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Podcast,  The SKYLER IRVINE Show

Investing in a Stock Market Crash

Brand Watch: Warren Buffett’s Berkshire Hathaway

  • 12:30 – Digital Trends
  • 12:35 – 5G + AR/VR Flash Forward
  • 14:45 – Quibi to show ads and charge for service
  • 15:25 – Twitter “Fleets”
  • 16:15 – Dorsey in Trouble as CEO of Twitter
  • 18:45 – Tik Tokers Making Money in their Sleep
  • 19:17 – Wins: Turd Sandwiches and Giant Douches
  • 20:14 – Losses: Cruising during Coronavirus
  • 22:22 – Quibi is destined for disaster

 On Brand Watch today we are going to be taking a look at Warren Buffett and Berkshire Hathaway as a brand. Not a lot of people know a lot about his early days, and I want to talk a little bit about Warren Buffett. Specifically, his investment strategies because at times like this, when the market is crashing, a lot of people like to quote Warren Buffett, but the thing is he’s human. He is just like a lot of other people. He just has some certain attributes that he’s developed over time that have essentially made him one of the world’s richest men today.

 

If you are unfamiliar, his company, Berkshire Hathaway, it originally was a textile manufacturing company. It started in 1839 and by 1955, it had merged with a company called Hathaway Manufacturing and officially became Berkshire Hathaway. This is a little bit interesting because what we know of Berkshire Hathaway today isn’t what it started out as and the story behind it’s a little bit interesting. I highly recommend reading a lot of these books on Warren Buffett. I’ll tag some in the show notes, the specific ones that are good. Again, there’s so much content out there about him. We could go on an entire podcast series, so I’m going to speed through a lot of this quickly and just give you a little bit of a gist of this story.

 

In 1962, as the company, Berkshire Hathaway, not yet owned by Buffet … so, at the time, it was consolidating its businesses, selling off a lot of its assets. Buffet started to notice this pattern that every time it sold off a windmill or every time … not a windmill, but every time it closed down one of its mills, the price went up because it was selling off these assets in a business that wasn’t really doing that well. Eventually Buffet acknowledged that this business was just basically going to hell and the current owners at the time, buffet was buying shares with this, buying shares of this on a regular basis. He owned a pretty good stake in this company. He’s about 30 years old at this time or he’s in his thirties and the current person in charge of Berkshire Hathaway in 1964 basically makes a tender oral offer. So, it means he verbally gives him a commitment saying, “I’m going to buy out all of your shares to Warren Buffett at 11 and a half dollars per share.”

 

Everything was halves and quarters and eighths back then. So, he agrees to this over the phone and by the time he receives the written offer for this, it is for $11 and three eighths. So, 11 and three eights dollars, excuse me. So, Buffet’s pretty pissed. He agreed to a certain price over the phone. When he got the actual paperwork, it was off by, I don’t know my fractions, but that is a very small amount. So, 11 and a half dollars was the agreed upon price. He actually received an offer at 11 and three eighths dollars. Buffet later admits that this undercutting offer made him angry. Well, duh it made him angry because instead of agreeing to this price, Buffet does the opposite. He decides to buy more share of the stock, eventually taking control of the entire company and fires Stanton, who was the person who made him that offer in the first place.

 

Essentially, this is just out of pure spite and anger. So, not only does it put him in this position of wanting to get revenge so to speak, now he’s the majority owner of a business that he didn’t like in the first place. If you’re looking at this like anyone else, this is a pretty petty move and a lot of people could probably relate to it. I’m curious how people would react if this was you, if you think this was a smart move because you got screwed over or if it’s a silly move. In hindsight, it’s pretty silly, especially given some of the things that Buffet says later. But in 1985, after a buffet is officially … I mean, this has happened in the early sixties. This is 20 years later. The last textile operations of Hathaway’s historic core service is completely shut down.

 

So, Buffet owns this company outright at a time where the reason that the company was in existence is completely past due and not even around anymore. Buffett is hanging onto this company that he owns majority of control over. He eventually starts buying insurance companies. He buys himself into Geico. He’s generating all these revenues and he keeps Berkshire Hathaway as his hub, as an umbrella company that everything lives underneath. So, he turned this failure into essentially a reminder for himself that he made the wrong decision once. Don’t do it again. He put all of his eggs under this one basket and he’s the person who is known as being one of the wisest investors ever, and a lot of it got his start off of this petty move that a lot of people don’t really know about.

 

In 2010, I’m quoting Wikipedia here, shout out Wikipedia. Buffet claimed that purchasing Berkshire Hathaway was the biggest investment mistake that he ever made. Claimed it had denied him compounded investment returns of about $200 billion over the next 45 years. That is a lot of money. There’s a lot of lessons in here and I’d love for you to dive in and take the lessons out of there that you want, but a couple of things I want to skim through is Buffet’s famous for a lot of reasons and most notably is he has a lot of quotes out there. He’s quoted a lot, especially when the markets crash, being smart like buffet and understanding that he is someone that got his start this specific way, but he used this as a jumping off platform for himself to not make those mistakes again. Don’t make them out of emotion. Make them out of rational decision-making.

 

In a vacuum, is this a good decision despite how you feel or despite emotions or despite certain concepts? And that’s how his philosophy has been over time. That’s something to really take a deep look at when markets are crashing around us and we think it’s because of the Coronavirus, but really there’s so many other things at play here. These are the times where people like Warren Buffett really capitalize. They’re able to do that because they’ve got a ton of recurring revenue. He’s in the insurance business. He owns most of Geico, so they’ve got monthly income coming in that he has to put somewhere that will be safe for a rainy day. So, when the markets crash, that’s when people make insurance claims. He’s got to be prepared for that. So, his business philosophy is built into that from the beginning. He’s got to find safe places to put his money.

 

My big takeaway for you in times like this and the biggest lesson that I think is the most valuable is when people try to chase the high yields or chase the opportunities with the biggest return is when they can find themselves in the most trouble. Whereas, someone like Buffet and his team and Charlie Monger, they look for opportunities with lowest downside. They plan on being around for a while, so if they can always minimize their downside, they’re in a better position than people that are constantly chasing higher returns or higher yield. Those inherently come with larger risks, so he doesn’t look around “What could make me the most money this year?” He wants to invest in something that’s likely to be around for the next 50 years and will make him the most money because he doesn’t plan on buying and selling. He wants to own these forever.

 

So, will this company be around in 50 years? Will this company be safe? Does it have a monopoly or close to it? He calls them moats. Is it hard for people to compete with them? What makes it hard? There are some inherent values that come into play with certain companies that have more to do with stock prices. Companies that have built a brand, you can’t really put a price on brand. Branding doesn’t really fit into any type of metric when you’re reviewing a company’s financials, so something like Apple, who spent millions of dollars on branding over the last 30 years, you can’t really put a price on that because some people will just blindly buy Apple products even if they cost more or they’re not as good as a competitor. In a vacuum, that’s a silly decision, but that decision is based on brand value. Some companies have that, some don’t.

 

So, if you’re looking at the market today, even if it’s down there, we’re flooded with oil right now, so oil prices are going to drop big time. A lot of small businesses are going to be hurt by this. Credit is going to start tightening. We’re going to start seeing people who have overleveraged and the ones that are going to survive are the companies that have built a brand and built a strong financial position for themselves. Apple could be hurt a lot because consumer products will drop because people can’t afford to buy new iPhones next year. Their supply chain is disrupted because China’s getting completely shut down. In the short term, Apple could go through a lot of trouble, but you don’t know when and why and for how long. Someone like Warren Buffett’s sitting on a pile of cash, hundred billion dollars. He’s probably going to be buying more of these types of companies because he’s not investing on a quarterly basis.

 

He’s investing for the next 30 years and if you are someone who’s watching or listening to this, you probably have 30 years yourself. These are the types of decisions to be making based on what is the lower downside versus what’s going to make me the most money in one year. Those are the ones that really get you in trouble and it provides opportunities for people like Warren Buffett to capitalize on because when the market is really good for a long time, yields drop. That means it’s hard to find a return on your money when you can’t buy something at a low cost. So, when prices of everything goes up, you have to start borrowing additional money and I’m not saying you, I’m saying in general, companies and investors and investment groups, they’ve got to take on bigger and bigger risks to find the same returns so they have to borrow more money.

 

They leverage themselves for lower returns, so when something like this happens and the market pulls back, a lot of people just lose everything. And that’s when guys like Warren Buffett are able to buy things at a huge discount because he plans on being around for a lot longer. That’s the biggest lesson to take away from this is if you are someone who’s got 30 years ahead of yourself, focus on what’s going to minimize your downside over your lifetime. Invest in companies that you don’t think are going to go away and instead of trying to find the perfect crypto investment that might double your money in a year. The problem is, say you do double your money in a year, you remember that forever. You think you’re smarter than you are, even if you just got lucky, and now you don’t know where to put that money and you end up chasing another bigger yield and eventually the market’s going to pull back for whatever extraneous reason and it’s going to really hurt your investment and put you back a long time.

 

So, to conclude, Warren Buffett and his current brand and that of Berkshire Hathaway, he’s got a lot of cash coming in on a regular occurrence and putting it in the safest place possible is part of the strategy that’s ingrained into not only his philosophy but also his specific business. A lot of times that means the safest place is not putting it in anything when the markets get a little bit crazy. And he gets laughed at a lot of times thinking that people are smarter than him and he’s lost his touch when the markets are booming, but then they always end up going bust and that’s when he jumps in and gets these giant deals again. He’s been very synonymous with just putting himself in a position to really take advantage of these situations of having a pile of cash when no one else does have a lot of cash.

 

And he’s able to do that by not making shortsighted decisions. If you were to ask people today, his brand is that of frugality and patience, but even if you talk to him now or you look up his Wikipedia site, it was born out of spite and anger. One of the richest people in the world today still thinks about $200 billion that got away. And I think that’s something to really think about when it comes to your own search for happiness.

 

So, moving on to what is trending, I know that was a very heavy subject but we had a lot of content we had to include into there, so we’ll try to keep it light and move quickly from here on out. Something that is trending today in the news is an iOS 14 leak reveals that Apple is developing new augmented reality app codenamed Gobi with QR like tags.

 

This is really interesting because I think if you combined the future of iOS and what they’re investing into augmented reality and their phones, combining that with the 5g roll-outs, and now we’re looking at this trend of remote work and people working from home and an increased attention on this as a cultural norm. It’s a recipe that’s going to be really interesting to see what it cooks up over the next few years of essentially speeding up a glimpse into how AR and VR could impact our lives. The technology is going to come faster than what we were expecting because it’s being pushed to the forefront of taking advantage of video conferencing. How can you make it more personal? How can you make it more feel like you’re there? More and more of these sports arenas are going to start playing games with no fans. We’ve already seen tournaments and the NCA get canceled altogether and just awarding the winner without playing the actual games.

 

As more and more of these giant meetup events get canceled and pushed off because of the concerns of coronavirus, people that can fill the void with better and better in-home technology are going to really see an opportunity here. To put things in perspective, a company like Uber, which exists today and we are all very familiar with and what it does, only exists because of an app on the iPhone and the iPhone didn’t even exist at a time where it has now generated new companies that we never would have considered because we didn’t even know the iPhone was coming, let alone the iPhone ecosystem, which became the app store. So, if you’re trying to figure out what AR and VR could mean for us, it’s almost even hard to get our minds around it because once the platform’s created, what people do with that is going to be hard to predict. We might see it happen faster than what we were expecting due to what’s going on in the world today, as scary as it might be.

 

Next up is Quibi and I’ve a lot to say about Quibi. We’re going to touch on this a little bit later in the show. I’m not a fan of Quibi, but they just released this week that they will release pre-roll ads that you cannot skip on its videos. They’re going to offer two tiers of service, one that is paid with ads and then one you pay more with no ads. Quibi is an online video service designed for short videos. I’m going to touch on this a little bit later, so don’t worry about that, but the fact that they are announcing already that they are going to be monetizing this early no matter what, it’s caught my attention for a lot of different reasons.

 

Last week, we touched on how LinkedIn was testing out Snapchat-like stories. This week Twitter announced the same. They’re calling them Fleets. They are tweets that disappear, and it’ll be interesting to see what they learn from that because Twitter is under some more news which we’ll get to right now. I’ll skip the next one and go right into this. Jack Dorsey bought himself a little bit more time as a Twitter CEO, but it might not matter. That was the headline. For those of you who don’t know, Jack Dorsey is the CEO of Twitter and he’s also the CEO of Square. Yeah, it’s kind of weird. He’s a CEO of two different companies and if you’re a shareholder in those companies, you probably wouldn’t love that, and you wouldn’t be wrong. A private equity firm just took a giant equity stake in Twitter and also [inaudible 00:16:07] themselves three board seats with the intention of maybe taking them private. What that means for Jack Dorsey, the current CEO, my prediction is … this is even a bold prediction.

 

I just really don’t think he’s going to last the summer, if not sooner. This type of change usually comes with the intention of he’s probably going to retire soon to spend more time with his family, so it’s not a forced resignation, but it kind of is. Twitter’s unperformed as a stock for quite some time and what’s really scary and interesting about this is comparing it to Facebook or comparing it to Snapchat and a lot of these tech firms with a CEO who’s got a lot of power, Twitter isn’t really on this category, but it gives us a little bit of a glimpse into how these people think, where they’ve built this company or they founded this company, they’re so involved with it, they’ve spent so much time, a lot of these times they don’t want to give up any power or any responsibility.

 

They want to be the sole decision maker. So, someone like Mark Zuckerberg gets a lot of flak for this because in his mind, he doesn’t think anyone can do as good of a job as he can. So, he’s justifying the fact that “I don’t want to give up power because no one can do this as good as I can.” And I think that’s very dangerous and a lot of people agree because on the flip side is what happens if something outside of your control puts someone else in charge of your company? So, because you’ve put in these restraints that make all of the decisions and power land on one person, what if something were to happen where another person took over and it wasn’t you? Would you still feel the same way about your company and the bylaws? Do you think that is the specific job role of that position or do you think that’s the only job role of the position if you have that position, but if it’s someone else then maybe the rules should be different?

 

And a good way to kind of think of this is, Jack has a lot of power. Zuckerberg has a lot of power. Spiegel has a lot of power at Snapchat. If these CEOs were replaced or taken private and someone else was put in charge, they’ve got so much power that it could be very dangerous for society. So, even if you have the best of intentions, someone else might not. So, unless you’re able to give up that power now, you’re putting it in a position to where some day that company could have someone else in charge and it would be in a position that you’ve created and you’ve allowed to have happen because you didn’t want to give up that power in the first place or create a distribution of power that made a lot more sense like most traditional companies have. We’ll see this unfold as more and more information comes out with CEO of Twitter likely being ousted.

 

Last thing today, this one out in the digital digest this week, TikTok creators are making money while they sleep. Literally, they’re live streaming themselves sleeping and cashing in on this. This is a trend that the news loves because the news loves to make fun of young people. Meanwhile, the only ones that are laughing are the people that are actually making money while they sleep. As long as you’re not crossing the line and getting too creepy, shout out to all of these TikTok creators that are finding new ways to monetize and get your money while you can. I think that is awesome.

 

Moving on. Last segment of the day, Wins, Losses and Bold Predictions. My team might like this one. I’m going to go. Wins this week are South Park. If anyone remembers the old South park episode, Giant Douche and a Turd Sandwich. I think that show becomes more relevant every election cycle. Basically, no matter what you are doing, any type of election comes down to choosing between a giant douche and a turd sandwich and it’s really starting to feel that way again. I’m not getting into specific policies or politics, but right now we’ve just got two old men fighting over the most powerful position in the world and they’re constantly telling us how incompetent the other one is and it’s hard not to believe both of them, yet one of them is going to end up in the office and that is just how our world works. So, there’s a lot of passion out there. There’s a lot of discourse, but really when it comes down to it, it always seems to be a giant douche and a turd sandwich. So, congratulations south park for predicting the future once again.

 

Losses for this week. I think this is a big loss. For the year of vacation and leisure time and to get a little bit specific, it’s a real bummer, but I’ve seen quite a few headlines that are calling out a lot of these people that are attending these cruises for being insane or ignorant in light of the coronavirus epidemic. On the surface, I get it. I understand it’s easy to make fun. Like, why would people still go on cruises if it’s obvious that you’re going to get sick? And I think we got to look a little bit deeper. I think, for a lot of these people, especially the people that go on cruises, it’s their only vacation time of the year usually. A lot of planning goes into this. You’re saving money for a long time.

 

You’re finding deals. You buy these all-inclusive packages. You’ve got family that you probably haven’t seen in a long time meeting you from different places and it’s all centered around flying in and going on this week long cruise and a lot of these people, they work jobs and it’s really hard to find a full week to get off. So, you combine all of these aspects into it and all of a sudden, this news cycle comes up and says, “Hey, you’re an idiot if you go on your cruise.” You’ve got to take into consideration how impactful this actually is. This might be the only trip of the year or for a few years or this might be the trip they’ve been saving up for a really long time. So, just straight up call someone ignorant for wanting to take some time off and go on their vacation, I think says more about the person that’s making that statement than the actual people they’re saying it to.

 

And I think we’d go a lot further along if we added a little bit more empathy to how a lot of these things really impact the people who don’t have a lot of choice. It’s fun to say, “Hey, everyone should be working from home,” but a lot of people can’t work from home. We’re seeing huge spikes in people showing up at coffee shops and working all day because they can’t go into their office, which basically defeats the purpose of working from home, which also really endangers the people that are working at the coffee shop or are delivering the food for the door dash drivers. These are the types of the gig economy. They don’t have a great health insurance plan to fall back on. We’ve seen this develop so quickly, we don’t even know how to handle it and the people that are going to get hurt are the ones that can’t really call in sick to work and are the most endangered and we’re also laughing at them for trying to go on vacation.

 

So, that’s a big loss all around and I hope we do a better job of trying to take that into consideration. Moving on. Bold prediction. Touching back on Quibi. Quibi launches on April 6th and, if you don’t know, Quibi defines itself as new episodes daily, each 10 minutes or less, movie quality shows designed for your phone. This is a company that has a ton of money behind it. I think the last number was $2 billion raised. They’re paying big name celebrities to create and produce shows that are 10 minutes or less and I think this is going to be a giant disaster. I think this is the typical case of too much money, the wrong business plan. I think it’s learned the wrong lessons from the data that it was reviewing and it’s a textbook case of a big media company making a big move without understanding what makes this type of content succeed in the first place.

 

We’ve seen Yahoo do this. We’ve seen AOL do this. Quibi has a lot of money behind it, a lot of big names, and they’re paying celebrities to create short form content because they’ve got data that says short form content performs well for young people. The problem is, they’ve learned the wrong lessons from why people like to engage with short form content. They’re trying to take TV and turn it into this copy paste mode and it’s the same thing as you’re trying to share a YouTube video on Instagram or vice versa. You really have to be true to these platforms to succeed on them and see what’s really making them work. And what makes a lot of these things work isn’t that it has a high production value or celebrity behind it. It’s they exceed despite that. So, trying to take the old model and jam it into short form video, I think is begging for disaster.

 

I think it’s got too much momentum that they’re afraid to make better decisions. And I think this is two years away from being a giant headline with a lot of money lost and deep write downs. The fact that they’ve announced this week, which we mentioned a little bit earlier in the show, that they are basically they’ve said I think it’s 3.99 for your subscription with ads that you can’t skip and then 8.99 or 9.99 a month for no ads. So, they are launching with a pay-only subscription at a time where typically a company like this with this much financing would be free and try and get a huge customer acquisition and then start to monetize. The fact that they’re monetizing from day one, I think, is the first step in a very messy future for Quibi.

 

Bold prediction. Keep an eye on that one. Timestamp this one. We’ll look back on it in a few years and maybe I’m wrong, I don’t think I’m going to be. That closes out our show today. Thank you, guys, for tuning in. I appreciate you watching and/or listening. Guys, thank you for producing today. Zeke, you are the man. Please drop a comment and let me know what you think of this episode and if you have any other topics or questions that you’d like to talk about in the next one. Stay safe and find the happiness that you are seeking, and I will see you on the next episode of the Skyler Irvine Podcast.

Thank you.