Bill Ackman: How To Invest For Beginners

Summary

In this insightful discussion, the speaker explores investment strategies, emphasizing the significance of valuation, management quality, and understanding the impact of emerging technologies like AI. They advocate for a long-term investment approach, taking cues from Warren Buffett's disciplined methods. The conversation highlights the importance of investing in familiar businesses and avoiding debt, while also critiquing the majority of mutual funds for their fees and lack of performance. With technology providing unprecedented access to information, individual investors are encouraged to leverage their knowledge and emotional resilience to navigate market volatility successfully.

Takeaways

• 😀 The value of a business can be assessed by its earnings yield, which is attractive when compared to safer investment options like government bonds.
• 📈 Optionality in investments, such as cloud services that are currently unprofitable but growing, can enhance a company's long-term potential.
• ⚠️ The rise of AI poses significant disruption risks to established businesses, necessitating adaptation to maintain profitability.
• 🏰 Strong management and governance are crucial; understanding the incentives that drive leadership behavior helps assess a company's long-term viability.
• 📚 Warren Buffett's investment philosophy emphasizes long-term thinking and emotional detachment during market fluctuations.
• 💡 Investors should only invest money they can afford to lose, avoiding high-risk leverage to maintain financial security.
• 🔍 Focusing on a small number of well-understood businesses (10-12) can be more beneficial than diversifying too broadly.
• 📊 Most mutual funds do not justify their fees; index funds are often a better choice for investors seeking diversification without high costs.
• 🌐 Today’s investors have unprecedented access to information, allowing them to leverage personal insights and experiences when analyzing companies.
• 🤔 Emotional resilience in investing is developed over time, enabling individuals to withstand market volatility and make rational decisions.

Q & A

What is the significance of the earnings multiple in evaluating a business?

The earnings multiple indicates how much investors are willing to pay for each dollar of earnings. For instance, a 15x multiple corresponds to a 7.5% earnings yield, which can be attractive compared to lower returns from government bonds.

How does the speaker view the relationship between AI and investment risk?

The speaker sees AI as a disruptive technology that poses risks to established businesses. Investing in companies that could be disrupted by AI makes the investment landscape more treacherous, highlighting the need for careful analysis of management's adaptability to technological changes.

What role does management play in the success of a company according to the speaker?

Management is crucial for a company's success. Understanding their incentives, track record, and ability to build effective teams is essential in evaluating a business. Strong leadership can significantly impact a company's performance and culture.

What lessons does the speaker derive from Warren Buffett's investment approach?

The speaker admires Buffett's long-term perspective and emotional discipline. Buffett's ability to remain rational during market fluctuations and to invest based on thorough analysis rather than market hype is a key lesson in successful investing.

What advice does the speaker give about investing money?

The speaker advises never to invest money that one cannot afford to lose. Investors should focus on high-quality businesses and avoid using borrowed funds, as unexpected events can significantly impact stock prices.

How does the speaker view mutual funds compared to individual investments?

The speaker is skeptical about mutual funds, arguing that many do not justify their fees and are often overly diversified. Instead, individual investors may find better returns by focusing on a small number of businesses they understand.

What does the speaker suggest about diversification in investments?

The speaker notes that most benefits of diversification can be achieved with about 10 to 12 investments. Investing in a small number of well-understood companies can lead to better outcomes than spreading investments too thinly.

Why does the speaker recommend investing in businesses that one understands?

Investing in businesses that one understands allows for more informed decision-making. Individual investors often have unique insights into products or services, which can help them assess potential investments more effectively.

What changes in information access have impacted individual investors?

The speaker highlights the evolution of information access from physical documents to digital resources. Today, vast amounts of information, including SEC filings and analyst calls, are available online, empowering everyday investors to make informed decisions.

How does the speaker suggest handling volatility in the markets?

The speaker advises that to handle volatility, investors should be financially secure and avoid making emotional decisions. Understanding the true value of their investments helps mitigate the emotional impact of market fluctuations.

Outlines

00:00

😀 Insights on Company Value and Investment Strategy

The discussion focuses on identifying strong investment opportunities by understanding company fundamentals and market trends. The speaker emphasizes the importance of assessing a company's competitive position, financial health, and management effectiveness. Key indicators for evaluating companies include debt levels, profitability, and the ability to generate consistent cash flow. The speaker also highlights the role of innovative business models, citing examples of successful companies that have adapted well to changing market conditions. The overall message stresses a disciplined, analytical approach to investing while remaining aware of external market influences.

05:02

😀 Navigating Long-term Investment and Emotional Resilience

This segment explores the importance of maintaining a long-term investment perspective while being cautious of emerging technologies like AI that may disrupt established industries. The speaker discusses the significance of understanding company leadership and their governance structure, noting that management incentives heavily influence business outcomes. Drawing lessons from Warren Buffett, the speaker advocates for emotional discipline in investment decisions, especially during market fluctuations. Practical advice for everyday investors includes investing only what one can afford to lose, avoiding leveraged positions, and focusing on quality companies rather than excessive diversification. The importance of consumer insights in assessing investment opportunities is also emphasized.

Keywords

💡Earnings Yield

Earnings yield is a financial ratio that measures a company's earnings relative to its price. It serves as an indicator of the return an investor can expect from an investment in a company's shares. In the video, a 15 multiple corresponds to a 7.5% yield, highlighting its attractiveness compared to safer options like government bonds.

💡Management Incentives

Management incentives refer to the motivations that drive executives and managers to make decisions that affect a company's performance. Understanding these incentives is crucial for evaluating how management will steer a company. The speaker suggests analyzing past management communications to gauge whether they prioritize the business's success or their personal gains.

💡Long-Term Perspective

A long-term perspective in investing involves focusing on the future performance and growth potential of an investment rather than short-term fluctuations. The speaker admires Warren Buffett for his ability to maintain this perspective, which is essential for making sound investment decisions amid market volatility.

💡Volatility

Volatility refers to the degree of variation in a trading price series over time, indicating how much and how quickly the value of an asset can change. The speaker emphasizes that investors should be financially secure to withstand market volatility, allowing them to remain rational and focused on long-term gains rather than short-term price movements.

💡Diversification

Diversification is an investment strategy that involves spreading investments across various financial assets to reduce risk. The speaker points out that while mutual funds often aim for diversification, they may not always justify the fees charged. Instead, focusing on a smaller number of well-understood companies can often yield better results.

💡Consumer Analysis

Consumer analysis involves evaluating how consumers perceive and interact with products and companies. The speaker notes that individual investors often have a better grasp of consumer preferences, as they can relate to products like Tesla, suggesting that personal experience can lead to more insightful investment decisions.

💡Financial Security

Financial security is the condition of having sufficient financial resources to meet current and future needs. The speaker underscores its importance for investors, asserting that being financially secure allows individuals to invest without the stress of needing immediate returns, enabling a more rational approach during market downturns.

💡Berkshire Hathaway

Berkshire Hathaway is a multinational conglomerate holding company led by Warren Buffett, known for its long-term investment philosophy. The speaker refers to Buffett's annual reports and partnership letters as key educational resources for understanding effective investment strategies, emphasizing the company's successful track record.

💡Investment Philosophy

Investment philosophy is a set of principles guiding an investor's decisions and strategies. The speaker highlights how Buffett's focus on long-term value and temperament has shaped his investment philosophy, teaching others the importance of remaining calm and rational amidst market fluctuations.

💡AI Disruption

AI disruption refers to the potential for artificial intelligence technologies to fundamentally change industries and business models. The speaker mentions the risks associated with AI, suggesting that while it offers new opportunities for companies, it also poses a threat to existing businesses that may become obsolete without adaptation.

Highlights

Business valuation is effectively assessed by the price paid for earnings, indicating a growing earnings yield over time.

A 15x earnings multiple provides an attractive yield of about 7.5%, especially compared to lower government bond yields.

Companies like those in the cloud sector often reinvest profits for growth, leading to lower immediate earnings but high long-term potential.

Investing involves recognizing the risk of technological disruption, particularly from AI, which can significantly affect profitability.

Historical cases, such as Kodak and Polaroid, serve as cautionary tales about how quickly dominant firms can falter due to changes in technology.

Management analysis is crucial; understanding the incentives that drive executives can reveal a company's potential trajectory.

Investors can learn about a company's management through historical communications, tracking their performance and decisions over time.

Warren Buffett exemplifies a long-term investment philosophy, highlighting the importance of emotional detachment from market fluctuations.

Successful investing requires rationality, especially during market volatility; buying low and being cautious at high prices is essential.

Everyday investors should only use money they can afford to lose, emphasizing the importance of financial security before investing.

Investing in a few high-quality businesses that one understands is often more effective than over-diversifying with mutual funds.

Many mutual funds may not justify their fees, and index funds can offer a better alternative for most investors.

Individual investors often have better insights into companies they are passionate about, leading to more informed investment decisions.

The modern investment landscape provides extensive resources for research, making it easier for individuals to make informed choices.

Investors should leverage their personal experiences and insights when choosing investments, enhancing their chances of success.

Transcripts

[Music]

the lion shows up and everyone starts

running you run with them that does not

work well in markets in fact you

generally have to do the opposite in

your lecture on the basics of finance

and investing you mention a book

intelligent investor by Benjamin Graham

as being formative in your life what key

lesson do you take away from that book

that informs your own investing sure

actually it was the first investment

book I read and as such it was kind of

the inspiration for my career and a lot

of my life important Book bear in mind

this is sort of after the Great

Depression people lost confidence

investing in markets World War II and

then he writes his book it's for like

the average man and basically he says

that you have to understand the

difference between price and value price

is what you pay value is what you get

stock market is here to serve you and

it's a bit like the neighbor that comes

by every day and makes you an offer for

your house makes you a stupid offer you

ignore it makes you a great offer you

can take it and that's the stock market

and the key is to figure out what

something's worth and you have to kind

of weigh it the stock market in the

short term is a voting machine it

represents speculative interests you

know supply and demand of people in the

shortterm but in the long term the stock

market's a weighing machine much more

accurate it's going to tell you what

something's worth and so if you can

Define what something's worth then you

can really take advantage of the market

because it's really here to to help you

and that's kind of the message of the

book in that same way there's a kind of

difference between speculation and

investing yeah speculation is just a bit

like buying trading crypto short-term

trading crypto maybe in the long run

there's intrinsic value but many

investors in a bubble going into crash

were really just pure speculators they

didn't know what things were worth they

just knew they were going up right

that's speculation and investing is you

know doing your homework digging down

understanding a business understanding

the competitive dynamics of an industry

understanding what Management's going to

do understanding what price you're going

to pay you know the value of anything I

would say other than love let's say is

the present value of the cash you can

take out of it over its life now some

people think about love that way but

it's not it's not the right way to think

about love investing is about basically

building a model of what this business

is going to produce over its lifetime

how do you get to the value of a thing

on the stock market Market sure

companies the value of a security is the

present value of the cash you can take

out of it over its life so if you're

think about a bond your bond pays a 5%

coupon interest rate you get that let's

say every year or twice a year split and

half and it's very predictable and if

it's a US Government Bond you know

you're going to get it so that's a

pretty easy thing to value a stock is an

interest in a business it's like owning

a piece of a company and a business a

profitable one is like a bond and that

it generates these coupons or these

earnings or cash flow you know year the

difference with a stock and a bond is

that the bond it's a contract you know

what you're going to get as long as they

don't go bankrupt in default with a

stock you have to make predictions about

the business you know how many widgets

are going to sell this year how many

going to sell next year what are their

costs going to be how much of the money

that they generate do they need to

reinvest in the business to keep the

business going and that's more

complicated but what we do is we try to

find businesses where with a very high

degree of confidence we know what those

cash flows are going to be for a very

long time and there very few businesses

that you can have a really high degree

of certainty about and as a result you

know many Investments are speculation

cuz it's really very difficult to

predict what I do for a living is find

those rare companies that you can kind

of predict what they're going to look

like over a very long period of time

what are the factors that indicate that

a company is going to be something

that's going to make a lot of money it's

going to have a lot of value and it's

going to be reliable over a long period

of time every consumer has a view on

different brands and different companies

you know what we look for are sort of

these non-d disruptable businesses a

business where you can kind of close

your eyes stock market shuts for a

decade and you know that 10 years from

now it's going to be a more valuable

more profitable company so we own a

business called Universal Music Group

it's in the business of helping artists

become Global artists that's recorded

music business and it's in the business

of owning music publishing rights of

songwriters I think music is forever

right music is a many thousand year old

part of the human experience and I think

it will be you know thousands of years

from now and so that's a pretty good

backdrop to invest in a company and the

company basically owns a third of the

global recorded music the most dominant

sort of market share in the business

they're the

at taking an artist who's 18 years old

who's got a great voice and helping that

artist become a superstar and that's a

unique talent and the result is the best

artists in the world want to come work

for them but they also have this

incredible library of you know the

Beatles the Rolling Stone YouTu Etc and

then if you think about what music has

become used to be about records and CDs

and eight track tapes and it was about a

new format and that's how they drive

sales and it's become a business about

streaming and streaming is a lot more

predictable than selling records right

you can sort of say okay how many people

have smartphones how many people going

to have smartphones next year there's a

kind of global penetration over time of

smartphones and you pay call at 10 11

bucks a month for a subscription or last

for a family plan and you can kind of

build a model of what the world looks

like and predict the growth of the

streaming business predict what kind of

market share Universal is going to have

over time you can't get to a precise

view of value you can get to an

approximation and the key is to buy at a

price that represents a big discount to

that approximation and that gets back to

Ben Graham Ben Graham was about what he

called invented this concept of marginal

safety right you want to buy a company

at a price that if you're wrong about

what you think it's worth and it turns

out to be worth 30% less you paid a deep

enough discount to your estimate that

you're still okay investing a big part

of investing is not losing money if you

can avoid losing money and then have a

few great hits you can do very very well

over time there are all kinds of risks

in every business this is one that I

think has a very high degree of

persistence and I can't Envision a world

where Beyond streaming in a sense now

you may have a neuralink chip in your

head instead of a phone but the music is

going to come in a digitized kind of

format you're going to want to have an

infinite library that you can walk

around in your pocket or in your brain

it's not going to matter that much if

the form factor you know the device

changes it's not really that important

whether it's Spotify or apple or Amazon

that are providers I think the Valu is

really going to reside in the content

owners and that's really the artists and

the label that's sort of one example

another example could be just you know

the restaurant industry you look at

businesses like a McDonald's right

whatever the company's like a 1950

vintage business and here we are it's

you know 75 years later and you can kind

of predict what it's going to look like

over time and the menu is going to

adjust over time to Consumer tastes and

I think the hamburger and fries is

probably Forever The Beetles The Rolling

Stones the hamburger and fries are

forever what's the actual process you go

through the process of figuring out what

the value of a company is like how do

you do the research so Chipotle What

attracted us initially is the stock

price dropped by about 50% great company

great concept athletes love it consumers

love it healthy sustainable fresh food

made in front of your eyes But

ultimately the company's lacking some of

the systems and had a food safety issue

consumers got sick almost killed the

rent but the reality of the fast food

quick service industry is almost every

fast food company has had a food safety

issue over time and the vast majority

have survived and we said look such a

great concept but their approach was far

from ideal we start with usually reading

the SEC violing companies file a 10K or

an annual report they file these

quarterly reports called 10 Q's they

have a proxy statement which describes

kind of the governance the board

structure conference call transcripts

are publicly available it's kind of very

helpful to go back 5 years and kind of

learn the story you know here's how

management describes their business

here's what they say they're going to do

then you can follow along to see what

they do it's like a historical record of

how competent and truthful they are you

it's a very useful device and then of

course looking at competitors and

thinking about what could dislodge this

company if it's an industry we don't

know well we know the restaurant

industry really well music industry you

know we'll talk to people in the

industry we'll try to understand the

difference between publishing and

recorded music we'll look at the

competitors we'll read books I read a

book about the music industry or a

couple books about the industry it's a

bit like a big research project and

these so-called expert networks now and

you can get pretty much anyone on the

phone and they'll talk to you about an

aspect of the industry that you don't

understand want to learn more about try

to get a sense you know public filings

of companies generally give you a lot of

information but not everything you want

to know and you can learn more by

talking to experts about some of the

industry Dynamics the personalities you

want to get a sense of management I like

watching podcasts if a CEO were to do a

podcast or YouTube interview you get a

sense of the people the kind of business

we're looking for is kind of business

everyone should be looking for right a

great business it's got a long-term

trajectory of growth even beyond the

foreseeable distance right those are the

kind of businesses you want to own you

want businesses that generate a lot of

cash you want businesses you can easily

understand you want businesses with

these sort of huge barriers to entry

where it's difficult for others to

compete you want companies that don't

have to constantly raise capital and

these are some of the great businesses

of the world but people have figured out

that those are the great businesses so

the problem is those companies tend to

have very high stock prices and and the

value is generally built into the price

you have to pay for the business so we

can't earn the kind of returns we want

to earn for investors by paying a really

high price price matters a lot you can

buy the best business in the world and

if you overpay you're not going to earn

particularly attractive returns we get

involved in cases where a great business

has kind of made a big mistake or You'

have a company that's kind of lost its

way but it's recoverable we buy from

shareholders who are disappointed who've

lost confidence selling at a low price

relative to what it's worth if fixed and

then we try to be helpful in fixing

theany company you said barriers to

entry how do you know if there's a type

of moat protecting from competitors

stepping up to the plate the most

difficult analysis to do as an investor

is that is kind of figuring out how wide

is the moat how much at risk is the

business to disruption and we're in I

would say the greatest period of disrupt

ability in history right technology a

couple of 19-year-olds can you know

leave whatever University or maybe they

didn't even go in the first place they

can raise millions of dollars they can

get access to infinite uh band with

storage they can contract with engineers

in lowcost markets around the world they

can build a virtual company and they can

disrupt businesses that seem super

established over time and then on top of

that you have major companies with

multi- trillion dollar market caps

working to find profits wherever they

can and so that's a dangerous World in a

way to be an investor you have to find

businesses that it's hard to foresee a

world in which they get disrupted in the

beauty of the restaurant business and

we've actually our best track records in

restaurants we've never lost money we've

only made a fortune interestingly

investing restaurants a big part of it

it's a really simple business and if you

get your pootle right and you're at 100

stores you know it's not so hard to

Envision getting to 200 stores and then

getting to 500 stores and the key is

maintaining the brand image growing

intelligently having the right systems

now when you go from 100 stores to 3500

stores you have to know what you're

doing there's a lot of complexity you

know if you think about your local

restaurant you know the family's working

in the business they're watching the

cash register and you can probably open

another restaurant across town but there

are very few restaurant operators that

own more than a few restaurants and

operate them successfully and the quick

service business is about systems that a

stranger who doesn't know the restaurant

industry can come in and enter the

business and build a successful

franchise now Chipotle is not a

franchise company they actually own all

their own stores but many of the most

successful restaurant companies are

franchise models like a Burger King a

McDonald's Tim Horton you know all these

various Brands Popeyes and there it's

about systems but the same systems apply

whether you own all the stores and it's

run by a big Corporation or whether the

owners of the restaurants are sort of

franchises you know local entrepreneurs

so if the restaurant has scaled to a

certain number that means they've

figured out some kind of system that

works it's very difficult to develop

that kind of system so that's a moe a

moe is you get to a certain scale and

you do it successfully and the brand is

now understood by the consumer and

what's interesting about chipot light is

what they've achieved is difficult

they're not buying frozen hamburgers

getting shipped in they're buying fresh

sustainably sourced ingredients in

preparing food in the store that was the

first quality of the product of Chipotle

is incredible it's the highest quality

food you can get you can get a serious

dinner for under 20 bucks and eat really

healthfully and very high quality

ingredients and that's just not

available anywhere else and it's very

hard to replicate and to build those

relationships with Farmers around the

country it's a lot easier to make a deal

with one of the massive food producers

buy your pork from them than to buy from

a whole bunch of farmers around the

country that is a Big Mo for Chipotle

very difficult to replicate you were

talking about Moes and this kind of

remind me of alphabet parent company

sure it's a big position for us it's

interesting that you think that maybe

alphabet fits some of these

characteristics It's tricky to know with

everything that's happening in AI it's

interesting that you think that there's

a mo what's your analysis of alphabet

why are you so positive about it it's a

business we've admired as a firm for

whatever 15 years but rarely got to a

price that we felt we could own it

because again the expectations were so

high and price really matters really the

sort of AI scare I would call it you

know Microsoft comes out with chat GPT

they do an amazing demonstration people

like this most incredible product and

Google working on AI even earlier

obviously the Microsoft Microsoft was

behind an AI that was really their chat

GPT deal that gave them a market

presence and then Google does this

fairly disastrous demonstration of Art

and the world says oh my God Google's

fallen behind an ai ai is the future

stock gets crushed Google gets store

price around 15 times earnings which for

a business of this quality is an

extremely extremely low price and our

view on Google one way to think about it

when a business becomes a verb that's

usually a pretty good sign about the

mode around the business you know you

open your computer and you open your

search and very high percentage of the

world starts with a Google page in a on

line you type in your search Google

advertising search YouTube franchise is

one of the most dominant franchises in

the world very difficult to disrupt

extremely profitable the world is moving

from offline advertising to online

advertising and that Trend I think

continues why because you can actually

see what your ads work you know they

used to say about advertising you know

you spend a fortune and you just don't

know which 50% of it works but you just

sort of spend the money because you know

ultimately that's going to bring in the

customer and and now with online

advertising you can see with granularity

which dollars I'm spending when people

click on the search term and end up

buying something it's a very high return

on investment for The Advertiser and

they really dominate that business now

ai of course is a risk if all of a

sudden people start searching or asking

questions of chat GPT and don't start

with the Google search bar that's a risk

to the company and so our view based on

work we had done and talked to Industry

experts is that Google by virtue of the

investment they've made the time the

energy that people put into it we felt

their AI capabilities were if anything

potenti greater than Microsoft Chat GPT

and that the market had overreacted and

because Google was a big company Global

business Regulators scrutinized it

incredibly carefully they couldn't take

some of the same Liberties a startup

like open AI did in releasing a product

and I think Google took a more cautious

approach and releasing an early version

of Bard in terms of its capabilities and

that let the world to believe that they

were behind and we ultimately concluded

they're tide or ahead and you're paying

nothing for that potential business and

they also have huge advantages think of

all the data Google has like the search

data the various applications email and

otherwise it's an incredible data set so

they have more training data pretty much

any company in the world they have

incredible Engineers they have enormous

Financial Resources so that was kind of

the BET and we still think it's probably

the cheapest of the big seven companies

in terms of price you're paying for the

business relative to its current

earnings it also is a business that has

a lot of potential for efficiency you

know sometimes when you have this

enormously profitable dominant company

all of the technology companies in the

post March 20 World grew enormously in

terms of their teams and they probably

over hired and so you've seen some you

know the Facebooks of the world and now

even Google starting to get a little

more efficient in terms of their

operation so low multiple for their

business one way to think about the

value of the business is the price you

pay for the earnings or alternatively

what's the yield if you flip over the

price over the earnings it gives you

kind of the yield of the business so a

15 multiple is almost a 7 half% yield

and that earnings yield is growing over

time as the business grows compared to

what you can earn lending your money to

the government you know 4% that's a very

attractive going in yield and then all

kinds of what we call optionality in all

the various businesses and Investments

they've made that are losing money

you've got a cloud business that's

growing very rapidly but they're

investing basically 100% of the profits

from that business in growth so you're

in that earnings number you're not

seeing any earnings from the cloud

business and you know they're one of the

top Cloud Player so very interesting

generally well-managed company with

Incredible assets and resources and

dominance has no debt it's got a ton of

cash pretty good story is there some

more risk introduced by the

possibilities of AI absolutely it's a

great question investing is about

finding companies that can't be

disrupted AI is the ultimate disruptable

asset or technology and that's what

makes investing treacherous is that you

own a business that's enormously

profitable management gets if you will

fat and happy and then a new technology

emerges that just takes away all the

profitability and AI is this incredibly

powerful tool which is why every

business is saying how can I use AI in

my business to make us more profitable

more successful grow faster and also

disrupt or protect oursel from the you

know the incomings it's it's a bit like

you know Buffett talks about a great

business like a castle surrounded by

this really wide mode but you have all

these barbarians trying to get in and

steal the uh princess and it happens you

know Kodak for example was an amazing

incredibly dominant company until it

disappeared Polaroid you know this

incredible technology and that's why we

have tended to stay away from companies

that are technology companies because

technology companies generally the world

is such a dynamic place that someone's

always working on a better version and

you know codec was caught up in the

analog film world and then the world

changed you mentioned management how do

you analyze the governance structure and

the individual humans that are the

managers of a company as I like to say

incentives drive all human behavior and

that certainly applies in the business

world so understanding the people and

what drives them and what the actual

financial and other incentives of a

business are very important part of the

analysis for investing in a company one

great way to learn about a business is

go back a decade and read everything

that management has written about the

business and see what they've done over

time you know conference calls are

relatively recent when I started in the

business there weren't conference call

transcripts now you have a written

record of everything management is said

and response to questions from analysts

at conferences and otherwise you learn a

lot about people by listening to what

they say how they answer questions and

ultimately their track record for doing

what they say they're going to do do

they under promise and overd deliver do

they overpromise and underd deliver do

they say what they're going to do do

they admit mistakes do they build great

teams do people want to come work for

them are they able to retain their

talent and then part of it is how much

are they running running the business

for the benefit of the business how much

they running the business for the

benefit of themselves very Senior

Management matters enormously you we use

the Chipotle example Steve ell's great

entrepreneur business got to a scale he

really couldn't run it the company

recruit a guy named Brian nickel and he

was considered the best person in the

quick service industry he came in and

completely rebuilt the company actually

we moved the company was moved to

California and sometimes one way to redo

the culture of a companies just to move

it geographically and then you can kind

of reboot the business but a great

leader has great followership over the

course of their career they'll have a

team they've built that will come follow

them into the next opportunity but the

key is you know really the top person

matters enormously and then it's who

they recruit you know you recruit an A+

leader and they're going to recruit

other a type people recruit a b leader

you're not going to recruit any great

talent beneath them you mentioned waren

Buffett you said you admire him as an

investor what do you find most

interesting and Powerful about his

approach most of what I've learned in

the investment business I've learned

from Mor muffett he's been my great

professor of this business my first book

I read in the business was the Ben

Graham intelligent investor but fairly

quickly you get to learn about Warren

Buffett and I started by reading the

Burkshire hathway annual reports and

then I eventually got the Buffett

partnership letters you can see which

are an amazing read to go back to the

mid1 1950s and read what he wrote to his

limited partners when he first started

out and just follow that trajectory over

a long period of time so what's

remarkable about him is one duration

right he's still added at 93 two takes a

very long-term view but a big thing that

you learn from him investing requires

this incredible dispassionate on

emotional quality you have to be

extremely economically rational which is

not something you learn in the jungle if

you think about the surviving the jungle

the lion shows up and everyone starts

running you run with them that does not

work well in markets in fact you

generally have to do the opposite right

when the Lemmings are running over the

cliff that's the time where you're

facing the other direction and you're

running the other direction I.E you're

stepping in you're buying stocks at

really low prices you Buffett has been

great at that and great at teaching

about what he calls temperament which is

this sort of emotional kind of or

unemotional quality that you need to be

able to dispassion look at the world and

say okay is this a real risk are people

overreacting people tend to get excited

about Investments when stocks are going

up and they get depressed when they're

going down I think that's just

inherently human you have to reverse

that you have to get excited when things

get cheaper and you got to get concerned

when things get more expensive I think

it's something you kind of learn over

time a key success factor is you want to

have enough money in the bank that

you're going to survive you know

regardless of what's going on with

volatility and markets people who one

you shouldn't borrow money so if you

borrow money you own stocks on margin

markets are going down and you have your

livelihood at risk it's very difficult

to be rational so key is getting

yourself to a place where you're

financially secure you're not going to

lose your house right that's kind of a

key thing and then also doing your

homework stocks can trade at any price

in the short term and if you know what a

business is worth and you understand the

management you know it extremely well it

doesn't bother you when a stock price

goes down or it has much less impact on

you because you know as Mr Graham said

you the shortterm the market the voting

machine you have a bunch of lemmings

voting One Direction that's concerning

but if it's a great business doesn't

have a lot of debt and people going to

just listen to more music next year than

this year you know you're going to do

well so it's a bit some combination of

being personally secure and also just

knowing what you own and over time you

build calluses I would say I'm a pretty

emotional person or I feel pretty strong

emotions but not an investing I'm

remarkably immune to kind of volatility

and that's a big advantage and it took

some time for me to develop that so you

weren't born with that you think no so

being emotional do you want to respond

to volatility yeah you can learn a lot

from other people's experience it's one

of the few businesses where you can

learn an enormous amount by reading

about other periods in history following

Buffett's career the mistakes he made if

you're investing a lot of capital every

one of your mistakes is going to be big

right so we've made big mistakes the

good news is that the vast majority of

things we've done have worked out really

well that also gives you confidence over

time but because we make very few

Investments you know we own eight things

today or seven companies that matter if

we get one wrong it's going to be big

news and so the other nature of our

business you have to be comfortable with

is a lot of public scrutiny a lot of

public criticism and that requires some

experience call it that the only person

who can cause you more harm than a thief

with a dagger is a journalist with a pen

is there some general advice from the

things you've been talking about that

applies to Everyday investors sure never

invest money you can't afford to lose

where if you lost this money it you know

you lose your house Etc so being in a

place where you're investing money that

you don't care about about the price in

the short term it's money for your

retirement and you take a really

long-term view I think that's key never

investing you borrow money against your

securities the markets offer you the

opportunity to leverage your investment

and in most worlds you'll be okay except

if there's a financial crisis or you

know a nuclear device gets detonated God

forbid somewhere in the world or there's

a unexpected war or you know someone

kills a leader unexpectedly you know

things happen that can change the course

of history and markets react very

negatively to those kinds of events and

you can own the greatest business in the

world trading for $100 a share and next

moment it could be 50 as long as you

don't borrow against Securities you own

really high quality businesses and it's

not money that you need in the short

term then you can actually be thoughtful

about it and that is a huge Advantage

the vast majority of investors that

seems tend to be the ones that panic in

the downturns get overrated when markets

are doing well Buffett is the ultimate

long-term thinker and just the decisions

he makes the consistency of the

decisions he's made over time and

fitting into that sort of long-term

framework is a very educational let's

put it that way for learning about this

business you mentioned eight companies

but what do you think about mutual funds

for everyday investors that diversify

across a larger number of companies I

think there are very few mutual funds

there thousands and thousands of mutual

funds they're very few that earn their

keep in terms of the fees they charge

they tend to be too Diversified and too

shortterm and you're often much better

off just buy an index fund if you look

carefully at their portfolios they're

not so different from the underlying

index itself and you tend to pay a much

higher fee now all of that being said

there's some very talented mutual fund

managers will danoff at fideli have a

great record over a long period of time

you know the famous Peter Lynch Ron

Baron another great long-term growth

stock investor so there's some great

mutual funds but I put them in the

handful versus the thousands and if

you're in the thousands I'd rather

someone bought just an index on

basically what would be the leap for an

everyday investor to go to investing in

a small number of comp companies like 2

3 four five companies I even recommend

for individual investors to invest in

you know a dozen companies you don't get

that much more benefit of

diversification going from a dozen to 25

or even 50 you know most of the benefits

of diversification come in the first

call it 10 or 12 and if you're investing

in businesses that don't have a lot of

debt they're businesses that you can

understand yourself you understand

actually individual investors did a much

better job analyzing Tesla than the

so-called professional investors or

analysts the vast majority of them so if

it's a business you understand if you

bought a Tesla you understand the

product and its appeal to Consumers you

know it's a good place to start when

you're analyzing a company so I would

invest in things you can understand

that's kind of a key you like Chipotle

you understand why they're successful

you can you know go there every week and

you can monitor is anything changing how

these new how chicken Alp store is that

a good upgrade from the basic chicken

you know the drink offerings improving

are the stores clean I think you should

invest in companies you really

understand simple businesses where you

can predict with a high degree of

confidence what it's going to look like

over time and if you do that in a not

particularly concentrated fashion and

you don't borrow money against your

securities you probably do much better

than your typical mutual fund yeah it's

interesting consumers that love a thing

are actually good analysts of that thing

or I guess a good starting point by

there's much more information available

today when I was first investing

literally we had people faxing us

documents from the SEC filings in

Washington DC now everything's available

online conference call transcripts are

free AI you know you have unlimited data

all kinds of message boards and Reddit

forums and things where people are you

know sharing advice and everyone has

their own by virtue of their career or

experience they'll know about an

industry or a business I would take

advantage of your own competitive

advantages