00:25:27] Sounds good.