00:00:00
One of the most provocative and
00:00:01
interesting investors in the country,
00:00:04
>> a legendary activist investor,
00:00:06
>> Persing Square CEO and founder, Bill
00:00:08
Aman.
00:00:10
>> Taking a short position and going public
00:00:12
with it is a pretty serious business.
00:00:14
Interestingly, some of the best
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businesses in the world are trading at
00:00:17
the lowest multiples.
00:00:18
>> We're kind of the rebirth of the closed
00:00:20
end investment company universe.
00:00:22
>> What did you think of Zara, the CEO of
00:00:24
OpenAI? I'm sorry, CFO. Felt like the
00:00:27
CEO. Yeah, I I was
00:00:30
>> stop with that stuff.
00:00:31
>> Uh, actually I was super impressed. Uh,
00:00:34
made me a lot more bullish on Open AI
00:00:36
and I thought
00:00:36
>> right
00:00:37
>> I thought she should be CEO of OpenAI.
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>> That's what I thought.
00:00:40
>> I think Sam should be I think Sam should
00:00:41
be chair. I think he's much better.
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>> There was a question I wanted to ask her
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that we didn't get time which was what's
00:00:46
it like working with Sam?
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>> I mean that could have been like three
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hours in a documentary.
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>> I wanted to kick this off. So thank you
00:00:54
so much for being here. We've tried a
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number of times to get you to all in and
00:00:58
it's great to to finally have you. You
00:01:00
obviously are a legend that doesn't need
00:01:02
much of an introduction lately in the
00:01:05
last number of call it years or months
00:01:07
or quarters or what have you. It seems
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like your investment philosophy may be
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changing your model uh where you've been
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activist and you've entered positions
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and exited positions and lately you've
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talked a lot about more kind of
00:01:18
permanent long-term holdings. would love
00:01:21
to hear a little bit about if that is
00:01:22
actually a change and how your evolution
00:01:24
and your investment model has kind of
00:01:26
changed over over time.
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>> Sure. So I would say the biggest change
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over time is an appreciation for the
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importance of I call business quality
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long-term durable protected
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non-disruptible growth. I would say
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early days you're smaller more liquid
00:01:43
investor. You don't have to think as
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long term as you become a bigger
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concentrated investor. Uh and over time
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you learn the importance of durable kind
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of growth. That's the most important
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factor. Uh I would say I'm as activist
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as I've ever been. Um but more of it's
00:02:00
on uh Twitter than than uh I would say
00:02:03
in the corporate context. And the reason
00:02:04
for that is when I started in uh Persing
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Square, no one sort of knew who we were.
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And so I actually one of our first
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investments was Wendy's International.
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Wendy's owned Tim Hortons, the Canadian
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coffee and donut chain. And the value of
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Tim Hortons was more than the entire
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value of Wendy's. So we had this very
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simple idea. Buy Wendy's spin-off Tim
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Horton's double our money. And uh we
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bought 10% of the company and I called
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the CEO and he didn't return my call and
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I called him again. He didn't return my
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call. I literally couldn't get a return
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phone call. That was the beginning. Uh
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so we actually called a friend who
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worked at Blackstone and Steve
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Schwarzman agreed to write a fairness
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opinion on what Wendy's would be worth
00:02:41
if we spun off Tim Hortons. We kind of
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mailed it in and filed it publicly and 6
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weeks later they spun off. Wow.
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>> And then the CEO finally called me back
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and uh he thanked me um and he had
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gotten fired. Um and and uh but he
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thanked me cuz he had a huge exit
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package and and he was very happy. But
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so in the beginning we couldn't get a
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return phone call so we had to and we
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were small so we had to go to a
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conference and we had to you know do
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presentations and go on CNBC. What
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happens over time is you join boards of
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directors you become known as an
00:03:13
investor. you know, we're kind of a
00:03:14
constructive shareholder. Um, I know
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pretty much every CEO in the S&P 500
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either directly or one person removed
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and, you know, maybe I age, we've aged a
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bit. Um, but you build kind of a
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reputation and today we buy a stake in a
00:03:29
company. Sometimes they'll put out a
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tweet saying, you know, we welcome
00:03:32
Purging Square as a shareholder, but
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they open the door for us. You know, in
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the beginning, we had to bang down the
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door and today so we we get very deeply
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involved in our companies if it's
00:03:41
needed. uh other companies we own.
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There's no nothing for us to do just be
00:03:44
to you know just clap.
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>> So you aren't you aren't considered a
00:03:48
value ad investor at this point.
00:03:50
>> Yeah. But we only want to add value. I
00:03:51
the conversation last night was kind of
00:03:53
an interesting one. You know the best
00:03:54
investments are one where you don't need
00:03:55
to join the board and do anything. Well,
00:03:57
that may be in a startup, but in a
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mature business, it may be.
00:04:00
>> No, I think in in the public company
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context, one of the valuable things we
00:04:04
can do that, you know, the problem of
00:04:05
being a public company today is kind of
00:04:07
the the very short-term nature of
00:04:09
markets, analysts, etc. And obviously to
00:04:12
run a business, a business is a, you
00:04:14
know, a good one is a forever thing. And
00:04:16
you want to make decisions in the
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context of decades sometimes or
00:04:20
certainly three, five years. And how can
00:04:21
you do that when someone's asking about
00:04:23
the tax rate in the second quarter? Um,
00:04:25
and having a big shareholder on the
00:04:27
board where you can kind of test ideas
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out with the big shareholder before you
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expose them to the public or the big
00:04:32
shareholder can say, "I'm supportive of
00:04:34
this initiative even though it's going
00:04:35
to hurt earnings in the next few
00:04:36
quarters is a helpful thing."
00:04:38
>> I just want to connect this last
00:04:39
conversation with Sarah to this. Um, are
00:04:43
you an investor in the AI complex and
00:04:46
how do you underwrite business model
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quality from what you see on the outside
00:04:50
in in the entire complex?
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>> I mean, yes, effectively we're an
00:04:53
investor. Actually today we own
00:04:55
Microsoft, we own Meta, we own Amazon.
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Uh actually I think you're either
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directly or indirectly you're invested
00:05:01
in AI.
00:05:02
>> Yeah.
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>> Or it's a threat. So you have to you
00:05:04
have to understand it.
00:05:05
>> Um how do I think about AI in a business
00:05:08
model context?
00:05:08
>> Business model quality. Yeah.
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>> Look, when you're a concentrated
00:05:11
investor or investor generally and your
00:05:13
long-term investor, the most important
00:05:15
and most challenging thing to do is
00:05:16
determine what's the risk of disruption.
00:05:19
What's the risk of two guys, two women
00:05:22
from Stanford in a garage, you know,
00:05:23
coming up with something? That risk, I
00:05:25
think, has gone up uh dramatically. This
00:05:27
is the greatest era in history to to
00:05:30
build a business, right? There's
00:05:31
unlimited access to compute, you know,
00:05:34
certainly for a startup, uh unlimited
00:05:36
access to capital, uh and a lot of
00:05:39
incredible talent, which means that the
00:05:41
probability of your being disrupted has
00:05:43
gone up enormously. So the hardest thing
00:05:44
you have to do as an investor is
00:05:47
understand you know and and that's
00:05:49
really where we spend most of our time.
00:05:50
>> What's your tendency in a moment like
00:05:51
this then? Do you swing towards the
00:05:54
chaos or do you reposition to things
00:05:56
that are maybe more durable and
00:05:57
defensible from AI where the
00:05:59
disruptibility is less
00:06:01
>> what's interesting about markets is
00:06:02
people always bring their eye to the new
00:06:05
new thing. Um and the new new thing is
00:06:07
sort of chips and semiconductors and
00:06:09
energy and that's where you know uh the
00:06:13
shorter term capital's going what tends
00:06:15
to happen is really high quality things
00:06:17
get left behind. Um, and the same thing
00:06:20
really happened, you know, I was I was
00:06:22
there in 2000, you know, when the in the
00:06:24
in in that sort of bubble. This is, you
00:06:26
know, this is different. I'm not saying
00:06:27
this is um, but there's some analogies
00:06:30
and the analogies are people got excited
00:06:32
about internet stocks and Bergkshire
00:06:34
Hathway traded at the lowest valuation I
00:06:36
think it ever traded out of it history
00:06:37
is people said, "Okay, that's all old
00:06:39
stuff." I think a similar thing is
00:06:41
happening today in a in a sense to
00:06:42
Amazon and Meta, Microsoft. Those are
00:06:45
the ones that
00:06:46
>> these are these are old-fashioned
00:06:47
companies in kind of this, you know, the
00:06:50
open AI.
00:06:51
>> So, they're undervalued in your mind.
00:06:52
>> Yes.
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>> What else is undervalued?
00:06:54
>> What about the SAS apocalypse? So, is it
00:06:56
oversold at this point?
00:06:57
>> Uh, again, I think it's a careful
00:06:59
analysis. I worry more about a
00:07:01
Salesforce um than I do about your kind
00:07:04
of um I think you got to do the work. I
00:07:06
think it's one company at a time, but I
00:07:08
think if you know, if you're a software
00:07:09
company today, you have to be as AI
00:07:12
enabled as you can. you can't I I think
00:07:14
there have been sort of monopolistic
00:07:17
type profit taking off of customers when
00:07:20
someone had a kind of a niche software
00:07:22
product they're charging you know 30,000
00:07:24
a year or something like this I think
00:07:26
those companies are really at risk uh
00:07:28
you know Microsoft when the average
00:07:30
customer is paying I don't know 50 bucks
00:07:32
a seat or some small number uh that
00:07:34
platform is worth a lot more uh less of
00:07:37
risk
00:07:37
>> I want to go back um to co because you
00:07:41
had an incredibly ly viral moment where
00:07:46
you were on CNBC at that moment and you
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pounded the table and you said this is
00:07:50
what's going to happen and literally the
00:07:52
market just ripped and you you were well
00:07:55
first it went traded massively down you
00:07:57
were right on that side of the trade and
00:07:58
then you were on the right side of the
00:08:00
trade when it ripped back up and then I
00:08:02
think it was maybe a month or two ago I
00:08:04
think publicly you basically pounded the
00:08:05
table and said this market's going way
00:08:07
higher can you just put us in your head
00:08:10
like where does that desire to be so
00:08:16
active and
00:08:18
you know it it gives you so much room to
00:08:20
be wrong but then when you're right it
00:08:23
does add to the lore of Bill Aman of
00:08:25
which you have a lot. So how do you
00:08:26
balance that? Where does it come from?
00:08:28
Like why in these moments do you just
00:08:29
get so convicted that the that the
00:08:31
conviction just has to spill out and
00:08:33
then you're just so out there?
00:08:34
>> So I've always been like uh my high
00:08:37
school yearbook epithet was most
00:08:39
verbose. Uh, and
00:08:42
>> and that and actually my my friend uh
00:08:44
actually lives around here. Uh, he his
00:08:47
quote that he put next to my name in my
00:08:49
yearbook. It says, "A closed mouth
00:08:51
gathers no foot." That was his. And so
00:08:54
that's kind of what I've lived by. I've
00:08:55
always had this sort of desire to speak
00:08:57
the truth about things. And um, you
00:08:59
know, was just talking with Jake
00:09:01
actually. We had breakfast this morning
00:09:03
uh, and we're talking about my Rhonda
00:09:05
uh, post. You remember that one? So like
00:09:07
you know there's just certain things
00:09:08
that need to be shared and discussed but
00:09:10
with respect to markets I actually what
00:09:12
happened was I was concerned about the
00:09:15
country because I felt we needed to have
00:09:19
basically a twoe pause you know this is
00:09:21
March of uh or February I guess it was
00:09:24
March of 2020 and I assumed we were
00:09:27
going to just do a short-term shutdown
00:09:29
let the virus cool down as hospitals
00:09:31
were kind of getting overwhelmed and uh
00:09:35
the president hadn't done that yet. I
00:09:36
was kind of surprised by this and that
00:09:39
that was what inspired me to go on TV as
00:09:41
a way to reach uh President Trump and
00:09:43
say, "Look, we need to shut down the
00:09:44
country just for two weeks." You know,
00:09:46
my uh and I said, "Look, you do this,
00:09:49
okay? The virus will blow over. Stocks
00:09:52
are at an incredibly cheap valuation. If
00:09:53
we handle this correctly, you're going
00:09:54
to make a ton of money." And we're
00:09:56
buying. You know, valuation is like a
00:09:58
tether on the market, right? When it
00:10:00
gets too high, it's like this rubber
00:10:02
band that's stretching and inevitably it
00:10:04
bounces back. But it works the other way
00:10:06
as well. When stocks get too cheap,
00:10:08
there's this, you know, the the rubber
00:10:09
bands actually pulling valuations up
00:10:12
>> and and so there there are certain
00:10:13
moments where it gets to that place. And
00:10:16
sometimes actually if you call that out,
00:10:18
it causes people to have kind of a
00:10:19
psychological reset.
00:10:20
>> What happened recently that caused you
00:10:22
to call that out?
00:10:23
>> Stocks just got crazy cheap. Just
00:10:25
incredibly cheap of really high quality
00:10:27
companies,
00:10:28
>> right? what you find extremely cheap in
00:10:31
fundamentals. fundamentals based on you
00:10:34
know what's the value of a financial
00:10:35
assets the present value of the cash it
00:10:36
generates over it life on that basis
00:10:39
stocks of really high quality companies
00:10:40
are really cheap
00:10:41
>> is there any way to underwrite and you
00:10:44
know I don't want to pick on specific
00:10:45
companies but we have the three that are
00:10:46
going public and then you have like a
00:10:48
palunteer let's say and these things
00:10:50
have become very popular in pop culture
00:10:54
in maxing on subreddits on you
00:10:58
know the public's consciousness high
00:11:00
netw worth individuals wanting to buy
00:11:02
into SPVS that are double
00:11:05
loaded and then getting wiped off the
00:11:06
cap tables. Is there any way to
00:11:09
underwrite 100 times revenue, 50 times
00:11:12
revenue, 150 times revenue in these
00:11:14
companies or are these just tremendously
00:11:16
overvalued because of the demand side?
00:11:19
>> I think you underwrite a SpaceX the way
00:11:21
you underwrite a venture capital
00:11:24
investment.
00:11:24
>> Interesting. Explain that. Unpack it.
00:11:26
>> So, everyone here invests in venture,
00:11:28
right? you know, you bet on, you know,
00:11:30
who's running it, right? The talent is
00:11:32
enormous. Um, it's people. They taught
00:11:35
me, I had a professor business school.
00:11:37
He said, "People, opportunity, context,
00:11:39
deal." So on people, SpaceX,
00:11:42
>> one of one.
00:11:43
>> Yeah. Opportunity, one of one context,
00:11:47
you know, incredible. And actually, you
00:11:49
know, feel bad for Blue Origin, but not
00:11:52
harmful to SpaceX. The fact that, you
00:11:54
know, they're their biggest way behind.
00:11:56
>> Then you get to deal.
00:11:57
>> Okay. That's the more complicated
00:12:00
question for SpaceX. Again, we don't
00:12:01
know what the valuation is going to be,
00:12:02
but if it's a billion, a trillion750
00:12:05
billion, then you say, okay, well, let's
00:12:07
think 5 years out. What does this
00:12:09
company look like? You know, what is
00:12:11
Starlink? What's the trajectory of
00:12:13
Starlink? You know, SpaceX is, you know,
00:12:15
near monopoly in terms of lowcost space
00:12:18
launch. That's going to become
00:12:19
increasingly important. And even Amazon
00:12:21
is going to have to become an even
00:12:22
bigger customer because they're not, you
00:12:24
know, Blue Origins, you know, and and
00:12:26
time, I would say, has become
00:12:28
increasingly valuable in the AI era,
00:12:31
right? You you delay a model. We were
00:12:32
talking, David and I were talking about
00:12:34
the administration and and his kind of
00:12:36
stepping in for the president not to
00:12:37
sign that executive order to kind of
00:12:39
slow us down.
00:12:40
>> Allegedly,
00:12:40
>> you lose a month. You lose a couple of
00:12:43
months today and it means a lot. So I
00:12:44
think the only question I have and I
00:12:46
haven't done the math. I you know I
00:12:47
actually invested in X. I invested in
00:12:49
XAI. I'm in an SPV. Ron Baron said Bill
00:12:53
you got to invest in SpaceX. So So I'm
00:12:55
I'm I'm in. So now I have So obviously
00:12:57
I'm rooting for kind of a good outcome.
00:12:59
I just does I haven't done the
00:13:01
>> Yeah, you have to.
00:13:02
>> What about
00:13:05
sorry
00:13:06
>> uh enthropic open AI Palunteer also fall
00:13:08
into this category. Do you underwrite
00:13:10
those as venture investments as well?
00:13:11
And have you done the the work on those?
00:13:13
They're venture investments that do what
00:13:15
what's helpful is they're not seed or
00:13:18
series A, right? They're, you know, D or
00:13:21
E, but they're still like venture
00:13:22
investments. These companies have proven
00:13:24
they can generate a lot of revenues.
00:13:26
>> And actually, I was just saying on
00:13:27
Sarah, I thought she had a very very
00:13:29
thoughtful
00:13:30
>> uh explanation on how they think about
00:13:32
committing capital, right? And and
00:13:34
that's the thing I haven't heard from on
00:13:36
Open AI, which is why if I were Open AI,
00:13:39
I would be getting that message out
00:13:40
because, you know, from the outside,
00:13:42
you're like, it's a pretty interesting
00:13:43
business model. You got a company that's
00:13:44
spending making capital commitments.
00:13:46
They're massively in excess of, you
00:13:48
know, revenues and how do you do that
00:13:49
and get, you know, it's it's degree of
00:13:51
difficulty, I would say, is hard.
00:13:52
>> Your perch um on the boards of let's
00:13:55
call it these more traditional Fortune
00:13:57
500 type businesses and your
00:13:58
conversations with those CEOs, how are
00:14:01
they thinking about AI? Is it something
00:14:04
that they're tipping into into with
00:14:06
pilots? Are they doing transformation
00:14:08
initiatives? Do they think this doesn't
00:14:10
really apply to us? We'll deal with it
00:14:12
later. What what's your sense of how
00:14:14
they're adopting or embracing AI?
00:14:16
>> I would say every CEO in America today
00:14:19
is like, how do I use AI? How how does
00:14:21
it apply to my business? How is it a
00:14:23
threat? Uh they got to find an internal
00:14:25
champion. They maybe have to recruit
00:14:26
someone from the outside. I would say
00:14:27
it's on the hierarchy of things they
00:14:29
worry about. It's probably number one as
00:14:31
both an opportunity and a threat. So if
00:14:33
you're not paying attention to it, you
00:14:35
you'll I mean your board is going to be
00:14:37
you know asking you first question every
00:14:39
meeting about what you know what how we
00:14:41
dealing with the AI threat, how are we
00:14:43
dealing with the AI opportunity. So it's
00:14:45
absolutely top of mind.
00:14:46
>> Are you seeing much early success? I
00:14:49
mean are through your you know again
00:14:50
through your visibility into these
00:14:52
companies. I mean there's a lot of mixed
00:14:54
signals that we get like McKenzie did a
00:14:56
study and said that 95% of enterprise
00:14:59
initiatives actually fail. Jamaath,
00:15:02
you've made this point around 8090 that
00:15:04
a lot of these enterprises don't really
00:15:05
know how to deploy AI. The the um you
00:15:09
know the fanciest title in Silicon
00:15:10
Valley these days is a for deployed
00:15:12
engineer which is basically a like an IT
00:15:15
consultant who can close the gap between
00:15:18
the promise of AI and the ROI of it. And
00:15:21
I think people are just trying to figure
00:15:23
out like how do we how do we use this
00:15:25
thing? I mean have you seen much actual
00:15:27
success? Is this the is this the
00:15:29
question right now? house is how do we
00:15:30
bridge this gap?
00:15:31
>> So I haven't seen much success
00:15:34
>> uh other than I mean I give you the
00:15:36
Persian square
00:15:37
>> story you know we're tiny little company
00:15:39
how we're using AI today the first use
00:15:41
case is really on the legal side um and
00:15:44
um you know kind of almost almost we
00:15:46
call it compliance back office type you
00:15:48
know functionality I think we're still
00:15:50
super super early in terms of big
00:15:52
companies using AI effectively.
00:15:54
>> Can I ask um or test a thesis with you?
00:15:57
you know the the venture underwriting
00:15:59
model where you think about people
00:16:00
you're underwriting a founder and their
00:16:02
capacity to lead and redirect the
00:16:04
organization in a changing environment
00:16:07
and technology environment market
00:16:08
environment and whatnot and we have seen
00:16:11
repeatedly similar success at scale if
00:16:13
the company is still founder where the
00:16:15
founder feels like they have the
00:16:16
authority to make all the radical
00:16:18
decisions needed to make sure that that
00:16:20
company persists and changes as needed
00:16:22
in a changing environment. Have you
00:16:24
looked at founder-led companies versus
00:16:26
non-founder-led companies where perhaps
00:16:29
the founders really do have an inherent
00:16:31
advantage in being able to navigate this
00:16:33
these changing environments and actually
00:16:35
generate outsized returns over time? And
00:16:37
I asked this particularly as it relates
00:16:39
to the SAS apocalypse and if you take a
00:16:40
look at the companies that are founder
00:16:42
led today versus not. If you're not
00:16:44
founder led, you have an incentive to
00:16:45
not make a mistake and get fired. If
00:16:47
you're founderled, you don't give a
00:16:48
Your job is to make sure the
00:16:49
company
00:16:50
>> Yeah, I think the answer is exactly what
00:16:51
you said. I think the problem is that
00:16:52
the average life of an S&P 500 CEO is
00:16:55
probably, I don't know, four years or
00:16:57
three year, three and a half years or
00:16:58
something like this and you're focused
00:17:00
on, you know, kind of shorter term
00:17:02
compensation. You don't generally don't
00:17:03
have a big economic stake in the
00:17:05
business. You're a founder. This is your
00:17:07
entire life. It's your entire
00:17:08
reputation. It's not like you're going
00:17:09
to go get another job. You you got to
00:17:11
kind of make it work. And also when
00:17:12
you're in the boardroom, you have the
00:17:14
authority of either being a major
00:17:15
voting, you know, voice or or a u you've
00:17:19
got a huge economic stake in the
00:17:20
company. You know, when we join a board
00:17:22
of a company, we're often the largest or
00:17:24
sec the largest non index fund type
00:17:26
shareholder. That kind of gives us, you
00:17:28
know, a little bit of a disproportionate
00:17:29
voice in the boardroom. Imagine if you
00:17:31
have that and you're CEO of the company,
00:17:33
right? So I think that does give you and
00:17:35
and also if you've gotten to be a
00:17:36
successful founder over time uh
00:17:38
guaranteed that you've made a number of
00:17:40
very challenging call calls over time
00:17:42
that turned out to be right otherwise
00:17:44
you wouldn't be there. And so you look
00:17:45
at Mark Zuckerberg right when he bought
00:17:47
I don't know Instagram everyone was like
00:17:49
shocked at the price paid or WhatsApp
00:17:51
you know these seemed like you know sort
00:17:52
of outside the you know the company only
00:17:54
had whatever 19 employees or something
00:17:55
when he paid a billion something. Um but
00:17:58
you make enough of those calls um and uh
00:18:02
you can make the other challenging call.
00:18:04
>> Is this antithetical to a Ben Graham
00:18:06
investing model like you have to have a
00:18:08
different set of skills as an investor
00:18:09
to to identify this talent for?
00:18:11
>> Yes. I mean Ben Graham is a really
00:18:14
important voice for investors and that
00:18:16
he said look you got to think about a
00:18:17
business a stock certificate is an
00:18:20
interest in a business as opposed to
00:18:21
just this piece of paper. That's
00:18:22
probably one of his most important kind
00:18:24
of apherisms. But he was investing for
00:18:26
the most part in liquidations. He was
00:18:28
invest you know in the days of Ben
00:18:30
Graham where there weren't there's no
00:18:32
Edgar system and in order to get a 10K
00:18:35
filing you had to go to the headquarter
00:18:36
of the company. there were a lot of
00:18:37
stocks trading at, you know, basically
00:18:38
the cash on the balance sheet and his
00:18:40
business model was, you know, buying
00:18:42
these things at stupidly cheap prices
00:18:43
and eventually um but Bened Graham made
00:18:46
most of his money investing in, I don't
00:18:48
know, Geico or something uh you know,
00:18:50
not
00:18:50
>> tell us um a little bit about, you know,
00:18:53
there's this sort of activist and
00:18:54
significant shareholder, but then
00:18:56
there's Howard Hughes and you've talked
00:18:58
a little bit about Berkshire Hathaway
00:19:00
2.0 or just being inspired by that.
00:19:02
Chimapi, you were inspired by it for a
00:19:04
long time.
00:19:04
>> Oh, Bill just took Persian Square
00:19:05
public.
00:19:06
>> Yeah. But with with the Howard Hughes
00:19:08
Corporation specifically, tell tell us
00:19:10
about that effort because you're
00:19:12
operating that business.
00:19:13
>> There's a book uh I think it's called
00:19:14
the financial history of Berkshire
00:19:16
Hathway. That's for geeks. Um, basically
00:19:19
this guy uh went back and read every 10
00:19:23
Q whatever he actually went through the
00:19:24
filings, looked at every deal that
00:19:26
Buffett ever did and you follow him over
00:19:28
uh 60-year period of time and the vast
00:19:31
majority of the value he created at
00:19:32
Bergkshire was through it actually the
00:19:34
ownership of an insurance operation and
00:19:36
what's interesting about insurance is
00:19:38
that uh you know running an insurance
00:19:41
company you have two jobs one is you you
00:19:43
know write business right you take risk
00:19:45
um you collect premiums in exchange for
00:19:47
the obligation to pay future claims and
00:19:49
then you get that you get money up front
00:19:52
and you responsibility is to invest that
00:19:53
money. Uh the vast majority of insurance
00:19:56
companies focus only on the liability
00:19:58
side of the balance sheet. Buffett was
00:19:59
really the first to do focus on actually
00:20:02
more on the asset side of the balance
00:20:03
sheet than on the liability side. And
00:20:05
over time on the liability side if you
00:20:07
if you manage the assets of an insurance
00:20:09
company well and the liabilities well
00:20:11
you can build this enormously profitable
00:20:13
compounding taxefficient machine over
00:20:15
time. And the question is, why haven't
00:20:17
other people done this? And the answer
00:20:20
is if you're really good at investing,
00:20:22
you go work for a hedge fund, you go
00:20:24
work for Fidelity, you go work for
00:20:26
Wellington, but you don't go work for an
00:20:28
insurance company. So the insurance
00:20:30
company's ability to recruit investment
00:20:31
talent is very limited. Buff Buffett
00:20:34
owned half the company. He was really
00:20:35
good at investing, which is why it
00:20:36
worked. So what we're doing is we're,
00:20:38
you know, Buffett started with a crappy
00:20:39
textile company, effectively liquidated
00:20:42
it over time, reinvested in insurance,
00:20:44
and then invested the assets. Well,
00:20:47
Howard Hughes is actually a really
00:20:48
interesting company, but it's a business
00:20:50
that Wall Street has not cared about for
00:20:51
a long period of time. We created it out
00:20:53
of the bankruptcy of of General Growth.
00:20:56
It was a spin-off of all the other
00:20:57
assets, and it's a company that owns
00:20:59
these small cities. So, I bet a lot of
00:21:01
people here have heard of Summerland
00:21:03
because uh a lot of the tech community
00:21:05
has moved from California to Las Vegas,
00:21:07
but we own this small city, 26,000 acres
00:21:11
of land. Uh we own all the commercial
00:21:14
land, we own all the residential land,
00:21:15
we sell lots of home builders, we build
00:21:17
a downtown, we build buildings. Uh it's
00:21:20
a bit like the Irvine company. You know,
00:21:22
Don Brand created probably hundred
00:21:24
billion dollars of personal wealth
00:21:25
managing a small city. So super cool
00:21:27
company, but the time frame is decades
00:21:30
as opposed to quarters. So Wall Street's
00:21:33
never cared. It's always traded at a
00:21:34
huge discount. So Buffett bought into a
00:21:36
textile business at a discount to
00:21:37
liquidation value at $63 a share, you're
00:21:40
owning Howard Hughes at a discount to
00:21:42
liquidation value. What we're doing is
00:21:43
instead of reinvesting all the cash the
00:21:45
business generates into real estate,
00:21:47
we're going to reinvest all the cash
00:21:48
into insurance. Uh we're next within the
00:21:51
next week or so,
00:21:52
>> you're in the business of building this
00:21:53
flywheel. We're going to build this into
00:21:55
a compounding machine over the next 50
00:21:57
years. It's something I've always wanted
00:21:58
to do. We have the benefit of
00:22:01
understanding both the insurance side of
00:22:02
the business and we can manage the
00:22:04
assets well and you can buy it at, you
00:22:06
know, whatever 60 cents on the dollar.
00:22:08
>> How do you think about investing the
00:22:09
assets of this insurance company? So,
00:22:11
>> so what Buffett did is he took 100% of
00:22:12
the insurance float and put the money in
00:22:15
short-term treasuries. So he took no
00:22:16
risk on kind of policyholder funds and
00:22:19
he took 100% of the surplus of the
00:22:21
insurer the equity and invest in common
00:22:23
stocks and that's what we're going to
00:22:24
do. Um and I think we can build a really
00:22:26
profitable insurance company. We're
00:22:28
starting at a very small scale. The
00:22:30
company's got like a $4 billion market
00:22:31
cap and the goal is to build it into a
00:22:33
trillion dollar thing over time
00:22:35
compounding. The other thing Buffett did
00:22:36
well is that he didn't issue any stock
00:22:38
or not for a very long time. So they you
00:22:40
know he started with a million shares
00:22:42
and today he has effectively like a
00:22:43
million. this is the future for very
00:22:45
talented managers like yourself versus
00:22:48
the traditional long short fund or do
00:22:50
you think they sit side by side?
00:22:51
>> I think it's hard to do this because you
00:22:53
need control of a public company and you
00:22:56
have to be not in a get-richquick
00:22:58
mindset and there if you're in the
00:22:59
get-richqu it's easier to go to Citadel
00:23:01
or Millennium or one of these.
00:23:02
>> Why does it have to be public?
00:23:04
>> Why does it have to be public? It
00:23:06
doesn't doesn't have to be public.
00:23:07
>> Why did you choose to take it?
00:23:09
>> Uh you know we we got here by accident,
00:23:12
right? So the most successful equity
00:23:14
investment we've ever made is we bought
00:23:15
this company called General Growth. We
00:23:16
bought the stock of a company going
00:23:17
bankrupt. Sort of the most contrarian
00:23:19
investment you can make. Stock went from
00:23:21
you know uh $20 billion market cap to
00:23:23
100 million and we bought a basically uh
00:23:27
a third of the company or 27% of the
00:23:30
company at uh $200 million market cap
00:23:32
and there was 27 billion of debt and the
00:23:34
bankruptcy emerg and the strategy we
00:23:36
said is look the assets are worth more
00:23:37
than liabilities. we're going to do the
00:23:39
first uh restructuring where the equity
00:23:42
gets to keep their investment in the
00:23:43
company. Two years later, we emerged
00:23:45
from Chapter 11. The stock went from 34
00:23:46
cents to $34. But part of the
00:23:49
restructuring was spinning off this
00:23:50
thing called Howard Hughes. And it was
00:23:52
really all of the junk that didn't
00:23:53
belong in the company that the analysts
00:23:55
hated. Um and so we did it uh sort of an
00:23:59
inadvertent investment. And you know, 15
00:24:02
years later, we haven't really created
00:24:03
much value with it. So we said, "Look,
00:24:05
we've got to you know, the market
00:24:06
doesn't like this thing. the market a
00:24:08
company has to earn a return in excess
00:24:10
of its cost of capital in order for a
00:24:12
stock to go up and the you know Elon's
00:24:14
done an amazing job keeping the cost of
00:24:15
capital of his company's really low you
00:24:17
know SpaceX goes public at a trillion
00:24:19
750 billion will probably be the lowest
00:24:21
cost of capital equity capital
00:24:24
transaction in the history of the world
00:24:26
the problem with this company because
00:24:27
it's real estate because it's
00:24:28
development because it's land ownership
00:24:30
the market says the cost of capital is
00:24:31
really high and you can only earn a
00:24:33
certain return of real estate so what
00:24:34
we're doing is we're repurposing the
00:24:36
real estate assets and we're
00:24:38
transforming the company into a much
00:24:39
higher returning kind of business.
00:24:40
>> The last few years you've become
00:24:42
incredibly famous. I mean just to kind
00:24:43
of put a fine point on the word. How
00:24:45
does that change and influence the way
00:24:48
that markets work because like you know
00:24:50
your voice gets amplified now. You also
00:24:53
have other places where other voices get
00:24:55
heard many people's whose names you
00:24:57
don't even know. You go into Wall Street
00:24:58
bets it's every random Tom Dick and
00:25:00
Harry with an opinion. tell us the way
00:25:03
the markets have changed with notoriety,
00:25:06
fame, social media influence, not just
00:25:08
yours, but in general.
00:25:09
>> Yeah, I don't think markets have changed
00:25:11
as a result of anything that's happened
00:25:13
with me or follower growth on on
00:25:15
Twitter. I think the Ryan Cohen guy, you
00:25:18
know, the GameStop guy.
00:25:20
>> Yeah.
00:25:20
>> You know, that is a change in markets
00:25:22
when um you know, a stock can trade at a
00:25:26
valuation well above its value simply on
00:25:30
the personality and the ability to
00:25:34
>> vibes
00:25:34
>> to to gather up, you know, armies of
00:25:37
followers. You know, the the fascinating
00:25:39
thing about liquidity and valuation is
00:25:43
the higher a stock price goes, and it's
00:25:46
going to sound sort of intuitive, but
00:25:49
it's not, the more valuable the company
00:25:51
becomes. You know, there's actually the
00:25:54
increase in value of the company
00:25:55
increases the value of the company,
00:25:57
right? Because it lowers the cost of
00:25:58
capital, it gives you more flexibility,
00:26:00
gives you the ability to issue stock,
00:26:03
raise capital, acquire other businesses.
00:26:05
And so, you know, getting back to the
00:26:07
Elon example, uh it's really his I would
00:26:11
say he's a better example of this. We've
00:26:12
not taken advantage of this at all.
00:26:14
Maybe we should,
00:26:15
>> but he built an army of believers and
00:26:17
followers
00:26:18
>> uh that enabled uh Tesla to be built.
00:26:22
>> Um you know, let me end as we wrap up
00:26:25
with a somewhat of a pointed question.
00:26:27
You're an incredible investor. If there
00:26:29
are people, if we want to be maximally
00:26:31
aligned with Bill Aman,
00:26:34
is the best way to be an LP in Persing
00:26:37
Square or is it best to go into the
00:26:38
market and buy?
00:26:40
>> So, we have two I think there are three
00:26:43
ways you can invest with us that are all
00:26:45
different and will achieve different
00:26:46
things. One is something entity called
00:26:48
Purging Square, which is the management
00:26:50
company at Purging Square. I think it's
00:26:51
one of the most interesting kind of
00:26:53
intellectually businesses because it's a
00:26:56
uh it's the entity that receives fees on
00:26:58
these three permanent capital vehicles
00:27:00
we manage. So, it's a royalty on the
00:27:02
compounding of investments in these
00:27:05
entities and there's no capex in the
00:27:07
business. So, we're going to pay out
00:27:08
basically all of our profits and we're
00:27:10
going to grow as quickly as the
00:27:12
underlying assets uh compound. So if you
00:27:14
invested a dollar in Persian Square, you
00:27:17
know, 22 years ago, that's that became
00:27:21
um you know uh 20 uh I think I should
00:27:26
know this number. It's like 27 or 28
00:27:29
times net of all fees. Wow. Okay. Over
00:27:31
over 22 years. Had we charged the fees
00:27:33
of this public vehicle, uh that number
00:27:36
would have been um you know uh 37 times
00:27:39
I'm sorry, no more in the something in
00:27:41
the mid-40s. Okay. What this means is we
00:27:43
now have a public vehicle that charges
00:27:45
only a 2% fee. We've got a one in London
00:27:47
that charges an incentive fee. If we
00:27:49
compounded the rates we have
00:27:50
historically, we'll have 35 times the
00:27:53
assets under management uh in 22 years.
00:27:55
So we'll go from 25 billion of assets to
00:27:57
something approaching a trillion. We
00:27:59
don't have to hire another person uh and
00:28:01
we don't have to spend another dollar if
00:28:03
you will on overhead. That that's a
00:28:04
pretty interesting business. So I like
00:28:05
that one. So Persian Square, if you want
00:28:07
to invest with us as a investor, invest
00:28:09
in something called PSUS and you own a
00:28:11
portfolio of our best ideas and it's
00:28:13
trading at an 18% discount to cash. You
00:28:16
want to believe that we can build the
00:28:17
next Bergkshire Hathaway, you own Howard
00:28:19
Hughes. We got three different ways.
00:28:20
>> Yeah, I bought some Howard Hughes. I
00:28:21
think following you on Twitter and going
00:28:24
the going direct movement does allow you
00:28:27
to communicate directly your vision and
00:28:30
and that actually makes it much easier
00:28:31
to to place the bet. And so I I do think
00:28:33
it has a profound impact because prior
00:28:36
to your extremely long tweets that have
00:28:40
been parodyied now there's an incredible
00:28:43
meme of a Bill Aman tweet coming in
00:28:45
which is
00:28:46
>> you did that extended iPhone that's a
00:28:48
foot tall.
00:28:48
>> No it was that was my Halloween costume
00:28:51
>> for last year.
00:28:53
>> You would have written something
00:28:54
shorter. You just didn't have the time.
00:28:55
Yeah.
00:28:57
>> Yeah. I guess uh I don't let other
00:28:59
people read, you know, um my
00:29:00
>> Do you do you like have anybody read it?
00:29:04
>> On the uh the Rhonda tweet uh which had
00:29:06
some legal implications, I did have my
00:29:08
communications guy and a lawyer
00:29:10
>> a friend who's a lawyer read it, but I
00:29:12
only gave him a few minutes cuz I was so
00:29:13
excited. Once I write something I really
00:29:15
like, I just want
00:29:16
>> Yeah. I agree. I agree. And the
00:29:19
torpedoes
00:29:21
does this too. He starts getting a
00:29:23
little bit frantic when he's writing
00:29:24
something and then he's like it and he
00:29:25
just hits.
00:29:26
>> I just hit that.
00:29:27
>> By the way, it's a very powerful thing
00:29:29
to be able to share your view and push a
00:29:30
button and reach 2.2 million people. So,
00:29:32
I I'll I'll have to Why don't we just a
00:29:34
picture on stage and I'll send it out.
00:29:35
>> Hell yeah. That's great. Let's do it.
00:29:37
>> Liquidity.
00:29:38
>> Gone all in.
00:29:39
>> All right.
00:29:41
Thank you.
00:29:56
Hey,
