Issue #41, Volume #1
His First $100 Million Came From Tech Investing
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Three Things You Need To Know Now:
1. The European Central Bank (“ECB”) cuts rates, again. Yesterday the ECB lowered interest rates by a quarter point, to 3% (it’s 4.5% to 4.75% in the U.S.). Inflation, at 2.3%, rose in November for the second straight month, and meanwhile, Europe’s economy is faltering (the ECB cut its GDP growth forecast for 2025 to 1.1%, from 1.3%). If only you could print prosperity!
2. Not to be outdone by Europe’s money printers, China has also pledged even more “stimulus.” Following similar announcements in September and October, the Chinese Communist Party on Thursday promised the traditional government-led solutions to a moribund economy: deficit spending, lower interest rates, and lower reserve requirements for banks – aka, print more money! Meanwhile, there’s a 19% unemployment rate among the country’s young people.
3. Brokerage CEO warns on margin lending. The CEO of Interactive Brokers, Thomas Peterffy, published a direct warning to his own customers today saying, “So, over the last three months, our margin loans are up by 16%. If you ask me, I think that equity prices are somewhat overextended…. We will not end up holding the bag of ___ from people who are unable to meet their margin calls.” Friends, when the head crack dealer says his customers are smoking too much crack, hopefully you will all realize it’s time to put the rocks down.
And one more thing…
The FDIC is on the chopping block. An alphabet soup of U.S. government agencies and departments are under scrutiny by the incoming Trump administration – including the Federal Deposit Insurance Corporation (“FDIC”), whose aim is to protect bank depositors’ funds and prevent bank runs. If Congress were to agree to abolish the FDIC, banks would cheer a lighter regulatory hand, less stringent capital requirements, reduced consumer protections, and a more conducive backdrop for consolidation (the insurance function of the FDIC would likely be absorbed by the Treasury Department). Hold on tight: There are no sacred cows in government anymore.
Today’s Poll: Up Or Down For Bitcoin?
Bitcoin – along with the rest of the crypto- and crypto-adjacent universe, including dogs-with-apples memecoins – has been on a tear.. It’s up 45% since November 4, thanks to President-elect Donald Trump’s pro-crypto views. But as we’ve written, there are plenty of reasons to believe that Bitcoin has reached a near-term peak… what do you think?
In Case You Missed It:
Thursday’s issue of Distressed Investing: We recommend the bonds of a beloved TV shopping network that’s poised for turnaround after a devastating fire.
Thursday’s Big Secret on Wall Street portfolio issue: A detailed look at our open portfolio stocks, as well as our three “Best Buys.” Plus, a market update: Investor optimism, leverage, and speculation are running rampant despite sky-high valuations. Why that’s concerning… and what to do.
And Wednesday’s issue of The Daily Journal… where Porter reveals his history with controversial real estate magnate Oren Alexander, and shows how Alexander’s recent arrest predicts the next financial crisis. (We’ve gotten a lot of mail about this one…)
Tilson is running for mayor of New York… Porter’s supporting long-time friend and colleague Whitney Tilson in his quest… if you’re inclined to help, please donate to Whitney’s campaign (donations are matched by the city eight-fold!) here. Porter will be organizing a dinner in New York for his campaign in the new year… email Porter at [email protected] if you’d like to attend.
Buffett’s Biggest Secret
His First $100 Million Came From Technology
Two Critical Lessons From Buffett’s Secret Tech Stonk
It’s commonly believed that Warren Buffett doesn’t buy tech stocks.
But that’s not true.
In fact, Buffett’s largest personal investment (outside of Berkshire) for many years was into a start-up tech business.
In 1960, Buffett put 20% of his entire net worth (!) into Data Documents. This was a start-up computer punch-card business founded a year earlier by two friends, Wayne Eaves and John Cleary.
Eaves and Cleary knew a lot about the computer business, which, at the time, was dominated by IBM. Specifically, they figured out that printing the “data documents” – the punch cards that were needed to program huge mainframe computers – was the most profitable business that IBM owned. Eaves and Cleary thought they could buy the presses needed to make the cards and then undercut IBM on price. But the machines were expensive – $78,000 each – and they needed capital to grow. So, they called Buffett and offered him a 16% equity interest in exchange for the capital needed to buy one press.
Over time, Buffett would invest around $1 million into the business. And, over 18 years, he earned a 33% annual return on the investment! While we don’t know precisely how much Buffett made from this investment, a reasonable estimate is $100 million. (If the $1 million compounded at 33% over 18 years, he could have made $169.5 million.)
I learned this from a video that surfaced recently (hat tip: Kevin Carpenter) of Buffett’s biographer, Alice Schroeder. Schroeder was the insurance analyst at Morgan Stanley who covered Berkshire and would later spend six years writing Buffett’s definitive biography, The Snowball.
In 2008 she gave a talk at a value-investing conference at the University of Virginia. And in this talk Schroeder explained an amazing secret about Buffett’s approach to tech investing.
First and foremost? Buffett’s maxim: Never lose money.
But how in the world can you invest in a venture tech company without putting capital at risk? You don’t!
When first approached about the opportunity (in 1959) Buffett turned his friends down.
Schroeder explained:
The first step in Warren’s investing process is always to say, ‘What are the odds that this business could be subject to any kind of catastrophe risk that could make it just fail?’ If there is any chance that any significant amount of his capital could be subject to catastrophe risk, he just stops thinking. No. And he won’t go there. It’s backwards [to] the way that most people invest because most people find an interesting idea, they figure out the math, they look at the financials, they do a projection, and then at the end they ask themselves, ‘Okay, what could go wrong?’ Warren starts with what could go wrong. Here, he said a start-up business competing with IBM could fail. Nope. Sorry. And he didn’t think another thing about it.
Happily, Eaves and Cleary didn’t fail. After a year in business, their start-up was growing fast. With the risk of catastrophic failure off the table, Buffett was interested. And so in 1960, when they needed capital to expand, Buffett said: Send over the financials.
Schroeder continued:
They explained to Buffett that they were turning their capital over 7x a year. A Carroll press cost $78,000 [and] every time they run a set of cards through it and turn their capital over, they are making over $11,000. So basically their gross profit a year on a press is enough to buy another printing press. At this point, Warren is very interested. Their net profit margins are 40%. It’s like the most profitable business that he’s ever had the opportunity to invest in.
Buffett then studied all of the company’s figures, quarter by quarter. He also researched similar information he could find on their competitors. But, interestingly, unlike just about every other investor I know, he didn’t bother coming up with an earnings forecast model. Instead, he approached his investment decision on a binary basis – just yes or no. And he made his decision based on his belief that the company would surely earn at least a 15% return on his capital.
In other words, Buffett wasn’t expecting anything spectacular from this investment. Instead, he wanted to make sure, first that he wasn’t going to lose anything, and second, that it was overwhelmingly likely to provide an adequate return.
Schroeder explained that’s the same way Buffett made every investment decision she ever saw him make.
The way he thought about it was really simple. It was a one-step decision. He looked at historical data and then he had this generic return that he wants on everything. It was a very easy decision for him — and he relied totally on historical figures with no projections. I think that that’s a really interesting way to look at it because I saw him do it over and over in different investments.
Interestingly, that’s the same way I’ve gone about making my best investments – like my recommendations of Anheuser-Busch in 2006, of Hershey (HSY) and NVR (NVR) in 2007, of Microsoft (MSFT) in 2012, of W.R. Berkley (WRB) in 2012; and more recently, of Domino’s Pizza (DPZ). These businesses were virtually certain to provide us with a very adequate return, and it was virtually impossible for us to lose money in these companies.
And look what happened after those recommendations in 2006 and 2007 – the worst economic disaster of our entire lifetime! But despite these enormous challenges, those investments continued to operate profitably throughout the entire period – even NVR, the homebuilder!
I don’t know if I can convince any of you, but I’m more convinced than ever that the best way to invest is always the easiest and the safest. Just buy the world’s greatest businesses, don’t pay too much, and wait. That formula works, no matter what else is happening in the world.
Looking at our recommended list today, I note there are plenty of these kinds of opportunities: Deere & Co. (DE), Diageo (DEO), Philip Morris International (PM), Nike (NKE), and Hershey, for example.
You can make investing hard. But it doesn’t have to be.There’s a video of Schroeder’s discussion of Buffett’s investing approach here.
Of course… over the long term, Buffett’s secret sauce – how he’s been the most successful investor in history – hasn’t been tech… it’s the magic of property & casualty insurance. It’s something so perfect that we call it God’s investment. We’ve put together a report that explains the insurance industry… and the most attractive stocks (which is also the best performing segment of the portfolio of The Big Secret on Wall Street). You can learn more here.
Good investing,
Porter Stansberry
Stevenson, MD
Mailbag
Rob T. writes:
I like a lot of your content, and I understand you are sometimes going to recommend stocks that are controversial because the goal is to make money. The reality about Gilead is that they are propped up by Bill Gates and his influence on U.S. public health policy as well as his heavy involvement in the WHO, where he is one of the top two or three donors consistently.
He isn’t doing it out of goodwill. He is doing it for control and influence. He is a philanthropath. Gilead’s propped-up COVID treatment Remdesivir is as deadly a drug that has ever been administered and hospitals did so without any concern for patients because of the lucrative subsidies they received from the federal government through the CARES Act. The NIH and NIAID had tested this drug well before 2020 and knew it was dangerous going back to 2002 with SARS 1. It shuts down kidneys and other key functions.
Let’s also get something straight. The narrative that the COVID vaccines stopped or slowed the plandemic in any fashion is a complete lie that is not supported by any substantive data. The shots don’t even prevent infection and many who have taken two or more shots end up with more intense sickness. This is mainly due to antibody dependent enhancement that results from the vaccine and circulating strain being mismatched. It is why flu shots are maybe 50% effective. The plandemic and vaccines were about money, control, and depopulation. The vaccines saved zero lives.
Operation Warp Speed was on the books of the Department of Defense since 2015 and Pfizer had patents on mRNA shots going back to 1990. These shots are a bioweapon. They killed my mother and injured many that I know. I was blackmailed into the shot by my own family in order to see my terminally ill mother and it only took one shot to send me to the ER with chest pains. I never took the second, but still saw my health deteriorate over the next several months until I sought treatment from a functional medical doctor who helped heal me over the course of a year. Another good friend of mine in good health suffered a stroke six months after his two shots. I have many other horror stories.
Like I said, I am a big fan of Porter Stansberry and have been a Stansberry Research subscriber since 2013, but let’s tell the truth about these pharma monsters. Without the insane amount of lobbying and their puppets in federal and state governments distorting market behavior, most of these pharmas would be broke and saddled with litigation if markets were allowed to naturally unfold.
Porter’s comment: I’ve never recommended Gilead Sciences (GILD). And neither has our biotech analyst, Erez Kalir. Marc Chaikin’s recommendation (that we featured in our Porter & Co. Spotlight on Tuesday) was clearly labeled as being from a guest writer. The Spotlight, published on Tuesdays, is designed to give you, for free, research we believe is credible and valuable from analysts we’ve known and respected for years. Obviously, you’re free to disagree! And, agree with us or not, all of your investments are up to you and at your own risk. Lots of people don’t like investing in many of the stocks we recommend, like Philip Morris International (PM)… or the alcohol companies… or the arms dealers… all businesses that we’ve recommended over the years because of their wonderful economics. We accept people as we find them: usually addicted to lots of things – substances or habits – that are bad for them. Or, as I like to say, everyone goes about life destroying themselves in their own way. We think it’s best to encourage everyone. But, I certainly take your point that there’s a big difference in owning a business that serves people freely (no one is forced to smoke, or drink, or shoot) and owning a Big Pharma company that uses government coercion to force its products on people. That’s something I wouldn’t own either.
P.S. Something that every man should own, though: A world-class razor.
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