1) Berkshire Hathaway (BRK-B) Chairman Warren Buffett turned 96 yesterday. Happy birthday to my longtime mentor!
I was recently asked to cite the five most important factors that explain his unparalleled investing track record. I couldn't limit it to five, so here are seven...
First, he's a genius – an investing savant. He regularly astounds people by recalling details about companies (revenues, profits, etc.) that he hasn't looked at in decades.
Second, he lets the magic of long-term compounding work for him. Buffett bought his first stock at age 11, so he has been investing for 85 years. And a 20% compound annual growth rate for 85 years turns every dollar into a mindboggling $5.4 million. (An average investor who simply matched the market's annual return of roughly 10% over that period would have turned every dollar into $3,300, which is still incredible!)
Third, Buffett got on a steep learning curve and never got off it. At age 60, he was already worth $3.8 billion. But when most people would have retired, he kept doing what he loved – and 94% of his wealth has been accumulated in the past 36 years.
Fourth, he has always been comfortable standing apart from the investing "herd" – in part because that's the way he's wired, but also in a literal sense. He had two stints in New York City in the 1950s – first as a graduate student at Columbia Business School and later as a securities analyst for his mentor Benjamin Graham's firm. Afterward, he moved back to his hometown of Omaha, Nebraska, which literally kept him a thousand miles from the herd.
Fifth, Buffett held on to his Berkshire stock when he closed his hedge fund, Buffett Partnership, at the end of 1969. This was critical because during times of turmoil, it meant he was never forced to sell to cash out panicky limited partners.
As a former hedge-fund manager, I speak from experience when I say how devastating it is to long-term returns if you're forced to sell at precisely the time you want to be buying (like October 2002, March 2008, March 2020, etc.). With a permanent capital vehicle, Buffett was able to invest for the long run.
Sixth, he recognized the power of marrying insurance businesses with his investing acumen early in his career, starting with the acquisition of National Indemnity in 1967. Insurance companies generate "float" – money received in premiums before claims are paid. This is a source of low-cost (or, in the right hands, like Buffett's, negative-cost) capital that can be invested. A good business might have a 10% cost of capital and a 15% return on capital/equity. That 5% gap, compounded over time, can produce excellent results.
But imagine what happens if the cost of capital is negative 5% and that capital is invested so well that it compounds at 20% annually. That 25% gap over 64 years explains how Berkshire Hathaway, which had a $10 million market cap when Buffett first invested in 1962, is now worth more than $1 trillion – a 100,000-bagger!
Lastly, and as I've advocated many times, Buffett let his winners run. Over time, most returns in any portfolio – and the market overall – are driven by a small number of monster stocks. Not just 10-baggers, but 100-baggers. To profit, you not only have to be smart enough to buy a few of these stocks... You must also have the patience and discipline to hold them for a long, long time. This is the main reason index funds beat nearly all actively managed funds. Index funds never sell their winners, while humans – being humans – get impatient or fearful.
In conclusion, Buffett's career is a fountain of important lessons that I think every investor can learn from.
2) My old friend David Einhorn of Greenlight Capital is one of the smartest investors I know, so I always look forward to reading his investor letters. And his second-quarter letter didn't disappoint – you can read it here.
I was particularly interested to see that he shares my view about SpaceX's (SPCX) absurd valuation, writing:
As for the [stock's] $1.75 trillion valuation at the IPO, we don't know if it is best described as the meme-ification of the market at scale, the latest proof that the markets are "broken," a remarkable manipulation of the IPO process (including floating less than 5% of the company while persuading several index providers to grant early inclusion), or just another insult to value investing.
We have spoken to investors who own SPCX, some of whom say they simply want to "invest in the future," while others express extraordinary confidence in the company's long-term prospects. One high-profile holder of many billions of dollars of SPCX told us that the company will generate $1 trillion of high-margin revenue. When we observed that $1 trillion would exceed the annual revenue of either Amazon or Walmart and asked him to support his claim, he offered no explanation and instead pivoted to a rant about short sellers.
David doesn't think much of the rating agencies that gave SpaceX an investment-grade credit rating:
According to Moody's, SPCX has the capacity to become one of the largest non-financial investment-grade borrowers, even though it isn't expected to be cash flow positive for years. We can't find any other examples of investment-grade ratings being awarded to a company with a multi-year forecast of negative free cash flow and no history of generating free cash flow.
Citing SpaceX's many promises, he concludes:
While we don't have a view as to whether data centers in space will replace all the data centers on Earth, whether asteroids can be mined for minerals, whether people will someday travel to Mars, or whether the moon will be an important manufacturing hub, we doubt that the discounted value of those possibilities, using an appropriate risk-adjusted discount rate, would lead to a number that approaches SPCX's market capitalization. Of course, that doesn't mean the stock won't go up. After all, twice a silly price isn't twice as silly. Our sense is that this IPO is something we might look back on as a marker that a major speculative top is near.
I agree with David and, like I said in my June 12 e-mail, still think this is "the most overhyped, overvalued large-cap stock of all time."
3) David also disclosed five new long positions Greenlight entered during the quarter:
Comcast (CMCSA) is a diversified media and technology company... At our entry price of $23.91 per share, CMCSA traded at only 5x EBITDA, which we believe significantly undervalues its free cash flow generation and the collective value of its businesses. CMCSA shares ended the quarter at $24.55.
Fortune Brands Innovations (FBIN) is a building products company... [If] FBIN simply achieves the low end of prior management's mid-cycle margin targets on current revenue, it should support approximately $5 of earnings per share. We acquired our position at an average price of $39.37, or approximately 8x those earnings, while peers trade for almost 20x. FBIN shares ended the quarter at $54.90.
Primo Brands (PRMB) provides bottled water through the retail channel as well as water delivery to homes and businesses... We acquired our shares at an average price of $20.20, implying a 12% free cash flow yield on our expectation for 2027 results, which compares to peer free cash flow yields of 3-5%. PRMB ended the quarter at $24.44.
PayPal Holdings (PYPL) is a consumer-facing payments platform with over 400 million active customers around the world... We believe PYPL's collection of payment assets is worth substantially more than the 8x earnings we paid. PYPL ended the quarter at $43.18. Subsequent to quarter-end, Stripe and Advent International reportedly made a joint offer to buy PYPL for $60.50 per share.
Versigent (VGNT) is a leading supplier of automotive wire harnesses that recently spun out of Aptiv (APTV)... By the end of 2028, VGNT is targeting $1 billion of cumulative free cash flow, or approximately one-third of its current market capitalization, with the majority expected to be returned to shareholders through buybacks. We acquired our shares at an average price of $29.20, or approximately 4x this year's expected earnings. VGNT ended the quarter at $42.01.
Tomorrow, I'll take a quick glance at each of these stocks to see which ones are worth a closer look. Stay tuned!
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.
P.P.S. Congratulations to David for having the good sense to propose to his longtime girlfriend, Nathalie, at the Greenlight 30th anniversary party on May 9, which Susan and I attended. Nathalie is wonderful and beautiful, inside and out. I commend David for doing what all wise people do – marry up! Here's a picture from that evening:
