"More than 95% of the content is not quantitative."
As the 6th largest company in terms of market value, where does Berkshire Hathaway's money come from?
Yes, through investments. So, where does the money for investments come from?
That's right, it comes from GEICO, the main insurance business. GEICO has not only provided huge returns in terms of profits and brand for Buffett, but its massive float has also provided ample ammunition for Berkshire Hathaway's equity investments.
In early May 2023, before Buffett's shareholder meeting, GEICO President and CEO Todd Combs gave an interview to the I Am Home podcast. In the one-hour interview, he discussed how he joined Berkshire Hathaway, Buffett's views on reading, what Buffett focuses on in the investment process, and how to conduct company research.
【One】Buffett on Reading
Todd met Buffett in the fall of 2001 when Buffett was a guest speaker at Columbia University.
During the Q&A session at the end of the course, the last question was about how Buffett spends his time every day. Buffett took out a crumpled folder filled with various papers and said, "I read these newspapers and things." A student asked, "But you can't be reading all the time, right?"
Buffett said, "That's how I read, read, and read. Knowledge compounds, it accumulates over time... it never disappears, and it never diminishes. Each and every one of you can do this. It's all free, but most people don't do it because their attention is scattered."
Todd summarized that we have two ways to do things, actively or passively. Whether it's playing golf, cycling, or investing, if you do something actively, you will gain a positive feedback loop and continue to iterate.
In terms of reading, Todd used to read 48 books a year, but now it's about 12 books a year because being CEO of GEICO takes up too much time. At first, he felt that he had to finish reading a book, but now his logic is that if the first few chapters of a book don't interest him, he will switch to another book.
Interestingly, Todd found that most people don't read company annual reports at all. He also found that industry magazines are a great source of information. "Whenever I call those people quoted in industry magazines to get more information, I can successfully reach them 9 out of 10 times."
Finally, Todd talked about giving books to Buffett and Munger. The first book he gave was "Ubiquity" by Mark Buchanan, which talks about power laws and fractal patterns. Todd said that people usually think linearly about life and risk, but in reality, it involves power laws.
【Two】Buffett, Munger: The Art of Interviewing
Before joining Berkshire Hathaway, Todd had been managing his own fund, but he was restless. "During the 2008 subprime crisis, we did well, but we also lost everything because I was working over 100 hours a week and often slept in the office."
Todd wanted to stop serving limited partners (LP) and stop using LP's money to invest. He wanted to have enough of his own capital to invest, just like Buffett.
So Todd tried to contact Munger, and after successfully persuading Munger's secretary, Todd and Munger met for the first time.
Originally, they were supposed to have breakfast, but it ended up being lunch. As for the content of their conversation, Todd said it was mostly about family, life, and technology. They also talked a lot about the universe. It wasn't until the last hour that they started discussing investments.
In the following 3-4 months, Todd and Munger communicated and met in various ways, each time for several hours, until Munger said, "You should meet Buffett."
The "interview" with Buffett was essentially a conversation. They talked for 7 hours in Buffett's office, discussing family and other topics, and only towards the end did they start discussing investments, such as how to view a certain stock and their investment philosophies. At the end of the meeting, Buffett invited Todd to join his team.
【Three】Investment Thinking #1: How to Build a Circle of Competence?
After joining the team, Buffett handed over a $2.5 billion portfolio managed by Lou Simpson to Todd.
During this process, Todd realized that if he could focus on the investment process, most problems would be solved on their own. But if he only focused on the results, he would become obsessed.
In investing, everyone makes mistakes, and Buffett acknowledges this. So Todd said, "If you have perfect investment performance and records, then either you are deceiving yourself or you have missed out on a lot of opportunities. You must constantly challenge yourself and push the limits."
Of course, everyone has their own circle of competence, and Todd's expertise lies in the financial, banking, and insurance industries. So he wouldn't suddenly enter a completely unfamiliar field.
In the process of building his circle of competence, Todd's method is to study industries, especially those with financial businesses, and understand their operations and financial situations. This is how his circle of competence gradually builds up. Todd advises taking one step at a time and acknowledges that everyone makes mistakes but should avoid making big ones.
How to avoid big mistakes?
Todd said, "You must avoid path dependency. Many people overestimate their abilities and the likelihood of success in a task. When you ask them about the probability of success, they may say 90% or 95%. But when you break down the task into its components, which may be 20, and if each has a success probability of 95%, then the overall success probability may be less than 50%. This method has helped me avoid many big mistakes."
【Four】Investment Thinking #2: Qualitative or Quantitative?
Investing can be divided into two modes: qualitative analysis and quantitative analysis.
Todd believes that quantitative analysis, which involves value evaluation, is actually very easy. It's just math. But the real secret to successful investing lies in qualitative analysis.
"When Buffett and I discuss stocks, 95% or sometimes even 99% of the time is spent on qualitative discussions. For example, where is the moat of this company? Where are the barriers to entry? These things are not found in annual reports."
In the investment process, the correct approach is to start "inside out." That is, start with the details, let them gradually converge into a foundation, and then analyze based on that foundation to gain a qualitative understanding.
"Unfortunately, most people start from the outside in. They start with a narrative, a story, most of which comes from hearsay, media reports, research reports, etc.," Todd said.
He believes that if you start your research with a story, all your viewpoints will be based on a partial and incomplete story, which may be wrong in itself.
The same goes for scientific research. You shouldn't start with a story and try to validate it. You should start with facts, and all analysis should be built on these facts.
In the investment process, Todd said he doesn't look at a company's market value. His approach is to play a game with himself. He looks at a company, does research, builds his own model, determines the value of the company, and then looks at the market value. In most cases, the result he gets is around 20% of the current market value of the company.
However, Todd also shared a surprising moment: when Mastercard went public, its market value was $3-3.5 billion, but Todd estimated it to be around $30 billion, which was the most worth building a position. Currently, Mastercard's market value has exceeded $360 billion, making it the 21st largest company in the world.
According to Todd, the biggest value of this research method is that it helps avoid the anchoring effect. When you first look at a company's market value, you become anchored to that number and get trapped. You start questioning yourself, "Everyone says this company is XXX, why do I think it's XXX?"
Finally, when examining companies, Todd said, "I want to know where they are taking risks in the face of potential risks. I look for asymmetric risks and rewards that have not been considered."
"Retail Wei Observation" focuses on the latest strategies, tactics, and thoughts in the field of new retail and new consumption from a global perspective. The platform's founder, Wang Ziwei, is an independent retail analyst.