Dissecting Buffett's Forgotten Investing Method (Lost Livestream Resurrected) | Martin Shkreli

Summary

In this insightful video script, the speaker delves into the concept of capital efficiency in investing, highlighting the importance of understanding financial statements and the iterative process of investment analysis. Using Apple and Checkpoint as examples, the discussion explores how companies generate profits relative to their assets, emphasizing the significance of capital efficiency in identifying strong investment opportunities. The script also touches on Warren Buffett's investment philosophy, the concept of 'Buffett return,' and the idea of moats in business, providing a comprehensive look at advanced investment strategies.

Takeaways

• 📚 The speaker emphasizes the complexity and iterative nature of understanding financial statements for investment analysis.
• 🧐 The importance of capital efficiency in investment is highlighted, comparing a business's assets to the profit they generate.
• 🤔 The concept of capital efficiency is defined as understanding the relationship between the assets required to generate profit and the actual profit made.
• 💡 The speaker introduces the 'Buffett return', a ratio mentioned in the book 'The Money Masters' by John Train, which is influenced by Warren Buffett's investment philosophy.
• 🔍 Apple is used as an example of a capital-efficient company, generating significant cash flow with relatively low capital expenditure on inventories and fixed assets.
• 🏭 The discussion of Apple's property, plant, and equipment (PPE) reveals the company's ability to generate high returns with minimal asset base, indicating a strong competitive advantage.
• 🚗 In contrast, the automotive industry, represented by Ford, is described as less capital efficient, requiring substantial capital to generate lower returns.
• 🛡 The concept of 'moats' or competitive barriers is introduced, explaining why some businesses can sustain high returns without attracting competition.
• 💼 Warren Buffett's investment strategies, including his focus on capital efficiency and understanding business moats, are discussed as key to his success.
• 📈 The speaker discusses the potential for arbitrage in businesses that require minimal capital investment to generate high returns, using Checkpoint as an example.
• 📘 The influence of Warren Buffett's investment philosophy, including his departure from traditional value investing and focus on private equity, is highlighted.

Q & A

What does the speaker consider the most interesting aspect of financial statements?

The speaker finds financial statements interesting because they appear simple but are inordinately complex, offering a deep understanding of a company's financial health and operations.

What is the concept of capital efficiency as defined by the speaker?

Capital efficiency is defined as comparing a business's assets, which are required to generate a profit, with the amount of profit being generated.

Why is capital efficiency important for investors?

Capital efficiency is important because it helps investors understand how much capital is needed to generate returns and whether the business is making efficient use of its capital to produce profits.

What is the 'Buffett return' mentioned in the script?

The 'Buffett return' is a ratio mentioned in the book 'The Money Masters' by John Train, which is likely a measure of return on investment that Warren Buffett is known for using or advocating.

How does the speaker describe Warren Buffett's influence on his investment philosophy?

The speaker describes Warren Buffett as the greatest investor of all time and states that Buffett's philosophy has influenced his own investment approach more than any other.

What does the speaker find remarkable about Apple's capital efficiency?

The speaker finds it remarkable that Apple can generate significant cash flow with relatively low capital expenditure, specifically highlighting Apple's ability to create a business valued at 600 billion dollars with only 23 billion in property, plant, and equipment.

What is the difference between the capital efficiency of Apple and Ford as per the speaker's analysis?

Apple has a much higher capital efficiency, generating 60 billion dollars annually with 23 billion in assets, whereas Ford generates 13 billion in cash flow with 71 billion in capital, indicating a lower return on investment.

What is the significance of the 'moat' concept in the context of capital efficiency?

A 'moat' signifies a barrier or competitive advantage that protects a company's high returns on capital from being eroded by new competitors, such as brand loyalty or unique business models.

How does the speaker view the concept of working capital in relation to capital efficiency?

The speaker views working capital as an important aspect of capital efficiency, noting that in some businesses, positive working capital can be used as a float to invest, which can significantly impact a company's capital efficiency.

What is the speaker's perspective on private equity as related to capital efficiency?

The speaker sees private equity as the ultimate arbitrage, where investors like Warren Buffett acquire companies at low prices and benefit from their capital efficiency, often leading to high returns on investment.

How does the speaker emphasize the importance of understanding a company's business model when evaluating capital efficiency?

The speaker emphasizes understanding a company's business model to identify why certain companies can achieve high returns with low capital requirements and to assess what prevents competitors from entering and reducing those returns.

Outlines

00:00

📈 Capital Efficiency and Investment Analysis

The speaker introduces the concept of capital efficiency in investment, emphasizing its complexity and importance for evaluating companies. They discuss the iterative process of financial analysis and the need for continuous learning, using Checkpoint (CHKP) as a case study. The speaker also mentions Warren Buffett's influence on their investment philosophy, highlighting the 'Buffett return' ratio and referencing John Train's book 'The Money Masters' for deeper insights into Buffett's strategies.

05:00

🏭 Understanding Capital Efficiency in Business Assets

This paragraph delves deeper into the definition of capital efficiency, comparing a business's assets to the profit they generate. The speaker uses Apple as an example to illustrate how capital efficiency can be measured, discussing the company's cash flow and asset base, including inventories and property, plant, and equipment (PPE). The importance of understanding what assets are consumed to generate profit is highlighted, along with the significance of capital efficiency in making informed investment decisions.

10:03

💡 The Significance of Capital Efficiency in Business Valuation

The speaker explores the implications of capital efficiency on business valuation, using Apple's market capitalization and PPE as a case study to demonstrate how a company's assets can be leveraged to generate substantial returns. They discuss the concept of 'moats' that protect high-return businesses from competition and the role of brand loyalty and other barriers to entry. The comparison between Apple and other businesses with lower capital efficiency, such as Ford, is used to emphasize the value of understanding capital requirements relative to profit generation.

15:03

🛡️ The Role of Brand and Moats in Capital Efficiency

The speaker discusses the role of brand loyalty and other competitive advantages (moats) in maintaining high capital efficiency. They contrast companies like Apple, which benefit from strong brand loyalty, with businesses in industries such as pharmaceuticals, where brand is less important. The speaker also touches on the concept of arbitrage and the importance of identifying and understanding the barriers that protect a company's high returns from competition.

20:06

🚀 Capital Efficiency in Software and Technology Companies

The focus shifts to software companies, particularly Checkpoint, to illustrate extreme capital efficiency. The speaker is intrigued by the high returns on minimal capital investment in such businesses and questions the sustainability of these margins. They ponder the reasons behind Checkpoint's ability to generate significant profits with minimal assets and the potential challenges of replicating such a business model in a competitive market.

🌟 Learning from Warren Buffett's Investment Strategies

The speaker reflects on Warren Buffett's investment strategies, particularly his understanding of capital efficiency and the use of working capital to invest in businesses. They discuss Buffett's shift from traditional stock investing to acquiring and holding companies, his focus on maintaining a strong reputation, and the lessons that can be learned from studying his approach. The anecdote of a young investor who had the opportunity to dine and converse with Buffett serves to illustrate the value of direct engagement with successful investors for learning and inspiration.

Keywords

💡Capital Efficiency

Capital efficiency refers to the ability of a business to generate profits with the assets it has. It is a measure of how well a company uses its capital to produce income. In the video, the speaker emphasizes the importance of understanding capital efficiency for investors, as it indicates how much capital a company needs to generate a certain level of profit. The example of Apple is used to illustrate a highly capital-efficient company, where a relatively small amount of property, plant, and equipment generates a large amount of cash flow.

💡Financial Statements

Financial statements are formal records of a company's financial activities, including balance sheets, income statements, and cash flow statements. They provide a snapshot of a company's financial health and are crucial for investors to analyze the performance and financial position of a company. The script mentions that understanding financial statements is a foundational step for investors, and the video aims to build upon this knowledge to delve deeper into concepts like capital efficiency.

💡Return on Assets (ROA)

Return on Assets (ROA) is a financial metric that shows how efficiently a company is using its assets to generate profit. It is calculated by dividing net income by total assets. The video script discusses ROA as one of the ratios investors look at to assess a company's capital efficiency, indicating how much profit a company makes relative to its assets.

💡Return on Equity (ROE)

Return on Equity (ROE) is a measure of a company's profitability in relation to its shareholders' equity. It shows how much profit the company generates with the money raised from its shareholders. The script implies that ROE, like other return-based metrics, is an indicator of a company's efficiency and is part of the iterative process of investment analysis.

💡Invested Capital

Invested capital refers to the funds invested in a business, including both debt and equity. It is used to finance a company's assets and operations. In the context of the video, the speaker discusses how the concept of capital efficiency relates to the amount of capital invested in a business and the returns it generates, using the example of Apple to highlight the high returns on relatively low invested capital.

💡Warren Buffett

Warren Buffett is an American investor, business tycoon, and philanthropist who is widely regarded as one of the most successful investors in the world. Known as the 'Oracle of Omaha,' Buffett's investment philosophy and strategies are often studied and emulated by investors. The video script mentions Buffett multiple times, discussing his influence on the speaker's investment approach and his understanding of capital efficiency and business moats.

💡Buffett Return

The 'Buffett Return' is a concept mentioned in the video that seems to refer to a specific ratio or method of evaluating a company's financial performance, attributed to Warren Buffett. The script suggests that this ratio is not widely known but is significant in understanding how Buffett analyzes investments, particularly in relation to capital efficiency.

💡Moats

In the context of investing, a 'moat' refers to a sustainable competitive advantage that protects a company from competition. The video discusses how high returns on capital can indicate the presence of a moat, such as brand loyalty or other barriers to entry that prevent competitors from eroding a company's profitability. The speaker uses examples to illustrate how some companies maintain high returns due to their moats.

💡Arbitrage

Arbitrage is the practice of taking advantage of a price difference between two or more markets to make a profit. In the video, the concept of arbitrage is used to explain the idea of creating a business with high returns on capital, where one could theoretically replicate a successful company's model and achieve high profits with a relatively small investment.

💡Private Equity

Private equity refers to investments in non-publicly traded companies, typically made by private equity firms that acquire and manage these companies with the goal of improving their operations and eventually selling them for a profit. The script mentions that Warren Buffett sees private equity as the 'ultimate arbitrage,' highlighting his shift from stock trading to acquiring whole companies for long-term value creation.

💡Working Capital

Working capital is the difference between a company's current assets and current liabilities, representing the liquid capital available to a company to fund its day-to-day operations. The video script discusses how some companies can have positive working capital, which can be used to invest or expand the business, contributing to their capital efficiency.

Highlights

The lesson focuses on the concept of capital efficiency in investment analysis.

Capital efficiency is defined as comparing a business's assets to the profit generated.

Financial statements are complex and require an iterative process to understand fully.

The importance of understanding concepts over memorizing formulas in finance and business.

Introduction of the 'Buffett return' ratio, a measure of capital efficiency.

Discussion on the book 'The Money Masters' by John Train, influential to the speaker's investment philosophy.

Apple is used as an example of a highly capital-efficient company.

Apple's property, plant, and equipment are worth $23 billion, a small fraction of its market cap.

The concept that high returns on capital should eventually be eroded by competition unless there's a barrier to entry.

Warren Buffett's influence on the speaker's investment approach.

Buffett's understanding of capital efficiency and its role in business valuation.

The idea that some businesses can use their working capital to invest and grow.

Private equity as the ultimate arbitrage according to Buffett.

Buffett's focus on image and reputation in investing.

A personal anecdote about meeting Warren Buffett and the insights gained.

The importance of reading and understanding the works and philosophies of successful investors.

Transcripts

uh so I think today's uh quote-unquote

lesson or review or whatever you want to

call these things uh is probably the the

most I think interesting one I've put

together yet it's probably the most

advanced one so it may not make sense to

everyone

uh from the perspective that um you know

it requires that you you watch the other

ones at least and probably have even

more knowledge beyond that but I thought

I'd sort of start to evolve what we've

been doing

um and we always have to look at

companies and investment opportunities

with the

um perspective that we're trying to make

good Investments and we started off just

sort of understanding what financial

statements a company provides and then

um seeing what we can Define from that

and what's interesting is it's a very

iterative process and a lot of the young

investors I need after I teach them the

very first elements of the process they

they sort of decide that they're the

greatest investors who ever lived and

don't need any more um understanding but

the reality is that financial statements

are probably like many things they look

very simple but they're inordinately

complex what you can Define from them is

um more complicated than uh you can even

imagine we're going to go a little bit

further into that with respect to

something called Capital efficiency a

little later and like most lessons again

we have a company that we're going to

use as a we're using a more as a muse uh

or Conversation Piece than we are as um

a serious examination into the company

um

but of course we're going to try to

examine it as best as we can in a few

hours uh and that company is called

checkpoint

um ticker is chkp it's a software

company

and uh we're gonna look at that and

we're going to talk also about Warren

Buffett you know I like to uh talk about

great investors

uh and Warren Buffett is arguably the

greatest of all time

um

and uh I'm a Avid buffetologist I'd say

he's influenced

me and my investing more than anyone

else and uh we'll talk about Buffett um

quite a bit so where do we get started

well uh maybe we can talk about what

what capital efficiency is because it's

going to dive into

um it's going to be related to kind of

what we're talking about you've probably

seen at some point some of these ratios

like return on assets return on Equity

return on book tangible book uh invested

Capital Etc and uh which you probably

haven't seen is something called the

Buffett return

um and I actually have this book

um let me run and get it real quick

because it's pretty important and it'll

tell you something important about how I

do what I do the money Masters it's by

John train I think it's out of print so

you gotta find a used copy

um I had a first edition copy and I gave

it away to somebody which was foolish so

I had to go buy this on Amazon for three

dollars which is a very good investment

but the entire thing's marked up pretty

bad anyway it's uh if you're familiar

with Jack schwager's books which I also

recommend uh John trading wrote the

first Jack schwager book before

um probably schwager was even born

what's interesting about this book is

that uh

it's sort of similar to the schwager

books that it goes through

um investor by each each chapter is an

investor

and um

the uh the first chapters by Warren

Buffett and it's got some things in here

that nobody knows about Warren Buffett

which is pretty cool because you think

someone who's the most successful

investor ever the richest man in the

world that's somebody that has been

studied and and sort of um you know

everybody knows everything about Warren

Buffett but the reality is you know

there's things in here that are really

not uh

um understood

um about Warren Buffett and one of those

is the so-called Buffett return which is

a ratio which we'll talk about in a

second but what is capital efficiency

and like all of these I I sort of put

the new things that I am writing in red

and I put the whole things in Black so

each lesson you can see what I added uh

to our little PowerPoint our PowerPoints

now like 70

let's see 74 75 73 slides

so it's almost a not quite a book but

it'll be a book sooner or later

um so what is capital efficiency well I

Define it as capital efficiency as a

concept and I think that's really

important is that we are always taught

in in probably it comes from school

where we're taught to memorize things

and not think about the concepts behind

them and in business investing and

finance it's way more important it's

important in chemistry it's important in

math but in business and finance I'd say

it's the most crucial where you actually

have to understand

Concepts and not formulas and so the

concept of capital efficiency is that

we're comparing a business's assets the

assets that that business requires to

generate a profit with the amount of

profit being generated so so that's a a

simple concept but it actually is

extremely tricky to sort of understand

for instance what assets are required to

generate a profit and that's the maybe

the hardest part of this and and so is

it desirable or undesirable obviously if

you think about it from a plain

perspective you'd rather much rather

let's say um you needed a a million

dollars of capital to make a dollar that

that would not be a capital efficient

business if you needed one dollar to

make a million dollars that would be an

extremely Capital efficient business and

why is capital uh efficiency important

obviously as return goes to zero you

could you could have alternative returns

right you could decide not to make that

capital investment uh and instead take

your capital and put it in something

returning higher the other concept is

that there's volatility around this

quote-unquote capital and what what is

the capital we're talking about well

we're actually talking about the balance

sheet so we're talking about things like

uh inventories and and uh property plan

equipment mostly so uh and this this

becomes a very very interesting

conversation let's look at some examples

um apple is one of the most Capital

efficient companies that exist so let's

pull up

in apple um income or out the financial

statements we'll say and so let's see

last quarter Apple generated

well let's just say for the last four

quarters Apple generated about 50 60 and

70 billion in cash flow for the trailing

12 months for the last

uh four quarters going backwards

um three times so on average they're

making about 60 billion on a full

annualized rate uh rate so the the book

is called the money Masters and it's by

John train

um I'm sure it'll go out of print

uh it's been out of print I'm sure it'll

go more out of print tonight but

actually talks about some wonderful

investors and you've never heard of

um one that's really uh fascinating is

actually a guy who just died is Robert

Wilson

um who's a New York uh Trader who is a

who was extremely successful that again

again almost nobody's ever heard of so

these old books can sometimes be

um rather nice I like how they say the

go go hedge fund days of the 60s which

is pretty humorous to anyone who's been

in the hedge fund industry recently so

anyway let's get back to Apple

so Apple's made UH 60 billion dollars on

an annualized basis so on on a four

quarter trailing basis and so the

question is what did it take for them to

make 60 billion dollars we all want

businesses that make cash flow at least

I do uh and um I know others don't but

uh I certainly want to make as much cash

flow as possible for my businesses and

the question is every business needs

assets to create those cash flows and on

a balance sheet it's supposed to be a

complete comprehensive description of a

company's entire asset base and there's

Concepts like off-balance sheet assets

and we don't have to get into those but

in general by law the balancing has to

contain every asset the company has and

the assets of apple look pretty simple

you have

um 230 billion in cash

and 305 billion in total assets so

really if you exclude the cash you're

left with 72 billion of quote-unquote

real assets but you can actually take

that a little further Buffett defines in

this book the uh the money Masters

um again something I don't think he's

ever talked about publicly other than in

this book which almost nobody's read

that he looks at the asset base as the

firm assets which is maybe an old name

for property plan equipment and

inventories and why why are those assets

of that are consumed capital

and so basically the way you look at it

is inventory is you have to spend money

to make your inventory right and you

hold that inventory and you hope to sell

it for for a higher price because that's

what a business is you make something

and then you sell it for a higher price

uh how much higher that's up to the

market but that inventory is capital

that's being consumed you have to hold

that Capital

um you have to Apple for instance here

has about 2.2 billion dollars of

inventories presumably those go into any

accounting student knows this goes into

raw materials work in progress and

finished goods so raw materials would be

you know I don't know glass I don't know

what Apple keeps holds in their stores

in their inventories but uh something

like that finished goods is probably the

bulk of it where they have finished

iPods and iPads that they're uh and

iPhones most especially where they're

going to be reselling those to uh

retailers for instance so inventories

are capital that you have to put up that

money right so before you sell a product

you actually have to spend the money and

make that product and that's capital

that's capital that you have to put into

the business and if you're a retailer

and we'll see those in a second the

capital you have to put into your

business is enormous because the margins

you're making on on your on your resale

are very limited whereas the amount of

money you have to put in your inventory

relative to the amount of money you're

making that's what capital efficiency is

all about property plant and equipment

is the most interesting part about all

this property plan equipment of course

is any expenditure that that

its expected life is greater than one

year right so uh that includes things

like buildings and plants and all those

types of things and so

basically what's what's really

remarkable and this kind of dawned on me

uh as a young investor maybe 10 years

ago or seven years ago inventory is

usually valued at Cost

um to answer that question

um what's really remarkable and this

should blow your mind for a second apple

is worth 600 billion dollars they're

making 60 billion dollars a year that's

10 times earnings but what's amazing is

if you look at this property plan

equipment think for a second about this

23 billion dollars of property plant

equipment what does that mean

does anyone have an idea

take it take a guess Apple has 23

billion dollars of property plan

equipment

how do you interpret that think about

that for a minute

it really is a

an interesting way to think about it

well we know what PP e is I'm not asking

you to Define PP e everybody knows what

PP e is it's again machines real estate

things like that and no one's really

getting it which is great because I feel

so proud of myself or understanding this

as a young investor the theory the

reason this is fascinating Apple's

entire property plant and equipment is

worth 23 billion dollars

why is that so interesting the market

cap is 600 billion okay

but the entire you could create recreate

the entire Apple business

if you had 23 billion dollars and there

are people with 23 billion dollars

you could actually replicate think about

you know trying to copy something

photocopy something you can actually

replicate all of Apple

for 23 billion dollars

right that's all it would cost you the

current value of all of their assets

imagine making a apple in a you know a

copycat app we'll call it uh uh crapple

and uh this crapple company

you could actually recreate every

machine every desk every office every

everything in the whole company with 23

billion dollars but why is the company

worth 600 billion dollars

that's the interesting part

there are businesses where

where you can generate a high return so

if we add this up we get that they're

making 63 billion dollars off of 23

billion dollars every year

so it's a 250 return there's no hedge

fund on the planet that has that kind of

return

um and so they're they're arguably the

best investors ever

so obviously if you recreated this

company Apple with your new brand name

it would not have the same brand loyalty

and brand value and and you wouldn't

have the same revenue and earnings but

there are businesses that you've never

heard of

that don't have that kind of brand

loyalty they're they're much different

they're business to business companies

and they're you know good examples

Pharmaceuticals doctors don't care what

company makes a drug they don't say oh

well I don't I don't trust this diabetes

drug because it's not made by Merck no

they prescribe the drug if it's safe and

effective and they don't really care if

Merck made it or or your you start a

pharmaceutical company made it

um you know there are businesses where

it totally doesn't matter what your

brand is

and there are companies where you could

recreate completely recreate a business

like this and generate High returns and

and that's sort of the essence of

Arbitrage

um and it's there's other sort of

reasons why these moats exist and Warren

Buffett was one of the First Investors

to sort of understand that

something there's something about

looking at return on

Capital whether you define a capitalist

assets or Book value or whatever you

want to find as Warren Buffett's

inventory plus firm Capital at some

point what you're what you're realizing

is that the higher that return the more

likely there is to be some kind of moat

or some kind of barrier that is stopping

new competitors from coming in and it's

often just brand right

it's often just you know customers love

Coca-Cola they've never heard of Martin

Cola and they're not going to drink

Martin Cola anytime soon

um but again in Pharmaceuticals that's

not the case

that's not the case in in medical

devices that's not the case there's

often something else that's stopping

these companies from coming in and

competing away that fat March everybody

would love to you know spend 20 million

to make 60 million a year to take

Apple's numbers divide them by a

thousand

um that's the a crazy return because not

only you're getting you only have to

spend that 20 million once that's the

crazy thing about Apple they spend the

20 billion one time and they make 60

billion every year you think about how

insane that is

uh why isn't that just disappear well

one reason is their phone's working

they'll blow up like Samsungs so they

have a lot of uh you know brand loyalty

people love their phones

um but one of the things about high

extremely high rates of return is that

eventually they should be chipped Away

by competition

and it really depends on the mode there

there are different moats in in Industry

one is sometimes you have entrenched an

entrenched customer that's that's emote

not because of brand loyalty but they're

remote because they're forced to be a

mode you see that a lot in software

where you can't change your Software

System every year you got to kind of

make your choice same thing works with

drugs once you start taking drugs most

people take it for for many many years

so uh it's interesting to sort of think

about and look at return on Capital

and try to sort of back into

um what is going on at the root of the

business why aren't there competitors

coming in and taking this return

sometimes the return is low give you an

example this is probably the highest

Capital uh efficient company there is if

I look at Ford we got numbers down to 15

19 returns

um and these are these are good years

for Ford right I'm just looking at it

last couple of quarters that we're in an

economic recovery this is a type this is

the sort of time when Ford does well

there's periods before we lose money and

uh Ford is a successful company

um but uh in that book that I mentioned

by John train Buffett talks about how

inefficient Capital inefficient

companies like Ford and gmr and they are

and uh these are the kinds of businesses

that you would not want to replicate for

instance the the cash flow of Ford is uh

trailing 12-month basis 13 uh billion

and to replicate their business you'd

have to put up 71 billion of capital

that's a very different deal from Apple

right where 20 billion makes you 60

billion here uh 71 billion makes you 13

billion

so it really is like it's backwards and

that's sort of the point here is that um

Brands matter with cars they matter a

lot less and margins are low customers

are very price sensitive

um and so forth so when I looked at

checkpoint software it was the company

we're going to focus on in a minute I I

found this astounding uh return where

they have virtually no capital

in fact they don't hold inventories

their software company they can't hold

inventories right so their actual

um only asset is their fixed assets

which are 54 million dollars which are

probably a couple of offices and things

like that and they make 200 million

dollars a quarter

and if you think about that you know if

someone said can you scrounge together

50 million dollars well I could a couple

of friends maybe you could

um and then after that you would make

200 million dollars a quarter that's

almost a billion dollars a year of 50

million in capital

I would love to just completely copy

whatever checkpoint's doing maybe hire

their team and go ahead and just copy

everything and if I can make half that

money a tenth of that money I'd be happy

um and that's what's fascinating about

these kinds of companies obviously the

what's important to understand is that

from a stock market perspective you

don't get that same deal

right the company got that deal you have

to pay whatever the market price is

which will be very high for a company

like this

um but the question really is if it's

that easy for maybe a new company to

come in and say you know what I want to

start a software security company and

all I have to put up is 50 million

dollars I could be just like checkpoint

and make 800 million dollars a year

I'd make 13 times my money in my first

year now obviously checkpoint's been

around 13 years and you're not going to

do that well that quickly but it does

tell you a little bit about the kind of

business you're in and most importantly

what you have to pay attention to when

you're forecasting because I think

that's the question

um you have to sort of forecast the

future and we haven't done that yet for

checkpoint but the point is that no pun

intended is that one has to sort of

carefully think about well

why is this business why does this

business exist which is a very sort of

existential question but

what are its customers really after what

is the company after why are they

getting the margins they're getting

about 50 operating margins which is you

know insane

um and almost no Capital how how do they

do this and what's to stop

um what's to keep their margins this

High what's to keep their returns this

High it doesn't seem like it's possible

that they could could be this high it's

sort of the old saying Easy Come Easy Go

and so one has to sort of think about

that pretty carefully

um so anyway

um let's go back to Buffett a little bit

we'll probably talk about Buffett for a

very very long time

um he is the the greatest of all time

the goat investor and I like to think of

uh people like Buffett um in the in the

vein of uh Albert Einstein who uh had

his honest mirabilis uh which is

translates in Latin to miracle year and

uh the point is that when when people

achieve these uh achievements that are

um you know otherworldly uh almost

Supernatural you know I think it's a

good term to use Buffett uh introduced

Concepts that um

uh people never anticipated in business

um and and like like Einstein

um

in some ways they were probably floating

around but he sort of put together put

them together and applied them uh and

what's most interesting about Buffett is

he learned the grand Dodd School of

investing and then sort of totally threw

it away

um

Ben Graham and uh

is this professor at Columbia and so uh

the flow generative businesses we'll

talk about at some point but Buffett

realized that this on this Capital

efficiency stuff what's amazing is that

you could have positive working capital

so much so that you could use that

working capital to invest once a moment

here

for instance um I define capital a

little bit differently from Buffett I

like to include accounts receivable and

accounts payable because there are

businesses where your customers

literally give you money to hold for

them

and sometimes you can actually use that

money

um to invest and there are some

businesses where your customers expect

you to um give them credit

uh and there's the same applies with

bills there's some businesses where

customers expect you to pay up front

when you go to a restaurant and you say

I'll pay you in 30 days well that would

be actually a great result for for a

Fortune 500 company but it's a terrible

result for uh for a restaurant

um so restaurants expect you to pay up

front

um but law firms and other firms like

that you know you could be paying over

60 days or 90 days so every business is

different I think that working capital

in general is is something that is

important to pay attention to and when

you think about Capital efficiency but

Buffett took it to the next level when

he realized that you could get flow

generating businesses and use their

float to do things

um he also realized I think some someone

early in his career that private Equity

is the ultimate Arbitrage

um

and this is something where he's

basically straight away from Trading

stocks and investing in stocks when that

was sort of his his beginnings and

almost all the money he's made in the

last decade I would say comes from

private Equity from actually acquiring

companies at low prices and keeping them

um

uh forever

um and then he sort of understood the

mode concept that I talked about and all

ties in the capital efficiency to some

extent but that there are companies

where their discount rates on when you

analyze and calculate their value their

discount rates are often very close to

zero

um which is really remarkable a couple

other things about Buffett that that are

important to understand are the His

Image and reputation

um

um he focused on that maybe more than

any investor I've ever seen and

um some of it is sort of manufactured

some of it is authentic

um one of the things I'll say about

Buffett you know you're you know you

might say well what can I learn from

Warren Buffett that somebody else has

you'd be surprised again I I wager that

most investors have never read this book

which is really remarkable because it

has an interview with Warren Buffett

that is is old and reflects uh his

thinking and anytime you can get

something like that it's great but I'll

tell you a story I have a friend

um who lives overseas and he manages a

very small hedge fund it's somewhat

insignificant you would argue he's great

investor

like me he's a big fan of Warren Buffett

and what he's done is he's actually made

a friendship with Warren Buffett he's

only 27 or something and he just

basically follows buffing around

um whenever he comes to America he tries

to sort of look up what Buffett's doing

sometimes Buffett will be giving a

speech at a school or something like

that and he'll go to the speech and

he'll just follow him around and and

eventually you know Warren Buffett's a

very nice man that that evening he said

oh you guys came from such a long way

I'm having dinner tonight at this

restaurant why don't you join me and he

got to talk to Buffett for two hours

just him uh and a couple other guys his

friends and you know to be able to pick

the greatest investors of all time his

brain

um for two hours I answered every

question there was not one question we

said you know I'm not comfortable

answering that

um

and uh

and this was last year you know or two

years ago I forgot but it wasn't you

know 30 years ago so even people like

Buffett are you're able to sort of meet

them and and if you're that interested

in in it all it is possible I'm not

saying it's easy

um

but you know if you can't do that

reading books and reading everything you

can about the person will probably be a

pretty good replacement