Berkshire Hathaway Part II

Summary Notes


In this gripping second installment of the Berkshire Hathaway trilogy, Ben Gilbert and David Rosenthal navigate through a tumultuous period in Warren Buffett and Charlie Munger's storied investment careers. As Berkshire Hathaway evolves, they confront the complexities of managing a growing portfolio of businesses, from See's Candies to GEICO, while grappling with the challenges of corporate governance and ethical dilemmas. The episode highlights Buffett's near-catastrophic entanglement with Salomon Brothers, where his reputation and decisive action narrowly avert disaster, showcasing the duo's unwavering commitment to long-term value creation and the preservation of corporate integrity. Amidst high-stakes scenarios, Buffett and Munger's investment philosophy matures, shifting from a focus on undervalued assets to an appreciation for the enduring power of quality businesses, influenced by their association with Charlie Munger. This chapter of the Berkshire narrative underscores the duo's ability to navigate the treacherous waters of Wall Street, emerging not only unscathed but with their legend and the value of their holdings significantly enhanced.

Summary Notes

Sugar Content in Beverages

  • Speaker A and Speaker B discuss the sugar content in a 20-ounce bottle of cherry coke.
  • They express surprise at the high amount of sugar in the bottle, which is 70 grams.

Speaker A: "No, 50. 70." Speaker B: "In a 20 ounce bottle, there's 70 grams of sugar." Speaker A: "70 grams of sugar in 120 ounce bottle."

  • The quote illustrates the unexpected high sugar content in soft drinks, which is a topic of health concern.

Introduction of Podcast Hosts and Their Backgrounds

  • Ben Gilbert introduces himself as the co-founder and managing director of Pioneer Square Labs and PSL Ventures.
  • David Rosenthal introduces himself as an angel investor based in San Francisco.
  • Both hosts share their roles in the podcast "Acquired," which covers technology companies and their success stories.

Speaker B: "I'm Ben Gilbert, and I am the co founder and managing director of Seattle based Pioneer Square Labs and our venture fund, PSL Ventures." Speaker A: "And I'm David Rosenthal, and I am an angel investor based in San Francisco."

  • The quote serves as an introduction to the hosts and their professional affiliations, setting the stage for the podcast's focus on technology and investment.

Warren Buffett's Investment Journey and Berkshire Hathaway

  • The episode continues the story of Warren Buffett after the dissolution of his own partnerships in 1969.
  • The narrative covers the transition of Buffett's investment style and the influence of Charlie Munger.
  • The hosts discuss Buffett's reasons for investing within the declining Berkshire Hathaway and his brief tenure as the chairman of a Wall Street bank.

Speaker B: "Today we will pick up right where we left off, telling the story of the declining suit liner manufacturer that he bought, Berkshire Hathaway."

  • This quote connects the current episode to previous content and highlights the focus on Warren Buffett's investment decisions and Berkshire Hathaway's history.

The Importance of Community in Tech Investing

  • The hosts promote their Acquired Slack community, emphasizing its role in fostering discussions about technology and investing.
  • They invite listeners to join the community to engage in thoughtful and nuanced conversations.

Speaker B: "It is a wonderful community discussing, of course, all things acquired in recent episodes. But more importantly, it is a smart group of people having thoughtful, nuanced, and respectful discussion about tech investing."

  • The quote encourages listener participation in the Acquired Slack community, highlighting the value of collective knowledge sharing in the tech investment space.

Pilot's Accounting Services for Startups

  • Pilot is introduced as a partner of the podcast and a provider of accounting, tax, and bookkeeping services for startups and growth companies.
  • The hosts discuss Pilot's growth and its backing by notable investors like Sequoia, Index, Stripe, and Jeff Bezos.

Speaker B: "Pilot is the one team for all of your company's accounting, tax and bookkeeping needs. And in fact now is the largest startup focused accounting firm in the US."

  • The quote explains Pilot's services and significance in the startup ecosystem, emphasizing its suitability for companies looking to outsource non-core functions.

The LP Program and Upcoming Events

  • The hosts mention the LP (Limited Partner) program and promote an upcoming book club event featuring author Brad Stone.
  • They explain the format of the book club, which includes an interview with Stone and a Q&A session for LPs.

Speaker B: "Our next book club will be with Brad Stone, who famously wrote the everything store, the upstarts. And now, David, what is his new book?" Speaker A: "Amazon Unbound, part two of the Amazon story, just like this is part two of the Berkshire story."

  • The quote details the upcoming LP event, linking it to the podcast's thematic approach of exploring business stories in multiple parts.

Disclaimer on Investment Advice

  • The hosts clarify that the podcast content is not investment advice but for educational and entertainment purposes.
  • They disclose their potential personal investments in companies discussed on the show.

Speaker B: "The show is not investment advice. David and I may have investments in the companies that are discussed on this episode, and this show is for educational and entertainment purposes only."

  • This quote serves as a disclaimer to remind listeners that the podcast's content should not be taken as professional investment guidance.

Charlie Munger's Early Life and Influence on Warren Buffett

  • The hosts discuss Charlie Munger's upbringing, his early interest in wealth for independence, and his career in law.
  • They explore Munger's personal life, including his family and his approach to dealing with personal tragedy.
  • Munger's intellectual curiosity, admiration for Ben Franklin, and his desire for a prominent role in a growing city are highlighted.

Speaker A: "Charles Thomas Munger, named for his grandfather Thomas Charles Munger, and he takes after his grandfather in many ways. Thomas's mantra in life was concentrate on the task immediately in front of you and control your spending."

  • The quote provides insight into Charlie Munger's values and the influence of his grandfather on his approach to life and finance.

Warren Buffett and Charlie Munger's Partnership

  • The episode discusses the initial meeting between Warren Buffett and Charlie Munger and the development of their partnership.
  • Munger's influence on Buffett's investment philosophy, including the shift from "cigar butts" to focusing on "wonderful businesses," is explored.
  • The collaboration between the two on various investments, including the blue chip stamp company and Seas Candy, is detailed.

Speaker A: "I think Warren felt that Charlie was the smartest person he'd ever met. And Charlie felt that Warren was the smartest person that he'd ever met. And for the two of them, that was quite the high compliment."

  • This quote encapsulates the mutual respect and intellectual connection between Warren Buffett and Charlie Munger, which forms the foundation of their successful partnership.

Warren Buffett's Investment in See's Candies

  • Warren Buffett and Charlie Munger, through Blue Chip Stamps, purchase See's Candies for $25 million.
  • Buffett justifies the price because of See's potential pricing power due to its brand strength.
  • This acquisition exemplifies Buffett's investment philosophy of buying a wonderful company at a fair price.
  • See's delivers over $2 billion in free cash flow over the years, proving the investment's success.

"So they do get the deal done with the family. Blue chip buys See's for $25 million. And over the ensuing years, this little candy company delivers over $2 billion in free cash flow to first blue chip. And then when it would get absorbed into Berkshire Hathaway for a purchase price of 25 million, this is the first time that this concept of a wonderful business at a fair price versus a fair business at a wonderful price is executed by Warren."

The quote emphasizes the successful acquisition of See's Candies and how it became a foundational example of Warren Buffett's investment strategy, highlighting the significant return on investment.

Charlie Munger's Investment Philosophy

  • Charlie Munger experiences volatility in his partnership's performance.
  • Munger's partnership has high returns but also faces significant losses, leading him to reconsider managing other people's money.
  • After recovering from losses, Munger decides to wind down his partnership and follows a similar model to Buffett's Berkshire.

"Meanwhile, Charlie is also learning from Warren that managing other people's money maybe isn't so great. So Charlie's partnership before 19, 71, 72, had done not quite Buffett levels of performance, but generated 28.3% IRRs for the first decade, which is still fabulous performance."

The quote discusses Charlie Munger's realization about the challenges of managing other people's money and his impressive investment performance despite its volatility.

Warren Buffett and Tom Murphy's Relationship

  • Warren Buffett is introduced to Tom Murphy by Bill Ruane.
  • Murphy impresses Buffett and invites him to join the Capital Cities board.
  • Buffett and Murphy decide to remain friends and advisors due to stock issuance disagreements and FCC rules.

"So they get together, and Warren is immediately impressed with Murph and with Capital Cities. And he just loves everything about this business."

The quote highlights the mutual respect and admiration between Warren Buffett and Tom Murphy, leading to a significant but informal advisory relationship.

Warren Buffett's Investment in The Washington Post

  • Warren Buffett buys a significant stake in The Washington Post.
  • Buffett's investment is based on his respect for CEO Katharine Graham and the newspaper's potential.
  • Buffett and Graham develop a close friendship and professional relationship.
  • The investment in The Washington Post yields a significant return for Berkshire.

"He writes Kay a letter. Remember, they've already met. He says, this purchase represents a sizable commitment to us being Berkshire and an explicitly quantified compliment to the Post as a business enterprise and to you as its chief executive."

The quote reflects Warren Buffett's strategic and respectful approach to investing in The Washington Post and his admiration for Katharine Graham's leadership.

The SEC Investigation of Berkshire's Corporate Structure

  • The SEC investigates Berkshire's complex corporate structure involving Blue Chip Stamps and Wesco Financial.
  • Buffett and Munger simplify their corporate structure to resolve SEC concerns.
  • They prioritize ethical business practices and long-term partnerships over short-term gains.

"Warren ends up getting subpoenaed and testifies that they paid the price they did because, quote, it was important how Wesco management feels about it."

The quote illustrates Warren Buffett's commitment to maintaining positive relationships with management teams, even when facing regulatory scrutiny.

Warren Buffett's Reinvestment in GEICO

  • GEICO faces significant losses and regulatory issues, leading to a drop in stock price.
  • Buffett sees an opportunity in GEICO's crisis and investigates the potential for a turnaround.
  • Jack Byrne is brought in as the new CEO of GEICO, signaling a possible recovery.

"So Warren, fortunately, hasn't had all of the cigar. But Ben Graham, ironically, Ben Graham with Geico philosophy beaten out of him. This piques his interest again in Geico."

The quote captures Warren Buffett's renewed interest in GEICO during its crisis, demonstrating his contrarian approach and confidence in the company's revival under new leadership.

Warren Buffett Observing GEICO

  • Warren Buffett watches GEICO's situation from a distance.
  • He's interested in GEICO's potential recovery and finds the stock price of $2 per share very attractive.
  • Buffett is looking for a sign of hope that GEICO can recover.

"No, this is Warren's watching from afar. He's waiting to see if there's something that, like, a glimmer of hope that maybe GEICo could make it out of this, because the stock is, like, super attractive and $2 a share."

This quote indicates Buffett's strategic patience and his keen eye for value, waiting for the right moment to invest in GEICO when its stock was significantly undervalued.

GEICO’s Board and Jack Byrne

  • GEICO's board is trying to navigate through the company's challenges.
  • Jack Byrne, a former executive at Travelers Insurance, is seen as the right person to lead GEICO.
  • Byrne's experience and approach to the insurance industry are expected to bring a turnaround for GEICO.

"So Jack had been one of the top execs at Travelers insurance before he resigned in like a huff when he was passed over for CEO."

The quote highlights Jack Byrne's background and the circumstances leading to his potential involvement with GEICO, suggesting his motivation and capability to lead a recovery.

Reinsurance Strategy

  • Jack Byrne devises a plan to approach other auto insurers to reinsure GEICO for future losses.
  • Reinsurance involves selling off risk to other insurance organizations.
  • The goal is to prevent regulatory fallout for other insurers if GEICO fails.

"So this is the argument that Byrne makes to the industry, and it mostly works. And the deal that he proposes is to get all these other auto insurers not to buy GEICO, but to reinsure GEICo for some of these future losses off of their own balance sheets."

This quote explains Byrne's strategic plan to stabilize GEICO through reinsurance, which is a critical move to spread risk and avoid a collapse that would affect the entire industry.

Warren Buffett’s Investment in GEICO

  • Warren Buffett is impressed by Jack Byrne's plan for GEICO.
  • Buffett uses Kay Graham's connection to meet Byrne and decides to invest heavily in GEICO.
  • He purchases $4 million of GEICO stock at $2 per share, showing his confidence in the company's future.

"The next day, after the dinner with burn at Kay's house, he buys $4 million of GEICO stock at $2 a share."

The quote captures Buffett's decisive action to invest in GEICO after being convinced of Byrne's plan, reflecting his investment philosophy and ability to make bold moves based on thorough assessment.

GEICO’s Capital Raising

  • GEICO needs additional capital to operate and pay off claims.
  • Buffett advises Byrne to secure a secondary equity offering.
  • Solomon Brothers, under John Gutfreund, agrees to underwrite a $76 million convertible debt deal for GEICO.

"It is Solomon Brothers... They're the only bank that is willing to underwrite what ultimately ends up being a $76 million convertible debt deal."

This quote details the critical financial maneuver that allowed GEICO to raise necessary capital, with Solomon Brothers playing a pivotal role in the company's recovery.

Regulatory Hurdles and Pricing Strategy

  • GEICO must negotiate with state regulators to adjust its pricing.
  • Jack Byrne takes a bold approach, especially with New Jersey, to ensure GEICO can reprice its policies.
  • Byrne's aggressive tactics signal his determination to save GEICO.

"Burns impalement of New Jersey had exactly that effect. Everybody knew he was serious and so."

The quote conveys Byrne's uncompromising stance in dealing with regulatory challenges, which was essential for GEICO to adjust its pricing and become profitable again.

GEICO’s Recovery and Growth

  • After overcoming capital and regulatory issues, GEICO focuses on proper pricing.
  • Byrne's leadership results in GEICO's profitability and growth.
  • Buffett's Berkshire Hathaway eventually acquires a significant portion of GEICO, highlighting its value.

"So Geico has now got two of the three problems solved. It's capitalized, it's got enough money to make it through."

This quote summarizes GEICO's successful resolution of its major issues under Byrne's leadership, setting the stage for its future success and Buffett's continued investment.

Federal Reserve's Ultimatum to Solomon Brothers

  • The Federal Reserve sends a deeply troubling letter to Solomon Brothers, questioning the continuation of their business relationship.
  • The firm is given ten days to respond and significantly change its business practices, or the Fed will end its relationship with Solomon, effectively destroying the firm.
  • Good friend and the general counsel (GC) of Solomon Brothers receive the letter but do not inform the board or take any immediate action.

"So the Federal Reserve sends a letter to good friend and Solomon saying, I think only good friend and the general counsel see this, saying that it is, quote, deeply troubled by both the firm's actions and lack of actions, and it is questioning whether it can continue to have a business relationship with Solomon Brothers."

This quote highlights the gravity of the situation for Solomon Brothers, with the Federal Reserve expressing severe concerns about the firm's conduct and considering severing ties, which would have catastrophic consequences for the firm.

Warren Buffett's Involvement in Solomon Brothers

  • Warren Buffett is alerted to the issues at Solomon Brothers and becomes involved due to the potential impact on his and Charlie Munger's reputations, as well as on Berkshire Hathaway.
  • Buffett takes immediate action by flying to New York to meet with the Federal Reserve and attempt to negotiate more time to address the issues.
  • Despite initial misunderstandings, Buffett ultimately convinces the government to give Solomon Brothers a chance to rectify its practices under his interim leadership.

"So Warren immediately gets on a plane to New York, and he goes and meets with the Federal reserve and tries to understand and sweet talk them."

This quote illustrates Buffett's proactive approach to dealing with the crisis at Solomon Brothers by personally meeting with the Federal Reserve to negotiate a resolution.

The Aftermath of the Crisis at Solomon Brothers

  • Buffett and Charlie Munger work to navigate Solomon Brothers through the crisis, with Buffett becoming the interim chairman and installing new management.
  • They confront the immediate threat of bankruptcy and government action but manage to avert disaster through Buffett's direct appeals to government officials.
  • The firm undergoes internal cleanup and cooperates with the government, leading to a settlement and eventual recovery.

"So now they have to deal with the aftermath. So Warren has no interest or ability in actually running day to day Solomon brothers, but what he can do is he can deal with the government and the public."

This quote emphasizes Buffett's role in managing the external relations and governmental issues facing Solomon Brothers, leaving the internal restructuring and cleanup to the newly appointed CEO.

Buffett's Investment Philosophy and Reputation

  • Buffett's investment philosophy is highlighted during the crisis, focusing on long-term value and reputation over short-term gains.
  • His decision to intervene and take control of Solomon Brothers is driven by the potential damage to his reputation and the future of Berkshire Hathaway.
  • Buffett's testimony before Congress and his actions during the Solomon Brothers crisis reinforce his commitment to ethical business practices and reputation management.

"The way that Solomon's going to operate going forward is lose money for the firm, and I will be understanding, lose a shred of reputation for the firm, and I will be ruthless."

This quote from Buffett's congressional testimony encapsulates his philosophy on the importance of reputation over financial results, indicating a zero-tolerance approach to any actions that could tarnish the firm's reputation.

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