Decoding Warren Buffett's Investment Strategies

Jason · 00:00Welcome to episode 180 of The Numbers Game. I'm Jase. I'm joined with Nick and Marty. How you doing, fellas?

Marty · 00:06I'm going well, mate. Yeah, clouds are out. We're getting into the back end of autumn. So, it's a good time to work. It's a great time to work. Great time to drink. Great coffee. Uh, and just catch up with friends and family and do what you do in Melbourne and connect.

Marty · 00:23So feeling good. You got to adapt from the summer periods and I feel like I'm doing that well. How are you Nick? You adapting? You still been in that bay swimming. You are a master at that. More

Nick · 00:34resilience. It won't stop. It won't stop. The minute you stop, you're not getting back in. So you just got to, you just got to keep going now.

Nick · 00:40But um, Yeah, I don't need to do ice baths at the moment, I can tell you that much. Because I, uh, get my fix from doing that. But, yeah, it's good. It's, um, oh, it's, yeah, I can't recommend it enough, to be honest. Um. But yeah, I'm good. I actually like the Melbourne winter. I went to a, um, a pub last night which was a

Nick · 01:00Sunday night and had a roast meal, um, and watched a football game and had a bottle of red wine and we actually had some friends from Sydney down and they, they've actually bought a house down here, um, cause they love it so much.

Nick · 01:15They love the, I said, they actually love the Melbourne winter. Um, and they split their time. They're a bit further north than Sydney. But, um, we're talking about how there's a romance about the Melbourne winters. And, I don't know, I don't think you've tried it before. Marty moved to Noosa and I think, yeah, the cold weather, there's something about it, you know.

Nick · 01:35bottle of red or a coffee or a hot fire.

Marty · 01:38Yeah. It's a very different culture. I mean here, it's very people oriented. It's very much getting together somewhere and having a good night out. Whereas up there, it's about being out and about totally different lifestyle, but the summer's bloody hot up there.

Marty · 01:52It's where our summers are pretty good too.

Jason · 01:55Yeah. And you hit the nail on the head, Nick, just reflecting back. I had a, shared a bottle of red with

Jason · 02:00case and, and, uh, um, dad Stevo on the weekend, we're watching a game of footy as well. Shout out to Stevo. Good fella. And, um, yeah, you're right. Culturally in Melbourne, I actually thinking about it, like some people complain about Windsor and, but I don't think it's that bad.

Jason · 02:14I think Melbourne, Melbourne, especially when footy seasons pumping, I, I was walking. I was walking somewhere around South Yarra and, you know, the restaurants were pretty full, the cafes were pumping and I went, you know what, you know, we talk on the show a lot about cost of living and interest rates and everything else, but there's still like a world of people out there that are going out and hitting the restaurants and cafes and mind you while Some will, will not survive the ones that are doing a really great job, selling a really good product with a really great service.

Jason · 02:44People will keep coming back where there's value. I mean, uh, anyway, and on the ice baths, geez, the ice bath, you're right. I had a few weeks off and got back in the ice bath last Wednesday and it was hard. Like it was so hard just mentally to sit there for six,

Jason · 03:00seven, eight minutes in 10 bags of ice. And yeah, but the bay, the bay might be the next best option for me.

Nick · 03:06It's just as cold, uh, well, it's not just as cold. That's, that's a lie. It feels just as cold, I think, because it moves around. Yeah. Um, you just stay in there longer, you get the same impact.

Marty · 03:15I love the way, I love the way you both, you know, get into the freezing conditions and just warm yourself up with a bottle of red.

Marty · 03:24It's a nice balance of both. Yes,

Jason · 03:26balance. Let's talk about balance Marty. We're all about balance here at The Numbers Game. And you know what, there's probably a man that we want to talk about today who's probably got all sorts of balance in his life. He's your good friend Marty and Nick's going to take us through this one.

Jason · 03:41But Warren Buffett's been up to something. He's been, uh, moving some money around and, you know, Nick you're here to unpack it for us. What is going on? He is

Nick · 03:50moving some money around and it's, you know, it's no secret he's sitting on a lot of cash at the moment. And I think for a lot of people, it's That's scary because if Warren Buffett moves to cash, everyone assumes that the

Nick · 04:00market's going to fall, but I don't think that's, that's the case.

Nick · 04:03He's just looking at some, um, some different deals that might come up. But, um, he, he recently has been, um, known or has been in the, the, the news for requesting that a deal or a business that he was buying. Um, a lot of stock of, um, was, uh, was, was not, uh, made public for certain reasons. Generally, Warren Buffett starts doing something.

Nick · 04:28People follow suit, um, and would, you know, well, he's doing that. So I must do it as well. And it can inflate share prices and whatnot. But he has revealed, um, in the last week, Or it has been revealed that he's taken a big stake in, in worldwide insurance company Chubb. And when I say big stake, we're talking 26 million shares, which equates to about 6.

Nick · 04:507 billion. Um, huge, huge drop in the ocean for Mr. Buffett, but very interesting. Very interesting move and,

Nick · 05:00um, what the article I was reading also spoke about is how he's offloading some of his, um, some of his Apple stocks. And I guess what they were alluding to was he's going more towards financial services and maybe reducing his exposure to consumer goods.

Nick · 05:16So my initial thought there was, okay, uh, people are doing it tough. So consumer goods, he's reducing his exposure there. And He's going into financial products because people don't have a choice. They need those products, whether it's insurance or finance or whatever it might be. These are the areas that he's focused in.

Nick · 05:35Um, and then I thought I was very intelligent because I worked that out. And then I did a little bit more reading and a little bit more researching. And I found out that he's actually selling down the Apple stock for tax reasons. Um, and the reason he's going into insurance companies is this methodology or this thing called the float.

Nick · 05:56You know what the float is, Jase?

Jason · 05:58Nah, I mean, I think of a float

Jason · 06:00like a cash register float at a retail store. You've got a float that needs to stay at a certain amount of money. Um, but I'm sure, am I, am I on the right idea here?

Nick · 06:10Uh, no. So I'll just move on. Good. I just thought it'd be a good opportunity to say that.

Nick · 06:17Um, so he's, he actually has a, has, uh, big holdings in four large insurers. And picture an insurer, what the insurer needs to do is, what the insurer does is they take premiums from people, um, whether it's car insurance, house insurance, personal insurance, they take premiums on the proviso that one day they may have to pay back out via a claim on that, um, on that individual or car asset, whatever it might be.

Nick · 06:47There's a big chance that they'll actually never pay out. So they're taking the money, they're holding the money, floating the money on the proviso that one day they might have to pay some out. So, what the float

Nick · 07:00does is that money that's then created as a, as backup money or as rainy day funds, he then has the ability to invest that or Berkshire Hathaway have the ability to invest that.

Nick · 07:11So um, the, the, the holdings in four insurance companies at the moment provides Berkshire Hathaway with around 164 billion in float that he can then invest into whatever he wants to. Um, you know, probably things like Coca Cola and these other businesses that he's heavy into. So it wasn't so much about, and look there, Marty, you might have a bit.

Nick · 07:35a bit more to say here, but it wasn't what I initially thought. I thought, Oh, I get rid of consumer stuff, go into financial products, but insurance is a big play for them. And it's because, because of the float gives them access to capital that they didn't have, um, that they can then go and invest. And obviously they can turn that back into cash at any given time.

Nick · 07:54If they need to, from an insurance claim point of view, you know, just another reason that Warren

Nick · 08:00Buffett is highly, You know, highly intelligent, or just another example of his high level of intelligence. And I would never have even thought about that, uh, when it comes to buying insurance companies. Um, but I mentioned the float to you, Marty, and you're all over it.

Nick · 08:13You just sort of winked at me. Yeah.

Marty · 08:15Yeah,

Nick · 08:15the float.

Marty · 08:16No, it's, it's, I mean, It's a great business insurance. You're getting paid cashflow up front for something that might never eventuate on a payout back to the client. I mean, it's very, very clever. And you have that money set aside, just like you said, that can be reinvested to make more cashflow.

Marty · 08:33I mean, it's just very, very clever, very clever. And I know he's big on it. Uh, even the Apple stock was really interesting. I was rating. I was reading between the lines because I sort of know his methodology, having read a few of his books now, but Apple was selling, what did they say? They, they lifted, he sold about 115 million of shares at 13 percent of his

Marty · 09:00holdings at about 790 mil of Apple.

Marty · 09:02And they, everyone naturally thought Apple's in trouble. There's problems. This is a big problem. But actually what he was doing on the flip side is Apple actually lifted their quarterly dividend by about 4. 2 percent and announced 110 billion of share buybacks. Um, so that was really interesting that the value of the stocks that Buffett and Berkshire will hold will actually go up in value.

Marty · 09:30By that significant amount over time. So even though he was cutting his position to invest in other opportunities, ultimately Apple will still be very strong. And there was some argument with Apple saying, well, they're giving out dividends and they're doing buybacks. Why aren't they innovating and doing more newer products and things like that?

Marty · 09:49There's always an argument here and there, but Buffett is actually mentoring. Um, Tim Cook, I think who runs Apple, he's actually mentoring him how to get

Marty · 10:00better returns on investment on his capital in Apple. So it's like this. So I'm going, aha, there's a, there's a bigger play here. I don't know the exact specifics, but I'm going, he's not making an exit move.

Marty · 10:14He's actually just strategically looking at overall value. Um, which is really, really interesting in the way he goes about things. So the float. Brilliant idea,

Nick · 10:24brilliant idea. And just to bring it back to a more micro level and I guess our SME listeners, um, and I'd be interested to get your take on this Jase, but yeah, as business owners, I think we need to be thinking about what are we doing with our own floats.

Nick · 10:41Um, you know, this, this wasn't really something that would have come up in the last. Three to four years because interest rates were so low, but it just got me thinking well How does this relate to our businesses that are on a more micro level? Well, if you're if you're holding a float of cash Whether it's you know Three to six months expenses depending on your business cash

Nick · 11:00flow and what you like to hold From a capital point of view you need to ensure that you're not That money is working for you and not just sitting like I think it would for a lot of businesses in a normal trading account, because in a normal trading account, it is doing absolutely zero for you.

Nick · 11:14So hypothetically, if you're someone, and this isn't crazy numbers, um, if you're someone that's got a hold of me and bucks in capital, which Jason, I think that would be a lot of businesses. Um, if you've got that. Parked in the right area, you know, you should be earning anywhere between five to 6 percent on that or 50 to 60 grand.

Jason · 11:32It's funny you bring that up. We had this, we're doing tax planning meetings with our clients at the moment, which we talk about almost every year on the show. Um, cause it's such an important meeting when, uh, just getting a business owner to sit down with their accountant, review the numbers and have a look at things.

Jason · 11:46And year on year, it's usually part of the conversation is just talking about How, where the cash is sitting, um, we look at of the total amount of cash sitting in a client's bank account, how much of it is long term savings for tax liabilities. Like if

Jason · 12:00you have a tax bill that's, um, come to you for the 2024 financial year, depending on how you've structured your year and your deposits to the ATO, you might owe, um, 1, 000.

Jason · 12:09A big final payment in May, 2025. Now, as long as you're managing your money properly, that money sits in your account becomes part of your working capital or part of your long term tax savings. Um, so I had this conversation with a client who had screwed away a fair bit of money for some future things that he wanted to do within the company.

Jason · 12:26And, um, yeah, he was sitting on about half a million dollars in his everyday trading account. And we just said, well, mate, I know that money in money out, it comes and goes, you know, you pay bills, you pay wages, the next couple of hundred grand drops in from your recurring age receivables. But I said, if you keep majority of that into your tax savings account, which he just left empty, cause he's like, Oh, there's no point putting it over there.

Jason · 12:48I'm just going to leave it in the, in the trading account and spend it when I need to explain to him that that half a million dollars, give or take sitting there for majority of the year would get him. You know, 20, 30, 000 in his bank account,

Jason · 13:00depending on the interest rate he can get. He was gobsmacked.

Jason · 13:02He's like, geez, I knew you'd mentioned this before, but I didn't think it was that much money. I said, well, each year as the interest rates have gone up, the actual net effects on the interest income you can earn has also gone up and you're going to benefit. And he's like, well, geez, that's pretty much my accounting fees covered.

Jason · 13:19Plus some extra spare change for the company. And I was like, that's a. Fantastic way to look at it. So it's free money. Yes. You've got to pay tax on it. And yes, it's part of your company's profits or your business profits, but you're better off putting your money to work. So, so it's a great conversation around.

Jason · 13:34And look, that's just one way to do it. This is one thing is investigated, uh, cash and getting interest, uh, cash returns and interest rates. Um, interest income on your money, but then, you know, there's other options through, you know, talking to you guys when it comes to financial advice, um, there's other things you can do with your money.

Marty · 13:51Oh, it's such a great point, uh, Jason. And that was the thing, you know, even Google, they make about 24 percent on their capital. Like they're

Marty · 14:00reinvested capital. And you go, what if you think as a small business owner, if I've got that money sitting in the account, how, think about the questions you need to ask to think, how do I get a better return on that dormant capital sitting there, you know, in relation to the business, your business.

Marty · 14:17You know, maybe you make a, it's a totally different criteria how you think about that money when you're thinking about getting a return on that excess cash. And I, I just think it's a, I like where you're heading with it because they're the questions sometimes we all as business owners go, great to have three months of expenses parked.

Marty · 14:34So we never get into trouble, right? You always think, try and think that way. So you're covered. But how could we utilize that in a way? Maybe conservatively at 6%, maybe a bit more aggressively if we see opportunities at 20%, you know, it's, um, it changes the game and business owners tend to love that too, to think about things like that.

Nick · 14:54It's so, it's just so easy to make five to five and a half percent now. You

Nick · 15:00know, um, do you think Marty, there's any relevance to the fact that my, yeah, maybe he is actually looking at down, downgrading consumer products because of where we're at and the cost of living and whatnot, and going to more products that are, I guess, necessities.

Nick · 15:18Like is my original thinking there, have you read anything on that?

Marty · 15:22Yeah, well, he did, um, invest in another company, which is more of a staple, uh, DJ Horton, and this is not financial advice, very general, so don't go and buy a dump load of DJ Horton, but they're, um, they're a home building company in east, north, southeast, and south central, southwest, northwest regions in the United States.

Marty · 15:43So he's bought about What is it? 700 million into that. So he expects, um, a lot of money to be injected into infrastructure around the U. S. in home building because there's a general under supply. So he's going into that.

Marty · 16:00He looks at fair value. I mean, it looks like the stock is underpriced based on some metrics I've had a look at, but he loves it.

Marty · 16:07Consistent high growth rate in the past three years, low long term debt, uh, dividend payout increasing every year, share repurchases every year, CapEx very low. Like, like good fundamental companies that Buffett loves, but he's going into this, this area. Where I think there's probably going to be government incentives around to get more properties built.

Marty · 16:29So interesting. He also thinks it's interesting time in the market because if interest rates do come down and that cash we're talking about is not sitting at five and a half percent and let's say it comes back to threes and fours then people will start to invest with the free capital that they have in their personal lives and discretionary spending will start to happen again but I think he sees The immediate opportunity is in infrastructure.

Marty · 16:57And, um, he's getting around those types of

Marty · 17:00opportunities, like insurances must have, you know, type type things. Looking

Jason · 17:04at the scale of both those businesses. I've just stacked, um, Chubb and DR Horton next to each other. So Chubb's revenue was 39 billion and profits were touch under 10 billion. Um, you know, Chubb operates in 54 countries.

Jason · 17:19Um, then when you think about the data behind that as well, like the, the, just You got AI and different capabilities coming in, which the insurance world's meant to be revolutionized by a lot of the ability to crunch through this data, you know, increasing profits. So again, we're talking 40 billion revenue nearly and 10 billion profit.

Jason · 17:37Then when you look at, yeah, massive, like huge scale, then looking at DR Horton, which I'd never heard of. So, you know, always love the interesting things that get brought up on this show, but DR Horton, if you were Building homes in Australia. And you wanted to look at a case study of something that's quite phenomenal from a scale point of view.

Jason · 17:54DR Horton is building 90, 000 homes per year in America,

Jason · 18:0090, 000 homes. Now I'll have to look at what our biggest, um, volume home builder builds here in Australia, obviously very different size, uh, market, but again, financial strength of DR Horton last year was 35 billion revenue for a touch out of 5 billion.

Jason · 18:17net profit. So, you know, I'd, I'd challenge that. There's not, well, there's definitely not a home builder in Australia. That's dropping that much profit to the bottom line. I mean, scale and percentages are everything, but, um, they're, they're innovative projects is something which is probably, you know, what, what captures the attention of guys like Warren Buffett, but in one project alone.

Jason · 18:38They're doing an 11, 750 home community in West, I don't know how to say it, Oahu in Hawaii. So, you know, when you, when you look at the scale of those projects to be trusted and then, yeah, if, if the government's ever going to get involved with a company, it'd be something that stacks up that strong financially, wouldn't it be?

Nick · 18:57So. Here's some, um,

Nick · 19:00just to give, just to give you a comparison. Now, this is an old article, so this wouldn't have changed. This would change a little bit, if anything, gone backwards. Um, but Metricon named Australia's biggest builder for the seven year in a row. This was in October 2022. Um, 5, 969 new home starts.

Nick · 19:24That's it. Well, just under 6, 000 homes a year. Metricon that, that was in 2022. So you probably shouldn't, that's actually gone backwards in the last couple of years. Um, and I think it's no secret that our builders, I know we're digressing a bit here, but it's no secret that our builders run on margins around sort of 10 percent or less.

Nick · 19:41Um, yeah. So what are we doing wrong? Maybe that's another episode. Well,

Marty · 19:47maybe it's something to do with, uh, The home prices being significantly lower in the U. S. too, so there might be more margin in, in the build as well based on salary, that would be interesting to have a look at. But the, the

Marty · 20:00one thing for sure is that the fact that Buffett's getting interested in financial services means that rates are coming down.

Marty · 20:08And profits, uh, you know, profits potentially could be going up in those sectors and there's a big undersupply of building that's the same in Australia as well. So, you know, I think there has to be some margin in it for the builders and stimulation around that, around that industry to get to where do we need to get to.

Marty · 20:25Um, so. It's like, I mean, the banks, the banks have got nicer houses than you, nicer furniture. They're going to make money no matter what climate a lot of the times, but it's just, I think, I actually think politicians too should wear like the, like football jerseys. They should wear their sponsors on their coats, I've always said.

Marty · 20:47So we know what we're really dealing with. I think that's the same as bankers almost, but it's, um, but I think, I think it's really important to take a note of this because. I think, uh, we're definitely going to have opportunities for, for a

Marty · 21:00lot of money to head towards building in the next couple of years, a hundred percent.

Jason · 21:04Well guys, uh, as always, anytime we talk about Warren Buffett, Marty, there's a, there's a glint in your eye, you get excited, uh, you know, and you know, you always just have like a sneaky extra side article up your sleeve, like this DR Horton Holmes. So, uh, Marty, you're a man that's always, uh, comes prepared.

Jason · 21:19So we appreciate that. And just like you, uh, everyone listening at home. Um, if you do appreciate us, please jump on, give us a follow, a subscribe, a like, whatever happens on the platform you're viewing us or listening us on. Uh, we are available in full color and HD on YouTube. If you haven't gone over to check that out, head to YouTube and search the numbers game podcast.

Jason · 21:39We'd love your feedback and love some comments and thoughts, but until next time, thank you for listening to the numbers game,

Marty · 21:45keep investing. HD. That sounds pretty impressive, Jase. Game over.

Jason · 21:52This podcast is for educational and informational purposes only. The conversations are of a general nature and do not qualify as financial

Jason · 22:00or tax advice.

Jason · 22:00We recommend before you make any financial decisions, you consult a licensed professional. Individuals on the podcast may hold positions in the companies discussed. ---