Rule #1 Finance Blog

With Investor Phil Town

InvestED Ep. 162- Special Guest: Laura Rittenhouse on How to Identify Great Management from Shareholder Letters

Join us as we have the pleasure of sitting down with author and Queen of Candor, Laura Rittenhouse. We are coming to you live after the Berkshire Hathaway Annual Meeting to talk about how to separate the average management from the great when reading annual shareholder letters.

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In Episode 162 You’ll Learn:

Who is Laura Rittenhouse?

  • Laura is the author of “Investing Between the Lines: How to Make Smarter Decisions by Decoding CEO Communications” and has been a featured author at the Berkshire Hathaway shareholder meeting. Her annual CEO Candor Surveys report on companies that excel in Candor and those that do not.

Charlie Munger’s Key Identifiers

    • You have to be capable of understanding the business.
    • The company has to have a long-term durable and withstanding competitive advantage.
    • You have to try and find management that has both talent and integrity.

What to Look for in an Annual Shareholder Letter

    • It’s all about the culture, try to keep an eye out when great culture shifts and there is a noticeable change.
    • Over everything – you have to find companies with little to no BS.
      • Warning Signs:
        • Watch Out for Cliches – “Our employees are our greatest asset…” or “The future is bright…”.
        • Vague or unauthentic writing
    • You want a CEO to have humility and to be able to talk about mistakes they have made and learned from.
    • Great Examples of Shareholder Letters:
    • Avoid FOG in a Letter
      • Fact deficient
      • Obfuscating
      • Generalities

Q&A Section

  • How do you know when a company has “turned” or the culture has changed?
    • Look for CEO succession and how the transition takes place.
      • Examples:
        • Honeywell – A wonderful example of how to do CEO succession.
        • Wells Fargo – Bad example.
    • You look for a culture change, look at their personalities, and trust your instincts.
    • The greatest CEOs write the greatest letters.
    • You should feel like the end of the letter that you just “met” with the CEO.
  • You have to have a trustworthy culture or else it doesn’t work.
  • It is important for the CEO to self-aware and confident.

Show Notes:

Episode 162 Full Transcription

Phil Town: Hey everybody, this is Phil Town.

Danielle Town: And this is Danielle Town.

Phil Town: And we’re here for the Rule One podcast, and I’m so glad I did that right.

Danielle Town: You did so good.

Phil Town: Rule One podcast, that’s where we try to figure out how to invest like the best investors in the world, and we have a special guest with us today at this podcast. Oh, and by the way, we’re podcasting and we’re going live on Facebook right now. So, hey everybody at Facebook.

Danielle Town: And, we’re live in the Bookworm bookstore in Omaha, Nebraska.

Phil Town: And if you have not been to Omaha, Nebraska, you should come, if only to come to the Bookworm bookstore.

Danielle Town: I agree. This is a fantastic bookstore.

Phil Town: Which is an awesome place. Super great people. Everything you want is right here, including us for the next two hours.

L.J. Rittenhouse: What?

Danielle Town: So, we have a special guest today. Do you want to go ahead and introduce?

Phil Town: Yeah, I really do. Laura is an incredible author. She is a friend of Warren Buffett. She has been instrumental in creating a kind of genre all of her own, which is solving one of my biggest hurdles ever in the history of investing. And that is the information she put in her book, Investing Between the Lines. So, would you guys all help me welcome here, Laura Rittenhouse. Everybody here

Phil Town: Laura, welcome.

L.J. Rittenhouse: That Omaha welcome.

Phil Town: Welcome to the podcast because-

Danielle Town: Welcome Laura.

Phil Town: The problem that you have aimed your book at, and a lot of your life at, coming out of Wall Street, coming out of the whole institutional investing world, and then looking at one of the biggest problems we have. And that is figuring out if managers are telling us the truth. Pretty big deal, and your book is stunning about this.

Danielle Town: And I’ve been talking it up, by the way, on this podcast Laura for like weeks now, ever since I read it, and wished that I had read it earlier. So, we’re going to talk much more at some point about the book itself, about the work you do, but today, we’re here at the Berkshire meeting together. We’re here at the Bookworm with everybody who’s just been through the Berkshire meeting. That’s what we want to talk about today.

L.J. Rittenhouse: Okay, what a great topic, right? Is this an experience like you’ve never had before in your life? Yes. Do you want to have it again? Yes. And why? It’s like, I don’t know, there’s another book that just came out. I don’t know if any of you saw it or you bought it. It’s really good. It’s called The Warren Buffett Shareholder, and it’s a collection of Larry Cunningham, who’s famous for writing the first essays of Warren Buffett. I got an email from him just two months ago, he said, we’re gonna put this book out, Letters of … about the meeting.

Danielle Town: It’s a collection of essays, right?

L.J. Rittenhouse: So, it’s stories, essays, from all kinds of people, from all kinds of walks of life, who’ve come to the meetings for the last twenty, thirty, whatever … or more recently. And what’s great about the book, I realized today, because it was done so quickly, the writing is really spontaneous, and it’s really personal. It gives you such a broad view, all the facets of what people experience and why they come here and what they bring to this. But getting back to-

Danielle Town: Well you wrote an essay for that book.

L.J. Rittenhouse: Oh, by the way-

Danielle Town: What was yours-

Phil Town: There we go.

L.J. Rittenhouse: By the way-

Danielle Town: So, what was the thought that came to your mind as soon as he said, Laura, would you please write an essay about the absolute encapsulation of your experience at the Berkshire meeting? What did you come up with?

L.J. Rittenhouse: This is funny. This is my … it’s on Facebook, okay. I am known on the internet as the queen of candor. That was the name given in a blog by Ink Magazine, so I will tell you that when I … I didn’t get much notice. I had like two and half weeks to pull this together.

Danielle Town: Wow, that’s crazy.

L.J. Rittenhouse: The first thing I wanted to do was to write about Susie Buffett, Susan T. Buffett, who was his first wife.

Danielle Town: Who was his wife.

L.J. Rittenhouse: Who, if you’ve seen the Charlie Rose interview, if you haven’t Google it. It’s wonderful. Charlie Rose interviews Susan T. Buffett and in that interview … she’s so charming, and you understand when Warren says, I could have never done this without Susie. And of course there’s a whole history there, which I won’t get into. So, I wrote this chapter, and I feature this, and I wrote some other things and I sent it into Larry and he said no. I said okay, go back to the drawing board. And then I realized that, for me, twenty years, I’ve come to Omaha every year for the past twenty years. Now, partly because I’ve written three books with Warren’s support. The first book being Do Business With People You Can Trust. I don’t know if anybody read that. I still have investors from Germany coming to say that’s their favorite book. It’s out of print now, but write me, I can get you one. The second book was Buffett’s Bites.

L.J. Rittenhouse: I write each of these books after catastrophes, so the first book was written after the dotcom crash and Enron. The second book was written right after the economic collapse in 2009. The most recent book, Investing Between the Lines, is the book that actually, Danielle sent me a fan letter, which was great. We all love getting fan letters, right? And, what Phil said is absolutely correct, that the hardest thing in investing … You can go to all kinds of classes and learn about how to analyze the numbers, right? Now, what I say on a video I did for Charted Financial Analysts, which selected my work as part of their Future of Finance initiative. I said, you know the problem that I think people have that are just numerically, quantitatively, oriented, is they have this idea that because numbers are precise, they are accurate, right? A number two is a number two. The word two could be t-w-o, t-w-o-o, tutu, t-u-t-u.

Phil Town: Yeah, but obviously people are going to the numbers because it gives you real information. But I think what either Charlie or Warren said, something to the effect that, when you’re running numbers through a formula that’s wrong, you’re getting a precisely wrong answer.

L.J. Rittenhouse: Exactly.

Phil Town: And that’s of course what happens so much when we do quantitative analysis is, we end up with … Anybody here who’s done any work trying to figure out the value of a business, even using some of the tools we have, you tweak the PE ratio a little bit and you got a whole different evaluation going on, right? I mean, just a little bit of a change here and a little change in the growth rate and bam, you’ve got something that all the sudden looks on-sale. So, you’re 100 percent right. And in fact, more and more as we get deeper into all this, it feels like it’s the subjective view of the long-term value of the business that’s important almost. Not even the numerical view. It’s the sense that the business will be worth a lot more in the future. It’s going to be more productive in the future. And a huge piece of that is who’s driving the car, right? What’s that management team doing with this thing that looks like it’s going to be more valuable down the road? That’s where you got deep into it.

L.J. Rittenhouse: That’s exactly why, when I wrote to Warren in 1997 to tell him what I was doing and that I had read his shareholder letter and it gave me all of these insights, he wrote me back to say, you’re doing the work of the angels.

Danielle Town: That’s amazing.

L.J. Rittenhouse: And, why don’t you come to the next shareholder meeting, which is how this all started.

Danielle Town: Wait, that was the first time you came? That was … you had written him. He wrote you, and that was when you first came. You hadn’t been here before that?

L.J. Rittenhouse: No.

Danielle Town: Wow.

L.J. Rittenhouse: And the thing-

Danielle Town: And you came as kind of a celebrity.

L.J. Rittenhouse: At that point, imagine … The meeting, 1998, which was the [Axharbon?00:07:57] Colosseum, at that meeting there were about seven thousand people. Everybody lined up single file in front of one door. The door opened and everybody quietly marched in one at a time.

Phil Town: Just like yesterday.

L.J. Rittenhouse: And I decided … I came up just yesterday. I said, you know we really should call this, the scramble to get in the doors, the running of the bulls in Omaha.

Danielle Town: Everybody’s laughing because they all just went through this, but I didn’t know this until … So, this is my first meeting ever and I didn’t know that everybody sort of … They call it a line, and it looks like a line, but the line is about 15 people wide, especially right at the doors, where it’s about 40 people wide. And when they open the doors, everybody just crams in as much as they possibly can, and then once you get in, I posted this on Instagram yesterday, people run for the seats. I mean, it’s really the running of the bulls.

L.J. Rittenhouse: Yeah, then it becomes, what’s that show? There were people who travel around the world, you know, the race.

Speaker 4: Amazing Race.

Phil Town: Yeah. Yeah.

Danielle Town: Oh, the Amazing Race.

L.J. Rittenhouse: You go from running of the bulls to Amazing Race.

Phil Town: Let me tell you that, in the podcast, we have hammered away at something Charlie said a few years ago to BBC. That there’s really these four things that you have to be thinking about. You gotta be sure you’re capable of understanding the business. You want to be sure it has durable, competitive advantage that will last, right? Something very durable. And you’d like to have management that has talent and integrity. You see the shift, right? It’s like you must have, and then you must have, and then wouldn’t it be nice to have. Because getting management that has talent and integrity, that’s a pretty good trick.

L.J. Rittenhouse: Well, I have to tell you, and I don’t know how many of you read my book, but I have really good news for you. It’s not that hard to figure this out. And what you’re saying, we haven’t used the word yet, it’s about the culture. It’s all about the culture. And who creates the culture? The leadership. It’s what the leadership stands for, and what you learn in reading the shareholder letters is based on a fundamental principle that we humans don’t like to accept, which is our words create our future. Our words create the future. Now, what does that mean? That means, I’m responsible for, you know, my future. Oh my gosh. But, I have come to really appreciate that. I mean, the power of language, remember, this is our ability, we humans unlike all the creatures in the world, we have the gift of symbolic language, meaning that … Dogs, they can talk, right? They have language. Animals can talk to one another, maybe to us. But, animals can’t make Botox. They can’t use language to create ice cream or hydrogen bombs. This is what we humans can do. This is how powerful our words are.

Phil Town: Botox, ice cream, and hydrogen bombs seem to all go together pretty well.

L.J. Rittenhouse: This is the vastness of human creativity.

Danielle Town: Laura, do you think that’s why so many people now come to see Buffett and Munger speak at Berkshire? Because they speak about so much more than investing, and they do so so eloquently.

L.J. Rittenhouse: Well people … Wisdom. The world wisdom came up very quickly. You want me …

Danielle Town: I think they’re not hearing us so well in the back so we need to speak up.

L.J. Rittenhouse: Okay. Speak up. Okay. Is this better? Thank you.

L.J. Rittenhouse: Okay, wisdom. That is … That’s the shortage, right? We have wisdom shortage right now I feel in our country. Let me get back to the question of culture because I know that what Warren really appreciated and how hard it is to determine what culture is. What I did is, they’ll tell you how I started doing this work. I had been on Wall Street. I left and I decided to create a strategic investor communications business because a lot of the clients, a lot of the CEOs I worked with wanted to continue working with me. And I said, I would sell you these expensive deals to buy another company or to do this fancy financing, but you’ve got to know if you’re communicating your value to your investors in a way so you’re getting the full value.

L.J. Rittenhouse: I created a lot of instruments so we could measure that. Imagine, this was a time when the cult of the CEO was just starting. Before that, a CEO, they didn’t make multiples, multiples, multiples of whatever the employees were making. In this dotcom era, and post-dotcom, it was CEOs … People would say the valuation of your stock is determined … 60 percent of the valuation of your stock is determined by the reputation of the CEO. If that indeed was correct, and to a large extent that was true, then you had to be sure that the CEO was putting out a story, putting out an impression of them as a leader that would convince investors that they deserve the valuations they were getting

Phil Town: Wait a second. How did you start looking at what the CEOs were saying as a reference point for whether they have integrity or not? Or wisdom? Or whether they’re somebody we want to put money with long-term? How did that come in right there?

L.J. Rittenhouse: Well, what is the one communication that most investors read, that Warren Buffett read all the time, right? He would say, early on I invested in Coca-Cola just from reading the shareholder letter, right? So, I started reading the shareholder letters of my clients and looking to see what kind of impression they were making through this communication.

Danielle Town: Oh, and these were your clients that you were hired to form essentially, like on their public view.

L.J. Rittenhouse: To help advise them … Yeah, linking valuation with communication.

Danielle Town: So you started out, actually, on the writing side of the whole thing. The company side.

L.J. Rittenhouse: Writing and advising, because what I started to do, once I began to read the letters of my clients, I started reading the letters of their competitors, and that got really interesting. Cause then I could say, Wow, you’re talking about this as your strategy, but they’re talking about that. Your strategy is raising these questions, which should be answered by this CEO.

Phil Town: What’s something that you … is there any one thing you have to see in a CEO letter to know that you’re really listening to somebody, or reading somebody, who’s got it together? Is there one thing, or is there no one thing?

L.J. Rittenhouse: Alright. The one thing … I’m telling you, this is the key determinate. You’ve got to find low BS. Very low levels of BS.

Phil Town: So, give us a high level of BS.

L.J. Rittenhouse: Well, when I say low levels, I mean measure. I actually measure this.

Phil Town: I know.

L.J. Rittenhouse: Okay.

Phil Town: But, what’s a high level of bull crap look like?

L.J. Rittenhouse: Well, one of my favorite, not favorite, one of the cliches, which I always gag when I see this … Employees are our greatest asset. I’m like, ugh. Really? I mean, if their-

Danielle Town: That’s a high level of BS?

L.J. Rittenhouse: If it’s asset, then are you depreciating your employees? Yeah, I guess you are, you know? You’re certainly not appreciating them if you’re using a dumb old cliché like that to honor them. And our brightest days are ahead.

Phil Town: Oh yeah.

L.J. Rittenhouse: Is anybody awake? Is anybody awake in that company to say-

Danielle Town: So, it’s vague. There’s no candor.

L.J. Rittenhouse: Well, and authenticity. What we’re looking for are leaders who lead authentically. And what does that mean? Okay. What does Jeff Bezos do? He’s always … It’s so interesting. Okay, here’s a good story. Jeff Bezos, who had always … So, I’ve developed codes and numerics so I can quantify the amount of truths and BS. So, I can get actually a measure of what I call candor, or I have a sanitized word for BS that I use with my clients, right? FOG. It’s and acronym for Fact-Deficient Obfuscating Generalities.

Phil Town: Fact-Deficient Obfuscation and Generalities. I like it. So, FOG. Beautiful.

L.J. Rittenhouse: When you see … So, you want to have low levels of FOG to feel that you can trust a company.

Phil Town: So, do you turn it on its head then and say that something that is, what are we looking at? FOG, right? So, full of facts is not fact efficient. Not obfuscating anything. Laying it out there. Straight out.

L.J. Rittenhouse: Straight on.

Phil Town: And then specifics.

L.J. Rittenhouse: Generalities. Details. Give me details.

Phil Town: Give me details.

L.J. Rittenhouse: Also, I was telling you about Jeff Bezos. His letters were amazing. You’ve all read his letters, right? Who has not read his letters? Oh my God. Go home and read them. Two funny stories since we have time, right?

Phil Town: Sure.

L.J. Rittenhouse: Okay. So, he always appends his 1997 letter because it was the first letter he ever wrote and he said, this is the letter that started the company and we’re still following this.

Danielle Town: That letter’s incredible. That first letter.

L.J. Rittenhouse: That letter ends with, it’s still day one at Amazon. Two years ago, he started his letter. He said, you know, I was at a meeting and somebody asked me, Jeff, what’s day two like? We always talk about day one.

Phil Town: Heck of day one.

L.J. Rittenhouse: What about day two? And Jeff said, day two. Death.

Phil Town: Death. Oh man.

L.J. Rittenhouse: Death.

Phil Town: Oh man. Stay day one.

L.J. Rittenhouse: You know, so day one is like, stay alive. John Travolta. Stayin Alive. Be alive. Bring your whole self to work. And I don’t know if you … For some reason, I get to fly planes and I sit next to a lot of Amazon people or people who are just hired. They’re great people to talk to. And what’s the one thing that Amazon that I don’t know that any other company does? Do you know the one thing they do that I’m sure accounts for it, and it’s related to communication?

Danielle Town: No.

L.J. Rittenhouse: They do not allow PowerPoints in their meetings. No PowerPoints. Forbidden. So, what do they do instead? They require people … Get back to, this is how important culture and communication is, they require people coming to a meeting to write, whatever it is, a six-page paragraph summarizing what the issue is, what the alternatives are, and what your recommended action is. So, people come with their memos. They sit down. They read it, and then they discuss it.

Phil Town: So, Bezos has a great letter. Buffett obviously has a great letter. John Mackey, can I put him in there?

L.J. Rittenhouse: Sure.

Phil Town: Cause I like John’s letters. Who else? In other words, if we were to say, here’s a group of people who you should read to see what it looks like to do it right.

L.J. Rittenhouse: Well, I’ll answer the question, but then I want to add something to that because this is one of the most important things that you can lean. I’m learning this right now, through this most recent group of shareholder letters. Is, you want to know when the culture is starting to turn. Because I do these … I’ve got numeric rankings, and I can see … So, I’m gonna get back to answering your first question.

Phil Town: No, I’m thinking … I’m looking over here because I’m thinking, man, we do this thing called story, which is all about trying to understand the business in a coherent sort of form and looking to see if the story’s changing, if the culture’s changing. Oh man, that would be Nirvana.

L.J. Rittenhouse: Okay, here’s Nirvana. God, what was the year? I think it was about 2005-2006. Amazon, which had always ranked in the top quartile of our survey. Suddenly, they dropped out of that ranking. I said, oh my god, what’s going on at the company. Then, I go to the financials, right, and they have three buckets of expenses that they consistently report. Let’s see if I can remember them. Fulfillment, marketing, and RND. So, if you look back over the three or four years, and the allocations to each of those buckets was pretty similar, except for the year that that ranking went down. And what happened? RND spending tripled. And the other expenses declined. I said, oh my god, they’re inventing something. They’re gonna do a high risk, technology, big deal thing. Wonder if they’re gonna succeed, right? Guess what it was.

Phil Town: AWS.

L.J. Rittenhouse: Kindle.

Phil Town: Kindle.

Danielle Town: Kindle.

Phil Town: Kindle. Interesting.

L.J. Rittenhouse: Now, they never write about … he never writes about AWS in his letter. He never-

Danielle Town: What’s AWS?

L.J. Rittenhouse: That’s where they make 90 percent of their profits come from … That’s a kind of FOG thing that I would worry a little bit about. AWS is Amazon Web Services-

Danielle Town: Oh, got it.

L.J. Rittenhouse: Which started in D.C. I actually had the pleasure of spending time with the woman who was very instrumental in growing that business. But that business accounts for 90 percent of their profit.

Phil Town: They were referring to that yesterday. Was it Munger that was talking? That somehow in 1996, they were looking at Jeff and at Amazon, and like Warren said, this guy made a miracle. And you’d have to have judged it … Oh, well I’m going to invest in a future miracle here because he did not just this book selling business, which then evolved into a retail online monster, but also, he did AWS. Which is like, who’s ever going to figure that’s going to happen, right? And he basically handed IBM their rear end. He just basically put a stop to IBM, and they’re running to catch up to this day. The first sign of that was when the CIA took AWS instead of Big Blue, right? Man, that was a huge wake-up call for IBM and everybody else who was looking at Amazon. They have just gone into some other world. I mean-

Danielle Town: Well, and it was very cool yesterday, just to get back to the meeting that we were all at. It was very cool to hear him talk about how they missed that one. They missed Amazon. They talked about how they missed Apple originally.

Phil Town: Google.

Danielle Town: Google. Exactly.

Phil Town: They missed Google.

Danielle Town: What did you think, Laura, was that a good example of the candor that you talk about, that you look for? The positive version of this, rather than the anti-version of what you’re not looking for.

L.J. Rittenhouse: So, how did they miss it? Well, this is …

Phil Town: Not so much how did they miss it, but that they’re reporting that they missed it.

Danielle Town: Yeah, that they talk about their mistakes with such alacrity.

L.J. Rittenhouse: And also, that’s alacrity and humility, right? Here’s Charlie Munger saying, we’re really stupid. We do a lot of stupid things here. Are you kidding me? But you’re still wise. And you know, let’s face it. It’s how we learn, right? Our failures. If we don’t learn, we’re still stupid, but if we can learn, we get wise.

Phil Town: I honestly wonder, this is a little bit sacrilegious, but I wonder, would they be so humble and forthcoming if they weren’t so great already? In other words, you’re hitting 340, you’re leading the American League in batting, and you’re gonna talk about the times you struck out.

Danielle Town: Well, but that’s a great question for Laura because-

Phil Town: Do you do that when you’re hitting 200?

Danielle Town: Because you’ve been here for 20 years. Have you seen any difference in those 20 years of how they’ve spoken about these kinds of mistakes?

L.J. Rittenhouse: I’ll mention, just in relation to this example, I tell you on a stack of bibles, that all the years that I’ve been coming here, I have heard them say, and I was influenced by this, don’t invest in what you don’t understand. Don’t invest in what you don’t understand.

Danielle Town: Yeah.

L.J. Rittenhouse: That’s why we don’t invest in technology. And what I heard Warren say yesterday, and maybe I misheard it so you can tell me, what I thought he said was, you know sometimes you have to invest in what you don’t understand. Which is an evolution. I did a-

Phil Town: What?

L.J. Rittenhouse: Yeah.

Danielle Town: I didn’t quite hear it like that.

Phil Town: I didn’t quite hear that either.

L.J. Rittenhouse: Did anybody else hear that? Did I dream it?

Phil Town: I don’t think… You don’t have to know how to take an iPhone apart, which is different than understanding the business, because I think the point he was making, tell me if I’m wrong, was that Apple is about something much larger than iPhone. It’s about, what did he say, the ecosystem. So, you have this ecosystem, which is an incredible mote, which they can just shove things like iPhones into because they’ve got the whole … They own my desktop. I don’t think he was saying you don’t understand.

Danielle Town: He also said that Todd and Ted have helped him to understand these newer companies.

L.J. Rittenhouse: This is called selective hearing.

Phil Town: Sacrilegious.

L.J. Rittenhouse: I could be wrong.

Phil Town: I’m gonna bet you on this one.

L.J. Rittenhouse: That’s okay. I don’t-

Phil Town: I’ll bet you dinner.

L.J. Rittenhouse: I don’t want to-

Phil Town: I’ll bet you dinner in New York.

L.J. Rittenhouse: Alright. You’re probably right. But here’s what’s so interesting. When he made that Apple investment, and he could have done Google, he could have done Facebook, all those, he chose Apple. And I thought that made a lot of sense because Apple is a retail business. You can go to the store. You can have a store experience. You’ve got real products. It’s like Google, Facebook, look what’s happened to them. I did a blog about that on Forbes recently. Let me tell you, it got a lot of pick up. It’s a serious model. But I’m gonna tell you something. It’s kind of crazy. I was just at a brunch, and I talked to this woman who I met last year, who is one of the smartest people I’ve ever met. I cannot tell you what she talked about cause I couldn’t understand half of it. But, I could tell it was really smart, and what she’s saying… I’ll tell you why.

Danielle Town: What did she say that you didn’t understand?

Phil Town: I feel like that all the time.

L.J. Rittenhouse: But you know what I mean, right?

Phil Town: Yeah, I know what you mean.

L.J. Rittenhouse: You know. Cause you don’t have all the context, but you know that there’s something that’s really … What I learned today, which I didn’t know about, that there is a movement going. Maybe you all know about this. There’s something going on about Net Neutrality and that this could really change the economics of all the Googles and all of the search companies. So, that’s the kind of thing that … You know, and I think that Charlie referenced that too.

Phil Town: He did. Absolutely right.

L.J. Rittenhouse: That the environment can change around you. The business can stay the same. That’s why Warren loves Coke, right? The environment is still there. You’re gonna drink that Coca-Cola.

Danielle Town: 20 years ago, did they speak differently, with more or less candor than they do now? Have you seen a change?

L.J. Rittenhouse: I think so. Remember, it’s not just because it’s … This is being streamed now, right? I think last year was the first year that it was streamed, and so when you’re steaming, you’re speaking to the whole world, and there’s gotta be a kind of self-censoring that goes on. Before, if you’ve got a closed space, and journalists that have been sworn to secrecy or something.

Phil Town: And seven thousand fans or whatever right? You can say what’s on your mind.

L.J. Rittenhouse: Yeah. But, it was a lot more personable. I don’t know, this might sound trivial, but getting back to culture. This said everything to me, and that first meeting that I went to, somebody got up, one of the investors got up and said, Warren, why did you drive yourself to the meeting? In an old Cadillac. Don’t you make enough money to drive a nice new car? Don’t you owe it to the shareholders to be driving a newer, safer car?

Phil Town: Interesting.

Danielle Town: And what did he say?

L.J. Rittenhouse: And what kind of question is that? He said, you know what, I could buy another car, but that would mean I have to learn how to drive it. I’d have to read the owner’s manual. This car works perfectly well. I have better things to do with my time. This is why I say what really makes Warren unique in the history of the world, thank you Karl Marx, is that he is a capitalist and not a materialist. Capitalism is built on consumption, conspicuous consumption. Look how important I am. I have three private planes. And for years, they had a small private plane, which Charlie called the Indefensible. Then he went and bought NetJets. So, now he can justify, I have a business so when I fly, my expense is feeding the business.

Danielle Town: I’m supporting my own business, so really it’s all symbiotic. So, you saw a difference from the last even two years since they started streaming it on Yahoo Finance so that people who weren’t there could still watch the meeting?

L.J. Rittenhouse: Yeah, I think so. But also, you were there yesterday, like any good conversation, the quality of the meeting is determined by the quality of the questions.

Danielle Town: And what did you think about these questions compared to-

L.J. Rittenhouse: I wasn’t there a lot, so I can’t tell you.

Phil Town: What were you doing?

L.J. Rittenhouse: Well, I was having my photograph taken.

Phil Town: Oh, you were being famous.

Danielle Town: You’re such a celeb.

Phil Town: You were being famous.

L.J. Rittenhouse: We were doing this book. I’m plugging this book, The Warren Buffett Shareholder, and also this book too.

Phil Town: Let me, I think if it’s time, we can open up to some questions here.

Danielle Town: Yeah, how about that Laura? Should we answer some questions?

Phil Town: You okay with that?

L.J. Rittenhouse: Well, is everybody okay about the culture thing? Because I think that is so important and I just really want you to know that what I’ve done in this book, and that’s what Danielle and this gentleman here, Phil, is actually gonna start teaching this.

Phil Town: Absolutely.

L.J. Rittenhouse: We’re gonna talk about that.

Phil Town: This becomes our key books in the course, and we don’t have very many key books. But, we’ve got some that are really important that solve a problem, and we just haven’t been able to solve that problem of management, right? We got the four Ms: media, mote, management, marginal safety.

Danielle Town: It’s the thing we get the most questions about.

Phil Town: We get the most questions about it. It’s the least numerically oriented of everything we do.

Danielle Town: Which is what makes me like it.

Phil Town: Right. And it’s about this integrity and talent, and it’s difficult. For years, we have been saying go read the shareholder letter, and if they’re not telling you what’s going wrong, they’re lying. Is that a little too harsh, do you think? Because you read most of these letters and nothing’s going wrong all year long. They’ve had no problems whatsoever, which doesn’t sound like candor to me.

L.J. Rittenhouse: It’s absolutely right, but there’s another phenomenon that I just want to … In terms of background to know what’s useful about this approach. So, in 2009, my IP lawyer called me and he said, Laura, did you read AIG’s letter? I don’t get it. I said, what do you mean you don’t get it? You’re so smart, of course, you get it. No, I don’t get it. So, I said okay I’ll read it. Oh, I’m sorry. No. I just ruined the story.

Danielle Town: You can start over. It’s okay.

L.J. Rittenhouse: It was Goldman Sachs’ letter. So, I read the letter and it starts off … great sentence. You look for things like grammatical … deconstructing, jargony words, run-on sentences. A run-on sentence, you know they’re lying.

Phil Town: Run-on sentence. That’s a lie.

L.J. Rittenhouse: A run-on sentence. Like, well mom I really tried to get home, but the teacher made me stay after and …

Phil Town: And then, and then, and then …

L.J. Rittenhouse: Very fine. Very fine. Very fine. Suddenly, the next paragraph. Oh my god. It was like the bus ran off the road. There was a sentence that made no sense. Those things. The telltale jargon, awkwardness. One sentence did not follow the next sentence. I said wow, what are they talking about. They’re talking about how … they explained why AIG was Goldman Sachs’ largest counter party in the collapse of the financial … the derivatives and how that had nothing to do with the bailout. So, I thought wow, this is the smoking gun right here. If you can’t explain that clearly and directly and straight forwardly, then that looks troublesome. I called my lawyer and I said, Steve, of course you couldn’t understand it. You weren’t supposed to understand it. It was crazy. I said, how could you not see that. And he said to me, I didn’t think I was smart enough. And you know what, we all fall … that’s why BS is so toxic. Because it shuts down our critical faculties.

Phil Town: That’s a really good point.

Danielle Town: That’s exactly why we wrote our book, Invested because so many people like me assumed that we didn’t understand the financial world because we weren’t smart enough. We didn’t have the basic tools. First of all, that’s completely BS. And secondly, we just had to lay them out so that it was clear for people in a way that was also easy to understand and kind of fun.

Phil Town: That’s that FOG you’re talking about.

Danielle Town: Yeah.

Phil Town: That’s not just in those letters. It’s industry-wide. They’re protecting a 100 billion dollar revenue stream, and if a little FOG is required to keep people ignorant, then by God, let’s have some FOG, right? We’re trying to put a little light on the whole and get the FOG away, and it really helps to have great books like Investing Between the Lines to go and dig in on it. And you have done something nobody else did, which is really really good. So, I’d love to see if you guys have any questions for Laura.

Danielle Town: Let’s take some questions.

Phil Town: And think if there’s anything about the day yesterday at Berkshire that you want to talk about as well. If there was something there that you heard, something that you want to chat about, we’d love to hear.

Danielle Town: Yeah, we’d love to hear what you guys thought about the Berkshire meeting yesterday.

Danielle Town: So, why don’t you come up here and then speak into this.

Mark: Hi, it’s Mark from New Orleans. Earlier, you were talking about when you know when a company is turned, but you didn’t really finish that. Would you keep going?

L.J. Rittenhouse: Yes, okay. What does this mean to have a company turn? It’s so important to … CEO succession. This is what Berkshire’s dealing with, right? The letters I’m reading right now, that came out last year … there’s a large number of CEOs in the company that are in our survey that have changed CEOs. One of them, for example, is Honeywell, which is a great company. What Dave Cote has done over the years, he not only writes his own letter, he makes up words. He creates his own words to describe things. There’s a new CEO coming on, and I invite you … this is the letter that came out last year. It’s a wonderful example of how to do CEO succession well.

L.J. Rittenhouse: He writes, this is what I’ve done. He takes a victory lap and so on. But, I’m now turning the reigns over to the new CEO, and then he comes in and does his own thing and lays out a plan for the company, a plan for the succession. That’s great. Mark, there are other situations like Wells Fargo. Wells Fargo had their problems and they brought in a new CEO. I really didn’t see much change in the letter.

Danielle Town: So you look for some change to see the personality, the efforts, the plan of the new CEO?

L.J. Rittenhouse: Yeah. Is the new CEO going to continue …

Phil Town: The culture.

L.J. Rittenhouse: The culture, or is the CEO going to improve the culture. Or, in Starbucks case, Howard Schultz turned the reigns over to the new CEO, but then he went on for a whole page about how involved he was going to continue to be in the operations of the business. So, I wasn’t quite sure about how that was a succession. You look for the culture change. You look for the personalities. The personalities come through and trust your instincts.

Phil Town: I think your book has had an impact enough to where a number of CEOs are no longer writing a letter. Do you notice that? Have you seen that as well? I’m thinking particularly, there’s a Canadian company that we look at a lot called Linamar and I’d love to hear from Linamar, if they get this out to them, because the CEO of Linamar is a fabulous woman who took the company even greater than her father who founded it. Both are in the Canadian hall of fame for entrepreneurs. It’s one of Canada’s big success companies in auto part manufacturing. They did not write a letter in 2009. The 2008 year was a train wreck for automobiles, right? Chrysler’s going down. GM’s going down. They just slammed the door on all the revenue for Linamar in a huge way, and all of a sudden you have no communication from the CEO.

Danielle Town: They do something related to autos? What do they do?

Phil Town: Yeah. They do auto parts. They do axles and transmissions.

Danielle Town: Okay. So, they just didn’t write a letter at all after that?

Phil Town: One year after another, after another, after another, and then bam. Nothing. At least nothing I could find. So, if there was a letter from Linamar, I’d love to see it. Otherwise, I’m going to continue to assume there was no letter that year.

Danielle Town: That sounds bad.

Phil Town: I and I just wonder if the pressure that you’re placing on these guys with this book, is getting to them in a way that their attorneys are saying, whoa, we are now … Investing Between the Lines by Laura Rittenhouse, that nasty person has caused us … Look it, they’re not happy with us. Because why? If you can read between the lines and you can sniff out the BS that they’re throwing, their lawyers are probably going to come and say just don’t write the letter.

Danielle Town: Well, okay. What a great question, or observation. First of all, I have a new mantra. The greatest CEOs write the greatest letters. Let’s spin it positively.

Phil Town: That’s the way to push it.

L.J. Rittenhouse: Yeah. And, the fact is, a lot of the professional investors, they just don’t read the letters. So, a lot of CEOs said, why bother? The big guys, who are the fund managers, they’re not reading them, so why should we bother writing them? I think that’s having more of an impact than this realization. I hope that’s the case because let’s face it, what audience is the biggest, most important audience of those shareholder letters? Question to the floor. What audience?

Danielle Town: I would say, analysts.

L.J. Rittenhouse: No.

L.J. Rittenhouse: Shareholders? No.

L.J. Rittenhouse: These are all great answers, but not the one I’m looking for.

Danielle Town: There’s a guess. Potential acquisitions. Okay

Phil Town: What? Employees?

L.J. Rittenhouse: Yay.

Danielle Town: Employees?

Phil Town: It’s my podcast.

L.J. Rittenhouse: And I didn’t tell him beforehand. Think about it. Employees are shareholders, right?

Phil Town: Right.

L.J. Rittenhouse: So, the employees go there every day. They’re like, oh, I don’t know what I’m supposed to be doing. Rumors are going on, and in difficult times, they go to that letter. They read that letter. They want to know because they get a chance to sit down with the CEO. Let’s face it, that’s why we love reading Warren’s letter. The letters over the years. At the end of the letter, what’s the standard of a great letter? At the end of that letter, you feel, I just met with that CEO. I looked at them in the eye. I got a read on what was going on.

Danielle Town: That’s a good point.

Phil Town: I think we gotta continue what I see on here. The greatest CEOs write the greatest shareholder letters. And I think if all of us, if you guys are out there doing this, and you start sending letters into the board of directors, to the CEOs, saying hey we depend on you to do this. A great CEO is going to communicate with the shareholders. A great CEO is going to communicate with the employees. They’re gonna tell the truth about what’s going on, and that’s what we really need to know. We need to know and understand your business better so we can evaluate it every year and know where we are as an owner. That’s all we want, right? We want to be able to know if the culture’s changing. We want to know if you’re changing the mote. If the mote’s shrinking. Are you having problems? Are you getting around the problems? How are you solving these problems? We don’t want a bunch of smoke blown at us, or in Laura’s terms, the FOG blown at us.

Danielle Town: I mean the fact that there’s a letter on its own … This is what I found so brilliant about your book, the fact that there’s a letter on its own doesn’t actually mean you’re getting any useful information from that CEO or from that company. It has to be worthwhile. And there are so many of them that are just not, that it really puts a spotlight on the ones that are. I think what you’re saying is exactly right, but let’s have more of the good ones.

Phil Town: Hundred percent right.

L.J. Rittenhouse: Amen.

Phil Town: Amen.

Danielle Town: So, let’s take another question. Who else? Yeah.

Phil Town: If it’s kind of hard to come up guys, we can repeat the question, but it would be great if you can come up.

Addy: So, my name is [Addy Pumpleampu? 00:43:24] and I’m from Brookfield, Wisconsin. It’s near Milwaukee, and I’ve been following, actually, you two for a while. And I first wanted to say thank you to all of you because this is actually a culture you’re creating, or have created, right? So, it’s a good platform for us. The other comment I wanted to make was that in my previous life, I was a doctor, and you brought up the point of the quantitative part of looking through a business, and then I guess the human part. I think the human psychology part is a very important part. It is part that we cannot necessarily quantify, and from my experience, sixty percent of doctors get sued. The main reason they get sued is for not telling the patient the truth, for not saying I do not know, or we are finding out, in communication. And, I think there is a parallelism in what we do here because reading between the lines is simply looking for genuineness, or truth, right? And we all know what that is. That’s the comment I want to make.

Phil Town: Thank you.

L.J. Rittenhouse: Yeah. It’s so funny. I want to take a little bit of … I’ll challenge you on your last statement. First of all, I love the analogy because a great shareholder letter is the sign of a healthy business. Related to what I said. I think this notion that people say, well how can you know the truth? And I really believe, in each of us, we know what the truth is. We know what the truth is, but then we lie to ourselves, or we just … It’s uncomfortable to know that. But, I think that’s a wonderful thing about human beings, is that it’s candid to the outside. It’s candid to ourselves.

Danielle Town: That we lie to ourselves?

Phil Town: Or we have really good bullshit detectors. Do we? Do you think? We know when somebody’s lying, we just are not letting it through.

L.J. Rittenhouse: We don’t want to … Yeah. I think we filter it.

Phil Town: And, do we filter a lot of that because these people are kind of coming from on high?

L.J. Rittenhouse: It’s scary.

Phil Town: You know, these amazingly successful people with all these degrees, and they tell us this stuff, and something is going off inside your head. You say that something’s wrong here and I don’t know quite what it is, but they’re such an authority.

L.J. Rittenhouse: I mean, it’s scary. Like if you’re an employee going like, oh, I see what’s going on here day to day, but I’m reading this letter. This has nothing to do with my reality here. That’s scary, right? Cause this person has authority over you and … I don’t believe this word has come up yet in our conversation. If it has, raise your hand. What about trust? It’s all about trust.

Phil Town: Yeah.

L.J. Rittenhouse: You have to have a trustworthy culture, otherwise it won’t work. It doesn’t work.

Danielle Town: I think what’s so beautiful about your comment, is that you’re saying that doctors themselves have a hard time communicating to their patients when they may not be able to do something, right? And I think that there’s a real corollary here to leaders of companies. They may not have the ability within themselves to announce when something’s going wrong. To say when they’ve screwed up. It may not be such a conscious thing.

Phil Town: They don’t have the guts to do it.

Danielle Town: Well, it also may not be such a conscious thing of, oh, I’ve messed up the company this year, so I’m just not going to tell everybody. It may be like, I can’t admit that I messed up the company this year. It might be everybody else’s fault, or it’s the economy, or it’s the president, or it’s because there’s some problem with my kid at home, you know? You blame it on other people and it’s very hard to communicate that out.

Phil Town: What do you think about that? Let me just ask … Laura’s giving me this look like, hmm.

Danielle Town: Yeah, tell us, Laura.

Phil Town: I want to know what you think about that.

Danielle Town: Tell us what you think.

L.J. Rittenhouse: I say BS.

Phil Town: You say BS. Alright

Danielle Town: So, you don’t think that that’s a real dynamic that exists.

L.J. Rittenhouse: First of all, what I haven’t talked about is what I’ve developed over the years. And what I recently … I’m automating this. I was recently meeting with some very high technological language programming people, and I showed them what I created. They said, oh my God, you did what the computers supposed to do, or can do. So, I’ve identified, we’ll call them codes. They are the clues. They’re codes. It’s like birding. You have to know kind of what the ear marks are of the bird … So that’s a Red-winged Hawk or something. So, to your point, I give extra points for a CEO in a shareholder letter who says, boy, we really made a mistake this year. I was wrong. And I have seen that. It’s rare, but I do see it. And the truth is, everybody knows it, right? It’s not like it’s trying to say there’s really not an elephant here. It’s the elephant in the room.

L.J. Rittenhouse: One time I gave a talk and the … It was supposed to facilitate these two companies, head groups, they were trying to do something together, and they were … So, I gave a short talk and I have a slide that shows an elephant sitting in a board room, in a board seat. And I said, and then there are these elephants in the room. We all know they’re there, but we don’t talk about them. Anyway, it opened everything up.

Phil Town: Well, is it-

Danielle Town: But it’s an important thing for the CEO to be somebody who’s self-aware then, is what your saying.

L.J. Rittenhouse: Well, self-aware and confident, right? A woman I met recently, she said, I read your book. You made me a lot of money. I said, well great. How was that? She said because you gave me confidence. You gave me confidence in my judgements. This is what’s ironic. When a company’s going through troubles, they don’t want to talk about it. I said, this is your moment to shine. You’re going to earn so many credibility points.

Phil Town: How do we communicate that to these companies that we’re invested in? How do we tell those guys, you’ve got to do it? Because I’m thinking of one company in particular, Chicago Bridge and Iron, where they made a terrible acquisition. They got in all kinds of lawsuits over a nuclear power plant, and the CEO effectively, who did that deal, he might as well have taken 1.5 billion dollars in the parking lot and set it on fire. He just completely wiped out the equity of the company in that regard. To this day, never has admitted there was a problem, and the board didn’t take action against him immediately. They let it slide for what, two or three years or something and then finally, he “retired.” And then more crap came out on the table. There’s gotta be some huge pushback from CEOs. What do they have to lose? It’s got to be a lot. I’m thinking that they have ever incentive to lie to us, and we’re not gonna get the truth.

L.J. Rittenhouse: Well, here’s something interesting. So, I’ve created a … It’s a great assumption and I think there’s many reasons why we would assume that, but … It’s so interesting. Over the years, I’ve created a hundred company benchmark sample survey. A hundred Fortune 500 companies representative by market cap industry and financial reputation and so on. Every year that I do these analytics, I get a normal bell curve. So, there are certain companies that really stand out, are great, companies that just, oh my goodness watch out, and then everybody else is kind of in the middle. Like, okay whatever. And, people will come in and out of those ranges. In fact, I think in my experience anyway, Phil, is it’s a more positive story than that, that there are in fact companies and CEOs out there … maybe the message to deliver to corporate boards because the CEOs, that’s who they report to, is that you really want your CEO to be as disclosive as possible. The reason I read shareholder letters is it’s where the lawyers typically don’t have much say about it. People say read the 10k now, well those are all so lawyered over. I mean, I still can find things there, but I call the shareholder the free skate in the Olympics. You know, you do your compulsories, you do your free skate.

Danielle Town: You do whatever you want.

Phil Town: Laura, thank you. Would you guys agree, that was pretty flipping great. Thank you very, very much for being on here.

L.J. Rittenhouse: You’re very welcome. And, by the way, this book Invested … I am going around telling everybody, this is a game changer. This book is a game changer because there are not … I can’t name other books which talk about the emotions of investing in the way that Phil and Danielle do, and I’ve gone around telling people, this book … May I say it? This book is Eat, Pray, Love meets the Intelligent Investor.

Phil Town: Nice.

Danielle Town: That’s the best description.

Phil Town: That’s the best. I think on that fabulous note-

Danielle Town: Laura has been such a champion of our book, and made sure it’s gotten to Mr. Buffett himself, which is incredible. We don’t know if he’s opened it, but we hope that he will. And thank you all for being here so much today.

Phil Town: Thank you all for being here.

Danielle Town: Alright.

Phil Town: Time to go play.

Danielle Town: Thanks everybody.

Phil Town: See ya.

Danielle Town: Bye.

Phil Town: Bye.

Phil Town: Hey, thanks for listening to Invested. We hope you enjoyed this episode. Head over to for our show notes and a special offer on how the podcast listeners can attend my three day, Transformational Investing Workshop for free, where we just teach the heck out of your for three straight days. We don’t sell anything, and we get you a scholarship to come do it for free. So, come on over there and take look at that. And, by the way, as our lawyers want me to say, everything discussed on this podcast is either my opinion or Danielle’s opinion, my opinion’s right, and is not to be taken as investing advice because I am not your investment advisor, nor have I considered your personal situation as your fiduciary, so this podcast is just for your entertainment and education only, and I hope you enjoyed it. So, until next time, time to go play.


On the InvestED podcast, Phil and his daughter Danielle shine a light on the successful investing strategies that gurus like Warren Buffett have used for 80 years. Listen in for a great stock market education on basics, learn how to invest on your own, and follow along with real-time examples and investing tips from week to week.
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