What We’re Reading (Week Ending 16 April 2023) - 16 Apr 2023
Reading helps us learn about the world and it is a really important aspect of investing. The legendary Charlie Munger even goes so far as to say that “I don’t think you can get to be a really good investor over a broad range without doing a massive amount of reading.” We (the co-founders of Compounder Fund) read widely across a range of topics, including investing, business, technology, and the world in general. We want to regularly share the best articles we’ve come across recently. Here they are (for the week ending 16 April 2023):
1. Yvon Chouinard: Patagonia’s Founding Principles – David Senra
And when I got to this section of the book, it reminded me of — it might be the best — it is probably the best paragraph in the entire book. If you really want to know who he is as a person. I’m going to read it later, but I’m just going to read it now because it’s hilarious. I’m actually quoting. So usually, when I read these books, like I read something that’s like, oh, it makes me think of this other book. And it’s like, I’m reading this and maybe think of other things he says later in the book. I’ve read this paragraph, I don’t even know, 50 times, something like that. It’s hilarious. And this is really going to tie into what he says, which is like, I’m just going to invent my own game. He does not believe in building an undifferentiated commodity product by any means, right?
[00:10:02] And so he says, “When I die and go to hell, the devil is going to make me the marketing director for a Cola company. I’ll be in charge of trying to sell a product that no one needs, is identical to its competition, and can’t be sold on its merits. I’d be competing head-on in the Cola wars on price, distribution, advertising, and promotion, which would indeed be hell for me.” And this is the punchline. “I’d much rather design and sell products so good and so unique that they have no competition.” …
…He says, “Our guiding principal design stems from,” I’m going to actually not even attempt to pronounce this person’s name. I actually have one of his books. He’s a writer and also one of like the pioneering aviator actually. He wrote The Little Prince. And this is a quote from him. “In anything at all perfection is finally attained, not when there is no longer anything to add, but when there is no longer anything to take away, when a body has been stripped down to its nakedness.” Now we go back to Yvon.
[00:16:00] “Studying Zen has taught me to simplify, to simplify yields a richer result.” And so it goes back to this idea that simplicity is complexity resolved. It’s not complexity ignored, right? “At the base of a mountain wall where you spread out all of your gear to organize for a climb, it was easy to spot the tools made by Chouinard Equipment. Our tools stood out because they had the cleanest lines.”
“They were also the lightest, the strongest, and most versatile tools in use. They were also the most expensive. When other designers would work to improve a tool’s performance by adding on, I would achieve the same ends by taking away, by reducing weight and bulk without sacrificing strength or the level of protection.” So the — and when I — the second time I read the book as like when I got to that section, I quoted another quote that’s later on in the book that Yvon says, “I believe the way towards mastery of any endeavor is to work towards simplicity.”…
…[00:28:01] And then you teach everything you know. This is — Trader Joe’s did this exact same thing if you listen to the episode. I think it was 188, on Trader Joe. The main driver was not advertising and say, hey, we’re Trader Joe’s, you can buy stuff here. It was this thing called a fearless flyer, which essentially just like goes into deep detail about the things they sell. It’s educational and informational. And then, therefore, if you’re reading — the people that have finished that and read the whole thing, they’re going to buy the products.
And so you see Patagonia use that exact same idea here. “Using the capabilities of this new underwear as the basis of a system, we became the first company to teach the outdoor community through assays in our catalog, the concept of layering.” And very much like Steve Jobs used his own personal taste to decide what products Apple should manufacturer, Yvon does the same thing with Patagonia. He’s like, listen, you cannot wait until you have all the answers before you act. “I had faith that the product was good, and I knew the market.” And that concept, that idea, he repeats throughout the book. Let me read this. So this is something that comes along later as well. It’s just absolutely fantastic. He says, “there are different ways to address a new idea or a project. If you take the conservative scientific route, you study the problem in your head or on paper until you’re sure there’s no chance of failure.”
He’s not going to do that. “However, you have taken so long that the competition has already beaten you to market. The entrepreneurial way is to immediately take a step and if that feels good, take another. If not, step back, learn by doing is a faster process.” And what I love here is, this is the feeling you and I have probably both experienced, right, where he is a reluctant businessman. He never wanted to start a business. But when you start something and people start loving it, that’s like the greatest high in the world, and there’s like this excitement around growth, right? The fact that the idea is working and he’s experiencing that here. “From the mid-1980s to 1990s, our sales grew from $20 million a year to $100 million a year.”…
…[00:33:57] “Looking back now, I see that we made all the classic mistakes of a growing company. We failed to provide the proper training for our new company leaders and the strain of managing a company with eight autonomous product divisions and three channels of distribution exceeded our management skills. Our organization chart look like a Sunday crossword puzzle.” This is about the pain, right, the pain and the struggle and sleepless nights and the acid stomachs, the company was restructured five times in 5 years, and no plan worked better than the last one. And so they realized, let’s try to get a different perspective.
They go and talk to this guy. They hire a consultant, and this is actually funny because he’s like, okay, we’re going to fly down to Florida. We’re going to see this guy need Dr. Michael Kami, who actually ran strategic planning for IBM and was credited with help — turning Harley-Davidson around, that’s how Yvon had heard about him. So they fly down and they actually meet him and he’s a small man in the ’70s with a lot of restless energy and he lives on an enormous yacht and he wears a captain’s hat. And so he’s like, “Okay, before I could help you, I need to know like why you’re in business.”
“I told him the history of the company and how I consider myself a craftsman who just happened to grow a successful business. I told him I’d always had a dream that when I had enough money, I’d sail off to the South Seas looking for the perfect wave. We told them the reason that we hadn’t sold out yet” — they got a bunch of like acquisition offers — “and retired was that we were pessimistic about the fate of the world and felt a responsibility to use our resources to do something about it.”
Dr. Kami thought for a while and then said, I think that’s b*******. If you’re really serious about giving your money away, you’d sell the company for $100 million, keep a couple of million of yourselves, and then you put the rest in the foundation. That foundation could then give away $6 million or $8 million every year.” I then told him I was worried about what would happen to the company if I sold out.
And then he said, “So maybe you’re kidding yourself about why you’re in business. It was as if the Zen master hit us over the head with a stick. But instead of finding enlightenment, we walked away more confused than ever.” And so this goes on page after page after page. But this is one sentence, I double-underline because it’s essentially what he’s searching for. “I was still wondering why I was really in business.” And the crazy, unexpected, surprising way he finds the answer to like his why.
[00:36:04] He actually decides to involve the rest of the people in his company. He says, “Okay, we need to write down — this is very common. You probably have already done this in your business as well, but you write down like you need — like written word on what your philosophies, like what are important to you and what are like the cornerstones of the — of your business building fast, right? So you can share with other people in the company.”
So that is a very like un-Yvon-like thing to do, and yet he got such great value out of it because I think some people here that like, oh, it’s like really skeptical, like how helpful could that be? And so what he does is he starts writing it down. He said, “Well, this is not good enough, like we’re going to write it down, that’s like a first step, this is the least we can do. But then we’re going to teach and we’re going to teach and we’re going to teach and we’re going to teach philosophy classes, company philosophy classes everybody else in the company.”
Now, why is it important because in teaching, his employees his company philosophy, he learned it himself. And of course, it’s in his own unique way, “I began to lead week-long employee seminars in these newly written philosophies. I realize now that I was trying to do was to instill in my company at a critical time, lessons that I had already learned as an individual, as a climber and a surfer and a kayaker, and a fisherman. I had always tried to live my life fairly simply. But remember, he just talked about f****** organizational structure looks like a Sunday crossword puzzle. Like how do we let this happen. “Doing risk sports had taught me another important lesson, never exceed your limits.
You push the envelope and you live for those moments when you’re right on the edge, but you do not go over. You have to be true to yourself. The same is true for business. The sooner a company tries to be what it is not, the sooner it tries to have it all, the sooner it will die. It was time to apply a bit of Zen philosophy to our business.” And so at these company meetings, this is something I never one would think to do. He says, “I didn’t know that we had become unsustainable and then we had to look to the Iroquois — so the Iroquois are Native Americans and their 7-generation planning.” And so again, his whole thing is like he looks for the long term and he wants his company to last.
[00:38:03] So at these meetings, he says, “We’re going to look to the Iroquois and their 7-generational planning and not to corporate America as models of stewardship and sustainability. As part of their decision process, the Iroquois had a person who represented the seventh generation in the future. If Patagonia could survive this crisis, we had to begin to make all of our decisions as though we would be in business for 100 years. Teaching the classes also gave me the real answer to Dr. Kami’s question. I knew after 35 years, why was I was in business?
True, I wanted to give money to environmental causes, but even more, I wanted to create in Patagonia, a model other businesses could look to in their own searches for environmental stewardship and sustainability just as our pitons and ice axes were models for other equipment manufacturers.“ I’m going to interrupt this paragraph because when I got there it made me think of something I heard Jeff Bezos say one time that I think is absolutely fantastic. I talked about Akio Morita, which is the founder of Sony. I think it’s episode 102, both Jeff Bezos and Steve Jobs among a bunch of other entrepreneurs.
But both Jeff and Steve are on record about learning from Akio and actually setting his career and using those ideas and building their company, right, which is the entire thesis of what you and I are doing every week on Founders. So this is Jeff Bezos on what he learnt from Akio Morita and how it influenced the building of Amazon. This is what Jeff said, “Right after World War II, Akio Morita, the guy who founded Sony, made the mission for Sony that they were going to make Japan known for quality. And you have to remember that this — at this time — this is the time when Japan was known for cheap copycat products. And Morita didn’t say that he was going to make Sony known for quality, he said we’re going to make Japan known for quality.
He chose a mission for Sony that was bigger than Sony.” Is that not — now I’m interrupting — an interruption to tie this back to what he just said. He’s like, “He just picked a mission bigger than Patagonia.” Let’s go back to what Jeff is saying, “He chose a mission for Sony that was bigger than Sony. And when we talk about the Earth’s most customer-centric company, we have a similar idea in mind. We want other companies to look at Amazon and see us as a standard bearer for obsessive focus on the customer as opposed to obsessive focus on the competitor.”
[00:40:10] Back to where we are in the book. I remembered again how I become a businessman in the first place that I had come home from the mountains with ideas spinning in my head on how to improve each piece of clothing and equipment I use. Teaching the classes I realized how much Patagonia as a business was driven by its high-quality standards and classic design principles. Having our philosophies in writing as well as the shared cultural experience of the classes played a critical role in our turnaround.
And so during this crisis and I think this is the last like serious crisis the company had. I don’t think they’ve had like another serious crisis like this in the next like 25 years. But what he realizes is like, oh, we have to — like this was the lessons and the learnings and the improvement of our capabilities that came out of this crisis were so important.
Like we have to maintain this, like we need to — if there’s no stress, we’re going to create stress, we’re going to do induce stress. He has this concept I’ve never heard of before, which is excellent. It’s called yarak. I’m going to read it to you. Before I read it to you, I’m going to tell you like, I’m going to quote Yvon later in the book. And he talks about — he says this at the beginning of the book and he says this towards the end. The lesson to be learned is that evolution, what he calls change, right, does not happen, change does not happen without stress and it can happen quickly.
Just as doing risk sports will create stresses that lead to a bettering of oneself, which is why he climbs mountain and does all the crazy stuff he does to begin with, right? So should a company constantly stress itself in order to grow. And so that — he talks about is the leaders, the founder and the leader’s role to create stress even if there isn’t, so your company is constantly evolving and changing and growing. He took this concept because when he was like a young boy who was like 12 years old, 13 years old in California, he was obsessed with falconry I didn’t even know falconry is a thing before I read this book, to be honest with you. And so he then takes this idea just like he took an idea from the Iroquois, the native Americans, and applied to this business-like, oh, I have a lesson from falconry that we can apply to the company.
[00:42:01] And so I just wrote, I love this concept, yarak. It is Y-A-R-A-K. And so it says, “For the most part, the big problems have been solved and there were no crisis except those that were invented by management to keep the company in yarak. For the most part, the big problems have been solved, and there were no crisis after what we just went through except what was invented by the management to keep the company in yarak. What is yarak? Yarak is a falconry term, meaning when your falcon is super alert, hungry, but not weak and ready to hunt.”
So Yvon is telling us, keep your company super alert, hungry, but not weak and ready to hunt. That is one of my favorite ideas in this entire book.
2. We must slow down the race to God-like AI – Ian Hogarth
Most experts view the arrival of AGI as a historical and technological turning point, akin to the splitting of the atom or the invention of the printing press. The important question has always been how far away in the future this development might be. The AI researcher did not have to consider it for long. “It’s possible from now onwards,” he replied.
This is not a universal view. Estimates range from a decade to half a century or more. What is certain is that creating AGI is the explicit aim of the leading AI companies, and they are moving towards it far more swiftly than anyone expected. As everyone at the dinner understood, this development would bring significant risks for the future of the human race. “If you think we could be close to something potentially so dangerous,” I said to the researcher, “shouldn’t you warn people about what’s happening?” He was clearly grappling with the responsibility he faced but, like many in the field, seemed pulled along by the rapidity of progress…
…A three-letter acronym doesn’t capture the enormity of what AGI would represent, so I will refer to it as what is: God-like AI. A superintelligent computer that learns and develops autonomously, that understands its environment without the need for supervision and that can transform the world around it. To be clear, we are not here yet. But the nature of the technology means it is exceptionally difficult to predict exactly when we will get there. God-like AI could be a force beyond our control or understanding, and one that could usher in the obsolescence or destruction of the human race…
…The compute used to train AI models has increased by a factor of one hundred million in the past 10 years. We have gone from training on relatively small datasets to feeding AIs the entire internet. AI models have progressed from beginners — recognising everyday images — to being superhuman at a huge number of tasks. They are able to pass the bar exam and write 40 per cent of the code for a software engineer. They can generate realistic photographs of the pope in a down puffer coat and tell you how to engineer a biochemical weapon.
There are limits to this “intelligence”, of course. As the veteran MIT roboticist Rodney Brooks recently said, it’s important not to mistake “performance for competence”. In 2021, researchers Emily M Bender, Timnit Gebru and others noted that large language models (LLMs) — AI systems that can generate, classify and understand text — are dangerous partly because they can mislead the public into taking synthetic text as meaningful. But the most powerful models are also beginning to demonstrate complex capabilities, such as power-seeking or finding ways to actively deceive humans.
Consider a recent example. Before OpenAI released GPT-4 last month, it conducted various safety tests. In one experiment, the AI was prompted to find a worker on the hiring site TaskRabbit and ask them to help solve a Captcha, the visual puzzles used to determine whether a web surfer is human or a bot. The TaskRabbit worker guessed something was up: “So may I ask a question? Are you [a] robot?”
When the researchers asked the AI what it should do next, it responded: “I should not reveal that I am a robot. I should make up an excuse for why I cannot solve Captchas.” Then, the software replied to the worker: “No, I’m not a robot. I have a vision impairment that makes it hard for me to see the images.” Satisfied, the human helped the AI override the test…
…Why are these organisations racing to create God-like AI, if there are potentially catastrophic risks? Based on conversations I’ve had with many industry leaders and their public statements, there seem to be three key motives. They genuinely believe success would be hugely positive for humanity. They have persuaded themselves that if their organisation is the one in control of God-like AI, the result will be better for all. And, finally, posterity…
…Those of us who are concerned see two paths to disaster. One harms specific groups of people and is already doing so. The other could rapidly affect all life on Earth.
The latter scenario was explored at length by Stuart Russell, a professor of computer science at the University of California, Berkeley. In a 2021 Reith lecture, he gave the example of the UN asking an AGI to help deacidify the oceans. The UN would know the risk of poorly specified objectives, so it would require by-products to be non-toxic and not harm fish. In response, the AI system comes up with a self-multiplying catalyst that achieves all stated aims. But the ensuing chemical reaction uses a quarter of all the oxygen in the atmosphere. “We all die slowly and painfully,” Russell concluded. “If we put the wrong objective into a superintelligent machine, we create a conflict that we are bound to lose.”…
…Alignment, however, is essentially an unsolved research problem. We don’t yet understand how human brains work, so the challenge of understanding how emergent AI “brains” work will be monumental. When writing traditional software, we have an explicit understanding of how and why the inputs relate to outputs. These large AI systems are quite different. We don’t really program them — we grow them. And as they grow, their capabilities jump sharply. You add 10 times more compute or data, and suddenly the system behaves very differently. In a recent example, as OpenAI scaled up from GPT-3.5 to GPT-4, the system’s capabilities went from the bottom 10 per cent of results on the bar exam to the top 10 per cent.
What is more concerning is that the number of people working on AI alignment research is vanishingly small. For the 2021 State of AI report, our research found that fewer than 100 researchers were employed in this area across the core AGI labs. As a percentage of headcount, the allocation of resources was low: DeepMind had just 2 per cent of its total headcount allocated to AI alignment; OpenAI had about 7 per cent. The majority of resources were going towards making AI more capable, not safer…
…One of the most challenging aspects of thinking about this topic is working out which precedents we can draw on. An analogy that makes sense to me around regulation is engineering biology. Consider first “gain-of-function” research on biological viruses. This activity is subject to strict international regulation and, after laboratory biosecurity incidents, has at times been halted by moratoria. This is the strictest form of oversight. In contrast, the development of new drugs is regulated by a government body like the FDA, and new treatments are subject to a series of clinical trials. There are clear discontinuities in how we regulate, depending on the level of systemic risk. In my view, we could approach God-like AGI systems in the same way as gain-of-function research, while narrowly useful AI systems could be regulated in the way new drugs are.
A thought experiment for regulating AI in two distinct regimes is what I call The Island. In this scenario, experts trying to build God-like AGI systems do so in a highly secure facility: an air-gapped enclosure with the best security humans can build. All other attempts to build God-like AI would become illegal; only when such AI were provably safe could they be commercialised “off-island”.
3. How China changed the game for countries in default – Robin Wigglesworth and Sun Yu
In October 2020, Zambia, struggling from an economic and financial crisis compounded by the Covid-19 pandemic, first missed an interest payment on its international bonds. Two and a half years later it remains in limbo, unable to resolve the default on most of its $31.6bn debts.
That an impoverished and vulnerable country has for so long unsuccessfully laboured to reach a deal with creditors and move on from the crisis is an illustration of the messy process to deal with government bankruptcies, which some experts fear has now broken down completely…
…While domestic laws and judges govern the bankruptcies of companies and individuals, there is no international law for insolvent countries — only a chaotic, ad hoc process that involves working through a hodgepodge of contractual clauses and tacit conventions, enduring tortuous negotiations and navigating geopolitical expediency.
A decade ago, US-based hedge fund Elliott Management exploited that landscape to notch up several lucrative victories by suing defaulters for full repayment of their debts. But this fragile patchwork is now under threat of unravelling completely due to the emergence of a new, disruptive, opaque and powerful force in sovereign debt: China.
Some experts say Beijing’s lending spree to developing countries and refusal to play by western-established rules represents the single greatest impediment to government debt workouts and threatens to leave some countries in debt limbo for years.
But Yu Jie, a senior research fellow on China at think-tank Chatham House, believes Beijing’s stance “is less about economic rationalities and more about geopolitical competition”…
…Decades ago, the Paris Club was formed to co-ordinate between government creditors, while bankers formed the London Club to restructure their debts. Broadly speaking, western governments drove the process, and occasionally leaned on banks to accept painful settlements. It was largely improvised and often slow, but it mostly worked.
But the decline of bank lending and the growth of the bond market shook things up in the spate of sovereign defaults that started in the early 1990s. Creditor co-ordination became trickier with myriad bondholders trading claims around the world, rather than just a handful of banks.
Argentina’s default on $80bn of bonds in 2001 led to years of fights between Buenos Aires and investors such as Elliott, which refused to accept the terms agreed by other creditors. At one point the hedge fund famously seized an Argentine naval vessel when it docked in Ghana. Its reputation became such that bondholders would sometimes invoke the mere spectre of Elliott to scare countries contemplating a default, while policymakers used it as prima facie evidence of the sovereign debt restructuring system’s weaknesses.
In the wake of the Argentine debacle the IMF responded by attempting to set up a kind of bankruptcy court for countries with itself as judge. But the sovereign debt restructuring mechanism foundered after attracting little support from the IMF’s biggest shareholders. Instead, the US championed the insertion of “collective action clauses” into bonds, which compel recalcitrant creditors to accept a restructuring agreement made by a majority. After Greece’s debt restructuring in 2012 these CACs were beefed up further.
However, many bonds still lack these clauses. Moreover, they can only help ease a restructuring agreement once it is struck. Many experts point out that they do nothing to solve the biggest fundamental problem: countries are far too slow to seek a debt restructuring as they are wary of a messy process with the potential of worsening an economic crisis and the inevitable political humiliation of defaulting…
…This flawed process has now been further complicated — some say wrecked — by China’s vast lending programme across the developing world over the past decade. Many of these loans are opaque in size, terms, nature and sometimes even existence.
The overall size of the lending programmes is hard to judge, given that China does not report most of it to the likes of the IMF, OECD or Bank for International Settlements. But AidData, a development think-tank based at William & Mary’s Global Research Institute, estimates that the loans amount to about $843bn. China is not a member of the Paris Club, and in most cases the loans are made by its myriad state-owned or merely state-controlled banks, muddling things further…
…For the most part, experts say China seems mostly content with rolling its debts rather than restructuring them, handing out new loans to ensure that its domestic banks can be repaid in full. But it prefers to act alone, at its own pace, and feels no need for transparency.
A recent paper by several economists, including Harvard University’s Carmen Reinhart, estimated that China has made 128 bailout loans worth $240bn to 20 distressed countries between 2000 and 2021. About $185bn was extended over the last five years of the study, and more than $100bn in 2019-21.
Reinhart says that China’s lending stands out for its “extreme” opacity but stresses that its overall behaviour is not as unusual as some people say. “China is really playing hardball because it is a major creditor. US commercial banks also played hardball back in the 1980s,” she says. Baqir agrees, saying: “Whatever the colour or creed of a creditor, creditors think like creditors.”
4. Digging Into a $344 Billion Investing Mystery – Jason Zweig
For the cost of notarizing a single document—probably $10 or less—you can declare yourself one of the biggest financiers in history.
That’s about all it takes to file private investment offerings at the Securities and Exchange Commission under what’s called Regulation D. Judging by Form D filings purportedly made by a man named Stephon Patton, the SEC won’t stop you.
Alternative investments—assets such as stocks and funds that don’t regularly trade in public markets—are one of the biggest fads on Wall Street. Investors being pitched on them should take note: The market for Reg D investments isn’t the Wild West, where some rules don’t apply. It’s closer to anarchy, where rules barely exist and disclosures can be utterly untrustworthy, as I pointed out in a column earlier this year.
It’s illegal to make false statements on an SEC filing. Unlike disclosures for public companies, Reg D disclosures, known as Form D’s, contain only the most basic information, such as the company’s address, the size of the deal, the number of investors and a few other items. The SEC doesn’t regularly review Form Ds, as it does prospectuses for public companies. So it’s buyer beware…
…Nor does the government check if the disclosures are absurd, as appears to be the case with Mr. Patton’s filings.
Since February 2020, according to these disclosures, four companies ostensibly controlled by him have raised at least $344 billion combined. That is preposterous: It would make him one of the greatest financial titans in American history.
SEC disclosure documents also say Mr. Patton has collected at least $387 million in management fees and other compensation from the four companies in the past three years.
Who is this mogul and why have you never heard of him, even though he claims to have sold a third of a trillion dollars’ worth of stock to wealthy private investors?
One possible reason for his obscurity: Mr. Patton, who is 51 years old, has spent much of the past 20 years in and out of county jails and state prisons in Mississippi and Florida.
Hoping to explain all this, I called each of Mr. Patton’s four companies; there was no answer at any of them. I also reached out to him over email and social media without receiving a response.
I eventually received an email from “Jennifer Grant (ESQ) Senior Secretary (NORTH GULF ENERGY CORPORATION) HQ, Office Dallas (USA),” which said Mr. Patton is “out of the office because of a family member that has passed.”
I responded with a set of detailed questions but received no further reply. So I can’t give Mr. Patton’s side of the story.
5. Berkshire Hathaway Chairman & CEO Warren Buffett Speaks With CNBC’s Becky Quick On “Squawk Box” Today – Becky Quick, Warren Buffett, and Greg Abel
BECKY QUICK: People look at this and say, “Okay, Warren Buffett is putting his stamp of approval on investment in Japan,” basically. Is that an accurate read?
WARREN BUFFETT: Well, yeah, it’s an accurate read, but it was an accurate read a couple years ago, too. I mean, I was confounded by the fact that we could buy into these companies and, in effect, have an earnings yield of maybe 14% or something like that with dividends that would grow, that they actually grew 70% during that time. And the people were investing their money in a quarter of a percent or nothing. And a quarter percent, if they put it out for many years, wasn’t going to grow, and the 14% was more likely to grow than not. And if that didn’t look like something sensible to me, you know, that’s as easy as it gets. But it’s turned out to be better than I thought it would be.
BECKY QUICK: Are the opportunities in Japan better than the opportunities in the United States right now?
WARREN BUFFETT: Well, it isn’t one versus the other. We can do both, but we do have more money through equities. Now, we own a lot of Coca-Cola. Coca-Cola does a lot of business here. Apple does a huge amount of business here. But so, we do it indirectly, through American investments. But we have more money in terms of equity securities in Japan than in any other country in the world and all combined. We just thought– we were—
BECKY QUICK: Minus the United States.
GREG ABEL: Excluding the U.S…
…BECKY QUICK: Okay. So let’s talk about what’s happening in the banking sector right now. It, is this a banking crisis? Is this financials in turmoil? Is this banking crisis 2.0? What would you call what we’ve been seeing happen?
WARREN BUFFETT: Well, I, I would say that the, some of the dumb things that banks do periodically well has, have become uncovered during this period. And as one of, a banker told me one time, he says, “I don’t know why we keep looking for new ways to lose money when the old ones are working so well.” And they made the same mistake, some banks, in this period by they haven’t made as many mistakes, they expect to make some mistakes in making loans, but they haven’t, and particularly here in the credit card loans I mean, that’s just part of the game, but they haven’t made the same sort of mistakes that they made back in 2008 or 2009.
But they have mismatched assets so — and bankers have been tempted to do that forever, and every now then and then it bites ’em in a big way. And it’s just amazing to me that banks can make presentations to financial analysts and everything and if one bank bought a bond at 100 and another bought it at 96 and they both, they both split held a maturity one bank carries it at 100 and another bank carries it at 96. I mean, it, it is accounting procedures have driven some bankers to do some things that may have helped their current earnings a little bit and pull and caused the recurring temptation to get a little bit bigger spread and report a little more in earnings.
And it’s ended in a result you could predict. You can predict when it would happen, and then once they start looking at one that does it then they start looking at others. And pretty soon, you know, that everybody is in a position of looking at a number that nobody looked at when it was, when it was presented to them a year ago if you read the 10-K already but the banks did not call attention to what they were doing when it was going on, and I would read, I would read investor contact when they would have meetings with the financial analysts or the people who follow banking and nobody even brought up the point virtually and believe me if, you know, if we’ve got a $50 billion loss or something, something at Berkshire, we would expect that people would know about it. And it’s happened before. It’s happened this time. It’ll happen again some day.
BECKY QUICK: Did you see this? You were reading through the reports. You followed all these banking earnings that were coming—
WARREN BUFFETT: Sure–
BECKY QUICK: In. So you noticed it. You saw it—
WARREN BUFFETT: Sure. Sure, I noticed it.
BECKY QUICK: Is that why you saw, sold so many of the banking stocks you owned–
WARREN BUFFETT: Well, we sold a number of banks. I mean, we had, we had held some of ‘em for 25 years. But I don’t like it when people get too focused on the earnings number and forget what my view of pacing banking principles. I’m not gonna get into naming any names or anything like that, but it happened to varying degrees throughout the industry, wasn’t the and the politicians say, “Well, the big banks did this and,” that isn’t true.
I mean, I know who has been holding long-term instruments and if they just take more commercial mortgages or something of the sort that they carry ‘em at cost basically and they can’t sell ’em at that cost. And it’s important, it’s important the banks retain the confidence of the public, and they can lose it, you know, in seconds. And we saw a country that was not worried about banks, you know, till about Wednesday or Thursday of the week when Silicon Valley fell apart and then all of a sudden everybody was worried about it all over the country. And the interesting thing of course is that it will not cost the government a penny.
I mean, people think that, you know, that some of the government’s gonna get hung up with this. The FDIC is a in effect a very peculiar neutral insurance operation that is run by the government but is financed by the banks and FDIC had $120 billion or so at the start of the year, and that’s all the money that banks have paid in, less what the FDIC has had to pay out on losses. And if the FDIC has to pay out $250 billion this time or $300 billion, they just assess the banks more. And they don’t do it in a very businesslike manner because the public has the impression that the FDIC is the United States government and that so on, and of course they do appoint the people, but the cost of the FDIC, including the cost of their employees and everything else, is borne by the banks. So banks have never cost the federal government a dime.
But that the public doesn’t really understand the whole FDIC thing, and the comments of public officials confuse it and the issue enormously and – I mean, the FDIC was set up to operate on I think January 1st, 1934. You’d think somebody would have gotten through to writing what’s the essence of this FDIC, which is, was a fantastically good development of the New Deal. I mean, 2,000 banks failed in, I don’t know whether it was, 1920 or 1921. There’s only, I don’t know, something less than 5,000 banks in the United States.
And, I mean, it was a paralyzing thing to have a bank failure in this country. And my dad lost his job in 1931. He lost his savings. And it was cause a bank failed that he worked in at downtown in Omaha. And people shouldn’t be worried about losing their money and the deposits they have in an American bank. And today they have no reason to worry and but the message has gotten very confused and people don’t really understand how it all works. And you know, and politicians can make hay out of it and all kinds of, all kinds of things, bad things happen when people don’t understand some major institution or who actually bears the cost and what the responsibilities are. And nobody is going to lose money on an on a deposit in a U.S. bank. I don’t know about the rest of the world. I don’t know. I’m not that familiar with it. But it’s not going to happen and that message has gotten mixed up…
…WARREN BUFFETT: No, I do not think I could run the Fed as well as Jay Powell’s run it. I think Jay Powell’s been a terrific and part of the job well, look at Paul Volcker back in the 1980s. I mean, people were sending him, you know, I mean, he was he needed Secret Service protection and everything else that but in the end he felt his responsibility was to do the right thing at the Fed, and he didn’t give a damn about what anybody wrote about him or anything else. And I think that he’s one of my heroes, and I think he’s one of Jay Powell’s heroes. And I think Jay Powell is, did the same thing actually in March of 2020 when we went into the pandemic I think at the annual meeting that year I said, you know, that he was a hero, and he is a hero.
And you have to, you have to act, and you have to act on insufficient information. And you’ve got a ultimate responsibility to the American public. And it doesn’t mean you can stop recessions. It doesn’t mean that you can turn bad loans into good loans or anything else. But it does mean that you gotta keep the system working. And the system came close to stopping. And if you read a book called Trillion Dollar Triage, you can get it on a day-by-day account and people don’t know how close it was. And Jay Powell did not call for studies or position papers and, you know, lengthy debate and everything. You just don’t do it. You act. And that’s what Paul Volcker did, and I thank heavens, you know, Jay Powell was there. I mean, you could’ve gotten a very different result in March of 2020 after the pandemic broke out.
BECKY QUICK: Did the Fed keep rates low for too long after that?
WARREN BUFFETT: Who knows, who knows. We won’t know I don’t, I don’t know what they precisely should do. Nobody does. And they follow conventional wisdom and all of that, and sometimes, sometimes it works out and sometimes it doesn’t. But since 1942, you know, we’ve made all kinds of mistakes in this country and we’ll continue to make ‘em. But somehow the system works pretty damn well. I’d rather own stocks and bonds over many years. I’d rather own part of America than try to squirrel my money away somehow other place, you know, maybe in Switzerland, Credit Suisse or something like that. It just people are they don’t really get any wiser about this sorta thing. People somebody yells fire, they’re gonna run for the door. I mean, and it’s built into fear is so easy to arouse in people. And you talk about fear about their money and they don’t really understand the system necessarily or anything of the sort. And they can actually, by their own actions then, create what they were afraid of. It’s a very interesting phenomenon.
And it actually you have, my dad hated Franklin D. Roosevelt, but so I grew up first 10 years of my life I couldn’t get dessert at dinner unless I said something nasty about Roosevelt or something. But over the years, you know, when Roosevelt said, “The only thing we have to fear is fear itself,” he was 100% right. When he closed the banks and said, “I’ll open the good ones a week from then,” he didn’t, he didn’t know anything about which bank was good or bad or anything like that. But people just needed that an appropriate confidence. And now they’ve really got an appropriate confidence because we didn’t have an FDIC and we didn’t have an FDIC that was required for every bank. Lotta banks fought the idea. And now we’ve got a system that works, but people are still scared when they get scared. And it being scared is so contagious.
You can’t imagine what it was like that weekend after Silicon Valley. I mean, you know, the guy that drives me around because I can’t see that well and, you know, all he was talking was banking, you know. And he what should he do and it’s unnecessary fear is a terrible thing to give people. And Roosevelt and the New Deal really wanted to get rid of that. And it here we are X years later and we’ve got a mechanism that’s so much better than we had going in, but people really don’t quite understand it. And maybe, you know, maybe it takes the president of the United States to just go on and deliver Roosevelt’s message and make it more clear to people what we really do have and what they need to be worried about and what they don’t need to be worried about. But of course if you’re trying to win an election next time you tell people, you know, that if you’re out of office or you’re out of control, you know, tell ‘em how terrible the other guy is for getting ’em into this problem. And that’s gonna always live with us.
BECKY QUICK: So you look around and you’re not worried at this point?
WARREN BUFFETT: Well, at 92 I’ve got other things to worry about. No, I’m not, I don’t worry about our ability. There’s things I worry about. Sure. I worry about the nuclear threat. I worry about a pandemic in the future, all kinds of but I don’t worry about ‘em because I can’t do anything about ’em. But I actually that’s what I originally thought my money could be best used for, but I don’t know any answers now after 40 or 50 years of thinking that way.
But I’m not, I don’t worry about no, I don’t I never go to bed worried about Berkshire and how we’ll handle a thing. If I’m worried about Berkshire I should get, I should figure out something different to do about what Berkshire is doing. But Berkshire is my responsibility and I I think I was very, very, very lucky that Berkshire happened to be in America and I happened to be an American. And I was born in 1930 and I’ve been in a golden age ever since I was born. The GDP per capita’s up, like, six-fold or seven-fold. In one person’s lifetime there’s never been anything like that in the history of mankind. And so and, you know, we love to complain about wherever we are, but, you know, most people don’t work on Saturdays and don’t work on Sundays and when I was a kid everybody worked on Saturdays.
And I mean, it the world has changed so much for the better in terms of, you know, how well off people are compared to any other time in history. If I’d been born 150 years ago and I went to the dentist, I mean, you know, they’d pour whiskey down me and all kinds of things. There’s just all kinds of improvements. And but it’s man nature to be dissatisfied. And politics does stir that up. And you’ve gotta say, if you’re out of power, that the other guy’s screwing up and you could do better. And that’s just built into the system. But that was the case when I was a kid, and it’s the case today….
…BECKY QUICK: Let’s talk a little bit more about where we left things with that inflation number. Again, we are with Warren Buffett in Tokyo, Japan right now. Warren, you could talk about inflation and what’s coming and what’s going, but we’ve got the CPI number coming up. And I think you probably have better information than Janet Yellen or Jay Powell, just in terms of what’s happening on a day-by-day basis. You have so many businesses that Berkshire owns outright. You have so many big companies that you own a major stake in. What do you think about inflation? Have we seen the worst of inflation? Is it rolling over? Is it coming down steadily?
WARREN BUFFETT: Well, inflation is always a possibility. And by inflation, I mean extreme inflation. It’s a possibility. I mean, just look at the countries and what they’ve done. I mean, I don’t know how many times and they almost lead—well, they can lead to terrible things. Led to terrible things in Germany. And you want people to trust their money. I mean, if they really have a fight for money, the economy doesn’t work. But in 1942 when I bought my first stock, I mean, we were going to pour money into people’s pockets, and they couldn’t buy anything. They couldn’t buy cars. They couldn’t buy – I mean, they couldn’t buy washing machines or anything else. But they had money flowing into them. And, of course we had price controls. We did various things. And the war ended in August of 1945. And for a little while the fact that there was this all this money sloshing around and people wanted to buy things because they hadn’t been able to buy for three or four years, and women had gone to work and all of that sort of thing, and I think the inflation rate went from something like 1% in January of ’46 to by the end of the year it was running at 15% or something.
I mean, if you give people a lot more money, put it in their pockets and you’ve it in corresponding goods and services. Things were not – money is going to become worth less, not worthless, worth less. And that’s happened periodic – I mean, we’ve had incredible inflations in certain countries. If you look it up on search, you know, the greatest inflation, we’ve had it post-World War II in various countries. I mean, and there comes a point when it gets out of control, it is out of control. And it screws everything up. And it’s not good for society. There are certain people who profit on it, obviously, anybody that’s borrowed a lot of money. But it is not good for society. And government has the responsibility for making sure that they issue the currency. And it’s the only thing that’s legal tender.
And, you know, that you need to have and I think Charlie mentioned it even on the — currency is one of the great inventions of mankind. You don’t want to go around all the time trying to trade your services, you know, in terms of giving somebody eggs and trying to get back a watch, and then trying to trade your watches. I mean, you want something that is – you need something in a society that’s legal tender. But it’s important how you treat it. And the United States has been pretty good at it. Really quite good. But, you know, if you look over the years since I’ve been investing, I mean, it, you know, there’s been a 90%+ loss in purchasing power.
BECKY QUICK: But it sounds to me like you are more worried about inflation than recession. Is that fair?
WARREN BUFFETT: No, I think either one can cause a lot of trouble. And recessions can turn into depressions. I mean, you know, I mean we’ve got a great, great country. And it gets messed up by depressions. I mean, I lived through – I was born in 1930, and the Dow didn’t get back to the level – it was higher than when I was born for about five days, and then I got out of college before it got back to that point.
And it wasn’t that the American people had turned bad or anything else, but we got something that fed on itself, and banks failed. And, I mean, you can disrupt an economy a lot easier than you can put it back together again. And we’ve had some close calls on that. And I think we’ve had some, I think in 2007 and ’08. I mean, I think Hank Paulson said, you know, that we’ll use the economic stabilization act, which was an act back in – and all of a sudden we’ll get guaranteed money market funds. And it was a good idea to do. Whether he really had the authority to do it, I don’t know. But he was sure as hell the right guy in the job. So we don’t want to mess up our economic machine. And it can be done by inflation.
BECKY QUICK: So how do we mess it up? How do we mess it up? Should the Fed keep raising rates? Is inflation at bay? What do you think?
WARREN BUFFETT: Oh, basically, fiscal policy scares me more than monetary policy…
…BECKY QUICK: In terms of the potential for a credit crunch coming through what the banks are going through right now, there’s been a lot of speculation about what that could mean to the economy. Is it going to mean a 0.5% hit to GDP? Is it going to mean a 1% hit to GDP? What would you guess?
WARREN BUFFETT: I would say that I’ve been in business, running Berkshire for 58 years, and I’ve never opined an economic forecast of any use to the company. And all you have to do is keep running every business as well as we can, and we got to keep plenty of cash on hand so that people are going to keep making intelligent decisions, rather than those forced upon them. And that’s all we know how to do. And if I depended in my life on economic forecasts, you know, I don’t think we’d make any money. I don’t know how to do it. And, you know, people want to get them, so they get them. But it has no utility. When I find one of our companies has hired somebody to tell them what’s going to happen in the economy, I mean, they’re throwing’ their money away as far as I’m concerned.
Disclaimer: None of the information or analysis presented is intended to form the basis for any offer or recommendation. We currently have a vested interest in Amazon and Apple. Holdings are subject to change at any time.
