With Whitney Tilson, Former Hedge Fund Manager, Long-term Berkshire Shareholder, Author, and Educator
Whitney Tilson is a long-time Berkshire Hathaway shareholder. He joins Steve to talk about how the essays of Warren Buffett deeply influenced his life in many important ways.
Meet Whitney Tilson: Investing Pro And Financial Educator
Tilson is a Harvard MBA who got into the investing business in 1994. He opened the hedge fund, Kase Capital, in 1999, which he managed for 18 years. Faced with a string of losses, Tilson closed Kase Capital in September 2017. He then shifted his focus to educating future portfolio managers and investors through his new venture, Kase Learning.
Tilson has authored several investment books including More Mortgage Meltdown: Six Ways to Profit in These Bad Times. It was published in 2009 right after the mortgage collapse. He was also one of the authors of Poor Charlie’s Almanack, the definitive book on Berkshire Hathaway Vice-Chairman Charlie Munger.
Tilson also has something of a record on the number of questions he has asked at Berkshire’s annual meeting, where 40,000 shareholders are clamoring for the chance to ask a question. Here’s his tip: move away from the pros and head to the overflow room where people aren’t all that hell-bent on asking questions.
Value Investing Is A Religion
Tilson has also written a chapter, titled “A Reception For All,” in Lawrence Cunningham’s book, The Warren Buffett Shareholder: Stories from inside the Berkshire Hathaway Annual Meeting.
In it, he writes that value investing is like a religion. It has a revered founder, Ben Graham; a pope, Warren Buffett; a senior Cardinal, Charlie Munger; an Old Testament, which is the book Security Analysis; and a New Testament, Graham’s follow-up book, The Intelligent Investor.
Value investing has a set of values, such as kindness and integrity. It has passionate disciples who have studied its texts and carefully analyzed new teachings. It has Mecca-type gatherings of believers where shareholders flock to Berkshire’s annual meetings in Omaha and almost feel an obligation to make the pilgrimage at least once in their life as a Berkshire shareholder. This value investing religion also lets you take Communion in the form of enjoying See’s Candies!
Buffett’s Influence On Tilson
Tilson says Buffett’s annual letters to shareholders changed his approach to investing and influenced his life far beyond investing. Buffett’s wisdom helped Tilson become happier and more successful outside the world of investing.
Buffett’s letters focused Tilson on understanding a company’s fundamentals and its intrinsic value as if he were buying the entire company, not just a few shares in it. He also understood the tremendous importance of having a margin of safety, ignoring the daily noise from Wall Street, focusing on high-quality companies, and making no more than 20 sizable investments in one’s lifetime. For instance, Buffett helped Tilson recognize the insanity of the Internet bubble and the Bitcoin craze. He also valued their underlying technologies and looked for long-term winners.
Steve draws parallels between the Internet and railroads in the late 19th century, where the underlying innovation changed human history. It’s also where long-term winners, such as FANG stocks (Facebook, Amazon, Netflix, and Google), were hard to spot early in the game. Taking a Buffett-like approach could help spot long-term winners. It will also help avoid losers that ride the wave but are naked when the tide goes out.
In closing, Tilson talks of the next chapter of his professional life, Kase Learning, through which he hopes to educate the next generation. From launching investment funds, finding great stocks, avoiding value traps, and controlling the emotional aspects of investing, there’s something for everyone.
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Steve Pomeranz: Whitney Tilson is well-known in the investment world. He founded and ran numerous investment partnerships and mutual funds and other enterprises. He’s also been the author of investment books like More Mortgage Meltdown: Six Ways to Profit in These Bad Times, which was published in 2009. And I’ve got to tell you if you’re going to write a book about mortgage meltdown and how to invest in them, that’s the year to have done it.
He was also one of the authors of Poor Charlie’s Almanac, the definitive book on Berkshire Hathaway’s Vice Chairman Charlie Munger. Whitney joins us today from Manhattan. He lives there with his wife and daughters; he’s the past chairman of the Manhattan Chapter of the Young President’s Organization.
Hey, Whitney, welcome to the show.
Whitney Tilson: Thank you, Steve.
Steve Pomeranz: You and I have never met before, but I feel like I know you because somehow you always get to ask a question at the Berkshire meeting, and that’s not an easy thing to do. So tell us, really quickly, how you managed to get your questions—I think it was eight out of the last fifteen. That’s impossible!
Whitney Tilson: Yes. Actually, I went back and counted. CNBC has actually posted an archive now that Buffett provided of all the past meetings going back about 20 years. I just attended my 21st consecutive Berkshire meeting. And it’s actually 9! Plus my wife asked one in 2013. It was easier in the old days, you know, anyone who wanted to could ask a question, and then the meeting exploded and 40,000 people come, and now you need to be a little lucky and a little clever. They have microphones throughout the auditorium at the convention center where it is held. But all the hardcore junkies go to the microphones near where they are sitting, which is as close to Buffett and Munger as possible.
And what I do is I just sneak up to the overflow room, where … You can watch the meeting and Buffett and Munger on a large screen. And none of the junkies go up there, so usually there are only maybe five people at the lottery that they have at the microphone. And you have to be in the top two in order to get your question asked. So I’ve gotten lucky a few times by just going to the overflow room.
Steve Pomeranz: Yeah, you know there are strategies too for getting a seat pretty close. I’m not going to disclose my strategy at all, but -.
Whitney Tilson: Yeah, like get up at 4 in the morning. It’s easy.
Steve Pomeranz: There’s other elements of that, in that. But that’s all I’m going to say.
Whitney Tilson: Okay.
Steve Pomeranz: Nevertheless, yeah, you have to have some strategies if your kind of competing against 40,000 other people. They’re not hard. It’s like investing, you know. It’s simple, but it’s not easy, right?
Whitney Tilson: Correct.
Steve Pomeranz: All right, so look, from what I’ve read about you, especially in the Lawrence Cunningham book that we’ve been discussing in this series, you say that Buffett has been a role model and influenced your life far beyond investing. He helped you to think about being a better person and has made you happier and more successful outside the world of investing.
I think many of us feel that way. I’ve had my own experience as I was wandering in the wilderness of the big brokerage firms early in my career with no values-oriented guidance until I started reading Buffett and everything changed. So tell us a little bit about your experience.
Whitney Tilson: It probably, the way you describe your experience is similar to mine. I discovered investing a few years after I graduated from Harvard Business School in the mid-90s because it’s the first time I ever had a few thousand dollars in my bank account in my life.
You know my parents were teachers, and I always had undergrad debt and then business school debt. As an undergraduate at Harvard I knew Bill Ackman who launched one of the early hedge funds and so I had my first few thousand dollars in my bank account, so I called him up, said, “Bill, I want to invest this, what do you suggest?” And he gave me the best advice that anyone has ever given me, which is go read all of Warren Buffett’s annual letters and then stop. You don’t need to read anything else.
And so I did, it resonated with me. A couple years later I started going out to Berkshire Meetings, I haven’t missed one since, and Buffett and Munger have really taught me the investing business. I launched my own hedge fund in 1999. Ran that for almost 19 years before closing it last fall. I’m now in the teaching investing business. But as I reflect back on two decades, Buffett and Munger have profoundly influenced me as an investor and taught me how to think about investing sensibly. But now that I’m no longer managing anyone else’s money, I look back and see that they’ve really influenced me in my development as a person.
Steve Pomeranz: Yeah, I want to talk about that in a moment. But I want to delve into this a little bit deeper. So, okay, he could have told you to read the annual reports of anybody he respected; he, of course, talked about Buffett’s reports. What was it initially do you think in those reports, that changed things for you?
Whitney Tilson: Well, from an investing perspective, I, like many people, keep in mind this was in the late 1990s, we were more than a dozen years into a bull market and just like today, there was all sort of foolishness. And I was a young guy and instead of Bitcoin, the foolishness of today, there was the internet stocks back then. And I was speculating foolishly and actually, worst of all, making some money doing it, which was teaching me all of the wrong lessons. That would have ultimately destroyed me, just like those who are speculating Bitcoin will be destroyed today.
So, when I read Buffett’s approach and understanding the fundamentals of calculating intrinsic value as if you were buying the entire company, not just trading shares of stock, then having a margin of safety and just being very comfortable, just ignoring all the crazies and fads and what Wall Street was pumping, and just stick to your knitting, only make a handful of decisions only when you really have an edge and high-quality companies.
And fundamentally, I grew up, you know, my parents were both teachers and they knew how to squeeze a dollar, and we always shopped at second hand stores, et cetera. So the concept of buying a dollar bill for 50 cents just resonated with me.
Steve Pomeranz: Yeah. You know you mentioned in one of your articles of the Buffett idea of a punch card with 20 potential places to punch.
Whitney Tilson: Yes, you get 20 investment decisions in a lifetime, it’s a concept.
Steve Pomeranz: Yes, it’s a concept, so take us through that a little bit.
Whitney Tilson: Well, the idea is, and by the way, I don’t know if anyone has ever really done this. Buffett has made thousands of investments in his life. Back in the early days, he would buy crummy little companies like Berkshire Hathaway, trading it at discount to liquidation. Or maybe at two times earnings, they’d run up to three times earnings, they’d sell them and buy another stock trading at two time earning. He did very well at that for the better part of two decades.
So, the concept though, is a sound one, which is … Particularly in the US market, particularly today, nine years into a bull market, there aren’t a lot of bargains laying around. And so you need to be very patient, very disciplined, and only invest when you really have an edge.
And these days, you know it was easy in late 08, early 09, you could throw a dart and hit anything, and it was cheap. But today it’s exactly the opposite. So it means you should only invest when you have super-high conviction, when you really have an edge, when you’re certain the market has made a mistake. And that means you make very few investments. Buffett talks about 20 in a lifetime, that’s how you should think about.
Steve Pomeranz: Yeah, if you only have so many choices, every choice really matters as opposed to just kind of throwing money at a lot of things because you heard a good idea or someone told about something and it happens to be working at the moment. Also, along with some of these ideas like with Bitcoin, there’s always about, you know, this person who doesn’t know much about anything, but he bought a bunch of Bitcoin when it was worth next to nothing and now he’s a gazillionaire. And that just gets your animal spirits rising. It’s like if that guy can do it, I can do it.
Whitney Tilson: Right. What you have to understand there is, is what’s going is a pump and dump scheme where the insiders created this nonsense, this worthless nonsense. They traded it amongst themselves at ever higher prices and then they suckered in the general public who were drawn in by the enormous fortunes that the early people had made. This is what bucket shops do, this is what the movie The Wolf of Wall Street was about. It’s a pump and dump scheme.
Steve Pomeranz: Beware of a good story too. A story that you can really understand and has … You know –
Whitney Tilson: Has merit! The best promotions and frauds and bubbles are always rooted in something that actually makes sense. Back when I first started investing, the internet bubble, everyone said, oh, the internet is the future. And that turned out to be true. The internet has changed the world, but that didn’t prevent every single one of those stocks from going down 80-100 percent.
In the same way the blockchain is real. That’s a very useful technology, but that doesn’t mean these 1700 cryptocurrencies that all of these scammers have created are pumping in their initial coin offerings are going to do anything but go, not to zero, the junky ones will go to zero. Bitcoin will retain some value because criminals use it as a method of transaction.
Steve Pomeranz: So it reminds me of the story of the railroads back in the 19th Century. They were, you know, revolutionary, they were going to change America, but fortunes were lost trying to figure out which railroads were going to be the most successful ones. And really, mostly only in hindsight did people realize which ones had enough merit or capital or whatever it was to succeed. I think we’re seeing that right now. We know about the FANG Stocks. You know the Facebooks, the Netflixes, and all of those. But we know about those in hindsight.
Whitney Tilson: Yeah, although I would … I actually own some of the FANG Stocks and do not put them in the same category because the FANG Stocks, by and large, most of them, are in winner-take-all businesses and have won. And will not be displaced and are generating unbelievable cash flows and have business models.
You know Facebook and Google, I think, have the two best business models ever, in the history of the world because their business models effectively are: they have no inventory, they can expand into globally. Facebook has 2.2 billion people who check Facebook at least once a month. Two thirds of them check Facebook at least once a day.
There are obvious network effects. Imagine someone else is going to come along … You know, obviously, every new person on Earth, who joins a social network to connect with friends and family is going to join a social network that has all their friends and family already on it.
Steve Pomeranz: Sure.
Whitney Tilson: I.E. Facebook. So, you know to the extent people, younger people are switching to Instagram, well, hello, that’s already owned by Facebook, so that’s, you know that’s quite different.
Steve Pomeranz: Well, what I was saying was knowing which were going to be the future FANG Stocks…
Whitney Tilson: Yes.
Steve Pomeranz: 15…that’s what I was talking about, 10 years ago, 12 years ago. It’s obvious in hindsight because your theory about winner-take-all. Okay, they won, now you can decide to glom onto them or not. But I’m talking about early in the process, very difficult.
Whitney Tilson: Yeah, because what you want to do, of course, is find these stocks before they have the better part of a trillion-dollar market cap. And you know, shame on me for not being open-minded enough, for example, to follow Google because I looked at Google when it IPOed, and I saw history where AltaVista came in, then Netflix displaced them, then Yahoo displaced them, and now Google displaced Yahoo.
So I sort of thought that’s pretty likely, someone’s going to come along and displace Google. And that may well have happened, but at a certain point, Google, you know, achieved enough of sort of a flywheel effect and virtuous cycle that it too became a winner-take-all business. And that should have been clear to me at least five years ago, and I didn’t do the work.
Steve Pomeranz: You could have … I’m going to give you a pass on that, I’m going to tell you why. Because at last year’s Berkshire Hathaway meeting, Buffett himself said they were … Geico was advertising on Google, and he saw what was going on there. And he missed it. So, I give you a pass on that one, not that my giving you a pass matters in your life, but you got a pass from me. I want to change the subject.
Whitney Tilson: Well, yeah. Yes. I mean look, Buffett is an 87-year-old guy, and I certainly understand him who never invested in tech stocks but I’m a younger guy and I –
Steve Pomeranz: You should have known better.
Whitney Tilson: I should have been able to figure it out, so I’m not giving myself a pass, but I appreciate it.
Steve Pomeranz: Okay. My guest is Whitney Tilson. He’s a well-known investment advisor, former investment advisor, former hedge fund manager. Hey, Whitney, I want to ask you, you wrote this in the Lawrence Cunningham book which … it’s called The Warren Buffet Shareholder: Stories from Inside the Berkshire Hathaway Annual Meeting. You say value investing is like a religion.
It has a revered founder, Ben Graham, a pope, Warren Buffett, a senior cardinal, Charlie Munger, it has an Old Testament, which is the book Security Analysis, it has a New Testament, the book called, The Intelligent Investor. It has a set of values, which are kindness and integrity. There are passionate disciples who studied the historical texts and carefully analyze new teachings. Gatherings, such as the type of the Mecca type gathering with the shareholder meeting in Omaha. And really the obligation to make the pilgrimage at least once in your life if you’re a shareholder.
That was terrific stuff. I think you left out a couple and I’m going to tell you what they are right now. This religion also allows you to take Communion, which is to eat and enjoy See’s Candies, right?
Whitney Tilson: Yes, agreed and … Wash it down with a Cherry Coke.
Steve Pomeranz: There you go. And very un-religion-like, there’s always one thing you have to say at the end of anything like that, and is don’t forget to get your car insurance at Geico.
Whitney Tilson: Right, and Buffett always adds, your engagement ring at Borsheim, and your furniture at Nebraska Furniture Mart.
Steve Pomeranz: There you go, I don’t really know any kind of religious text that has a commercial at the end, but, when you’re at the meeting, Buffett’s relentless talking about that. And he’s got no shame when it comes to pitching the companies that are in his book. I understand that you’re not in the investment business anymore, you’re now in the teaching business. We’ve got about a minute and a half left, please tell us about that.
Whitney Tilson: Sure, I converted Kase Capital, closed that after 19 years almost, and opened up Kase Learning to try to teach the next generation of investors, both about what I learned and what I call “Two Decades in the Trenches,” which is how to become a better investor and make more money on the investment side, both by finding great stocks but also avoiding value traps, becoming a better portfolio manager, better controlling the behavioral finance, the emotional aspects of investing.
It’s a comprehensive three-day course, and the other piece of it is though, just because you’re a good cook doesn’t mean you should open a restaurant, right? But a lot of young people … they’re having success investing and they want to start their own fund. And there’s a whole entrepreneurial side of the business about, should you try to launch your own fund? If you do, you have to pick a prime broker and a whole bunch of other service providers, you set redemption terms, et cetera.
And then once you launch your fund—I launched with a million dollars out of my bedroom—then how do you build it? How do you make a name for yourself? How do you raise money? Because that’s really hard when they’re 8,000 other hedge funds out there. That’s the core of what we do. We’ve got a couple other little programs, conferences on short selling, which is something that I did for 15 years, that kind of thing. But all of the information about this is at kaselearning.com.
Steve Pomeranz: Okay, yeah, so does this take place in New York? Is this an online program? What, how do you access it?
Whitney Tilson: Yeah, right now it’s all in person. We’ve done three of these four-day programs, now going to be a five-day program. We’re adding a day on an advanced seminar on short selling.
So there’s a three day investing boot camp, one day seminar on how to launch and build an investment fund, and one day seminar on short selling. We’re doing it in New York again in June, taking it to London in July. There’s been enormous interest in this all over the world, so I think we’re going to do half in New York and half in various cities around the world going forward.
Steve Pomeranz: And to find out more about it, what’s the website?
Whitney Tilson: Yeah, the website is K.A.S.E. Kaselearning.com
Steve Pomeranz: Very good. My guest Whitney Tilson, Buffet-o-phile, I think you can say, along with me. If you have any questions about what we just discussed, you know, ask us, go online to stevepomeranz.com. Ask us anything you like. We love your questions. That’s stevepomeranz.com and while you’re there, sign up for our weekly update.
This is where we send you weekly commentaries and our interviews straight to your inbox. You can pick and choose whichever segment you may like, you can read the transcripts, you can read a summary, or you can listen to just that segment, and of course, you can listen to the whole show. Whitney, thank you for joining us today.
Whitney Tilson: My pleasure, Steve.