InvestED Ep. 164 – Charlie Munger’s 3 Ways to Build a Great Portfolio

This week Phil shares a few of Charlie Munger’s lesser known secrets on how to build a great investment portfolio. Join us as we dive in on gurus, cannibal companies, and valuable spin-offs that can take your returns to the next level.

 

In Episode 164 You’ll Learn:

  • Value Investing w/ a Rule One Twist
    • “Founder of Value Investing”: Ben Graham – Security Analysis
    • Value investing uses the fundamentals of the company to determine the value of the business and then buy it for substantially less than that.
    • More on “Cigar-Butt Investing” – A non-rule one type of value investing.
    • Price should always be less than the working capital.
    • Look for wonderful businesses with durable competitive advantages.
    • Value investors don’t typically rely on technical indicators, because does not have concrete credibility.
  • Munger’s 3 Ways to Build a Great Portfolio (based on what other people are doing)
    • Clone your gurus and look at what they are buying.
      • Listen to Episode 143 – 145 to learn more about how to follow gurus in the market. Listen now.
    • Buy “Cannibal Companies”
      • Companies that are eating themselves, taking their excess cash and buying their own stock. Investors who own the company own a bigger piece of the company without having to buy any more stock and increasing their ownership.
    • Buy companies that are spinning off of their own companies.
      • You often get stock from the new company if you own the original making it a bonus buy.
      • Example: Chrysler and Ferrari.
      • Find your own spin-off companies for free with this resource.

Show Notes:

Full Transcript of Episode 164

Phil Town: Hey everybody. This is Phil Town.

Danielle Town: And this is Danielle Town.

Phil Town: Welcome to the Invested Podcast where we dive into how Warren Buffett and Charlie Munger, as best we can tell, and from my 30 years of experience, invest.

Danielle Town: Look at all those caveats.

Phil Town: We’re looking at tagline here. We’re working on it. It’s been two years. But you guys get a general idea.

Danielle Town: Yeah, we are talking about value investing. And about how Charlie Munger and Warren Buffet value invest and how my dad, Phil Town, value invests.

Phil Town: You know, I really like the word value invest as a generic name for what we do. And then I really …

Danielle Town: There’s a but, isn’t there?

Phil Town: Yeah. I really don’t like the name value invest because so many investors are categorized as value investors who don’t invest the way we do and who don’t invest the way Buffett and Munger do. Did you know that?

Danielle Town: What? Hmm?

Phil Town: That’s right.

Danielle Town: Tell me about that. Quickly. Because we’re talking about technical indicators but tell me about that.

Phil Town: Which is completely off the reservation when it comes to value investing, let me tell you. So appropriately, we should say that value investing originated with Ben Graham in the 1930s with a book called Security Analysis that he wrote as a university professor at Columbia with David Dodd, another university professor there. And it has continued to be the Bible of value investing. And what it basically tries to teach is how to use the fundamentals of a company, the accounting numbers, to determine the value of the business. And then, buy it for substantially less than that. That’s Ben Graham 101.

 But the way he did it is classic value investing. And that is to buy quite a large number … Ben would buy between 100 and 200 companies. Quite a large number of companies that were very cheap on a value basis without regard to whether they were a wonderful business or not.

Danielle Town: Oh see, okay. So I thought what you were going to say is that he … I don’t know what I thought you were going to say. Basically, what I think of as value investing is the way Charlie Munger and Warren Buffett do it. And what I think of as what Ben Graham did, which was the precursor to value investing, I think of that as … Maybe nobody else calls it that … But I think of it as cigar butt investing.

Phil Town: And that’s fair enough.

Danielle Town: Have I just invented my own lexicon? Am I the only one who thinks about it like that? Because I just think there are so many people Warren Buffett has made this style of investing so famous and it’s so synonymous with him … synonymous is the wrong literal word but you know what I mean … closely synonymous with him that … and he calls it value investing. So I guess I sort of imagine the other version, the older version, as like not quite value investing. Maybe that’s not technically accurate.

Phil Town: There’s probably an evolution here. But I think an awful lot of quote value investors buy a large number of stocks that they think are cheap and they don’t particularly worry about the quality of the company per se.

Danielle Town: Oh really? Like now, today, in 2018, they call themselves value investors?

Phil Town: Yeah.

Danielle Town: Oh, I wasn’t aware of that.

Phil Town: Now there are very few investors that do it the way Ben Graham did it because it’s almost impossible to find 200 companies that would be available at the price that Graham was paying. So Graham’s way of investing is often called … It’s essentially you’re looking at a price less than working capital.

Danielle Town: Oh dear.

Phil Town: Essentially just saying when you take the cash of the company, subtract the debt, right? Just the cash of the company and subtract the debt, what you have left there, buy the company cheaper than that. And it’s … You can do that during a depression and a world war. It’s very difficult to do that during times of an expanding economy that we’ve been in ever since World War II.

 So those deals don’t exist anymore. And when Buffett made the transition to what we would, I think, correctly call value investing today, what he added to this was the company should be a wonderful business. And that you should hold it for a long, long time. Maybe forever.

Danielle Town: What does he mean by wonderful business?

Phil Town: Buffett means a business that … He sometimes uses the word business franchise. That they have a niche that they can defend aggressively. As you know, what Charlie says right, about a moat? That it’s a durable, competitive advantage. That’s what they mean by a wonderful business. That it has this extraordinary, durable competitive advantage. That the company has such good advantage that they keep enlarging that durable, competitive advantage every year. And it gets more durable and a bigger advantage. So a Coca-Cola-like advantage. That’s what they call wonderful. Ben didn’t particularly care about how wonderful it was. He just wanted to buy it super cheap. Cheaper than the cash in the company.

Danielle Town: So are you saying that these people that follow that sort of style now don’t also don’t care if it’s a wonderful business, if it has a moat, if it has good management, if they truly understand it?

Phil Town: I would say most value investors today who would be not Warren Buffett style, right? Buffett style and Munger style, my style, what I hope is your style, are highly focused. We’re talking about 70% or 80% of our portfolio in our top 10 positions, right?

Danielle Town: Mm-hmm (affirmative)

Phil Town: So people who are often called value investors tend to be much more diversified owning maybe 1% of their portfolio in a single company, maybe 100 stocks, 50 stocks, 200 stocks. But I think they try very hard to get reasonably decent companies. It’s just that they don’t have to get it right because they so quote over diversified that a few losers here or there wouldn’t matter.

 To Buffett, it would matter a lot. If you’ve got 10% of your entire net worth in Apple Computer, it matters a lot whether it succeeds or fails.

Danielle Town: Okay. So how about these people who call themselves value investors yet are not Buffett style value investors, do they use these technical indicators at all or are they still no, no, no, that stuff is all fake and clouds and we can’t rely on any of that stuff?

Phil Town: I would say the preponderance, by that I mean the great majority, are going to argue that this is soothsaying, cloud watching. And basically useless.

Danielle Town: So they’re in line with the Buffett thing. Buffett adds this additional protection and then probably because of that additional protection, finds it much harder to find companies to buy. And therefore, owns far fewer companies but feels safer doing so.

Phil Town: Yep, yep. I would agree. Also, there’s another big distinction and that is that quote diversified value investors tend to not stay in companies forever. These companies they hope go up to their intrinsic value from their on sale price they bought it at and then they get rid of it and move on. And these people are almost all front managers. They’re almost all trying to beat the index. And I would say, by and large, they don’t massively beat the index.

 I think value investors have a bit of a better track record than investors who just bank on Facebook going up but not a lot better track record. Right? It’s just the Buffetts of the world. It’s the Buffetts and the Mungers and the Ruanes and guys like that, Prumins. Not Prumins, Rick Guerin, who really restrict their choices for buying companies and know a lot about those companies and watch them and own them for the long term. And I think that’s where the big returns come from. Charlie said you change 15 investments in Berkshire and you don’t have that rate of return at all.

Danielle Town: You change 15 investments and you don’t have that rate of return.

Phil Town: In other words, Berkshire let’s say is ballpark average is 20% a year growth rate. Charlie is saying if you remove just 15 companies from their investment portfolio, you would have a market return at the market.

Danielle Town: Do you mean over their entire investing career or do you mean right now?

Phil Town: No, over their entire investing career.

Danielle Town: Oh, that makes more sense. Okay. I was thinking … Yeah, they probably only own 15 companies so yeah, if you change those, you’re right, that would make a huge difference. Over the entire time that they’ve been doing it, yeah, that would be …

Phil Town: Right. Right. And that’s actually really saying something very important because people who diversify across a hundred companies, they could never say that. There are no 15 companies that would even have any significant impact on their portfolio almost certainly because they don’t own enough of them to have an impact. And as a result of not owning a very small number of businesses that you hope do well, you own a large number of let’s say reasonably good businesses. Hey man, I’m sorry, but you are the market. You just became the S&P 100.

Danielle Town: Well. Yeah. So, for those of us trying to track those people in very, I don’t know the right word …

Phil Town: What, to clone them?

Danielle Town: No, no, no, no. Just to keep tabs on them.

Phil Town: Yeah, to keep tabs. I like to clone but you can call it keep tabs.

Danielle Town: Oh, no, no, no. I thought you were talking about the people who own a huge number of companies and are essentially the S&P 500.

Phil Town: I am. And I would clone some of their stuff.

Danielle Town: You would? Even though they own a whole bunch of companies and you only want to own a couple?

Phil Town: Yeah, just because of this. I’m going to … Many of these people are really good investors. Okay? They know a good company from a bad company. And the fact that they don’t particularly beat the market, in the long run, isn’t because they don’t know a good company from a bad company, it’s because they over-diversify. And so, that doesn’t mean they’re not picking some real good ones in there.

 So figure it like this. You can look at 8,000 companies across North America. Or you could look at the ones this guy is buying. There’s only a hundred of them. Now take that list and find the handful that are really good that you really understand.

Danielle Town: Mm-hmm (affirmative). That’s hard.

Phil Town: Yeah, but it’s less hard than looking at 8,000.

Danielle Town: Yes, that’s true. That’s true.

Phil Town: Anything you can do that will reduce the number of companies that you’re looking at to those which are in your circle of competence, right? They’re in your wheelhouse. And knowing that somebody halfway decent is buying those companies is really useful. I love to clone. And Charlie Munger loves us to clone. Charlie has said that that’s one of the very best ways.

 He says there are three ways. I don’t know if I ever told you this. Let’s try this out. Charlie said there are three ways to build a really great portfolio based on what other people are doing.

Danielle Town: Oh no, we have not talked about this. We’re supposed to talk about technical indicators. All right, tell me.

Phil Town: But we’re not. Okay, I mean, everybody right now is going shut up about technical indicators because we want to know what Charlie said, I guarantee you.

Danielle Town: Everybody right now is going you guys never stay on topic. Danielle is trying so hard to make this thing happen just to get through them so that we don’t have to go another six weeks without talking about them. But you guys, you’re all right because I want to hear about the portfolio secrets from Charlie Munger. So I’m throwing those things out. Dad, what are the portfolio secrets from Charlie Munger?

Phil Town: Well, first off I have to tell you where I found this out because this is cool stuff. This comes from … We’ve talked about Mohnish Pabrai in the past.

Danielle Town: I’m sorry. You’re just so excited. Okay.

Phil Town: We’ve talked about Mohnish in the past who I love and who I think is one of the highest integrity, most brilliant money managers in the world. And a dyed in the wool, rule one type investor. And who had lunch with Charlie. And at the lunch, Mohnish asked Charlie if he had any really great secrets about how to make a fantastic portfolio over time. Stuff he hadn’t told anybody. And Charlie goes yeah. Which I think is pretty cool. Yeah, I got one. I got three actually. He said first …

Danielle Town: Hold on, hold on, hold on. So he tells Mohnish stuff he’s never told anyone and then Mohnish goes out and tells you and everyone?

Phil Town: He didn’t tell me directly. Mohnish just put it on a YouTube video and spit it out there.

Danielle Town: Oh, okay. All right.

Phil Town: It was an interview with somebody, I forget who, that he talked about this. And it was brilliant. All right? So part of it we already know.

Danielle Town: Okay. Number one. Number one.

Phil Town: Number one we already know. Clone really good investors.

Danielle Town: Okay.

Phil Town: Copy the best investors. So when they go into something, if you can find out that they’re going into that thing, they’re buying into it, that’s a huge, huge advantage. It’s like having one of the best investors in the world call you up and say hey Danielle, I’m buying Apple Computer. I’m buying a lot of it.

Danielle Town: Yeah, yeah. So you told me that and we put it in our book, Invested, and we said we called them our gurus, the investors that we look to who we think are doing a great job out there. And we can see, actually, what companies they’re buying because they have to publicly file with the SEC what companies they’re buying. So that’s a great way to do it.

Phil Town: Check that box. And I actually didn’t know that Charlie was all gung-ho on that until Mohnish had lunch with him and had that little interview. Because I’ve heard Warren Buffett talk about that. I’ve heard Prem Watsa in Canada talk about it. Obviously, Mohnish is a huge cloner, loves to talk about it. But Charlie never a word that I ever heard. Okay, so copy other great investors.

 Number two. Buy cannibals.

Danielle Town: Buy cannibals.

Phil Town: Cannibals.

Danielle Town: Cannibal companies? Companies that are cannibals?

Phil Town: Cannibal companies. Yes. Companies that are cannibals which is probably not exactly the right word but it’s close enough. It’s companies that are eating themselves.

Danielle Town: I was wondering if you were going to say eating themselves or eating other companies.

Phil Town: Eating themselves. That’s probably not a cannibal. Whatever that is.

Danielle Town: I don’t know.

Phil Town: Probably a really terrible thing.

Danielle Town: Probably some terrible word for that.

Phil Town: It is, I’m sure.

Danielle Town: How are they eating themselves?

Phil Town: They are taking excess free cash, noticing that their stock price is significantly underpriced relative to the value, and then they’re taking the cash out of their equity and buying their own stock. And when they do that, they’re retiring big blocks of stock. So for example, Apple has thought itself to be substantially underpriced for quite some time. And has been buying back its own stock particularly urged on by several big investors. And since 2013, it’s eaten 20% of its own company. And what that means is that investors who own the stock in 2013, now own 20% more of the company than they did then without having to spend another nickel. Right?

 IBM from 1996 is an aggressive cannibal. It still is. It bought back, in a 20 year period, it bought back 50% of its stock. So if you owned that company in 1996, by 2016, you had effectively doubled the amount of ownership that you have.

Danielle Town: Wow. Wow.

Phil Town: I know, it’s astonishing what that will do for you. Right?

Danielle Town: Yeah.

Phil Town: Particularly since the price of IBM, let’s say, went from, I don’t know, I’m ballparking it but … I can get it exactly actually.

Danielle Town: I mean, that’s what I was … The result of that is the price goes up because you own then more so people want to own a larger chunk and they’re aware that what they’re purchasing is more than what it used to be.

Phil Town: Yeah, you’ve removed slices of the pizza, right? You’ve still got the same sized pie but the price per share goes up. So back in 2016, IBM was at, let’s see, about halfway through the year it was about $150 per share. And you go back to 1996, let’s see what that looks like. It’s working on it here, hang on.

Danielle Town: So you go back, you look, you can see when these buybacks happen and that they then have some sort of result. Is that worth going back and looking at actually?

Phil Town: Well, I think it is. Because if you were in 1996. My chart isn’t going back quite that far. It goes back to 1998. But in 1998, the price was roughly $50 bucks a share. And today, it’s $151. And you own twice as many shares. So not only has the price moved up triple to the original price, or doubled and a half, but you also doubled the amount you actually own of the company. So trying to figure out what that means. You’re still … You know what, in a weird way, it doesn’t mean anything like what I just implied, now that I’m thinking about it because all you own are the number of shares you own.

Danielle Town: Right.

Phil Town: So if you own 100 shares …

Danielle Town: Yeah, you’ve been saying for a while that you keep on owning more but it doesn’t actually really affect you.

Phil Town: It doesn’t actually feel like that, right. But the stock price has been driven up because there’s less of it.

Danielle Town: That’s the part that affects you.

Phil Town: Right. That’s the part that affects you.

Danielle Town: Exactly.

Phil Town: So buybacks, those are cannibals. That’s the second thing.

 And then, the third thing is that Charlie says you want to buy companies which are spinning off chunks of their business.

Danielle Town: Oh.

Phil Town: So not long ago, Mohnish and Guy Spear bought Fiat Chrysler and I looked at it really hard and I couldn’t quite see it. Those guys are just smarter than me. And we just stick to our guns and realize you don’t have to be a genius to do this, you just have to be patient until stuff gets into your wheelhouse. So I just couldn’t quite see it.

Danielle Town: They’re not smarter than you. They’re just maybe a little more interested in car companies, that’s all.

Phil Town: Why thank you, honey. That’s so sweet.

Danielle Town: They’re not.

Phil Town: I’m going to tell Guy that next time I see him.

Danielle Town: There you go.

Phil Town: So the impact of this purchase or one reason for the purchase was that Fiat intended to spin off Ferrari which is its own huge brand worldwide. And when you get a spinoff, what’s so cool about this is let’s say you bought the Fiat Chrysler stock at $8 a share and then over the time period while they were cranking up to spin this off, the stock price went to $16. They still own Fiat Chrysler or excuse me, they still own Ferrari. Then they spun off Ferrari at a value per share of about $6 bucks. Right? So the stock price …

Danielle Town: So let’s just talk about the mechanics here for a second. So if I own Fiat Chrysler, if I own one share of Fiat Chrysler, and then they do this spinoff, what happens then is that I also own as just by operation of law, own some number of shares of the new spinoff based on whatever that situation is where they decide that oh, one share then equates to, I don’t know, one share maybe of …

Phil Town: Often it does equate to one share. Actually in this …

Danielle Town: Often it’s one to one but sometimes it’s a little different.

Phil Town: In this particular case, it actually was and I think I got the ratio wrong. I think it’s that you got Fiat Chrysler shares, you got 10 shares for every … Sorry, you got one-tenth of a share for every share of Fiat Chrysler that you own.

Danielle Town: Okay, that makes sense. That makes sense.

Phil Town: So you get one …

Danielle Town: So if you own shares of Fiat Chrysler, you would get one share of Ferrari.

Phil Town: One share of Ferrari. And that share went public at $40.

Danielle Town: Like the starting price of Ferrari was $40.

Phil Town: Ballpark, yeah. Okay.

Danielle Town: But wasn’t the price of Fiat Chrysler $16?

Phil Town: It is. So it takes 10 shares of … The 10 shares that you had of … Sorry, the one-tenth share that you have …

Danielle Town: This is hard.

Phil Town: … of Ferrari, when you put them together, the one-tenth share that you got for one share of Fiat, is worth $4.

Danielle Town: Got it, got it, got it. Okay.

Phil Town: So effectively, they’re giving you $4 of value. And so, right after they did that, the stock price dropped from $16, let’s say, down to $12 to reflect the … essentially the shift of $4 of value over to another company.

Danielle Town: Yeah, okay.

Phil Town: All right. But then, Fiat Chrysler stock went up and now it’s up in the $20s, I think, without Ferrari. And the Ferrari stock I think is at $80 or something.

Danielle Town: Whoa.

Phil Town: Yeah, so both of these companies did better separated than they were doing together.

Danielle Town: Which is probably why the company did that.

Phil Town: That’s why they did that.

Danielle Town: In that situation.

Phil Town: And it’s why Charlie said look for spinoffs. Another …

Danielle Town: That is interesting.

Phil Town: Isn’t that cool?

Danielle Town: We have not really talked about that. I remember when it happened and you, I think it was maybe right after it had happened and you were telling me about it.

Phil Town: I was moaning about it.

Danielle Town: Yeah, we were sitting in Florida and you were playing polo.

Phil Town: And I was like ah.

Danielle Town: And you’re like let me tell you about this thing that I checked out.

Phil Town: That I didn’t do. Watch this one.

Danielle Town: Yep.

Phil Town: Yep.

Danielle Town: But that was very interesting and I actually haven’t thought about it since then so it’s cool to hear about it in the context now of years later knowing a little bit more about investing.

Phil Town: Yeah.

Danielle Town: About that kind of searching for those kind of situations could be very helpful.

Phil Town: Now I want to give you guys a good book to read.

Danielle Town: Please.

Phil Town: Are you ready? This is a good book. You really should read this, Danielle. This is written by Joel Greenblatt. G-R-E-E-N-B-L-A-T-T.

Danielle Town: Name please?

Phil Town: Joel.

Danielle Town: No, no. Name of the book.

Phil Town: Oh, name of the book is You Can Be A Stock Market Genius.

Danielle Town: Oh yeah, I’ve seen that book.

Phil Town: Do I have the name right? I think I do.

Danielle Town: Joel Greenblatt wrote that?

Phil Town: Well, let me see.

Danielle Town: I think I actually have that on my shelf somewhere. Not sure I’ve ever opened it. Shocker of all shockers.

Phil Town: I’m going to be really embarrassed if this isn’t Joel’s book. Yeah, thank goodness.

Danielle Town: Oh good.

Phil Town: I wasn’t totally positive. Yeah, so Joel Greenblatt, You Can Be A Stock Market Genius. Uncover the secret hiding places of stock market profits.

Danielle Town: Fabulous.

Phil Town: Now to put this book in context, when Joel wrote this … This book is over 20 years old.

Danielle Town: Oh, I didn’t know it was that old, wow.

Phil Town: When he wrote this, he was making about 50% a year.

Danielle Town: Hmm.

Phil Town: Running a fund. Oh, he was just killing it. Since that time, he has just chilled out. He’s a professor, I think, sometimes prof at Columbia. He’s really a famous guy and really a super investor. Doesn’t work at it like he used to but this book is fantastic and you really need to read it and focus on the chunk of it that’s focused on spinoffs because Joel loves these spinoffs.

Danielle Town: Oh, interesting, okay.

Phil Town: And they have been a source of a lot of great success because often a company that spins off a subsidiary particularly when that company’s stock is undervalued already, they’re unlocking value both in the parent company and in the spinoff company and you get the spinoff company for free.

Danielle Town: Yeah, that’s amazing.

Phil Town: Man, that’s really a double whammy, right? When you’re getting it from a company that’s already on sale. So I would strongly urge you to look at these three things. Charlie said basically if you were to be a professional fund manager and you wanted to be really successful, these three things would create the basis of your great success running somebody else’s money.

Danielle Town: How would one seek out upcoming spinoff opportunities? Is it just through the news?

Phil Town: No, well, yeah. But you’ve got to be all over the news to find it all. So, like many of these things, you would google spinoffs website. And you’ll find a website called stockspinoffs.com. And you click on that little guy right there and you have an entire website for free dedicated to spinoffs that are going on where people are writing about it. So here’s La Quinta is spinning off a chunk of their hotel chain. You know? It’s just lots …

Danielle Town: That’s amazing. There’s a website for every bloody thing in investing. It is the craziest thing. And it’s so helpful. And it’s so amazing to me that we live in this world where literally when you were like what 20, whenever you would have started doing investing stuff.

Phil Town: When I was your age.

Danielle Town: I don’t know if it’s when you were … I’m going to say that you had to go to the library to look up annual reports and stuff.

Phil Town: Yeah, 1981. To the library.

Danielle Town: Was that true when you were 35?

Phil Town: I was whatever that is, 33, I think, yeah, about 33. And I just remember my good friend. You know this family, Michael, and Linda, and they’re great friends. And Michael is way into this and comes from a fairly wealthy family. And he would pay Value Line I think it was $50,000 a year to get the data.

Danielle Town: What? Oh my gosh.

Phil Town: Yeah, so I went to the library. Yeah.

Danielle Town: I mean, I could see somebody who is a professional paying something like that but a personal, like a private person, that’s amazing.

Phil Town: Yeah, I mean, look at the change.

Danielle Town: You’ve got to make a lot of money to make that worthwhile.

Phil Town: And here’s what’s really crazy.

Danielle Town: I know, and by the way, here we are complaining, I constantly am complaining to myself in my own head of the cost of the Wall Street Journal and the occasional paid website that I pay for because they have good info. And I’m all grumbly about it.

Phil Town: Exactly. And by the way, Value Line remains just the really crème de la crème of data. Very focused on a smaller number of companies than the 11,000 that are running around North America. But still really good. And I think they’re $1,000 now. So compare that to 1981 when $50,000 is $100,000 in today’s dollars compared to $1,000 as a guideline on the democratization of information.

Danielle Town: Mm-hmm (affirmative). That’s amazing.

Phil Town: To me, this is as astonishing as the printing press in terms of the democratization of knowledge.

Danielle Town: I’d agree. I mean, the more I get … The thing is this world is not accessible to many of us. People listening are not included in that because you guys now know about this stuff. But back when I did not know about this, I had no clue that there was this whole world of information and now that I’m seeing it and engaging with it and realizing that yes, it is worth paying for. And there’s so much that’s free. And there’s incredible stuff if you pay like really a small amount of money as you were just saying. It’s just amazing. Like, let’s take a minute and be thankful.

Phil Town: And be thankful.

Danielle Town: And be grateful for this. It’s amazing.

Phil Town: It’s stunning. And honestly, the way that information is conveyed from people who know it to people who don’t is almost medieval. I mean, when you think about it. It’s like right now we’ve got some guys taking timber off of one of our properties. And we went out and talked to them the other day to see who’s driving these huge machines like out of Avatar, right? I mean, it almost felt like the really bad guys in Avatar. And these huge bulldozers and these huge machines that the wheels all go different directions. I don’t know.

 And obviously, watching these guys zoom around in the forest and ripping trees and … They really have to know what they’re doing. And I’m pretty sure there’s not a trade school where you go and learn this. And so, I asked one of the guys who owns it how did he learn? And he goes, well, I learned from my dad.

Danielle Town: Really?

Phil Town: Yeah.

Danielle Town: Wow. That’s sweet.

Phil Town: And sure enough, one of the guys on another crew, I go over there and he gets out, he’s a young guy, and I said so how did you learn this? He said I learned from my dad. And I said who’s your dad? Well, that’s my dad over there, the other guy you were talking to. And then the other guy in the other cab was his cousin. Okay? And so, I asked his dad again, how do you get the kids where … I mean, this is $300,000 machinery, you can’t just let them go break it. And he said we let them come out on weekends when you can go slower and we’re not under such time pressure because the mills aren’t open. And we let them get up to speed. But my point is, unless you’ve got a dad or an uncle who’s in that business, you’re probably not going to learn that skill set.

Danielle Town: Or a mother or an aunt.

Phil Town: Possibly. I mean, more and more you would expect that. So here’s what I’m thinking. That’s where we’re at right here with this investing education is that you learn because your father knows it. And I learned because I got lucky and apprenticed to a guy, right? Buffett learned because he got lucky and went to school with a guy who later let him apprentice to him. I mean, it’s just wow. We’re in the medieval stone age when it comes to actually passing this information along.

Danielle Town: But Buffett also had a father who was a stockbroker.

Phil Town: Buffett’s father was a stockbroker.

Danielle Town: I mean, just at the meeting he was talking about … I think he was 10 or 11 years old when he made his first stock purchase.

Phil Town: Exactly. And Charlie Munger’s grandfather was a … or father or grandfather was a judge and loved investing and got involved in investing.

Danielle Town: And you know, the only way Buffett was able to do that as a kid was because his father was a stockbroker. And he could say to his dad, hey dad, can you go to … No kid would have been able to do that back then.

Phil Town: No. And it doesn’t just … I remember very well your grandfather trying to get me interested in this sort of thing just looking at Chevron Oil stock prices in the newspaper because he worked for Chevron Oil and he had some stock in Chevron. But my dad didn’t know anything about it. So he couldn’t answer any questions. I didn’t even know what questions to ask. And of course, I’m looking at this really horrible newspaper.

Danielle Town: Welcome to my world, Dad, where I started out not knowing what questions to ask. See, it’s a real … I love that you said that. Do you see what a major, major wall that is?

Phil Town: Yeah. Yeah.

Danielle Town: When you don’t even … You have somebody in front of you who knows stuff and you don’t know how to get it out of them.

Phil Town: Right.

Danielle Town: Because you really don’t know how.

Phil Town: Thus, the apprenticeship. And right now, that’s what we have. We have apprenticeships. And it takes a while, doesn’t it? I mean, we’ve been at this for …

Danielle Town: It takes a while.

Phil Town: … once a week for about 45 minutes for pushing …

Danielle Town: I thought you were going to say for about 45 years.

Phil Town: No, not that long. Just the last couple years. But the questions … You’re now really getting comfortable and you’re making good investments. And I’m thinking this is to a place where this will probably be a lifetime practice for you.

Danielle Town: Definitely.

Phil Town: That doesn’t happen overnight. It’s a process that you’ve gone through where I’m standing by you this whole way …

Danielle Town: Totally.

Phil Town: … trying to get you there. Which just seems very apprentice-like to me, which is of course, how I learned as well. I spent a year as an apprentice.

Danielle Town: It is very apprentice-like and you’re exactly right. It has taken a while. It has taken several years. And I feel confident. I feel like there’s a lot to know still but good Lord, there’s just no comparison to how I felt. There’s no comparison in what I know but even more importantly to me, there’s no comparison in how I feel from a couple years ago.

Phil Town: So I’m going to suggest something to everybody who’s listening that you have more tools now than I had. And more tools even than when Danielle started. And one of those tools is the newsletter that Danielle has created on her website at Invested … sorry, at danielletown.com. And the newsletter, I will tell you from having a number of people read it who are our students is simply fantastic. And in particular when my brother, your uncle, who’s an extremely good investor, says this is really, really good. He means it’s really, really good.

Danielle Town: Thanks, Dad. That’s really nice of you to mention. I appreciate that.

Phil Town: I just read your latest newsletter and I’m telling you, it is just fantastic about the Buffett weekend. And I just really strongly recommend you guys read it. It doesn’t take very long. It only comes out once a month so you’re not going to be inundated. And I would strongly urge you to get on the list.

Danielle Town: That’s very kind of you. I appreciate you saying that. Yeah, it’s really fun. I want it to be great content, not too often, and just really giving a good sense of what investing practice looks like and resources.

Phil Town: And I think what you guys have learned here on the podcast is that Danielle, as an apprentice, is a really good screener for information that’s going right through unchallenged. And as a result, what she puts together, I think, is some of the finest writing about how to invest that anybody’s ever done. And that includes the book, Invested, and that includes her newsletter. So I’m going to just encourage you guys. If you want to be able to look over the shoulder of someone who’s a very, very attentive apprentice, then that’s a great place to go.

Danielle Town: Oh Dad. We didn’t plan this at all and I feel very touched that you’re …

Phil Town: Oh honey.

Danielle Town: … bringing it all up. Thank you.

Phil Town: And I think on that we should just say that next week we will talk about the MACD [inaudible 00:36:53] and finish up this little detour we’re making into technical trading so you guys will know it exists. So my apologies for not getting back on that but I thought the information about Charlie was pretty important.

Danielle Town: I did too. And you know, I have a theory why it’s so difficult for us to finish this technical indicator thing. It’s because we really don’t care.

Phil Town: We really don’t care that much.

Danielle Town: It’s not important. We’re doing …

Phil Town: It’s a sideshow.

Danielle Town: It was something you brought up and it was interesting and weird and yet, we just keep somehow not getting through it.

Phil Town: I know. And yet, I want to do it and part of the reason is …

Danielle Town: I do too.

Phil Town: … because if we ever get around to talking about options or trading or anything like that. To the other kinds of things that Buffett is very, very good at, then this stuff will kick in. But not yet. And so, we’ll just finish this up next week and move on.

Danielle Town: I know. I was at your workshop, I guess, last month and somebody, as they always do, said to me when are you going to start learning options? Because that’s a huge thing that you teach and it’s incredible and I was like you know what? Actually, I can almost think maybe I would do something like that.

Phil Town: What a journey that’s been to that place.

Danielle Town: Yeah, no kidding. So yes.

Phil Town: All right, cool. Well, we’ll get there. So until then.

Danielle Town: All right.

Phil Town: Time to go play.

Danielle Town: Thanks, everybody.

Phil Town: See you guys.

 

 

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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.