Key Takeaways from Warren Buffett’s Shareholder Letter

[00:00:01] This is The Canadian Investor, where you take control of your own portfolio and gain the confidence you need to succeed in the markets. Hosted by Braden Dennis and Simon Belanger The Canadian Investor Podcast. Welcome into the show. My name is Braden Dennis, as always joined by the very dependable Mr. Simon Belanger.

[00:00:24] Today, we got three bangers of topics. My first topic is called How People Get Rich Now. And then you're going to talk about Buffett's latest letter to shareholders. And I think that there is tons of talking points inside of there as well. So should be a good one. Yeah, it's always great because it's always a mix of life lessons mixed with some commentary on the business itself.

[00:00:53] So it's always great to read his letters. And I haven't read all of them, but now having read pretty much all of them for the last five, six years makes me want to go back and get that book that he actually references to get all the letters, I think up to 2014. And then the rest are available online. But I think most of them are available on their 1999 website that hasn't been updated.

[00:01:19] Yeah, The Science of Hitting, Alex Morris wrote it. Him and I have had tons of phone calls through the year. Really good guy. And I'm glad his book is getting the clout because I think he had personally asked both Charlie and Warren about kind of their permission to do it. Like he wanted their backing. Yeah.

[00:01:41] And they were happy that he was putting it together. So I'm glad he's getting some love from some big names, including, of course, them themselves. That's great. No, I think, yeah, it's anyways, it's not it's my my to do list. I think it would be fascinating to just see how he has evolved over time. All right, let's start with how people get rich now. That is the title of Paul Graham's essay in April of 2021.

[00:02:10] Meme coins, meme coins, gamble your life savings, let it ride. Rug all of your followers on Trump coin. No, this is from Paul Graham 2021. For those who do not know, Paul Graham is the founder of Y Combinator. Y Combinator is definitely the premier startup accelerator out of Silicon Valley.

[00:02:34] They've had tons of big wins. It's basically just like this three month program. They give you 500K for some piece of the business. You go through this kind of ideation phase to launch phase to demo day where you present it to a bunch of investors. And the idea is like you have a working product and investors by the end of the cohort. And, you know, some huge companies have come out of that. Instacart, Airbnb, Stripe, DoorDash, the list goes on and on.

[00:03:04] And he had this essay that I thought was was pretty interesting. It was old now, but well, a couple years back now, but it's timely. So here are some stats from the essays. In 1982, the most common source of wealth was inheritance. Of the 100 richest people, 60 inherited from an ancestor. There were 10 Dupont heirs alone.

[00:03:29] By 2020, the number of heirs had been cut in half, accounting for only 27 of the 100 biggest fortunes. Why would the percentage of heirs decrease? Not because inheritance taxes increased. In fact, they significantly decreased during this period. The reason the percentage of heirs has decreased is not that fewer people are inheriting great fortunes, but more people are making them.

[00:03:56] How are people making these new fortunes? Roughly three fourths by starting companies and one fourths by investing. Of the 73 new fortunes in 2020, 56 derived from founders or early employee equity and 17 from managing investment funds. So I thought this is a good one for us to riff on and three topics maybe for us to discuss.

[00:04:21] P.G. A.K. Paul Graham has been part of hundreds, if not thousands of successful entrepreneurial stories to this point. P.G. A.K. Paul Graham has been part of the 100% of the year. This is not the 100,000th most richest people.

[00:04:51] I think this type of thinking is useful if you want to be hyper wealthy, but don't rule out the compounding at 8% to 12% for a long time as a way to get extremely wealthy with patience. I think I've asked you before, but do you know your magic number, which is basically you snap your finger? You're like, at this number, another dollar probably doesn't make a difference whatsoever.

[00:05:14] Yeah, I don't think you asked me specifically, but I would think it's probably around like 10 million would be around the number for me where I know I'd be able to be good for the rest of my life with my family, pay the mortgage off, have a bit invested and enough to cover our expenses. I don't think I would need much more beyond that.

[00:05:39] Of course, when you're looking at 10 million versus 100, capital preservation has to be a big part of your investment thesis. Even if you're looking at bigger fortunes, you're not looking to grow it as quickly. You're more looking for capital preservation and then some growth with it. Yeah, I think that that's a good number. And some people might be listening to that and go, that's so high. I could do with far, far less. And I think that that's true.

[00:06:08] There's no right or wrong answer to this. It's very personal. But I think when people think about that number, the reason that it's higher than just one or two, and I think probably close to what you're saying, is that lower number is fine if you already have your core assets that you want to own. Five is fine if I already own my house and some other big thing, fancy thing that I want. So I think 10 net worth is quite nice. Yeah.

[00:06:34] And then factoring into all the uncertainty we have in front of us, are we going to see systemic inflation in the coming decades, potentially shifting global world order? To me, that's a premium. If you asked me five years ago, I probably would have said 5 million. But that's the premium I'm putting in 2025. Yeah. Yeah. And again, this is also the – people probably have two numbers.

[00:07:00] There's like the number I asked you is not how much do you want. It's snap your finger and another dollar doesn't move the needle incrementally. Yeah. So people probably usually have two numbers, which is like kind of their magic number of like some retirement number. But then that second number is the snap your fingers and incrementally extra dollars just like don't make that much of a difference for your lifestyle.

[00:07:29] I like your answer. It's almost that what's the I can make it work number and then for sure it's going to work or a high degree of probability is going to work. Yeah. And that 12 doesn't make a material difference than 10 or – it is kind of an asymptote you hit or like the incremental gains start to fall off on the scale. Okay.

[00:07:59] Number two. So back to the essay. In 1982, there were two dominant sources of new wealth, oil and real estate. Of the 40 new fortunes in 1982, at least 24 were due primarily to oil or real estate. Now a small number are of the 73 new fortunes in 2020, four were due to real estate and two to oil. By 2020, the biggest source of new wealth were sometimes called tech companies.

[00:08:26] Of the 73 new fortunes, about 30 derived from such companies. These are particularly common amongst the richest of the rich. Eight of the top 10 fortunes in 2020 were fortunes of this type. You know, the Bill Gates, the Jeff Bezos, the Zuck types. And it got me thinking, you know, there was an interesting point he referred to later in the essay. He goes, are these – some of them, of course, yes, they're tech companies.

[00:08:53] But are they tech companies or are they the new way that each category is done? Like Amazon is a retailer, but it's also – retailers don't make cloud – don't invent cloud computing and AWS. And, you know, yes, Tesla is a car company, but it's technology first is how they derive their product. So it's an interesting talking point. Like are they tech companies?

[00:09:24] Are they retailers? Or is this just the modern business and that tech is just too broad of a term? Yeah, when they compare – I think you might have seen that recently. Amazon sales surpassing Walmart sales. Yeah, exactly. And yeah, when I see that, I'm like, okay, well, probably if you compare retail to retail, Walmart's still in front. So it's not apples and apples. Like, yes, it's probably a half apple with a half orange.

[00:09:52] It's not like a straight comparison. So I always find it a bit funny because obviously Amazon, AWS has grown so rapidly that clearly it's giving a leg up to Amazon in terms of sales growth. Yeah, yeah, good point. On my other screen, I'm like, hmm, let me compare the retail business of –

[00:10:16] I'm going to go on a limb and say that Walmart is still larger by a good amount. It is, but it's getting pretty close actually. Yeah, it's probably shrinking. Online stores and third-party revenue is actually getting pretty – yeah, it's more than half. But you're right. Yeah, it's difficult with these businesses, right? Because Amazon says like, oh, here's the advertising business.

[00:10:44] But the advertising business is ads on the retail site. You know, like they're attached at the hip. Like you can't really separate them. It's a good way to make your margins on the retail business look worse than they really are is what it is in my opinion. But that's neither here nor there. So I guess my question is, what do we think the companies of the 2030s are going to be? Well, you know, we have the same conversation February 2035.

[00:11:14] And is there a new era of AI companies? Is there a new era of robotics companies? Is there a new era of X, something that we've never even thought of? I'm curious if you have any hot takes, kind of a Cathie Wood type discussion. I think for me it's going to be a combination of infrastructure building and technology. So I think it's going to be that.

[00:11:40] It's going to be hard infrastructure, whether it's roads, bridges, even, you know, the federal government here throughout the idea of a high-speed train between, I think, Quebec and Toronto. But also infrastructure and building these data centers and building the electrical grid to power all of this AI. But also some of the progress with the technology behind it. So you said robotics, AI and all that stuff. So I think it's going to be a combination.

[00:12:08] I think there's going to be a lot of intersection between all of that. Because even thinking, right, as I'm talking, if we're thinking about self-driving cars, I'm going to think that if we start seeing that in Canada, we're going to have to modify our roads ever so slightly to make, well, probably some pretty large modification. Because I don't know if you've been in Montreal in the winter, especially in old Montreal where the streets are super narrow. It's very difficult to get by.

[00:12:38] And to think that there'd be AI able to do that for self-driving cars, I'm a bit skeptical unless there's infrastructure improvement. That's just an example I'm giving here. Yeah, these technologies, the edge case, they are in the business of edge cases, like handling these niche edge cases. And if you handle them really well, you have mass adoption. But handling them really well is going to take a lot longer than we think.

[00:13:07] Because in certain scenarios, like, yeah, this technology is ready to go. But I think over the next 10 years, it'll be solving those, squashing those edge cases one at a time. And you're right. It might be the dominant tech companies are more of a go-to-market like Uber than the go-to-market like Facebook. Let me explain. So Facebook is adopted by anyone and everyone low friction can download on your phone.

[00:13:37] The Uber go-to-market strategy is geography by geography. And handling those edge cases and regulation and infrastructure like that. So they're both successful go-to markets. But I think that the new ones are going to look more like Ubers and less like Facebooks. And you're right. I think that it is a lot of infrastructure challenges that we're going to have to cross off. I mean, we've talked about it, right? Electric vehicles. Like, we need more charging stations. There just needs to be better infrastructure. You still don't have the same amount that you see gas stations everywhere.

[00:14:06] There's so many examples when you think about technology and the rapid adoption that we need to just build the infrastructure to support it. And that's not even counting the actual infrastructure that we're seeing in a lot of our city that needs to be updated because it's 40, 50, 60, 70 years old. So I think it's going to be those two. In my view, it's going to be those two that are really going to be driving it. It's an interesting challenge when you have condos and apartments, parkades. How do you retrofit?

[00:14:36] Like, a lot of this stuff is like, how do you build a business case for retrofits? The math is so hard to make work. It's really hard to make the math work. Yeah. No, people can think about so many examples. But the more we talk about it, right? We bought a new old home and we upgraded the power from 100 amp to 200 amp because eventually we want to be able to have a plug-in hybrid.

[00:15:05] And to be able to, I think it's the stage two chargers. Like, I'm not sure which one, but there's different stages. Level two, you need to have that higher ampage. So that's, I know it's more of a residential build-out, but that's just an example. Existing homes, a lot of them just don't have that 200 amp. So there's just so many things that as technology. 240 volts. What's that? 240 volts. Okay. Yeah. But the ampage, the service to the house is what I'm talking about. Would it be 200?

[00:15:35] That sounds like a lot. I'm not in my electrical engineering. Older homes is 100 and then 200 for like newer builds, but our home was older and that's why. Yeah. Something, third point, something I believe I have experience to give some advice on now, which is the path of the founding CEO, which is like the Paul Graham wealth creation story that he's talking about here of the 100 richest people, the mega billionaires. The path of that founding CEO is not fun.

[00:16:04] A lot of sacrifices made. It's the one I want, but it's not for most, like honestly. And what would I do today with this knowledge that I have now? And I feel like this is me giving some advice for some hungry people out there, which is if I wanted the quote unquote riskier path, but you know, a huge upside without needing

[00:16:30] to be that founder led CEO that Paul Graham's talking about is joining a high growth startup at about employee 20 to 30. In his numbers, he put here that there are more rich people being created from early employee options than real estate and oil in that math. And so why that timeframe between 20 and 30?

[00:16:58] It's that this company is no longer a crapshoot. It's default alive pretty much. And salaries are now competitive. So you're not having to take a huge haircut and you get options as part of your offer. So is it riskier than big corporate jobs? Yes, of course. But even if your job there is not 100% safe, you are able to capture like 100X or more upside.

[00:17:25] So I think that this should be, you know, strongly considered. The folks in Southern California get this or Northern California, they get this. But young people in Canada don't really think about this. They're not taught this. They don't know as many friends that got rich this way unless they know friends at Shopify and stuff like this. I think it's a path that I would be looking at if I was in a position for looking for a job. Yeah, I think it all comes down to do you want a high floor or a high ceiling?

[00:17:55] I think it's just that. You have to decide. Do you want a high floor? Then, okay, go for the corporate job. Overall, your total comp early on will likely be higher than the startup with 20 to 30 employees. You'll probably get more job stability. But again, nothing is certain, especially in the world we're living in right now. You see corporate jobs being cut left, right and center, whether you're looking at those in the U.S. for the government, but also just big corporate jobs.

[00:18:25] But at the end of the day, it is upside. And I mean, I've said I'm leaving my job. I'll be leaving at the end of March. And to me, at the end of the day, it was that right. It was I'm probably going to have a higher floor at my old job. But the ceiling with putting more time in the podcast and generating more revenue and more income is much, much higher than my other job. And obviously, there's a lot of intangible benefits of being your own boss as well that I value a whole lot.

[00:18:54] And that's not monetary. But that's the way I kind of see it. And living in Ottawa, I think Ottawa is especially guilty of this, of getting these cushy jobs because the federal government is such a big employer. Right. Is that a lot of people get into that. And there's a lot of mentality. And anyone living in Ottawa probably can agree with me that, you know, you're good to you're good for life if you get a job, a permanent job at the government.

[00:19:21] And I've always kind of pushed back on that because, look, you never know what's going to happen. And a permanent job doesn't mean that it can eventually get cut. If there's a new government in that's more and there's more austerity, for example. So I always caution people that nothing is guaranteed in life and you have to just evaluate the plus, you know, and the minuses from each different path. Yeah, well said.

[00:19:49] And like you mentioned for that auto example, people follow the paths that they've seen success in, especially growing up, right? It's the same way that Canadian young people in Canada think that buying a house is their path to wealth because that was the path to wealth for maybe their parents and their parents' parents. Everyone saw it.

[00:20:12] Everyone saw their, you know, $50,000 home become a, you know, some 20x investment over their lifetime. Right. And so and maybe they're benefiting now from that. Their inheritance is benefiting from that now. Right. And so that's a path that is tangible and familiar.

[00:20:31] When you have places like California or new startup pubs like Miami, Austin in the US, people are seeing those success stories in their personal life. Right. And you mentioned in your Ottawa, everyone's there's so many government employees. Right. Just given the fact that, you know, Parliament's there and a lot of federal government employees live and work there. Makes sense.

[00:20:58] So there's these paths that are not as common for Canadians that I want to bring to light, like joining a high growth startup is actually a really good way to ride the wave of new ideas without with taking more risk, but not necessarily like, you know, egregious, unwieldy risk. And you're at the at the current time you're looking at it.

[00:21:26] In defense of Ottawa, though, I will say this is that Ottawa in the late 1990s and early 2000 had a pretty strong tech community, a tech sector. Right. And I think also what happened is a lot of people got hurt pretty badly by working at the infamous Nortel back then. I was going to say Nortel. Yeah. Nortel is the one that comes to mind. And there's still some tech companies in Ottawa, especially located in Canada, one of the suburbs of Ottawa.

[00:21:54] So I but I think a lot of people know people that were really. There's also Shopify, right? Of course. Yeah. Yeah, exactly. Shopify is a more recent example. But I think Nortel was such a sad and unfortunate story and impacting so many people and people losing their pension benefits, a big chunk of it. And people having to that were working for Nortel having to get jobs with the federal government.

[00:22:19] And I think a lot of people still have that in the back of their mind, even though they're probably the kids of someone that used to work for Nortel right at this point. So I think it's probably a combination of both here. My grandfather and my uncle worked at Nortel back in the day. Was a Canadian darling. Yeah, it was. It sure was a Canadian darling. So that's it. Paul Graham's essay, how people get rich now. And yeah, so just summary.

[00:22:50] Don't rule out 8 to 12% being a really good way to get really rich. But also don't rule out, you know, going for something high upside career wise at the same time. And then the other one being there's going to be a lot of quote unquote tech companies that create a lot of wealth in certain areas over the last 20 years and over the next 20 years.

[00:23:17] And I think look out for less sexy areas that are going to be completely changed by new tech. Like old traditional, you mentioned the infrastructure, old traditional ways of doing things are going to change a lot with AI. And the wealth might not be created by the companies that people think of when they think of AI. Yeah. Because that's what's happened over the last 20 years.

[00:23:46] Quote unquote tech companies, right? It's almost like those energy services company, right? That will service the oil and gas producers. I know it's more like 20, 30 years ago. But even still today, they benefit from the sector without... It's a second order effect. Exactly. That's it. All right. You want to take us away with the buff dog? Yes. Warren. Warren Buffett. So like I said earlier, he came out with his shareholder letters.

[00:24:16] A lot of good stuff. I mean, you just started the first page. I started. There was already a really good quote by Warren Buffett. And I'll start off with that. So the first point is Buffett makes mistakes just like everyone else. And he had a really good quote. So I'll quote him here. During the 2019 to 2020 period, 2023 period, I have used the words mistake or error 16 times in my letters to you.

[00:24:43] Many other huge companies have never used either word over that span. Amazon, I should acknowledge, made some brutally candid observation in 2021 in their 2021 letter. Elsewhere, it has generally been happy talk and pictures. I think this is a phenomenal quote. And obviously referring to Amazon, I think he's referring to when they basically acknowledge that they just overbuilt in terms of logistics.

[00:25:10] And they overbuilt because of the pandemic and they had to right size. Would that have been Jeff's last letter? I think so. Or was it the transition between both of them? I think it was around that time. But I clearly remember around when that happened. And honestly, if you've been listening to the podcast and you know me, I've been really critical of public companies when they're trying to put a lot of fluff on their earnings release.

[00:25:37] And I talked about this with Dan a little bit last Thursday, is when you see an earnings release and you know the results aren't good, but the press release is basically this obscure segment of the company that grew 25%. Yes, total sales were down like 5%, but they bury the total sell way, way down the press release.

[00:26:03] That's an example that is very easy to spot. And I will often see management, and I'm sure you've noticed that too, blaming external factors and not taking ownership for the mistakes they did. And you can really get... To me, if I see this kind of management team, it's usually a big no-no. And I really appreciate recently TFI International came out. I was just about to say TFI's earnings call.

[00:26:33] Alain Bedal was brutally honest and honestly made me like the company even more. Even though they're going through, let's be frank here, a really tough period. And it's not just the company, it's the sector as a whole. But to me, that just shows how good of a management team that is, that they're transparent with their shareholders and that's how it should be. And clearly, Buffett agrees with that. Shout out to jointtci.com if you were following.

[00:27:03] I sold TFI in December. $9 a month for crystal ball on jointtci.com. No, great point, right? And I appreciate when management team has those like throw in all of the bad news quarters that just need to happen every once in a while. You know, pull back the guidance if they have it. Throw in, okay, these things aren't good. The Trade Desk just had one of those as well too. Oh, yeah. Stocks down big, big.

[00:27:33] And, you know, when it comes from a founding CEO like Bezos or, you know, Warren Buffett or in this case, Jeff Alain Bedard, also Jeff Green with, you know, the founding CEO of The Trade Desk. You know, all four high quality managers, high quality ethical people. And they have told shareholders what to expect, right? And every once in a while they have some of those quarters.

[00:28:02] And you're right. It does make you kind of like the company more because, you know, if anyone who runs a business, it's not roses every quarter for 40 years straight. That's not how it works. Yeah, exactly. And he even goes to say that not all the companies Berkshire owns are great. He says some are rare gems. Some are good but not great businesses. And some of the businesses are lagging and some have been disappointment.

[00:28:30] But there is no major drag on the business for even the companies that are really lagging. And what I really liked about Buffett is he emphasizes I made the mistake. He uses I. He's not trying to blame it on someone else at the business external factor. He takes ownership for it. And there's a lot to be to like about that. For me, I think you know me, right?

[00:28:56] Like if I messed up and people that know me, I will be the first one to say, you know what? I messed up here. I will. Here's what I'm going to do. A, B, C, and D to fix this. But if it's my fault, I will take ownership. And you would be surprised how people usually react. Usually it's not bad. Like people will be like, OK, you said you make a mistake. You're going to work to fix it. You outline how you're going to fix it. People tend to be pretty understanding by that. Yeah.

[00:29:24] It's also a vote of trust moving forward that you're going to be aware of how to be better, right? Yeah, exactly. That's all you can really expect. And especially when evaluating management teams. It's like there's no magic formula to picking stocks. There's no like if I buy low PE stocks that grow at this level and there's no magic formula.

[00:29:49] But the closest form of a magic formula that I have ever found is partnering with fantastic managers as a shareholder. I don't know of a better formula than that. Think of all the great, great winners have all been by great, great management and people that are authentic and trustworthy with your capital. Yeah, he has like for people. I encourage you to read the letter.

[00:30:18] He actually has an excerpt where one of the companies it was a tribute to one of the companies that they had under the umbrella. The manager that sold the company to Berkshire because he wanted some stability but still wanted to work for the company. And he went directly to Buffett and he said, I don't want to sell it to any other company than Berkshire because I know it'll be treated well. And he gave his price. Buffett didn't even negotiate.

[00:30:46] He said, OK, that's the price. He said, how much salary do you want? And he surprised him and said a much lower amount than Buffett expected. And Buffett said, OK, but if you're but he also even like put in a provision that would compensate him if it did better because he thought it was even on the low side. But he said, I think the guy passed away after 20 years of the the business being purchased by Berkshire.

[00:31:15] And he said it was one of the best decisions I've ever made. Yeah, just goes to show. So now 2024, the next takeaway is 2024 was a better year than expected for Berkshire. And despite that, 53 percent of their operating companies saw a decline in earning. So clearly the best ones were pulling pulling it up a little bit. Returns were held by improved yield on short term treasury. So short term treasury bills. They also increased those holdings of highly liquid asset during the quarter.

[00:31:44] Their interest business performed well in big part because of Todd Combs, who reshaped Geico in major ways in the last five years. And they were fortunate to have no monster event. And he said monster event or adverse event that occurred in 2024, causing massive insurance losses. But that someday it will happen because obviously the insurance business is not something that's easy.

[00:32:10] But it was really interesting just to hear him talk about the overall business here. But that the insurance business also was performing quite well, especially when you're hearing a lot of this stuff. And with, you know, climate, all the impacts, the fires that we saw in the U.S., how Berkshire was still pretty resilient with that. Yeah, it's quite amazing how diversified this business is.

[00:32:37] It's like kind of it's almost like the bull and the bear case on buying the stock. Is this exactly? Yeah, exactly. And the next point here is just a quick one. So Berkshire actually paid more in U.S. taxes than any other company in U.S. history. So they paid $26.8 billion of taxes in 2024 in the U.S.

[00:33:04] That's not counting some taxes that they paid outside the U.S. And that's 5% of all taxes that were paid by corporate America. And it's more than some of the large tech companies. I'm pretty sure you even like mentioned those during the letter as well. But it's pretty staggering thinking that they've paid pretty much $27 billion in taxes last year in the U.S. alone.

[00:33:29] 5% of total American corporate income taxes paid last year, Buffett said. Which is 5% is staggering. Of all American corporate income tax, Buffett urged federal government to use the money to alleviate poverty and warned officials against overspending or destabilizing the dollar. Quote, spend it wisely. Take care of the many who, for no fault of their own, get the short straws in life.

[00:33:58] They deserve better. And never forget that we need you to maintain a stable currency. And that result requires both wisdom and diligence on your part. Saying, hey, I'll write this $27 billion check. People need it more than me. And he's always been like that. People need it more than me. But also, spend it properly, please.

[00:34:22] Yeah, and it wasn't the only kind of dig he took at the, let's say, uncertain future of fiat currencies with the lack of better words. So I was going to put that point a bit later, but because he brought it up. So he had another quote here. Berkshire will never prefer ownership of cash equivalent assets over the ownership of good businesses, whether controlled or partially owned. Paper money can see its value evaporate if fiscal fully prevails.

[00:34:52] In some countries, this reckless practice has become habitual. And in our country's short history, the U.S. has come close to the edge. Fixed coupon bonds provide no protection against runaway currency. So he did not mince words. And I'm going to show a chart here on FinChat because it's a little bit... I was going to say, this is interesting coming from him. Yeah, exactly.

[00:35:19] And it's interesting to see because what I'm showing here essentially is the increase in total assets for Berkshire compared to the total, basically, cash and cash equivalent. So the cash they have on hand includes actual cash, but also includes short-term treasury bills. And what you need to see, it doesn't have the ratio, but the ratio has gone up pretty significantly over the last year.

[00:35:46] So it went from close, basically just under 16% to 29% in this latest quarter. So clearly, they've been accumulating cash yet. He's mentioning that specifically that they prefer owning good businesses over holding cash, but in reality, he's doing something else. So my interpretation, and let me know if you agree with that, is that he's clearly more concerned

[00:36:11] about the current state of the market and valuations right now with the classic Buffett indicator looking at the market cap compared, total market cap compared to the U.S. GDP being at all-time highs. Versus the U.S. currency. He's concerned about the U.S. currency. It's pretty clear by what he said here in the excerpt, but clearly, he's more concerned about the state of the current markets. Do you agree with that? I mean, it's both.

[00:36:40] It's kind of shocking to hear him say that and then has that much cash on hand. But also, I think it's a good fair warning, right? Like, it's the same with what you mentioned in that tax quote of just like, we cannot be, we need a stable currency. He mentioned that twice in this letter. Yeah. Yeah. And that needs to, at the end of the day, it needs to rein in spending, right? You can't keep having deficits the way that not only the U.S., but Canada is also guilty

[00:37:10] of that. And I just thought it was a fascinating thing because looking at the graph here, right? Like, you can just kind of almost say the top line total asset stays relatively stable. Obviously, I know it increases a little bit, but it's really the baby blue line, which is the cash equivalents that just goes way up. So clearly, it becomes a bigger percentage. And it was, I don't know, it's very interesting. It just has a way to say it that people would read that and like, yeah, he's probably not wrong.

[00:37:40] And instead of using pay, like obviously, he uses paper money, but a synonym here for people not familiar would be fiat. I just want to be able to put pen to paper and put together sentences like, paper money can see its value evaporate if fiscal folly prevails. Dude, I'm such a bozo. I use like the most simple, basic words and you got Buffett here. Fiscal folly prevails. You got to use that tresaurus or whatever in that.

[00:38:11] Remember back in the day? Yeah. Tresaurus? I just heard tresaurus. I liked that. Yeah. You know what I'm talking about. I know what you're talking about. I just love it. Right click and word. But now, yeah. So to continue here, another takeaway is having control of companies. So having full ownership of a company versus partial ownership of a public company has both upsides and downsides.

[00:38:39] So what he said, and it's pretty obvious when you think about it. So when they have control of a company and they don't like the management decision, they can dictate what they would like these managers to do. They have all the control. On the other hand, it's much harder to exit a company if you want a fair price that you fully control because you're the only one controlling it. So you have to find a buyer that is willing to buy that company at a price that you'd both be able to agree to.

[00:39:07] Now, for partial ownership for publicly listed companies, they have a lot less control over what management does, but it's much easier to exit position with a caveat that he did mention since their position, even if it's a small position for Berkshire, their positions tend to be so large that oftentimes when they exit a position, they have to do it over like a full year to not move the share price too much.

[00:39:36] But it was interesting just for him to say, yeah, there are both upsides and downsides to each of the strategy. Yeah, it makes sense. I mean, the private mark versus the... Well, the private mark, which is listed in a public equity, aka Berkshire B, and then the actual public equities that are owned in the holdco as well. Well, it's an interesting makeup overall that kind of goes flying under the radar of just

[00:40:03] like, you've had the best manager managing your money via a public equity vehicle for no fee. And then I don't know if you've seen the Bill Ackman thing about him creating the next Berkshire. Oh, yeah. And you look at the fee structure, it's going to take 1% of the market cap per year as a fee. It's saying that it's going to be the next Berkshire Hathaway.

[00:40:28] It's like, dude, the next Berkshire Hathaway is key on the fact that Buffett didn't charge you a single management fee along the way. Yeah. Wasn't he supposed to go public with that thing like a year or two ago? And then that just... No, this is a new thing. He's going to acquire ticker HHH and put Pershing underneath... What is that company again? It's Howard Hughes Holdings. I know he was thinking about it like two years ago, and then I guess the appetite for it was really not there.

[00:40:58] I think his timing wasn't great because it was probably in like 2022 when the markets were not great. And I think he had a valuation in mind and the market was just not there. That's right. Yeah. So Bill Ackman says he would invest $900 million to merge basically Howard Hughes and his Pershing Square, his investment company, together to create the quote unquote modern day Berkshire Hathaway. But dude, Buffett didn't charge.

[00:41:27] First of all, you're not Buffett. Second of all, Buffett didn't charge a management fee. That's like such a distinctive correlation. It's like, I'm going to train every day. I'm going to become the next Wayne Gretzky at hockey. I can't shoot or skate at all, but there's a chance that I might become the next Wayne Gretzky. Not a good one. The next one here. Berkshire prefers to invest than consume.

[00:41:55] That's the way he put it because Berkshire does not pay a dividend. They'd rather reinvest that money in the business rather than pay out a dividend, which equals to spending, which definitely makes sense. But it does kind of makes you understand his reasoning a little better. And then the next one here. Property and casualty insurance is a difficult business. And of course, for those not familiar with Berkshire, the insurance part of the business is a big part of their business.

[00:42:22] And I thought this was really interesting because I don't think we're seeing this as much in Canada. But I know in the US, especially in California, I think there was some talk and I'm not it's just stuff that I've read a little bit. But to essentially force companies to insure people at a certain rate. And what you've seen happen is companies are just exiting California because it's just not profitable.

[00:42:48] And it's it really puts that into perspective because Buffett said, look, the big problem is that these type of business is you take the money up front. So you have your float. You get the money. People pay premium. You get that up front. You hope to grow the money over time in a conservative way. Right. You don't want to take too much risk so that if when there is a payout, you have made a profit on it, because that's the whole point.

[00:43:17] If you're going to be losing money, you're going to go out of business. The big problem is that these payouts can sometimes happen decades later. And only then will the insurance business know whether it is it was able to make a profit or not on that. And Berkshire's insurance business remains extremely well positioned, but there is risk. And he was very adamant on that. They are not dependent on reinsurers like a lot of other insurance businesses, which gives them a big edge.

[00:43:46] But to just kind of wrap up here what I was saying, we must never write in at inadequately price policies in order to stay in the game. That policy is corporate suicide. Damn. I think it's a rebuttal of this type of stuff that's been happening in certain states. I think that's pretty much what it is. Yeah. Right. We must never write inadequately priced policies in order to stay in the game. Yeah.

[00:44:15] I mean, the insurance business, especially when you've been running an insurance business for this length of time, you have to not blow up. And that's harder than it sounds. It's like they're in the game of not blowing up. I have always found insurance to be a very interesting and such a lucrative business. Of course, it's like one of the oldest, most lucrative businesses humanity has ever come up with.

[00:44:41] But that don't blow up category that is so key to this is actually really hard to do for a really long time. And how Berkshire has managed to do it so well has been, yeah, quote, never write inadequately priced policies. But again, it's such a hard business because you might not know whether it's adequately priced or not. That's right. And one of the things he mentioned is that you- You got to be good at this game. Exactly.

[00:45:09] You have to be good, but you also, there are certain type of policies that one way you can mitigate this is you only underwrite them for six months or a year, like a car insurance policy or something like that. So you have more ability to adjust those premiums if need be. But again, it's really hard to tell. And there might be a whatever disaster happening and then they will take a massive hit.

[00:45:36] And he was pretty clear that it's not a if it happens, it will happen at some point. When people say always follow the money, always follow where insurers are willing to underwrite policies ahead of where the public is consensus willing to live. A la the LA wildfires state farm pulling out just two, three months before that disaster happened.

[00:46:04] They knew they were not writing policies there. They knew the risks of the wildfires. They knew the situation was extremely risky and how they were managing the risk of widespread contagion of local fires. So, you know, follow the money. It can also translate to follow the insurance underwriting. Yeah. Yeah. I think there's I don't think they love the state, but I think there's much higher premiums in Florida to the areas that are specifically more impacted by hurricanes. On the Gulf Coast, especially. Yeah.

[00:46:34] So it is. Look, I don't think it's anything that like nefarious or anything like that. Insurance companies look they have to make money at the end of the day. If they lose money, they'll just go out of business. And I know it sucks if your insurance premium goes up. But a lot of the time, there's some very stringent underwriting that goes under that. And it's just it's just the reality of it. And I guess the next the last point here to finish off and we'll probably skip the last

[00:47:02] segment because this was a good discussion. But which I'm not surprised because it's always great to read his letters. But Berkshire continues to focus its investment in the U.S. But there are exceptions. And one notable exception is Japan. So Berkshire started investments in five Japanese companies about six years ago. One of them is Mitsubishi. And they liked their prudent approach of paying dividend and buying back shares when appropriate.

[00:47:32] And their valuations were much more reasonable than comparable businesses in the U.S. And more reasonable compensation to their management team versus U.S. counterparts. And they really liked these investments. Buffett was saying that he hopes even once he's no longer the head of Berkshire, that he thinks they're going to be holding these investments for a long time, even beyond his time at the company.

[00:47:59] And over that period of time, so just a bit less than six years, their $13.8 billion investment has almost doubled. So it is interesting to see and just kind of shows that if you're willing to... We've talked about that before, right, on the podcast. If you're looking to find value, then looking outside of the U.S., but also Canada,

[00:48:25] you can find value in other countries where valuations are just lower. You'll have to do some significant due diligence. And of course, there's enhanced currency risks that are there too. But I think it's a good lesson for investors that a really good type of company, and I've talked about railways, I think was the last time I mentioned it, that are trading at pretty expensive multiples in the U.S. Well, why not a railway in Europe or railway in Japan?

[00:48:54] You may be able to find those kind of companies that are very profitable, but trading much more attractively because they're located in Europe, because they're located in Japan. It's been fascinating to see the percentage of U.S. equities make up of global equities market cap wise.

[00:49:17] So depending on the day, I think you're looking at around 120 trillion of market cap across global public equities. And that number of which U.S. makes up of it has ticked up to like nearly half. And it's just, it's trended up and up and up and up. I mean, partly due to the rise of, touch on the first topic,

[00:49:43] these quote unquote tech companies that are just so dominant in their market cap. But you're right. I mean, it's been two things. Those companies have grown at outsized clips. No question. But they've also seen their multiples grow at outsized clips. So you have the two, you know, the two, the twin engines, as Chris Meyer would call it, in terms of growth of the equity value, growth in the underlying business and growth in the underlying multiples.

[00:50:13] And you haven't seen that growth in the underlying multiples nearly as much in ex-U.S. equity markets. Yeah. Yeah, absolutely. Absolutely. So no, overall, I mean, some really good takeaways. Now I have to put the rest of the letters that I haven't read on my to-do list. That's the next thing. They're pretty amazing. I didn't read this section, but I saw someone was telling me that they're talking about making the meeting shorter. I don't know if you picked up on that. Yeah, I didn't read on that section.

[00:50:43] I stopped to. Yeah. I think I personally would be. I've only been to one meeting, so I'm not going to act like I've been to one Omaha Berkshire Hathaway meeting in person in 22? What year was it? Anyways. No, I think it was 23. Yeah, I think so. Yeah, that sounds right. It was in last year, the year before. Yeah. Yeah.

[00:51:10] Anyways, it wasn't that long ago. It was the last one Charlie was at. Yeah, it was the last page. I kind of just skimmed quickly because it was on the upcoming meeting, and then I was like, oh, maybe there's other stuff. But it seemed like it really just focused on what was going to happen at the meeting, almost the logistics and stuff. So I kind of skipped over that. Yeah. So two things before we wrap up Berkshire-wise that I picked up on was,

[00:51:40] one, they're going to make the meeting shorter, which again, I've been to one meeting, but it was long as hell, dude. Like I was pretty tapped out by lunch, and then they kind of go into it again and do another like four hours of questions to like four o'clock-ish. And, you know, you got the two guys up there, and then you got at the time, Charlie and Warren up there. Now, just Warren up there. And they're just answering questions for hours and hours and hours.

[00:52:10] And I'm just like, how are these guys still going? Like I'm personally just like, how are they still, like, I don't even know I'm going and they're still going, right? Like he's 94 years old. And his replacement plan that he just talked about, it's like, do these guys want to retire? That he's mentioning who's going to replace him? Like, God forbid they had a retirement plan. I'm not sure what the plan is. Yeah, sorry. I had to mute myself.

[00:52:37] My dog was chiming in, so yeah. Leroy was chiming in. Do you know how old Greg Abel is? Let me look it up. I think he's in his 60s, late 60s, I think. Okay, he's only 62. 62. Okay. Okay. Yeah. Yeah. But like, you know, they've been warming Greg up as the successor for how long now, right? Yeah. I mean, if he's going to follow the path of Charlie and Warren, I mean, he's going to be, you know,

[00:53:05] even if he takes over in a few years, let's say 65, he's got a good 20 years in front of him, right? Yeah. God forbid he any retirement plans. He joined the board of directors in 2018. I'm not sure when he joined the company per se. Yeah, I think it was way before that. Way before that. Yeah. Yeah. CEO of, I think he became CEO of Berkshire Hathaway Energy in 2008. If I'm reading this, yeah, if this is correct. Yeah, interesting.

[00:53:35] At 94, quote, this is from the letter, quote, at 94, it won't be long before Greg Abel replaces me as CEO. Yeah. Yeah. And he will be writing the annual letters. Yeah. They seem to be very aligned, so I think it's still going to, it's going to be different, but I still think there's going to still be that familiar feel that we're seeing under Buffett. But I think it's going to continue under him. Yeah. Look, I mean, time is undefeated.

[00:54:05] Yeah. We all go somewhere, somewhere, sometime. And him writing these kinds of things, it's going to be tough when that happens eventually. He's provided so much. And anyone that has ever kind of picked him as the evil mascot of capitalism just needs to read that he just paid $27 billion in taxes. Right?

[00:54:33] I'm sure they'll find a way to not like him. I mean, I still have people saying, like, they don't like him because he still doesn't get Bitcoin, for example. Look, I mean, I'm well into Bitcoin, but I still admire Warren Buffett. Like, it doesn't have to be one or the other. Like, again, I just find it sometimes people are so anchored in their beliefs.

[00:54:56] And as soon as they have an icon or someone that, you know, they may agree with at 90%, but that 10% they don't, then they just throw everything else out the window. I just find a lot of people nowadays are like that. And it's too bad because there's just a lot of good stuff to take from Buffett. And I don't agree with him on everything, but I mean, I agree with him on the majority of stuff. So, yeah. You're allowed to have a nuanced take. Exactly.

[00:55:22] My fiance and I just finished the OJ documentary on Netflix. Oh, yeah. The OJ Simpson one. Is it good? Yeah. It's worth a watch. There's a lot of things that I didn't know about the case at all. Okay. You know, given that it's been, what, 30 years? Yeah. I was old enough to remember the car chase, but I was like, I think I was like five or something. I was really young. Yeah. Yeah. It's like, you're allowed to have a nuanced take.

[00:55:46] You can think OJ was an unbelievably great football player and also think he was a double murderer because he was. Like, you're allowed to have a nuanced take, right? Like, it doesn't have to be black and white. Oh, man. Yeah. You should watch it. It's frustrating. It is so frustrating, though, because obviously, you know the outcome. Yeah. I'll put it on our watch list. Yeah. Yeah. It's pretty good. Take care. Thanks for listening to the podcast, folks. We appreciate you.

[00:56:16] And, you know, as the show marches on to episode 500, we are here creating content for the pod. You can support the show and see that crystal ball on our updates every month for $9 Canadian at jointtci.com. I also updated the portfolio tracking spreadsheet yesterday to now include 2025. So, thanks for the subscriber who commented on that a few days ago, reminding me to update to 2025. That is done.

[00:56:45] So, go ahead and you can check that out. You can download it, make a copy of it, and use it for your own as a jointtci.com. We just updated, Simone, I got to show you this right after the call here. But we just created custom metrics on FinChat. So, you can create separate metrics that are relevant. So, some examples that I think are interesting is like we track the number of Costco warehouses, aka stores. And we track, obviously, all their financial metrics.

[00:57:13] So, you can do like how much operating income per store that you can expect, for instance. Or like Amazon reports AWS revenue and they report operating income. Just divide those and you have operating margins specifically for AWS. So, there's lots of obviously metrics that you can derive and spreadsheet out. But we just do it for you here and make it easy for you to do the math right on the platform. It's pretty sick. Yeah, sounds pretty good. I'll have to show me after. See you in a few days. Take care. Bye-bye.

[00:57:42] The Canadian Investor Podcast should not be construed as investment or financial advice. The hosts and guests featured may own securities or assets discussed on this podcast. Always do your own due diligence or consult with a financial professional before making any financial or investment decisions.