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Welcome to personal finance for long-term investors, where we believe Benjamin Franklin's advice that an
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investment in knowledge pays the best interest both in finances and in your life. Every episode teaches you personal
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finance and long-term investing in simple terms. Now, here's your host, Jesse Kramer. Hello and welcome to
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episode 110 of Personal Finance for Long-Term Investors. My name is Jesse Kramer. By day, I work for a fiduciary
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wealth management firm helping clients all over the country. For more details, you can go to bestinterest.blog/work.
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Link will be in the show notes. And by night, I write a blog called The Best Interest, and I podcast here on personal
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finance for long-term investors. I try to help busy professionals and retirees avoid costly mistakes and grow their
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wealth. And I do so by simplifying complex ideas about personal finance, from investing to taxes to retirement
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and beyond. And we have a fun and unique episode for you today. When Warren Buffett decided to announce his
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retirement from Berkshire Hathway this year, I penciled in an episode dedicated totally to Warren. If you read or if you
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listen to me enough, you'll know that he's not only one of my favorite investing minds, but his communication
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style, his emphasis on reputation and the actions we take, even his hokey small town, Midwestern style, all things
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that I really appreciate. And now, what I don't want today to be is simply to
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lob, you know, Warren Buffett quotes at you and and tell you why I like those quotes. That's not what we're going to
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do. Even though, yes, he is the most quotable investor of all time. Instead, I want to dive deeper. I want to go into
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I decided upon eight subject matter areas, many specific to investing, uh, where I believe Warren Buffett has added
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a huge amount of wisdom over the years. Eight topics where you'll be a better
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investor and maybe even a better person because you'll hear what Warren Buffett
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has to say. But first, let's do a review of the week. Marv8383 left a five-star review on Apple Podcast
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and said, "You'll love it. Great show. Jesse has an amazing way of explaining
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concepts. Highly recommend." Marv, thanks so much for the kind words. And yes, I now have a a super soft batch of
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uh t-shirts specifically for the personal finance for long-term investors brand. They are no longer the best
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interest t-shirts. So, shoot me an email, Marv, and I will send one of those t-shirts your way. And now, let's
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get back to Uncle Warren Buffett. First, I want to talk about something near and
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dear to all of our hearts. The benefits of long-term thinking. At its core, Warren Buffett's investing philosophy is
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remarkably simple. Buy wonderful businesses at fair prices and hold them for forever. But wrapped in that
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simplicity is this commitment to patience and discipline. And the idea that time, not timing, but time, is the
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investor's greatest ally. Yes, it sounds so easy, but executing that philosophy
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through thick and thin throughout his whole career, that's the hard part. He
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taught that investing isn't about reacting to headlines or timing the market. It's about aligning with
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companies that produce real value over decades. You know, he famously said, "If
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you aren't willing to own a stock for 10 years, don't even think about owning it
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for 10 minutes." That mindset pushes investors to think less like traders and
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to think more like owners, right? We are all owners. We own shares of businesses.
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You wouldn't buy a local farm or a local pizzeria to own it for just a month or
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even just to own it for a year. you would probably have a multi-year business plan in mind, maybe even a
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decade or an infinite business plan, an indefinite business plan in mind. And the same goes for owning stocks. Buffett
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also redefined what it means to quote unquote do nothing in our world that's
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kind of obsessed with action and optimization. He champions inactivity really as a strength. He has this famous
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quote where he said, "Leuthy bordering on sloth remains the cornerstone of our
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investment style." Yes, of course it's funny, but it's also this profound
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statement on allowing long-term compounding to do the heavy lifting. You only have to make a few good decisions
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and then you can let compounding of time take care of the rest. And then there's
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his temperament. Buffett showed that investing success isn't just about IQ or
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models. It's really about behavior. Granted, if you've heard Buffett talk,
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especially when the numbers are involved, yes, he also has a very impressive IQ. So, it kind of oozes out
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of them, I guess. But nevertheless, when the markets panic, long-term thinkers stay grounded. when other people chase
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fads, we stay the course. And Buffett proved that mental discipline and that emotional control are these durable
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competitive advantages. And we will come back to that phrase later. In doing all
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this, Buffett gave everyday investors like us a a northstar. His letters, his interviews, his examples provide not
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just market insight, but really some life guidance to think long term, to stay rational, to let the compounding of
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time do its quiet work. And it really is quiet work. You know, I'm a little over
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a decade into my personal investing timeline. And granted, it's been one heck of a decade to be invested in
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stocks, but man, there's some pretty quiet yet impressive growth that happens
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over a decade. Sometimes that quiet compounding actually gets pretty loud and impressive. Next, I want to talk
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about a a different and interesting Buffett ism. It's the circle of competence. Warren Buffett famously
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said, "Know your circle of competence and stay inside it." It's another one of
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those ideas that is quite simple. It's almost too easy to ignore. Kind of like
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eat your vegetables or or get enough sleep. But part of Buffett's genius lies
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in that simplicity. He's not trying to sound clever. He's just trying to stay
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effective. Your circle of competence is what you actually understand. You know, it's what you were competent in. It's
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not what you've skimmed through once on social media or what your buddy at the
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golf course ranted about. It's the stuff that you've dug into, you've studied and
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tested and internalized. It's the stuff that you could explain to a like a smart
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12-year-old and have them actually get it. And most of the world, I think it's
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fair to say, is not inside our personal circles of competence. Only the stuff that we're truly an expert in is inside
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our circle of competence. To that end, we probably all have that one friend who seems to have an opinion about
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everything and also kind of acts like this walking Wikipedia page who drops facts on you. I would argue that people
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like that ought to tighten up their circle of competence a little bit. And for Buffett, that circle includes
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insurance companies and banks and railroads and consumer brands like Coca-Cola. He's famously said that there
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are huge areas of the market like tech being the the most famous one for most of his career that he just doesn't
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understand well enough to invest in. He probably could have bluffed that fact and most of us probably would have
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believed that bluff, but he doesn't do it. He has some humility and and discipline and a really powerful
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combination of those two things. And the investing lesson here is pretty obvious.
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You don't have to swing at every single pitch. In investing, you're allowed to
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just keep the bat on your shoulder as long as you want to. You can let the confusing pitches go by and you can wait
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for the fat pitch right down the middle in the middle of your circle of competence. And your circle of
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competence might be small and that's okay. What matters is that you know where the edges of your circle are. And
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that idea, it expands way beyond investing too. You know, we're constantly nudged, sometimes even shoved
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outside our circles of competence. Social media, probably the internet these days, rewards overconfidence. At
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work, a boss might reward a fake it till you make it approach. And that's not
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exactly good. That's outside of a circle of competence. Our egos, if we're being
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honest, love the idea of being the smartest person in the room. I'm okay admitting that. But the problem is that
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consistently operating outside your circle of competence is going to lead to mistakes and stress and imposttor
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syndrome. It's going to end up overcommitted, underinformed. We're going to wonder why things in life feel
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so fragile, like we're always kind of at the at the edge of breaking. But the
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flip side is that staying inside your circle of competence, it's not a sign of
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weakness. It's just a sign of self-awareness. And if you want to grow, you don't need to pretend to know
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everything. You can just learn a little bit more. Just expand the circle of competence slowly and deliberately. And
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Buffett again had a quote where he said, "You don't have to be an expert on every
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company or even many companies. You only have to be able to evaluate companies within your circle of competence. The
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size of that circle is not very important, but knowing its boundaries is vital." And yeah, same goes for life.
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You don't need to be the best parent, the best investor, the best partner, the
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best athlete, cook, comedian, home repair expert all at once. Instead, you can focus on your circle of competence.
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Go deep. Chip away at the edges, sure, when it makes sense. But this idea, it's
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not flashy. It might not make you the most fun person at the cocktail party, but it might help you make better
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decisions in investing and in life. Next, I want to talk about Buffett's contributions to the idea of intrinsic
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value. Intrinsic value, you know, what is something worth? And that question, I'd say Warren Buffett kind of
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consistently hunted for the answer to that question throughout his career. He made tens of billions of dollars asking
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that question over and over again. What is this thing really worth? Not what it's trading for, not what the headlines
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say, not what your buddy on Reddit thinks it'll do next week, not what the market says its price is. What's it
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really worth? Now, Buffett describes intrinsic value as the present value of future cash flows. That's it. That's
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usually what his definition is. If you buy a lemonade stand, what matters, you know, it doesn't matter what the paint
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color is or whether people are excited about lemonade this week. What matters is how much real cash that lemonade
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stand will produce for you next month, next year, and over the next 20 summers, over the coming decades. What is that
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stream of future income? What is that worth to you today? That's intrinsic value. And intrinsic value, it forces us
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to think like a business owner, not like a trader, not like a speculator. It's a
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filter that Buffett uses, well, used and uses to strip away the noise, to strip away the hype and some of the psychology
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and speculation in markets and ask himself, what am I actually getting in return for the dollars that I spend on
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this company that I spend on this investment today? What am I actually getting in return? And sure, that
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particular lens has made Buffett one of the richest men in the world, but just as importantly, it's helped him avoid
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all sorts of shiny distractions along the way. And speaking of shiny distractions and intrinsic value, that
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brings us to two assets that Buffett doesn't like. Gold and Bitcoin. So, starting with gold, Buffett doesn't deny
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that it's valuable in the sense that people want it. You know, it's shiny,
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it's rare, it has thousands of years of monetary history behind it. But Buffett's argument against gold is
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pretty simple. Gold doesn't produce anything. You can hold it, you can store
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it, you can polish it, but it doesn't grow. It doesn't generate income. It
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doesn't throw off cash flows. In Buffett's world, that means that its intrinsic value is basically zero. From
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his 2011 letter to Berkshire Hathway shareholders, Buffett wrote, "Gold gets
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dug out of the ground, and then we melt it down, dig another hole, bury it again, and pay people to stand around
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guarding it. It has no utility." Of course, he's describing like bank vaults
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or safes there, digging another hole, burying it, and paying people to guard it. So gold has extrinsic value because
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another person will likely come along and buy it from us, but it has no intrinsic value. It has no growth engine
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built into it. Now onto Bitcoin. Buffett's even less enthusiastic. In 2022, he famously said, "If you told me
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you owned all the Bitcoin in the world and you offered it to me for $25, I wouldn't take it because what would I do
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with it? It doesn't reproduce. It doesn't send me a check. It doesn't do
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anything." And that argument I actually find is particularly interesting because
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if you did own all of the Bitcoin in the world, who would you trade it with to give you value? If I own all of the
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Apple stock in the world, if I'm the 100% owner of Apple as a business, I bet
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someone would be willing to come along and buy some of that Apple from me because equity in Apple does have
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intrinsic value because the company sheds off cash flow to investors. But if all the Bitcoin in the world is in one
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person's hands, would the rest of us feel a need to buy some from that person? Are we missing out on something
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if one person owns all the Bitcoin? I think that's a pretty interesting and convincing thought experiment. But
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before the the lasered crypto crowd comes after me, does that mean that gold and Bitcoin are worthless? Well, no.
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They have market value. They have subjective value, and that's exttrinsic value. And in Bitcoin's case, you can
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make the argument around say the network effects and scarcity and its role as a a
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store of value or alternative currency. That's fine. But in Buffett's framework,
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price is what you pay and value is what you get. And if there's no future cash
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flow, then there's no intrinsic value to to anchor you to a future price. Buffett's idea of intrinsic value
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doesn't just work for giant companies or investment portfolios. It works for
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normal people, too, just looking to invest their 401k or make sense of a volatile world. It reminds us to ask,
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you know, what am I really buying? What am I expecting to earn from this investment in the future? Is this
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investment producing something real internally, or am I just hoping that someone will pay more later than I paid
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today? And that can be a compass to help us out in confusing markets. Gold shines
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when the world gets nervous. Bitcoin spikes usually on on stories and hope. But cash flowing businesses, ones with
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pricing power and loyal customers and long-term demand, those are the kind of assets that Buffett would bet on and
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those are the ones that tend to hold up over decades. At its core, intrinsic value is a mindset. It says you don't
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need to predict the next trend. You don't need to outhype the crowd. You just need to understand what you own,
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why you own it, and what it will give you or provide to you in return. Sometimes that's a stock, sometimes it's
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rental property, sometimes it might be bonds, it could be just boring old index funds. But if you know the cash flows
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and you pay less than what they're worth, you're probably on the right path. And if you don't know the cash
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flows, well, you might want to ask yourself, is this investing or am I just speculating? Buffett's circle of
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competence doesn't include gold or Bitcoin, but it does include clear thinking, patience, and knowing what
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something's really worth. That is intrinsic value. The next big Buffett topic, so you know, how do you know that
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your investment choices aren't too risky? Well, Buffett would suggest that you need a sufficient margin of safety.
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It's a funny thing. If you listen enough to Buffett, his sense of humor is great
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and often uh it's in the gutter. And if you had to pick one of his more innocent
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gutter quotes, it's that only when the tide goes out do you discover who's been
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swimming naked in investing. That principle is all about the margin of safety. It's not just a financial idea.
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It is a way of thinking about risk in general and uncertainty in general and just the future. I would argue it's how
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smart people stay solvent, how they stay in the game, how they sleep at night. So, we'll start with the investing
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version. Buffett borrowed the concept of margin of safety from his mentor Benjamin Graham. Ben Graham, the father
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of value investing. You know, like many of us, Buffett stood on the shoulders of
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giants and specifically on the shoulders of Benjamin Graham. Many amazing investing ideas seem to originate with
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Graham. The metaphor of Mr. Market is probably my favorite of those Graian ideas. But back to margin of safety, we
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should start with the idea that we just discussed. Every investment has intrinsic value, what it's actually
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worth based on future cash flows and fundamentals. But we're not perfect, right? We're humans. We make mistakes.
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The future is uncertain. Our spreadsheets won't always match reality. So what do we do about that fact? Well,
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we build in a cushion. We aim for undervalued assets that give us some breathing room that give us a margin of
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safety in case we're wrong. If we think that a company's intrinsic value is $10
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per share, we should only purchase it if it's selling for $7 or $8 per share.
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That difference, that's our margin of safety. Buffett put it this way. You don't try to drive a 9800 lb truck over
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a bridge that says limit 10,000 lb. Instead, you go down the road a bit and you find a bridge that says limit
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15,000. Margin of safety protects us from two scary realities in investing. The first is just being wrong. And the
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second one is bad luck, right? Maybe this business that we're looking at, maybe it hits a rough patch. Maybe
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interest rates go haywire or our analysis was just off. If we bought with a margin of safety, we have room to be
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wrong and still come out the other side okay. Maybe not with huge gains, but at least without catastrophic losses. And
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investing, it it truly is a losers game. If you're unfamiliar, losers games are
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games where it's all about minimizing bad outcomes. I would argue that for most of us, tennis is a losers game
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because if you've ever seen amateur tennis or even like pretty good high school or decent college tennis, a lot
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of tennis is simply about not hitting the ball out. Winners games though are all about maximizing good outcomes. And
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investing, that is a losers game. Avoiding catastrophe is the name of the game in investing. It's a name of the
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game in financial planning. It's about understanding our risks and avoiding or
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minimizing or mitigating them. And Buffett's investing record, it's not just about hitting home runs. Yes, he
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hit a lot of home runs, but more so it's about never striking out. He preserves
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capital. He avoids ruin. He only bets when the odds and the price are clearly in his favor. He's got the, you know,
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another one of his famous quotes that just kind of popped into my head is the rule number one is never lose money and
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rule number two is don't forget rule number one, try not to strike out, right? That's what that rule is. But the
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principle doesn't just apply to stocks. really does apply to a lot of other things in finances. I mean, if we think
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about our personal finances, the best financial plans have a built-in cushion. They have an emergency fund,
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conservative withdrawal rates in retirement, not maxing out your your mortgage just because the bank says you
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can, sufficient insurance coverage to mitigate risks. These are all examples of margins of safety in our personal
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financial life because life is unpredictable. Layoffs happen. Roofs leak, your kids need braces, your HVAC
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dies on the coldest day of the year. A margin of safety means you're not living
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paycheck to paycheck. It means a surprise doesn't break you. It might annoy you, but it doesn't break you. You
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avoid the awful, terrible losses as best you can. In business, the same idea. Great operators don't run their
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companies at the edge of disaster. They keep some cash on hand. They avoid overleveraging. They leave a little bit
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of slack in the system because the real world isn't frictionless, right? There
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are delays and defects, bad customers, broken supply chains, economic downturns, and the margin of safety. It
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can apply to so many other areas of life. I won't wax philosophical on on relationships or lifestyle or things
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like that, but consider how building in a margin of safety can help you certainly on the financial side and
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maybe elsewhere too. Cuz when the storm comes, and it will come, right? The storm always has come before and we can
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only see so far out on the horizon. The margin of safety is what keeps you and your plan and your finances intact. Or
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as Buffett would say, only when the tide goes out do you find who's been swimming
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naked. So don't swim naked, at least not metaphorically. Here's a quick ad and
00:18:19
then we'll get back to the show. Every week I send a quick free email to thousands of readers that shares three
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simple things. One, my new articles and podcasts. Two, the best financial content of the week from all over the
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internet. and three, a financial chart that explains some important concept in the news that week. It's a great primer
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to boost your financial knowhow. But Jesse, I don't want another email. Well,
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this might not be for you, but I do hear you, which is why I make it very short,
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sweet, and full of only the essentials. A whopping 66% of subscribers read my email at least once a month. They're
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enjoying it, and maybe you will, too. You can subscribe for free on the homepage at bestinterest.blog.
00:19:03
Again, that's a free no strings attached subscription at bestinterest.blog. For the next big buffetism, you know,
00:19:11
here on personal finance for long-term investors, we've talked about the benefits of diversified passive
00:19:15
investing and efficient markets. But I want to talk about Buffett's focus on
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market inefficiencies and on concentration rather than diversification. Because even though it
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might not be something that most of us do in our personal portfolios, there are some really valuable lessons to learn
00:19:31
here. Buffett's career has been this 70-year rebuttal of one of the most popular modern theories in finance, the
00:19:39
efficient market hypothesis or EMH. EMH basically says that stock prices or market prices in a quote unquote
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efficient market that they always reflect all available information. That the market is a perfectly rational
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pricing machine. that it's impossible to consistently beat the market unless
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you're lucky or cheating. So, it's not to say that the market is always right.
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It's a little bit different than that. Instead, EMH says that the market has
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always synthesized available information better and more consistently than any individual can synthesize that
00:20:12
information. So, doesn't mean that the market's always right. It just means
00:20:16
that the market is better at understanding what's going on than you are as an individual. And if you think
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you can consistently beat the market, well, you're in trouble because there's
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no way you can have more information and and do better things with that information than the market can. That's
00:20:30
what the efficient market hypothesis says. But Buffett famously disagrees. He doesn't think that the market is
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irrational all the time, but he's built his fortune betting that at a reasonable
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frequency, the market is irrational enough for him to outsmart it. And he's been right consistently for decades.
00:20:49
Buffett isn't saying that markets are dumb. He's just saying that humans are
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emotional. And since markets are made up of humans and since humans, like all mammals, sometimes have some herd
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behavior that stock prices often reflect our biases, our fears, and our manas. Sometimes we get greedy. Other times, we
00:21:06
panic. In both cases, prices can swing wildly away from what a business is truly worth, away from that intrinsic
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value that we talked about earlier. And going back to earlier when I mentioned Benjamin Graham's uh Mr. market
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metaphor. Buffett refers to Mr. Market as your manic business partner. Every day, Mr. Market offers to buy or sell
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shares of companies at whatever mooddriven price he feels like. Sometimes he's generous with you. Other
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times, he's delusional. Part of Buffett's genius is waiting until Mr. Market is being irrational in Buffett's
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favor by essentially selling $1 bills for.7 and then Buffett pounces. In doing so, he's made billions by disagreeing
00:21:47
with the idea that markets are always right. By disagreeing with the efficient market hypothesis, em it it lives in the
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halls of academia. It's very clean. It's elegant. It's mathematically satisfying.
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It's logically satisfying. But the real world and investing in the real world is
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messy and prices get distorted. Fear sometimes spreads faster than spreadsheets would recognize. And not
00:22:08
all investors are rational, well-informed agent. In fact, most aren't. Buffett once joked, "I'd be a
00:22:14
bum on the street with a tin cup if the markets were always efficient." Because
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if prices were always right, there'd be no such thing as a cheap stock. There'd
00:22:21
be no undervalued business. There'd be no opportunity to buy Coca-Cola at a 40%
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discount during a market sell-off. But Buffett did exactly that and made billions in the process. If EMH was
00:22:32
right, there'd essentially be no risk or volatility in the market. If EMH was
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perfectly right, we would have a much different feeling stock market than we currently do. But we should pivot here
00:22:44
to Buffett's other quote unquote heresy, at least compared to the way that most
00:22:48
of us invest. He doesn't really diversify. I mean, I guess at this point he diversifies a little bit, but he
00:22:53
certainly doesn't diversify in the way that conventional wisdom says you should. Modern finance says to own
00:22:59
hundreds of stocks, to spread out your bets, to reduce risk, to not put too many eggs in one basket. But Buffett's
00:23:04
approach is more like you should put all your eggs into very few baskets, baskets
00:23:09
that you've analyzed very very critically and then you should wash those baskets very carefully. He
00:23:14
believes in concentration. When he finds a business that's deeply undervalued or
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of extremely high quality and it's within his circle of competence, it's
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run by trustworthy managers. He buys big. That's how Bergkshire Hathway ends
00:23:27
up with massive positions in Apple and Coca-Cola and American Express. Not to mention the real way that Bergkshire has
00:23:33
grown so much, you know, Bur Bergkshire is kind of famous for owning Apple and Coca-Cola, but the real way that
00:23:38
Bergkshire has grown so much is by buying entire privately held companies outright. He's not trying to own a
00:23:44
little bit of everything. He's trying to own a lot of the very best things bought
00:23:49
at the right price. And that's a key reason why he's outperformed for so
00:23:52
long. When most investors are taking a little bit of everything, Buffett's waiting for the pitch to be right down
00:23:58
the middle and then he swings hard. But yes, Buffett did also say that indexing is smart and we should touch on that and
00:24:05
this is where kind of nuance matters. Buffett has said that for most investors, including many of us
00:24:10
listening, for most investors, diversification is the way to go because most people don't have the time, the
00:24:16
skill, or the temperament to identify these inefficiently priced businesses and to concentrate in them wisely. So
00:24:23
instead of pretending that you're Warren Buffett or the next Warren Buffett or
00:24:26
that you have the time to even be half of what Warren Buffett is, it's probably
00:24:30
better to own the whole market and to do so cheaply and to let compounding do the
00:24:35
rest. That's not a contradiction. It's just an acknowledgement of reality. For
00:24:39
the skilled few investors out there, inefficiencies do exist. They aren't necessarily easy to find or to exploit.
00:24:46
And Buffett had the right temperament and the right framework and the right discipline to act when others couldn't.
00:24:51
So yes, most people should diversify, but for Buffett, concentration in a few mispriced gems, that's exactly what made
00:24:58
him rich. Buffett didn't just reject efficient markets. He he really crushed
00:25:02
them. And he showed us in practice some of the issues with the efficient market hypothesis. So the efficient market
00:25:08
hypothesis says you can't beat the market. Well, Buffett says maybe you can't, but I can and I did. And if
00:25:14
you're not Buffett, that's fine. Just own the whole haystack. Just don't be
00:25:18
surprised. And you should remember that there's still a needle there in the haystack. And every so often, someone
00:25:23
with the right skills and the right mindset is going to be pretty good at finding those needles. The next
00:25:29
Buffettism I want to go down is the frequently cited ideas of economic moes. In business speak, an economic moat is a
00:25:36
durable competitive advantage that a company has that protects it from the competition. Just like a medieval moat
00:25:42
protected a castle from would-be invaders, the wider and the deeper the moat, the harder it is for rivals to
00:25:48
attack. And Buffett spent a lifetime looking for castles with moes and just as importantly for trustworthy, you
00:25:54
know, royalty kings and queens to sit inside of those castles. He said, "The
00:25:58
most important thing for me is figuring out how big a moat there is around the business. What I love, of course, is a
00:26:04
big castle and a big moat with piranhas and crocodiles." So, let's not get ahead
00:26:09
of ourselves. Let's talk a little more specifically about what makes a moat a
00:26:13
moat. Buffett and Charlie Munger had a name for the key types of moes that they would identify over the years. First,
00:26:20
they looked for brand. So, when you think Coca-Cola, Apple, Disney, you're not just buying sugar water or tech
00:26:26
gadgets or cartoon movies. You're buying trust and nostalgia and identity. Those
00:26:32
names, Coke, Apple, Disney, they mean something to us beyond just what the products are. That's brand. The next
00:26:39
mode they talked about are network effects. The more people who use a service, the more valuable it becomes.
00:26:44
So if you think of Visa or Mastercard, they have these huge, you know, networks of payment processors. Modern examples
00:26:51
might be Airbnb or LinkedIn. These network effects, they're typically compounding in nature, right? So 200,000
00:26:58
users of LinkedIn isn't just twice as good as 100,000. It might be 10 times as
00:27:03
good. And for each additional user, it just compounds the network bigger and bigger and bigger. The next moat that
00:27:10
companies have are cost advantages. If you can produce or distribute something cheaper than anyone else, you've got an
00:27:15
edge. Two examples here might be Walmart because of their scale or GEICO because
00:27:20
of their underwriting model. There are things that Walmart and Geico can do with their scale that protects them
00:27:25
against upstart competition. The next mo is switching costs. For some companies,
00:27:30
it can be painful for customers to leave you, whether due to logistics or cost or
00:27:35
complexity, and you've built a moat around your business because of that. So, one example might be enterprise
00:27:40
software like Oracle or Salesforce. There might even times in our own lives where changing dentists or starting to
00:27:46
use a new grocery store and trying to figure out the new store layout has this annoying switching costs and that kind
00:27:53
of that inertia of annoyance. we might not want to switch. Certain companies and certain services, they can magnify
00:28:00
these switching costs to a huge degree. It's not that they're trying to be
00:28:03
annoying to switch away from. It's just the nature of their work. And that stickiness, that switching cost is a big
00:28:09
competitive advantage and a big moat. The next moat is regulatory protection. This one is certainly not sexy, but
00:28:15
Buffett owns utility companies for a reason. When regulation grants you a near monopoly, that is a moat that's
00:28:22
enforced by law. And the last one that they would look for is intellectual property. So patents and trademarks and
00:28:28
proprietary technology offers a strong defense for a company. Now sure Buffett was not very enamored with tech
00:28:34
throughout his career. Apple being the one notable difference, but that moat is still a relevant one here in 2025. Now
00:28:41
one of the key attributes of these moes is durability. A moat isn't just some
00:28:45
flash in the pan advantage. It's a structural feature of a company that lets the business fend off competition
00:28:51
for years, if not decades into the future. But Buffett doesn't just want to own Modi businesses. He also wants to
00:28:56
own them at a fair price. That's really the sweet spot because a great moat might already be priced into the
00:29:03
company. And if you're paying too much for a company, even the best moat can't
00:29:06
protect you from poor returns. And I think this is an interesting lesson that, you know, we can if we want to
00:29:11
apply it to our own life. And for me, I think about the skill sets that we each have that are just hard to replicate or
00:29:17
maybe the the networks that we've built over time or the reputations that we've
00:29:22
built over time. You know, are you known for a a rare technical ability? Have you
00:29:26
cultivated relationships in your network that keep on opening doors for you? Do other people at work say, you know what,
00:29:32
we really need you and specifically you on this project? Those are all moes. And
00:29:37
just like in business, you want to invest in deepening and widening your moat through learning, through
00:29:42
consistency and trust. There's a the saying here in the content creation world that some people are in overnight
00:29:48
success, but years in the making. And I see a lot of truth in that. You know, when I look at the flywheel of my blog,
00:29:54
but especially here on this podcast, it is spinning faster than ever. More listeners, more reader than ever. But
00:30:00
it's really only spinning that fast because of the years that I've put into
00:30:03
it so far. that time, that effort, that's a natural moat. And yes, if some giant company wanted to come in and
00:30:10
publish a hundred episodes over the course of three months and just really put a ton of resource into their own
00:30:16
podcast, I'm sure they could, you know, market it and surpass me and that's
00:30:20
fine. But there's something too that the time and effort, the natural moat that
00:30:24
I've built that the every weekly article and every episode digs my moat a little
00:30:30
bit wider and a little bit deeper. Now, moes like that, they don't guarantee
00:30:34
success, but they certainly make failure a lot less likely. Buffett once said, "In business, I look for economic
00:30:39
castles protected by unreachable moes. In life, I look for personal relationships that are built on
00:30:45
unshakable trust." We can't all be billionaires who are buying these monopolistic railroads and global
00:30:51
insurers like Geico. But we can build trust. We can build skills. We can widen our own moes financially,
00:30:56
professionally, and otherwise. And that might be one of the most buffetesque moves of all. Here's a quick ad and then
00:31:03
we'll get back to the show. I still remember it was 2019 and a guy from Fidelity came in to speak to my then
00:31:08
employer about personal finance in general and about our 401k plan in particular. There were 60 or so of us
00:31:14
who attended, mostly 50 plus years old, clearly with retirement on their minds. And nothing against this individual from
00:31:21
Fidelity, but unfortunately the guy just didn't really know what he was talking
00:31:24
about. It ended up being a major disappointment. And a bunch of my colleagues afterwards said, in short,
00:31:30
you know, man, we're really thirsty for good financial retirement information.
00:31:34
Where do we go find it? Now, does that sound true, listeners, for you and your colleagues? Last year, either in person
00:31:40
or via Zoom, I spoke to about 800 employees at 11 different organizations. Sometimes about personal finance in
00:31:47
general, sometimes about specifics of their retirement plans, sometimes about the the nitty-gritty details of social
00:31:52
security and withdrawal planning and retirement math. The point being, if you're interested in inviting me to come
00:31:58
talk money to you, to your colleagues, where you work, that is absolutely something I'm interested in talking to
00:32:03
you about. Simply drop me an email to jesse@b bestinterest.blog and let's start a conversation. And I've got two
00:32:10
more topics today, two more Buffett topics that I I just find really cool and special. You know, Buffett has
00:32:15
always had a great way of tackling issues where too few people understood the risk involved, but Buffett wasn't
00:32:21
afraid to speak up. One of my favorite examples of that is derivatives. Buffett once called derivative products
00:32:27
financial weapons of mass destructions. At its simplest, right, a derivative is a financial contract where the value of
00:32:33
that contract is derived derivative derived from something else. A stock, a bond, an index, currency, even the
00:32:40
weather. Common examples are options and futures and swaps. And I know I I've
00:32:44
given you the definition, but I haven't really explained it yet. You can think
00:32:47
of these derivatives as financial side bets. I could go out right now and I could bet $5 that Apple will reach $250
00:32:56
per share by a certain date. And if I'm right, depending on the way the contract
00:33:01
is structured, depending on what Apple's price actually reaches, if it's $ 250 or
00:33:05
if it's more, I could easily turn my $5 bet into $100. But if I'm wrong, then my
00:33:11
$5 bet goes to zero. That's a really simple example of an option. It's a side
00:33:16
bet on the future price in this case of a different financial instrument. I'm
00:33:20
not buying Apple stock itself. I'm betting on the price of Apple in the future. Simple example of an option.
00:33:26
Options can be used smartly to hedge risks. You know, if you're betting big on one thing, you might buy options that
00:33:34
kind of bet against that one thing in a different way just to hedge your risk. But more often than not, options are
00:33:40
used to speculate and to speculate wildly. They're used to gamble. And sometimes, as Buffett's seen, they can
00:33:45
be used to hide the truth. Buffett's concern isn't that derivatives exist.
00:33:49
It's how they're used and more precisely how misunderstood they are. And in 1982,
00:33:53
Buffett wrote a very famous letter. He responded to congressional discussions that were about approving futures
00:34:00
contracts, derivatives on the S&P 500 index. And at the time, Buffett was managing a $600 million equity
00:34:07
portfolio. He had 30 years of experience. and he wrote, "In my judgment, a very high percentage,
00:34:12
probably at least 95% and more likely much higher than that of the activity generated by these contracts will be
00:34:18
strictly gambling in nature." He foresaw that most activity in in derivatives
00:34:23
wouldn't be for hedging. It wouldn't be for long-term investing. It wouldn't be
00:34:27
for risk management. It would be purely speculative betting just like casino play. Buffett observed that low margin
00:34:35
requirements, they tempt people into risky bets. And just like the bet I explained before, if I can put $5 down
00:34:41
on Apple and turn it into $100 in a few months, that's a low margin requirement
00:34:46
and a risky bet. Buffett also said the unintelligent are easily seduced by taking tiny amounts of money to control
00:34:54
large bet positions. And that futures markets and options markets are a negative sum game. A negative sum game
00:35:00
because brokers collect high fees on every transaction. So those who are trading the options therefore must be
00:35:06
losing overall. And Buffett warned that speculative volume would tarnish the stock market's reputation. That casual
00:35:13
investors betting and gambling in this way would get burned and they would blame their losses not on the betting,
00:35:19
not on the speculation, but on stocks and the stock markets, right? They ought to be blaming the derivatives, but they
00:35:24
won't. They'll just blame the stock market as a whole. He argued that America needed long-term investors, not
00:35:30
widespread gamblers, and that futures contracts would hurt security prices. He said, "The propensity to gamble is
00:35:36
always increased by a large prize versus a small entry fee," which I think makes
00:35:40
sense, right? When you see the the the lotto sign on the billboard driving down the highway that the Powerball jackpot
00:35:46
is now 10 billion and you can go buy a Powerball ticket for five bucks, that's
00:35:51
a large prize versus a very small fee and it gets a lot of people to go and gamble. Buffett also said that futures
00:35:57
markets would be overwhelmingly detrimental to the security buying public. It's an amazingly preient letter
00:36:03
written 43 years ago, but helping to explain some of what we've seen in financial markets over recent years.
00:36:08
What follows for the next minute or so is one long quote. Buffett said, "You
00:36:13
will have people wagering as to the short-term movements of the stock market and able to make fairly large wages with
00:36:18
fairly small sums. They will be encouraged to do so by brokers who will see rapid turnover of customer capital.
00:36:24
the best thing that can happen to a broker in terms of his immediate income. A great deal of money will be left
00:36:30
behind by these 95% as the casino takes a bite of each transaction. We do not need more people gambling in
00:36:37
non-essential instruments identified with the stock market in this country, nor brokers who encourage them to do so.
00:36:42
What we need are investors and advisers who look at the long-term prospects for an enterprise and invest accordingly. We
00:36:48
need the intelligent commitment of investment capital, not leveraged market wages. The propensity to operate in the
00:36:54
intelligent pro-social sector of capital markets is deterred, not enhanced, by an
00:36:59
active and exciting casino operating in somewhat the same arena utilizing somewhat similar language and serviced
00:37:06
by the same workforce. Boom. Dropping the hammer on them, Warren Buffett. But I mean, I will say not to pick on Robin
00:37:13
Hood, but okay, I'm going to pick on Robin Hood a little bit. There are others out there. Robin Hood's probably
00:37:18
just the most well-known. When you can easily download an app, trade options, and you get confetti thrown at you on
00:37:25
screen for winning money, that feels like a casino, and that's not exactly the intelligent pro-social sector of
00:37:31
capital markets that Warren Buffett is referring to. So, good for Warren for taking a stand against derivatives and
00:37:38
often taking a vocal stand to explain things, especially risky things that other people uh in the markets weren't
00:37:44
either addressing, weren't aware of, or needed someone smart to come in and explain. And the last topic today, the
00:37:51
last Buffett ism that I think Buffett just added a lot of wisdom to over the years is trust and character and
00:37:58
reputation. Yes, he's the oracle of Omaha, a stock picker, a value investor,
00:38:03
a capital compounding savant. But his true edge isn't intelligence or investing acumen. It's trust and
00:38:10
character and reputation. Because once you've built a reputation for honesty
00:38:13
and reliability, people want to do business with you. As we've seen with Warren Buffett, they trust you with
00:38:18
their money, their careers, and their futures. And in a world full of spreadsheets and tickers and technical
00:38:23
one-upsmanship, Buffett reminds us that the most valuable asset doesn't really
00:38:27
show up on a balance sheet. It's your name. He said, "It takes 20 years to
00:38:31
build a reputation and 5 minutes to ruin it. If you think about that, you'll do
00:38:35
things differently." Buffett's entire empire at Bergkshire Hathway is built on
00:38:39
trust. It's not a coincidence. In fact, it's pretty remarkable that many of
00:38:44
Bergkshire's deals, especially those done in a hurry, they come together without term sheets, without endless due
00:38:50
diligence, without the legal footnotes. And as scary as that might sound in today's latigious world, those deals are
00:38:56
built on trust because people want to sell to Buffett. If you've ever listened
00:39:00
to some of the stories in some of the shareholders meetings, there are some giant companies that proactively reach
00:39:06
out to Buffett and they say, "We're selling and we want to sell to you." And
00:39:10
if you think about that, if you were in Buffett's position, you might say, "Boy,
00:39:14
if you're coming just to me, I'm going to offer you a really low ball price,
00:39:18
but that's not the case. Buffett would offer a fair price. These people are reaching out to Buffett. They want to
00:39:23
partner with him because they trust him to do what he says he'll do." From the
00:39:28
owners of the Nebraska Furniture Mart, one of the largest furniture stores in the country, to the family behind the
00:39:33
BNSF Railway, Buffett is known for keeping his word and treating these companies fairly, treating the people
00:39:39
fairly. He doesn't renegotiate terms down the line. He doesn't backstab. He
00:39:43
doesn't nickel and dime. When Buffett took over Solomon Brothers in the early
00:39:46
90s, 1991, he famously testified in front of Congress, "If you lose money for the firm, I will be understanding.
00:39:53
But if you lose a shred of reputation, I will be ruthless. Yes, profits are nice,
00:39:57
but integrity is more important. Integrity scales." When Buffett buys a company, he wants to leave the founder
00:40:03
or the CEO in place. You heard that right. Buffett doesn't want to start leading the company. He wants to leave
00:40:08
the management team in place. No micromanaging, no cultural transplant because he trusts the people he invests
00:40:15
in. And he only invests in people he can trust. One of his more famous lines is about this trifecta he looks for in a
00:40:21
business partner. He says, "We look for three things when we hire people. Intelligence, energy, and integrity.
00:40:27
Because if you don't have the last one, the first two will kill you." Again,
00:40:30
intelligence, energy, and integrity. If you don't have the last one, integrity,
00:40:35
the first two will kill you. You can't really outsource trust. You can't fake
00:40:39
character. You either have it or you don't. Eventually, the cream will rise to the top. And Buffett's entire
00:40:44
framework, his investing style, his management philosophy, his public image is built around filtering for that, for
00:40:50
that trust. You see it in his partnerships, like with Charlie Munger. It was a 60-year relationship that never
00:40:56
required a contract. You see it in the way Buffett handles Bergkshire Hathway's
00:40:59
annual meetings, right? Transparent and unscripted and honest even when it's
00:41:03
uncomfortable. You see it in the shareholder letters. He doesn't dodge the bad years or the bad performance. He
00:41:08
owns it. And in doing so, he earns even more trust. Back to the the Solomon brother scandal. When Buffett joined the
00:41:14
board in 1991 to help that firm survive, a major scandal it was going through involving illegal treasury trading.
00:41:21
Solomon's reputation was in the gutter and morale at the firm was crushed and
00:41:25
the feds were really circling in about to close the firm. And Buffett's fix to
00:41:29
that was to tell the truth and to take responsibility and to own the mistakes and rebuild the trust from the ground
00:41:36
up. And Solomon survived, albeit barely. But Buffett's message rang true beyond
00:41:41
Wall Street that reputation is a moat. And if you lose your reputation, you lose everything. Going back to branding,
00:41:48
Buffett's personal brand is so strong that tens of thousands of people flock
00:41:53
to Omaha every year to hear him talk for six hours about insurance and railroads
00:41:57
and seize chocolate candies because they trust him. They believe him. They want to learn from him, not just about
00:42:03
investing. They want to learn how to live. And that's the Buffett dividend. When you live by a trusted set of
00:42:08
principles, you attract people who want to live the same way. Your network improves, your opportunities grow, your
00:42:13
upside compounds, not because you're the smartest person in the room, but because
00:42:17
you're the one that people know they can rely on. What did Charlie Mer say? We
00:42:21
take the high road because it's less crowded. It's less crowded up there.
00:42:24
Now, the hard part is that trust takes years to earn and can take seconds to lose. And Buffett is careful with his
00:42:31
words. He's plain spoken, but never careless. He underpromises and overdelivers, admits mistakes, avoids
00:42:36
conflicts of interest. Crucially, he plays the long game. He didn't chase shortcuts. He didn't fall for shiny
00:42:42
gimmicks. He built slowly and steadily because he knew the compounding effect of trusts was just as powerful as the
00:42:47
compounding effect of capital and time. He said, "You can't make a good deal
00:42:52
with a bad person." And in a world obsessed with metrics and margins, Buffett reminds us that the most
00:42:57
important assets are invisible. It's your word and your reputation and your ability to be trusted. Not necessarily
00:43:03
sexy things. Certainly, they don't show up in quarterly reports, but they're the
00:43:07
bedrock of everything that Warren Buffett built at Bergkshire Hathaway. And if you want to play that long game
00:43:11
with money or with people or with your career, you'd be wise to follow his lead
00:43:15
because reputation doesn't just protect your downside, it opens doors that spreadsheets never could. So, Warren
00:43:21
Buffett, thank you very much for the lifetime of immortal lessons. Thanks for tuning in to this episode of Personal
00:43:27
Finance for Long-Term Investors. If you have a question for Jesse to answer on a
00:43:32
future episode, send him an email over at his blog, The Bestinest. His email address is [email protected].
00:43:39
Again, that's jessevestinterest.blog. Did you enjoy the show? Subscribe, rate,
00:43:45
and review the podcast wherever you listen. This helps others find the show and invest in knowledge themselves. And
00:43:52
we really appreciate it. We'll catch you on the next episode of Personal Finance
00:43:56
for Long-Term Investors. Personal Finance for Long-Term Investors is a personal podcast meant for education and
00:44:03
entertainment. It should not be taken as financial advice and it's not prescriptive of your financial
00:44:08
situation.