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Warren Buffett On How To Turn $40 Into $10 Million

Patrick Morris, Warren Buffett

With Patrick Morris, Contributor of Motley Fool

With Steve’s deep interest in following all things Warren Buffett, he speaks with fellow Buffettologist, Patrick Morris of The Motley Fool about his recent article titled “Warren Buffett tells you how to turn $40 into $10 million”.

Turn $40 Into $10 Million

About a decade ago, Buffett spoke about how a $40 investment in Coca-Cola (when it first went public in 1919) would be worth a little over $10 million today, underscoring the beauty of patience and compound interest and the perils of trying to time the market. $40 in 1919 is the equivalent of $540 today, the price of an Xbox.  So if someone said you can either get an Xbox or a few million dollars in 50 years, what would you rather have?

Patrick truly believes there is no value in the daily noise of investment media on trading the market, following a trend, timing the market to buy stocks, etc.  Instead, he likes Buffett’s approach of selecting solid companies or index funds and making systematic investments every month or every quarter.

As Buffett puts it: “With a wonderful business, you can figure out what will happen; you can’t figure out when it will happen. You don’t want to focus on when, you want to focus on what. If you’re right about what, you don’t have to worry about when.”

Buffett’s $50 Billion Cash Hoard

Steve notes that Buffett has a $50 billion cash hoard at Berkshire Hathaway.  Of that, Patrick says, Buffett keeps a cool $20 billion as a rainy-day fund to protect the company against unexpected turbulence.  The other $30 billion is his war chest for big investments.  As Buffett puts it, “the elephant gun is loaded and I’m out hunting”, looking for businesses that he understands.  For instance, he openly says that Facebook and Twitter are great, but he doesn’t feel comfortable buying any of them outright.

Possible Berkshire Acquisitions

Patrick says that Costco fits most of Buffett’s acquisition criteria, citing Buffett’s frequent praise of Costco’s management team and low-price business model, but yet believes it is really over-priced and doesn’t meet that other Buffett mantra of “buying great companies at good prices”.

As Rose Blumkin, the founder of Nebraska Furniture Mart (a company Berkshire acquired), said, “If you have the lowest price, customers will find you at the bottom of a river.”  Wisdom from a 104-year old lady that Buffett has taken to heart, evident also from the success of Geico (a Berkshire acquisition that has gained market share on its low-cost insurance offerings) and Walmart (in which Buffett owns a sizable stake).

Buffett likes to acquire companies that have a “moat”, a defensible advantage that is hard to replicate by competitors.

Patrick believes the energy company, Phillips 66, also meets Buffett’s criteria.  Berkshire recently made several acquisitions in the energy sector, including American Energy and Chicago Bridge and Iron, and is prepared to pour $15 billion into added energy investments.

Buffett’s challenge with technology companies is that there is no guarantee that they will be around 10 or 20 years from now.

Buffett’s Advice To College Students

In closing, Steve quotes Buffett’s advice to college students:

“The most important investment that a person can make is in themselves.  I tell students that you only get one body and one mind.  You better treat them the same way.  It’s hard to change habits at 50 or 60.  The best asset is your own self.  You can become, to an enormous degree, the person that you want to be.”

So, if you’re in high school or already in college, heed Buffett’s advice, make the most of your years in college to better understand who you are and what you’d like to do with your life, not just in college but well beyond!

Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital.  Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions.  Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances.  The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.

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Steve Pomeranz: As you know, I like to follow all things Warren Buffett. My next guest has a similar passion, and he writes about Buffett from his perch at The Motley Fool. Patrick Morris is his name, and I welcome him back to the show.

Welcome back, Patrick. How are you doing?

Patrick Morris: I’m great. How are you?

Steve Pomeranz: Fine.

You know you’ve written some articles recently about Buffett, as you always do. One that caught my attention was “Warren Buffett tells you how to turn 40 dollars, that’s 40 bucks, into 10 million dollars.”

How do you do that?

Patrick Morris: That’s a great question.

Really, Buffett spoke to the media about a decade ago. About just the reality he talked about when Coca-Cola…when it first went public in 1919, so almost 100 years ago, 95 years ago. Forty dollars put into it, safely and securely, and if it just simply had been held there for 95 years. Ultimately, the way the company itself has grown today, it would be worth a little over 10 million dollars.

Steve Pomeranz: That’s really hard to believe, isn’t it?

Patrick Morris: It is. I mean it truly is incredible. I think of the biggest lessons from that is just the beauty of patience. I think so often, as it relates to investing, we hear so much surrounding whether or not people should buy a stock one month and sell it another. Here’s Warren Buffett talking about the beauty of compound interest. How just buying and holding, how it makes sense over years, decades, and soon enough that number will be centuries. The power associated therein.

Steve Pomeranz: Well, you know 40 dollars ain’t what it used to be, but in your article you say the equivalent of 40 dollars is 540 dollars. That’s kind of the cost of an Xbox.

The question is, do you buy the Xbox or do you buy so many shares of a great company and just hold it forever?

Patrick Morris: That’s a great question.

To be honest with you, I like video games. I was always a big fan of playing Madden and things like that growing up. Admittedly, if my parents had asked, “Hey Patrick, you can either get an Xbox or in 50 years you can have a couple million dollars saved up. What would you rather have?” I would probably no longer ask for video games for Christmas.

Steve Pomeranz: Well, you were a bit of a nerd, I think, because if your parents are still asking you that question, the only thing on your mind is the video game.

Investing for the long term is the key here. The power of patience and the dangers of timing. Let’s spend a couple of minutes on that. He’s noted continually that it’s terribly dangerous to attempt to time the market. You don’t know what’s going to happen from day to day, from month to month. You can take a look at a company or a group of companies that can grow their earnings over time and intrinsically become more valuable.

There are so many products out there and sales people out there telling us to trade the market, to follow some kind of trend, to sell if the stock goes down, and to buy it going up. Are you saying all of that has got no value?

Patrick Morris: I’m going to be totally honest with you. I really think that there is no value in that.

I think one of the most interesting things to me, very recently … there is, of course, the Michael Lewis book Flash Boys. About how they’re all these remarkable things going on on Wall Street, related to firms attempting to beat another firm in buying a collection of shares of one company. Not by minutes or seconds, but fractional milliseconds of milliseconds.

I really think just one of the most dangerous things related to the stock market… we can often think, “Oh well, it’s going up so I don’t want to buy. It’s going down, I don’t want to buy.” I’m right there with Buffett. I think there is just beauty in just saying, “Okay, well I’m going to invest in this company based on all the parameters of it.” Then saying, “Okay, this is an intelligent investment,” or simply saying, “Okay, every month, no matter what happens. I’m going to put my money into something like an index fund and if it goes up I’ll buy it. If it goes down, I’ll buy it and just save through that.” It’s kind of the beauty associated therein.

Steve Pomeranz: Getting back to Warren Buffett and what he’s doing these days. He’s got over 50 billion dollars in cash in Berkshire Hathaway. 50 billion!

I was at the last Berkshire Hathaway conference, and he said he keeps 20 billion dollars just to kind of hang around to protect the company and to have the month there, just a cool 20 billion. He has a 30 billion dollar war chest, and he says that his elephant gun is loaded and he’s out hunting. You say in your article that he thinks that he should probably take on some debt to buy this next company. Maybe he’s looking for a 50 billion dollar company. I mean what kind of company do you think would fit that parameter?

Patrick Morris: Yeah, that’s a great question.

Admittedly, my assumption is pure speculation. Thankfully, he’s narrowed the list somewhat. He’s often spoken to the reality that he’ll only invest in businesses that he understands. He’s written and said a lot about what that looks like. He said openly, “Hey, Facebook and Twitter are great, but…” It’s not as though he doesn’t understand them, he just doesn’t feel he would be comfortable buying it outright. There are two we can cross off our list, but he definitely doesn’t suggest that those themselves aren’t great investments, just ones that he personally wouldn’t make.

Having said all of that, Buffett is full of wisdom and insight. Two companies that I highlighted, that I think would be really interesting. One is Costco. It falls right into that threshold of 50 billion. One of the very interesting things about Costco is he’s praised it relatively frequently and relatively often, speaking of the management team that operates it, just their business model.

His favorite business is one he acquired in ‘80. It was a furniture company and the woman who ran it told him—I may not get the exact quote but—”If you offer the lowest price on anything, customers will find you at the bottom of a river.”

You see it with Geico itself, which is an insurance company that Berkshire Hathaway bought and has had incredible success. When they bought it in the ‘90’s, it only had 2% of the insurance market. Now it has 10% because people will always find the lowest price. That’s what Geico does and operates in and that’s what Costco does.

Steve Pomeranz: He also owns Walmart. Walmart, of course, is the lowest cost provider there, so that’s a bit of a moat that Warren Buffett always talks about. You want to buy a company that has a moat around it that’s very difficult for other competitors to come in. Costco would fit that.

I’ve done some math on Costco. I think Costco is really overpriced. I know that Buffett, and far be it from me to speak Buffett’s mind, but he wants to buy a great company at a fair price. He doesn’t have to buy it cheap, but I don’t think he’s going to overpay either. The math that I’ve done, I kind of suggest that I think Costco is currently overpriced, but we shall see.

Any other companies that he might have his sights on??

Patrick Morris: Yeah.

The only other one—again, this is pure assumption and I mentioned it—but it’s Phillips 66, which is, of course, an energy company that we’re well aware of and have heard of. The really interesting about that is that Buffet, very recently, he’s made a variety of acquisitions in the energy landscape. He’s talked about how, so far, through American Energy and some of the other subsidiaries that Berkshire Hathaway owned, they’ve poured 15 billion dollars into making investments and they’re prepared to do another 15 billion. So, often Warren Buffett had talked just to businesses that could operate and plug along and maybe not have to make these big capital expenditures.

Now in some ways, he’s turned his focus and sights and is really interested in the energy landscape. That’s one where it’s just kind of an assumption and saying, “Hey, this is a big energy firm that we know Buffett likes energy and has been actively pursuing that.” Who knows? Maybe that will be an option that is out there as well.

To be totally honest with you, I haven’t explored it from a value perspective. Although he said he’d rather buy a great business at a good price than a good business at a great price. The value is always something you consider and certainly one to keep in mind.

Steve Pomeranz: Both of those companies have a capitalization of around 50 billion. This idea of him not buying Facebook, I think what he does, is he wants to know a company is going to be in business, or that what they do is going to be viable 10 years from now, 10 and more years.

I think even with a technology company, it’s hard to know whether that particular software or hardware is really going to last long enough time. Does it have an enduring aspect to it to last, like Coca-Cola, 100 years? So many technology companies were popular, great products, but then they fall by the wayside. I don’t think Warren Buffet is really interested in trying to figure out whether a particular product is going to be around 10 years from now.

He’s looking for these solid businesses. You talk about the energy complex, even Burlington Northern, Santa Fe that he bought a few years ago. They haul coal. They haul gas. It’s part of the infrastructure of moving things around. I know he’s also made an investment, a smaller investment, in Chicago Bridge and Iron, which also builds natural gas terminals and things like that that’s involved.

You know, maybe you are right. Maybe he’s really building up this energy side of things.

Before we go, well, we’re kind of out of time, but he also had some things to say to college students, and I want to read them really quickly if you don’t mind from your article.

I’m going to quote him:

“The most important investment that a person can make is themselves.” He says, “I tell students that you only get one body and one mind. You better treat them the same way. It’s hard to change habits at 50 or 60. The best asset is your own self. You can become, to an enormous degree, the person that you want to be.”

Talking about kids going to college and what’s important. Follow your bliss. Follow your dream. Final comments, Patrick?

Patrick Morris: Yeah, I think that’s great advice.

Warren Buffett, he’s one of those guys, he talks so much about his past and what that’s looked like. He says he made some mistakes in college and didn’t necessarily pursue the investing side of things, but he learned so much through it. I think that’s great advice to all of us where, really, treat those 4 years, or however many years in college, as really a season to better understand who we were created and made to be and what that will look like. Not just in college but well beyond that.

Steve Pomeranz: Very good.

My guest, Patrick Morris from The Motley Fool.

Thank you, Patrick.

Patrick Morris: Thank you, Steve.